Introduction: The Finance Act of 2022 has ushered in significant changes, and one provision that demands attention is Section 115TD(3) of the Income Tax Act. Effective from April 1, 2023, this section has far-reaching consequences for charitable trusts, posing challenges that may not be widely known among organizations and their consultants.
Section 115TD(3) is being reproduced as under: –
Section 115TD: Accreted income of the trust or institution is taxable in the below circumstances:
1) Trust is converted into any form which is not eligible for grant of registration under section 12AA. Trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA:
i) The registration granted to it under section 12AA has been cancelled or
ii) Trust has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it:
-
- has not applied for fresh registration under section 12AA in the said previous year.
- has filed application for fresh registration under section 12AA but the said application has been rejected.
(3) For the purposes of sub-section (1), a specified person shall be deemed to have been converted into any form not eligible for registration under section 12AA or section 12AB or approval under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 in a previous year, if,—
(i) the registration or approval granted to it under section 12AA, or section 12AB, or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, has been cancelled.
Our Analysis
If registration or approval granted under section 12 AA or section 12AB or sub clause (iv) or sub clause (v) or sub clause (vi) or sub-clause (via) of clause (23C) of section 10 is cancelled then such specified person shall be deemed to have been converted into any form not eligible for registration under section 12AA or section 12AB or approval under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 then the specified person will be chargeable to tax As per section 115 TD (1) relevant extracts are reproduced as under
As per section 115TD(2), the accreted income of the specified person as on the specified date shall be charged to tax and such specified person shall be liable to pay additional income-tax (herein referred to as tax on accreted income) at the maximum marginal rate on the accreted income.
Our Analysis
According to above, the trust or institution will be liable to pay additional income tax on accredited income at maximum marginal rate.
The accredited income has been defined in 115 TD (2) which is being reproduced as under: –
The accreted income for the purposes of section 115TD (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.
Our Analysis
According to above, accredited income will be calculated as fair market value of all assets of the trust and reducing liabilities of the trust on specified date. In a nutshell if registration of a trust is cancelled then it will be liable to pay tax on net assets of the trust on fair market value.
Now, a moot question arises is what are the circumstances in which registration of a trust or institution can be cancelled. This has been mentioned in explanation to section 11(4) as specified violations which are being reproduced below: –
Explanation. ––For the purposes of this sub-section, the
following shall mean “specified violation”, ––
(a) where any income derived from property held under trust, wholly or in part for charitable or religious purposes, has been applied, other than for the objects of the trust or institution; or
(b) the trust or institution has income from profits and gains of business which is not incidental to the attainment 35 of its objectives or separate books of account are not maintained by such trust or institution in respect of the business which is incidental to the attainment of its objectives; or
(c) the trust or institution has applied any part of its income from the property held under a trust for private religious purposes, which does not enure for the benefit of the public; or
(d) the trust or institution established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste; or
(e) any activity being carried out by the trust or institution––
(i) is not genuine; or
(ii) is not being carried out in accordance with all or any of the conditions subject to which it was registered; or
(f) the trust or institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.
Our analysis
The specified violations enumerated above give ample discretion to tax authorities to cancel registration of trust or institutions. Particularly explanation (f) non-compliance of requirements of any other law, as a trust may be governed by many laws.
The above specified violations are so subjective that for the smallest violation of any law e.g. ESI, PF, minimum wages, electricity, security law etc. Various income tax authorities will have different views on this, causing a lot of litigations and possible misuse in implementing the above provisions.
Chargeability of income tax on accredited income is bad in law as under:
1. Section 115 TD (1) is logically correct as in that case a charitable institution is converted into a non-charitable institution, so all the assets of the trust become personal property of trustees or members of the institution.
2. While 115 TD (3) is a deeming provision in which additional income tax is chargeable even if the character of the trust remains charitable and the property of the trust do not become property of its trustees or its members.
Also, a trust would be deemed to have been converted into any form not eligible for registration under section 12AA or section 12AB or approval under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 in a previous year, if, —
(ii) it has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it—
(a) has not applied for fresh registration under section 12AA, or section 12AB, or approval under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 in the said previous year; or
(b) has filed application for fresh registration under section 12AA or, section 12AB, or approval under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 but the said application has been rejected.”;
It is important to mention that renewal of a trust is due after 5 years of the registration, e.g. For a trust getting registration in the year 2022 is required to apply for renewal after 5 years. It is very difficult for the Trustees/ CFO/ consultants of the trust to memorize/to mark a calendar for 5 years to make sure filing of renewal application is well in time. A missing on part of Trustee/ CFO/ consultant for not filling renewal application within the prescribed time can cause huge cost to the trust/ trustees. So, TRUSTEE/ CFO/ CONSULTANT OF CHARITABLE TRUST BEWARE.
We appreciate the concern of revenue for compliance of specified violations, however, the hanging sword on principal officer or trustee of the charitable trust for making payment within 14 days in above mentioned cases as per 115 TD (5) is very uncomfortable to the trustees or members of the trust or institution.
Rather, there may be a situation that no genuine person will like to be principal officer or trustee of various charitable institutions run by various religious communities consisting of large numbers of members. If compliance of various laws was really the only objective of the revenue, it could have been achieved by not allowing benefits of registration of the trust for the year or years, till the default continues.
We understand that hidden agenda of revenue to bring these provisions may be to discourage the continuation of charitable trust, which is not fair on part of revenue.
It is humbly submitted that cancellation of a trust under 12 AB Explanation (f) for violation of any other laws is bad in law as various laws have their own penal provisions for their violations and income tax act cannot penalise a person for violation of any other law when he has already been penalised under any other law. The doctrine of double jeopardy is a rule that states that no one should be put twice in peril for the same offence.
Revenue should not forget that there is a very big contribution of community based and family run charitable trusts that has created a massive infrastructure in education. Education sector could not have achieved this level only with the help of government resources.
Charging of tax at maximum marginal rate on fair market value of net assets of trusts on specific violations are bad law and may be subject matter of writ petitions.
For ex:
An institution set up almost 50 years ago may be running so many, medical, engineering, degree colleges and schools spreading on huge lands having fair market value running into hundreds of crores may be hit by the above provisions.
It is very important to mention that a charitable trust running many intuitions if, only one institution violates any provision mentioned under specified violations, then section 115TD (3) will be invoked on whole of the trust including all the intuitions run by it.
YOUR KIND ATTENTION IS DRAWN ON MEMORANDUM EXPLAINIG THE PROVISIONS OF THE FINANCE BILL 2022 WHICH IS EXPLAINED AS UNDER: –
A trust or institution under the first or second regime may voluntarily wind up its activities and dissolve or may also merge with any other non-charitable institution, or it may convert into a non-charitable organization. In order to ensure that the benefit conferred over the years by way of exemption is not misused and to plug the gap in law that allowed the trusts and institutions having built up corpus/wealth through exemptions being converted into non-charitable organisation with no tax consequences, a new Chapter XII-EB consisting of Sections 115TD, 115TE and 115TF was inserted in the Act by the Finance Act, 2016.
This chapter seeks to impose a levy in the nature of an exit tax which is attracted when the organisation is converted into a non-charitable organisation or gets merged with a non-charitable organisation or a charitable organisation with dissimilar objects or does not transfer the assets to another charitable organisation.
From the reading of above we understand that it is not properly explained by the memorandum that what the purpose behind introducing the above amendments is.
It is humbly submitted that basic intent of memorandum explaining the provision of the finance bill is to explain the members of parliament and all stakeholders the proposed amendments in easy language so that they can give their reaction to the proposed amendments to the Parliament.
Any amendment which is not properly explained in memorandum is breach of trust towards the members of parliament and stakeholders.
Conclusion:
The introduction of Section 115TD(3) raises critical questions about the fairness and practicality of its implications on charitable trusts. While compliance with laws is crucial, the subjective nature of violations and the potential tax burden call for a balanced reevaluation of these provisions. Charitable trusts, being essential contributors to various sectors, deserve a transparent and reasonable regulatory framework that encourages their continued service to society.
ALL TRUSTS ARE SUGGESTED TO APPROACH REVENUE AUTHORITIES TO WITHDRAW THE ABOVE AMENDMENTS THROUGH THEIR ASSOCIATIONS.
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