INTRODUCTION

The Finance Bill, 2024 (“the Bill”), for the purpose of rationalising the provisions of Charitable Trusts and Institutions, proposes certain amendments under the following sub-headings: 

1. Merger of trusts under first regime with second regime

2. Merger of trusts under the exemption regime with other trusts

3. Condonation of delay in filing application for registration by trusts or institutions

4. Rationalisation of timelines for funds or institutions to file applications seeking approval under section 80G

5. Rationalisation of timelines for disposing applications made by trusts or funds or institutions, seeking registration for exemption under section 12AB or approval under section 80G

These proposals are discussed seriatim:

Merger of trusts under first regime with second regime

Background: The provisions granting exemption to certain educational, medical and other charity institutions existed in two sets of provisions.  These were referred to as the “first and second regime” by The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (“TOLA”). The first is contained in the provisions of sub-clause(s) (iv), (v), (vi) or (via) of clause (23C) of section 10 of the Income Tax Act, 1961 (“the Act”) and the second is contained in the provisions of sections 11 to 13 thereof.  The provisions of the respective regimes lay down the procedure for filing application for approval/ registration, the conditions subject to which such approval/ registration shall be granted or can be withdrawn etc. 

Over the last couple of years, vide TOLA and other successive Finance Acts, the said procedure and conditions governing the two regimes have been largely aligned.  The main remaining difference being that the trusts of the first regime do not have the option to apply their unspent income in a subsequent year.

After alignment, the necessity of having two sets of provisions was in question. So, to take forward the process of simplification of procedures and to reduce administrative burden, the Bill proposes that the first regime be sunset, and trusts, funds or institutions be transited to the second regime in a gradual manner.

Proposed Amendment: It is, therefore, proposed that:

• Applications seeking approval or provisional approval under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10, and filed on or after 1st October 2024, shall not be considered.

• Applications filed under these sub-clauses before 1st October 2024, and which are pending would be processed and considered under the extant provisions of the first regime itself.

• Approved trusts, funds or institutions would continue to get the benefit of exemption, as per the provisions of sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10, till the validity of the said approval.

• They would be eligible to apply for registration, subsequently, under the second regime. Amendments have accordingly been proposed in section 12A.

• Certain eligible modes of investment, under the first regime ( those specified in clause (b) of third proviso to clause (23C) of section 10) shall be protected in the second regime, by way of amendment in section 13.

Impact of the Amendment:  On or after 1^st October 2024, trusts or institutions will be registered as per the provisions applicable to second regime only.  The existing institutions of the first regime will also have to apply for renewal of registration under the provisions of second regime only, after the expiry of the validity of their existing approval. Thus, the provisions of first regime as applicable to the institutions covered by clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 will become otiose, in due course.  However, their existing approval will continue to be valid till the expiry of the period for which such approval has been granted.

Comments: The Institutions of the first regime will be benefitted by these proposals.  Firstly, the provisions of section 10(23C) of the Act are cumbersome as there are about 23 Provisos to the main section and difficult to comprehend. Secondly, they had to walk on a tight rope after the decision dated 19^th October, 2022 of the Hon’ble Supreme Court in the case of M/S New Noble Educational Society vs The Chief Commissioner of Income Tax [TS-5192-SC-2022-O] whereby a new meaning was given to the word ‘solely’ appearing in section 10(23C).   

Note: These amendments will take effect from the 1st day of October 2024 and will apply to applications made on or after this date. However, all applications pending on that date will be governed by the existing provisions.

Condonation of delay in filing application

for registration by trusts or institutions

Background:  TOLA required all the existing trusts to apply for registration/approval on or before 30.06.2021. However, considering the difficulties in the electronic filing of Form No. l0A, the Central Board of Direct Taxes (the Board) in exercise of the powers conferred upon it under Section 119 of the Act extended the due date for filing Form No. 10A in such cases to 31.08.2021 vide Circular No.12 of 2021 dated 25 .06.2021, to 31.03.2022 vide Circular No. 16 of 2021 dated 29.08.2021 and further till 25.11.22 vide Circular No. 22 of 2022 dated 01.11.2022.

A trust or institution desirous of seeking registration under section 12AB for the first time is inter alia required to apply within timelines specified in clause (ac) of sub-section (1) of section 12A. It has been noted that at times trusts or institutions are unable to file application within specified timelines.

Proposed Amendment:  The Bill proposes that the Principal Commissioner/ Commissioner may be enabled to condone the delay in filing application and treat such application as filed within time. The delay may be condoned if he considers that there is a reasonable cause for the same.

Impact of the Amendment:  If a trust or institution fails to apply within time specified, it may become liable to tax on accreted income as per provisions of Chapter XII-EB of the Act. A situation of permanent exit of trust or institution from the exemption regime may also arise. So, this amendment will ensure that there is no hardship in genuine cases.

COMMENT: The extensions given by the CBDT as stated in the introductory paragraph were general in nature and applied to all trusts or institutions.  But the proposed amendment will give relief on case-to-case basis after considering the cause for delay. 

Note: These amendments will take effect from the 1st day of October 2024.

III. Rationalisation of timelines for funds or institutions

to file applications seeking approval under section 80G

Background: Section 80G of the Act, inter alia, provides for the grant of approval to certain funds or institutions for receiving donation. Deduction is available for donations to approved funds or institutions, in the hands of the assessee making such donations. The first proviso to sub-section (5) of section 80G provides timelines for filing application for approval, for funds or institutions referred to in sub-clause (iv) of clause (a) of sub-section (2) of section 80G. The second proviso lays down the procedure for processing the same.

It has been noted that at times funds or institutions are unable to file application within specified timelines. A situation of unintended permanent exit of fund or institution from section 80G approval may also arise.

Proposed Amendments: It is proposed to amend the first and second provisos to rationalise the timelines for filing applications for approval.

Note: These amendments will take effect from the 1st day of October 2024.

Rationalisation of timelines for disposing applications made by trusts or funds or institutions, seeking registration for exemption under section 12AB or approval under section 80G

Background: Applications seeking registration under section 12AB, filed by trusts or institutions, are required to be processed by the Principal Commissioner or Commissioner within a period of six months from the end of the month in which the application was received. Similarly, the applications of funds or institutions referred to in sub-clause (iv) of clause (a) of sub-section (2) of section 80G, seeking approval are required to be processed by the Principal Commissioner or Commissioner within a period of six months from the end of the month in which the application was received.

Proposed Amendment: For better administration and monitoring, it is proposed to rationalise timelines for disposing applications made by trusts or funds or institutions to six months from the end of the quarter in which the application was received.

Impact of the Amendment:  Time of six months available to the Principal Commissioner or Commissioner for disposing off an application for registration under section 12AB will be calculated from the end of the quarter in which the application was made instead of the end of the month in which the application was made.  Thus, he will get more time to dispose of the application for registration.

Comment: Donors prefer to make voluntary contributions to a trust which is approved/ registered under the Act. So, there is a need for speedy disposal of a trust’s application for registration.  Therefore,  the proposed extension of time for disposal of such an application by the Principal Commissioner or Commissioner is a retrograde step.

Note: These amendments will take effect from the 1st day of October 2024.

V. Merger of trusts under the exemption regime with other trusts

Background: The Income Tax Act is primarily concerned with financial aspects and exemption of the trusts or institutions of the first and second regimes. It does not lay down any rules for their formation or functioning.  But when a registered or approved trust or institution ceases to exist, the Act steps in to ensure that the exemption granted by it is not abused.  The Act provides for accredited tax on accredited income vide the provisions contained in Chapter XII-EB, which are commonly called as ‘EXIT TAX” and which result into recovery of the amount of exemption already granted in earlier years.  It is seen that in many cases the exit tax exceeds the quantum of exemption so granted. 

The provisions of Section 115TD are attracted in any of the three situations, viz., (a) when a specified person is converted into any ineligible form, (b) merges with another entity or (c) fails to transfer its assets upon dissolution to any other specified person within the prescribed period.

Proposed Amendment: The proposed amendment is about the second situation stated hereinabove. The Bill proposes to insert section 12AC to prescribe the conditions under which a merger shall not attract provisions of Chapter XII-EB.  The proposed section 12AC is reproduced below:  

“Where any trust or institution registered under section 12AB or approved nder sub-clause (iv) or subclause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, merges with another trust or institution, the provisions of Chapter XII-EB shall not apply if––

(a) the other trust or institution has same or similar objects;

(b) the other trust or institution is registered under section 12AA or section 12AB or approved under subclause (iv) or sub-clause (v) or sub-clause (vi) or subclause (via) of clause (23C) of section 10, as the case may be; and

(c) the said merger fulfils such conditions as may be prescribed.”  

Impact of the Amendment:  It is seen that the first two conditions of the proposed section 12AC are same as stated in the provisions of section 115TD(1)(b).  The proposed section proposes to prescribe additional third condition which is yet to be prescribed and so, the impact of the amendment is not yet clear.  However, the legislature claims that the proposed amendment will provide greater clarity and certainty to taxpayers.  

Comments:  The objects of all the trusts or institutions registered or approved under the relevant provisions of the Act must confirm to the provisions of section 2(15) of the Act and so, all trusts are supposed to be charitable or religious wholly or in part. However, the objects as specified in section 2(15) of the Act has seven limbs and the objects of a trust may or may not contain one or more or all the seven limbs.  In this sense, their objects may be different. If the legislature means that the objects of the trusts should be same or like those seven limbs, the provision should specifically state so.  

For example, “relief of poor” is one of the objects specified in section 2(15). But neither the word ‘relief’ nor ‘poor’ has been defined in the Act.  The Hon’ble Supreme Court  in the case of Thiagarajar Charities v. Addl. CIT [1997] 92 Taxman 152/225 ITR 1010 (SC)] = [TS-5053-SC-1997-O], concluded that, inter alia, an object to establish, maintain, run develop, etc. and assist in the establishment, maintenance, running, development of a school or hostel for benefit of students, libraries or reading rooms, hospitals, clinics, dispensary, etc. shall be considered under “Relief of Poor”.  One of the trust may maintain a hostel and another may maintain a dispensary.  The question is whether their objects are same or similar.

Moreover, the words “same” or “similar” have different meaning and significance.  The word “same” is narrower in scope.  By using these two words as alternative to each other, the importance of the word “same” is lost. 

Clarity is required about the first proposed condition.

Lacuna:  Consequent to the proposed insertion of section 12AC, the provisions of section 115TD(1)(b) ought to have been deleted. 

Note: These amendments will take effect from the 1st day of April, 2025.