Levy of tax where charitable institution ceases to exist or converts into a non-charitable organization

The existing provisions of section 2(24) of the Act define “Income” in an inclusive manner. Any voluntary contribution received by a charitable trust or institution or a fund is included in the definition of income. Sections 11 and 12 of the Act provide for exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions, subject to various conditions contained in the said sections. The primary condition for grant of exemption is that the income derived from property held under trust should be applied for the charitable purposes, and where such income cannot be applied during the previous year, it has to be accumulated and invested in the modes prescribed and applied for such purposes in accordance with various conditions provided in the section. If the accumulated income is not applied in accordance with the conditions provided in the said section within a specified time, then such income is deemed to be taxable income of the trust or the institution. Section 12AA provides for registration of the trust or institution which entitles them to be able to get the benefit of sections 11 and 12. It also provides the circumstances under which the registration can be cancelled. Section 13 of the Act provides for the circumstances under which exemption under section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.

A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its activities and dissolve or may also merge with any other charitable or non-charitable institution, or it may convert into a non-charitable organization. In such a situation, the existing law does not provide any clarity as to how the assets of such a charitable institution shall be dealt with. Under provisions of section 11 certain amount of income of prior period can be brought to tax on failure of certain conditions. However, there is no provision in the Act which ensure that the corpus and asset base of the trust accreted over period of time, with promise of it being used for charitable purpose, continues to be utilised for charitable purposes and is not used for any other purpose. In the absence of a clear provision, it is always possible for charitable institutions to transfer assets to a non-charitable institution. There is a need to ensure that the benefit conferred over the years by way of exemption is not misused and to plug the gap in law that allows the charitable trusts having built up corpus/wealth through exemptions being converted into non-charitable organisation with no tax consequences.

In order to ensure that the intended purpose of exemption availed by trust or institution is achieved, a specific provision in the Act is required for imposing a levy in the nature of an exit tax which is attracted when the organization is converted into a non-charitable organization or gets merged with a non-charitable organization or does not transfer the assets to another charitable organisation.

Accordingly, it is proposed to amend the provisions of the Act and introduce a new Chapter to provide for levy of additional income-tax in case of conversion into, or merger with, any non-charitable form or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution. The elements of the regime are: –

  • The accretion in income (accreted income) of the trust or institution shall be taxable on conversion of trust or institution into a form not eligible for registration u/s 12AA or on merger into an entity not having similar objects and registered under section 12AA or on non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved under section 10(23C) within a period twelve months from dissolution.
  • Accreted income shall be amount of aggregate of total assets as reduced by the liability as on the specified date. The method of valuation is proposed to be prescribed in rules. The asset and the liability of the charitable organisation which have been transferred to another charitable organisation within specified time will be excluded while calculating accreted income.
  • The taxation of accreted income shall be at the maximum marginal rate.
  • This levy shall be in addition to any income chargeable to tax in the hands of the entity.
  • This tax shall be final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it shall be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.
  • In case of failure of payment of tax within the prescribed time a simple interest @ 1% per month or part of it shall be applicable for the period of non-payment.
  • For the purpose of recovery of tax and interest, the principal officer or the trustee and the trust or the institution shall be deemed to be assessee in default and all provisions related to the recovery of taxes shall apply. Further, the recipient of assets of the trust, which is not a charitable organisation, shall also be liable to be held as assessee in default in case of non-payment of tax and interest. However, the recipient’s liability shall be limited to the extent of the assets received.

These amendments will take effect from 1st June, 2016.

Clause 60 of Finance Bill 2016

Clause 60 of the Bill seeks to insert a new Chapter XII-EB consisting of new sections 115TD, 115TE and 115TF in the Income-tax Act on special provisions relating to tax on accreted income of certain trusts and institutions.

Sub-section (1) of the proposed new section 115TD provides that notwithstanding anything contained in any other provision of the Act, a trust or institution registered under section 12AA in any previous year shall be liable to tax on accreted income in the event of certain eventualities mentioned in the proposed new section, as on the specified date, at the maximum marginal rate, in addition to the income-tax chargeable in respect of the total income.

Sub-section (2) of the proposed section provides that the accreted income for the purposes of sub-section (1) means the amount by which the aggregate fair market value of the total assets of the trust or the institution, as on the specified date, exceeds the total liability of such trust or institution computed in accordance with the method of valuation as may be prescribed.

It is further proposed to provide that while computing the accreted income in respect of a case referred to in clause (c) of sub-section (1), assets and liabilities, if any, related to such asset, which have been transferred to the trust, institution or other organisation as specified therein within a period of twelve months from the date of dissolution, shall be ignored.

Sub-section (3) of the proposed section provides for specific situations under which a trust or institution can be said to have converted into any form which is not eligible for grant of registration.

The additional income-tax to be charged shall be in addition to the income-tax chargeable in respect of the total income of such trust or institution whether income-tax is payable by the trust or the institution on its total income or not. It also provides that the amount of tax shall be remitted within fourteen days of the date of occurrence of events specified in various situations.

The proposed section 115TE provides for the levy of interest, in case of failure to pay tax within the time provided, at the rate of one per cent. for every month and part thereof of such failure.

The proposed section 115TF provides that in case of failure of payment of tax, the principal officer or the trustee and the trust or the institution shall be deemed to be an assessee in default in respect of the amount of tax payable and all provisions of the Income-tax Act relating to recovery and collection of taxes shall apply to them.

This amendment will take effect from 1st June, 2016.

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