Recent developments in Income Tax act applicable to Charitable Trusts

Introduction

Charitable organisations or non- profit organisations (NPOs) play an important role in society as the intent of these organisations is not to work with any profit motive. Income of these organisations is fully exempt from taxation subject to the fulfilment of certain conditions. One of such conditions is that such organisations are required to be registered under Income Tax Act,1961

Definition of Charitable purpose

As per Section 2(15) of the income tax charitable purpose” includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility

However, the advancement of any other object of general public utility shall not be a charitable purpose if it involves the carrying of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to trade, commerce or business. It may also be noted that the organisation would not lose its charitable status if the receipts from such activity is less than 20% of the total receipts in any particular year.

The term Religious purpose is not defined under the Income tax Act.

Mandatory Registration

In order to avail the benefit of exemption from taxation  under Income Tax law an organisation is mandatorily required to be  registered under section 12A .  The benefit of exemption under section 11 and 12  is available to both charitable and religious purpose. Section 11 provides exemption in respect of income from property held for charitable or religious purpose.

Recent developments applicable to Charitable trusts or NGOs

Re-registration upon change or modification in the objects:

The Finance Act, 2017 made it mandatory for a charitable institution to make an application for fresh registration upon change or modification in the objects. Prior to this there was no such explicit provision in the Act that mandated the fresh registration in case change or modification of the objects after the registration has been granted. It may also be noted that Re-registration is not necessary for changes in the articles or rules.

Insertion of Proviso to sub section 7 of section 11

 With effect from 1^st June 2020 the following proviso shall be inserted:

Provided that such registration shall become inoperative from the date on which the trust or institution is approved under clause (23C) of section 10 or is notified under clause (46) of the said section, as the case may be, or the date on which this proviso has come into force, whichever is later

Provided further that the trust or institution, whose registration has become inoperative under the first proviso, may apply to get its registration operative under section 12AB subject to the condition that on doing so, the approval under clause (23C) of section 10 or notification under clause (46) of the said section, as the case may be, to such trust or institution shall cease to have any effect from the date on which the said registration becomes operative and thereafter, it shall not be entitled to exemption under the respective clauses.”

Section 11(7) of the Act, prior to its amendment by the Finance Act 2020, provided that where a trust or an institution had been granted registration under Section 12AA(1)(b) or had obtained registration at any time under Section 12A and the said was in force for any previous year, then the trust would not get exemption under Section 10 except in respect of agricultural income or income under Section 10(23C). Consequent upon insertion of Section 12AB, the said sub section has been with effect from 1^st June 2020 to cover a trust registered under Section 12AB also. Further it has also been amended to include income to notified institutions under Section 10(46) to be claimed as exemption along with Section 10(1) and Section 10(23C) of the Act.

Registration and Renewal under section 12AB

The Finance Act 2021 requires existing trusts registered under section 12A/12AA to apply for re-registration under section 12AB with effect from 1^st April 2021

Section 12A requires that every trust registered under section 12A/12AA are required to make an application for re-registration withing the specified period and if the application is not made the registration will not be stand cancelled on the expiry of the due date specified whereas by the implication, provisions of section 11 and 12 shall not be available by such trusts from the financial year 2021-22 onwards