Clause 68 of the Finance Bill, 2026 seeks to amend section 351 of the Income-tax Act, 2025, which defines “specified violations” by registered non-profit organisations (NPOs).
The amendment removes the reference to section 346 from section 351(1)(b). This change ensures that certain violations relating to commercial activities carried out by NPOs engaged in the advancement of any other object of general public utility are no longer classified as “specified violations.”
The amendment aligns the Income-tax Act, 2025 with the position under the Income-tax Act, 1961, where such violations were not intended to result in cancellation of registration.
The amendment is effective from 1 April 2026, i.e., from tax year 2026-27 onwards.
Existing Legal Position Under Section 351
Section 351 enumerates activities that constitute “specified violations” by a registered NPO. A specified violation carries serious consequences, including the possibility of cancellation of registration and withdrawal of tax benefits. Under the existing framework:
- Section 351 includes, by reference to section 346, violations arising from commercial activities carried out by NPOs engaged in the advancement of any other object of general public utility
- The same category of violation is also covered under “other violations” in section 353
This dual classification resulted in commercial-activity-related breaches being treated as specified violations, exposing NPOs to disproportionate consequences, including cancellation of registration.
What Does Clause 68 Propose?
Clause 68 proposes to:
- Amend section 351(1)(b) by omitting the reference to section 346, and
- Make consequential amendments to give effect to this omission
As a result, violations arising from commercial activities referred to in section 346 will no longer fall within the definition of “specified violation” under section 351.
Meaning of the Proposed Amendment
In practical terms, the amendment clarifies that:
- Commercial-activity-related violations by certain registered NPOs are excluded from the category of specified violations
- Such violations will continue to be recognised and dealt with under other applicable provisions (including section 353), but
- They will not, by themselves, trigger cancellation of registration as a specified violation
The amendment is classificatory and corrective in nature.
Rationale for the Amendment
As explained in the policy note:
- Under the Income-tax Act, 1961, commercial activity violations of this nature were not treated as grounds for cancellation of registration
- Including them as specified violations under the 2025 Act was inconsistent with legislative intent
- The amendment restores the intended distinction between:
- Serious violations warranting cancellation, and
- Other violations warranting regulatory or remedial action
Implications of the Amendment
1. Removal of Disproportionate Consequences
- Registered NPOs will no longer face automatic exposure to cancellation of registration solely due to such commercial-activity-related violations
- Provides certainty and stability for NPOs engaged in incidental or regulated commercial activities
2. Continued Applicability of Compliance Framework
- The amendment does not absolve NPOs of compliance obligations
- Violations will continue to be examined and addressed under section 353 or other applicable provisions
3. Alignment with Earlier Law
- Ensures continuity with the Income-tax Act, 1961
- Prevents escalation of regulatory breaches into existential consequences contrary to earlier policy design
What the Amendment Does Not Do
- ❌ It does not permit unrestricted commercial activity by NPOs
- ❌ It does not dilute monitoring, enforcement, or penalty provisions
- ❌ It does not affect other categories of specified violations under section 351
The amendment is limited strictly to reclassification of a particular category of violation.
Effective Date
✔ Applicable from 1 April 2026. Applies to tax year 2026-27 and subsequent tax years.
Conclusion
Clause 68 of the Finance Bill, 2026 introduces a narrow but significant correction to the framework governing violations by registered non-profit organisations. By excluding certain commercial-activity-related breaches from the definition of “specified violation,” the amendment prevents disproportionate outcomes, such as cancellation of registration, and restores alignment with the legislative intent under the Income-tax Act, 1961.
The change strengthens the compliance framework by ensuring that penalties are proportionate to the nature of the violation, without weakening regulatory oversight.
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