Issue/Justification
The Finance Act, 2016 inserted a new Chapter XII-EB to provide for levy of additional income tax in case of conversion into, or merger with, any non-charitable form/entity or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution. However, sub section (3) deems such conversion to have taken place if registration granted to a trust under section 12AA is cancelled. In other words, the process of ‘conversion’ includes a case where registration of charitable trust is cancelled under section 12AA. There may be host of grounds including inadvertent defaults of non-compliance with section 13(1) which can be a ground for invoking cancellation under section 12AA. This neither indicates intent to convert property into a non-charity nor a case where the charitable objects are abandoned. In fact, the order cancelling registration under section 12AA is appealable and there is a possibility of reversal of such order at the appellate stage.
Further, sub section (5) requires payment of tax within fourteen days of the cancellation of registration under section 12AA, which may cause hardship in genuine cases. There are a number of judgements where the orders of cancellation of registration have been struck down subsequently in appellate proceedings. In such circumstances, requiring the trust to pay the tax and interest, when an appeal is pending, may not be justifiable.
The levy of exit tax may result in double taxation in cases where a whole or part of the amount, may have been assessed to tax in earlier years. For instance, trust may have suffered tax on account of noncompliance of provisions of section 11 or section 13.
Accordingly, the amount on which tax has been levied in an earlier year should not be included once again while computing accreted income for levy of exit tax.
Suggestion
a. The provisions of Chapter XII-EB be appropriately aligned with the intent expressed in the Explanatory Memorandum i.e., to levy exit tax only in case of voluntary wind-up of activities or dissolution or merger with charitable/non-charitable institutions or conversion of charitable institution into noncharitable institution.
b. The amount on which tax has been levied in an earlier year due to noncompliance of the provisions of section 11 to 13 should not be included once again while computing accreted income for levy of exit tax, since the same would result in double taxation.
