Analysis of amendment in section 10(23)(C) & 11 of Income Tax Act-1961 by Finance Bill, 2018

Union Budget 2018 has brought drastic change in the relief already provided to hospitals, educational institutions, trusts and funds registered under section 10(23)(C) & section 11, which is very important & considerable.

Let’s discuss the amendment in detail: –

As per section 11 so much of income as it consists of income derived from property held under  trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property shall not be included in the total income of the person.

In short if the trust has applied at least 85% of the receipts for the charitable or religious purposes in India than whole 100% of the income will be exempt.

Before proposal of budget 2018-19 that 85% of application was not subjected to the provisions of section 40(a)(ia),40A (3) & 40A(3A). i.e. provisions of Business Chapter were not considered for application of Income.

Note: –

Section 40(a)(ia): deals with the provision of 30% Disallowance of Expenses for non-deduction or non-payment of TDS.

Section 40A (3): deals with the provision of Disallowance of 100% of expenditure if payment is made by any mode other than account-payee cheque or draft exceeding ₹10.000/-.

Section 40A (3A): deals with the provision of Disallowance of 100% of expenditure if payment is made in excess of ₹10,000 in a day otherwise than account payee cheque or account payee bank draft, for an allowance made in the assessment for any year on the basis of incurred liability, to be treated as income of the year in which such payment is made.

Since these charitable & religious entities does not carry any business activities. institutions or trust carrying the activities were out of the scope of section 40(a)(ia),40A (3) & 40A(3A).

Provisions of above mentioned sections have been made mandatory by union Budget 2018-19, in respect of application of income for trust &institutions carrying charitable & religious activities.

1. 30 % of Expenditure would not be considered as application of income under section 10(23C) and section 11 of the Act, if TDS thereon is not deducted or deducted but not deposited to the Government. As per section 40(a)(ia).

2. 100% Expenditure would not be considered as application of Income u/s 10(23C) and Section 11 of the Act, if payment for any expenditure is made in cash exceeding 10,000/- in a day. As per section 40A (3) & 40A (3A).

Let’s understand the same with the help of an example: –

Gross receipts from properties held under trust for religious/charitable purposes- ₹1,00,00,000/-

Expenditure incurred on above activities-₹ 90,00,000/-

Out of the above expenditure, Payment of Rs 5,00,000 is made without deducting TDS & payment of ₹25,000 is made in cash.

Now the computation of income will be as follows: –

Amount expended