Explore the profound impact of the Finance Act, 2023 on Charitable Trusts and Institutions under Sections 12AA, 12AB, and Clause 23C of Section 10 of the Income Tax Act, 1961. Unpack amendments categorically, covering exemption regimes, corpus provisions, donation implications, registration simplification, timelines for filing returns and audit reports, specified violations, exit tax provisions, and more. Gain comprehensive insights to navigate the intricacies of the revised tax landscape for charitable entities.
Impact Of Finance Act, 2023 On Charitable Trust and Institution Referred to In Section 12AA Or 12AB Or Clause (23C) Of Section 10 of The Act, 1961
This article is written for covering all the areas which creates impact on trust or Institution referred to in clause (23C) of Section 10 & Sec 12AA/12AB with the recent amendment made by Finance Act, 2023. For better understanding, amendment made is divided into eight major categories which are as follows:
> Introduction of Regime for claiming exemption (Para 1)
> Provisions for Corpus and Loan or Borrowing (Para 2)
> Donation to other Trust (Para 3)
> Simplification of registration process (Para 4)
> Timeline for furnishing returns & other forms (Para 5)
> Specified Violation (Para 6)
> Provision of Exit tax (Para 7)
> Others (Para 8)
- INTRODUCTION OF REGIMES FOR CLAIMING EXEMPTION (Para 1)
Under this, exemption available to the trust or institution referred to in clause (23C) of Section 10 & registered u/s 12AA/12AB would be available under two Regimes tabulated below:
|
FIRST REGIME |
SECOND REGIME |
| (Trust or institution claiming exemption u/s 10) | (Trust or institution claiming exemption u/s 11 & 12) |
| (Exemption to the trust or institution, University, educational institution, Hospital referred to in sub clause (iv) (v)(vi)(via) of Sec 10(23C)subject to the fulfillment of conditions provided therein) | (Exemption to the trust or institution registered u/s 12AA/12AB of the Act subject to the fulfillment of conditions provided therein) |
- PROVISION FOR CORPUS AND LOAN OR BORROWING (Para 2)
♦ Corpus shall not form part of Total Income–
Under the existing scheme, Voluntary contribution made with a specific direction that it shall form part of Corpus shall not be included in the Total income of the Trust or Institution subject to the condition such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) of section 11 of the Act maintained specifically for such corpus. (as per Explanation 1 to the third proviso to clause (23C) of section 10 / clause (d) of sub section (1) of section 11 of the Act)
Existing Scheme
♦ Application out of Corpus or Loan/Borrowing shall not treated as application inserted by Finance Act, 2021
While determining the amount of application, application out of corpus or Loan/Borrowing for charitable and religious purpose shall not be treated as application of income for charitable and religious purpose (third proviso of clause (23C) of section 10 of the Act and clauses (a) and (b) of section 11 of the Act) w.e.f 01.04.2022.
Provided that when such amount is deposited back or invested into one or more of the funds specified in in sub-section (5) of section 11 or when such loan or borrowing is repaid in any year from the income of that year then it will be treated as application in that particular year.
Loophole in the Existing system
Under the existing scheme, it was found that there were two loophole exist which is misutilized by trust or institutions
First– Prior to changes made by Finance Act, 2021, application out of corpus or loan/borrowing has been treated as application prior to 01.04.2021 and subsequently after insertion of explanation by Finance Act, 2021 at the time of investing back of depositing back of corpus or repayment of loan/borrowing it is again treated as application which amount to double deduction, hence an undue advantage was taken here by the trust or institution which need to be taken care of.
Second– There was no time period specified for depositing or investing back of such amount of corpus or repayment of loan or borrowing , hence availablility of indefinite period create result in loss to the revenue authorities.
To curb these difficulties, Finance Act 2023 has come up with the following amendments:
- That application out of corpus or loan or borrowing before 01.04.2021 should not be allowed as application for charitable or religious purposes when such amount is deposited back or invested in to corpus or when the loan or borrowing is repaid.
- That if the trust or institutions invest or deposit back the amount into Corpus and repay the loan within 5 years of application from the corpus or loan, it shall be treated as application. ( applicable for those withdrawal/application made out of corpus or loan/borrowing on or after 01.04.2021)
- Conditions to be satisfied while making the application from the corpus or Loan/ Borrowing
i. Such application should not be in the form of corpus donation to another trust.
ii. TDS, if applicable, should be deducted on such application.
iii. Application whereby payment or aggregate of payments made to a person in a day exceeds Rs 10,000 in other than specified modes (such as cash) is not allowed.
iv. Carry forward and set off of excess application is not allowed
v. Application is allowed in the year in which it is actually paid.
vi. Application should not directly or indirectly benefit any person referred to in sub-section (1) of section 13 of the Act and the income of the trust or institution should not enure any benefit to such person.
vii. Application should be in India except with the approval of the Board
- DONATION TO OTHER TRUST (Para 3)
Existing Provision- Under the existing regime, donation made by Trust or Institution referred to in Sec 10(23C) or Sec 12AA/12AB of the Act other than the corpus donation to another Trust or Institution registered u/s 10(23C) or Sec 12AA/12AB of the Act with similar objectives is treated as application of income in the hands of Donor Trust.
Example
Trust A has donated Rs. 50 lakh to Trust B during the year. In such a case situation is as follows: (Existing Scheme)
Treatment for Trust A (Donor Trust)
| Application of Income in the Hands of Trust A (Donor Trust) | Rs. 50 Lakh |
Hence, 100% donation made to Trust B is treated as application of Income in the hands of Trust A.
Treatment for Trust B (Donee Trust)
|
Donation received is treated as Income in the hand of Trust B |
Rs. 50 lakh |
| Entitled to apply only 85% of This income | Rs. 42.50 Lakh |
Here, as per the existing provisions of the Act, Trust B is entitled to apply either 85% or whole of the Income earned from charitable and religious purpose for claiming exemption. Hence this accumulation of 15% of the Income brings disparity and result in loss of revenue to the Authorities.
Amendment made by Finance Act, 2023
To remove this disparity, it is proposed to allow only 85% of the eligible donation made by one Trust other than corpus donation to another trust with similar objectives and registered u/s 10(23C) or Sec 12AA/12AB of the Act as application of Income in the hands of Donor Trust. (w.e.f 1st April, 2024 relevant to A.Y. 2024-25)
- SIMPLIFICATION OF REGISTRATION PROCESS (Para 4)
Under the existing Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 which provides for Provisional and Regular Registration by Trust and Institution referred to in sec 10(23C) / 12A/ 80G as follows:
Problems faced by the New Trust/ Institution on account of this Two tier Registration process
1. Under this existing regime, New Trust/ Institution need to go through two tier process for registration
- To apply for Provisional registration – Prior to 1 month of commencement
- Again apply for regular registration- Within 6 month prior to commencement Or expiry of Provisional reg. whichever is earlier.
AMENDMENT MADE BY FINANCE ACT, 2022 WITH RESPECT TO NEW TRUST/INSTITUTION
- TIMELINE FOR FURNISHING RETURNS & OTHER FORMS (PARA 5)
While computing the Total Income of the Trust /Institution referred to in sub clause (iv)(v)(vi)(via) of clause (23C) of Sec 10 or Trust/ Institution registered u/s 12AA/12AB of the Act , exemption u/s 10 or Sec 11 shall be provided to the Trust or Institution where:
> Such Trust or institution applies 85% of its income during the relevant previous year wholly and exclusively for the objects for which it is established.
FILING OF FORM 10 & 9A & AMENDMENT THEREOF
Where the Trust or institution referred to in sub clause (iv)(v)(vi)(via) of clause (23C) of Sec 10 or Trust/ Institution registered u/s 12AA/12AB of the Act doesn’t apply or fail to apply 85% of its income during the relevant previous year on account of two situation covered below:
Amendment made by Finance Act, 2023
|
(Applicable for trust/ Institution referred sub clause (iv)(v)(vi)(via) of clause (23C) of Sec 10 or registered u/s 12AA/12AB) Accumulated or set apart for application to such objects subject to conditions: |
(Applicable for trust/Institution registered u/s 12AA/12AB)
Whole or part of the income has not been received during the Relevant year (Case 1) OR Income received on 31st March (Case 2) |
| a. Period of accumulation is 5 years | a. Filing of Form 9– should be file on or before filing ITR as specified u/s 139 of the Act. |
| b. Filing of Form 10– should be filed on or before filing ITR as specified u/s 139 of the Act. | b. Case 1-should be applied during the PY in which the income received Or in the next immediately FY. |
| c. invested or deposited in form or mode specified u/s 11(5). | c. Case 2- should be applied in the Next immediately FY. |
Form 9A/ 10 should be filed at least two month prior to the date of filing ITR as specified u/s 139 of the Act.
FILING OF AUDIT REPORT AND AMENDMENT THEREOF
CBDT vide Notification No. 7/2023 in GSR 118(E) dated 21.02.2023 and through Income-tax (3rd Amendment) Rules, 2023 amended Rule 16CC and Rule 17B of the Income-tax Rules, 1962 and also amended the tax audit report required to be furnished by Charitable Trusts or Institutions including NGOs registered under section 12A or approved under section 10(23C) of the Income-tax Act, 1961 (‘Act’) in Form No. 10B and Form No. 10BB. This amendment shall come into force from 01.04.2023 i.e. applicable for A.Y. 2023-24.
Rule 16CC– This rule is applicable for form of audit report prescribed under tenth proviso to section 10(23C) i.e. for trust and institution referred to in sub clause (iv)(v)(vi)(via) of clause (23C) of Sec 10.
Rule 17B- This rule is applicable for form of audit report prescribed under sub-clause (ii) of clause (b) of sub-section (1) of section 12A.
Note: Before this amendment dated 21.02.2023, Form 10B was applicable for Trust/Institution claiming exemption u/s 11 and 12 and Form 10BB was applicable for Trust/ Institution claiming exemption u/s 10(23C).
SELECTION OF AUDIT REPORT
Post amendment, new form of Audit Report shall be selected on the basis of amended provision as specified below:
|
Applicability of Form |
Type of Trust | Limit |
| Form No. 10B | Trust or Other Institutions registered u/s 12AA/12AB | Total income is more than Rs. 5 crore |
| Form No. 10B | Trust or Other Institutions registered u/s 12AA/12AB | Receipt of any foreign contribution under FCRA |
| Form No. 10B | Trust or Other Institutions registered u/s 12AA/AB | Application of any income outside India |
| Form No. 10B | Trust or Other Institutions approved u/s 10(23C) without giving effect to the provisions of the sub-clauses (iv), (v), (vi) and (via) of the said clause | Total income is more than Rs. 5 crore |
| Form No. 10B | Trust or Other Institutions approved u/s 10(23C) | Receipt of any foreign contribution under FCRA |
| Form No. 10B | Trust or Other Institutions approved u/s 10(23C) | Application of any income outside India |
| Form No. 10BB | In any other case, not covered above-
|
|
- SPECIFIED VIOLATION (PARA 6)
With the introduction of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 relating to application for registration of the trust, it was provided that the trust/ Institution need to file Form 10A to apply for Provisional registration for New Trust that has not commenced operation or for validation of Regular registration for Old trust already registered u/s 10(23C) or Sec 12A.
Since the process of granting the provisional approval/registration for the new trusts and re-registration/approval for the trusts already registered is automated. Application is filed by the trust or institution on e-filing portal and provisional approval/registration or the approval/registration in such cases is granted in an automated manner without verification.
Now Finance Act, 2023 has come up with the provision that this automated Provisional registration/ revalidation of Regular registration can be cancelled by the officer for certain “ Specified violation” where application referred in first proviso of clause (23C) of Sec 10 or application referred to in clause (ac) of subsection (1) of section 12A of the Act is not complete or it contains false or incorrect information
Applicable with effect from 1st April,2023
- PROVISION OF EXIT TAX (PARA 7)
With the introduction of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 relating to application for registration of the trust, it was provided that the trust/ Institution need to file Form 10A to apply for Provisional registration for New Trust that has not commenced operation or for validation of Regular registration for Old trust already registered u/s 10(23C) or Sec 12A.
However, it was Noticed that there were certain trust/Institution which :
i. Didn’t apply for Provisional registration, applicable for New trust that has not commenced operations prior to one month of commencement of business.
ii. Didn’t apply for regular registration after getting provisional Registration within 6 month of commencement or expiry of provisional registration.
iii. Didn’t apply for revalidation of regular registration for the Old trust/institution already registered u/s 10(23C) / 12A within 6 month from the expiry.
IRREGULARITY OBSERVED ON ACCOUNT OF ABOVE
Thus, by not applying for re-registration/approval or registration/approval, the trust gets an easy route to exit without payment of the tax on accreted income, However Finance Act, 2016 introduced Chapter XIIEB consisting of Sections 115TD, 115TE and 115TF which seeks to impose a levy in the nature of Exit Tax on the accredited income of the Trust/ Institution at the rate of maximum Marginal rate.
Existing provision for Applicability of Sec 115TD
Where a Trust /Institution registered u/s 12AA has
(a) converted into any form which is not eligible for grant of registration under section 12AA:
(b) merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA or
(c) failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via), within a period of 12 months from the end of the month in which the dissolution takes place,
Accreted income is the amount of aggregate of Fair Market Value (FMV) of total assets as reduced by the liability as on the specified date. The method of valuation has been prescribed in rules which is liable to tax at Maximum Marginal Rate.
AMENDMENT MADE BY FINANCE ACT 2023
It is proposed to amend the provisions of section 115TD of the Act by inserting clause (iii) in sub-section (3) of section 115TD of the Act to provide that the provisions of Chapter XII-EB shall be applicable if any trust or institution under the first or second regime fails to make an application :
Upon violation of these, it shall be deemed to have been converted into any form not eligible for registration or approval in the previous year in which such period expires.
It is further proposed principal officer or the trustee of the specified person, as the case may be, and the specified person shall also be liable to pay the tax on accreted income to the credit of the Central Government within fourteen days from the end of the previous year in a case referred to Sec 115TD of the Act.
These amendments will take effect from 1st April, 2023 and will accordingly apply to the A.Y. 2023-24 and subsequent assessment years.
- OTHERS (PARA 8)
♦ Where the Trust / Institution referred to in sub clause (iv), (v),(vi)(via) of clause (23C) of Sec 10 or Trust/ Institution registered u/s 12AA/12AB fails to file ITR within the time limit prescribed u/s 139 then they will not be allowed exemption. (i.e. by filing updated return (ITR-U) , trust/Institution referred above will not be allowed exemption)
♦ Deduction u/s 80G will not be available for
(ii) The Jawaharlal Nehru Memorial Fund
(iiic) The Indira Gandhi Memorial Trust
(iiid) Rajiv Gandhi Foundation
Author Bio
the atricle is totally against the decisions of highcourts and SC