Additional Income Tax compliance burden for Charitable/Religious Trusts

A New Era of Taxation of Charitable/Religious Trusts-Facing the challenges ahead amid a Paradigm Shift in the Regulatory Scheme clothed with some additional compliance burden for the Financial Year 2020-21

This year the Taxman has come with a substantial overhaul having regard to the taxation of the Trusts, Societies, NGOs etc. i.e. Charitable Trusts including educational, medical and/or religious one through the Finance Bill, 2020 (of-course which has now attained the status of Finance Act, 2020). For avoidance of repetition we will use the term charitable trust or trust only hereinafter in this article rather than to mention in detail all type of such trusts/societies.

There are changes in the taxation system of charitable trusts i.e. both for existing registered ones and for future ones also. Although since last years the Taxman is regularly making changes in statutory provisions in relation to such charitable trusts, but this year the changes so made happens to be enormous and will have a long lasting impact on the constituents. The purpose of present changes as enumerated by Hon’ble FM while presenting the budget are (a) To provide a rational process of registration on the one hand, (b) To provide for a mechanism of regular/periodic check to ensure that the conditions of approval or registration or notification are adhered to and further (c) To avoid a non-adversarial regime.

The changes so made were made interalia in sections 10(23C), 11, 12A, 12AA, 12AB, 80G, 80GGA with insertion of new section 12AB, 234G and consequential changes were made in section 56, 253, 115BBDA and 115TD of Income-tax Act, 1961. Any section mentioned in this article is of Income-tax Act, 1961 (the act) if unless mentioned otherwise.

We may analysis here the important changes under some suitable heads for the sake of smooth understanding:-

A. Registration process u/s 12aa and/or 10(23c):

That erstwhile registration section 12AA has been replaced by section 12AB. Earlier provision of section 12AA will be inoperative w.e.f. 01.06.2020. Registration Process for all is as under:

(a) All existing registered trust u/s 12AA or 10(23C)

√ All existing registered trust are required to re-apply for re-registration.

√ Such application in the prescribed form is to be filed with the Pr.CIT or CIT within a period of 3 months from06.2020.

√ Nopowers are granted to Pr.CIT/CIT to condone delay (if any).

√ The registration will be granted for a five years.

√ The registration will be granted within three months from the end of month in which application received by Pr.CIT/CIT.

(b) Trust enjoying simultaneous registration in regard to tax exemption u/s 12AA or approval u/s 10(23C)

√ Now it is not permissibleto simultaneous enjoy both of exemptions u/s 12AA or approval u/s 10(23C)

√ Finance Act 2020 has provided for Automatic cancellation of 12AA registratione.f. 01.06.2020 of any such trust who erstwhile simultaneously enjoys exemption under section 10(23C) or notified u/s 10(46) of the act alongwith registration u/s 12AA.

√ An option to apply again for registration u/s 12AB (new section) for such trust/s is provided.

√ On registration u/s 12AB, the approval u/s section 10(23C) or u/s 10(46) stands withdrawn/inapplicable.

√ Any such application for registration u/s 12AB (if so needed) is required to be filed at least 6 months prior to the commencement of the assessment year for which the said registration is sought to be made operative.[i.e. if any such trust wants to reinstate the registration u/s 12AB and to forego approval u/s 10(23C) etc., it is imperative for such trust to apply for registration u/s 12AB upto 30.09.2020.]

√ For the process of registration and time limit, kindly see (f) below.

(c) New application for registration u/s 12AA or approval u/s 10(23C) [which are not yet registered under old regime]

√ All the new applications will be dealt with new applicable provisions i.e. 12AB.

√ It is provided that any such new application will have to be made at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought. (In our opinion there remained some drafting error on the part of legislature which may be rectified in due course of time).

√ Any application for registration filed under old regime which remains pending for disposal as on 01.06.2020 will be treated as an application in accordance with the new provisions.

√ After receipt of fresh application as above or in case of any pending applications under old regime, initially provisional registration will be accorded for a period of three years.

√ The provisional registration will be granted within one month from the end of month in which application received by Pr.CIT/CIT.

√ Such trust to whom provisional registration is granted will then apply for final registration at least 6 months prior to the expiry of the period of provisional registration or within 6 months from commencement of the activities of the trust, whichever is earlier.

√ For the process of regular registration provisional registration and time limit, kindly see (F) below.

(d) Application for renewal of registration.

√ Application shall be required to be done at least six months prior to the expiry of the period of the earlier registration.

√ For the process of registration and time limit, kindly see (f) below.

(e) Application for registration, if there is change/s in objects of the trust.

√ The trust adopted or undertaken modification of the objects which don’t conform to theconditions for registration.

√ An application for registration is to be made before Pr. CIT/CIT.

√ The application is to made within a period of 30 days from the date of such adoption or

√ For the process of registration and time limit, kindly see (f) below.

(f) Process of registration and time limit in above referred case/s.

√ This is applicable for registration in all the above cases except for first time registration under new regime of existing registered trusts as in (a) above and/or in case of granting of provisional registration as in (c) above.

√ It is mandated that PCIT or CIT shall call for such documents or information from the trust or institution ormake such inquiries as he thinks necessary in order to satisfy himself about—

(A) the genuineness of activities of the trust or institution; and

(B) the compliance of such requirements of any other law forthe time being in force by the trust or institution as are material for the purpose of achieving its objects [It is new requirement at the stage of registration itself and in our opinion it is going to be a harsh provision in the times to come); and

√ It is only after satisfying himself about the (A) as above and the compliance ofthe requirements under item (B), CIT/CIT will register the trust or pass an order for rejection of the application after affording a reasonable opportunity of being heard;

√ The order must be passed by Pr.CIT/CIT within six months from the end of month in which application received by Pr.CIT/CIT.

B. Some other important changes in relation to trusts

√ The registration of a trust may be cancelled by Pr.CIT/CIT in any of the following cases:-

1st case:  Pr.CIT/CIT records a satisfaction that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust.

2nd case:  Pr.CIT/CIT notices that the activities of trust are carried out in such a manner that there happens to be a contravenes of the provisions of section 13(1) i.e.

(a) Trust failed to make investment/deposit in accordance with modes as prescribed u/s 11(5) or

(b) Any benefit directly/indirectly has been provided to trustee/relatives of trustee etc. in contravention to provisions of section 13(3) or

(c) The trust is created for any particular religious community or caste.

(d) It happens to be a private religious trust.

3rd case: Pr.CIT/CIT notices that the trust has not complied with any such requirements of any other law for the time being in force as may be applicable to trust or institution in case any such compliance is material for the purpose  of achieving the objects of the trust.

If we go by the phraseology of applicable sections, it become important to note here that against any such action of Pr. CIT/CIT for cancellation, erstwhile plain shield of having a reasonable cause as available with the assessee trust in the previous regime in some of the cases has been taken away by the legislature in the new regime. However needless to mention a reasonable opportunity of being heard is still available to assessee before any such cancellation of registration and assessee trust will be having an option to put any such claim before the authorities which will then be tested on touchstones of evolved jurisprudence as regard to applicable principles of law.

√ The accounts of trust must be audited before the due date prescribed u/s 44AB, which usually happens to be 30.09.2020 unless specifically extended.

√ The audit report so obtained by trust must be filed upto such due date i.e. upto 30.09.2020.

√ A further period of one month is available for filling ITR to such trusts.

√ The provisions in relation to prohibition of cross donations in between different charitable trusts has been made elaborated.

√ A clarification in form of explanation to section 10(23C) as been added to provide that corpus donations are not part of income of such trust/institution.

√ Here in our opinion the above explanation is beneficial to assessee and is in the form of a clarification, it will be applicable retrospectively. This has of-course abolished a old and long pending basis of litigation in case of 10(23C) institutions.

√ Consequential changes to give effect to substantial changes as above have been made in Section 56 (Income from other sources), Section 253 (Appeals to ITAT), Section 115BBDA (In relation to Dividend) & section 115TD (Taxation of trust which has ceased to be eligible for exemption as a registered charitable institution).

C. Registration u/s 80G

As we know that in case of section 80G registered trust, a benefit is bestowed upon the donors to avail deduction u/s 80G in relation to amount of donation so made (subject to some limits) from taxable income. The Finance Act 2020 has come up with some changes meant for the donee trust out of which some are of interest for donors also:-

√ The existing approved donee trust/fund etc.which are already approved u/s 80G of the Act shall have to apply for approval.

√ Application in the prescribed form is to be filed with the Pr.CIT or CIT within a period of 3 months from06.2020.

√ Such approval or registration shall be valid for a period 5 years only at any one time.

√ The order of registration in such cases will be made within three months from the end of month in which application received by Pr.CIT/CIT.

√ All such application which are pending for approval of registration as of now shall be treated as an application in accordance with the new provisions.

√ Any new applicants will be granted provisional registration first.

√ The time limits and registration process is more or less similar as prescribed in section 12AB above with an important exception of non applicability of any condition as to compliance of any other laws for the time being in force.

√ All such trustswill be required to file a statement of donations having prescribed details with the prescribed Income-tax Authority within prescribed time.

√ Allsuch trusts are required to furnish to the donor a certificate certifying the amount of donation and other stipulated details within prescribed time.

√ Time limits of filling, details, manner and form etc. has not been prescribed so far.

√ Undoubtly the statement will happen to be in the form of e-filing of statement and the same must be going to reflect in the annual statement in relation to donor (e.g. 26AS or any other as may be prescribed).

√ The deduction to donor will be available on the basis of such information in his/her annual statement.

√ A penalty of Rs.200/- per day u/s 234G in case of failure to furnish statement and/or to issue certificate as above.

√ The limit of cash donations u/s 80GGA has been restricted to Rs.2000/-.

D. Some suggestions

Based on reasonable appreciation of new provisions keeping in mind the intent of legislature behind enacting the same, we may humbly suggest, as under, to take some immediate action/s (especially for the existing registered trusts):-

√ Make sure that application for registration is being filed within due time as discussed above or any extended time (if so extended in view of current situation).

√ Take care for having strict compliance of the provisions of section 11(5) and 13(3) atleast before 01.06.2020 by analyzing each and every item of ‘Asset Side’ of Balance Sheet of Trust.

√ A second thought must be made on reasonableness of any payments being made to trustee/specified persons (if so being made).

√ If practically possible evidence in support of reasonableness of any such payments made may be collected simultaneously and be retained as a part of regular records.

√ Be aware of any other law as may be applicable to the trust, the compliance of which is material forthe purpose of achieving the objects of the trust and an analysis may be made of the compliance level of any such law in case of trust.

Dear Sir/Madam, I must say there is a gargantuan task ahead in the next months and once the prevailing lockdown/Curfew is getting over, all stakeholders here (Trust/CA/Advocate/Department) must be ready to do one’s part of duty to make the new era a smooth reality. Hope the new regime will prove to be a positive change for the overall development of targeted sector in consonance with Public Policy of Republic of India rather than happening to be an another weapon for the authorities to demonstrate one’s unfettered power.

Enquiries are welcomed and may be dropped at icajaind@gmail.com.