1. Introduction
Sections 11 and 12 of the Income-tax Act provide for exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions, subject to certain conditions. The income derived from property held under trust should be applied for the charitable purposes, and where such income cannot be applied during the previous year, it may be accumulated and invested in the modes prescribed and applied for such purposes in subsequent years as prescribed. If the accumulated income is not applied in accordance with the conditions provided in the said section within a specified time, then such income is deemed to be taxable income of the trust or the institution. Section 12AA provides for registration of the trust or institution which entitles them to get the benefit of sections 11 and 12. It also provides the circumstances under which the registration can be cancelled. Section 13 of the Act provides for the circumstances under which exemption under section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.
2. Proposed New section 115TD
2.1 A new section 115TD has been proposed in the Finance Bill, 2016 for imposing a levy in the nature of an exit tax called additional income-tax, which will be attracted when any trust, society or the organisation is converted into a non-charitable organisation or gets merged with a non-charitable organisation or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution.
2.2 Tax at maximum marginal Rate : In case of conversion of trust or institution into a form not eligible for registration u/s. 12 AA or on merger into an entity not having similar objects and registered under section 12AA or on non-distribution of assets on dissolution to any charitable institution registered u/s. 12AA or approved under section 10(23C) within a period 12 months from dissolution, the accreted amount of income of assets of the trust or institution shall be taxable at maximum marginal rate of 30 per cent.
2.3 What is Accreted income : The accreted income means the amount by which the aggregate fair market value of the total assets of the trust or the institution, as on the specified date, exceeds the total liability of such trust or institution computed in accordance with the prescribed method of valuation. The asset and the liability of the charitable organisation which have been transferred to another charitable organisation within specified time will be excluded while calculating accreted income.
2.4 “specified date” means,—
(a) The date of conversion in a case where assets of the trust or institution are converted into any form which is not eligible for grant of registration under section 12AA;
(b) The date of merger in a case such trust or institution is merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA; or
(c) The date of dissolution in a case where such trust or institution failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or to any fund or institution or trust 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), within a period of 12 months from the end of the month in which the dissolution takes place.
2.5 Time limit for payment of tax and persons responsible for payment:
Section 115TD provides that the principal officer or the trustee of the trust or the institution, as the case may be, and the trust or the institution shall also be liable to pay the tax on accreted income to the credit of the Central Government within 14 days from,—
(i) The date on which the order cancelling the registration is received by the trust or the institution in a case the registration granted to it under section 12AA has been cancelled;
(ii) The end of the previous year in a case the trust has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it has not applied for fresh registration under section 12AA in the said previous year;
(iii) The date on which the order rejecting the application is received by the trust or the institution in a case the trust has filed application for fresh registration under section 12AA but the said application has been rejected;
(iv) The date of merger in a case such trust or institution is merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA; or
(v) The date on which the period of 12 months expires from the date of dissolution in a case where such trust or institution failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or to any fund or institution or trust 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).
2.6 Persons responsible for payment or who may be deemed to be assessee in default
a) Section 115TD(4) provides that notwithstanding that no income-tax is payable by a trust or the institution on its total income computed in accordance with the provisions of this Act, the tax on the accreted income under section 115TD(1) shall be payable by such trust or the institution.
b) Section 115TD(5) provides that the principal officer or the trustee of the trust or the institution, as the case may be, and the trust or the institution shall also be liable to pay the tax on accreted income to the credit of the Central Government
c) Section 115TF(1) provides that if any principal officer or the trustee of the trust or the institution and the trust or the institution does not pay tax on accreted income in accordance with the provisions of section 115TD, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of the Income-tax Act for the collection and recovery of income-tax shall apply.
d) Section 115TF(2) provides that notwithstanding anything contained in section 115TF(1), in a case where the tax on accreted income is payable under the circumstances referred to in clause (c) of section 115TD(1), the person to whom any asset forming part of the computation of accreted income under sub-section (2) thereof has been transferred, shall be deemed to be an assessee in default in respect of such tax and interest thereon and all the provisions of the Income-tax Act for the collection and recovery of income-tax shall apply, provided that the liability of such person shall be limited to the extent to which the asset received by him is capable of meeting the liability.
2.7 Interest in case of failure of payment of tax
Section 115TE provides that where the principal officer or the trustee of the trust or the institution and the trust or the institution fails to pay the whole or any part of the tax on the accreted income referred to in section 115TD(1), within the time allowed under section 115TD(5) of that section, he or it shall be liable to pay simple interest at the rate of one per cent for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.
2.8 Effective date for the new provisions
These amendments will take effect from 1st June, 2016. But as the accumulated or accreted income of the earlier years is also proposed to be taxed, practically it tantamount to tax retrospectively. It is in a sense also a case of double taxation as the income of the trust might have already suffered tax if the trust did not spent 85 per cent or 75 per cent of its income or failed in applying the income within one year in case option was exercised under Explanation (2) below section 11(1) or to the extent accumulated amount was not utilised within the specied period of accumulation u/s. 11(2).
The practical difficulty will arise in collection of tax if the assets are transferred from one entity to another and instead of liquid money in Bank account or fixed deposit the assets are in the form of immovable property. It would be better if the rate of tax is lowered and tax is collected in the form of TDS/TCS say @ 10 per cent on transfer of such assets or income. After all the recipient NGO is also engaged in social activities even if not registered under section 12AA. The reality of life is that NGOs play an important role in imparting medical, educational and relief to poor in our country and also carrying objects of general public utility, which supplement the welfare measures undertaken by the Government.
2.9 The action against Trust/Institution is continuing for many years
It may be noted that for last several years the benefits to the trusts have been curtailed or new restrictions imposed by the Central Government. Some such steps are as under :
a) The period for accumulation under section 11(2) used to be 10 years which was reduced to 5 years by the Finance Act, 2001 in respect of income accumulated or set apart on or after 1st April, 2001.
b) The statutory accumulation under section 11(1)(a) was permitted up to 25 per cent and the same was reduced to 15 per cent by the Finance Act, 2002 w.e.f. asst. year 2003-04.
c) The definition of charitable purpose under section 2(15) was tinkered with from time-to-time to restrict the benefit to the Trusts. For example section 2(15) was substituted by the Finance Act, 2008 with effect from asst. year 2009-10. A proviso was added to provide that the advancement of any other object of general public utility shall not be a charitable purpose if it involves the carrying of 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 income from such activity.
d) The 2nd proviso was inserted by the Finance Act, 2010 w.r.e.f. asst. year 2009-10 to provide the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is
Rs. 10 lakh (increased to Rs. 25 lakh with effect from asst. year 2012-13) or less in the previous year.
e) The 3rd proviso was inserted by the Finance Act, 2015 w.r.e.f. asst. year 2016-17 to provide that the advancement of any other object of general public utility shall not be a charitable purpose if it involves the carrying of 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 income from such activity, unless –
– Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility and
– The aggregate receipt from such activities during the previous year do not exceed 20 per cent of the total receipts of the trust or the institution undertakingsuch activities of that previous year.
2.10 The Government need to review its policy
The Government need to review its policy in respect of the working of the charitable trusts or institutions in India. The fact should be kept in mind that the Government effort alone are not enough for meeting the enormous necessities of people in practical life. Therefore the Government should act as felicitator in functioning of the trusts and institutions. Wherever any violation is noticed, the Income Tax official should help in amending the function of such trust. If necessary, the officials may visit the trusts and render proper advice for streamlining the compliance by such trust. If required even the Commissioner of Income-tax may nominate its representative as a Trustee in such trust. The whole gamut of trusts need support of Income Tax department and the Central Government.