Decoding the End of Perpetuity Regime for NGOs, Charitable Trusts etc.

The Finance Act 2020 has brought in some dynamic changes in respect of the exempted Trusts, Societies, NGOs, Charitable Trusts, Section 8 Companies including educational, medical and/or religious institutions complying with the certain rules of registration under the Income Tax Act, 1961 (the Act). The registrations were perpetuity in nature, and their registrations could be invoked in the only certain scenario. The registrations under the former legislation were a cumbersome process without any time limit. The registration under section 12AA of the Act will be redundant from 1st October 2020 and the new section (12AB of ITA) applicability is approaching fast with effect from 1st October 2020. This new incorporated section 12AB of the Act will have a new regime of the registration process by prescribing the time frame for processing the application and validity of such exemption certificate granted. The objective of the refreshing the registrations with a fixed timeline is to curb the malpractices that have been noticed in the functioning of some of such institutions in the judicial and official scrutiny of the granted lifelong exemptions.

The objective behind the Change

The amendments were introduced by the Finance Act 2020. Smt. Nirmala Sitaraman Hon’ble Finance Minister of the Union Government has stressed the need for such amendments on account of the following.

(a) To provide a rational process of registration on the one hand,

(b) To provide for a mechanism of regular/periodic check to ensure that the conditions of approval or registration or notification are adhered to and further

(c) To avoid a non-adversarial regime.

There are many taxpayers who are claiming false 80G deduction claim at the time of filing Income Tax Returns. The CPC can only verify that the particular Trust or Entity is registered in Section 80G and has a valid certificate. However, the new procedure for the grant of registration to the charitable trusts and a periodical review of their functioning as bonafide charitable institutions is definitely to ensure that they function only to promote the cause of charity and not for private profit. The amendments will also help in removing the malpractices that have been on the increase in recent years escaping income tax on their incomes under the garb of exempted charitable institutions.

New regime inserted by Finance Act 2020.

In order to implement the new regime, the Act has inserted/deleted/brought amendments to following sections, which shall come into force from 01 October 2020 i.e. Section 10(23C) with respect to clause (iv), (v), (vi), (vii),Section 11,Section 12A, Section 12AB (inserted), Section 12AA ( deleted), Section 35 with respect to clause (ii), (ii a) and (iii) of sub-section 1 Section 80G, Section 80GGA, Section 234G (inserted) & Section 271K (inserted) The attempt to make entire process online, prescribed forms are yet to be released. These changes mainly relate to the grant of registration requiring every approved registered charitable trust to apply for re-registration and subsequently after every five years. New charitable trusts will be granted provisional registration for a period of three years and full/final registration later by adopting the prescribed procedure. Further, Simultaneous registration for tax exemption to charitable institutions in accordance with the procedure prescribed in the section 12AA or approved u/s 10(23C) or exemption through notification u/s 10(46) of the Act will not be available from 1st October (earlier 1st June) 2020. The extension of applicability from June 1st to October 1st is on account of the unprecedented humanitarian and economic crisis due to COVID-19. Accordingly, the entities approved/registered under section 10(23C), 12 AA, 35, and 80G of the Act will be required to file intimation within three months from October 1 st 2020 to December 31, 2020 (Earlier 1st June 2020 to 31st August 2020).

All existing registered trust requires re-registration u/s 12AA or 10(23C)

All existing registered trusts/societies/entities are required to re-apply for re-registration. Such application in the prescribed form is to be filed with the jurisdictional Pr. CIT or CIT (exemptions) within a period of 3 months from 1st October 2020. There is no provision of condoning of delay in the legislation, hence the applications be made in the time slot of 1st October 2020 to 31st December 2020. The registration will be granted within three months from the end of the month in which application received by the Jurisdictional Pr. CIT/CIT (Exemptions). While grating exemption, PCIT can call for such other information or documents which are indispensable. Also, PCIT is obligated to ensure the PCT has not violated any law which is for time being in force relating to the trust. PCIT is required to dispose of the application within three months from the end of the month in which the application is received. The validity of the exemption granted by PCIT is only for five years. For the transition period, the existing registration obtained before the new process stands to be valid.

New application for registration u/s 12AA or approval u/s 10(23C)

The Trusts which are not yet registered under the old regime requires registering under section 12 AB from now. Such applications will have to be made at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought. Any pending applications as on 01.10.2020 will be treated as an application in accordance with the new provisions. After receipt of fresh application as above or in case of any pending applications under an old regime, initially, provisional registration will be accorded for a period of three years. It is also proposed that such PCIT can grant provisional registration immediately without making a detailed enquiry into the objects/activities or compliance with any other laws, etc. The provisional registration will be granted within one month from the end of the month in which application received by jurisdictional Pr. CIT/CIT (Exemptions). Such trust to which provisional registration is granted will then applies for final registration at least 6 months prior to the expiry of the period of provisional registration or within 6 months from commencement of the activities of the trust, whichever is earlier. Subsequent to the provisional registration, when PCT satisfies any one of the conditions mentioned therein is required to make an application again to PCIT for regularizing the registration. Such application made therein is required to be validated by PCIT after an exhaustive examination of the activities carried on, and other information or documents which are essential for granting an exemption. Any approval granted by PCIT in such case will be valid for five years.

Trust enjoying dual registrations in regard to tax exemption u/s 12AA or approval u/s 10(23C)

Finance Act 2020 has provided for automatic cancellation of 12AA registration we.f. 01.10.2020 (Earlier 01.06.2020) of any such trust which erstwhile simultaneously enjoys exemption under section 10(23C) or notified u/s 10(46) of the act along with registration u/s 12AA. By doing so, even if the condition under section 13 of the IT Act is violated, such assessee was having the option to avail benefit under section 10(23C) of the IT Act. There are a plethora of judgments in the past upholding that both section 12AA and 10(23C) of the IT Act are two different sections, though they have similar provisions, cancellation of one of the registrations will not automatically render the other registration inoperative and hence the assessee was eligible to take benefit under the surviving registration. Now it is not permissible to simultaneous enjoy both of exemptions. However, an option to apply again for registration u/s 12AB (new section) for such trust/s been provided. On registration u/s 12AB, the approval u/s section 10(23C) or u/s 10(46) stands inapplicable. Any such application for registration u/s 12 AB is required to be filed at least 6 months prior to the commencement of the assessment year for which the said registration is sought to be made operative. So, if any such trust wants to reinstate the registration u/s 12AB and to forego approval u/s 10(23C) etc., it is imperative for such trust to apply for registration u/s 12AB up to 31.12.2020. In this backdrop, a new proviso in section 11 of the IT Act has been inserted which provides that Trust can either claim an exemption under section 11 & 12 of the IT Act or under section 10(23C) of the IT Act. The Trust has the discretion to choose only one of the above exemptions. In case a trust registered under section 12 AA of the IT Act, opts stream of an exemption (i.e. either 10(23C) or 10 (46) of the IT Act), the existing registration under the section 12AA of the IT Act becomes inoperative. However, if Trust desires, it can apply for fresh registration under section 11 & 12 of the IT Act. In that scenario, the registration under the section, 12 AB will become operative. The process relating to the fresh application for non-operative trust to operative trust is almost similar to the one narrated herein with some minor changes.

Registration u/s 80G

Section 80 G permits deduction from the income of the donor in respect of donation to the prescribed fund or approved charitable institution. A trust already approved u/s 80G of the Act shall also apply for approval and on doing so, the approval/ registration /notification in respect of the entity shall be valid for a period of up to 5 years at any one time. Application in the prescribed form is to be filed with the Pr.CIT or CIT within a period of 3 months from 01.10.2020. Such approval or registration shall be valid for a period 5 years only at any one time. The order of registration in such cases will be made within three months from the end of the month in which application received by Pr. CIT/CIT. Any application pending for approval of registration shall be treated as an application in accordance with the new provisions wherever they are being provided. Any new applicants will be granted provisional registration first. The time limits and registration process are more or less similar as prescribed in section 12AB above with an important exception of non-applicability of any condition as to the compliance of any other laws for the time being in force.

After five years renewals of registration shall be required.

The application shall be required to be done at least six months prior to the expiry of the period of the earlier registration.

In case of Change of Object of the Trust

In case, the trust modifies its objects which don’t conform to the conditions for registration. Whenever the registered Trust alters its object clause; they are required to make an application within 30 days from the date of alteration before the PCIT. PCIT is sought to verify the object clause and other documents before granting the registration. The order must be passed within 6 months from the end of the month in which the application is received, and validity of the order passes is effective only for 5 years.

Filing of Annual Statement of Donation by Entities to cross-check claim of donation by donor 80G from FY 2020-21

The Finance Act 2020, has made mandatory for all entities registered in Section 80G, Trust or institution (donee) have to submit an Annual Statement of Donation for such periods as may be prescribed Income Tax Authority or the person authorized by such authority within such time as may be prescribed. The Income Tax Department has not yet come out with guidelines or forms for the same. If Annual Statement of Donation contains any mistakes or there is a need for any addition or updating of information in the same then a correction statement can be filed like we file revised Income Tax and TDS Returns The information such as the Name, Address, PAN Number, Aadhar Number, Date of Donation, Mode of Donation and Amount donated will be asked. All Donors will get 80G deduction only based on Annual Statement of Donations filed by the Trust or Entity. It would be in similar lines like TDS deducted and viewed in Form 26AS. To verify the donation/deduction, donors need to download Form 26AS having all the information of the Donation made and Entity details. Income Tax Forms will have the auto-populated options so that returns can take the donation figure and calculate deduction automatically Further The Trust or Entity shall furnish to the donor, a certificate which shall specify the amount of donation in a prescribed manner containing prescribed particulars and within the prescribed time as per rules of Income Tax Department which will be notified soon. In case there is a delay in filing, a late fee of Rs. 200/- per day shall be applicable Section 234 G, which is mandatory. A penalty of Rs. 10,000/- which may go up to Rs. 10,00,000/- u/s. 271K.

Section 80GGA / Section 115BBDA Compliances

The section 80GGA of the Act prescribes for deduction of donations for scientific research or rural development. Deduction to the donor from his income u/s 80G or 80GGA of the Act will be allowed only if a statement is furnished by the donee recipient who will be required to furnish a statement in respect of the donations received. In case of failure to do so, a fee and penalty will be levied. Where the name of the donor does not appear in the report furnished by the donee or where no report is furnished by him, the deduction u/s 80G will not be allowed to the donor. A heavy burden has, therefore, been placed on the donor to ensure that the donee furnishes the prescribed statements to the tax authorities.

Section 115BBDA deals with the taxation of the dividend received by an assessee from a domestic company exceeding Rs. 10 lakhs while section 115TD levies tax on the income of a trust or an institution which has ceased to be eligible for exemption as a registered charitable institution. Consequential changes have been made in these two sections to make reference to the new provisions included for the registration of a charitable trust and the grant of exemption of its income from income tax.

Procedural changes made

The time limit for submitting the accountant’s certificate in prescribed a format for Trust or institution is now to be done one month prior to filing the return of income, earlier this was required to be done at the time of filing of the tax return. The time limit for filing the return of income in case of a trust or institution required to get its account audited is now 31st October of each year. A clarification as an explanation to section 10(23C) has been added to provide that corpus donations are not part of the income of such trust/institution.