ANALYSIS OF INCOME-TAX PROPOSALS RELATED TO CHARITABLE TRUSTS & INSTITUTES IN BUDGET 2023
Finance Bill 2023 has proposed various amendments in provisions related to charitable trusts and institutes. The proposed amendments and the background for those proposals are elaborated as under,
1. Due date of filing form 9A and 10:
It is proposed that the due date for furnishing Form
No. 9A and 10 would be 2 months prior to the due date of filing ITR. (Applicable
from AY 2023-24)
Background:
Auditor is required to file form 10B one month before
the due date of furnishing ITR. In said form 10B the auditor is required to
provide information related to deemed application or accumulation. Whereas, the
existing due date for filing Form 9A and 10 is same as that of ITR. Owing to
which, the Auditor was not in a position to provide the required information,
as the requisite forms i.e., 9A and 10, were filed much after the submission of
Form 10B. Thus, to align the time limits the due date of filing Form 9A and 10
has been changed.
(Form 9A and form 10 are to be filed for deemed application of income and accumulating the income, respectively).
Comments:
There have been cases where adjustment to the returned
income were made where trusts filed form 10B and ITR together a month before
the actual due date of filing ITR. The apparent reason was that, audit report
was not filed a month before filing ITR. Similarly, in case if any trust
furnishes all the forms and ITR together before any due date and if adjustments
to returned income are made, then it will lead to infructuous demands.
2. Exemption to be allowed if ITR is filed in given time:
It is proposed that for claiming exemption u/s 11 of
the Act, the respective trust is required to file ITR before the date specified
u/s 139(1) or 139(4) of the Act. (Applicable from AY 2023-24)
Background:
Finance Act 2022 brought new kind of return called as
Updated Return, which could be used by trusts to claim exemption. So, with an
intention to clarify the situation, it is now proposed that exemption would be
allowed if return is filed u/s 139(1) or 139(4) i.e., within original due date
or belated return.
This proposed amendment will also pave the way to claim
exemption, by filing a belated return also.
3. Restriction on use of Corpus Fund/ loan fund for application towards objects.
a. It is proposed that the amount of corpus fund or loan
fund, which was utilized earlier towards application of charitable or religious
purpose, is invested or deposited back in modes prescribed u/s 11(5); or, the
loan is repaid back will be treated as application of income only if it is
invested/deposited/repaid within a period of 5 years from the end of the year
in which the said corpus or loan fund was utilized towards objects of the
trust.
b. Further, such re-investment or repayment related to
any corpus or loan pertaining to period prior to 01.04.2021 won’t be considered
as application of income.
c. Further, it is also proposed that for claiming such
reinvestment or repayment as application, certain conditions be fulfilled, such
as-
i.
The
application should not be as corpus donation to another trust
ii.
Provisions
of TDS and limit of cash payment (Rs.10,000) is followed.
iii.
The
application of income is not determined considering the carry forward or set
off of excess application of any preceeding previous year.
iv.
Application
of income is considered only in the year in which actual payment is made
v.
The
Income or the Application of income should not directly or indirectly benefit
the persons mentioned in section 13(1) i.e., related parties.
vi.
Application
of income is within India except with the prior approval of CBDT
(Applicable from AY 2023-24)
Background:
Basically, voluntary contributions (donations) received
with specific direction to form part of corpus are exempt u/s 11(1)(d) i.e.,
such receipts are not required to be applied to the extent of 85%. Accordingly,
vide Finance Act 2021, it was amended that, such receipts be invested separately
according to section 11(5) and such corpus fund or loan funds cannot be used
for applying towards charitable or religious purpose. It was further provided
that, where the trust has used corpus or loan funds for charitable or religious
purpose and such utilization is not allowed as application then whenever said
trust invests /deposits back such utilized funds in corpus fund (as per section
11(5)) or repays the loan, then in that year such amount so invested back or
repaid will be treated as application of income.
After, said amendment vide Finance Act 2021, the CBDT has noticed that before such amendment trusts have utilized the corpus or loan funds towards charitable and religious purpose. And now if they are allowed to claim application of income upon reinvesting in corpus specific fund u/s 11(5) or repayment of loan, then it will lead to double deduction. So, it is now proposed that any reinvestment or repayment of loan related to corpus or loans pertaining to period prior to 01.04.2021 will not be considered for determining application of income whenever such reinvestment or repayment takes place.
Further, such reinvestment or repayment if allowed to be done for infinite period then it will be difficult to monitor. So, it is now proposed that reinvestment or repayment of loan be done within 5 years.
Comments:
1. The limitation of 5 years, will create practical
difficulties for the trusts particularly for repaying the loans.
2. It be please noted that, where a trust has not
utilized the loan funds for application towards charitable or religious purpose
then there is not requirement to repay the loan within 5 years. Such condition
of repayment within 5 years is only for those cases where loan funds are
utilized towards charitable or religious purpose.
4. Restriction on application of income if donated to another trust:
It is proposed that if a trust pays or credits any
amount to another trust (referred to in section 10(23C)(iv), (v), (vi), (via)
or in section 12AB) then application will be treated only of 85% of such
payment or amount credited. (Applicable from AY 2024-25)
Background:
Basically, the income of a trust is exempt if it
applies 85% of its income towards charitable or religious purpose either itself
or by donating to another trust. However, such donation should not be towards
corpus of the recipient trust, so as to ensure that 85% of income is actually applied
towards charitable or religious purpose. That is to say, a trust is allowed to
accumulate 15% of the income freely after applying 85% of the income.
However, CBDT has observed that certain trusts are trying to defeat this purpose of application to the extent of 85% of the income by forming multiple trusts by donating funds to each other and accumulating 15% at every stage. Thus, the effective application of income is reduced much lesser than 85%. Accordingly, now it is proposed to amend that whenever any trust donates to another trust only 85% of such donation would be considered as application of income.
For e.g., Trust ‘A’ donates Rs.5,00,000/- to trust ‘B’, then only Rs. 4,25,000/-
lac would be considered as application of income in case of trust ‘A’. Further,
if trust ‘B’ donates Rs. 4,25,000/- Lacs to trust ‘C’ then only Rs.3,61,250/-
will be considered as application of income in case of trust ‘C’. Thus, in this
chain transaction, Rs.75,000 + Rs. 63,750 would be required to apply towards
charitable or religious purpose by Trust A and B respectively.
Comments:
Though the intention of Amendment is to curb the
illicit practices, it will also create problem to genuine trusts. For e.g. If
Trust ‘A’ receives Rs.20,00,000/- as voluntary contribution out of which it applies
Rs.7,50,000/- towards charitable purpose and Donates Rs.10,00,000/- to another
trust in that case, the working of application of income would be as under,
|
Particulars
of application |
Amount
actually applied |
Amount
to be treated as Application |
|
For
charitable purpose |
7,50,000 |
7,50,000 |
|
Donated
to another trust |
10,00,000 |
8,50,000 |
|
Total |
17,50,000 |
16,00,000 |
It can be observed that though the trust has actually
applied Rs.17,50,000/- (87.5% of total receipts) only Rs.16,00,000/-(80% of
total receipts) will be considered as Application. So, said trust now will be
forced to first apply Rs.1,00,000/- towards objects so as to meet the
requirement of 85% of application of Total Income.
So, where a trust wishes to accumulate Rs.2,50,000/-
(being 20L-17.5L for its future activities, now can only accumulate
Rs.1,50,000/-.
a. In case where activities have been commenced and such trust’s income was never exempted u/s 10(23C)(iv), (v), (vi), (via) or u/s 11 or 12 : Any time after the commencement of activities. This application will be considered for Regular Registration and not for Provisional Registration.
b. Where activities have not been commenced: at least one month prior to the previous year for which registration is sought.
Background:
According to
existing provisions, an unregistered trust can make an application for
registration u/s 12AB of the Act a month prior to the start of Previous year. For
e.g. If a trust wants to register u/s 12Ab, then application is to be filed on
or before 1st March of any year so that it gets registered from subsequent
1st April onwards. Owing to this condition, trusts which had already
commenced their activities were unable to get register during the year and could
get benefit of exemption from subsequent year. And moreover, such trusts were
also required to apply for registration twice i.e., for Provisional and then
regular registration.
For e.g. A trust is incorporated on 01/11/2022 and has started its activities and has also received donations in FY 2022-23. If this trust wants to get registered then it can get registered only from FY 2023-24 and not from FY 2022-23, since application for registration can be filed only a month prior to the commencement of the previous year. Owing to which said trust was debarred from registering and claiming exemption in FY 2022-23. And further, upon receipt of provisional registration such trust was again required to apply for regular registration.
Thus, to tackle this scenario, Finance Bill 2023, has proposed to amend the current provisions and has proposed to allow those trusts, where activities have already been commenced, to make application any time during the year. And said application will not be for provisional registration but for regular registration. Accordingly, the PCIT or CIT will be examining the application in detail the way it is done for regular registration.
6. Power of PCIT or CIT to cancel registration where the registration or re-registration are defective:
In current scenario provisional registration or
renewal (re-registration) is automatic whereupon the CPC grants registration
without any verification. There have been cases where registration applications
and approval are defective. Accordingly, it is proposed to cover such defects
in the ‘specified violations’ owing to which PCIT/CIT will have the power to cancel
the registration. (Applicable from 01.04.2023)
7. Consequence of not renewing the registration or not applying for Regular registration:
It is proposed that if a trust do not renew
(re-register) or do not apply for regular registration then such trust would be
required to pay tax on the accreted income at Maximum Marginal Rate (as per
section 115TD). (Applicable from AY 2023-24)
Background:
A registered trust which
-
gets
converted into any form which is not eligible for registration under clause
(iv), (v), (vi), (via) of section 10(23C) or section 12AA or 12AB. Or
-
gets
merged with other entity which is not a registered trust having similar objects
Or
-
Fails
to transfer its assets upon dissolution to other registered trust within 12 Months
from the end of the month in which dissolution took place.
Then such trust is required to pay income-tax at Maximum
Marginal Rate on its accreted income in addition to income-tax on its total
income. Accreted income is difference between fair market value of assets and
liabilities.
Further, according to scheme of registration,
-
a
trust which was already registered u/s 12A before 01.04.2021 was required to
re-register(renew) or
-
a
trust which is a provisionally registered trust is required to apply for
Regular registration or
-
a
trust which has regular registration is required to renew its registration at
least 6 months prior to its expiry.
However, there may be cases where certain trusts would
not have re-registered or apply for regular registration. Owing to which they
may get easy route to exit without payment of the tax on accreted income. Thus,
it is proposed to cover such instances in section 115TD so that when a trust do
not re-registers or do not apply for regular registration then it will be liable
for tax at Maximum Marginal Rate on its accreted income.
Comments:
This Amendment may
bring tough times for those trusts who have forgot to renew their registrations
on or before 25/11/2022.
8. Roll Back of exemption where registration is given during pendency of any Assessment.
In existing Act, there are certain provisos which provides that
- where registration is given during pendency of assessment then exemption can be claimed even for that Assessment year for which Assessment is pending.
- If registration is granted to a trust, then the Assessing Officer shall not re-open earlier assessment years merely for the reason that trust was not registered.
Now, it is proposed that- considering the new scheme of registration, where a trust is required to get registered before commencement of its activities, these provisos will become redundant. Accordingly, these provisos are omitted. (Applicable from 01.04.2023)
Comments:
Apparently, it
can be seen that, CBDT has missed on a fact that, there are still many trusts which
have lot of activities but are not yet registered u/s 12A or 10(23C) of the Act.
In those all cases, these amendments may create problem.
Please note: Above elaboration is done referred to a ‘charitable
trust’. It be please noted that, similar amendments are proposed for institutions
covered under clause (iv), (v), (vi) and (via) of section 10(23C) of the Act.
Disclaimer: Above article is a personal opinion and
interpretation of the author of the respective provisions of finance bill 2023.
Author has tried to collect relevant information and accordingly presented the
same. Above article should not be considered as a piece of advice and not be
relied wholly by anyone for their or their client’s purpose. The interpretation
made by the author is by presuming certain facts/ instances/ situations which may
not be existing in every situation accordingly the reader is requested to
consider this article merely as a reference and not as a pure advice. Author
won’t be responsible for any repercussions emerging due to reliance placed by
anyone on this article. Thanks.
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