Budget 2021 – 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 Act. 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. Section 12AB is the new section which comes into effect from the 1st April, 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 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 specific purpose up to 5 years, other than corpus donations referred above. Instances have come to the notice where the 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 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 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 unintended double deduction.

Both these situations, at times, also result in paper loss which is claimed by the assessee as carry forward resulting in unintended short application (less than 85%) in 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 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 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 to the extent of such deposit or investment.

c) 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.

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.

[Clauses 5 and 6]

Text of the Relevant Clause of the Finance Bill 2021

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 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 sub­section (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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