AMENDMENTS APPLICABLE TO CHARITABLE TRUSTS UNDER THE INCOME TAX ACT
Through Finance Act, 2023 sea changes have yet again been brought to taxation of charitable trusts which have taken effect from 1st of April 2023. These changes have been reproduced as under for ready reference-
1. Explanation 1 of Section 11(1)- If any Charitable or Religious Trust fails to apply minimum 85% of its income for Charitable or Religious Purpose, then it has two options–
1. to apply the same in the next previous year (PY) (if income is received during the year) or
2. the PY in which income is actually received or the next PY in which it is received.
Although to exercise such option the CHARITABLE/RELIGIOUS TRUST has to file Form 9A with the department. Earlier the last date to file this form was the due date mentioned in Section 139(1) for filling the ROI i.e. 31st October of the AY. After the amendment, from 1st , April 2023, the due date for exercising the option via Form 9 will be at least 2 months prior to the due date of filling the return of income, i.e. 31st August of the AY.
2. Explanation 4 of 11(1)- We all are aware that corpus donation is not treated as income of the trust, therefore if any expenditure/application is done from the corpus, it will not be treated as application for calculating 85% limit. However, when the CHARITABLE/RELIGIOUS TRUST will deposit back the amount in the corpus (in modes specified u/s 11(5)), it will be treated as application of funds to the extent of deposit back.
Finance Act 2023 has inserted few conditions which need to be complied with for treating the deposit back as application of funds, these conditions are-
1. There was no violation of certain provisions when the funds from corpus were used.
2. Amount is deposited back within 5 years from the end of the year in which funds were 1st used from corpus.
3. Funds must be withdrawn from the corpus only after 31st March, 2021. (if withdrawn before this date then deposit back not treated as applied). Same conditions are applicable for repayment of loans.
3. Explanation 4 of 11(1)- Another major change introduced by FA 23 is regarding the donations/contributions (except corpus donations) made to other trusts covered u/s 10(23C) or 12AB. In case any such donation is made, only 85% of such donation will be treated as applied for calculation of amount applied. E.g. CHARITABLE/RELIGIOUS TRUST A donates Rs. 100 to CHARITABLE/RELIGIOUS TRUST B. Then only Rs 85 will be treated as applied for CHARITABLE/RELIGIOUS TRUST A. The basic logic behind this reduced benefit to the CHARITABLE/RELIGIOUS TRUST is that CHARITABLE/RELIGIOUS TRUST B is also required to apply only 85% of the donation received and will get exemption of entire Rs. 100 donation received.
4. Section 11(2) – Similar to the amendment regarding the due date of furnishing Form 9A, last date for submission of Form 10 has been brought back by 2 months ie. at least 2 months prior to the due date of furnishing ROI u/s 139(1). Just for the sake of mention, Form 10 is for informing the AO that income has been accumulated or set apart for application within a period of 5 years. Form 10 needs to be filled on or before 31st August of the AY.
5. Section 11(7) – (Applicable w.e.f. 1st April 2024). Earlier any CHARITABLE/RELIGIOUS TRUST registered u/s 12A, AA, or AB, could only avail the exemptions of Section 10 (1), (23C) and (46). But now FA 23 has added clause 46A to section 10, and CHARITABLE/RELIGIOUS TRUST are allowed to avail the exemption of this new clause.
Clause 46A – It states that income of any body, board, commission, trust etc. which has been established by the central or state government for benefit of general public will be exempt from income tax.
6. Section 12A (1) (ac) (vi)- Earlier in order to claim exemption u/s 11, a new CHARITABLE/RELIGIOUS TRUST had to apply for fresh registration u/s 12AB at least 1 month prior to the beginning of the PY from which the exemption was required. FA 23 has amended this sub clause and made 2 scenarios in case of fresh registration, which are as follows-
1. If the activities of the CHARITABLE/RELIGIOUS TRUST have not started – Apply for registration at least 1 month prior to the beginning of the PY from which you want to avail the benefits of section 11. Say for E.g. you want to take the exemption during the PY 2024-25 and you have not started the religious or charitable activity at the time of application then you must apply for registration u/s 12AB on or before 29th February 2024.
2. If the activities of the CHARITABLE/RELIGIOUS TRUST have started – In such as case you have the freedom of applying at anytime of the previous year from which you seek the exemption. However, one must keep in mind that no exemption has been claimed under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, or section 11 or section 12 in the past.
3. Section 12A(1) (ba)- Another benefit bestowed by the FA 23 on the CHARITABLE/RELIGIOUS TRUST is that earlier a condition to avail exemption was that the ROI had to be filled within the time allowed u/s 139(1) i.e. 31st October of the AY, however now even if he return has been filled belated, within the time allowed u/s 139(4), still the exemption u/s 11 can be availed.
4. Section 12A(2)- FA 23 has snatched away certain benefit of the CHARITABLE/RELIGIOUS TRUST by omitting the 2nd, 3rd and 4th provisos of this sub section. Earlier if a CHARITABLE/RELIGIOUS TRUST has applied for registration in a particular year. On the date of such registration any proceedings for any preceding PY were going on then the CHARITABLE/RELIGIOUS TRUST could get the benefit of Section 11 for the PY for which the assessment proceedings were going on. However, the objectives of the CHARITABLE/RELIGIOUS TRUST must be same in both the years. This benefit has been forfeited by the new amendments.
5. Section 12AB (1) (i) (b) and (c) (Applicable from 01-10-23)- Due to the amendment mentioned in point no. 6 regarding the time of applying on the basis of activities have commenced or not, changes were required in Section 12AB (1) (i)-
i. If the activities of the CHARITABLE/RELIGIOUS TRUST have not started- In such a case the department will give provisional registration for a period of 3 years.
ii. If the activities of the CHARITABLE/RELIGIOUS TRUST have started – In such a case the department will give registration for a period of 5 years after being satisfied about the genuineness of the activity of the trust. Earlier as per clause c, all new CHARITABLE/RELIGIOUS TRUST were given provisional registration for 3 years.
CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.
He is also socially active on LinkedIn at linkedin.com/in/capranayjain
CA Pranay Jain