Tax on accreted income – Section 115TD (1)(b) – merger of two trusts / organisations
a) Tax on accreted income – Section 115TD (1)(b) – merger of two trusts / organisations
a. One will appreciate that entire scheme of Income tax is based on Real income theory.
b. Tax on accreted income is payable even if entity is merged with other entity which is registered u/s 12AA but whose objects are not similar.
c. Further, the term “similar object” is subjective and prone to litigation.
d. Provisions of section 115TD will apply even if a charitable institution transfers its assets to an institution substantially financed by government or which has turnover not exceeding the specified limit.
e. Said provisions will apply even if a charitable institution transfers its assets to an institution which is approved by Charity Commissioner under Maharashtra Public Trust Act, 1950. These provisions create a charge without considering practical and real difficulties.
It is suggested that the existing clause (b) be substituted by the following clause:
“(b) merged with any entity other than an entity which is a trust or institution registered under section 12AA;”
b) Tax on accreted income – Section 115TD(1)(c) – time limit for transfer of assets to any other trust or institution
Time limit of 12 months as envisaged in section 115TD(1)(c) may not be enough for the trust to comply with, in some cases due to various genuine reasons.
Appropriate provisions may be made which would empower Pr. CIT/CIT to extend this period.
c) Section 115TD(4) – Trust to pay tax on accreted income even though it is not otherwise required to pay income-tax
a. The balance sheet approach envisaged in section 115TD may result in taxation of income which has legitimately enjoyed exemption in earlier years.
b. It may result in taxing an amount which was always eligible or entitled to an exemption. The proposed suggestion would ensure that only the following assets would be liable to accreted
(1) assets acquired out of non-agricultural income which is otherwise exempt, (e.g. dividend
(2) assets acquired out of the basic accumulation of 15% of income;
(3) assets acquired out of corpus donations exempt under section 11(1)(d);
(4) assets acquired out of bequests;
(5) assets acquired out of income below exemption limit;
(6) assets acquired out of business income on which tax is paid under section 11(4A);
(7) assets acquired out of income, taxed upon application of first proviso to section 2(15);
(8) assets acquired out of income which has suffered tax on account of application of section
(9) agricultural land.
It is suggested that provisions of section 115TD may not apply to the assets generated out of specified income on which exemption was not claimed.
d) Recovery provisions on trustees etc. – Section 115TD(5)
Section 115TD(5) reads as follows:
“(5) The principal officer or the trustee of the trust or the institution, as the case may be, and the trust or the institution shall also be liable to pay the tax on accreted income to the credit of the Central Government within fourteen days from,-…”
The term ‘principal officer’ is very widely defined in section 2(35) as follows-
“principal officer’, used with reference to a local authority or a company or any other public body or any association of persons or any body of individuals, means—
“(a) the secretary, treasurer, manager or agent of the authority, company, association or body, or
(b) any person connected with the management or administration of the local authority, company, association or body upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer thereof;”
The AO can consider almost any person connected with the management as the principal officer of the institution. It seems that primary liability to pay tax is on principal officer or the trustee and if they don’t pay then that would be of Trust.
Applicability of recovery provisions on the trustees etc. should be made only if it is proved that non-recovery is attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the charitable institution or trust.
e) Section 115TD(5) – Period of 14 days insufficient
Section 115TD(5) reads as follows:
“(5) The principal officer or the trustee of the trust or the institution, as the case may be, and the trust or the institution shall also be liable to pay the tax on accreted income to the credit of the Central Government within fourteen days from,—-
a. Time limit is too short to pay especially when institution is required to dispose of its assets to make payment.
b. It takes longer time to take permission from Charity commissioner appointed under Maharashtra Public Trust Act, 1950.
c. Further when capital assets are sold, proceeds would also be subject to capital gains tax. As per section 115TD(5),Tax need to be paid within a period of 14 days.
Time limit may be suitably modified /increased.