Budget 2020: Concerns / Issues As To Proposed Provisional Registration/ Approval Under Section 12AB, Section 10(23C) & Section 80G
Introduction : It has been proposed under the Finance Bill, 2020 that w.e.f. 01st June, 2020 the registration / approval to the charitable / religious institutions, educational institutions, medical institutions etc. will be granted for the limited period of 5 years. Later on, on expiry of the 5 years, the registration / approval will have to be got renewed. Further, the registration / approval to the first time never registered / approved fresh applicants will at first instance be provisional and later on, the same will have to be got converted in to full / final registration / approval. (For details kindly refer separate article of the author on the topic : Budget 2020 EXEMPTION U/S. 11 AND 10(23C) AND APPROVAL U/S. 80G FOR CHARITBLE / RELIGIOUS ETC. TRUSTS, INSTITUTIONS ETC. – AN ANALYSIS OF PROPOSED AMENDMENTS).
In this regard, there are several serious concerns / issues. In this article an attempt has been made to discuss these issues / concerns.
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1. Availability Of Exemption / Deduction During Tenure Of Provisional Registration / Approval:
It is an important issue that whether during the tenure of provisional registration / approval, the applicant will be entitled for exemption U/s. 11 & 10(23C) and the donors will be entitled for deduction U/s. 80G or not.
In this regard, it is the personal opinion of the author that during the above tenure the above benefits may be available. The detailed analysis of this issue is as under :
i. Section 11 Exemption :
The relevant condition for exemption U/s. 11 (as given in clause (ac) of sub section (1) of section 12A(amended)) is that the trust is registered U/s. 12AB. The registration U/s. 12AB simply means any type of registration granted U/s. 12AB. The exemption conditions do not distinguish between the different types of registration which may be granted U/s. 12AB. They also do not specifically restrict that only fully registered (and not provisionally registered) entities will be granted exemption. Further, clause (b) of first proviso (amended) of section 12A (2) specifically says that in case of provisional registration, the exemption shall be available from the assessment year from which the institution is provisionally registered. The relevant part thereof is reproduced here as under :
“Provided that the provisions of sections 11 and 12 shall apply to a trust or institution, where the application is made under–
(a) sub-clause (i) of clause (ac) of sub-section (1), from the assessment year from which such trust or institution was earlier granted registration;
(b) sub-clause (iii) of clause (ac) of sub-section (1), from the first of the assessment years for which it was provisionally registered:” (emphasis supplied by us).
ii. Exemption U/s. 10(23C) :
Similarly, the relevant condition for exemption under 10(23C) (as contained in amended first proviso to section 10(23C) is that the institution is approved under amended second proviso of section 10(23C). It also do not distinguish between different type of approval (i.e., full or provisional etc.). Further, clause (ii) of the eighth proviso (amended) of section 10(23C) specifically says that in case of provisional approval, the exemption shall be available from the assessment year from which the institution is provisionally approved. The relevant part thereof is reproduced here as under :
“Provided also that any approval granted under the second proviso shall apply in relation to the income of the fund or trust or institution or university or other educational institution or hospital or other medical institution,–
(i) where the application is made under clause (i) of the first proviso, from the assessment year from which approval was earlier granted to it;
(ii) where the application is made under clause (iii) of the first proviso, from the first of the assessment years for which it was provisionally approved; (emphasis supplied by us).
iii. Section 80G Approval :
The relevant clause as to grant of deduction to the donor is contained in existing clause (vi) of sub section (5) of section 80G (i.e., the institution / fund is approved). It also do not distinguish between the different type of approvals (as discussed in detail above in relation to section 12AB and 10(23C) above). The amended provisions also do not specifically mention that no deduction will be available to the donor in case of provisional approval to donee institution. Further clause (b) of fourth proviso to sub section (5) of section 80G (amended) specifically says that in case of provisional approval, the approval shall be applicable from the assessment year from which the institution is provisionally approved. The relevant part thereof is reproduced here as under :
“Provided also that the approval granted under the second proviso shall apply to an institution or fund, where the application is made under–
(a) clause (i) of the first proviso, from the assessment year from which approval was earlier granted to such institution or fund;
(b) clause (iii) of the first proviso, from the first of the assessment years for which such institution or fund was provisionally approved;” (emphasis supplied by us).
Thus the exemption / deduction under these sections may be available during the tenure of provisional registration / approval.
2. Duplicate Work In Cases Where The Institution Has Already Commenced Activities:
The cases of fresh registration / approval are mentioned in the proposed amendments as “any other case”. In all these cases at first instance only provisional registration / approval for 3 years is to be given without any reference to the commencement / non commencement of activities by the institution.
The provisionally registered / approved institutions will have to apply for full / final registration / approval at least 6 months prior to the expiry of the period of 3 years of provisional registration / approval or within six months of commencement of their activities whichever is earlier. In this regard, clause (iii) of amended first proviso to section 10(23C) is reproduced as under :
“Provided that the exemption to the fund or trust or institution or university or other educational institution or hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) under the respective sub-clauses shall not be available to it unless such fund or trust or institution or university or other educational institution or hospital or other medical institution makes an application in the prescribed form and manner to the Principal Commissioner or Commissioner, for grant of approval,–
(iii) where such fund or trust or institution or university or other educational institution or hospital or other medical institution has been provisionally approved, at least six months prior to expiry of the period of the provisional approval or within six months of commencement of its activities, whichever is earlier;” (emphasis supplied by us).
The amended section 12A and section 80G also contains the similar provisions.
Thus, in view of the above time period, those institutions who have already commenced their activities before making first time fresh application, but have been provisionally registered / approved (instead of full / final registration / approval due to requirement of new law) can make application for full / final registration / approval on the same day on which they will be granted the provisional registration / approval.
Thus, in cases of first time never registered / approved fresh applicants, where the activities have already been commenced prior to fresh application, the entire process is duplicate process. It is expected that in fresh cases where the activities have already been commenced, the Government should not provide for mandatory provisional registration but should proceed for final / full registration / approval only.
3. Difficulties If The Provisionally Registered / Approved Institution Is Not Granted Final Registration / Approval:
In case where the provisionally registered / approved institution applies for full / final registration / approval, the application may be rejected. The amendment in section 11, 12A, 12AB (new section), 10(23C), 80G (or any other section in the Act) do not throw light on the issue that in case final / full registration / approval is not granted to such institution, what will happen as to the exemptions claimed U/s. 11 or 10(23C) or deductions claimed by donors U/s. 80G.
Though logically it can be inferred that the reassessment proceedings may be initiated in these cases to withdraw the exemptions claimed during tenure of provisional registration. The same may also happen in cases where the donors have claimed deduction U/s. 80G.
Considering above situation, it appears that this situation may be more painful then present system of grant of registration / approval. In present system, the institutions / donors reasonably knows while claiming the exemption / deduction that they are entitled for that. However, in new system the situation while claiming deduction / exemption there will always be uncertainty as to its fate, which is not indicator of good and fair tax system.
Similarly, this type of uncertainty may also result in mal practices. The fraudulent institutions may obtain provisional registration / approval for three years without any enquiry. During these 3 years they may obtain donation by showing to the general public that donation to them is deductible U/s. 80G. After the period of 3 years they may not move for obtaining full / final approval and may escape. Similar type of mal practices may also happen on obtaining of provisional registration (without enquiry) U/s. 11 or approval U/s. 10(23C).
Even genuine institutions may have to face problem during tenure of provisional approval / registration. Due to uncertainity of fate of deduction, exemption etc. the people may hesitate to give donations to such institutions.
Thus, in view of the above problems, rather than granting provisional registration / approval to each and every one without any enquiry, it is expected to be provided that provisional registration / approval shall be granted only to those who have not commenced activities. So that the genuine institutions may not be deprived of registration / approval for want of commencement of activities.
Further, it is also expected to be provided that in case the full / final approval is not granted U/s. 80G to the institution, the proceedings will not be started against the genuine donors to withdraw deduction claimed by them.
CONCLUSIONS :The entirely new system may have some benefits but it also consists of various problems. Before implementation of the new system it is expected that the steps should also be taken for resolution of the problems so that the genuine institutions may not suffer.
Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author do not owns any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.
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