Rationalization of the provision of Charitable Trust and Institutions to eliminate possibility of double deduction while calculating application or accumulation u/s 10(23C) and 11:

  • Taxation of Charitable Institutions have been under scanner in recent times and the Government has, in last few years, have brought in various amendments in the relevant provisions governing the taxation of Charitable Institutions.
  • Finance Act, 2021 proposes to amend provisions of Section 10(23C) and 11 of the Income Tax Act, 1961 to resolve few anomalies and plug loopholes in the provisions regulating charitable institutions’ taxation.

Relevant provisions are discussed in brief as under:

Treatment of Corpus Donations:

1. Under the existing provisions of the Income Tax act, 1961, corpus donations received by trusts, institutions funds etc. are exempt as under:

  • Explanation to third proviso to Section 10(23C) provides that income of the fund or trust or institution or any university or any 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.
  • Similarly, Section 11(1)(d) provides that voluntary contributions made with 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.

2. These entities are not allowed to accumulate more than 15% of their income or in specific cases, accumulate to specific purpose up to 5 years, from the voluntary contributions other than corpus donations referred above in terms of Section 1191)(b) read with clause (2) of explanation-1 to Section 11.

3. However, practically it may happen that where these entities claim the corpus donations to be exempt and at the same time, they claim their application as part of the mandatory 85% application from income other than such corpus. Such treatment results in a situation where the corpus income has been claimed as application against the mandatory 85% application of non corpus income. And thus, amount to double deduction in the hands of the Charitable institutions while computing income chargeable to tax.

4. In order to ensure that there is no double claim by charitable institution while calculating application or accumulation, following amendments are proposed by way of insertion of sub clause(a) to explanation 2 to section 10(23C) and sub clause (a) or clause (b) of section 11:

  • Voluntary contributions made with a specific direction that it shall form part of Corpus are required to invested or deposited in one or more of the forms or modes specified in sub section(5) maintain specifically for such corpus.
  • Application for charitable or religious purpose from the corpus as referred to in clause (d) of this subsection, shall not be treated as application of income for charitable or religious purposes However , the amount not so treated as application, or part there of, will 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, in to 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.

Treatment of Expenditure incurred out of Borrowed funds:

  • Incurring of an expenditure on charitable purposes/objects from out of borrowed funds and consideration of repayment of loans/borrowing taken/raised for its application on charitable purposes have been a matter of controversy. There are various judicial precedents where in it has been helt that Repayment of loan is to be treated as application.
  • There are instances, wherein the charitable institutions have been found to be claiming amount incurred out of borrowed funds as application of income and also based on judicial precedents repayment of loans also has been claim as an application in a few cases.
  • In order to end such controversy and to bring in clarity in law, following amendments are proposed by way of insertion of sub clause(b) to explanation 2 to section 10(23C) and sub clause (ii) to explanation 4 to section 11 for the purposes of determining the amount of application under clause (a) or clause (b) of section 11:

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 clause (a) and (b) of Section 11. However, when loan or borrowing is repaid from the income of previous year, such repayment shall be allowed as application in the previous year in which it is repaid to the extent of such repayment.

Treatment of unabsorbed deficit of earlier year:

  • By introducing new explanation -2 to Section 10(23C) and explanation – 5 to Section 11 as under:
  • 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.
  • This amendment have overruled the decision of Supreme Court in the case of CIT vs. Rajasthan and Gujarat Foundation,(2018) 300 CTR where in it was held that the deficit arising out excess of expenditure over income during the earlier previous year can be set off against the surplus income over expenditure relating to subsequent year.

Raising the prescribed limit for exemption to certain entities U/S 10(23C)

  • Section 10(23C)(iiiad) and (iiiae) provides for exemption for the income received by any person on behalf of university or educational institution/ hospital as the case may be, as referred in the relevant clause . The exemption is available to the referred entities if their annual receipt does not exceed the prescribed amount of Rs.1 Cr.
  • It is proposed to increase the prescribed limit from Rs.1CR. to Rs. 5Cr.

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