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

analysis-of-amendments-for-charitable-trusts-and-ngos-finance-bill-2021

The Finance Bill, 2021 has proposed to make changes or amendments in provisions related to the charitable trusts, educational/medical institutions and NGOs under the Income Tax Act, 1961 (“Act”). The amendments are proposed in section 10(23C) and section 11 of the Act.


    Like preceding years, this year too the Finance Bill has proposed to amend provisions of section 10(23C) and section 11 of the Act. These amendments are restrictive in nature to clarify the stand of the legislature on certain issues. However, the magnitude of the amendments proposed this year is not as widespread as introduced by Finance Act, 2020, though have a far-reaching impact. Readers are aware that Finance Act, 2020 has introduced the concept of renewal of registration as prescribed new registration procedure under section 12AB. These provisions were made applicable from 1st June 2020. However, due to the COVID-19 pandemic, the provisions were first deferred to October 2020 and then vide Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, these provisions have been deferred till 1st April 2021.


    Summary of the Amendments for Charitable Trusts/NGOs


    The nature of amendments in the Finance Bill, 2021 address the following four issues of charitable trusts/NGOs and institutions-


    I. Corpus Donation exempt only if invested as per section 11(5)


    Voluntary contributions made with a specific direction that it shall form part of the corpus shall be required to 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 for claiming exemption under section 11(1)(d).



    Further, application out of corpus shall not be considered as an application for charitable or religious purposes for the purposes of clauses (a) and (b) of section 11(1)(a)/(b).


    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. 


    II. Application from loans and borrowings shall not be considered as application of income


    Application from loans and borrowings shall not be considered as application for charitable or religious purposes for the purposes of clauses (a) and (b) of section 11(1)(a)/(b). However, when a 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 to the extent of such repayment.


    III. No Set-off or deduction or allowance of any excess application


    It is proposed 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. In other words, Charitable Trusts shall not be allowed to claim any carry forward and set-off of past year losses.



    IV. Exemption limit to educational or medical institutions increased  to Rs. 5 crores


    In order to provide benefit to small trust and institutions, it has been proposed that the exemption under sub-clause (iiiad) and (iiiae) shall be increased to Rs 5 crore from the existing limit of Rs. 1 crore and 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).


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


    Analysis of in-depth discussion on each and every amended provision related to charitable trusts/NGOs and other institutions


    Exemption to Corpus Donation


    Before we discuss the amendment requiring a Trust or NGO to invest in the modes specified in section 11(5), it is pertinent to discuss in brief the background concept of Corpus Donation.


    What is Corpus Donation


    The term corpus donation is not defined in the Income Tax Act. In general, the term corpus donation refers to the permanent nature of donation which a donor expressly donates as such to an organization. A donation becomes a corpus donation only if it is accompanied by a specific written direction of the donor to that effect. In the absence of any specific written direction of the donor, a donation cannot be treated as a Corpus donation.


    A donor when donates his money to any organization wishes that such amount of donation is used for charitable activities. Hence, all the amount of donation received as general donation is used for charitable activities of the institution. However, for the smooth running and existence of an institution or organization, it needs some fixed nature of income to meet certain fixed nature of administrative expenses of the trust or NGO. These include expenditure in the nature of salaries, rent, rates and taxes, etc. The Corpus donation provides a certain consistent flow of income to the organization so that in the absence of any short/non-collection of donation, etc. the fixed income can be used for running the organization.


    Under these circumstances, the donee trust or NGO may request the donor to allow it to retain some part of the donation as a corpus of the organization. The recipient can treat such part of the donation as corpus only if the donor allows it to do so. 


    Corpus Fund is permanent in nature and is alike capital of a commercial organization. The income from the corpus fund is used to meet the basic expenditures for the administration and survival of the trust or NGO.


    Generally, a corpus donation is not allowed to be utilized for the attainment of the purposes of the Trust/NGO, but the interest or dividend income accrued on such fund can be utilized for charitable objectives and can be accumulated also.


    However, any organization cannot use or treat a donation received as a corpus donation as per its choice, if no prior and very specific direction in writing is received from the donors to this effect.


    Corpus Donation vs. Corpus Fund: How is Corpus Donation created by a Trust/NGO


    Corpus fund is different from Corpus Donation. Generally, Corpus Fund can be created in the following ways-

    1. Out of Corpus Donation received with a specific direction in writing from the donor

    2. Out of Income from Corpus Donation if so directed by the donor

    3. Out of Accumulated Income after applying 85% of income

    4. Out of taxes paid income say, anonymous donations.

    5. Corpus donation received at the time of creation of trust


    How is Corpus Donation treated by a Trust/NGO


    The general concept is that when a trust or NGO receives any donation as a corpus donation with a specific direction in writing from the donor, the donee/recipient is required to keep the same separately from the general fund of the trust or NGO. This is because a corpus donation is not meant for use in charitable objectives but to use as a permanent fund for a regular flow of income.


    Therefore, ideally, all the corpus donation shall be required to be kept separately in an income-yielding product and not to mix it up with the general fund which is solely meant for utilization for attainment of its objectives.


    What is happening before the amendment


    Prior to the amendment proposed by Finance Bill, 2021, many Trusts or NGOs are using the corpus donation for attaining the objectives of the organization. Such corpus donations are applied for the charitable purposes of the trust instead of keeping the same apart from the general donation. Further, the application is also treated towards the 85% application of income during the year of the trust.


    Thus such organizations are getting a double deduction for the corpus donation. It should be remembered that corpus donation received with a specified written direction from the donor is exempt from income tax. In this case, it is not mandatory to apply 85% of corpus donation, unlike general donation.


    Section 11(1)(d) of the Act 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.


    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.


    Hence, it is a case of a double deduction for corpus donation. 


    Amended Provisions to plug the loophole


    In order to prevent such unintended double benefits, it is proposed that 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.


    For this purpose, section 11(1)(d) is amended with effect from 1st April 2022 (AY 2022-23) in the following words-


    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) ....



    Hence, after the proposed amendment, section 11(1)(d) reads as follows-


    11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—

    (a)....

    (b)....

    (c)....

    (d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. 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


    Analysis of the amendment under which corpus donation shall be exempt only if invested as per section 11(5)


    Prior to the amendment, the only condition to claim exemption for corpus donation was that it must be supported by a written direction from the donor. Once a voluntary contribution is received from the donor with a specific direction that such donation or contribution shall be the corpus donation or contribution, it is exempt under the income tax.


    Post amendment, this only is not sufficient. Apart from the written direction of the donor, the donee trust or NGO is also required to invest the corpus donation as per modes specified in section 11(5).


    Is a separate bank account mandatory for corpus donation


    Such investment shall be made separately for each and every corpus donation. The expression “maintained specifically for such corpus” denotes that the investment of each corpus donation shall be required to be maintained separately in such a manner that each corpus donation can be easily identified separately.


    However, there is no requirement to maintain a separate bank account for each corpus donation. It is sufficient if all the corpus donation is invested in the same bank. The only requirement is that the corpus donation shall be invested in such a manner so that each and every corpus donation can be identified separately.


    For example, if corpus donation is invested in bank fixed deposits, then each corpus donation shall bear a separate fixed deposit receipt number. However, if more than one corpus donation is received on a day, all the amount can be aggregated and invested under one bank FDR.


    The main requirement is that the investment of corpus donation shall be separately identifiable from other donation or income of the trust or NGO. As a general rule, it is advisable to invest each and every amount of corpus donation separately.


    Timing of investment of Corpus donation


    The law is silent about the timing of investment. It does not state by which time the amount of corpus donation is required to be invested as per section 11(5) to avail the exemption. Whether the investment is required immediately or may be invested at the end of the year. What should be the position when more than one corpus donation is received in a day at different times?


    Generally, corpus donation will be received in a bank account of the trust or the NGO. The bank account may be a current account or a savings account. This bank account is itself a mode of investment specified in section 11(5). Hence, there shall be no issue on the timing of investment of corpus donation.


    From this bank account, money may be invested in other permissible modes at any point of time.


    Use of Corpus fund


    Once a corpus donation is received in a bank account, it is automatically invested in the prescribed modes. The law requires to claim exemption of corpus donation it should be invested in one or more forms or modes as prescribed in section 11(5). The bank account in which corpus donation is received is itself a prescribed mode. It can be transferred to any other prescribed mode, say, in the bank fixed deposit.


    Now a question arises can corpus donation be used for charitable objectives of the trust or NGO. The answer in negative lies with the newly inserted Explanation 4 to section 11(1) which expressly restricts that invested amount of corpus donation shall not be treated as application of income for charitable or religious purposes. Though it states that corpus fund shall not be treated as an application of income but there is no prohibition that corpus fund cannot be used for charitable purposes. Corpus donation, if not invested, can be used for the attainment of charitable objectives.


    However, one relaxation is provided in this regard. If the charitable trust or NGO applies any amount of corpus donation of a year for charitable or religious purposes then such use of corpus donation shall be treated as application of income for charitable and religious purposes. However, if in a later year, the trust or NGO, out of its income of that year, ploughs back the amount of such application of disallowed corpus donation to the corpus fund, then such refund of money out of current income shall be treated as application of income for that year. The application is limited to the amount of investment returned back to the corpus fund.


    Therefore, in accounting parlance, it is a kind of taking loan or borrowings from the corpus fund and refund of the loan or borrowings to the corpus fund.


    For example, if in the FY 2021-22, an NGO has received a corpus donation of Rs. 5,00,000/- and is used for charitable purposes. In the next year, the NGO has received Rs. 5,00,000/- as general donation means the income of the NGO is Rs. 5,00,000 in FY 2022-23. The NGO has ploughed back Rs. 5,00,000 to the corpus, it will be treated as an application of income of Rs. 5,00,000 for FY 2022-23. If instead of a part of Rs. 3,00,000 is ploughed back to the corpus fund in FY 2022-23, then also Rs. 3,00,000 will be considered towards the mandatory 85% application of income in FY 2022-23.


    Important: It should be noted that as per the amended law, the first step is to invest the corpus donation and then the same is used for charitable purposes. Thereafter, the income of the trust or NGO is used to replenish the used corpus fund. Thus, firstly, the use of corpus funds is mandatory before replenishing the same out of the income of the trust/NGO. If the income is first transferred to the corpus fund it will not be considered as an application of income.


    Treatment of maturity proceeds of investments out of corpus donation


    A question arises what will be the position when the investment made out of the corpus donation matures. Will it be required to again invest or it will be treated as income of the Trust or NGO in the year of maturity.


    The law is not clear in this aspect. The law only requires investment of corpus donation in the prescribed modes. When the investment matures, the principal amount invariably partakes the character of corpus donation whereas the income portion in the matured amount of investment may be treated as the income of the organization.


    This is one of the plausible interpretations of the proposed law.


    It should be borne in mind that the bank account in which the investment maturity is credited is itself one of the prescribed modes of investments and is in sufficient compliance with the provisions.


    Period of Investment in Section 11(5) prescribed modes


    There is an issue in the period for which the corpus donation is required to be invested in the prescribed modes. In other words, how long the corpus donation should remain invested by the trust or NGO. There is no definite answer in the proposed amendment. However, going by the nature of the corpus donation, it should remain invested in any of the prescribed modes forever.


    Consequences of Contravention of the condition of compulsory investment of corpus donation


    If the trust or NGO violates the condition which requires compulsory investment of corpus donation then the same will be dealt with as per the provisions of section 13(1)(d). In this case, the exemption under section 11 to such corpus donation shall not be available.


    Corpus Donation investment in business


    Trusts/NGOs if invest the corpus donation of the year in the business undertaking as per section 11(4) cannot be said to be an investment made in the modes specified in section 1195) and hence runs the risk of losing the exemption on such corpus donation. Such an investment in business undertaking cannot be said to have been made in conformity with section 11(5).


    Corpus donation received prior to April 2021


    The amended provisions regarding the investment of corpus funds in the prescribed modes of investment as per section 11(5) is proposed to be applied from the assessment year 2022-23. In other words, it shall apply to all the corpus donation received on or after 1st April 2021.


    The proposed law is silent on the same requirement for corpus donation received prior to April 2021. In the absence of any clarification, it can be interpreted to mean that the provisions of mandatory investment of corpus donation shall not apply to corpus donation received prior to April 2021. Thus, corpus donation received upto 31st March 2021 shall not be subject to the mandatory requirement of investment as per section 11(5).


    Application from loans and borrowings


    Finance Bill, 2021 has also proposed to restrict the use of loans and borrowings as application of income. Many times, Trusts or NGOS have to borrow money primarily for acquiring capital assets. The borrowed funds are then repaid out of income of the trust/NGO in subsequent years.


    What is happening before the amendment


    Instances have also come to the notice where these entities take loans or borrowings and make 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.


    Amended Provisions to plug the loophole


    To ensure that there is no double-counting while calculating application or accumulation, it has been proposed that 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) 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 application in the previous year in which it is repaid to the extent of such repayment.


    For this purpose, section 11(1) is amended with effect from 1st April 2022 (AY 2022-23) in the following words-


    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) …..; 


    (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) …..


    (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. 


    Analysis of the amendment under which loans and borrowings shall be treated as application of income


    Similar to corpus donation, the proposed law has expressly restricted treating the use of loan funds as application of income in any year. However, when the loan is repaid out of general donation or income of the Trust or NGO, the same shall be treated as application of income towards charitable purposes. It should be borne in mind that the loan funds must have been used for charitable purposes then only the refund of such loan or payment of EMI shall be considered as application of income.


    Set-off of Excess Application of Income


    A trust or NGO applies its income for charitable purposes. Once the income is applied towards charitable purposes, it cannot be denied as such and it becomes immaterial the financial year in which it is applied.


    Normally speaking, there cannot be more application of a trust or NGO than its income in a year. This is because a trust or NGO applies its income only. No one can spend more than what is earned. 


    However, there are certain situations when a trust applies more than its current year income to be adjusted against its future income. Sometimes, an organisation also applies its corpus donation towards charitable purposes. Under these circumstances, there arises a deficit in its Income & Expenditure Account for the year.


    In any year if there is a deficit (means the excess of expenditure over income)  it means the trust/NGO has overspent either from borrowed funds or its corpus fund. The deficit or excess of expenditure over income may also arise due to keeping the books as per the accrual method of accounting. It is not necessary to spend the money in order to treat the same as having been applied for a charitable purpose. A provision for expenses may be treated as application of funds.


    In commercial income parlance, 'set-off' means adjustment of losses with the profits or gains from another source under the same head or other head of income. In case of commercial concerns, there are separate provisions for carry forward and set-off of losses. The same is missing in the case of a Trust/NGO.


    What is happening before the amendment


    In the absence of specific provisions, the judicial pronouncements on the matter were being followed by the assessees. The Supreme Court in the case of CIT(E) v. Subros Educational Society (2018) 303 CTR 1/166 DTR 257 (SC) decided the matter in favour of the assessee and held that any excess expenditure incurred by the trust/charitable institution in an earlier assessment year could be allowed to be set off against income of subsequent years.


    Excess application of income in earlier years is considered as application out of the income of the current year for the purposes of Section 11. Section 11 states that income derived from property held under trust is to be excluded for the purposes of computing income of the Trust/NGO to the extent to which such income is applied to charitable or religious purposes in India. 


    It was interpreted that there is no provision in the law that restricts or states that the income should have been applied for charitable or religious purposes only in the year in which the income has arisen. Application takes place in the year in which the income is adjusted to meet the expenses incurred for charitable purposes. Thus, even if the expenses are incurred in earlier years, the same can be adjusted for application in subsequent years.


    Amended Provisions restricting the set-off of past deficit against the current year's income


    It is now clarified in 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.


    Post amendment, the set-off of past deficit against the current year's income will no longer be permissible for computing 85% application of current year’s income.


    For this purpose, section 11(1) is amended with effect from 1st April 2022 (AY 2022-23) in the following words-


    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) …..; 


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


    “Explanation 4.–,

    …….


    (i) …..


    (ii) …


    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.” 


    Analysis of the amendment under which set-off of any excess application of earlier years will not be allowed


    The above amendments have overruled various decisions of the Courts rendered in this regard. Further, ITR-7 also was not allowing adjustment or set-off of excess application in earlier years against current year’s income.


    This provision shall apply from AY 2022-23 which relates to FY 2021-22. Hence, any unabsorbed excess application standing in the Balance Sheet of a Trust/NGO will remain as such forever if the same is related to future income. If the same exists due to excess application from corpus fund or loan fund, the same can be adjusted as per other amended provisions discussed above.


    Raising of prescribed limit for exemption under sub-clause (iiiad) and (iiiae) of clause (23C) of section 10


    Section 10(23C) of the Act provides for exemption of income received by any person on behalf of different funds or institutions etc. specified in different sub- clauses.


    Section 10(23C)(iiiad) provides for the 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 said sub-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, Section 10(23C)(iiiae) provides for the 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 said sub-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. The presently prescribed limit for these two sub-clauses is Rs 1 crore as per Rule 2BC of the Income-tax Rule.


    What is happening before the amendment


    The prescribed limit for exemption from section 10(23C) for these two sub-clauses is Rs 1 crore as per Rule 2BC of the Income-tax Rule.


    Amended Provisions to raise exemption limit 


    Representations have been received to increase this limit of Rs 1 crore, as provided under Rule 2BC. In order to provide benefit to small trust and institutions, it has been proposed that the exemption under sub-clause (iiiad) and (iiiae) shall be increased to Rs 5 crore and 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).


    For this purpose, section 10 is amended with effect from 1st April 2022 (AY 2022-23) in the following words-


    Amendment of section 10.

    5. In section 10 of the Income-tax Act,–


    (a)....


    (b)....


    (c)....


    (d) with effect from the 1st day of April, 2022,–


    (i)....


    (ii)....


    (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”;


    Analysis of the amendment raising the exemption limit under section 10(23C)


    The amount of exemption limit of Rs 1 crore which was earlier required to be provided in the Rules, is now enhanced to Rs. 50 crore and enshrined in the provisions itself.


    Further, prior to the amendment, the exemption of Rs. 1 crore was available for each institution. In other words, the annual receipts of each of the medical or educational institutions was taken separately without aggregation to determine the threshold exemption limit of Rs. 1 crore. Since the pre-amended provision uses the expression ‘receipts of such hospital or institution do not exceed the amount of annual receipts as may be prescribed’ was interpreted to be applicable for each institution separately.


    However, the proposed amendment has changed the expression from ‘receipt of such hospital or institution’ to ‘if the person has receipts from university or universities or educational institution or institutions’. Hence, the annual receipts shall be determined from ‘person’ level and not institution level. Therefore, the annual receipts of all the hospitals and/or institutions of the ‘person’ shall be seen to determine the enhanced exemption limit of Rs. 5 crore.


    Further, the Explanation below Clause (iiiae) clarifies that 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.


    Prior to the amendment, the term 'aggregate annual receipts' refers to the receipts by the educational institution and not that of the person.


    However, what constitutes ‘annual receipts’ is still not defined in the Act. It should be borne in mind that all receipts do not constitute aggregate annual receipts and it is only those receipts that pertain to providing education and which have an element of recurrence and regularities can be regarded as annual receipts. Keeping in mind the intention of the provisions, annual receipts should mean receipts from the various fees and charges collected by the institution.


    Annual receipts shall not be confused with the total income of the school or university. The income from interest on FDRs is an additional income of society and it cannot be considered to be part of annual receipts of the school.[Param Hans Swami Uma Bharti Mission vs. ACIT in ITA No. 4154/Del/2011, ITAT Delhi]


    Receipts from sale of land, sale of Car, are not to be included in annual receipts. [ACIT vs. Public Rose Shiksha Samiti in ITA No. 363/JP/2013, ITAT Jaipur]


    Corpus donation is included in annual receipts. [Indian Medical Trust vs. ITO, ITA No.105/ JP/2011, ITAT Jaipur]


    Sale proceeds of land and bonds was not an annual receipt therefore, the same had to be excluded while considering the monetary limit prescribed under section 10(23C)(iiiad). [CIT vs. Madrasa E-Bakhiyath-Us- Salihath Arabic College [2014] 50 taxmann.com 81/ 226 Taxman 372 (Mad.)]


    Conclusion


    The above amendments will no doubt give big problems in the accounting of the organizations. With these amendments, Trusts/NGOs have to face big accounting issues. From now onwards, one has to prepare the accounts based on ‘Funds’ separated into corpus fund, loan funds and Accumulated fund. A detailed working is required to be maintained for each nature of fund so that, in future, the application can be adjusted seamlessly. A trust or NGO must think about these accounting considerations. 


    The NGO shall keep records of the application under the three broad categories-

    (i) Application out of current year income

    (ii) Application out of Corpus fund/donation

    (iii) Application out of Loan and Borrowings


    It is only the application out of current year income that will be counted towards 85% application. Any repayment of loan or replenishment of use of past corpus fund out of current year income shall be considered as an application towards 85% of the current year income.


    After the proposed amendments only the application out of current income will be allowed as application of income. Further, the set-off of past deficit against the current year’s income is no longer permissible.


    It should be noted that similar provisions were also proposed in section 10(23C) for institutions approved thereunder.



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