The Finance Minister unveiled the Finance Bill, 2023 with the objective to build on the foundations laid down in the previous budgets. One of the prominent arenas of direct taxation in which amendments are made relate to the legal provisions applicable for charitable trusts / institutions. The frequency of the amendments shows, how the previous changes are not made with foresight and thus tinkering of legal provisions in every Finance Act for charitable trusts / institutions has become habitual. The provisions relating to taxation or tax relief for non-profit organisations are rigid across the countries since any leeway for abuse of the tax concession could trigger huge revenue loss to the exchequer. Thus, rigidity in legal provisions for NGOs/NPOs is justified but the frequency of changes to the legal provisions made in India shows inadequate preparatory process in drafting the same by not visualizing various scenarios that may emerge after the legal amendments become operational.
Application of corpus donation and inter-trust donation
As per the provisions of section 11(1) (d), any amount spent by the trust out of corpus donation cannot be treated as application of income. The amount of corpus donation has to be used for the purpose for which it is received. The amount of corpus donation should be invested in the forms or modes specified under section 11(5) of the Act within five years from the end of the previous year in which such application is made from corpus. It will be treated as application of income only when it is deposited back to corpus. However, if the deduction for application of income out of corpus donation has been claimed before 1 April, 2021, it cannot be claimed as application of income again when it is deposited back to corpus. Moreover, at the time of depositing back the amount to the corpus, , it will be allowed as application of income, only if following conditions are satisfied for its application for charitable or religious purpose:
| (1) | Such application should not be in the form of corpus donation to another trust [twelfth proviso to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation 2 to sub-section (1) of section 11 of the Act for the trust or institution under second regime]; | |
| (2) | TDS, if applicable, should be deducted on such application [thirteenth proviso to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation 3 to sub-section (1) of section 11 of the Act for the trust or institution under second regime]; | |
| (3) | Application whereby payment or aggregate of payments made to a person in a day exceeds Rs. 10,000/- in other than specified modes (such as cash) is not allowed (thirteenth proviso to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation 3 to sub-section (1) of section 11 of the Act for the trust or institution under second regime); | |
| (4) | Carry forward and set off of excess application is not allowed [Explanation 2 to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation 5 to sub-section (1) of section 11 of the Act for the trust or institution under second regime]; | |
| (5) | Application is allowed in the year in which it is actually paid [Explanation 3 to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation to section 11 of the Act for the trust or institution under second regime]; | |
| (6) | Application should not directly or indirectly benefit any person referred to in sub-section (1) of section 13 of the Act and the income of the trust or institution should not enure any benefit to such person [twenty-first proviso to clause (23C) of section 10 of the Act for the trust or institution under first regime and clause (c) of sub-section (1) of section 13 of the Act for the trust or institution under second regime]; | |
| (7) | Application should be in India except with the approval of the Board in accordance with the provisions of clause (c) of sub-section (1) of section 11 of the Act |
These conditions are applicable to the trusts or institutions approved under section 10(23C) as well as trusts or institutions registered under section 12AA/12AB of the Act.
Sometimes one trust gives donation to another trust with or without condition to form part of corpus of done trust. If the amount of donation given to another trust to form it as part of corpus of donee trust, such donation cannot be treated as application of income of donor trust.
If such donation is given to another trust without condition to form part of corpus of donee trust, it will be treated as application of income. However, as per the amendment made vide Finance Bill 2023, such donation will be treated as application of income only up to 85% of amount credited or paid. For example, if A trust has given donation (without condition to form part of corpus) to B trust for Rs.100000/-, A trust can treat only Rs.85000/- as application of income.
Consequence of not filing application for registration:
All charitable trusts and institutions covered by section 10(23C) (except (i) to (iiiae)) and section 11 were required to apply for re-registration or approval before 31.03.2021. The due date for re-registration or approval was extended up to 25.11.2022 vide CBDT Circular No.22 of 2022 dated 01.11.2022. The re-registration /approval in the case of existing trusts / institutions is valid for 5 years. The new trusts and institutions also have to apply for registration one month before the commencement of the previous year relevant to the assessment year from which the registration is sought. Those institutions were granted provisional registration / approval for a period of 3 years.
The rationale behind the amendment proposed by the Finance Bill, 2023 was that certain trusts and institutions have not applied for regular registration after taking provisional registration. Similarly, certain existing trusts / institutions have not applied for re-registration / approval. Once a trust or institution has availed exemption from tax it can exit only on payment of tax at the maximum marginal rate on its accreted income. The accreted income represents the income on which tax has not been paid previously and tax relief was obtained. By not applying for re-registration / approval the trust and institution may get an easy route to exit without payment of tax on the accreted income.
The Finance Bill, 2023 proposes to insert clause (iii) in section 115TD(3) to provide that the provisions of Chapter XII-EB shall be applicable if any trust or institution fails to make application in accordance with the provisions of the Act for registration or re-registration within a period specified in the respective provisions. The trust or institution shall be deemed to have been converted into any form which is not eligible for registration under section 12AA or section 12AB or applicable sub-clause of section 10(23C) in the previous year in which the time period for application expires. Thus, Finance Bill, 2023 effectively closes any scope for charitable trusts or institutions to gain relief from exit tax by not seeking re-registration / approval etc.
Donation received in cash
Many trusts receives remarkable amount of donation in cash from the donors. It can be received for specific event or occasion or for various event from single donor. Section 269ST, which restrict cash receipt in a day or for any single transaction from any person more than Rs.2 Lakh is applicable to trust also. Hence any trust cannot receive more than Rs.2 Lakh as cash donation from any single person for any single event or occasion. This requirement is applicable to religious trusts also. Further, section 269ST is applicable to voluntary contribution as well as corpus donation also. Hence corpus donation received from single donor in cash should not exceed more than Rs.2 Lakh.
If the trust contravenes provisions of section 269ST, penalty under section 271DA for the amount equal to the amount of such receipt may be imposed.
Also, donation given to charitable trust or institution registered under section 80G cannot be claimed as exempt by the donee, if the amount of donation more than Rs.2000/- is given in cash.
