Charitable Institutions supplement the efforts of the Government in providing social services. This fact is more visible during the COVID-19 whereby many such institutions have taken upon themselves the task of providing food to the needy and supporting other social activities. The Government, on their part realising the supplementary efforts of the these institutions, provide various relief in the form of relaxation from tax incidence. However, certain conditions are prescribed which must be complied in order to avail the exemptions provided by the Government.
The major compliance is in terms of various provisions contained under Income Tax Act,1961. Some major amendments have been made in the Income Tax provisions pertaining to charitable organisations and we shall dwell upon the same hereunder.
Non -Government Organisation(NGO) is a broad reference to an organisation carrying on charitable activities. The structure of NGO could be either of the following three:
The main object of the organisation as stated above must be to carry on the charitable activities as per the mandate contained in the Object clause as laid out in the Memorandum or Trust Deed.
PROVISIONS UNDER THE INCOME TAX ACT,1961:
The provisions pertaining to charitable organisations are mainly contained under Section 10(23C), 11, 12 and 13 of the Income tax Act,1961.
EXEMPTION TO VARIOUS INSTITUTIONS:
Clause (iiiab) and clause (iiiac) of Section 10(23C) provides exemption from Income tax to university or educational institution and hospitals or other medical institutions existing solely for educational and philanthropic purpose respectively and not for purposes of profit, and which is wholly or substantially financed by the Government. As per Rule 2BBB of the Income Tax Rules,1962 if more than 50% of the total receipts of the institution are Government grants during the relevant year then it shall mean to be substantially financed by the Government. Also not for purpose of profit here doesn’t mean that the institution cannot have surplus but the object must not be of earning profit and should not so exist for earning profit.
Similarly clause (iiiad) and clause (iiiae) of Section 10(23C) provides exemption from Income tax to university or educational institution and hospitals or other medical institutions existing solely for educational and philanthropic purpose respectively and not for purposes of profit, if the aggregate annual receipt of such institution does not exceed Rs. One Crore.
Further, apart from above, clause (vi) and clause (via) of Section 10(23C) of the Income Tax Act,1961 provides exemption from Income tax to university or educational institution and hospitals or other medical institutionsexisting solely for educational and philanthropic purpose respectively and not for purposes of profit, which is so approved by the Chief Commissioner or the Director General of Income Tax.
Clause (iv) of Section 10(23C) of the Income Tax Act,1961 exempts income of any other fund or institution established for charitable purposes which may be approved by the Chief Commissioner or the Director General of Income Tax.
Likewise clause (v) of Section 10(23C) of the Income Tax Act,1961 exempts income of any trust (including any other legal obligation) or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be approved by the Chief Commissioner or the Director General of Income Tax.
Exemption is also provided under Section 11 to various institutions whose income is derived from property held wholly for religious and charitable purposes and whose income is so applied for the object of the institution.
PRIOR APPROVAL OR REGISTRATION:
However, in order to be exempt, it was mandatory for the charitable institution or religious institution or university or educational institution or hospital or medical institution or other charitable trust ( hereinafter referred to as “institution”) as referred to in clause (iv), (v), (vi), (via), of sub-section 23C of Section 10 and in Section 11 of the Act, to be so approved or registered by the prescribed authority under the Income Tax Act,1961. The institution had to apply for approval or registration only once and if so granted to the institution u/s 10(23C) or u/s 12AA would continue to be valid unless rescinded or withdrawn.
AMENDMENT MADE BY FINANCE ACT,2020 :
Finance Act,2020 has made amendment to first proviso and second proviso of Section 10(23C) and by way of inserting clause (ac) under sub-section (1) of Section 12A of the Act requiring that all existing institution to make fresh application with the Principal Commissioner or Commissioner for seeking approval or registration, as the case may be. Such application is required to be made by 31st August,2020. It is provided that the approval or registration shall be granted for a period of five years and while so granting the approval or registration to institution, no enquiry shall be further made.
However, going forward, all fresh application for approval or registration is required to be made at least one month prior to the previous year relevant to the Assessment year for which approval or registration is sought. In matters of such fresh application made by the Institution for the first time, provisional approval or registration will be granted which will be valid for three years. These institutions are thereafter required to apply for registration within six months of the commencement of the activity or at least six months prior to the date on which the provisional approval or registration is due to expire, whichever is earlier.
All these institutions which have been accorded approval or registration under the amended provisions and since now the approval/registration will be only for five years, shall be required to apply for renewal at least six months prior to the date on which the approval or registration is due to expire. The Principal Commissioner or the Commissioner shall make enquiry as to the genuineness of the working of the institution and shall accordingly accord or deny approval/registration by way of order in writing.
Further, it is also provided under section 12A(1)(ac)(v) of the Act, that if any modification is made to the object of the institution then the institution shall apply for fresh registration within one month of such modification of the object.
Explanation to proviso 3 has been inserted to provide that income of the institutions as specified above and falling u/s 10(23C) shall not include any voluntary contribution if the same is made with a specific direction that they shall form part of the corpus of such institution. Though such provision existed u/s 11 of the Act but was missing u/s 10(23C). However, it is pertinent to note that this explanation has been inserted with the opening words.. “For the removal of doubts it is hereby clarified…..” Now this could mean that this Explanation could be considered to be clarificatory in nature with retrospective effect.
Amendments have been made in the tenth proviso to Section 10(23C) to provide that institutions as referred in clause (iv), (v), (vi) and (via) shall file the audit report before the due date specified u/s 44AB. Earlier tax audit report was to be filed along with the Income Tax Return. Also even earlier institutions referred to in clause (iiiab), (iiiac), (iiiad) and (iiiae) of Section 10(23C) were not required to get their accounts audited and obtain audit report from Chartered Accountant under the provisions of Income Tax Act.
Further amendment has been made in the twelfth proviso to provide that any voluntary contribution made with a specific direction that it shall form part of the corpus, by institutions as referred to (iv), (v), (vi) and (via) to other institutions approved u/s (iv), (v), (vi) and (via) of Section 10(23C) or to institution registered u/s 12AA shall not be regarded as application of income. Earlier the restriction was only with regard to contribution made to institution registered u/s 12AA. Similar amendment has been made to Explanation 2 under sub-section (1) of Section 11 of the Act for contribution made to institutions with a specific direction that it shall form part of the corpus, to institutions approved u/s 10(23C) clause (iv), (v), (vi) and (via) or Section 12AA.
It has also been provided that an institution can now either opt to be approved u/s 10(23C) or notified u/s10(46) or get registered u/s 12AB. Earlier institutions were opting to be registered under both the provisions but now the same is restricted.
Similar amendment has been made u/s 80G of the Income Tax Act,1961 requiring the institution to seek for fresh approval u/s 80G and similar provisions have been provided as stated above for approval/registration u/s 10(23C) or 12AB of the Act. The approval shall be now given for five years while earlier approval once granted remained valid until withdrawn.
Also it is provided that the institution shall be required to furnish statement in respect of all the donations received in a form and manner as may be prescribed. It is expected that quarterly statement would be required to be furnished online. The certificate for donation is required to be furnished by the done in a form containing such particulars and within such time as may be prescribed.
While some major amendments have been made as stated above, but however the other provisions as existed earlier shall continue to apply. Below some of the other aspects of taxation of NGOs that must be borne in mind.
Charitable Purpose is defined u/s 2(15) of the Act and includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. It is also provided that advancement of any other object of general public utility cannot include any activity which is in the nature of trade and commerce unless the activity itself constitutes an activity of advancement of any other object of general public utility and the aggregate receipt from such activity does not exceed 20% of the total receipt of the institution.
The institutions as referred above are required to apply 85% of their income towards the object of the institution and can accumulate upto 15% of the Income. However, in case income is not received during a year then institutions registered u/s 12A/12AA (now 12AB), may apply the income in the year so received. Also these institution may exercise option for accumulation of income exceeding 15% of the current year income for specific purpose upto the following five years. Institutions approved u/s 10(23C) have general permission for accumulation of income exceeding 15% of the current year income for period not exceeding five years. The amount so accumulated exceeding 15% of the income must be applied over the next five years.
Depreciation cannot be claimed to be application of income if the capital expenditure on acquisition of the asset has been claimed as application of income.
TDS is required to be deducted by the aforesaid institutions and also the cash expenditure must not exceed the limit prescribed u/s 40(A)(3)/(3A).
The funds of the institution must be invested only in the modes prescribed u/s 11(5) of the Act.
Exemption in respect of any other income u/s 10 of the Act(other than Agricultural income) is not available to such institutions.
Anonymous donation shall attract tax @30% u/s 115BBC of the Act on the anonymous donation exceeding Rs.1,00,000/- or 5% of the receipt, whichever is higher. However, religious institutions are exempted from this provision.
Amount or any property received by institution not registered u/s 10(23C) or 12A/12AA/12AB in excess of Rs. 50,000/- shall become taxable u/s 56(2)(x).
SOME IMPORTANT JUDICIAL PRONOUNCEMENTS:
CIT(E) .v. Subros Educational Society (2018) 303 CTR 1 / 166 DTR 257 (SC): Affirming the view of the Hon’ble Delhi High Court that any excess expenditure incurred by the trust/charitable institution in earlier assessment year could be allowed to be set off against income of subsequent years.
(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit.
(2) The predominant object test must be applied – the purpose of education should not be submerged by a profit making motive.
(3) A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.
(4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes.
(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons
CIT vs. Society For The Promotion Of Education, Adventure Sport & Conservation Of Environment (Supreme Court): 382 ITR 6 (SC): The short issue is with regard to the deemed registration of an application under Section 12AA of the Income Tax Act. The High Court has taken the view that once an application is made under the said provision and in case the same is not responded to within six months, it would be taken that the application is registered under the provision.
Children’s Education Society’s Vs. DCIT ((2013)358 ITR 373 (Kar-HC): If an assessee is running several educational institutions, if any of them is wholly or substantially financed by the Government, then the income from such educational institution received by the assessee is not included while computing his total income. Similarly, income from each educational institution if they are not receiving any aid from the Government wholly or substantially in respect of which the aggregate annual receipt do not exceed Rs.1 crore received by the assessee, is also not included while computing annual total income of the assessee.
Delhi Public School Ghaziabad Society v. ACIT (2019) 69 ITR 31 (SN) (Delhi ) (Trib.): Business income Incidental to object of Trust-Providing transport to students and staff working for society is incidental to achieve object of providing education i. e. object of society and not in nature of business-Entitle to exemption.
Chandraprabhuji Maharaj Jain Juna Mandir Trust v. DCIT (2019) 266 Taxman 399 (Mad.)(HC): Accumulation of income-Form No 10 was filed belatedly–Rejection of claim on technical formalities is held to be not valid-AO is directed to decide the allowability of claim on merits.
Sarvodaya Mutual Benefit Trust, Thellar. v . ITO (2018) 61 ITR 104 (Chennai) (Trib): Trust formed for providing financial assistance to self-help groups. Assessee taxable as association of persons at maximum marginal rate on entire income not merely on surplus.
CIT (E) v. Matunga Gymkhana (Bom)(HC) (UR): It was recently held that Income applied for the object of the Trust -Promotion of sports, games and providing recreation facilities to the public at large and to the members in particular and therefore receipts on account of compensation from decorator against gymkhana function, miscellaneous income and compensation from caterer (restaurant) cannot be construed as activities in the nature of trade, commerce or business for the purpose of the proviso to S. 2(15) of the Act