Amendment vides Finance Act 2020: Whether provisions of Section 11 and Section 12 of Income Tax Act, 1961 (Act) shall apply under certain conditions?

The post Finance Act 2020 – Applicability of Section 11 and Section 12 of Income Tax Act, 1961 (Act):

Case 1: Where approval under Section 10(23C) or Section 10(46) exist

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 w.e.f 01-06-2020 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.

Hitherto Section 11(7), on account of its own language, made it evident that an entity had the option to claim exemption under Section 10(23C)/ 10(46) or SECTION 11. Now, a proviso has been inserted in Section 11(7) – First Proviso – w.e.f. 01-06-2020 to provide that the registration referred to in it (i.e. under Section 12A or 12AA or 12 AB) shall become inoperative from the later of: (i) date on which such trust or institution is approved under Section 10(23C)/ 10(46) or, (ii) the date on which the proviso comes into force, i.e. 01-06-2020.

In other words, the registration shall be inoperative if the approval is obtained under Section 10(23C) or an institution notified under Section 10(46) of the Act.

A second proviso has also been added to the said sub-section w.e.f. 01-06-2020, to provide that the trust or institution, whose registration has become inoperative under the first proviso, may apply to get its registration again operative under Section 12AB. However on doing so, the approval under Section 10(23C) or notification under Section 10(46) to such institution or trust shall cease to have any effect from the date on which the said registration shall become operative and thereafter, it would not be entitled to exemption under the respective clause. Thus once the registration becomes operative under Section 12AB, the trust or institution will not be entitled to exemption under Section 10(23C)/ 10(46).

Section 12A(1)(a) states that Section 11 and Section 12 shall not be apply in relation to income of any trust or institution unless it has been duly registered. Now, if the registration is inoperative, the trust or institution will not be eligible to exemption under Section 11. It can however, continue to claim exemption under Section 10(23C) or Section 10(46) as the case may be.

It is pertinent to note here that the exemption under Section 10(23C) is qua the institution and not the assessee. Hence if an assessee is running several educational institutions and if any of them is wholly or substantially finance by the Government, then the income from such institution is not included while computing the total income although the income from other institutions may not be exempt. Thus a charitable trust could claim exemption qua a particular institution under Section 10(23C) and other institutions under Section 11. However, after the amendment, the institution now will have to decide whether to claim exemption under Section 10(23C) or Section 11 of the Act.

Also, hitherto there was no limit as to how many times a charitable institution could switch from Section 11 to Section 10(23C) and vice versa. Now it appears from a plain reading of the provisos is that the 2 provisos collectively give an opportunity for maximum two voluntary switches – (i) obtain approval/ notification under Section 10(23C)/ 10(46) and make existing registration under Section 12AB inoperative, subsequently, (ii) make the registration under S 12AB and the approval/ notification under Section 10(23C)/ 10(46) ceasing to have any effect. This is also confirmed by the Explanatory Memorandum which provides that, “the switching may be allowed only once so that switching is not done routinely and also it remains efficient to be administered” 

The Explanatory Memorandum states once because – for trusts already registered under Section 12AA and also having approval under Section 10(23C), only one voluntary switch is possible since the first proviso will automatically apply on 01-06-2020.

It is important to note that the registration is only made inoperative and not cancelled and therefore the PCIT/ CIT can cancel the registration vide Section 12AB (4)/(5) of the Act when it is inoperative under First Proviso of Section 11(7) of the Act. In the event of it not being cancelled the trust or institution shall also not be able to exit tax on the accreted income under Section 115TD and shall be liable to pay additional tax (along with the tax on income of the trust or institution) at the maximum marginal rate on the accreted income.

Case 2: Where approval under Section 10(23C) or Section 10(46) DOES NOT exist

Section 11 of the Act provides for grant of exemption in respect of income derived from property held under trust for charitable or religious purposes to the extent to which such income is applies or accumulated during the previous year for such purposes in accordance with the provisions contained in Section 11, 12, 12A, 12AA, 12AB, 13 etc.

Section 12A(1) provides for the conditions to be fulfilled by any trust subject to which exemption under Section 11 and Section 12 shall be available to it. One of the conditions is that the trust or institution is registered under Section 12A or 12AA. Finance Act 2020 has amended Section 12A w.e.f 01-06-2020 and a new section 12AB has been inserted with effect from the same date in respect of the requirements regarding registration, the period for which the registration shall be granted, the time within which the audit report should be furnished, cancellation of registration etc. Hitherto, a registration granted under Section 12A/ 12AA had perpetual validity in the sense that it was valid until the registration was cancelled under Section 12AA(3)/ (4). Now the registration will be valid for a specified period, that is, upto 3 years (for provisional registration) or maximum period of 5 years, as the case may be.

Amendments summarised:

Sl Category Time limit for application for registration
(1) A trust/ institution registered under erstwhile Section 12A or S 12AA – Time limit for application of registration On or before 31-08-2020
(2) A trust/ institution registered under erstwhile Section 12AB and the period is due to expire Atleast 6 months prior to expiry of period of registration
(3) A trust/ institution provisionally registered under Section 12AB Atleast 6 months prior to expiry of period of provisional registration or within 6 months of commencement of its activities – whichever is earlier
(4) A trust/ institution whose registration has become inoperative due to First Proviso of Section 11(7) Atleast 6 months prior to the commencement of the AY from which the registration sought to be made operative
(5) A trust/ institution which has adopted or under taken modification of the object not conforming to the conditions of the registration Within a period of 30 days from the date of the said adoption
(6) A trust/ institution formed before 01-06-2020 but not made an application Atleast 1 month prior to the commencement of the PY relevant to the AY from which the registration sought to be made operative
(7) A trust/ institution formed after 01-06-2020
(8) A trust/ institution formed before 01-06-2020 and applied as well and the application is pending

Therefore, in accordance with the amendment, interalia, trust or institutions already registered under the erstwhile Section 12A or Section 12AA have to mandatorily apply if exemption is desired, irrespective of, size, period for which registration is enjoyed and whether religious or charitable. A trust/ institution has to make fresh online application for registration to PCIT/ CIT within 3 months from the date on which the provision comes into force, i.e. 3 months from 01-06-2020. In the event such fresh application is not made under Section 12AB, then automatically the erstwhile application becomes inoperative.

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