Unlocking the mysteries behind amendments proposed under Finance Bill 2017 for charitable institutions!
Unlocking
the mysteries behind amendments proposed under Finance Bill 2017 for charitable
institutions!
the mysteries behind amendments proposed under Finance Bill 2017 for charitable
institutions!
Since readers were anxious to know the impact of the
much-awaited Finance Bill 2017 on charitable organizations, we uploaded a brief
summary on 1st February 2017 itself! Based on several queries that
we have received from those who diligently follow our Blog, we are pleased to
provide a deeper analysis together with our advisory on several issues arising
out of this Bill.
much-awaited Finance Bill 2017 on charitable organizations, we uploaded a brief
summary on 1st February 2017 itself! Based on several queries that
we have received from those who diligently follow our Blog, we are pleased to
provide a deeper analysis together with our advisory on several issues arising
out of this Bill.
1) Amendment
to Section 10(23C)
to Section 10(23C)
Generally, universities, educational institutions, hospital and
medical institution claim tax exemption u/s 10(23C).
medical institution claim tax exemption u/s 10(23C).
With effect from 1st April 2017, if any amount is credited or paid
out of income of any fund or trust or institution or any university or other
educational institution or any hospital or other medical institution referred
to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via),
of Section 10(23C) to any trust or institution registered under section 12AA,
being voluntary contribution made with a specific direction that they shall
form part of the corpus of the trust or institution, shall not be treated as application of income to the objects for which
such fund or trust or institution or university or educational institution or
hospital or other medical institution, as the case may be is established.
out of income of any fund or trust or institution or any university or other
educational institution or any hospital or other medical institution referred
to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via),
of Section 10(23C) to any trust or institution registered under section 12AA,
being voluntary contribution made with a specific direction that they shall
form part of the corpus of the trust or institution, shall not be treated as application of income to the objects for which
such fund or trust or institution or university or educational institution or
hospital or other medical institution, as the case may be is established.
2) Amendment
to Section 11
to Section 11
Section 11 exempts from tax Income
from property held for charitable or religious purposes. However, a new
“Explanation 2” has been proposed for insertion according to which any amount
credited or paid, out of the income a trust or institution to any other trust
or institution registered under section 12AA, being contribution with a specific direction that they shall form part
of the corpus of the trust or institution, shall not be treated as application
of income for charitable or religious purposes.
from property held for charitable or religious purposes. However, a new
“Explanation 2” has been proposed for insertion according to which any amount
credited or paid, out of the income a trust or institution to any other trust
or institution registered under section 12AA, being contribution with a specific direction that they shall form part
of the corpus of the trust or institution, shall not be treated as application
of income for charitable or religious purposes.
Analysis
As of now, charitable organizations are not allowed to make a
corpus donation or a grant to another charitable organization out of their
accumulated income. But, they are allowed to make corpus donations/grants out
of their current or non-accumulated income.
corpus donation or a grant to another charitable organization out of their
accumulated income. But, they are allowed to make corpus donations/grants out
of their current or non-accumulated income.
However, now, with the proposed amendment, giving a corpus
donation or grant by one charitable organization to another charitable
organization will no longer be allowed for organisations that are tax exempt and
who wish to retain their tax-exempt status.
donation or grant by one charitable organization to another charitable
organization will no longer be allowed for organisations that are tax exempt and
who wish to retain their tax-exempt status.
What is the government’s rationale?
Currently, donations given by
tax-exempt entities to other tax exempt entities, with specific direction that
it shall form part of corpus, is considered application of income in the hands
of donor trust and not considered as income of the recipient trust, (corpus
being a capital receipt). Thus, in the
opinion of the Central Government, charitable entities are engaging in giving
corpus donations without actual applications.
tax-exempt entities to other tax exempt entities, with specific direction that
it shall form part of corpus, is considered application of income in the hands
of donor trust and not considered as income of the recipient trust, (corpus
being a capital receipt). Thus, in the
opinion of the Central Government, charitable entities are engaging in giving
corpus donations without actual applications.
Example:
‘ABC Foundation’ gives a corpus
donation to ‘XYZ Trust/NGO’.
donation to ‘XYZ Trust/NGO’.
For ‘ABC Foundation it is application
of income (out of the 85% of the income which it is required to apply in any
given fiscal year. In the meantime, ‘ABC Foundation’s’ donation towards corpus
is neither applied immediately by ‘XYZ Trust/NGO’ for charitable objects nor
accounted for as ‘income’, because corpus being in the nature of a capital
receipt is accounted for as capital in the Balance Sheet. Therefore, in the view of the revenue authority, large sums of money
are simply hoarded and not applied for charitable purposes.
of income (out of the 85% of the income which it is required to apply in any
given fiscal year. In the meantime, ‘ABC Foundation’s’ donation towards corpus
is neither applied immediately by ‘XYZ Trust/NGO’ for charitable objects nor
accounted for as ‘income’, because corpus being in the nature of a capital
receipt is accounted for as capital in the Balance Sheet. Therefore, in the view of the revenue authority, large sums of money
are simply hoarded and not applied for charitable purposes.
The view taken by the Central
Government is of course flawed. Corpus helps charitable institutions and NGOs
tide over lean periods and enhances sustainability of on-going activities. Hence,
from a sector point of view, this is regressive step taken by the government
and yet another step away from creating an enabling environment for the growth
and sustainability of the philanthropic/voluntary sector.
Government is of course flawed. Corpus helps charitable institutions and NGOs
tide over lean periods and enhances sustainability of on-going activities. Hence,
from a sector point of view, this is regressive step taken by the government
and yet another step away from creating an enabling environment for the growth
and sustainability of the philanthropic/voluntary sector.
Please Note: Inter-charity donations between
one tax-exempt charitable organization to another tax exempt charitable
organization is not disallowed!
one tax-exempt charitable organization to another tax exempt charitable
organization is not disallowed!
One tax-exempt charitable institution
may contribute to another tax-exempt charitable institution, provided it is not for corpus. This way, for the donor
institution it would be application of income and for the recipient institution
it would be income to be applied for charitable purpose according to its
objects.
may contribute to another tax-exempt charitable institution, provided it is not for corpus. This way, for the donor
institution it would be application of income and for the recipient institution
it would be income to be applied for charitable purpose according to its
objects.
Does this mean charitable institutions cannot receive
corpus donations/grants?
corpus donations/grants?
NO! Giving
corpus donation/grants has been restricted only for inter-charity donations
between one tax exempt charitable institutions to another tax exempt charitable
institution.
corpus donation/grants has been restricted only for inter-charity donations
between one tax exempt charitable institutions to another tax exempt charitable
institution.
Charitable intuitions may continue to receive corpus
donations/grants from other sources as follows:
donations/grants from other sources as follows:
a) Individuals may continue to give
towards corpus of any charitable institution and also enjoy tax deduction u/s
80G.
towards corpus of any charitable institution and also enjoy tax deduction u/s
80G.
b) Companies too may continue to give
towards corpus of any charitable institution, out of their CSR or other funds
(including to their own corporate foundation) and also enjoy tax deduction u/s
80G. However, the corporate foundation of a company would not be able to give a
corpus donation/grant to another charitable institution/NGO.
towards corpus of any charitable institution, out of their CSR or other funds
(including to their own corporate foundation) and also enjoy tax deduction u/s
80G. However, the corporate foundation of a company would not be able to give a
corpus donation/grant to another charitable institution/NGO.
c) Overseas individuals and
institutions too may continue to give towards corpus of any charitable
institution registered or having prior permission under the Foreign
Contribution (Regulation) Act 2010.
institutions too may continue to give towards corpus of any charitable
institution registered or having prior permission under the Foreign
Contribution (Regulation) Act 2010.
3) Amendment
to Section 12A
to Section 12A
Section 12A has been amended to the effect that, if a trust or
institution has either applied for registration u/s 12AA or already is
registered under the old section 12A or the new 12AA and, subsequently adopts or undertakes modifications of the objects which do not
conform to the conditions of registration, the trust or institution must apply
in the prescribed form and manner, within a period of thirty days from the date
of said adoption or modification, to the Principal Commissioner or
Commissioner.
institution has either applied for registration u/s 12AA or already is
registered under the old section 12A or the new 12AA and, subsequently adopts or undertakes modifications of the objects which do not
conform to the conditions of registration, the trust or institution must apply
in the prescribed form and manner, within a period of thirty days from the date
of said adoption or modification, to the Principal Commissioner or
Commissioner.
At present, there is no explicit
provision in the Income tax Act which mandates trusts or institutions to
approach the income-tax authorities for intimation in the event of adoption or
undertaking modifications of the objects after the registration has been granted.
provision in the Income tax Act which mandates trusts or institutions to
approach the income-tax authorities for intimation in the event of adoption or
undertaking modifications of the objects after the registration has been granted.
It has been propose that section 12A may
be amended so as to provide that where a trust or an institution has been
granted registration under section 12AA or has obtained registration at any
time under section 12A [as it stood before its amendment by the Finance (No. 2)
Act, 1996] and, subsequently, it has adopted or
undertaken modifications of the objects which
do not conform to the conditions of registration, it shall be
required to make an application within a period of thirty days from the date of
such adoption or modifications of the objects in the prescribed form and
manner.
be amended so as to provide that where a trust or an institution has been
granted registration under section 12AA or has obtained registration at any
time under section 12A [as it stood before its amendment by the Finance (No. 2)
Act, 1996] and, subsequently, it has adopted or
undertaken modifications of the objects which
do not conform to the conditions of registration, it shall be
required to make an application within a period of thirty days from the date of
such adoption or modifications of the objects in the prescribed form and
manner.
4) Amendments concerning filing of Return of Income:
Entities registered under section 12AA
are required to file return of income under section 139(4A), if the total
income without giving effect to the provisions of sections 11 and 12 exceeds
the maximum amount which is not chargeable to income-tax. However, there is no
clarity as to whether the said return of income is to be filed within time
allowed u/s 139 of the Act or otherwise. In order to provide clarity in this
regard, it is proposed to further amend section 12A so as to provide for
further condition that the person in receipt of the income chargeable to
income-tax shall furnish the return of income within the time allowed under
section 139 of the Act (i.e. within six months of the close of the financial
year or 30th September).
are required to file return of income under section 139(4A), if the total
income without giving effect to the provisions of sections 11 and 12 exceeds
the maximum amount which is not chargeable to income-tax. However, there is no
clarity as to whether the said return of income is to be filed within time
allowed u/s 139 of the Act or otherwise. In order to provide clarity in this
regard, it is proposed to further amend section 12A so as to provide for
further condition that the person in receipt of the income chargeable to
income-tax shall furnish the return of income within the time allowed under
section 139 of the Act (i.e. within six months of the close of the financial
year or 30th September).
Fees for late filing of Return
i)
Fee of Rs.
5,000/- u/s 234F will be levied if the income tax return is filed after 30th
September, but, before 31st December and Rs. 10,000/- if filed after
31st December. However, the penalty of Rs. 5,000/- and Rs. 10,000/-
will be reduced to Rs. 1,000/-, if the taxable income is less than Rs. 5 lakh. Since
charitable organizations are tax exempt their taxable income would be Nil and
therefore the penalty for late filing will be Rs. 1,000/- only.
Fee of Rs.
5,000/- u/s 234F will be levied if the income tax return is filed after 30th
September, but, before 31st December and Rs. 10,000/- if filed after
31st December. However, the penalty of Rs. 5,000/- and Rs. 10,000/-
will be reduced to Rs. 1,000/-, if the taxable income is less than Rs. 5 lakh. Since
charitable organizations are tax exempt their taxable income would be Nil and
therefore the penalty for late filing will be Rs. 1,000/- only.
ii)
The option of
filing revised income tax return will now be allowed only till the end of the
assessment year. In other words, if the last date of filing income tax return
for the fiscal year 2016-17 is 30th September, 2017 then such return
may be revised before 31st March, 2018 and no later.
The option of
filing revised income tax return will now be allowed only till the end of the
assessment year. In other words, if the last date of filing income tax return
for the fiscal year 2016-17 is 30th September, 2017 then such return
may be revised before 31st March, 2018 and no later.
5) Cash
donations in excess of Rs. 2,000/-
donations in excess of Rs. 2,000/-
Finance Act 2012 had inserted a new sub-section (5D) to Section
80G making any payment exceeding a sum of ten thousand rupees allowed as a
deduction only if such sum was paid by any mode other than cash. The Finance
Minister has now proposed that this limit of Rs. 10,000/- be further reduced to
just Rs. 2,000/-.
80G making any payment exceeding a sum of ten thousand rupees allowed as a
deduction only if such sum was paid by any mode other than cash. The Finance
Minister has now proposed that this limit of Rs. 10,000/- be further reduced to
just Rs. 2,000/-.
This does not mean that cash donations in excess of Rs. 2,000/-
cannot be accepted by charitable organisations. It simply means, the donor
cannot claim tax deduction u/s 80G while computing his/her income liable to
tax, for sums given in excess of Rs. 2,000/- to any charity by way of cash.
cannot be accepted by charitable organisations. It simply means, the donor
cannot claim tax deduction u/s 80G while computing his/her income liable to
tax, for sums given in excess of Rs. 2,000/- to any charity by way of cash.
There is no limit on donations made by cheque or
e-transfer. In other words, a donor may write out a cheque of any amount or
contribute using his/her credit card and claim tax deduction.
e-transfer. In other words, a donor may write out a cheque of any amount or
contribute using his/her credit card and claim tax deduction.
Where charitable organisations are concerned, they should make it
clear to all donors that they cannot claim tax deduction for contributions
exceeding Rs. 2,000/- by way of cash. Donation receipts issued to donors
contributing in cash exceeding Rs. 2,000/-, should indicate that the amount was
received in cash and being in excess of Rs. 2,000/- it would not entitle the
donor to claim tax deduction. As a matter of abundant caution, charitable
organisations should obtain the full contact details of the donor and his/her
PAN.
clear to all donors that they cannot claim tax deduction for contributions
exceeding Rs. 2,000/- by way of cash. Donation receipts issued to donors
contributing in cash exceeding Rs. 2,000/-, should indicate that the amount was
received in cash and being in excess of Rs. 2,000/- it would not entitle the
donor to claim tax deduction. As a matter of abundant caution, charitable
organisations should obtain the full contact details of the donor and his/her
PAN.
In order to move towards a less cash
economy and reduce generation and circulation of black money, it is proposed to
insert a new section 269ST in the Act to provide that no person (with the
exception of the government, any banking company, post-office, savings bank or
co-operative bank) shall receive an amount of three lakh rupees or more:
economy and reduce generation and circulation of black money, it is proposed to
insert a new section 269ST in the Act to provide that no person (with the
exception of the government, any banking company, post-office, savings bank or
co-operative bank) shall receive an amount of three lakh rupees or more:
(a) In aggregate from a person in a
day;
day;
(b) In respect of a single
transaction; or
transaction; or
(c) In respect of transactions relating
to one event or occasion from a person, otherwise than
by an account payee cheque or account payee bank draft or use of electronic
clearing system through a bank account.
to one event or occasion from a person, otherwise than
by an account payee cheque or account payee bank draft or use of electronic
clearing system through a bank account.
Thus, in
the current environment, cash transactions are likely to bring charities under
greater scrutiny of Assessing Officers and our advisory would be to discourage
cash donations.
the current environment, cash transactions are likely to bring charities under
greater scrutiny of Assessing Officers and our advisory would be to discourage
cash donations.
6) Sections
35AC & 35(1)(ii) & (iii).
35AC & 35(1)(ii) & (iii).
Finance Bill 2017 makes no reference to these sections because Finance
Act 2016 has already amended these sections.
Act 2016 has already amended these sections.
a) Section 35AC: No deduction
shall be available with effect from 1.4.2017 (i.e. from previous year 2017-18
and subsequent years).
shall be available with effect from 1.4.2017 (i.e. from previous year 2017-18
and subsequent years).
b) Section 35(1)(ii): Weighted
deduction shall be restricted to 150 per cent from 01.04.2017 to 31.03.2020
(i.e. from previous year 2017-18 to previous year 2019-20) and deduction shall
be restricted to 100 per cent from 01.04.2020 (i.e. from previous year 2020-21
onwards)
deduction shall be restricted to 150 per cent from 01.04.2017 to 31.03.2020
(i.e. from previous year 2017-18 to previous year 2019-20) and deduction shall
be restricted to 100 per cent from 01.04.2020 (i.e. from previous year 2020-21
onwards)
c) Section 53(1)(iii): Deduction shall
be restricted to 100 per cent with effect from 01.04.2017 (i.e. from previous
year 2017-18 and subsequent years).
be restricted to 100 per cent with effect from 01.04.2017 (i.e. from previous
year 2017-18 and subsequent years).
7)
Powers of survey u/s 133A
Powers of survey u/s 133A
Powers
of survey u/s 133A are now extended to cover offices charitable institutions as
well.
of survey u/s 133A are now extended to cover offices charitable institutions as
well.
The power of survey under the Income tax Act has been provided U/S
133A and 133B.
133A and 133B.
The provisions contained in section 133A are independent and to
the exclusion of the other provisions of the Act since the wording of the
section starts with: ‘Notwithstanding anything contained in any other
provisions of the act.
the exclusion of the other provisions of the Act since the wording of the
section starts with: ‘Notwithstanding anything contained in any other
provisions of the act.
The power of survey can be exercised by the following U/A 133A:
i) A Commissioner
ii) A Joint Commissioner
iii) A Director
iv) A Joint Director
v) An Assistant Joint Director
vi) A Deputy Director
vii) An Assessing officer
viii) A Tax Recovery officer
ix) An Inspector of Income Tax
An Income Tax
authority is empowered under section 133A to enter
any place within the limits assigned to him or the place occupied by any person
in respect of which he exercises jurisdiction or the place in respect of which
he is authorized by such an income tax authority, who is assigned the area in
which such place is situated or who exercises the jurisdiction in respect of
any person occupying such place.
authority is empowered under section 133A to enter
any place within the limits assigned to him or the place occupied by any person
in respect of which he exercises jurisdiction or the place in respect of which
he is authorized by such an income tax authority, who is assigned the area in
which such place is situated or who exercises the jurisdiction in respect of
any person occupying such place.
No survey can be conducted at the
residential premises unless the residential premises are shown to as the business
premises by the assessee concerned. Since the power of Survey is limited to the
business premises only, therefore, the survey can be conducted only during
business hours i.e. after sunrise and before sunset.
residential premises unless the residential premises are shown to as the business
premises by the assessee concerned. Since the power of Survey is limited to the
business premises only, therefore, the survey can be conducted only during
business hours i.e. after sunrise and before sunset.
Noshir H.
Dadrawala
Dadrawala
Hi Noshir
Thank yo such an insightful article. Quick clarification on Section 35 AC. It cannot be claimed by anyone starting April 1, 2017 or April 1, 2018 or a different time period.
http://economictimes.indiatimes.com/news/economy/policy/deduction-benefit-under-section-35ac-only-till-march-31/articleshow/53770555.cms