The non-profit organization i.e. trusts formed for the charitable purposes are not required to pay any income tax on income earned by the trusts. The law clearly defines the charitable purpose for which a trust can be established and carry its charitable activities. A trust is required to maintain its books of accounts and get the same audited every year as well as file its return of income with the due date prescribed under the Income Tax Act 1961. Further, a trust having its object as “other object of general public utility” are prohibited from doing / undertaking any business activities up to the limit that the total receipts from such incidental business activities does not exceed 20% of the total receipts of the trust for that particular year.
Until the enactment of Finance Act 2022, there was no clear understanding or view so as to how the income from the incidental business of a trust will be computed in case a trust fails to fulfil above mentioned condition of 20%. Further, ambiguities around computation of taxable income in case a trust fails to get its books of accounts audited or fails to file its return of income within due date were there. The Finance Act 2022 brought in amendments in section 13 of the Income Tax Act by inserting sub-section (10) which provides for mechanism for computation of income from incidental business of a trust. In this regard, the memorandum explaining the provisions of the finance bill 2022 read:
“5.1 Allowing certain expenditure in case of denial of exemption
i) Different provisions mandate denial of exemption to the trusts or institutions under both the regimes. Some of the provisions under which exemption is not available for its violation are as follows:
a) Having commercial receipts in excess of 20% of the annual receipts in violation of the provisions of proviso to section 2(15);
b) Not getting the books of account audited;
c) Not filing the return of income presently specifically provided under the second regime only;
ii) There is presently lack of clarity on computation of taxable income in case of non-availability of exemption in these cases. For example, if the exemption is denied to the trust or institution for the late submission of the audit report, its entire receipts may be subjected to taxation and no deduction for any application may be allowed.
iii) In order to bring clarity in the computation of the income chargeable to tax in such cases, the following amendments are proposed”
These ambiguities are tried to be removed by Hon’ble Finance Minister through the Finance Act 2022. The newly inserted provisions of sub-section (10) of section 13 of the Act provides here as under:
“(10) Where the provisions of sub-section (8) are applicable to any trust or institution or it violates the conditions specified under clause (b) or clause (ba) of sub-section (1) of section 12A, its income chargeable to tax shall be computed after allowing deduction for the expenditure (other than capital expenditure) incurred in India, for the objects of the trust or institution, subject to fulfilment of the following conditions, namely:—
(a) such expenditure is not from the corpus standing to the credit of the trust or institution as on the end of the financial year immediately preceding the previous year relevant to the assessment year for which income is being computed;
(b) such expenditure is not from any loan or borrowing;
(c) claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income, in the same or any other previous year; and
(d) such expenditure is not in the form of any contribution or donation to any person.
Explanation.—For the purposes of determining the amount of expenditure under this sub-section, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.
(11) For the purposes of computing income chargeable to tax under sub-section (10), no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee under any other provision of this Act.
Hence, as per the amended provisions of section 13 of the Act, in case of a trust which does not fulfill the condition of less than 20% business receipts or which fails to maintain the books of accounts / fails to get the books of accounts audited or which fails to file its return of income within due date, then the taxable income of such trust shall be computed after allowing it the benefit of expenditures incurred by it for the purpose of earing the revenue. Therefore, the benefit of expenditures incurred shall be given to the assessee trust and only the net income of a trust shall be taxable under the income tax law. However, the following shall be applicable while allowing the credit for expenditures incurred for the above said business purpose:
i). Deduction of capital expenditures shall not be allowed
ii). Expenditures made out of the corpus of the trust shall not be allowed
iii). Expenditures made out of the loan or borrowing of the trust shall not be allowed
iv). Claim of depreciation shall be allowed only in respect of such assets the purchase/acquisition of which has been claimed as application u/s 11 in any year
v). Expenditure in the nature of a donation or contribution to any person shall not be allowed
vi). Where payment for the expenditure has been made to a resident person, tax has been deducted on under the provisions of the Income Tax Act (i.e. provisions of section 40(a)(ia) shall be applicable mutatis mutandis)
vii). No payment for expenditure has been made in cash in excess of Rs. 10,000 (i.e. provisions of section 40A(3) / 40A(3A) shall be applicable mutatis mutandis)
Therefore, in order to bring clarity in the computation of the income chargeable to tax in cases where a trust fails to maintain its books of accounts / get the books audited or fails to maintain the limit of max 20% business receipts, the government has brought the above said amendment in provisions of section 13. These provisions shall be applicable w.e.f. 01.04.2023 i.e. AY 2023-24.
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