Charitable Trust / Institution
Definition of Charitable Purpose
In Divya Yog Mandir Trust v. Jt. CIT (2013) 60 SOT 154 (URO) (Delhi)], the Tribunal held that any form of educational activity involving imparting of systematic training in order to develop the knowledge, skill, mind and character of students is to be regarded as “education” covered under section 2(15) of the Income-tax Act, 1961. In view of above, it can be concluded that imparting of Yoga training through well structured yoga shivir/camps fall under the category of imparting education which is, one of the charitable objects defined under section 2(15).
Now, the Finance Bill, 2015 proposes to amend the definition of section 2(15) of the Act as well as conditions for exemption under the one of the objects of the bill “Ease of doing business / dispute resolution”. Therefore, it is proposed to include “yoga” as a specific category in the definition of charitable purpose on the lines of education, to avoid any controversy due to international recognition granted to it by United Nation.
Advancement of any other object of general public utility
The present definition in section 2(15) was substituted by Finance Act, 2008 and the first proviso was added to state that the advancement of any other object of general public utility will cease to be a “charitable purpose” if it involves any “trade, commerce or business” and aggregate receipts from such activities exceed rupees twenty five lakh. Thus, the proviso is very widely worded and implies that even smallest commercial activity will render the entire organisation not charitable.
Now, to mitigate the impact of the above proviso, the bill proposes that as regards the advancement of any other object of general public utility is concerned, there is a need is to ensure appropriate balance being drawn between the object of preventing business activity in the garb of charity and at the same time protecting the activities undertaken by the genuine organisation as part of actual carrying out of the primary purpose of the trust or institution.
It is, therefore, proposed to amend the definition of charitable purpose to provide that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless –
(i) Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(ii) The aggregate receipt from such activities, during the previous years, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, for the previous year.
Accumulation of income u/s. 11(2)
Under the provisions of section 11 of the Act, the primary condition for grant of exemption to trust or institution in respect of income derived from property held under such trust is that the income derived from property held under trust should be applied for the charitable purpose of India. Where such income cannot be applied during the previous year, it has to be accumulated and applied for such purpose in accordance with various conditions provided in the section. While 15% of the income can be accumulated indefinitely by the trust or institution, 85% of income can only be accumulated for a period not exceeding 5 years subject to the conditions that such person submits the prescribed Form 10 to the Assessing Officer in this regard and the money so accumulated or set apart is invested or deposited in the specified forms or modes. If the accumulated income is not applied in accordance with these conditions, then such income is deemed to be taxable income of the trust or institution.
In CIT v. Nagpur Hotel Owners’ Association (2001) 247 ITR 201 (SC)] the Supreme Court held that, it is abundantly clear from the wording of section 11(2), that it is mandatory for the person claiming the benefit of section 11 to intimate to the assessing authority the particulars required, under rule 17 in Form No. 10 of the Income Tax Rules, 1962 i.e. for accumulation of income. Therefore, it is necessary that the assessing authority must have this information at the time he completes the assessment.
To overcome, the above judgment, it is proposed to provide that, in order to remove the ambiguity regarding the period within which the assessee is required to file Form 10, and to ensure due compliance of the above conditions within time, it is proposed to amend the Act to provide that the said Form shall be filed before the due date of filing return of income specified under section 139 of the Act for the fund or institution. In case the Form 10 is not submitted before this date, then the benefit of accumulation would not be available and such income would be taxable at the applicable rate. Further, the benefit of accumulation would also not be available if return of income is not furnished before the due date of filing return of income
These amendments would help the Yoga Institution to claim the exemption under section 11 of the Act. Further, if Form 10 is submitted, for accumulation of income by charitable trust / institution, before due date of filing return of income, it would facilitate the revenue to process the return of income without waiting to seek the copy of Form 10. Thus, complying with the vision of the Prime Minister “maximum governance minimum Government”.
Additional Depreciation and Investment in new Plant or Machinery:
Another object of the Bill, is to boost the vision of Prime Minister, “Make in India”. Therefore it is propose to amend the Income-tax Act, 1961 as under:
i) Additional Investment Allowance
Manufacturing sector plays significant role in the economic growth of any region. Therefore, in order to encourage the setting up of industrial undertakings in the backward areas of the State of Andhra Pradesh and the State of Telangana, it is proposed to provide following income tax incentives:
It is proposed to insert a new section 32AD in the Act to provide for an additional investment allowance of an amount equal to 15% of the cost of new asset acquired and installed by an assessee, if:
(a) He sets up an undertaking or enterprise for manufacture or production of any article or thing on or after April 1, 2015 in any notified backward areas in the State of Telangana; and State of Andhra Pradesh; and
(b) The new assets are acquired and installed for the purposes of the said undertaking or enterprise during the period beginning from April 1, 2015 and ending on March 31, 2020.
This deduction shall be available over and above the existing deduction available under section 32AC of the Act. Accordingly, if an undertaking is set up in the notified backward areas in the State of Andhra Pradesh or Telegana by a company, it shall be eligible to claim deduction under the existing provisions of section 32AC of the Act as well as under the proposed section 32AD if it fulfils the conditions specified in the said section 32AC and conditions specified under the proposed section 32AD.
The phrase “new asset” has been defined as plant or machinery but does not include-
(i) Any plant or machinery which before its installation by the assessee was used either within or outside India by any other person:
(ii) Any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;
(iii) Any office appliance including computer or computer software;
(iv) Any vehicle;
(v) Any ship or aircraft; or
(vi) Any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.
With a view to ensure that the manufacturing units which are set up availing this proposed incentive actually contribute to economic growth of these backward areas by carrying out the activity of manufacturing for a substantial period of time, it is also proposed to provide suitable safeguards for restricting the transfer of the plant or machinery for a period of 5 years. However, this restriction shall not apply to the amalgamating or demerged company or the predecessor in a case of amalgamation or demerger or business reorganisation but shall continue to apply to the amalgamated company or resulting company or successors, as the case may be
ii) Additional depreciation:
To incentivise investment in new plant or machinery, additional depreciation of 20% is allowed under the existing provisions of section 32(1)(iia) of the Act in respect of the cost of plant or machinery acquired and installed by certain assessee. This depreciation allowance is allowed over the above the deduction allowed for general depreciation under section 32(1)(ii) of the Act. In order to incentivise acquisition and installation of plant and machinery for setting up manufacturing units in the notified backward area in the State of Andhra Pradesh or the State of Telangana. It is proposed to allow higher additional depreciation at the rate of 35% (instead of 20%) in respect of the actual cost of new machinery or plant (other than a ship and aircraft) acquired and installed by a manufacturing undertaking or enterprise which is set up in the notified backward area of the State of Andhra Pradesh or the State of Telangana on or after of April 1, 2015. This higher additional depreciation shall be available in respect of acquisition and installation of any new machinery or plant for the purpose of the said undertaking or enterprise during the period beginning on April 1, 2015 and ending on March 31, 2020. The eligible machinery or plant for this purpose shall not include the machinery or plant which are currently not eligible for additional depreciation as per existing proviso to section 32(1)(iia) of the Act.
iii) Additional depreciation in succeeding year
It is also proposed to make consequential amendments in the second proviso to section 32(1) of the Act for applying the existing restriction of the allowance to the extent of 50% for assets used for the purpose of business or less than 180 days in the year of acquisition and installation. However, the balance 50% of the allowance is also proposed to be allowed in the immediately succeeding financial year.
Thus amendment would help in avoiding controversy. In DCIT v. Cosmo Films Ltd.(2012) 139 ITD 628 (Delhi) (Trib.) and ACIT v. SIL Investments Ltd. (2012) 73 DTR 233 (Delhi)(Trib.) decided in favour of the assessee and allowed to set off 50% additional depreciation in succeeding year, while in Brakers India Ltd v. DCIT(2013)96 DTR 281(Chennai)(Trib.) decided against the assessee.
Transaction not regarded as transfer
To overcome the judgment of the Supreme Court in Vodafone International Holdings B. V. v. UOI (2012)341 ITR 1(SC), Explanation 5 to section 9(1) was inserted by the Finance Act, 2012 with effect from April 1, 1962. The Explanation reads as under:
“For the removal of doubts it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives directly or indirectly, its value substantially from the assets located in India.”
To mitigate rigour of the above Explanation, the Finance Bill, 2015, proposes to insert section 9A to the Act. Simultaneously, it is also proposed to include following two clauses to section 47 of the Act.
(i) Any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if conditions provided therein;
(A) At least 25% of the share holders of the amalgamating foreign company continue to remain share holders of the amalgamated foreign company; and
(B) Such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.
(ii) any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if;
(a) The shareholders holding not less than 75% in value of the shares of demerged company continue to remain share holders of resulting foreign company; and
(b) Such transfer does not attract tax on capital gains in the country in which demerge foreign company is incorporated.
Consequential amendment is also proposed in respect of cost with reference to mode of acquisition.
Tax neutrality on merger of similar schemes of Mutual Funds
Securities and Exchange Board of India has been encouraging mutual funds to consolidate different schemes having similar features so as to have simple and fewer number of schemes. However, such mergers/consolidations are treated as transfer and capital gain are imposed on unit holders under the Income-tax Act.
In order to facilitate consolidation of such schemes of mutual funds in the interest of the investors, it is proposed to provide tax neutrality to unit holders upon consolidation or merger of mutual fund schemes provided that the consolidation is of two or more schemes of an equity oriented fund or two or more schemes of a fund other than equity oriented fund. It is further proposed that the cost of acquisition of the units of consolidated scheme shall be the cost of units in the consolidating scheme and period of holding of the units of the consolidated scheme shall include the period for which the units in consolidating schemes were held by the assessee. It is also proposed to define consolidating scheme of a mutual fund which merges under the process of consolidation of the schemes of mutual fund in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and consolidated scheme as the scheme with which the consolidating scheme merges or which is formed as a result of such merger.
These amendments would help to achieve one of the objects of the bill “Ease of doing Business / Dispute resolution”.
Amendment of section 115JB
The Finance Minister Mr. Arun Jetley in his speech, while presenting the budget of 2015-16 in para 116 observed:
“In order to rationalise the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT.”
Therefore, under “rationalisation measures” being one of the objects of the Bill, the provisions of section 115JB are proposed to be rationalised.
Vide Finance Act (No. 2), 2014 it was provided that any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 would be capital asset. Consequently, the income arising to a Foreign Institutional Investor from transactions in securities would always be in the nature of capital gains.
It is, therefore, proposed to amend the provisions of section 115JB so as to provide that income from transactions in securities (other than short term capital gains arising on transactions on which securities transaction tax is not chargeable) arising to a Foreign Institutional Investor, shall be excluded from the chargeability of MAT and the profit corresponding to such income shall be reduced from book profit. The expenditure if any, debited to profit and loss account corresponding to such income (which is being proposed to be excluded from the MAT liability) are also proposed to be added back to the book profit for the purpose of computation of MAT.
In view of the above,
A new clause (iic) is also proposed to be inserted in Explanation 1 so as to provide that the amount of income from transactions in securities, (other than short term capital gains arising on transactions on which securities transaction is not chargeable) accruing or arising to an assessee being a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1922 if any such amount is credited to the profit and loss account, shall be reduced from the book profit for the purpose of calculation of income tax payable under the section. Further by inserting a new clause (fb) in Explanation 1, it is proposed that the book profit shall be increased by the amount or amounts of expenditure relatable to the above income
A new clause (iib) is proposed to be inserted in Explanation 1 so as ato provide that the amount of income, being the share of income of an assessee on which no income tax is payable in accordance with the provisions of section 86, if any such amount is credited to the profit and loss account, shall be reduced from the book profit for the purpose of calculation of income tax payable under the section. Further by inserting a new clause (fa) in Explanation 1 it is proposed that the book profit shall be increased by the amount or amounts of expenditure relatable to the above income.
Section 86 of the Act provides that no income tax is payable on the share of a member of an AOP, in the income of the AOP in certain circumstances. However, under the present provisions, a company which is a member of an AOP is liable to MAT on such share also since such income is not excluded from the book profit while computing the MAT liability of the member. In the case of a partner of a firm, the share in the profits of the firm is exempt in the hands of the partner as per section 10(2A) of the Act and no MAT is payable by the partner on such profits.
In view of the above, it is proposed to amend the section 115JB so as to provide that the share of a member of an AOP, in the income of the AOP, on which no income tax is payable in accordance with the provisions of section 86 of the Act, should be excluded while computing the MAT liability of the member under 115JB of the Act. The expenditures, if any, debited to the profit and loss account, corresponding to such income (which is being proposed to be excluded from the MAT liability) are also proposed to be added back to the book profit for the purpose of computation of MAT.
Thus, long term capital gains and short term capital gains on which STT is paid by FIIs, would be excluded from MAT, but short term capital gains (other than STT paid) would be taxed in MAT at 18.5%. in the hands of FIIs. Further, the share of profit AOP in the hands of member is proposed to be excluded rightly as there is no provision to exclude the share of profit of AOP in the hands of member like section 10(2A), wherein the share of profit of the firm is excluded, in the hands of partner.
Tax on income received from Venture Capital Companies and Venture Capital Fund
The provisions of section 115U were introduced by the Finance Act, 2000 with effect from April 1,2001 with a view to provide incentive to venture capital. The section 115U provides that any income accruing or arising to or received by a person out of investment made in a venture capital company or venture capital fund shall be chargeable to tax if it were the income received by such person had he made the investments directly in venture capital undertaking. Similarly the income received by the person shall also be deemed to be of the same nature and bear the same proportion as if it had received by the venture capital company or venture capital fund.
Now the Finance Bill, 2015 seeks to insert a new Chapter XII–FB consisting of new section 115UB in the Income-tax Act, relating to tax on income of investment funds and income received from such funds.
Therefore, it is proposed to provide that existing pass through scheme contained in the provisions of section 10(23 FB) and section 115U shall not apply to such fund on or after April 1, 2016, however such investment fund to which new regime provided in section 10(23FBA) and section 115UB applies.
CA. H. N. Motiwalla