The Author Mr. Harish Kara (Chartered Accountant), writes about the rationalization of provisions applicable to Charitable Trusts through the amendments proposed by the Finance Bill, 2022 relating to taxability of Trusts and the implications thereof. He analyses the amendments proposed under the two regimes applicable to charitable trusts which are categorised as trusts or institutions referred to in Section 10(23C)(iv)/(v)/(vi)/(via) and Trusts and Institutions registered u/s 12AA/12AB. He highlights that the proposed rationalisations can be achieved through effective monitoring and implementation. Underscores that the proposed amendments aim to bring consistency in the two regimes and provide clarity. He discusses the attributes of the proposed amendments regarding maintenance of books of account for Trusts, levy of penalty for passing unreasonable benefits to the Trustees / Specified Persons, Time Limit for cancellation of Registration etc.

Rationalisation of the provision of Charitable Trust and Institutions

The exemption to trusts or institutions is available under the two regimes.  Fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 categorised under first regime.  Trusts registered under section 12AA/12AB categorised under second regime.

The Finance Bill proposes to rationalise provisions of both the above exemption regimes by ensuring their effective monitoring and implementation; bringing consistency in the provisions of the two exemption regimes; and providing clarity on taxation in certain circumstances.

Books of account to be maintained by the trusts or institutions under both the regimes

To maintain books of account by the trusts or institutions under both the regimes it is proposed to amend clause (b) of sub-section (1) of section 12A of the Act and tenth proviso to clause (23C) of section 10 of the Act to provide that where the total income of the trust or institution under both regimes, without giving effect to the provisions of clause (23C) of section 10 or 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.

Penalty for passing on unreasonable benefits to trustee or specified persons

As per section 13(1)(c) of the Act, trusts or institution under the second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person. To discourage misuse of the funds of the trust or institution by specified persons as s, it is proposed to insert a new section 271AAE in the Act to provide for penalty on trusts or institution under both the regimes for passing on any unreasonable benefit to the trustee or any other specified persons.   As per the said proposed new section penalty is leviable 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.

Time Limit for cancellation of Registration

As per first and second provisos to clause (23C) of section 10 and clause (ac) of sub-section (1) of section 12A, with effect from 01-04-2021, provisional registrations or provisional approvals or re-registrations or approvals in certain cases, on application made to the Prescribed Authority/Principal Commissioner of Income Tax are granted in an automated manner and the respective rules have been amended accordingly.  The said Authorities also can cancel such registration for non-genuine trusts or institutions.  However, there is no time limit prescribed for the PCIT/CIT to decide on intimation by the Assessing Officer under section 143(3) for the withdrawal of approval.

To fix time limit for cancellation of registrations, it is proposed to substitute sub-section (4) of section 12AB 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—

(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;

Also 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 which is 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 out by the trust or the institution under the second regime, which is not genuine; or is not being carried out in accordance with all or any of the conditions subject to which it was registered; or the trust or the institution under the second regime has not complied with the requirement of any other law, 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.

Sub-section (5) of section 12AB of the Act is to be substituted with a new sub-section (5) to provide that that the order under clause (ii) or (iii) of subsection (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 subsection (4).  Similar substitutions are proposed to fifteenth proviso to clause (23C) of section 10.

Changes to Sec 11(3)

As per section 11(1), to claim exemption, a trust or institution is required to apply 85% of its income during any previous year.  If it is not able to apply 85% of its income during the previous year, it is allowed to accumulate under section 11(2), for a period not exceeding 5 years subject to fulfilling certain conditions.   Similarly, 11(3) 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. While, on the other hand, there are no such specific provisions under clause (23C) of section 10 of the Act.

 Now it is proposed that section 11(3) 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 subsection (2) of section 11, but not utilised for the purpose for which it is so accumulated or set apart. 

Also Similar provision is proposed to Explanation 3,4 & 5 to the third proviso to clause (23C) of section 10 of the Act to provide that for the purposes of determining the amount of application under this proviso, where eighty-five per cent of the income referred to in clause (a) of the third proviso, is not applied, wholly and exclusively to the objects for which the trust or institution under the first regime is established, during the previous year but is accumulated or set apart, either in whole or in part, for application to such objects, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, proposing the conditions analogous to section 11(2) and 11(3) of the Act.

Twenty First Proviso to Clause (23C) of Section 10, analogues to Sec 13

To bring consistency in the provisions relating to payment to specified person i) Under section 13 of the Act, trusts or institutions under the second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person, it is proposed to insert twenty first proviso in clause (23C) of section 10 of the Act to provide that where the income or part of income or property of any trust or institution under the first regime, 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 the 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 trust or institution under the first regime.

In the Finance Act, 2016 new Chapter XII-EB was introduced to charge tax of accreted income of the trust in certain cases. A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its activities and dissolve or may also merge with any other charitable or non-charitable institution, or it may convert into a non-charitable organization. In order to ensure that the intended purpose of exemption availed by trust or institution is achieved, a specific provision in the Act was brought about for imposing a levy in the nature of an exit tax which is attracted when the organisation is converted into a non-charitable organisation or gets merged with a non-charitable organisation or a charitable organisation with dissimilar objects or does not transfer the assets to another charitable organisation.  However, the said provisions of the Chapter XII-EB have been made applicable to only the trusts or institutions under the second regime.  To bring consistency, in both regimes it is proposed to amend the provisions of section 115TD, 115TE and 115TF of the Act to make them applicable to any trust or institution under the first regime as well.

Filing of return by institutions claiming exemption

As per 12A(1)(ba) of the Act, If a trust or institution under the second regime does not furnish return of income in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section, then provisions of sections 11 and 12 are not applicable.  However, there is no similar provision in the other regime.  To bring consistency it is proposed to insert twentieth proviso to 10(23C) of the Act to provide that for the purpose of exemption under this clause, any trust or institution under the first regime is required to furnish the return of income for the previous year in accordance with the provisions of sub-section (4C) of section 139 of the Act, within the time allowed under that section.

Allowing certain expenditure in case of denial of exemption

Presently there is no clarity on computation of taxable income in case of non-availability of exemption. In cases where exemption is denied to the trust or institution for the late submission of the audit report, belated filing of return of income etc., its entire receipts are subjected to taxation and no deduction for any application are allowed.

In order to bring clarity in the computation of the income chargeable to tax in such cases, the new section 13(10) is proposed to provide that where the provisions of sub-section (8) are applicable to any trust or institution under the second regime or such trust or institution violates the conditions prescribed 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 (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.  Also new Explanation to section 13(10) of the Act proposed 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".  A new section 13(11) also proposed in 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.

It is proposed to insert twenty second and twenty third provisos to clause 10(23C) the Act to provide that where any trust or institution under the first regime violates the provisions of the eighteenth proviso or violates the conditions prescribed under tenth or twentieth proviso, 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 such trust or institution, subject to the conditions analogues to the provisions to proposed new sections 13(10) and 13(11).

Taxation of certain income of the trusts or institutions under both the regimes 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 under the first or second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person. For the trusts or institutions under the second regime of 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. For trusts or institutions under the first regime similar provisions is proposed by way of insertion of twentieth proviso to clause 10(23C) of the Act.

(b) It is mandatory for any trust or institution under the first regime, to keep their funds in the specified modes. Third proviso of section 10(23C) of the Act specifically provides that the funds of such trusts or institutions shall be maintained in these specified modes. For the trusts or institutions under the second regime, 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.

Further, the trusts or institutions under both the regimes 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 maximum 5 years.

Special provisions are proposed to ensure that the income applied in violation is taxed at special rate without deduction. Accordingly, it is proposed to amend section 13(1)(c) of the Act and to insert new twenty first proviso in clause 10(23C) 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.  Also new Explanation 4 in third proviso to section 10(23C) of the Act is proposed which provide that income accumulated 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.  Such income are now proposed to be taxed at special rates. Therefore, a new section 115BBI proposed in the Act providing that where the total income of any assessee being a trust under the first or second regime, includes any income by way of any specified income, the income-tax payable shall be at thirty per cent on the aggregate of specified income.

Amendments proposed to section 80G:

Voluntary Contributions 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 section 11(1) of the Act to provide that place notified under 80G(2)(b), any sum received by such trust or institution as a voluntary contribution for the purpose of renovation or repairs of such palaces notified under 80G(2)(b), 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 section 11(5).

It is also proposed to insert Explanation 3B to section 11(1) 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 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.  Similar provisions are proposed to insert Explanation 1A & 1B in section 10(23C).

5.4 Clarifying that application will be allowed only when its actually spent by Trust or institution under both the regimes 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 3 to clause 10(23C) and Explanation to section 11 to provide that any sum payable by any trust under the first or second regime shall be considered as application of income only 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..