pri Cash Transaction Restrictions on Charitable Trusts under Income Tax Cash Transaction Restrictions on Charitable Trusts under Income Tax

A charitable or religious institution has substantial source of receipts in form of donations. Such donations may be corpus or voluntary. The Income Tax Law provides blanket exemption to corpus contributions (received for a particular purpose such as for construction of a building) whereas it requires application of voluntary contributions in general for charitable or religious purposes.

Donations can also be bifurcated into anonymous and non-anonymous form i.e. a donation where donor identity is available and disclosure thereof, if required by the authorities is not denied can be termed non-anonymous donation whereas the other form in which anonymity of donor particulars’ is maintained are called anonymous donation (Gupt Daan).

Restrictions on the Donor under Section 80G of the Income Tax Act, 1961

Section 80G

It is only a charitable trust who can get registered under section 80G and provide receipts to the donors making them eligible to claim deduction under section 80G (in computation of donor’s total income). Thus, religious trusts are not eligible for section 80G registration.

The Finance Act 2017 has amended the provisions of section 80G (5D) wef AY 2018-19 providing that “No deductions shall be allowed under this section in respect of donation of any sum exceeding two thousand rupees unless such sum is paid by any mode other than cash.” Thus a person donating more than Rs. 2,000/- in cash on or after 01.04.2017 shall not be entitled to claim benefit of such deduction under section 80G. It is further to be noted that this limit is for donor and not for donee.

Example: If a person donates Rs. 1,000 each in cash to 5 trusts registered u/s 80G, he shall be eligible to claim deduction only for Rs. 2,000 and not for total Rs. 5,000.

If Rs. 5,000 is donated in cash to 1 trust registered u/s 80G, then no deduction shall be allowed u/s 80G

  • For a charitable trust, there is no limit per donee or on aggregate basis on receipt of donation in cash. The only limit is that the aggregate anonymous donation (where records of identity of donor not available) should not exceed higher of Rs. 1,00,000 or 5% of total donations in a financial year.ž
  • The taxation of such donation in the hands of recipient charitable trust would depend on this fact even that whether donor identity is available with the trust or not.ž

Restrictions on the Donee i.e Trust – Taxation of Anonymous Donation

The taxability of anonymous donation is covered by the provisions of section 115BBC of the Income Tax Act 1961 attracting tax liability @ 30% depending on the status of trust being charitable or religious i.e. if a trust is a religious trust it need not pay tax per above section 115BBC whereas if it is a charitable trust the anonymous donations are taxable @30% (if anonymous donation exceeds- Rs. 1,00,000 or 5% of total donations whichever is higher)

“Anonymous donations” are not taxable under section 115BBC if

(i) Such donations are received by any trust / institution established wholly for religious purposes. Therefore, in case of a trust owning a temple, the offerings / donations made by the devotees etc. shall not be taxable under this section even if the names and addresses of donors are not available. Such donations shall be covered under section 11 and 12.

(ii) Such donations are received by any trust / institution established wholly for religious and charitable purposes. However such donations shall be taxable under section 115BBC if the anonymous donation is made specifically for any university / school / educational institution OR hospital / medical institution run by such trust or institution.

Where the total income of an assessee, being the person in receipt of income on behalf of; Ø any university or other educational institution or any hospital or other institution referred to in Section 10(23C) or Ø any trust or institution u/s 11 includes any income by way of any anonymous donation, the income tax payable shall be aggregate of:

-the amount of income-tax calculated at the rate of 30% on the aggregate of ANONYMOUS DONATIONS received in excess of –

-5% of the total donations received by the assessee; OR

-Rs. 1,00,000, WHICHEVER IS HIGHER, and

the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of the anonymous donations which is in excess of the 5% of the total donations received by the assessee or ` 1,00,000, as the case may be.

NOTE: Anonymous donations which are taxable under section 115BBC shall not be entitled to exemption under section 11 and 12 as per provision of section 13(7). Ø Anonymous donations which are not taxable under section 115BBC shall be taxable under the normal provisions subject to exemption under section 11 and 12.

ANALYSIS: Any donation received by trust or institution established: –

Wholly for RELIGIOUS purpose – 115BBC NOT applicable, Section 11 & 12 shall apply. So, if any temple, gurdwara, mosque, Church, etc. owned by trust and donations received from devotees, without disclosing their names and address shall not be taxed under section 115BBC. –

Wholly for CHARITABLE purpose – 115BBC applicable

Partly for RELIGIOUS & Partly for CHARITABLE purpose – 115BBC NOT applicable. But where donation is made with specific direction that such donation is for any university / educational institutional hospital / medical institutional run by such trust / institution, then such anonymous donations is covered under section 115BBC and taxable at the rate of 30%.ž

Taxation of Non-Anonymous Donation

Any kind of non-anonymous donations received by a trust can be claimed exempt subject to the provisions of section 11 & 12 of the Income Tax Act 1961. In other words, a trust may accumulate 15% of such donations and required to apply remaining 85% for public charitable or public religious purposes. The law further provides exemption from tax if the conditions specified for deemed application or accumulation are duly satisfied.

It’s important to note that anonymous donations received by religious trust which are not taxable as per section 115BBC are dealt at par level of non-anonymous donations for taxation of religious trusts.

Whether cash donations are anonymous donations:

Where the donor identity is available and can be disclosed, if required, even if such donation is received in cash it can’t be called as anonymous donation. Therefore, treating cash donations as anonymous is not prima-facie correct proposition.

Restrictions on Payment of Expenditure by Trust

The Finance Act, 2018 has inserted Explanation 3 to Section 11(1). The said Explanation 3 provides as under

“For the purposes of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of Expenses or payments not deductible in certain circumstances section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.

Thus, a new Explanation 3 has been inserted after section 11(1) with effect from assessment year 2019-20 to provide that for the purposes of determining the amount of application of income under section 11(1)(a)/(b), the provisions of section 40(a)(ia), and of section 40A(3)/(3A), shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”. Section 40(a)(ia) provides that in computation of profits and gains of business, 30% of any sum payable to a resident on which tax is not deducted/paid in accordance with the said section is not allowable as a deduction. Section 40A(3) provides that no deduction is allowable in computation of profits and gains in respect of cash payments exceeding Rs.10,000. Section 40A(3A) provides that if a deduction is allowed in year 1 on mercantile basis and subsequently in year 2 the assessee makes cash payment, the payment so made shall be deemed to be profits and gains of business of year 2, if the payment exceeds Rs.10,000.

As per the Memorandum to the Finance Bill 2018, the Explanation is inserted to encourage cash less economy and curb generation of black money. The relevant extract is as under :

“At present, there are no restrictions on payments made in cash by charitable or religious trusts or institutions. There are also no checks on whether such trusts or institutions follow the provisions of deduction of tax at source under Chapter XVII-B of the Act. This has led to lack of an audit trail for verification of application of income.

Prior to insertion of Explanation 3, the department were making the provisions of section 40(a)(ia) and 40A(3) applicable to the trust. However, in following decisions it was held that said provisions were not applicable for computing income of the trust u/s 11 :

Bombay Stock Exchange Ltd. v. Dy. DIT [2015] 228 Taxman 195 (Mag.) (Bom);

Vidya Pratishthan v. Dy. CIT [2011] 44 SOT 90 (Pune) (URO);

ITO v. Mother Theresa Educational Society [2016] 68 taxmann.com 320 (Visakh)(Trib.);

ITO v. Haryana State Counseling Society [2016] 71 taxmann.com 274 (Chd)(Trib);

Kendriya Academy Vidhyalaya Shiksha Samiti v. Asstt. CIT [2016] 73 taxmann.com 391 (Jp)(Trib.);

ITO v. Kalinga Cultural Trust [2018] 61 ITR (Trib.) 24 (Hyd)

EXPLANATION 3 IS APPLICABLE PROSPECTIVELY

The Explanation is applicable from A.Y. 2019-2020 and subsequent years. Though the provisions of Section 40(a)(ia) and 40A(3) are made applicable to computation of Income u/s 11 by way of an explanation, it cannot be said that the explanation will be applicable retrospectively. This is because there is a presumption under the law that the amendment is prospective unless made applicable retrospectively. The Finance Act, 2018 itself states that the Explanation is applicable prospectively. Further, Section 40(a)(ia) and 40A(3) are specific disallowances only applicable for computing income under the Head profit and gains of business and profession and thus it could not have been presumed to be applicable to computation of income u/s 11 prior to insertion of Explanation 3.

MUTATIS-MUTANDIS

As per websters dictionary the expression “mutatis mutandis” means “with the necessary changes having been made” and/or “with the respective differences having been considered” . It means “with due alteration of details”.

Thus, when a law directs that a provision made for a certain type of case shall apply mutatis mutandis in another type of case, it means that it shall apply with such changes as may be necessary, but not that even if no change be necessary, some change shall nevertheless be made. The phrase is an adverbial phrase, qualifying the verb “shall apply” and meaning “those changes being made which must be made”. The phrase has its own and usual meaning, viz., that only such verbal changes are to be made in the statute as would make the principles embodied therein applicable in respect of an application for reference. [See Paresh Chandra Chatterjee v. The State of Assam AIR 1962 SC 167 & Aparna Trading Corporation (I) Private Limited v. CCT (1982) 51 STC 199 (Cal)]

Thus, the expression permits due alteration of changes as may be necessary.

Applicability Of Explanation 3 To Capital Expenditure

The provisions of section 40(a)(ia) and 40A(3) are not applicable to capital expenditure as same is not claimed as a deduction while computing total income. This legal position has been laid down by several judicial precedents. As far as computation of income u/s 11 is concerned, it has been held that Capital Expenditure incurred towards the objects of the trust are allowed as application of Income. Thus, if the legal position existing u/s 40(a)(ia)/40A(3) is applied, then while computing income u/s 11, application of capital expenditure without deducting TDS or incurred in cash cannot be disallowed. However another view is also possible that as provisions of section 40(a)(ia)/40A(3) are applicable mutatis mutandis (ie with the necessary changes having been made and/or with the respective differences having been considered) capital expenditure incurred without complying with the provisions of Section 40(a)(ia) /40A(3) shall not be allowed as application of income.

A similar restriction has been provided by proviso in clause (23C) of section 10 so as to provide similar restrictions on the entities covered under item (a) of the third proviso which refer to only sub-clauses (iv), (v), (vi) or (via) of said clause in respect of application of income. Even the memorandum explaining the provisions speaks only about sub clauses (iv),(V),(vi) or (via). This means the proposed amendment will not apply to other fund/ institution/trust covered under sub-clauses (i) to (iiiae) of clause (23C) of section 10 since the amendment will apply only to sub-clause (iv) to (via).

The sub-clauses (i) to (iiiaaaa) are pertaining to certain funds created by the Central Government like Prime Minister, Chief Minister relief funds and such other funds. But sub-clause (iiiab), (iiiac) (iiiad) and (iiiae) are applicable to educational and medical institutions which are falling under certain criteria or within certain prescribe limits are fully exempted but these are not covered under the proposed amendment. The proposed amendment is applicable for determining the application of income which will be restricted to the extent of disallowance. The impact of these provisions will not be very effective since the whole income of the Trust even after the reduction in application of income will be exempt.

Receipt of Donation by Placing Collection Boxes by Religious & Charitable Trusts

Collection Boxes (Golaks) are generally placed at temples, gurdwaras, mosque, church etc. for collection of donations and contributions. Charitable Trusts owning hospitals, schools etc. also have donation boxes at these institutions. At times, some of the donation boxes have an inscription or a sign nearby stating that the donation made in that particular box would be for a particular capital purpose, or that it is for the corpus of the trust. The issue here is whether these donations are voluntary contributions or will form part of corpus of fund and whether these receipts can be taxable as anonymous donations u/s 115BBC.

Different collection boxes with different inscriptions

Different collection boxes with different inscriptions

Important Case Laws:

  • Gurudev Siddha Peeth vs. ITO 59 taxmann.com 400
  • DCIT vs. All India Pingalwara Charitable Society 67 taxmann.com 338
  • Shree Mahadevi Tirath Sharda Ma Seva Sangh vs. ADIT 133 TTJ 57(Chd.) (UO).
  • Prabodhan Prakashan vs. ADIT 50 ITD 135.

Compulsorily Filing of Income Tax Return u/s 139

Who all are required to file return of income under newly inserted SEVENTH proviso to Section 139(1)?

Seventh proviso to section 139 has been inserted with effect from 1st April 2020 which is as under:

Provided also that a person referred to in clause (b), who is not required to furnish a return under this sub-section, and who during the previous year—

(i) has deposited an amount or aggregate of the amounts exceeding one crore rupees in one or more current accounts maintained with a banking company or a co-operative bank; or

(ii) has incurred expenditure of an amount or aggregate of the amounts exceeding two lakh rupees for himself or any other person for travel to a foreign country; or

(iii) has incurred expenditure of an amount or aggregate of the amounts exceeding one lakh rupees towards consumption of electricity; or

(iv) fulfils such other conditions as may be prescribed,

shall furnish a return of his income on or before the due date in such form and verified in such manner and setting forth such other particulars, as may be prescribed.

Analysis of Condition – (i)

The proviso applies only if the deposit/deposits are made in a current account; it will not apply if such deposits are made in a savings account.

The deposit may be made in cash or by cheque or by any other electronic mode. It may even be made by transfer from another bank account, including a current account.

The deposit has to be made in one or more current accounts ‘maintained with a banking company or a co-operative bank’. ‘A’ is often interpreted as ‘any’ and not ‘one’ [see CIT v. Khoobchand M. Makhija [2014] (Kar.); CIT v. D. Ananda Basappa [2009] (Kar.)]. In the context, it appears that the ‘a’ banking company may be read as any banking company and the aggregate of deposits in all current accounts should be reckoned to ascertain whether the limit of Rs. 1 crore is fulfilled or not.

It is the aggregate of all such deposits made by the person that is relevant during a previous year for the purpose of the condition.

On a literal reading, the deposit may be made in the current account maintained by the person or by any other person. To illustrate, if an individual directly deposits Rs. 1 crore in a current account maintained by another person “B”, the said deposit will be reckoned for the purpose of calculating the aggregate sum of Rs. 1 crore. However, it is to be noted that while clause (i) is silent as to who maintains the account with the bank, clause (ii) expressly refers to foreign travel expenses for himself or any other person. This suggests that clause (i) ought to be reasonably construed as an account being maintained by the assessee. Further it will be difficult to track the amount deposited by one person in another person’s account

Section 13A

  • Political parties which is registered with the Election Commissioner of India, are exempt from paying income tax. To avail exemption political parties are required to submit a report with Election Commissioner of India and furnish details of contributions received in excess of Rs. 20,000/- from any person. In order to discourage the cash transactions, additional conditions are provided for availing the benefit of the said section:
  • No donation of Rs. 2,000/- or more is received otherwise than by an account payee cheque/draft/use of electronic clearing system through a bank account or through electoral bonds. With effect from assessment year 2020,21, these donations may also be accepted through any electronic mode as may be prescribed.
  • Political party furnishes a return of income for the previous year in accordance with the provisions of Sec.139(4B) on or before the due date.
  • Further Political parties cannot accept a cash donation even as small as Re. 1 from a company.
    • Sec 13B read with Rule 17CA
  • For availing the benefit of exemption u/s 13B, an electoral Trust shall accept contributions only by way of an account payee cheque or account payee bank draft or by electronic transfer and shall not accept any contribution in cash.

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