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Amendments related to Charitable Trusts/NGOs: Budget 2021

amendments-related-to-charitable-trusts-ngos-budget-2021

While presenting the Union Budget 2021 in the Loksabha on 01.02.2021, the Finance Minister Nirmala Sitaraman announced certain reliefs to small trusts of the country. Certain other disputed issues in the provisions related to charitable trusts are also settled in the Finance Bill, 2021.


Exemption for Small Trusts


The government intends to reduce the compliance burden on small charitable trusts running educational institutions and hospitals. So far, there is a blanket exemption to such entities, whose annual receipt does not exceed Rs. 1 crore. It is proposed to increase this amount to Rs. 5 crore.



Hence, in order to reduce the compliance burden on the small charitable trusts running educational institutions and hospitals, it is proposed to increase the limit on annual receipts for these trusts from present Rs. 1 crore to Rs. 5 crore for non-applicability of various compliances like approval etc.


Carry Forward of loss by Charitable Organisations


In order to provide certainty, it is proposed to clarify that charitable trusts shall not be permitted to claim carry forward of loss. However, the loan repayment and replenishment of corpus shall be allowed as application.



Rationalisation of the provision of Charitable Trust and Institutions to eliminate possibility of double deduction while calculating application or accumulation


Exemption to funds, institutions, trusts etc. carrying out religious or charitable activities is provided under clause (23C) of section 10 of the Act and sections 11 and 12 of the Income Tax Act, 1961 (“Act”). 


Section 12A of the Act, inter alia, provides for the procedure to make an application for the registration of the trust or institution to claim an exemption under section 11 and 12. Section 12AB is the new section which comes into effect from the 1st April 2021.


Read Also: Analysis of Amendments for Charitable Trusts and NGOs: Finance Bill, 2021


Under the existing provisions of the Income-tax Act, 1961, corpus donations received by trusts, institutions, funds etc. are exempt as follows:


a) Explanation to the third proviso to clause (23C) of section 10 provides that income of the funds 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.


b) Clause (d) of sub-section (1) of Section 11 provides that voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of the trust or institution.


These entities are not allowed to accumulate more than 15% of their income or accumulate for the specific purpose up to 5 years, other than corpus donations referred above. Instances have come to the notice where these entities claim the corpus donations to be exempt and at the same time claim their application as part of the mandatory 85% application from income other than such corpus. This results in a situation where the corpus income has been exempted and its application has been claimed as an application against the mandatory 85% application of non-corpus income.


Instances have also come to the notice where these entities take loans or borrowings and make an application for charitable or religious purposes out of the proceeds of loans and borrowings. Such loans or borrowings when repaid, are again claimed as application. This results in an unintended double deduction.


Both these situations, at times, also result in paper loss which is claimed by the assessee as carry-forward resulting in the unintended short application (less than 85%) in the following years.


To ensure that there is no double-counting while calculating application or accumulation, it has been proposed that


a) Voluntary contributions made with a specific direction that it shall form part of the corpus shall be invested or deposited in one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus.


b) Application out of corpus shall not be considered as an application for charitable or religious purposes for the purposes of the third proviso of clause (23C) and clauses (a) and (b) of section 11. However, when it is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus from the income of the previous year, such amount shall be allowed as an application in the previous year in which it is deposited back to the corpus to the extent of such deposit or investment.


c) Application from loans and borrowings shall not be considered as an application for charitable or religious purposes for the purposes of the third proviso of clause (23C) and clauses (a) and (b) of section 11. However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as an application in the previous year in which it is repaid to the extent of such repayment.


d) Clarify in both clause (23C) of section 10 and section 11 that for the computation of income required to be applied or accumulated during the previous year, no set-off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed.


These amendments will take effect from 1st April, 2022 and will accordingly apply to the assessment year 2022-23 and subsequent assessment years.


For this purpose, amendments have been carried out in section 10(23C) and section 11 of the Act.


Clause 5 of the Finance Bill, 2021 amends section 10(23C) to give effect to the above proposals in the following manner:


(iii) in clause (23C),–


(I) in sub-clause (iiiad), for the words “receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed”, the words “receipts of  the  person  from  such  university  or  universities  or educational  institution  or  educational  institutions  do  not exceed five crore rupees” shall be substituted; 


(II) in sub-clause (iiiae),–


(A)  for  the  words  “receipts  of  such  hospital  or institution do not exceed the amount of annual receipts as may be prescribed; or”, the words “receipts of the person from  such  hospital  or  hospitals  or  institution  or institutions do not exceed five crore rupees.” shall be substituted;  


(B) after sub-clause (iiiae), the following Explanation shall be inserted, namely:–


Explanation.––For the  purposes  of  sub-clauses (iiiad) and (iiiae), it is hereby clarified that if the person has receipts from university or universities or educational institution  or  institutions  as  referred  to  in  sub-clause (iiiad), as well as from hospital or hospitals or institution or  institutions  as  referred  to  in  sub-clause  (iiiae),  the exemptions under these clauses shall not apply, if the aggregate  of annual  receipts  of the  person from such university  or  universities  or  educational  institution  or institutions  or  hospital  or  hospitals  or  institution  or institutions, exceed five crore rupees; or”; 


(III) in the third proviso,–


(A) the Explanation shall be numbered as Explanation 1 thereof and in Explanation 1 as so numbered, after the words “medical institution:” occurring at the end, the words, brackets and figures “subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub- section (5) of section 11 maintained specifically for such corpus.” shall be inserted;  


(B) after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:–


Explanation 2.––For the purposes of determining the amount of application under this proviso,- 


(i)  application  for  charitable  or  religious  purposes from the corpus as referred to in Explanation 1, shall not be  treated  as  application  of  income  for  charitable  or religious purposes:

  

Provided that the amount not so treated as application or  part  thereof,  shall  be  treated  as  application  for charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus, from the income of that year and to the extent of such investment or deposit; and 


(ii) application for charitable or religious purposes, from  any  loan  or  borrowing,  shall  not  be  treated  as application of income for charitable or religious purposes: 


Provided that the amount not so treated as application or  part  thereof,  shall  be  treated  as  application  for charitable or religious purposes in the previous year in which the loan or borrowing, or part thereof, is repaid from the income of that year and to the extent of such repayment:”; 


(IV) in the fourteenth proviso, after the figures and letters “12AA”, the words, figures and letters “or section 12AB” shall be inserted; 


(V) after the twentieth proviso, the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation  shall be inserted, namely:–

 

Explanation 2.––For the purposes of this clause, it is clarified that the calculation of income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding to the previous year;”;


Amended provisions in section 10(23C) explained


Clause 5 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.  


The said section provides that in computing the total income of a previous year of any person, certain categories of income shall not be included in the total income.


Sub-clause (iiiad) of clause (23C) of the said section provides for exemption for the income received by any person on behalf of university or educational institution as referred to in that sub-clause. The exemptions under the clause are available subject to the condition that the annual receipts of such university or educational institution do not exceed the annual receipts as may be prescribed.  


Similarly, sub-clause (iiiae) of the said clause provides for exemption for the income received by any person on behalf of hospital or institution as referred to in that sub-clause. The exemptions under the clause are available subject to the condition that the annual receipts  of  such  hospital  or  institution  do  not exceed  the  annual  receipts  as  may  be prescribed.  


Presently, the amount prescribed for sub-clause (iiiad) as well as (iiiae) is one crore rupees. It is proposed to increase the limit of annual receipts, for exemption under sub-clause (iiiad) and (iiiae), to five crore rupees and provide that such limit shall be applicable for an assessee with respect to the aggregate receipts from university or universities or educational institution or institutions as referred to in sub-clause (iiiad) as well as from hospital or hospitals or institution or institutions as referred to in sub-clause (iiiae). 


Explanation to the third proviso to the said clause provides that income of the funds 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. 


It is proposed to number the said Explanation as Explanation 1 thereof and to provide that such voluntary contributions should be invested or deposited in one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus. 


It is further proposed to insert Explanation 2 in the said proviso so as to provide that,–


(a) application out of such corpus shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C), provided when it is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus from the income of the previous year, such amount shall be allowed as application in the previous year in which it is deposited back to corpus and to the extent it is deposited back;


(b) application from loans and borrowings shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) provided when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as application in the previous year in which it is repaid and to the extent it is repaid.


Fourteenth proviso of the said clause provides that if any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of said clause  of  said  section  accumulates  its  income,  then  payment  or  credit  out  of  such accumulation,  to exempt  entities as prescribed in the proviso,  shall not be treated as application.


It is proposed to amend the said proviso to make a reference of section 12AB which provides for the procedure of registration.


It is also proposed to number the Explanation as Explanation 1 thereof the twentieth proviso to the said clause and to insert a new Explanation 2 therein so as to provide that for the computation of income required to be applied or accumulated during the previous year, no set off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed. 


These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years. 


Clause 6 of the Finance Bill, 2021 amends section 11 to give effect to the above proposals for Charitable Trusts in the following manner:


Amendment of section 11


6. In section 11 of the Income-tax Act, with effect from the 1st day of April, 2022,– 


(a) in sub-section (1),–


(i) in clause (d), for the word “institution”, the words, brackets and figures “institution, subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus” shall be substituted; 


(ii) after Explanation 3, the following Explanations shall be inserted, namely:–


Explanation 4.–For the purposes of determining the amount of application under clause (a) or clause (b),–


(i)  application  for  charitable  or  religious  purposes from the corpus as referred to in clause (d) of this sub-section, shall not be treated as application of income for charitable or religious purposes:  


Provided that the amount not so treated as application, or  part  thereof,  shall  be  treated  as  application  for charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus, from the income of that year and to the extent of such investment or deposit; and 


(ii) application for charitable or religious purposes, from  any  loan  or  borrowing,  shall  not  be  treated  as application of income for charitable or religious purposes: 


Provided that the amount not so treated as application, or  part  thereof,  shall  be  treated  as  application  for charitable or religious purposes in the previous year in which the loan or borrowing, or part thereof, is repaid from the income of that year and to the extent of such repayment. 


Explanation 5.–For the purposes of this sub-section, it  is  hereby  clarified  that  the  calculation  of  income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding the previous year.”; 


(b) in sub-section (2), in the Explanation, after the figures and letters “12AA”, the words, figures and letters “or section 12AB” shall be inserted; 


(c) in sub-section (3), in clause (d), after the figures and letters “12AA”, the words, figures and letters “or section 12AB” shall be inserted. 


Amended Provisions of Section 11 Explained


Clause 6 of the Bill seeks to amend section 11 of the Income-tax Act relating to income from property held for charitable or religious purposes. 


Clause (d) of sub-section (1) of the said section provides that voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of the trust or institution.    


It  is  proposed  to  amend  the  said  clause  (d) so as  to  provide that  such  voluntary contributions should be invested or deposited in one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus.  


It is further proposed to insert a new Explanation 4 to sub-section (1) so as to provide that–


(A) application out of the corpus shall not be considered as application for charitable or religious purposes for the purposes of clause (a) and (b) of sub-section (1), provided when it is invested or deposited back, into one or more of the forms or modes specified in sub- section (5) maintained specifically for such corpus, from the income of the previous year, such amount shall be allowed as application in the previous year in which it is deposited back to corpus and to the extent it is deposited back.  


(B) application from loans and borrowings shall not be considered as application for charitable or religious purposes for the purposes of clause (a) and (b) of sub-section (1), provided when such loan or borrowing is repaid from the income of that previous year, such repayment shall be allowed as application in the previous year in which it is repaid and to the extent it is repaid.  


It is also proposed to insert a new Explanation 5 to  the said sub-section so as to provide that for the computation of income required to be applied or accumulated during the previous year, no set off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed.  


Explanation to sub-section (2) provides that if any trust or institution accumulates or set off apart its income then payment or credit out of such accumulation, to exempt entities as prescribed in the Explanation, shall not be treated as application. Clause (d) of sub-section (3) provides that such income, credited or paid to entities prescribed, shall be deemed to be income of the trust or institution. 


It is proposed to make a reference of section 12AB in the said Explanation to the said sub-section (2) and clause (d) of sub-section (3), which provides for the procedure of registration. 


These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years. 



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