The provisions of sections 11 and 12 of the Income-tax Act, 1961 (“the Act”) provide for exemption to trusts/institutions in respect of income derived from the property held under trust and voluntary contributions received with a specific direction that the same shall form part of the corpus of the trust or institution. This exemption is subject to fulfilment of prescribed conditions.
One of the conditions is that 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. It also provides that, if the accumulated income is not applied in accordance with the conditions provided in the said section within the 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 the circumstances under which exemption under sections 11 or 12 in respect of whole or part of income can be denied to the trust or institution.
The Finance Bill, 2017 has proposed various amendments to the existing provisions of sections 11 and 12 of the Act which amendments are explained hereunder:
1. Restriction on exemption in case of corpus donation by exempt entities to other exempt entities
As per the existing provisions of the Act, donations made by a trust 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 clause (23C) of section 10, except those made out of accumulated income, are considered as application of income for the purposes of its objects. Similarly, donations made by entities exempted under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 to any trust or institution registered under section 12AA, except those made out of accumulated income, are also considered as application of income for the purposes of its objects.
Donation given by these exempt entities to another exempt entity, with specific direction that it shall form part of corpus, though considered as application of income in the hands of donor trust but is not considered as income of the recipient trust.
Allowing the corpus donations as an application of income was leading to indefinite accumulation of funds through other trusts without there being actual applications.
To keep in check this practice which was being adopted by some charitable institutions, the Finance Bill, 2017 has proposed to insert a new Explanation to section 11 of the Act to provide that any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1) of section 11, being contributions 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.
It is also proposed to insert a similar proviso in clause (23C) of section 10 so as to provide similar restriction in respect of any amount credited or paid out of their income.
2. Fresh application within 30 days of modification of objects
The provisions of section 12AA of the Act contain provisions relating to registration of a trust for availing benefit under sections 11 and 12 of the Act. It also provides that the Principal Commissioner of Income-tax or the Commissioner of Income-tax may cancel the registration on being satisfied that the activities are not genuine or are not being carried out in accordance with its objects subsequent to the grant of registration. Presently, there are no provisions which enable trusts/institutions to apply and obtain a fresh registration in cases where there are modification in the objects after grant of registration.
The Finance Bill, 2017 proposes to amend section 12A of the Act so as to provide that where a trust/institution which has been granted registration under section 12AA or under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996] and, subsequently the trust/institution adopts or undertakes modifications in its objects which do not conform to the conditions of registration, the trust/institution shall be required to obtain fresh registration. The application for fresh registration has to be made in the prescribed manner within 30 days of adoption or modification of its objects.
3. Filing of return of income for availing exemption
Presently, entities registered under section 12AA of the Act are required to file its return of income under section 139(4A) of the Act, if their income without giving effect to sections 11 and 12 of the Act exceeds the basic exemption limit. There was no clarity as to whether return of income is to be filed within the time limit of section 139 of the Act or otherwise.
The Finance Bill, 2017 proposes to amend the provisions of section 12A of the Act so as to provide an additional condition of filing the return of income within the prescribed time limit u/s. 139(1).
4. Extension of the power to survey
Existing provision pertaining to places where survey can be undertaken are proposed to be expanded. The Finance Bill, 2017 proposes to provide that the income-tax authorities can enter into place where charitable activities are carried on for the purpose of carrying out survey.
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