The Finance Bill, 2020 proposes to make a plethora of procedural changes in the matter of granting exemption to Charitable Institutions from income tax and continuance thereof. Author Dindayal Dhandaria, Chartered Accountant, examines the nuances of the proposals and their impact on the charity institutions. The author contemplates that the electronic process of registration and the automatic grant of URN will remove hardships caused due to loss of registration certificate and/or number. The author discusses the proposal to fix the duration of registration for 5 years and subject to examination by the authorities after every 5 years, without a provision for condonation for delay in applying for renewal of registration, and opines it as a cumbersome one, keeping the assessees on toes. Further, speaking of provisional registrations, the author ponders on what would happen in the eventuality of no commencement of activities of the Trust for a long period in absence of provision for renewal of the Provisional Registration. The author also points out at lack of clarity on how the income of the provisionally registered charity institution between the periods from its formation till rejection of its application would be taxed or dealt with if its application is not approved. The authors in his concluding remarks suggests that, "If it is necessary in the wisdom of the IT Dept. or for reasons known to it alone, such cumbersome proposals should not be made applicable to all the institutions, but to institutions exceeding gross receipts beyond a threshold limit or based upon some suitable criteria".
Proposals Relating To Charity Institutions In Finance Bill, 2020 -"Vishwas To Vivad"!
The Trustees or Managers or Founders or Administrators of various charitable and/or religious institutions, educational institutions, hospitals and medical institutions and funds enjoying exemptions under various provisions of the Income Tax Act, 1961 have never been at ease with the Revenue Authorities. Such institutions called as “Charity Institutions” by the Hon’ble Finance Minister Smt. Nirmala Sitaramanji had a fair share of litigations with the Income Tax Department. The Finance Bill, 2020 proposes to make a plethora of procedural changes in the matter of granting them exemption from income tax and continuance thereof. In the name of making such procedural changes, the Bill proposes measures which are destined to have a disastrous impact on the charity institutions unless the law is adhered to by them in all respects. The changes proposed by the Bill are cumbersome and would add to the misery of the persons administering the charity institutions. They have genuine reasons to allege that while the Income Tax Department is moving towards “Vivad to Vishwas” in other cases, it is moving towards “Vishwas to Vivad” in their case.
2. SCOPE OF THIS ARTICLE
In this article, the existing provisions section 10(23C)(vi), the changes thereto proposed by the Bill, and the reasons for changes are explained along with the Author’s comments. It does not deal with the following related amendments:
1. Proposals relating to amendments of section 12A, 12AA and 12AB;
2. Proposals relating to amendment of section 35;
3. Proposals relating to section 80G, 80GGA; and
4. Consequential amendments
3. THE LEGEND
For the sake of brevity, in this article, unless the context otherwise required:
1. The term “the Act” shall mean Income Tax Act, 1961;
2. The term “the Bill” shall mean the Finance Bill, 2020;
3. The term “charity institutions” shall mean an University or other educational institution referred to in clause (vi) of sub-section (23C) of section 10 of the Act;
4. The term “The Prescribed Authority” shall mean the Principal Commissioner of Income Tax or Commissioner.
4. EXISTING CHARITY INSTITUTIONS TO APPLY AFRESH FOR APPROVAL
The existing first proviso to clause (23C) of section 10 of the Act provides for making an application for grant of exemption by a charity institution and the second proviso lays down the conditions for granting the same.
The Bill proposes to substitute both the above provisos.
As per clause (i) of the substituted first proviso, an existing charity institution which has been approved under the existing second proviso is required to make an application in the prescribed form and manner to the Prescribed Authority, for grant of approval within three months from the date on which this clause comes into force.
Clause (i) of the substituted second proviso provides that upon receipt of such application, the Prescribed Authority shall pass an order in writing granting approval to it for a period of five years.
As the Bill provides that this clause shall come into force w.e.f.1st June, 2020, all the existing charity institutions will be required to make a fresh applications for approval within 31st August, 2020. The grant of approval for a period of five years will be automatic as no enquiry is envisaged in case of such institutions.
It is seen that the Registration Certificates and/or registration numbers are not available with many charity institutions which were registered several years ago. Even the Income Tax Department is unable to find its old records. Now-a-days, the e-Returns require such institutions to mandatorily quote their registration numbers and failure to do so results into non-furnishing of Returns of Income by them which has adverse consequences which are illustrated in the following case:
In JCIT vs CRM Jat Post Graduate College, [TS-7999-ITAT-2019(Chandigarh)-O], it was held that where assessee's claim for exemption of income was rejected because registration certificate granted under section 12AA had been lost/misplaced, in view of fact that details of registration certificate such as file number and date etc. were produced on record and, moreover, there was no evidence showing that registration granted to assessee earlier had been subsequently cancelled, impugned order denying assessee's claim was to be set aside.
In paragraph 124 of her Budget Speech, the Hon’ble Finance Minister Smt. Nirmala Sitaraman has proposed to make the process of registration completely electronic under which a Unique Registration Number (URN) shall be issued to all the existing charity institutions and also to institutions seeking approval after coming into force of the Bill.
So, a fresh application for approval and automatic grant of URN to these Charity Institutions will remove the hardship caused due to loss of registration certificate and/or number, as illustrated in the above case.
5. RENEWAL OF APPROVAL OF THE CHARITY INSTITUTIONS:
Under the existing provisions of law, an approval once granted to a charity institution remains in force till the same is withdrawn as provided in 15th proviso to clause (23C) of section 10. In other words, it is perpetual and there is no requirement to apply for renewal.
As stated earlier, a charity institution will now be granted approval for a period of five years – neither less nor more – and it shall expire at the end of such period. The Bill makes provision for grant of approval after the expiry of such period. It provides that a charity institution shall make an application for renewal of registration at least six months prior to expiry of the said period.
Upon receipt of such application, the Prescribed Authority shall:
(a) call for such documents or information from it or make such inquiries as he thinks necessary in order to satisfy himself about
the genuineness of activities of such charity institution; and
the compliance of such requirements of any other law for the time being in force by it as are material for the purpose of achieving its objects; and
(b) after satisfying himself about the objects and the genuineness of its activities under item (A), and compliance of the requirements under item (B), of sub-clause (a),––
(A) pass an order in writing granting approval to it for a period of five years;
(B) if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its approval after affording it a reasonable opportunity of being heard;
It is to be noted that unlike the application for approval by existing charity institutions made after enactment of the Bill, the grant of approval in cases of renewal is not automatic. The Prescribed Authority will have powers to make certain enquiries as stated above and may grant approval for a further period of five years or reject such application resulting into cancellation of approval after affording a reasonable opportunity of being heard to the charity institution.
The above process of approval can be repeated every five years.
In spite of the provision to review and renew approval every five years, no change is proposed in the existing requirements of furnishing returns of income annually, their assessment and the power given to the specified Authorities to cancel the registration of the charity institutions. Notwithstanding that the Assessing Officer examines the genuineness of the activities of the trust every year, the same will be examined again every fifth year by the Prescribed Authority at the time of renewal of approval. Moreover, there is no provision for condoning delay in making application for renewal. It is a cumbersome provision and a charity institution would have to be on its toes.
This provision relating to withdrawal of approval has generated a lot of litigation. It will be easier on the part of the Income Tax Authorities to reject an application for approval as compared to withdrawing the same. It is, undoubtedly, a pro-revenue measure and any abuse thereof would result into fresh litigation.
6. PROVISIONAL REGISTRATION
In the existing law, there is no provision for provisional registration of a charity institution.
Clause (iv) of the substituted first proviso of the Bill proposes that except in cases of existing charity institutions and those applying for renewal as stated in paragraphs 3 & 4 hereinabove, a charity institution applying for the first time after enactment of the Bill shall, in the first instance, be granted a “Provisional Registration”. For this purpose, it shall have to apply for approval at least one month prior to the commencement of the previous year relevant to the assessment year from which the said approval is sought and the Prescribed Authority shall pass an order in writing granting approval to it provisionally for a period of three years from the assessment year from which the registration is sought.
As per the existing second proviso, prior to its amendment by the Finance (No. 2) Act, 2019 w.e.f. 1.9.2019, the Prescribed Authority had to satisfy itself about the genuineness of the activities of the charity institution. After the amendment, in addition to this, the Prescribed Authority has to satisfy itself about the compliance of requirements under any other law as are material for the purpose of achieving its objects.
If a charity institution applies for approval before commencement of its activities and is not likely to commence the same within the time available to the Prescribed Authority for disposal of its application, it would be unable to satisfy itself about the requirements laid down by the above amendment.
Moreover, it has been a contentious issue as to whether a Specified Authority while granting approval to a charity institution should only look into the genuineness of the activities of the institution with reference to its objects or whether it could look into application of its funds also.
In a case before I.T.A.T., Jodhpur Bench, the Tribunal held that at time of registration of trust, what has to be looked into is whether trust is a genuine one or it is a sham institution floated only to avail benefits of exemption under Act. It also opined that stage for consideration of relevance of object of trust and application of its fund would arise at time of assessment when benefits were claimed by assessee in terms of sections 11 and 12. High Court of Rajasthan upheld the order of the Tribunal. However, a SLP against this decision has been admitted by the Hon’ble Supreme Court. Refer CIT (Exemption) vs Dali Bai Sewa Sansthan [TS-5466-SC-2018-O].
In the case of Badri Narain Kanta Devi Katta Charitable Trust v C.I.T. (Exemptions), Jaipur (ITA No 1212/JP/2018, dated JULY 30, 2019), it was held that once objects of assessee-trust is found to be charitable and section 12AA registration is granted, immediate non-start of activity by assessee trust cannot be a reason for denial of approval under section 80G(5).
In view of above developments, the Bill introduces a scheme of “Provisional Registration” which would be granted without making any enquiry.
7. PROVISIONALLY APPROVED CHARITY INSTITUTIONS TO APPLY FOR FINAL APPROVAL:
Clause (iii) of the substituted first proviso of the Bill provides that where a charity institution has been provisionally approved as stated in the preceding paragraph, it shall apply for final approval at least six months prior to expiry of the period of the provisional approval or within six months of commencement of its activities, whichever is earlier.
The above clause further provides that at the time of considering such an application, the Prescribed Authority shall follow the same procedure as in case of an application for renewal of approval as stated in paragraph 4 hereinabove.
A charity institution may or may not commence its activities within the period of three years. If it takes a longer time to commence its activities, there is no provision for renewal of the Provisional Registration.
There is no clarity as to how the income of the provisionally registered charity institution between the periods from its formation till rejection of its application would be taxed or dealt with if its application is not approved.
8. PERIOD OF COMMENCEMENT OF APPROVAL
The Bill proposes to substitute the existing eighth proviso to clause (23C) of section 10.
The substituted eighth proviso provides for determination of the assessment year from which an approval granted under the substituted second proviso shall apply in different cases.
It provides that where the application is made by an existing charity institution under clause (i) of the first proviso, the approval shall apply from the assessment year from which approval was earlier granted to it i.e. from the original date of registration.
It further provides that where the application is made by a provisionally registered charity institution under clause (iii) of the first proviso, the approval shall apply from the first of the assessment years for which it was provisionally approved.
It further provides that in any other case (i.e. the cases of renewal), the approval shall apply from the assessment year immediately following the financial year in which such application is made:
The above-stated provisions would give a certainty about the assessment years from which an approval for exemption would be effective. There would not be any scope for confusion or argument that an approval would be effective from an assessment year subsequent to its grant by the prescribed authorities.
9. TIME LIMIT FOR DISPOSAL OF AN APPLICATION
The Bill proposes to substitute the existing ninth proviso to clause (23C) of section 10, also.
The substituted ninth proviso prescribes the period within which the Prescribed Authority would be required to pass an order on the applications received.
Applications by existing charity institutions covered by clause (i) of the substituted second proviso.
Before the expiry of three months calculated from the end of the month in which the application was received.
Nature of application for approval
Time limit for passing an order
Applications by existing charity institutions covered by clause (i) of the substituted second proviso.
Before the expiry of three months calculated from the end of the month in which the application was received.
Applications for renewal or for grant of approval to provisionally registered charity institutions covered by clauses (ii) and (iii) of the substituted second proviso.
Before the expiry of six months calculated from the end of the month in which the application was received.
Applications by new charity institutions covered by clause (iv) of the substituted second proviso.
Before the expiry of one month calculated from the end of the month in which the application was received.
The above proviso further provides that the above orders shall be passed in such form and manner as may be prescribed.
10. DUE DATE FOR FURNISHING OF AUDIT REPORT
Under the existing law, a charity institution is required to furnish the Audit Report along with its Return of Income. The Bill proposes to change the due date for furnishing the Return of Income from 30th September to 31st October and it further proposes that an Audit Report shall be furnished one month prior to the due date for furnishing of Return of Income.
Consequential amendments are proposed in the tenth proviso to clause (23C) of section 10.
11. TIME LIMIT FOR MAKING APPLICATIONO FOR APPROVAL BY NEW CHARITY INSTITUTIONS
According to the existing sixteenth proviso to clause (23C) of section 10, a new charity institution applying first time for grant of approval or continuance thereof is required to make an application before the 30th day of September of the relevant assessment year from which the exemption is sought.
As against the above, clause (iv) of the substituted first proviso of the Bill enables making such an application at least one month prior to the commencement of the previous year relevant to the assessment year from which the said approval is sought.
As the above-stated two provisions are contradictory to each other, the Bill provides that the sixteenth proviso shall be omitted with effect from the 1st day of June, 2020.
12. TRANSITIONAL PROVISIONS FOR PENDING APPLICATIONS
The existing eighteenth proviso deals with pending applications, on which no notification has been issued before 1st June, 2007. This proviso is no longer relevant and the Bill proposes to substitute it so as to deal with pending applications at the time of coming into force the provisions of the Bill.
The Bill proposes that: all applications made under the existing first proviso pending before the Prescribed Authority, on which no order has been passed before the date on which the substituted first proviso has come into force, shall be deemed to be an application made under clause (iv) of the first proviso on that date.
The Bill provides that the substituted first proviso shall come into force with effect from 1st day of June, 2020. So, all pending applications will be deemed to have been received on 1st day of June, 2020 irrespective of the dates when the applications were actually received.
The above amendment will have the following two consequences:
1. Firstly, such pending applications will have to be disposed off by the Prescribed Authority before the expiry of one month calculated from the end of the month, in which the application is deemed to have been received i.e. by 31st July, 2020.
2. Secondly, such pending applications would, in the first instance, be granted provisional registration. The Charity Institution can apply for final approval as per the new provisions proposed by the Bill.
13. NON-GOVERNMENTAL EDUCATIONAL INSTITUTIONS HAVING ANNUAL RECEIPTS EXCEEDING RS. 1 CRORE TO OBTAIN APPROVAL UNDER SECTION 12AB ONLY.
The Bill proposes to insert a proviso to sub-section (7) of section 11 so as to provide that the registration under section 10(23C) shall become inoperative from the date on which the trust or institution is approved under clause (23C) of section 10 or the date on which this proviso comes into force, whichever is later.
The Bill proposed to insert another proviso to the above sub-section so as to provide that the trust or institution, whose registration has become inoperative under the proposed first proviso, may apply to get its registration operative under proposed section 12AB subject to the condition that on doing so, the approval under clause (23C) or notification under clause (46) of section 10, as the case may be, to such trust or institution shall cease to have any effect from the date on which the said registration becomes operative and thereafter, it would not be entitled to exemption under the respective clause.
At present, the exemptions available under section 11 of the Act are available to all the charitable organisations including the educational institutions. The educational institutions, whether Government or non-government, are entitled to exemption under section 10(23C) of the Act also. While the Government educational institutions and the non-government institutions having annual receipts upto Rs. 1 crore are not required to obtain approval from any Authority, educational institutions having annual receipts exceeding Rs. 1 crore are required to obtain approval from the Prescribed Authority. [refer section 10(23C)(vi)]. Alternatively, such an educational institution can apply for approval under section 12AA also.
Sub-section (7) of section 11 while providing that the charitable and/or religious trusts will not be entitled to deduction under the provisions of section 10 made an exception in respect of clause (1) of clause (23C) thereof. Due to this exception, the educational institutions trusts having annual receipts exceeding Rs. 1 crore are free to avail registration under any alternative provision or under both the provisions [i.e. under section 10(23C)(vi) or 12AA]. Following illustrative cases support this view:
1. In I.T (Exemption), Chandigarh v.Khatu Ji Para Medical Technology Educational & Research Society [TS-5564-HC-2019(Punjab & Haryana)-O], it was held that where Commissioner (Exemptions) had accepted that main aim of assessee society was running of college and educational institutions and made no adverse observation regarding genuineness of objects or activities carried on by society, registration under section 12AA could not have been denied holding that it was entitled to exemption under section 10(23C)(vi).
2. In IT (Exemptions) vs Beant College of Engineering & Technology [TS-5717-HC-2019(Punjab & Haryana)-O], it was held that where AO rejected assessee's claim for registration under section 12AA on ground that it had been claiming exemption under section 10(23C)(iiiad), since assessee was free to avail registration under any alternative provision if more than one alternatives were available, impugned order passed by Assessing Officer was to be set aside.
A Trust or a Society may be running various hospitals and colleges and may be carrying out other charitable activities and thus, may be engaged in multiple types of activities. It can obtain single approval under section 12AA. But many of them are having approvals under both the sections.
It is noted that while the Bill proposes to do away with the alternatives available to an institution covered by section 10(23C)(vi) and it does not provide that nothing contained in section 10(23C)(vi) shall apply on or after 1st June, 2020. So, even if the registration of existing charity institutions become inoperative and they are made to apply for fresh registration under section 12AB, charity institutions formed after the coming into force of the Bill would have option to apply under section 10(23C)(vi) or section 12AB (substituted for section 12AA.
15. CONCLUDING REMARKS/SUGGESTIONS
In case of a charitable trust having registration under both the sections 10(23C)(vi) and 12A/12AA of the Act, while e-filing the Return of Income for Assessment Year 2019-2020, the income tax department’s software/utility did not enable an assessee to upload its Return of Income claiming separate deductions under these two sections. Till Assessment Year 2018-19, it was allowed. The Author had been associated with furnishing of the Returns of Income for both the years, but he did not have premonition of the coming changes.
As the exemption provisions of both the sections, viz., Section 10(23C) and Section 11 being more or less similar and both have similar conditions and requirements for claiming the exemption, it was not necessary to have alternative provisions. It causes confusion and administrative problems. So, the amendment proposed by the Bill, in this regard, is welcome.
As per existing law, a charity institution seeking exemption is required to furnish its Return of Income every year and the Assessing Officer has ample powers to examine the activities of the institution including to impose tax and to cancel its registration, upon specified circumstances. So, it is not understood as to why a repetitive review of the activities of the charity institution is desired every five year. If it is necessary in the wisdom of the Income Tax Department or for reasons known to it alone, such cumbersome proposals should not be made applicable to all the institutions, but to institutions exceeding gross receipts beyond a threshold limit or based upon some suitable criteria.