Finance Bill, 2022 proposes significant amendments related to charitable trusts and institutions or NGOs covered under section 10(23C) and sections 11 to 13 of the Income-tax Act, 1961 (‘Act’) which are referred to as Trusts or institutions falling under the first regime and second regime respectively.
Most of the amendments related to section 10(23C) are proposed to be introduced for aligning the same with that of the second regime. In this article, the amendments related to charitable trusts and NGOs covered by the second regime under section 11 to section 13 are discussed.
Changes or Amendments introduced by the Finance Bill, 2022 related to Trusts/NGOs
Each of the proposed amendments for Trusts and NGOs by the Finance Bill, 2022 is discussed in detail in the following paragraphs.
Section 11(1): Voluntary Contributions for the renovation and repair of temples, mosques, gurudwaras, churches etc. notified under section 80G(2)(b)
Donations for the renovation and repair of temples, mosques, gurudwaras, churches etc notified under section 80G(2)(b) of the Act are received for specific purposes. However, it is not clear if such donations are treated as corpus donations or are required to be applied or can be accumulated for a maximum period of 5 years.
In order to provide clarity, it is proposed to insert Explanation 3A in sub-section (1) of section 11 of the Act to provide that where the property held under a trust or institution includes any temple, mosque, gurdwara, church or other place notified under section 80G(2)(b), any sum received by such trust or institution as a voluntary contribution for the purpose of renovation or repair of such temple, mosque, gurdwara, church or other place, may, at its option, be treated by such trust or institution as forming part of the corpus of the trust or the institution, subject to the condition that the trust or the institution,
(a) applies such corpus only for the purpose for which the voluntary contribution was made;
(b) does not apply such corpus for making contribution or donation to any person; and
(c) maintains such corpus as separately identifiable;
(d) invests or deposits such corpus in the forms and modes specified under sub-section (5) of section 11.
It is also proposed to insert Explanation 3B in sub-section (1) of section 11 of the Act to provide that for the purposes of Explanation 3A, where any trust or institution has treated any sum received by it as forming part of the corpus and subsequently any of the conditions specified in clause (a), (b), (c) or clause (d) thereof are violated, such sum shall be deemed to be the income of such trust or institution of the previous year during which the violation takes place.
For this purpose, Clause 5 of the Finance Bill, 2022 amends section 11(1) in the following manner:
Amendment of section 11.
5. In section 11 of the Income-tax Act,–
(a) in sub-section (1), after Explanation 3, the following Explanations shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2021, namely:–
“Explanation 3A.–For the purposes of this sub-section, where the property held under a trust or institution includes any temple, mosque, gurdwara, church or other place notified under clause (b) of sub-section (2) of section 80G, any sum received by such trust or institution as voluntary contribution for the purpose of renovation or repair of such temple, mosque, gurdwara, church or other place, may, at its option, be treated by such trust or institution as forming part of the corpus of the trust or the institution, subject to the condition that the trust or the institution–
(a) applies such corpus only for the purpose for which the voluntary contribution was made;
(b) does not apply such corpus for making contribution or donation to any person;
(c) maintains such corpus as separately identifiable; and
(d) invests or deposits such corpus in the forms and modes specified under sub-section (5) of section 11.
Explanation 3B.–For the purposes of Explanation 3A, where any trust or institution has treated any sum received by it as forming part of the corpus, and subsequently any of the conditions specified in clause (a) or clause (b) or clause (c) or clause (d) of the said Explanation is violated, such sum shall be deemed to be the income of such trust or institution of the previous year during which the violation takes place.”;
Explaining the proposed amendment in the provisions of section 11(1)
Clause 5 seeks to amend section 11 of the Act relating to income from property held for charitable or religious purposes.
Clause (d) of sub-section (1) of the said section provides that income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution, subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus, shall not be included in the total income of the previous year of the person in receipt of the income.
It is proposed to insert a new Explanation 3A to sub-section (1) to provide that where the property held under a trust or institution includes any temple, mosque, gurdwara, church or other place notified under clause (b) of sub-section (2) of section 80G, any sum received by such trust or institution as voluntary contribution for the purpose of renovation or repair of such temple, mosque, gurdwara, church or other place, may, at its option, be treated by such trust or institution as forming part of the corpus of the trust or the institution, subject to the condition that the trust or the institution––
(a) applies such corpus only for the purpose for which the voluntary contribution was made;
(b) does not apply such corpus for making contribution or donation to any person;
(c) maintains such corpus as separately identifiable; and
(d) invests or deposits such corpus in the forms and modes specified under sub-section (5) of section 11.
It is also proposed to insert a new Explanation 3B to the said sub-section (1) to provide that for the proposed Explanation 3A where any trust or institution has treated any sum received by it as forming part of the corpus and subsequently any of the conditions mentioned in clause (a) or clause (b) or clause (c) or clause (d) of the said Explanation is violated, such sum shall be deemed to be the income of such trust or institution of the previous year during which the violation takes place.
These amendments will take effect retrospectively from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.
Section 11(3): Year of Chargeability of unutilized or unapplied accumulated income
Under the existing provisions of the Act, a trust or institution is required to apply 85% of its income during any previous year. However, if it is not able to apply 85% of its income during the previous year, it is allowed to accumulate such income for a period not exceeding 5 years as per sub-section (2) of section 11 of the Act.
The accumulation of income, as per the provisions of sub-section (2) of section 11 of the Act is allowed subject to the fulfilment of certain conditions.
Similarly, sub-section (3) of section 11 of the Act provides for the specific previous year in which the accumulated income will be subjected to tax in case of different types of violations. It, inter alia, provides that if the accumulated income is not applied within 5 years, it shall be taxed in the 6th year.
It is proposed to amend the provisions of sub-section (3) of section 11 of the Act to provide that any income referred to in sub-section (2) which is not utilised for the purpose for which it is so accumulated or set apart shall be deemed to be the income of such person of the previous year being the last previous year of the period, for which the income is accumulated or set apart under clause (a) of sub-section (2) of section 11, but not utilised for the purpose for which it is so accumulated or set apart.
For this purpose, Clause 5 of the Finance Bill, 2022 amends the provisions of section 11(3) in the following manner:
Amendment of section 11.
5. In section 11 of the Income-tax Act,–
(a)....
(b) in sub-section (3), with effect from the 1st day of April, 2023,–
(a) in clause (c), the words “or in the year immediately following the expiry thereof” shall be omitted;
(b) for the long line, the following long line shall be substituted, namely:–
“shall be deemed to be the income of such person of the previous year–
(i) in which it is so applied or ceases to be so accumulated or set apart under clause (a); or
(ii) in which it ceases to remain so invested or deposited under clause (b); or
(iii) being the last previous year of the period, for which the income is accumulated or set apart but not utilised for the purpose for which it is so accumulated or set apart under clause (c); or
(iv) in which it is credited or paid to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution under clause (d).”;
Explaining the proposed amendment in the provisions of section 11(3)
Sub-section (3) of section 11 of the Act provides that where the trust or institution has accumulated any income under sub-section (2), and violates any of the conditions provided under sub-section (2), such income shall be deemed to be the income of the trust or institution as per the provisions of sub-section (3).
It is proposed to amend the said sub-section (3) to substitute its longline so as to provide that where the income referred to in sub-section (2) is applied or ceases to remain invested or not utilised or credited or paid as specified therein, the same shall be deemed to be the income of such person of the previous year–
(i) in which it is so applied or ceases to be so accumulated or set apart,; or
(ii) in which it ceases to remain so invested or deposited; or
(iii) being the last previous year of the period, for which the income is accumulated or set apart under clause (a) of sub-section (2), but not utilised for the purpose for which it is so accumulated or set apart; or
(iv) in which it is credited or paid to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution.
These amendments will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.
Section 11: Application of income will be allowed only when it is actually paid
Trust or institution are required to apply 85% of their income for the purposes specified. As is evident from the word “ application”, it means actually paid. This is the position which has been held by different courts also.
Accordingly it is being clarified by inserting Explanation to section 11 to provide that any sum payable by any trust shall be considered as application of income in the previous year in which such sum is actually paid by it irrespective of the previous year in which the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed by it.
It is further proposed to insert proviso to the proposed Explanation to section 11 to provide that where during any previous year, any sum has been claimed to have been applied by such trust, such sum shall not be allowed as application in any subsequent previous year.
Clause 5 of the Finance Bill, 2022 amends section 11 in the following manner:
Amendment of section 11.
5. In section 11 of the Income-tax Act,–
(c) after sub-section (7), the following shall be inserted, namely:––
“Explanation.–For the purposes of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it):
Provided that where during any previous year, any sum has been claimed to have been applied by the trust or institution, such sum shall not be allowed as application in any subsequent previous year.”.
Explaining the proposed amendment in the provisions of section 11
It is proposed to insert an Explanation to section 11 of the Act so as to provide that for the purposes of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it).
It is further proposed to insert a proviso to the said Explanation to provide that where during any previous year any sum has been claimed to have been applied by the trust or institution, such sum shall not be allowed as application in any subsequent previous year .
These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.
Section 12A(1)(b): Books of account to be maintained by the Trusts or institutions/NGOs
Where the total income of any trust or institution without giving effect to the provisions of section 11 and section 12 of the Act exceeds the maximum amount which is not chargeable to income-tax in any previous year it is required to get its accounts audited.
However, there is no specific provision under the Act providing for the books of accounts to be maintained by such trusts or institutions. It is proposed to amend clause (b) of sub-section (1) of section 12A of the Act to provide that where the total income of the trust or institution without giving effect to the provisions of section 11 and 12, exceeds the maximum amount which is not chargeable to tax, such trust or institution shall keep and maintain books of account and other documents in such form and manner and at such place, as may be prescribed.
For this purpose, Clause 6 of the Finance Bill, 2022 proposes to amend the provisions of section 12A(1)(b) regarding maintenance of the Books of Accounts by a Trust or NGO in the following manner-
Amendment of section 12A.
6. In section 12A of the Income-tax Act, in sub-section (1), for clause (b), the following clause shall be substituted with effect from the 1st day of April, 2023, namely:––
“(b) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year,––
(i) the books of account and other documents have been kept and maintained in such form and manner and at such place, as may be prescribed; and
(ii) the accounts of the trust or institution for that year have been audited by an accountant defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB and the person in receipt of the income furnishes by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed; ”.
Explaining the proposed amendment in the provisions of section 12A(1)(b)
Clause 6 seeks to amend section 12A of the Act relating to conditions for applicability of sections 11 and 12.
Clause (b) of sub-section (1) of the said section 12A provides that the provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless, inter-alia, where the total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year, the accounts of the trust or institution for that year have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB and the person in receipt of the income furnishes by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be provided by rules.
It is proposed to substitute the said clause so as to provide that in addition to the condition requiring the trust or institutions, having income exceeding the maximum amount not chargeable to tax, to get their accounts audited, such trusts shall also be required to keep and maintain books of account and other documents in such form and manner and at such place, as may be provided by rules.
These amendments will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.
Section 12AB: Reference to the Principal Commissioner or Commissioner (PCIT/CIT) for the Cancellation of Registration of a Trust/NGO
a) The following issues related to the process of approval or registration, or cancellation or withdrawal thereof, have been noticed, namely:-
i) Registration or approval of non-genuine trusts or institution under automated approval system:
The provisions of section 12A(1)(ac) provide that application for registration of the trusts or institution under section 12AA/12AB shall be made to the principal Commissioner or Commissioner. The provisional registrations or re-registrations in certain cases, under these clauses, are granted in an automated manner and the respective rules have been amended accordingly. It is essential to ensure that non-genuine trusts or institutions do not get exemption provided by these provisions.
ii) Provisions related to reference for the cancellation of trusts
Provisions of sub-section (3) of section 143 provide that no order under this sub-section shall be made, denying the benefits of clause (23C) of section 10, unless the Assessing Officer has intimated the Central Government or prescribed authority the contravention of the provisions of sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 and approval granted to such trust or institution has been rescinded. There is no such provision in cases of trusts or institutions under the second regime i.e. registered under section 12AB.
iii) No time limit prescribed for the PCIT/CIT to decide on references for the withdrawal of approval
For the trusts or institutions approved u/s 10(23C), the provisions for making reference by the Assessing Officer to the Principal Commissioner or Commissioner are contained in the first proviso to sub-section (3) of section 143 and the time limitation for the completion of assessment is extended as per the provisions of clause (iii) of Explanation 1 to section 153. Presently, there is no time limit for such Principal Commissioner or Commissioner to decide on such reference.
b) In order to address the above issues, it is proposed to amend the provisions of section 12AB of the Act as follows:
(I) Sub-section (4) of section 12AB of the Act is proposed to be substituted with a new sub-section (4) to provide that where registration or provisional registration of a trust or an institution has been granted under clause (a) or clause (b) or clause (c) of sub-section (1) of section 12AB or clause (b) of sub-section (1) of section 12AA, as the case may be, and subsequently,
(a) the Principal Commissioner or Commissioner has noticed occurrence of one or more specified violations during any previous year;
(b) the Principal Commissioner or Commissioner has received a reference from the Assessing Officer under the second proviso to sub-section (3) of section 143 for any previous year, or
(c) such case has been selected in accordance with the risk management strategy, formulated by the Board from time to time, for any previous year,
the Principal Commissioner or Commissioner shall—
(i) call for such documents or information from the trust or institution or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence or otherwise of any specified violation;
(ii) pass an order in writing cancelling the registration of such trust or institution, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violation have taken place;
(iii) pass an order in writing refusing to cancel the registration of such trust or institution, if he is not satisfied about the occurrence of one or more specified violation;
(iv) forward a copy of the order under clause (ii) or (iii), as the case may be, to the Assessing Officer and such trust or institution.
(II) The term “specified violation” is proposed to be defined by inserting an Explanation to sub-section (4) of section 12AB of the Act to mean the following violation :-
(a) where any income of the trust or institution under the second regime has been applied other than for the objects for which it is established; or
(b) the trust of institution under the second regime has income from profits and gains of business whichis not incidental to the attainment of its objectives or separate books of account are not maintained by it in respect of the business which is incidental to the attainment of its objectives; or
(c) the trust or the institution under the second regime has applied any part of its income from the property held under a trust for private religious purposes which does not enure for the benefit of the public; or
(d) the trust or institution under the second regime established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste;
(e) any activity being carried outby the trust or the institution under the second regime,
(i) is not genuine; or
(ii) is not being carried out in accordance with all or any of the conditions subject to which it was registered; or
(f) the trust or the institution under the second regime has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1) of section 12AB, and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.
III) Sub-section (5) of section 12AB of the Act is proposed to be substituted with a new sub-section (5) to provide that that the order under clause (ii) or (iii) of sub-section (4) shall be passed before expiry of the period of six months, calculated from the end of the quarter in which the first notice is issued by the Principal Commissioner or Commissioner, on or after the 1st day of April, 2022, calling for any document or information, or for making any inquiry, under clause (i) of sub-section (4);
Consequentially sub-section (3) of section 143 of the Act is proposed to be amended by deleting the reference to trusts or institution approved u/s 10(23C) in the first proviso and delete the existing third proviso.
It is proposed to insert another proviso in sub-section (3) of section 143 of the Act providing that where the Assessing Officer is satisfied that any trust or institution has committed any specified violation, as defined in the Explanation to sub-section (4) of section 12AB, as the case may be, he shall,
(a) send a reference to the Principal Commissioner or Commissioner to withdraw the approval or registration, as the case may be; and
(b) no order making an assessment of the total income or loss of such fund or institution or trust shall be made by him without giving effect to the order passed by the Principal Commissioner or Commissioner clause (ii) or (iii) of sub-section (4) of section 12AB.
Consequentially, it is also proposed to amend the provisions of clause (iii) of Explanation to section 153 by deleting the reference to trusts or institution approved under section 10(23C) and to insert a new clause (xiii) to provide that the period commencing from the date on which the Assessing Officer makes a reference to the Principal Commissioner or Commissioner under the second proviso to sub-section (3) of section 143 or is deemed to have been made under Explanation 3 to the fifteenth proviso to clause (23C) of section 10, and ending with the date on which the copy of the order under clause (ii) or (iii) of fifteenth proviso to clause (23C) of section 10 or clause (ii) or (iii) of sub-section (4) of section 12AB, as the case may be, is received by the Assessing Officer shall be excluded in computing the period of limitation.
For this purpose, Clause 7 of the Finance Bill, 2022 proposes to amend the provisions of section 12AB(4) and (5) regarding Cancellation of Registration and Passing of Order thereof a Trust or NGO in the following manner-
Amendment of section 12AB.
7. In section 12AB of the Income-tax Act, for sub-sections (4) and (5), the following the sub-sections shall be substituted, namely:––
‘(4) Where registration or provisional registration of a trust or an institution has been granted under clause (a) or clause (b) or clause (c) of sub-section (1) or clause (b) of sub-section (1) of section 12AA, as the case may be, and subsequently,––
(a) the Principal Commissioner or Commissioner has noticed occurrence of one or more specified violations during any previous year; or
(b) the Principal Commissioner or Commissioner has received a reference from the Assessing Officer under the second proviso to sub-section (3) of section 143 for any previous year; or
(c) such case has been selected in accordance with the risk management strategy, formulated by the Board from time to time, for any previous year, the Principal Commissioner or Commissioner shall—
(i) call for such documents or information from the trust or institution, or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence or otherwise of any specified violation;
(ii) pass an order in writing, cancelling the registration of such trust or institution, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violations have taken place;
(iii) pass an order in writing, refusing to cancel the registration of such trust or institution, if he is not satisfied about the occurrence of one or more specified violations;
(iv) forward a copy of the order under clause (ii) or clause (iii), as the case may be, to the Assessing Officer and such trust or institution.
Explanation.–For the purposes of this sub-section, the following shall mean “specified violation”,–
(a) where any income derived from property held under trust, wholly or in part for charitable or religious purposes, has been applied, other than for the objects of the trust or institution; or
(b) the trust or institution has income from profits and gains of business which is not incidental to the attainment of its objectives or separate books of account are not maintained by such trust or institution in respect of the business which is incidental to the attainment of its objectives; or
(c) the trust or institution has applied any part of its income from the property held under a trust for private religious purposes, which does not enure for the benefit of the public; or
(d) the trust or institution established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste; or
(e) any activity being carried out by the trust or institution––
(i) is not genuine; or
(ii) is not being carried out in accordance with all or any of the conditions subject to which it was registered; or
(f) the trust or institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.
(5) The order under clause (ii) or clause (iii) of sub-section (4), as the case may be, shall be passed before the expiry of a period of six months, calculated from the end of the quarter in which the first notice is issued by the Principal Commissioner or Commissioner, on or after the 1st day of April, 2022, calling for any document or information, or for making any inquiry, under clause (i) of sub-section (4).’.
Explaining the proposed amendment in the provisions of section 12AB(4)/(5)
Clause 7 seeks to amend section 12AB of the Act relating to procedure for fresh registration.
Sub-sections (4) and (5) of the said section contains provisions regarding cancellation of the registration granted to a trust or institution.
It is proposed to substitute sub-section (4) of the said section to provide that where registration or provisional registration of a trust or an institution has been granted under clause (a) or clause (b) or clause (c) of sub-section (1) or clause (b) of sub-section (1) of section 12AA, as the case may be, and subsequently,–
(a) the Principal Commissioner or Commissioner has noticed occurrence of one or more specified violations during any previous year; or
(b) the Principal Commissioner or Commissioner has received a reference from the Assessing Officer under second proviso to sub-section (3) of section 143 for any previous year; or
(c) such case has been selected in accordance with the risk management strategy formulated by the Board from time to time for any previous year,
the Principal Commissioner or Commissioner shall—
(i) call for such documents or information from the trust or institution, or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence or otherwise of any specified violation;
(ii) pass an order in writing, cancelling the registration of such trust or institution, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violations have taken place;
(iii) pass an order in writing, refusing to cancel the registration of such trust or institution, if he is not satisfied about the occurrence of one or more specified violations;
(iv) forward a copy of the order under clause (ii) or clause (iii), as the case may be, to the Assessing Officer and such trust or institution.
It is further proposed to insert a new Explanation to the said sub-section so as to provide that the following shall mean “specified violation”–
(a) where any income derived from property held under trust, wholly or in part for charitable or religious purposes, has been applied, other than for the objects of the trust or institution; or
(b) the trust or institution has income from profits and gains of business which is not incidental to the attainment of its objectives or separate books of account are not maintained by such trust or institution in respect of the business which is incidental to the attainment of its objectives; or
(c) the trust or institution has applied any part of its income from the property held under a trust for private religious purposes which does not enure for the benefit of the public; or
(d) the trust or institution established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste; or
(e) any activity being carried out by the trust or the institution––
(i) is not genuine; or
(ii) is not being carried out in accordance with all or any of the conditions subject to which it was registered; or
(f) the trust or institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.
It is also proposed to substitute sub-section (5) of the said section to provide that the order under clause (ii) or clause (iii) of sub-section (4), as the case may be, shall be passed before the expiry of a period of six months, calculated from the end of the quarter in which the first notice is issued by the Principal Commissioner or Commissioner, on or after the 1st day of April, 2022, calling for any document or information, or for making any inquiry under clause (i) of sub-section (4).
These amendments will take effect from 1st April, 2022.
Section 13: Disallowance of proportionate income applied for specified persons, Computation of income of a trust/NGO in case of certain non-compliances and no deduction in respect of any expenditure or allowance or set-off of any loss
Providing clarity on taxation in certain circumstances
There are various conditions prescribed for availing exemption under the Act. There is a need for clear provisions in the Act listing out how income is to be computed in case of non-compliance. Hence, it is proposed to provide for the same so that there is no dispute and the law is applied consistently.
Allowing certain expenditure in case of denial of exemption
i) Different provisions mandate denial of exemption to the trusts or institutions. Some of the provisions under which exemption is not available for its violation are as follows:
(a) Having commercial receipts in excess of 20% of the annual receipts in violation of the provisions of proviso to section 2(15);
(b) Not getting the books of account audited;
(c) Not filing the return of income;
ii) There is presently lack of clarity on computation of taxable income in case of non-availability of exemption in these cases. For example, if the exemption is denied to the trust or institution for the late submission of the audit report, its entire receipts may be subjected to taxation and no deduction for any application may be allowed.
iii) In order to bring clarity in the computation of the income chargeable to tax in such cases, the following amendments are proposed:-
(a) It is proposed to insert sub-section (10) in section 13 of the Act to provide that where the provisions of sub-section (8) are applicable to any trust or institution and such trust or institution violates the conditions prescribed under section 12A(1)(b)/(ba), its income chargeable to tax shall be computed after allowing deduction for the expenditure (other than capital expenditure) incurred in India, for the objects of the trust or institution, subject to fulfilment of the following conditions, namely :-
(i) such expenditure is not from the corpus standing to the credit of such trust or institution as on the last day of the financial year immediately preceding the previous year relevant to the assessment year for which the income is being computed;
(ii) such expenditure is not from any loan or borrowing;
(iii) claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income in the same or any other previous year; and
(iv) such expenditure is not in the form of any contribution or donation to any person.
(b) It is also proposed to insert an Explanation to sub-section (10) to section 13 of the Act to provide that for the purposes of determining the amount of expenditure under this sub-section, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits and gains of business or profession".
(c) It is also proposed to insert sub-section (11) to section 13 of the Act to provide that for the purposes of computing income chargeable to tax, under sub-section (10), no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee under any other provision of the Act.
For this purpose, Clause 8 of the Finance Bill, 2022 amends section 13 in the following manner:
Amendment of section 13.
8. In section 13 of the Income-tax Act, with effect from the 1st day of April, 2023,–
(a) in sub-section (1),–
(i) in clause (c), in the long line, for the word, brackets and figure “sub-section (3)”, the words, brackets and figures “sub-section (3), such part of income as referred to in sub-clauses (i) and (ii)” shall be substituted;
(ii) in clause (d), in the long line, for the word and figures “November, 1983”, the words, figures and brackets “November, 1983, to the extent of such deposits or investments referred to in sub-clauses (i), (ii) and (iii)” shall be substituted;
(b) after sub-section (9) and before Explanation 1, the following sub-sections shall be inserted, namely:––
‘(10) Where the provisions of sub-section (8) are applicable to any trust or institution or it violates the conditions specified under clause (b) or clause (ba) of sub-section (1) of section 12A, its income chargeable to tax shall be computed after allowing deduction for the expenditure (other than capital expenditure) incurred in India, for the objects of the trust or institution, subject to fulfilment of the following conditions, namely:––
(a) such expenditure is not from the corpus standing to the credit of the trust or institution as on the end of the financial year immediately preceding the previous year relevant to the assessment year for which income is being computed;
(b) such expenditure is not from any loan or borrowing;
(c) claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income, in the same or any other previous year; and
(d) such expenditure is not in the form of any contribution or donation to any person.
Explanation.—For the purposes of determining the amount of expenditure under this sub-section, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.
(11) For the purposes of computing income chargeable to tax under sub-section (10), no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee under any other provision of this Act.’.
Explaining the proposed amendment in the provisions of section 13
Clause 8 seeks to amend section 13 of the Act relating to section 11 not to apply in certain cases.
Sub-section (1) of section 13 provides for cases wherein the provisions of section 11 or section 12 shall cease to operate, so as to exclude from the total income of the previous year of the trusts or institutions in receipt of such income.
Clause (c) of said sub-section provides that provisions of section 11 or section 12 shall cease to operate where certain benefits have been passed on by the trust or institution to specified persons.
It is proposed to amend the said clause (c) so as to provide that the part of income, as referred to in said clause, which enures or is used or applied directly or indirectly for the benefit of any person referred to in sub-section (3) of the said section, such part of income shall not be excluded from the total income of the trust or institution in receipt of such income.
Clause (d) of said sub- section provides that the provisions of section 11 or section 12 shall cease to operate unless the funds of the trust or institution are invested or deposited in specified modes.
It is further proposed to amend the said clause (d) so as to provide that, in case any funds of the trust or institution are invested or deposited in any one or more forms other than specified modes, then income to the extent of such deposits or investments, shall not be excluded from the total income of the trust or institution in receipt of such income.
It is also proposed to insert a new sub-section (10) to the said section so as to provide that where the provisions of sub-section (8) are applicable to any trust or institution or it violates the conditions specified under clause (b) or clause (ba) of sub-section (1) of section 12A, its income chargeable to tax shall be computed after allowing deduction for the expenditure (other than capital expenditure) incurred in India, for the objects of the trust or institution, subject to fulfilment of the following conditions, namely:–
(a) such expenditure is not from the corpus standing to the credit of the trust or institution as on the end of the financial year immediately preceding the previous year relevant to the assessment year for which income is being computed;
(b) such expenditure is not from any loan or borrowing;
(c) claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income in the same or any other previous year; and
(d) such expenditure is not in the form of any contribution or donation to any person.
It is also proposed to insert a new Explanation in the said sub-section (10) to provide that for the purposes of determining the amount of expenditure under this sub-section, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits and gains of business or profession".
It is also proposed to insert a new sub-section (11) to the said section so as to provide that for the purposes of computing income chargeable to tax under sub-section (10), no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee under any other provision of this Act.
These amendments will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.
Section 115BBI: Taxation of certain income of the trusts or institutions at special rate
Following incomes of the trusts or institutions are chargeable to tax, under different provisions of the Act:-
(a) The trusts or institutions are required not to pass on any unreasonable benefit to the trustee or any other specified person. Section 13(1)(c) of the Act provides that the entire exemption shall be denied to the trust irrespective of the amount of benefit passed on.
(b) Section 13(1)(d) of the Act provides that the exemption shall be denied to the trust irrespective of the amount of investment in non-specified modes.
(c) Further, the trusts or institutions are required to apply at least 85% of their income during the year. Where the trust is not able to apply 85% of the income, it may accumulate such income for a maximum period of 5 years.
Sub-section (3) of section 11 of the Act specifically provides for the trusts or institutions that such accumulated income, which could not be applied within the period of accumulation (maximum 5 years), shall be deemed to be the income of the trust.
There is a specific provision under clause (2) of Explanation 1 to section 11(1) of the Act providing for the accumulation of income for a period of one year. Sub-section (1B) of section 11 of the Act provides that if the income accumulated under clause (2) of Explanation 1 to sub-section (1) of section 11 of the Act could not be applied within the time allowed; it shall be deemed to be the income of the trust.
Denying exemption to the trust, for a small amount of income applied in violation to the provisions referred in clause (a) and (b) above creates difficulties to the trusts or institutions as there is ambiguity about the manner of taxation of such income. Further, there is a need for special provision to ensure that the income applied in violation is taxed at a special rate without deduction. Accordingly, in order to rationalise the provisions, the following amendments are proposed:-
(a) It is proposed to amend clause (c) of sub-section (1) of section 13 of the Act to provide that only that part of income which has been applied in violation to the provisions of the said clause shall be liable to be included in total income.
(b) It is also proposed to insert twenty first proviso in clause (23C) of section 10 to specifically provide that where the income of any trust under the first regime, or any part of the such income or property, has been applied directly or indirectly for the benefit of any person referred to in sub-section (3) of section 13, such income or part of income or property shall be deemed to be income of such person of the previous year in which it is so applied. The provisions of sub-section (2), (4) and (6) of section 13 of the Act shall also apply to it.
(c) It is proposed to amend clause (d) of sub-section (1) of section 13 of the Act to provide that only that part of income which has been invested in violation to the provisions of the said clause shall be liable to be included in total income.
(d) All the above incomes are required to be taxed at a special rate. Hence, it is proposed to insert new section 115BBI in the Act providing that where the total income of any assessee being a trust registered under section 12AA/12AB, includes any income by way of any specified income, the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of specified income; and
(ii) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of specified income referred to in clause (i).
(e) The sub-section (2) of this new section seeks to provide that no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act in computing specified income.
(f) Explanation to the proposed section defines "specified income" to mean:-
(i) income accumulated or set apart in excess of fifteen percent of the income where such accumulation is not allowed under any specific provisions of the Act; or
(ii) deemed income referred to in Explanation 4 to third proviso to clause (23C) of section 10 or sub-section (3) of section 11 or sub-section (1B) of section 11;or
(iii) any income which is not exempt under clause (23C) of section 10 on account of violation of the provisions of clause (b) of third proviso of clause (23C) of section 10 or not to be excluded from total income under the provisions of clause (d) of sub-section (1) of section 13; or
(iv) any income which is deemed to be income under the twenty first proviso to clause (23C) of section 10 or which is not excluded from total income under clause (c) of sub-section (1) of section 13; or
(v) any income which is not excluded from total income under clause (c) of sub-section (1) of section 11.
For this purpose, Clause 28 of the Finance Bill, 2022 inserts a new section 115BBI in the following manner-
Insertion of new sections 115BBH and 115BBI.
28. After section 115BBG of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of April, 2023, namely:–
........
Specified income of certain institutions.
115BBI. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any specified income, the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated at the rate of thirty per cent. on the aggregate of such specified income; and
(ii) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of specified income referred to in clause (i).
(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the specified income referred to in clause (i) of sub-section (1).
Explanation.–For the purposes of this section, “specified income” means–
(a) income accumulated or set apart in excess of fifteen per cent. of the income where such accumulation is not allowed under any specific provision of this Act; or
(b) deemed income referred to in Explanation 4 to the third proviso to clause (23C) of section 10, or sub-section (1B) or sub-section (3) of section 11; or
(c) any income, which is not exempt under clause (23C) of section 10 on account of violation of the provisions of clause (b) of the third proviso of clause (23C) of section 10, or not to be excluded from the total income under the provisions of clause (d) of sub-section (1) of section 13; or
(d) any income which is deemed to be income under the twenty-first proviso to clause (23C) of section 10 or which is not excluded from the total income under clause (c) of sub-section (1) of section 13; or
(e) any income which is not excluded from the total income under clause (c) of sub-section (1) of section 11.’.
Explaining the proposed provisions of new section 115BBI
Clause 28 seeks to insert new section 115BBI relating to specified income of certain institutions.
Sub-section (1) of the proposed new section 115BBI provides that where the total income of an assessee, being a person in receipt of income on behalf of any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any specified income, the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated at the rate of thirty per cent. on the aggregate of such specified income; and
(ii) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of specified income referred to in clause (i).
Sub-section (2) of the said section provides that no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act in computing the specified income referred to in clause (i) of sub-section (1).
The Explanation to the said sub-section provides that "specified income" means––
(a) income accumulated or set apart in excess of fifteen percent of the income where such accumulation is not allowed under any specific provisions of the Act; or
(b) deemed income referred to in Explanation 4 to third proviso to clause (23C) of section 10 or sub-section (1B) or (3) of section 11; or
(c) any income which is not exempt under clause (23C) of section 10 on account of violation of the provisions of clause (b) of the third proviso of clause (23C) of section 10, or not to be excluded from the total income under the provisions of clause (d) of sub-section (1) of section 13; or
(d) any income which is deemed to be income under the twenty-first proviso to clause (23C) of section 10 or which is not excluded from the total income under clause (c) of sub-section (1) of section 13; or
(e) any income which is not excluded from the total income under clause (c) of sub-section (1) of section 11.
These amendments will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.
Section 271AAE: Penalty for passing on unreasonable benefits to trustee or specified persons
Under section 13 of the Act, trusts or institution are required not to pass on any unreasonable benefit to the trustee or any other specified person. In order to discourage such misuse of the funds of the trust or institution by specified persons, it is proposed to insert a new section 271AAE in the Act to provide for penalty on trusts or institution under both the regimes which is equal to amount of income applied by such trust or institution for the benefit of specified person where the violation is noticed for the first time during any previous year and twice the amount of such income where the violation is notice again in any subsequent year.
The proposed section seeks to operate without prejudice to any other provision of chapter XXI. Thus, if any penalty is leviable under any of the other provisions of this chapter, in addition to the proposed penalty, that penalty would also be applicable.
The proposed new section seeks to provide that, if during any proceeding under the Act, it is found that a person, being any trust or institution, has violated the provisions of section 13(1)(c), the Assessing Officer may direct that such person shall pay by way of penalty,
i) a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13 where the violation is noticed for the first time during any previous year; and
ii) a sum equal to two hundred percent of the aggregate amount of income of such person applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13, where violation is noticed again in any subsequent previous year.
For this purpose, Clause 76 of the Finance Bill, 2022 proposes to insert a new section 271AAE in the following manner-
Insertion of new section 271AAE.
76. After section 271AAD of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2023, namely:––
Benefits to related persons.
“271AAE. Without prejudice to any other provision of this Chapter, if during any proceedings under this Act, it is found that a person, being any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in subclause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medicalinstitution referred to in sub-clause (via) of clause (23C) of section 10, or any trust or institution referred to in section 11 has violated the provisions of the twenty-first proviso to clause (23C) of section 10, or clause (c) of sub-section (1) of section 13, as the case may be, the Assessing Officer may direct that such person shall pay by way of penalty––
(a) a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13, where the violation is noticed for the first time during any previous year; and
(b) a sum equal to two hundred per cent. of the aggregate amount of income of such person applied, directly or indirectly, by that person, for the benefit of any person referred to in sub-section (3) of section 13, where violation is noticed again in any subsequent previous year.”.
Explaining the proposed provisions of new section 271AAE
Clause 76 seeks to insert section 271AAE in the Act relating to benefits to related persons.
The proposed new section provides that without prejudice to any other provisions of Chapter XXI of the Act, if during any proceedings under this Act, it is found that a person, being any fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10, or any trust or institution referred to in section 11 has violated the provisions of the twenty-first proviso to clause (23C) of section 10 or clause (c) of sub-section (1) of section 13, as the case may be, the Assessing Officer may direct that such person shall pay by way of penalty–
(a) a sum equal to the aggregate amount of income of such person applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13, where the violation is noticed for the first time during any previous year; and
(b) a sum equal to two hundred per cent. of the aggregate amount of income of such person applied, directly or indirectly, by that person, for the benefit of any person referred to in sub-section (3) of section 13, where violation is noticed again in any subsequent previous year.
This amendment will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.
Note: This article presents the proposed amendments related to trust and NGOs in detail. A short and concise article on the subject in a simple manner for easy understanding will be published separately.
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