Implications of Finance Bill 2021 on charitable trusts & institutions

We were wondering what new restrictions or compliance burdens would come in the wake of the Union Budget 2021. Mercifully, Finance Bill 2021 is relatively mild in terms of its impact on charitable trusts and institutions.

Relief for Institutions claiming exemption u/s 10(23C)

It has been proposed that the prescribed limit for exemption under sub-clause (iiiad) and (iiiae) of clause (23C) of section 10 of the Act be enhanced.

Clause (23C) of section 10 of the Act provides for exemption of income received by any person on behalf of different funds or institutions etc. specified in different subclauses.

Sub-clauses (iiiad) of clause (23C) of the section 10 provides for the exemption for the income received by any person on behalf of university or educational institution as referred to in that sub-clause. The exemptions under the said sub-clause are available subject to the condition that the annual receipts of such university or educational institution do not exceed the annual receipts as may be prescribed.

Similarly, sub-clauses (iiiae) of clause (23C) of the section provides for the exemption for the income received by any person on behalf of hospital or institution as referred to in that sub clause. The exemptions under the said sub-clause are available subject to the condition that the annual receipts of such hospital or institution do not exceed the annual receipts as may be prescribed. The presently prescribed limit for these two sub-clauses is Rs 1 crore as per Rule 2BC of the Income-tax Rule.

Representations had been made to increase this limit of Rs 1 crore, as provided under Rule 2BC.

In order to provide benefit to small trust and institutions, it has been proposed that the exemption under sub-clause (iiiad) and (iiiae) shall be increased to Rs 5 crore and such limit shall be applicable for an Assessee with respect to the aggregate receipts from university or universities or educational institution or institutions as referred to in sub-clause (iiiad) as well as from hospital or hospitals or institution or institutions as referred to in sub-clause (iiiae).

This amendment will take effect from 1st April, 2021 and will accordingly apply to the Assessment Year 2022-23 and subsequent assessment years.

What this means?

Universities, educational institutions, hospitals can now enjoy exemption u/s 10(23C) for annual income or receipts up to Rs. 5 Crore instead of the earlier limit of Rs. 1 Crore.

Treatment of Corpus donations

Exemption to funds, institutions, trusts etc., carrying out religious or charitable activities is provided under clause (23C) of section 10 of the Act and sections 11 and 12 of the Act.

Section 12A of the Act, inter alia, provides for procedure to make application for the registration of the trust or institution to claim exemption under section 11 and 12. Section 12AB is the new section which comes into effect from the 1st April, 2021.

Under the existing provisions of the Income-tax Act, 1961, corpus donations received by trusts, institutions, funds etc., are exempt as follows:

a) Explanation to third proviso to clause (23C) of section 10 provides that income of the funds or trust or institution or any university or other educational institution or any hospital or other medical institution, shall not include income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus.

b) Clause (d) of sub-section (1) of Section 11 provides that voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of the trust or institution.

These entities are not allowed to accumulate more than 15% of their income or accumulate for specific purpose up to 5 years, other than corpus donations referred above. Instances appear have come to the notice of the authorities where these entities claim the corpus donations to be exempt and at the same time claim their application as part of the mandatory 85% application situation where the corpus income has been exempted and its application has been claimed as application against the mandatory 85% application of non-corpus income.

Instances also seem to have come to the notice of the authorities where these entities take loans or borrowings and make application for charitable or religious purposes out of the proceeds of loans and borrowings. Such loans or borrowings when repaid, are again claimed as application. This results in unintended double deduction.

Both these situations, at times, also result in paper loss which is claimed by the Assessee as carry forward resulting in unintended short application (less than 85%) in following years.

To ensure that there is no double counting while calculating application or accumulation, it has been proposed that

1. Voluntary contributions made with a specific direction that it shall form part of the corpus shall be invested or deposited in one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus.
2. Application out of corpus shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) and clauses (a) and (b) of section 11. However, when it is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus from the income of the previous year, such amount shall be allowed as application in the previous year in which it is deposited back to corpus to the extent of such deposit or investment.
3. Application from loans and borrowings shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) and clauses (a) and (b) of section 11. However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as application in the previous year in which it is repaid to the extent of such repayment.
4. Clarify in both clause (23C) of section 10 and section 11 that for the computation of income required to be applied or accumulated during the previous year, no set off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed

These amendments will take effect from 1^st April, 2021 and will accordingly apply to the Assessment Year 2022-23 and subsequent assessment years.

What this means?

1. Donations received towards corpus must be invested in approved securities as per Section 11(5) of Income tax and the investment must be tagged to or identified with that corpus.
2. If the corpus fund is spent, deduction will be allowed only in the year the fund is put back into the corpus.
3. Loan and borrowings (booked as liabilities) would also be allowed for deduction only in the year the loan or borrowing is repaid.

What is the rationale?

A trust could receive donation of Rs. 10 Lakhs towards corpus and the same would be capitalized in the Balance Sheet and not treated as Income in the Income & Expenditure Statement. At the same time, there would be no bar on the trust subsequently using this corpus donation of Rs. 10 Lakhs. With this proposed amendment, corpus donations will have to be tagged or linked with specific investments such as a Bank Fixed Deposit of the same amount.

Noshir H. Dadrawala