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Section 12AB: Amendments in Procedure for Registration of Charitable Trusts and NGOs

 
section-12ab-amendments-in-procedure-for-registration-of-charitable-trusts-and-ngos

Finance Act, 2020 has made sweeping changes with respect to provisions related to Trusts and NGOs claiming exemption u/s 11 or u/s 12 of the Income Tax Act, 1961. These amendments are related to registration procedure of all the existing registered trusts under section 12AB, renewal of registration, approval for deduction u/s 80G and furnishing statement of donations received to the Income Tax Authorities are some of the noted ones.


    Introduction

    The Finance Minister in her Budget Speech while presenting the Union Budget 2020 on 01.02.2020 has announced the following measures undertaken under the Income Tax Act for the Charitable Institutions-

    “Acknowledging the important role played by the charitable institutions in the society, the income of these institutions is fully exempt from taxation. Further, donation made to these institutions is also allowed as deduction in computing the taxable income of the donor.


    Currently, a taxpayer is required to fill the complete details of the donee in the income tax return for availing deduction.


    In order to ease the process of claiming deduction for donation, it is proposed to pre-fill the donee’s information in taxpayer’s return on the basis of information of donations furnished by the donee. This would result in hassle-free claim of deduction for the donation made by the taxpayer.


    Further, in order to claim the tax exemption, the charity institutions have to be registered with the Income Tax Department. In the past, the process of the registration was completely manual and scattered all over the country.


    In order to simplify the compliance for the new and existing charity institutions, I propose to make the process of registration completely electronic under which a unique registration number (URN) shall be issued to all new and existing charity institutions. Further, to facilitate the registration of the new charity institution which is yet to start their charitable activities, I propose to allow them provisional registration for three years.” 


    The amended procedure for registration of charitable trusts/NGOs under section 12AB is applicable from  01.06.2020. However, owing to COVID-19 pandemic, CBDT deferred the implementation of the new procedure for registration under section 12AB and approval from 01.06.2020 to 01.10.2020 vide a Press Release dated 08.05.2020. Legislatures amendments are yet to be made.


    Income Tax Act allows many tax exemptions and reliefs to those who are engaged in genuine charitable activities. When tax exemptions are given many tend to misuse the provisions and carry on charitable activities in a non-genuine manner just to use the exemptions which prompts the legislature to amend the laws frequently in order to prevent the misuse of law. It is the intention of the legislature to provide the tax benefit only to those which carry on genuine charitable activiti4es. 


    In the continuation of achieving the desired result and to extend the benefit only to genuine charitable trusts, the government has amended the provisions related to charitable trusts/NGOs many times. This has added additional compliance burdens who are genuinely carrying on the charitable activities.


    Read More:

     

    New Section 12AB to replace Section 12AA and Section 12A for Charitable Trust and NGO Budget 2020

     

    An Insight into Amendments for Charitable Trusts –Budget 2020


    The Finance Act, 2020 has completely revamped the registration procedure of a charitable trust under the Income Tax Act. It is not that there were no changes took place earlier under the Income tax law regarding the registration provisions. The uniqueness in this time is that the registration granted will not be perpetual and will remain valid for a period of 5 years and needs to be renewed. The concept of renewal of registration certificate for claiming exemption by a charitable trust is introduced for the first time in the Finance Act, 2020 in order to curb malpractices in abusing the exemptions given to a trust.


    Intention of the legislature behind the amendment


    Section 11 of the Act provides for grant of exemption in respect of income derived from property held under trust for charitable or religious purposes to the extent to which such income is applied or accumulated during the previous year for such purposes in accordance with the provisions contained in sections 11, 12, 12A, 12AA and 13 of the Act.


    Sub-section (7) of section 11 of the Act, inserted by the Finance (No. 2) Act, 2014 with effect from 1st April, 2015, provides that where a trust or an institution has obtained registration under section 12AA [as it stood immediately before its proposed amendment] or under section 12A [as it stood immediately before its amendment by the Finance (No 2) Act, 1996] and said registration is in force for any previous year, then, exemption under section 10 [except under clauses (1) and (23C)] shall not be allowed. 


    The present process of registration of trusts, institutions, funds, university, hospital etc under section 12AA or under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10, and approval of association, university, college, institution or company etc need improvement with the advent of technology and keeping in mind the practical issue of difficulty in obtaining registration/ approval/ notification before actually starting the activities.


    It is also felt that the approval or registration or notification for exemption should also be for a limited period, say for a period not exceeding five years at one time, which would act as a check to ensure that the conditions of approval or registration or notification are adhered to for want of continuance of exemption. This would in fact also be a reason for having a non-adversarial regime and not conducting roving inquiry in the affairs of the exempt entities on a day to day basis, in general, as in any case they would be revisiting the concerned authorities for new registration before expiry of the period of exemption. This new process needs to be provided for both existing and new exempt entities.


    The above intention is taken from the memorandum to the Finance Bill, 2020. However, on reading of the whole scheme of the new provisions the followings intentions of the legislature are transpired-


    1. The new registration procedure under section 12AB is not a permanent one but for a limited period of five years. This has been done to periodic review of the conditions on which registration was granted or approval was given for enjoying the exemption. This has been done to keep a check primarily on the followings-

    a) Objects of the Trust on which registration was granted are being adhered to or not,

    b) Genuineness of the activity of the Trust

    c) Compliances with other laws applicable to the Trust


    2. The concept of provisional registration has been introduced to tackle the practical issue of difficulty in granting registration or approval before the start of actual charitable activities by a trust or an institution.


    Scheme of provisions of a Trust


    The Scheme of provisions of a Trust in the Income Tax Act, 1961 is listed below-


    Sec. 2(15)

    Definition of Charitable Purpose

    Sec. 10(23C)

    Exemption from Income for approved universities/educational institutions/hospitals/ medical institutions

    Sec. 11

    Income from property held for charitable or religious purposes

    Sec. 12

    Income from voluntary contributions of trusts

    Sec. 12A

    Conditions for applicability of sections 11 and 12

    Sec. 12AA

    Procedure for registration (inapplicable from 01.06.2020)

    Sec. 12AB

    New procedure for fresh/renewal of registration

    Sec. 13

    Sec. 11 not to apply in certain cases

    Sec. 115TD

    Tax on Accreted Income


    Amendments in section 12A: Under the existing provisions of the Income-tax Act, exemption from income-tax in respect of the income of a charitable or religious trust or institution is available only if certain conditions are satisfied. One of these conditions is that the person in receipt of the income shall make an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Chief Commissioner or Commissioner of Income-tax within the specified time.


    The Chief Commissioner or Commissioner shall call for documents and information and hold enquiries regarding the genuineness of the trust or institution. After he is satisfied about the charitable or religious nature of the objects and genuineness of the activities of the trust or institution, he passes an order granting registration and if he is not so satisfied, he passes an order refusing registration, after providing an opportunity of being heard to the applicant before an order of refusal to grant registration is passed by the Chief Commissioner or Commissioner and the mentioning the reasons for refusal of registration in the order.


    Further, the order granting or refusing registration has to be passed within six months from the end of the month in which the application for registration is received by the Chief Commissioner or Commissioner and a copy of such order is sent to the applicant.


    Thus section 12A provides that the grant of registration shall be one of the conditions for availing income-tax exemption u/s 11 and u/s 12.


    Prior to 01.04.1997, a trust was granted registration under section 12A of the Act. Effective 01-04-1997, registration is being granted under section 12AA which was inserted by the Finance (No.2) Act, 1996. This section 12AA shall become inoperative from 01.06.2020.


    Note: The new procedure for registration u/s 12AB has been postponed to 01.10.2020 vide CBDT Press Release dated 08.05.2020. Earlier, the applicability date was fixed at 01.06.2020 but due to COVID-19 pandemic the date is extended to 1st October. However, no corresponding amendment is so far announced for non-applicability of section 12AA. A suitable amendment is expected in this front.


    The provisions related to shifting to the new registration regime u/s 12AB is written in this section 12A. A new clause (ac) is added in sub-section (1) of section 12A which is discussed in appropriate places in this article.


    Further, since registration is shifted to section 12AB, hence, wherever section 12AA is written, the new section 12AB is added.


    Approval under section 10(23C) vis-a-vis Registration under section 12AA


    Section 10(23C) is a self-contained code containing the legislative provisions providing an exemption from income tax to universities and educational institutions and hospitals and medical institutions subject to the fulfilment of stipulated conditions.


    Income of an educational institute is subject to exemption under Sections 10(23C)(iiiab)/ (iiiad)/ (vi).


    The income of a hospital or other institution shall be eligible for exemption if it satisfies the conditions prescribed under Sections 10(23C)(iiiab)/ (iiiad)/ (vi).


    If these Institutions are also registered under section 12AA or section 12A then exemption can be claimed under any of these two provisions. Thus these institutions have the advantage of claiming exemption either under section 10 or under section 11/12.


    It has been noticed that there is some anomaly by providing exclusion to institutions or fund registered under clause (23C) of section 10, but the same exclusion is not available to entities claiming exemption under clause (46) of section 10 which are established or constituted under a Central or State Act or by a Central or State Government. Such entities are, thus, not able to get notified under clause (46) of section 10 if they are holding registration under section 12A/12AA.


    The anomaly pointed out above, needs to be addressed. However, as the provisions relating to charitable entities constitute a complete code and that once any trust or institution has voluntarily opted for it by obtaining the requisite registration, it flows that the conditions in relation thereto should be complied with and the option of switching at convenience should not be available. Accordingly, while request for exclusion of clause (46) may be acceded to for exemption thereunder even in those cases where registration under section 12AA or 12A remains in force, there should be only one mode of exemption available and also, that the switching may be allowed only once so that such switching is not done routinely and also it remains efficient to be administered.


    We have two sections for claiming exemption - one is under section 11(1) and other is section 10(23C), though section 10(23C) is for limited institutions. Section 11/12 is for any charitable as well as religious trusts.


    The approval for a new Institution and reapproval process is almost similar to the provisions for a Charitable Trust as prescribed for section 12AB.


    For an existing trust registered under section 12A or under section 12AA 


    Why the concept of re-registration is introduced when a Trust is already registered is the main question which may come to the mind of many people.


    Actually, there are many trusts in India which are claiming exemption from its income but do not have the registration certificates. These are those trusts which are very old and the department itself could not trace the registration certificate of these old trusts. However, based on earlier assessment records, the exemption is being allowed to such trusts. In order to streamline the registration of all the trusts, it is decided to introduce the concept of re-registration so that all of the trusts are given computer-generated URN. Further, there are many trusts which are registered u/s 12A and u/s 12AA. Many trusts have dual exemption privilege-u/s 11 and u/s 10(23C). Therefore it is decided to have only one registration either u/s 12A/12AA or u/s 10(23C). However, u/s 10(23C) only a few institutions like universities, educational institutions, hospitals and medical institutions can claim exemption whereas section 11 covers any charitable institutions carrying on any charitable activities and even religious trusts.


    The term religious purpose is not defined under the Income-Tax Act. However, Section 2(15)​ of the Act defines “charitable purpose" to include relief of the poor, education, medical relief, preservation of the environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.


    In case of an institution approved u/s 10(23C) then the re-approval provisions have been incorporated in the Finance Act, 2020. It may be noted that an institution is approved u/s 10(23C) whereas an institution is registered u/s 12A/12AA (now section 12AB). The approval is taken by filing an application in Form No. 56D (now changed to Form No. 56) where an application for registration is made in Form No. 10A for a charitable trust.


    A simple procedure for re-registration: The procedure to re-registration seems to be very simple. Since trust is already registered, the idea is to provide a new registration number and registration certificate which will be computer-generated. Hence, a simple application may be notified for the purpose of re-registration u/s 12AB. Although no form is yet notified for the purpose of re-registration u/s 12AB for the existing trusts. No in-depth scrutiny of documents etc. is expected to happen in the case of re-registration. Further, there will be no lapse in the exemption period and the same will be continued in this FY 2020-21. 


    After the re-registration, all the trusts will be registered under section 12AB. Further, any new registration of a newly established will also be given u/s 12AB even if their application is pending as on 1-10-2020. If not done by 31.12.2020, the trust will become deregistered.


    Amendments have been made in section 12A. A clause (ac) is added in sub-section(1). Wherever there is a reference of section 12AA, section 12AB is added since from 01.10.2020, the section 12AA will be completely go-out from the statute.


    In the case of section 10(23C), similar provisions in line of section 12AB are provided. However, in the case of section 10(23C) there is no change in the provision and it will remain approved u/s 10(23C) but with a 5-year validity.


    Time limit for making application for new registration u/s 12AB for an existing registered Trust or Institution


    Where a trust or institution is already registered under Section 12A or u/s 12AA then such a trust or institution is required to be filed an application before the PCIT/CIT within 3 months starting from 01.06.2020 to 31.08.2020 (now extended to 01.10.2020 till 31.12.2020) for converting the earlier registration under section 12A or under section 12AA to the new section 12AB. [Section 12A(1)(ac)(i)]


    Time limit for passing the Order granting the registration 


    When an existing trust or institution apples for migration to new registration scheme under section 12A(1)(ac)(i), then the order for registration under section 12AB shall be passed by the PCIT/CIT within a period of three months from the end of the month in which the application is filed. This registration shall remain valid for a period of 5 years. [Section 12AB(1)(a)]


    Applicability of exemption on the income in case of migration to new section 12AB


    A trust or an institution which is granted registration under section 12AB(1)(a) can avail the exemption under section 11 and under section 12 from the assessment year from which registration was earlier granted to the trust or institution. It means the exemption will continue and there will be no break in the exemption that the trust or institution is enjoying.


    It is provided that a trust or an institution which is already registered under section 12A or section 12AA is required to apply for re-registration within 31st August 2020 (now extended to 31.12.2020). The Principal Commissioner or the Commissioner shall grant the new registration certificate within a period of three months from the end of the month in which application is made. It is further provided that the exemption shall be available from the assessment year from which registration was earlier granted to the trust or institution. In other words, it implies that the new registration certificate will be applicable from the Assessment Year from which the registration was issued originally. The certificate will remain valid for 5 years.


    Now consider a case where a Trust was registered in 2011. Then the validity of the period of the registration certificate would have expired in 2016. The language of the provision does not suggest that the same will become applicable from AY 2021-22 or like. Necessary correction or amendment is expected when the Bill will be enacted. Actually, the exemption should have been allowed from the assessment year immediately following the previous year in which registration under section 12AB is granted.


    Cancellation of Registration once shifted to New Section 12AB


    When a trust or institution is registered under section 12AB and the period of 5 years of the said registration is due to expire, then the trust or institution shall at least 6 months prior to the expiry of the said period of 5 years shall apply for renewal of registration. 


    It is to be noted that at the time of renewal of registration, the Commissioner shall call for such documents or information and make an enquiry to satisfy himself about the genuineness of the activities of the trust or institution and also the compliance of such requirement of any other law for a time being enforced by the trust or institution which may be material for the purpose of achieving its object. 


    Any registration granted u/s 12AB(1)(a) or u/s 12AB(1)(b) can be cancelled subsequently if the Principal Commissioner or the Commissioner is satisfied that -

    (a) the activities of the trust or institution are not genuine; or

    (b) are not carried out as per the objects of the trust or institution; or

    (c) the trust or institution has not complied with the requirement of any other law for the time being in force as is material for the purpose of achieving its objects and the order or direction or decree, by whatever name called, holding that such non-compliance has occurred has attained finality or has not been disputed, after giving a reasonable opportunity of being heard to the trust or the institution.


    The enabling provision empowering the Principal Commissioner or the Commissioner to cancel the registration of a Trust or institution in the new section 12AB is on the same line of the existing section 12AA.


    Dual Registration and Approval for exemption


    A hospital or an educational institution may be registered u/s 12A/12AA for claiming exemption or approved u/s 10(23C) for claiming exemption under this section from its income.  In many cases, a hospital or an educational institution may have dual benefits - registered u/s 12A/12AA and approved u/s 10(23C).


    One should keep in mind that both the approval u/s 10(23C) and registration u/s 12A or u/s 12AA from 01.06.2020 (now extended to 01.10.2020) cannot be held. One needs to decide and apply for reapproval and re-registration accordingly. This is applicable for a hospital, medical institutions, university or other educational institutions. Others do not have the privilege of dual benefits and hence have to choose section 12AB only.


    The option to retain the registration u/s 12AB or approval u/s 10(23C) shall be decided once at all. It should be noted that if one does not make any choice between the two, then the approval u/s 10(23C) shall prevail and the registration u/s 12AB (actually registered u/s 12AA or u/s 12A) shall become inoperative from 01.10.2020.


    Registration to become inoperative


    Section 11(7) of the Act provides that where a trust or an institution is registered u/s 12A or u/s 12AA or u/s 12AB and the said registration is in force for any previous year then exemptions contained in section 10 shall not operate on trust’s income. This is excluding section 1091), section 10(23C) and section 10(46). It means if a trust or an institution is registered u/s 12A/12AA or u/s 12AB and is also approved u/s 10(23C) then the said trust or institution can claim both the exemption either u/s 11 or u/s 10(23C).


    Though it is not possible to claim both the exemption in the same assessment year but any institution can claim exemption u/s 11 in one year and exemption u/s 10(23C) in another year depending on the circumstances under which there are more benefits in that particular year.


    The Finance Act, 2020 has inserted a new proviso to section 11(7) as the first proviso to provide that the registration u/s 12A or u/s 12AA or u/s 12AB shall become inoperative -

    For an existing registered trust having approval also u/s 10(23C) 

    From 01.10.2020

    In future, if a registered trust obtains approval u/s 10(23C)

    From the date of such approval


    For an existing trust or an institution having  both the registration u/s 12A or u/s 12AA and is also approved u/s 10(23C), at the first instance the registration u/s 12A or u/s 12AA will become inoperative from 01-10-2020. If it becomes inoperative and the trust wishes to continue with section 11/12 exemption then it means the trust has to apply for fresh registration under which it would get the provisional registration in place of normal registration. This is not the intention of the legislature. Hence, the legislature has given an option to such a trust or institution so that it can make the registration u/s 12AB operative under the circumstances.


    Therefore, in order to continue to avail the exemption u/s 11, the trust or institution having both the registration and approval has to apply for revival of the registration at least 6 months prior to the commencement of the assessment year from which registration is sought to be made operative. This time limit of 6 months is provided in the amended Section 12A(1)(ac)(iv).


    Once the application for revival of inoperative registration is made within the prescribed time limit as per section 12A(1)(ac)(iv) then the CIT shall pass an order accepting the application or rejecting the application within 6 months from the end of the month in which application was received. Before rejecting the application for revival of the registration, reasonable opportunity of being heard shall be given to the trust/institution.


    Once the application for revival of registration is accepted, then the trust shall be registered u/s 12AB for a period of 5 years and exemption shall be available from the Assessment Year immediately following the financial year in which such an application is made. [Section 12A(2)]. In this case, the registration will not be a provisional one but a normal registration which shall remain valid for a period of five years.


    The second proviso to section 11(7) provides that once the registration of such a trust or an institution of which the has become inoperative is made operative u/s 12AB then the approval under section 10(23C) shall cease to be in effect from the date on which such registration becomes operative and thereafter no exemption u/s 10(23C) can be claimed.


    In this manner, there will be no break or gap in the continuity for claiming the exemption u/s 11 and u/s 12 even though the registration becomes inoperative.


    In future, if a trust or an institution is registered u/s 12AB obtains any approval u/s 10(23C) then the registration u/s 12AB will become inoperative.


    There is one lacuna in the amended provisions so far noticed. If a hospital, a medical institution, a university or educational institution even opts to keep the registration u/s 12A/12AA or under the new section 12AB and does not want to continue with the approval u/s 10(23C) then also his default option will be the same. That is, the registration u/s 12A/12AA shall become inoperative and by default, only the approval u/s 10(23C) will remain active.


    Due to the ongoing COVID-19 pandemic, a practical problem has crept in the operation of the provision due to extension of the time from which the provisions of section 12AB shall come into force. Earlier, the effective date of making section 12AB effective was 01-06-2020 which is extended to 01-10-2020. 


    Had the original date was not extended then the registration of such trust or institution would have become inoperative on 01-06-2020. Under such circumstances, the trust or institution shall have the time to revive the registration u/s 12AA (or section 12AB) up to 30-09-2020 in order to claim exemption u/s 11 from the AY 2021-22.


    As stated above, the application for claiming an exemption for the AY 2021-22 has to be made at least 6 months prior to the commencement of AY 2021-22 means thereby by 30.09.2020. But the provisions have been made applicable from 1.10.2020 amid corona outbreak which is not possible. Hence, legislative changes or clarification is awaited on this matter.


    Before deciding the option to keep either the registration or the approval, it should consider all the pros and cons by 01.10.2020. Though both the sections provide for the exemption from income tax on the income to these institutions, there are certain differences between the two provisions which one should keep in mind before choosing the option-


    1. Withdrawal of exemption during the assessment: In course of assessment proceedings, if the assessing officer finds that the trust or institution has contravened all or any of the conditions of approval then he cannot on his own withdraw the exemption. He can withdraw the exemption only after he has intimated the Central Government or the prescribed authority (PCIT/CIT) that contravention has happened and the authority has withdrawn the approval. Thus, in case of a trust or institution, AO has no inherent power to refuse exemption under section 10(23C).


    In contrast, in case of a registered trust or institution u/s 12AA or u/s 12AB, AO may not provide exemption u/s 11 or 12 on his own powers. For denying the exemption in such a case, he is required to obtain any approval from any authority. 


    It should be noted that denying exemption u/s 11 is not cancellation of registration. AO has no power to cancel the registration of a trust or institution registered under section 12AA/section 12AB.


    2. Corpus Donation: Upto 31.03.2020 corpus donation for a trust or institution approved u/s 10(23C) was not exempt. Thus an institution approved u/s 10(23C) has to compulsorily spend 85% of the corpus donation. There was no difference between corpus and voluntary donation. In case of registration u/s 12AA and section 12AB, corpus donation is fully exempt. The condition of application of 85% of corpus donation does not apply to a trust or institution registered u/s 12AA or u/s 12AB. But Since now one can have only one either registration or approval - section 10(23C) is amended to exempt corpus donation effective from 01.06.2020. Now there is a level playing field for both the registration and approvals as corpus donation is brought at par both for availing exemption under section 10(23C) and under section 11/12.


    For this purpose, an explanation is added to the third proviso of section 10(23C) to clarify that corpus donation shall not form part of income. It should be noted that this explanation was not there in the Finance Bill, 2020 when it was presented in the Loksabha. It was introduced as a government amendment when the Bill was passed by the Loksabha. The said explanation to the third proviso reads as follows-

    "Explanation.--For the removal of doubts, it is hereby clarified that for the purposes of this proviso, the income of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, shall not include income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution:".

     

    3. Deemed application of income: Where a trust or institution has not received the income during the year, the trust or institution has an option to apply such income for charitable purposes during the previous year immediately following the previous year in which it has received the income. It generally applies in case of income accrued and the trust or institution follows accrual basis of accounting.


    Similarly, Where a trust or institution fails to apply whole or any part of the income received during the year, it has an option to apply such income for charitable purposes during the previous year immediately following the previous year in which the income was derived. It generally happens when the income is received towards the end of the financial year, say on 28th March.


    For exercising such an option, the trust or institution has to file Form 9A electronically to the assessing officer.


    This is only applicable for a trust or institution for claiming exemption u/s 11 or 12 for a trust or institution registered u/s 12AB.


    There is no such provision in case of a trust or institution approved under section 10(23C). Such a trust or institution has to compulsorily apply 85% of its income accrued and/or received during the financial year.


    4. Audit Report: Audit Report in Form 10BB is prescribed for a trust or institution approved under section 10(23C), whereas it is Form 10B for a trust or institution registered under section 12AB.


    5. Applicability of section 115TD: Section 115TD is applicable for a trust or institution registered u/s 12AA or u/s 12AB for claiming exemption u/s 11/12 but it does not apply to a trust or institution approved under 10(23C). A trust or institution approved under section 10(23C) does not have to pay tax on accredited income under section 115TD on dissolution etc.


    6. Application for registration: Application for approval for claiming exemption under section 10(23C) is required to be made in Form 56 read with Rule 2CA but an application for registration u/s 12AA (now section 12AB) is required to be made in Form 10A.


    It should be noted that the provisions related to registration under section 12A/12AA is changed to section 12AB but there is no change in section for reapproval in case of section 10(23C). The reapproval will be given under section 10(23C) itself.


    Renewal of registration after every 5 years


    In the earlier regime, the registration certificate once issued remains valid till it is cancelled. In other words, the registration certificate was of permanent nature and valid for perpetuity or indefinite period. The new registration is not permanent. It is valid only for a period of 5 years and required to be renewed after every 5 years.


    FRESH REGISTRATION FOR A NEWLY SET UP TRUST


    It is mandatory for a trust to get the registration under section 12AB of the Income-tax Act, 1961 so as to claim exemption under Section 11. A trust is required to apply for registration in Form No. 10A.


    Procedure of fresh registration for a newly established trust


    Documents required to be furnished along with application form


    The documents which are required to be furnished along with application Form No. 10A are as follows:


    (a) where the trust is created, or the institution is established, under an instrument, self-certified copy of the instrument creating the trust or establishing the institution;


    (b) where the trust is created, or the institution is established, otherwise than under an instrument, self-certified copy of the document evidencing the creation of the trust, or establishment of the institution;


    (c) self-certified copy of registration with Registrar of Companies or Registrar of Firms and Societies or Registrar of Public Trusts, as the case may be;


    (d) self-certified copy of the documents evidencing adoption or modification of the objects, if any;


    (e) where the trust or institution has been in existence during any year or years prior to the financial year in which the application for registration is made, self certified copies of the annual accounts of the trust or institution relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up; note on the activities of the trust or institution;


    (f) self-certified copy of existing order granting registration under section 12A or section 12AB, as the case may be; and


    (g) self-certified copy of the order of rejection of application for grant of registration under section 12A or section 12AB, as the case may be if any.


    Presently, a newly established trust has to face various difficulties in obtaining registration for exemption since a new trust does not start charitable activities when registration is applied for. Further, without registration and approval u/s 80G it becomes difficult for a new Trust to raise finance from the donors and without financial means, charitable activities cannot be started. 


    As a result, many CITs refuse to grant registration solely on the basis of objectives of the Trust and in the absence of starting any activity. This has led to many litigations and undue harassment to the assessees.


    In order to mitigate this problem from obtaining registration for a new Trust, Finance Act, 2020 has provided for granting ‘Provisional Registration’ to the newly established trusts in section 12AB.


    Further, where an application is pending for registration as on 01.10.2020, the same will be considered as an application pending under the new provisions of section 12AB. No separate application is required to be made for such.


    Pending Application for registration


    Any pending application for registration u/s 12AA as on 01.10.2020 shall be deemed to be an application filed u/s 12AB. Since 12AB is coming into force from 1st October 2020 any application prior to that date can be filed only u/s 12AA and not u/s 12AB. Hence any pending application for registration u/s 12AA shall be deemed to have been made u/s 12AB from 1st October, 2020.


    After October, all the trusts will be registered u/s 12AB. The registration will be given within three months but the registration will be a provisional for a period of three years. The pending application shall be at par with a fresh registration for a newly established trust.


    Time limit for making application for new registration u/s 12AB for a newly established Trust


    A new Trust wishes to claim exemption u/s 11 and u/s 12 is mandatorily required to obtain registration under the Income Tax Act in Form No. 10A alongwith the requisite documents as stated above.


    As per Section 12A(1)(ac)(vi), the time limit for making an application for new registration is at least 1 month prior to the commencement of the previous year relevant to the assessment year from which approval is sought. In other words, application for new registration shall be made one month prior to the commencement of the relevant previous year from when exemption is sought.


    For example, if the exemption is sought from the assessment year 2021-22 relevant to the previous year 2020-21, then the application for fresh registration shall be made on or before 29th February 2020.


    Now suppose a Trust is formed on 1st September 2021 and it wishes to claim exemption from the income of the previous year 2021-22 then as per the above provision, it is generally interpreted that the application is required to be made by 29th February 2021 (since the previous year is 2021-22) which is not possible now. This interpretation leads that no exemption can be claimed for the assessment year 2022-23 relevant to the previous year 2021-22. It will lead to a situation where fresh registration for a newly established Trust shall always be required to be made in February of the preceding year.


    However, this is not the case. This interpretation is not correct. It is true that a newly established trust has to apply for registration 1 month prior to the commencement of the previous year relevant to the assessment year from which approval is sought. Therefore, the trigger point is not the date of establishment of the new Trust or the start of charitable activities. The prescribed period of 1 month is based from when the registration for claiming exemption is sought. Thus in the given example if the registration for exemption is sought from the first AY 2022-23 itself then the application shall be required to be made by 31st July 2021 and not 29-02-2021.


    As per the definition of ‘previous year’ contained in section 2(34) read with section 3, "previous year" means the financial year immediately preceding the assessment year. However, in the case of a business or profession newly set up or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.


    Thus from the above definition, a ‘previous year’ may be of a shorter period than the full financial year. First previous year can be for a period of less than 12 months.


    Assessment year” is defined in section 2(9) of the Income Tax Act which means the period of twelve months commencing on the 1st day of April every year.


    Thus in the given example, the previous year 2021-22 will commence from 1-9-2021 and ending on 31-3-2022. The relevant assessment year will be 2022-23 to begin from 1-4-2022. If the exemption is sought from AY 2022-23, then the application for new registration shall be made 1 month prior to the commencement of the previous year from 1-9-2021 to 31-3-2022 relevant for the assessment year 2022-23 i.e. 31-07-2021.


    Please note that at the first instance the registration to a newly established Trust will be a ‘Provisional registration’ for a period of three years only after which it needs to be converted into a normal/final registration. The normal/final registration shall remain valid for a period of five years - as per the provisions discussed for an already registered trust in this article.


    However, for the FY 2020-21, there is a relaxation to apply by 1-10-2020. From the next financial year 2021-22 and onwards, application for registration in Form No. 10A by new trusts shall be required to be made at least 1 month prior to the commencement of the previous year relevant to the assessment year from which exemption is to be claimed.


    Time limit for passing the Order of approval or rejection 


    The CIT shall have to pass the order granting the provisional registration to the trust or institution or rejecting the application within one month from the end of the month in which the application for registration u/s 12A(1)(ac)(vi) is received. [Section 12AB(3)]


    Applicability of exemption on the income in case of provisional registration


    The exemption shall be available immediately from the assessment year from when the provisional registration is granted. In other words, when a newly established trust is granted a provisional registration then the said trust shall be eligible to claim exemption from the assessment year immediately following the financial year in which application is made. Thus in the given example above, the exemption shall be available from AY 2021-22 once the provisional registration is granted to the trust u/s 12AB.


    Difference between Registration procedure for an existing Trust and a newly established Trust


    Though the procedure for registration of a newly established Trust is almost similar to an existing Trust u/s 12AB with the following differences-


    1. The registration for a newly incorporated Trust will be ‘Provisional’ whereas the registration will not be a provisional but a normal/final registration for an existing trust.


    2. The Provisional Registration shall remain valid for a period of three years whereas a normal/final registration shall remain valid for a period of five years.


    3. The PCIT/CIT has the power to accept or reject the application for provisional registration u/s 12AB in case of a newly established trust or institution. However, no such rejection power exists for already registered trust or institution shifting to new section 12AB.


    Converting the Provisional Registration to normal registration for 5 years


    In case of a newly set-up Trust, the trust will be granted a Provisional Registration and that too for a maximum period of three years. One cannot continue with the provisional registration forever. It needs to be converted to normal or final registration which shall have a validity of 5 years. Once final/normal registration is granted to the trust for a period of 5 years then the provisions as discussed for an existing trust in this article shall apply thereafter.


    For conversion of the provisional registration to a normal/final registration, the Trust needs to apply for conversion of provisional registration to normal/final registration after completion of 6 months from the commencement of charitable activities or at least 6 months prior to the completion of the period of 3 years of provisional registration whichever is earlier.


    Hence, if the charitable activities have been commenced by the new trust then within 6 months or 6 months prior to the completion of the period of 3 years of provisional registration whichever is earlier, it has to apply for a normal/final registration under section 12AB. This normal/regular/final registration shall remain valid for a period of five years and to be renewed after every 5 years as per provisions discussed in this article for an existing trust.


    This is applicable for newly established trusts only not for existing registered Trusts u/s 12A or u/s 12AA.


    Once a newly established trust gets the registration for an exemption then normally it prepares itself to start its charitable activities as per the objects. Hence, one of the activities are commenced by the Trust, then only the question of applying for the normal registration arises. This will generally be the case for new trusts. Only where trust is creating any capital asset, say, the donation is being collected for the construction of a school building etc. then only the period of 3 years of provisional registration is required. But remember, there is no provision so far in the Act to extend the period of three years further. Hence, charitable activities may be commenced within this period. Since the application for normal registration is required to be made within 2 ½  years, charitable activities must be commenced by that time as while granting the normal provision u/s 12AB this factor will be seen.


    It is thus implied that at the time of conversion of provisional registration to normal registration for 5 years, complete checking of documents will be done. In case the CIT is not satisfied with the charitable activities of the trust or the activities are not carried out for the objects for which provisional registration was granted or there are any non-compliance of any other law having a material effect on the objects of the trust then CIT has the power to reject the registration.


    Cancellation of Provisional Registration


    Once a newly established trust or institution is provisionally registered under section 12AB for a period of three years then it needs to apply for a normal/regular/final registration as stated above. Only at that time, provisional registration can be cancelled if the PCIT/CIT is not satisfied with the genuineness of its activities, its objects and compliances under any other law. Once provisional registration is cancelled, provisions of section 115TD shall apply.


    Consequences for failure to get registered u/s 12AB


    Now a question arises whether it is mandatory for every existing trust registered u/s 12A or u/s 12AA to migrate to new section 12AB.


    The Act has prescribed the procedure and time limit for migrating to the new registration scheme u/s 12AB for an existing registered trust. It is nowhere stated that migration is mandatory. There is no direct express provision in the statute which states that the migration to section 12AB is mandatory. The lawmakers might be thinking that all the registered trusts will shift to the new registration regime. However, it is provided that section 12AA shall be omitted from the statute with effect from 01.06.2020. 


    It is further provided in amended section 12A that in order to claim exemption u/s 11 and u/s 12, a trust must be registered u/s 12AB. Thus if a trust is not registered u/s 12AB, it cannot avail exemption u/s 11 and u/s 12.


    If a trust does not migrate to section 12AB will it be attracted by section 115TD? Will omission of section 12AA leads to the conclusion that the registration gets cancelled for attracting section 115TD.


    Accredited Income u/s 115TD

     

    Charity is lifelong, a charity has no end, a charity cannot be ceased, hence,charity can be transferred or handed over but charity must carry on. And that’s why income tax exemption has been given to a charitable institution. The purpose of providing exemption to a charitable institution is that since the income is used for charitable purposes, it continues to be utilized for charitable purposes and is not used for any other purpose.


    Therefore, whatever asset base is created by a charitable institution is out of exempt income on which no tax was paid earlier. But it may voluntarily wind up its activities or it may convert into a non-charitable organisation. That is why section 115TD is introduced to ensure that the benefit conferred over the years by way of exemption claimed by charitable trusts is not misused by converting it into a non-charitable organization. It is a kind of exit tax that we call ‘Tax on Accredited Income’ under the income-tax laws.


    Section 115TD is no doubt a draconian but fair provision. On reading the provisions one will find that there is no unfairness in the law, although it involves huge financial implications on the Trust since tax on accredited income is computed on the market value of net assets of the Trust. Section 115TD read with Rule 17CB provides for computation of net assets value of the Trust.


    Tax on accreted income is to be paid at the ‘Maximum Marginal Rate’ (MMR). This levy is in addition income-tax chargeable in hands of Trust. With the highest surcharge of 37%, the effective peak MMR comes to 42.744% from the AY 2020-21.


    Section 115TD is applicable in the following three circumstances under which tax on accreted income is leviable:


    1. Trust is converted into any form which is not eligible for grant of registration under section 12AA. Trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA:


    i) The registration granted to it under section 12AA has been cancelled or


    ii) Trust has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it:


    a) has not applied for fresh registration under section 12AA or section 12AB in the said previous year.


    b) has filed an application for fresh registration under section 12AA or section 12AB but the said application has been rejected.


    2) Trust is merged with any entity other than an entity which is a trust on an institution not having similar objectives and not registered u/s 12AA or section 12AB.


    3) Trust failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or section 12AB or approved u/s 10(23C) within a period of 12 months from the end of the month in which the dissolution takes place.


    It should be noted that section 115TD does not apply to a trust or institution approved under section 10(23C).


    Applicability of section 115TD after the amendment


    As per the amendment, if a trust is registered u/s 12AA then such trust is required to apply for re-registration u/s 12AB after 1-10-2020 but within 31-12-2020. 


    What if a trust which is registered u/s 12AA does not or fails to apply for re-registration u/s 12AB within the stipulated period.


    So far till date, there is no express provisions in the Act which states section 115TD shall apply in such case. As stated above, section 115TD applies in case of cancellation of registration, modification of objects, merger of the trust, and dissolution of the trust.


    In case one fails to apply for re-registration u/s 12AB, it is neither cancellation of registration nor merger or dissolution of trust. Further, it is not modification of objects on which registration was granted.


    Nowhere in the law it is stated that if a trust fails to apply for re-registration u/s 12AB it will amount to cancellation of registration. Hence, failure to reapply for the registration u/s 12AB does not amount to cancellation of registration.


    It seems to be a flaw in the law which provides an easy way to exit without paying tax on wealth which was accumulated after availing exemptions over a period of years.


    Another view on the matter cannot be ruled out. If a trust fails to apply for re-registration u/s 12AB, then the trust will be deregistered and the provisions of section 115TD will apply. Though this seems to be more logical and rational, the provisions of the law, as it stands today, does not mean so. Hence, a legislative amendment is imperative to clear the ambiguity.


    It does not seem to be the objective of the legislature to provide a leeway to those trusts or institutions who fail to convert their existing registration to section 12AB without going through section 115TD. A clarification or amendment in this matter is highly expected. 


    Similar is the case for a trust or institution which has been given provisional registration u/s 12AB for a period of three years but fails to convert to normal registration u/s 12AB within the stipulated period. There is no clarity whether the provisions of section 115TD shall apply to such trusts or institutions in this case.


    Under the income tax law, when a trust or institution is de-registered or is unregistered, it is treated as an AoP assessee and is taxed at MMR. Further, provisions of section 56(2)(x) shall apply to these trusts or institutions where the receipt of amount exceeds Rs. 50,000 in a financial year. This is applicable to those trust or institution which has been given provisional registration u/s 12AB for a period of three years but fails to convert to normal registration u/s 12AB within the stipulated period.


    Modification of Object


    Where any modification is made to the objects of the trust which do not conform to the conditions for registration, an application shall be made within a period of 30 days from the date of such modification.


    On similar lines to that of section 12A(1)(ab), if after granting of registration the institution amends its objects which are not in conformity with the conditions of registration, by virtue of section 12A(1)(ac), such institution is required to obtain fresh registration under section 12AB.


    When a registered trust or an institution after modifying any or all of the objects of the Trust/Institution on which registration was granted then the trust shall be granted a normal registration for a validity period 5 years. In this case, there will be no provisional registration. If the trust or an institution is already given registration, the same registration after accepting the modification in objects will continue.


    However, while granting registration after the modification in the objects, the thrust of verification will be on the object, genuineness of activities and compliance with other laws in line of new registration. Once registration is granted, the exemption will be given from the assessment year immediately following the financial year in which the application is made. Hence, there will be no break in availing exemption by the trust or institution. The Trust will enjoy the continuity of exemption without any gap. However, it may be noted that the CIT has the power to reject the application in this case.


    Any order of approval or rejection shall be required to be passed within a period of 6 months from the end of the month in which application is received.


    Trust or Institution adopted or undertaken Modifications to its Objects


    The applicable provisions on modification of objects is thus summarized as under-

    SectionActivitiesRemarks
    S. 12A(1)(ac)(v)Time limit for making application for registrationWithin 30 days from the date of adoption or modification of objects
    S. 12AB(1)(b)(ii)(A)Validity of time period of registration5 years
    S. 12AB(1)(b)(i)(A)(B)Conditions to be checkedObjects,
    Genuineness of activities
    Compliance of requirements of any other law
    S. 12A(2)Availability of ExemptionFrom the AY immediately following the financial year in application is made
    S. 12AB(3)Order of approval/rejectionWithin 6 months from the end of the month in application was received

    80G approval: Similar amendments have been made relating to the procedure for approval/re-approval under section 80G. For fresh cases, provisions for provisional approval are also incorporated. Hence, a newly established trust or institution can apply for simultaneous registration under section 12AB and approval under section 80G.


    Power of Rejection of registration application [Section 12AB(1)]


    After reading the amendments related to the procedure for registration under section 12AB, it is to be noted that in the following cases the PCIT or CIT has the power to reject the application for registration of a trust or institution under -


    Situations

    Power to reject the application for registration under section 12AB

    Where the trust or institution is registered under section 12AB and the trust or institution has applied for renewal of its registration after 5 years

    Such an application can be rejected by the PCIT/CIT if the PCIT/CIT is not satisfied about the-

    i) Objects of the trust or institution

    ii) Genuineness of the activities of the trust or institution

    iii) Compliances under any other law which are material for the purpose of achieving the objects of the trust or institution.


    Before rejecting the application, the trust or institution must be given a reasonable opportunity of being heard.


    Where the trust or institution is provisionally registered under section 12AB and it applies for conversion of provisional registration to normal registration

    Where the registration has become inoperative

    Where the trust or institution is registered under section 12AB and has modified its objects which do not conform to the conditions of registration


    In these cases, detailed scrutiny of documents and records will take place since PCIT/CIT has been given powers to call for such documents or information from the trust or institution or make such enquiries as he thinks necessary.


    Power of cancellation of registration [Section 12AB(4)]


    The registration of a trust or institution can be cancelled only if a trust is registered under section 12AB. Thus, in all the above four cases where the CIT has the power to reject the application has also to cancel the registration of the trust or institution.


    In addition to the above four cases, section 12AB(4) and section 12AB(5) provides for cancellation of the registration of a trust or institution can be cancelled by the PCIT or CIT in the following circumstances-

    1. Where the activities of the trust or institution are not genuine, or

    2. Where the activities of the trust or institution are not carried out in accordance with the objects of the one which registration was granted.

    3. Due to operation of section 13(1),

    4. Where the trust or institution has not complied with the requirement of any other law and such non-compliances has attained the finality


    Compulsory granting of registration


    In the following two cases, the PCIT/CIT shall pass an order to grant registration without calling for much documents and information-


    1. Where an application is filed by a trust or institution for migration of existing registration u/s 12A or u/s 12AA to section 12AB. In this case, though no detailed information is released, it appears the new registration will be granted on the basis of existing registration. It is not clear whether the old registration certificate will be required or not.


    2. Where an application is filed by a newly established trust for a Provisional Registration, the same shall be granted within the prescribed time limit. In this case, it appears that no detailed scrutiny of documents will be done and the provisional registration will be granted on the basis of the object of the trust or institution.


    However, the fourth proviso to section 12A(2) suggests that provisional registration may be refused by the PCIT/CIT under section 12AB.


    What if the Time Limit for granting registration is not adhered to


    AS stated above, the PCIT or CIT has to dispose of the application by an Order u/s 12AB(3) within a period of three months, six months and one month for migration of registration, fresh/normal registration and provisional registration. Section 12AB(3) uses the expression ‘shall be passed’ which clearly suggests that the passing of order within the stipulated time limit is mandatory.


    Similar provisions also exist in the earlier provisions. From the experience, it can be said that even though the law prescribes the time limit, seldom the same is practically adhered to. Thus a question may arise on the fate of registration of the trust if the time limit of passing of the order is not followed by the PCIT or the CIT. Whether Drastic and draconian provisions of section 115TD-Tax on accredited income will apply after the expiry of time limit.


    In this context, CBDT had issued Instruction No. 16 of 2015 dated 06.11.2015 in which it has taken a stern view on the fact that the time limit of six months specified in s. 12AA(2) of the Income-tax Act 1961 for passing an order granting or refusing registration under s. 12AA are not strictly followed and warned of adverse action if the order is not passed within the prescribed time limit.


    There is a Supreme Court decision in the case of CIT vs. Society for the Promotion of Education, Adventure Sport & Conservation of Environment wherein it was held that non disposal of an application for registration before the expiry of six months as provided u/s 12AA (2) results in deemed grant of registration.


    Following the ration laid down in the above mentioned case, it can be presumed that once the time-limit to pass the  order u/s 12AB(3) is passed, the registration of the trust or institution shall remain valid and shall be deemed to have been granted to the trust or institution.


    Though the legal proposition will be that the trust is deemed to have been granted registration but the fact is that there is no registration certificate and registration number. In the online filing era, it would be difficult to claim the exemption in the return of income without a registration number.


    Hence, a suitable provision should be incorporated in the Act itself for automatic allotment of registration number or other methodology whereby a deemed registered trust or institution can claim the exemption.


    Conclusion


    The start date to migrate to the new registration regime under section 12AB is 01.10.2020 and the last date is 31.12.2020. The form will be a simple form as an intimation only to switch to new section 12AB. The application process seems to remain simplified. One should not wait till the last date for filing the application.


    However, please note that there is no provision to condone the delay for shifting to the new registration regime and there is clarity if one fails to reapply for the new registration on the applicability of section 115TD.


    At last, one should keep in mind that there is no concept of or any provisions related to the surrender of registration in the Income Tax Act. One cannot go out of charity at his own wish since, earlier full exemption was claimed on the income. However, there do exist provisions related to the cancellation of registration.


    The entire scheme of registration procedure u/s 12AB will be online though not faceless.

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