Certain amendments in Budget 2023 pertaining to Trusts or Institutions

As per Section 10(46) of Income Tax Act, 1961, any specified income arising, on or after 1-6-2011, to a body or authority or Board or Trust or Commission or a class thereof which is constituted or established by or under a Central, State or Provisional Act or constituted by the Central Government or a State Government, with the object of regulating or administering any activity for the benefit of the general public shall be exempt if it is not engaged in any commercial activity; and is notified by the Central Government for the purpose of this section 10(46).

For the purposes of this clause ‘specified income’ means the income, of the nature and to the extent arising to a body or authority or Board or Trust or Commission (by whatever the name called) referred to in this clause, which the Central Government may, by notification in the Official Gazette, specify in this behalf.

Recently, Honorable Supreme Court has an occasion to deal with the applicability of exemption u/s 10(46) in case of any authority or Board or Trust or Commission or anybody in while delivering its land mark judgment in case of ACIT (Exemptions) vs AUDA (CA No 11762/2017 vide its order dated19th October, 2022) reported in (2022) 6 NYPCTR 1180 (SC).

While elaborating the said issue, Honorable Supreme Court has made a fine distinction in respect of statutory authorities, board or any such authorities established by State or Central Government for the purpose of achieving essentially public functions/services. Honorable Court has held that that amounts or any money charged by such authorities for the public services rendered by them are prima face not commercial or business receipts as their primary object is that of advancement of public purposes functions.

In order to bring clarity on the interpretation and observation made by Honorable Apex Court, a new clause (46A) is proposed to be introduced to provide for exemption of income arising to a body or an authority or a board or a trust or a commission, not being a Company, which has been establishment or constituted by or under a Central or State Act with one or more of the following purposes viz:

• Dealing with and satisfying the need for housing accommodation;
• Planning, development or improvement of cities, towns and villages;
• Regulating or regulating and developing, any activity for the benefit of the general public; or
• Regulating any matter, for the benefit of the general public, arising out of the object for which it has been created.

It may also be noted that such authority or a board or a trust or a commission is required to be notified by the Central Government in the Official Gazette for the purposes of this clause’

Consequential amendment is also proposed in Explanation to the 19^th proviso of clause (23C) of section 10. Similarly, consequential amendment is also proposed in sub section (7) of section 11.

Taxation of Charitable Trusts and Institutions:

The scheme of Charitable Trusts and Institutions has been completely changed by substantial amendments/substitutions of the provisions of section 10(23C)/11 and 12 and relevant registration procedures.

At present exemption to these trusts or institutions is available under the two regimes-

• Regime for any fund or institution or trust or any university or other educational institutions or any hospital or other medical institution referred to Section 10(23C) (clause iv, v or vi or via) of the Act (herein after referred to as trust or institution under first regime); and
• Regime for the trusts registered under section 12AA/12AB of the Act (hereinafter referred to as trust or institution under second regime).
• Section 12A of the Act, inter alia, provides for procedure to make application for the registration of the trust or institution to claim exemption under section 11 and 12 of the Act. Section 12AB of the Act is the new section which comes in to effect from 1^st April, 2021.

Treatment of donation to other trust:

The income of the trusts and institutions under both regime is exempt subject to the fulfilment of certain conditions. Some of such conditions are as under:

• At least 85% of income of the trust or institution should be applied during the year for the charitable or religious purposes to ensure bare minimum application for charitable or religious purposes.
• Trusts or institutions are allowed to either applied mandatory 85% of their income either themselves or by making donation to the trusts with similar objects.
• If donated to other trusts or institutions, the donation should not be towards corpus to ensure that the donations are applied by the done trust or institution.

Thus, every trust or institution under both the regimes is allowed to accumulate 15% of its income each year.

In order to plug loophole and possible misuse of this provision by trying to defeat the intention of the legislature by forming multiple trusts and accumulating 15% at each layer, it is proposed that only 85% of the eligible donations made by the trust or institution under the first or the second regime to another trust shall be treated as applicable.

Relevant appropriate amendments are made in provisions of Section by inserting clause (iii) in Explanation2 2 of the third proviso of clause (23C) of section 10 of the Act and clause (iii) in Explanation 4 to sub section(1) of section 11 of the Act.