Mr. Rajesh Patil (Chartered Accountant) discusses the amendments proposed in the Finance Bill, 2023 with respect to Charitable Institutions. The author throws light on all the amendments that will affect taxability and compliance. He also analyses the consequences on lapse in re-registration by the Charitable Institutions. He is of the view, " The charitable trusts and institutions need to be very careful in planning their affairs considering the developments that have taken place in the recent past and need to plan their activities with utmost care. We also need to see how these proposals are finally enacted by the time the Finance Bill is passed."

“Charitable and Religious Trust – An overview of Finance Bill 2023 proposals”

Background

In the recent past there have been series of developments for charitable and Religious Trusts which has led to divergent interpretations and debates. The Finance Bill 2023 also proposes certain amendments in this regard.

The exemption from tax to Charitable and Institutions is available under broadly two regimes on fulfilments of prescribed conditions viz. (i) Exemption for Funds, institutions, trust, university, other educational institution, hospital, or other medical institution approved under Section 10(23C) (ii) Exemption under Section 12AA/12AB. Section 11 provides an exemption to trusts or institutions registered under Section 12AB while Section 10(23C) provides exemption to certain funds or institutions approved under this provision.

Registration or Approval

Charitable or Religious Trusts are required to take registration under Section 12AB or approval under Section 10(23C) to avail of the exemptions. Further, Section 80G also allows deduction to the donor for the donations made to PCIT/CIT approved fund or institution. The new scheme introduced from 1 April 2021 provides that the first-time registration or approval under section 12AB, Section 10(23C) and Section 80G required to be made in two stages viz. provisional and regular. The two stage requirements posed a challenge to the trusts where activities had been already commenced, as these trusts required to simultaneously apply for two registrations.

Finance Bill 2023 proposals

Direct registrations

The Finance Bill 2023 proposes amendment to allow direct final registration/approval without applying for provisional registration/approval. The trust or institutions need to make an application for regular registration/approval if it has already commenced the activities and it has not claimed any exemption under section 10(23C) or Section 11/12. The PCIT or CIT on receipt of the application may call for the documents and information as he thinks fit to satisfy genuineness of activities or trust or institution for the purposes of achieving the objectives. The genuineness signifies that the activities of trust/institution should be real and not sham or bogus. The PCIT/CIT also need to ensure that the trust or institution complies with any other law which is material for the purposes of achieving objects of the trust or institution. After making necessary enquiries the PCIT/CIT need to pass a speaking order granting or refusing the registration within six months from the end of the month in which the application was received. The PCIT/CIT shall pass the order registering the trust/institution for five years.

Provisional registrations

The Finance Bill 2023 proposes that only those trusts and institutions shall file and application for provisional registration/approval that has not yet commended its activities. In such cases, the application has to be filed at least 1 month before the commencement of the previous year relevant to the assessment year from which the registration/approval is sought. On plain reading of the proposal, it appears that the PCIT/CIT does not have the power to satisfy himself about the objects and has to pass an order in writing granting provisional registration/approval within one month from the end of the month in which the application for registration was received. The provisional registration must be granted for 3 years from the assessment year from which the registration is sought. The trust or institution provisionally registered/approved need to convert it’s provisional registration into regular registration by making necessary application six months prior to expiry of three year period of the granted approval.

Deduction for donation to other donation to other trusts

The income of trusts and institutions is exempt under both regimes of Section 11/12 and Section 10(23C) provided a minimum of 85% of the income is utilized during the year for religious and charitable purposes. These trusts and institutions can accumulate 15% of their income annually. The mandatory 85% utilisation can either be done by the trust or institution itself or by donation to trusts with similar objectives other than towards corpus of the trust. It was observed that trusts or institutions attempted to circumvent the legislative intent by creating multiple trusts and accumulating 15% at each layer. In order to plug this loophole and trust should be effectively use the money for charitable purposes the Finance Bill 2023 proposes to cap inter-charity donations by restricting the deduction for donations to other charitable trust to only 85% of the donations made to other trusts.

No benefit of exemption if updated return is filed

The existing provisions provided that the benefit of exemption under section 11 or section 10(23C) can be claimed if the return is filed with the due date provided under section 139. The Finance Act 2022 inserted section 139(8A) by which an assessee whether or not such assessee has filed the return allowed updated return to be filed within the time prescribed under that section. Thus there was nothing in the law that restricted the filing of updated return by institutions claiming exemption under section 11 and 12.

The Finance Bill 2023 proposes an amendment to these provisions by providing that the return of income by such trusts and institutions shall be filed within the time allowed under section 139(1) or section 139(4). It thus appears that trusts or institutions filing updated return under section 139(8A) may not be entitled to claim exemption under section 11 or section 10(23C). The exemption shall be available only if the return is filed within the time allowed under section 139(1) or section 139(4). We may expect clarity in this regard by the time the Finance Act 2023 is passed.

Preponement of due date of filing forms

The trusts and institutions are required to get their accounts audited by filing form 10B/10BB one month before the due date of filing the return. Where the trusts and institutions exercised the option of accumulation in form 9A or form 10 as the case may be, the due date to file these forms was the due date for filing of return of income. Auditors in form 10B/10BB also need to report details of Form 9A and Form 10 in their audit report. This created difficulties for the auditors since the due date to file audit report was earlier than the due date for filing form 9A or Form 10. Accordingly, Finance Bill 2023 proposes to prepone the due date for filing Form 9A and Form 10 from due date of filing the return to two months prior to the due date of filing return of income. Accordingly Charitable trusts and institutions need to plan their activities in order to meet the deadlines proposed.

Cancellation of Registration

The Finance Act 2022 introduced new provisions for the cancelation of registration/approval. Under this provisions cancellation proceedings can be initiated suo moto if the PCIT/CIT has noticed specified violation even before the assessment by the Assessing Officer.

The Finance Bill 2023 proposes also to include the cases where the application for approval or registration is incomplete or contains false or incorrect information within the scope of specified violation. Accordingly, it will be imperative for the trust or institutions to ensure that the application is complete and correct.

Extension of Accreted Tax

Under the existing provisions of section 115TD, tax on accreted income under specified circumstances is levied at the maximum marginal rate in addition to income-tax chargeable in the hands of the specified trust or institution. The specified trust or institution can take no credit for such tax levied on accreted income.

The Finance Bill 2023 proposes to extend applicability of these provisions to the following situations:

a. It fails to make an application for re-registration.

b. It fails to convert provisional registration to regular registration or

c. It fails to get the renewal of registration within the specified period.

Accordingly, the Trusts or institutions need to be very mindful of the timely applications for registrations or renewal of registrations apart of other existing specified circumstances.

Application our of corpus or loans & borrowings

The Finance bill 2023 proposes that:

a. Application out of corpus or loans or borrowings before 1 April 2021 would not be allowed as an application for charitable or religious purposes when such amount is deposited back or invested in to corpus or when the loan or borrowing is repaid.

b. If the trust or institution invests or deposits back the amount into the corpus or repays the loan within 5 years of application from the corpus or loan, then such investment/depositing back into the corpus or repayment of the loan will be allowed as an applicable for charitable or religious purposes.

c. The conditions that are required to be satisfied in the case of an application for charitable or religious purposes must also be satisfied while making the application from the corpus or loan or borrowing.

The charitable trusts and institutions need to be very careful in planning their affairs considering the developments that have taken place in the recent past and need to plan their activities with utmost care. We also need to see how these proposals are finally enacted by the time the Finance Bill is passed.

Disclaimer:

The views expressed are personal views of the author. The application and impact of tax laws can vary widely based on the specific facts involved. The author is not responsible for any errors or omissions, or for the results obtained from the use of this information. In no event will the author be liable to the reader or anyone else for any decision made or action taken by relying on the information in this article or for any consequential, special or similar damages.