Impact of Finance Bill 2022 on Charitable Trusts & Institutions

Application of income

In any financial year a trust or institution is required to apply at least eighty-five per cent of its income. The term ‘application’ means actually spent or paid.

Thus, any sum payable by any trust shall be considered as application of income in the previous year in which such sum is actually paid by it irrespective of the previous year in which the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed by it.

Where during any previous year, any sum has been claimed to have been applied by such trust, such sum shall not be allowed as application in any subsequent previous year.

In other words income of a trust or institution shall be considered as ‘applied’, only when actually paid or spent.

Corpus

Where any trust or institution has treated any sum received by it as forming part of the corpus and subsequently any of the conditions specified under section 11(1) are violated, such sum shall be deemed to be the income (and not capital) of such trust or institution of the previous year during which the violation takes place.

Power to cancel tax exemption

Section 12AB (4) is proposed to be amended giving powers to the Principal Commissioner or Commissioner to pass an order in writing cancelling the registration of such trust or institution, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violation have taken place;

The term “specified violation” is proposed to be defined by inserting an Explanation to section 12AB (4) of the Act to mean the following violation:

1. where any income of the trust or institution has been applied other than for the objects for which it is established; or
2. the trust of institution has income from profits and gains of business which is not incidental to the attainment of its objectives or separate books of account are not maintained by it in respect of the business which is incidental to the attainment of its objectives; or
3. the trust or the 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
4. 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
5. any activity being carried out by the trust or the institution, is not genuine; or is not being carried out in accordance with all or any of the conditions subject to which it was registered; or
6. the trust or the institution has not complied with the requirement of any other law 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.

Utilization of accumulated income

While a trust or institution is required to apply at least eighty-five per cent of its income during the fiscal year, Income tax Act also allows income of a trust or institution to be accumulated for a period of up to five years. It is proposed to amend the provisions of section 11(3) of the Act to provide that if any income is not utilized for the purpose for which it is so accumulated or set apart shall be deemed to be the income of such trust or institution of the previous year being the last previous year of the period, for which the income is accumulated or set apart under section 11(2)(a), but not utilized for the purpose for which it is so accumulated or set apart.

In other words, accumulated income must be applied for the purpose for which it accumulated.

Tax treatment in case of loss of tax exemption

It is proposed that in case a trust or institution loses its tax exemption the income chargeable to tax shall be computed after allowing deduction for the expenditure (other than capital expenditure) incurred in India, for the objects of the trust or institution, subject to fulfilment of the following conditions, namely:

• such expenditure is not from the corpus standing to the credit of such trust or institution as on the last day of the financial year immediately preceding the previous year relevant to the assessment year for which the income is being computed.
• such expenditure is not from any loan or borrowing.
• claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income in the same or any other previous year; and
• such expenditure is not in the form of any contribution or donation to any person.

The provisions of section 40(a)(ia) and section 40A(3) & (3A)  shall apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.

Also, for the purposes of computing income chargeable to tax no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the Assessee under any other provision of the Act.

Income chargeable to tax

It is proposed to amend section 13(1)(c) of the Act to provide that only that part of income which has been applied in violation to the provisions of the said clause shall be liable to be included in total income.

It is proposed to amend section 13(1)(d) of the Act to provide that only the that part of income which has been invested in violation to the provisions of the said clause shall be liable to be included in total income.

All the above income are also required to be taxed at special rate. Hence, it is proposed to insert new section 115BBI in the Act providing that where the total income of any Assessee being a trust, includes any income by way of any specified income, the income-tax payable shall be the aggregate of the amount of income-tax calculated at the rate of thirty per cent on the aggregate of specified income; and the amount of income-tax with which the Assessee would have been chargeable had the total income of the Assessee been reduced by the aggregate of specified income.

Keeping proper Books of Account

The provisions of Sections 12A(1)(b) and Section 10(23C)(x) which deal with tax exemption are proposed to be amended  to ensure that such trusts and institutions keep and maintain books of account and other documents in such form and manner and at such place, as may be prescribed.

Penalty in case of unreasonable benefit to trustee

A new section 271AAE has been proposed imposing penalties on trusts and institutions which shall be equal to the amount of income applied by such trust or institution for the benefit of trustee or specified person where the violation is noticed for the first time during any previous year and twice the amount of such income where the violation is notice again in any subsequent year.