In the budget speech, Finance Minister while mentioning about the Direct Tax proposals, at para 6.15, stated as under: –

“6.15. It is proposed to rationalise the process of registration in the case of Trusts, Institutions, Funds, University, Hospital etc, and approval in the case of Association, University, Collage Institution or Company. It is also proposed to provide filing of statements of donation by donor so that the deduction claimed by the donor in its tax return can be pre-filed”.

1.1. In pursuit of such objectives, Finance Bill 2020, introduced in the Parliament by the Finance Minister, proposed rationalisation of provisions that related to trusts and institutions. Section 11 of the Act, is the section that enables the grant of exemption, in respect of income derived from property held under trust for charitable or religious purpose. The exemption shall be to the extent to which such income is applied or accumulated during the previous year for such purposes, as per the provisions obtaining in sections 11, 12, 12A, 12AA and 13 of the Income Tax Act 1961. Further section 10, in terms of sub clauses (iv), (v), (vi) and (via), of clause (23C) provides for registration of other trusts, funds, institutions, university or other educational institutions.

1.2. Keeping in view the technology development, and the practical difficulty in obtaining registration, approval / notification before actually starting the activities, and with the view that the present process needs improvement, a new process has been provided for both existing and new trusts. As per the new process, the approval or registration or the notification for exemption should be for a limited period not exceeding five years at one time. This is with a view to ensure that the conditions for approval or registration or notification are adhered to for want of continuance of exemption. The new process is for both existing and new trusts. The amendments that have been sought to be made to the present governing provisions are as under:—

Proposed amendments — New provisions

I. Presently section 12AA of the Income Tax Act 1961, provides for the “Procedure for Registration”. It is proposed to amend this section. Accordingly Nothing contained in this provision shall apply on or after 1-6-2020, as per sub-section (5) inserted. There is an amendment to clause (7) of section 11. The amendments in nut shell, is as under:-

a) Similar to exemptions under clause (1) and (23C) of section 10, exemption under clause (46) of section 10 shall be allowed to an entity even if it is registered u/s12AA subject to the condition that the registration u/s. 12AA shall become inoperative from the date on which the entity approved under section 10(23C) / (46) or 1st June 20, whichever is later. As per the amended provision, if the entity wishes to make it operative in the future, it will have to file an application as per new section 12AB inserted, and then its approval under clause (23C) or (46) of the section 10, it had earlier, shall cease to have any effect from the date on which registration u/s. 12AB becomes operative.

b) As per sub clause (iiiab) or (iiiad) of section 10(23C), the exemption is direct without any necessity of formal approval.

c) The issue that may arise for consideration, is that whether the restriction as per the amended clause on switching before the exemption regime will also apply in case of entities registered u/s. 12AA and claiming exemption under various sub clauses of section 10 (23C) of the Income Tax Act 1961.

II. Section 12A provides for the “Conditions for applicability of section 11& 12” of Income Tax Act 1961. New clause (ac), to sub clause (1) of Section 12A is proposed to be added with sub clauses (i) to (vi). The effect of the added sub clauses is as under:—

a) All the trusts registered under erstwhile 12A/12AA shall have to reapply for registration / approval as the case may be on or before 30.09.2020.

b) The trust or institution registered under new section 12AB and the period of the said registration is due to expire, reapply at least six months prior to expiry of the said period;

c) The trust or institution, has been once provisionally registered under section 12AB, reapply at least six months prior to expiry of period of the provisional registration or within six months of commencement of its activities, whichever is earlier;

d) The registration of the trust or institution becomes inoperative due to the first proviso to sub-section (7) of section 11, reapply at least six months prior to the commencement of the assessment year from which the said registration is sought to be made operative;

e) The trust or institution, if adopted or undertaken modifications of the objects which do not conform to the conditions of registration, reapply within a period of thirty days from the date of the said adoption or modification;

f) In any other case, apply at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought,

Such Trust or Institution will be treated as registered, in accordance with the new provision proposed u/s. 12AB.

III. Addition of matter to Clause (b), of sub clause (1) to section 12A

Where the total income of the trust or institutions as computed under this Act, without giving effect to the provisions of section 11 and section 12, exceeds the maximum amount which is not chargeable to income tax in any previous year, the accounts of the trust or institution for that year have to be audited and the audit report should be furnished “before the specified date referred to section 44AB i.e, on or before the date, one month prior to due date specified u/s 139(1)” (Added).

IV. A new section 12AB has been introduced. As per this provision:—

a) In case of an application for registration under section 12(A)(1)(ac)(i), CIT shall directly pass the order of registration for 5 years, with effect from 1-4-2020 within 3 months from end of month in which application was received.

b) In case of an application for registration u/s. 12A(1)(ac), clauses (ii), (iii), (iv), (v), Principal CIT shall pass an order granting registration of 5 years or order rejecting the application as the case may be after calling for necessary documents and information to verify the genuineness of activities of trust and compliance of any other Law by the trust as applicable within 6 months from the end of the month in which application was received.

c) An entity making fresh application for approval under clause (vi) of section 12A(1)(ac), shall be provisionally approved or registered for three years on the basis of application without detailed enquiry even in the cases where the activities of the entity are yet to begin and then it has to apply again for approval or registration which, if granted, shall be valid from the date of such provisional registration, within 1 month from end of month in which application was received.

d) The application for registration, subsequent to provisional registration should be at least six months prior to the expiry of provisional registration or within six months of start of activities whichever is earlier.

e) The application pending for approval, registration, as the case may be shall be treated as application in accordance with the new provisions wherever they are being provided for.

V. Sub section (4) and (5) to section 12AB, specify the provisions related to cancellation of registration by CIT, where the activities of trust were found to be non genuine / against the approved object, in violation of the provisions of Income Tax Act 1961 or any other law. In respect of trust or institution or university, or other Educational Institution or Hospital or other medical institution referred to in sub clauses (iv) or sub clause (v) or sub clause (vi) or sub clause (via) of section 10(23C) and claiming exemptions, and registered / seeking registration under the respective sub clauses, provisions exactly similar to section (4) & (5) of section 12AB have been inserted in 1st, 2nd, 8th, 9th, 10th and 16th proviso to section 10(23C).

VI. Sub clauses (viii) and (ix) are added to sub section (5) of section 80(G) of Income Tax Act. According to the said clauses added:—

(i) The exempt entity receiving Donation / any Sum hitherto has no reporting obligation.

(ii) The entities receiving Donation / any Sum, are made to furnish a statement in respect thereof.

(iii) The entity should issue a certificate to Donor / Payer, and the claim for deduction to the Donor / Payer, may be allowed on that basis only.

(iv) If there is a failure to furnish the statement, levy of penalty is also provided, may be to ensure proper filing of the statement.

Such a situation for addition of clauses (viii) & (ix) to sub section (5) to 80(G) may be to standardise the process through one to one matching between the amount received by the exempt entity and the amount claimed as deduction by the Donor / Payer. Perhaps as similar to TDS matching.

VII. Explanation 2A has been proposed to be inserted below sub section (5D) of section 80(G). This was to enable the claim of an assessee for the deduction in respect of any donation made to an institution or fund to which the provisions of sub section (5) shall apply, in the return of income for any assessment year filed by him shall be allowed on the basis of information relating to said donation furnished by the institution or fund to the prescribed income tax authority.

VIII. Consequential Amendments.

a) There is an amendment to sub section (2) of section 56. It has been proposed to make reference of section 12AB, in the clauses (v), (vi), (vii) and clause (x) of sub section 2 of section 56. Such reference was to the effect, that the said clauses shall not apply to any sum of money received from any Trust, or Institution registered u/s. 12 AB of the Income Tax Ac. This amendment will take effect from 1st June 2020.

b) Section 80GGA deals with “Deduction in respect of certain donations for scientific research or rural development”. It has been proposed to add, explanation to sub section (2A) of section 80GGA. This is to the effect that the assesse’s claim, for deduction in respect of any sum referred to in sub section (2) in the return of income for any assessment year filed by him, shall be allowed on the basis of information relating to such sum furnished by the payee to the prescribed income tax authority or the person authorised by such authority, subject to verification in accordance with the risk management strategy formulated by the board from time to time. This amendment will take effect from 1st June 2020.

c) Section 115BBDA, deals with “Tax on certain dividends received from domestic companies”. There is an explanation to the said section in clause (b) of the explanation, in the sub clause (iii), it has been proposed, for the words, figures and letters “under section 12A or section 12AA”, the words, figures and letters” “under section 12A or section 12AA or section 12AB” shall be substituted with effect from 1st day of June 2020.

d) Section 115TD, deals with tax on “Accredited income”. It has been proposed to make reference to section 12AB, in the said section, wherever the reference to section 12AA has been made. This was to the effect, that the provisions of the section shall Mutatis Mutandis apply to the Trust or Institution registered under section 12AB. This amendment shall take effect from 1st June 2020.

e) In section 253, of the Income Tax Act, which provides for preferring an appeal by an assessee to the Appellate Tribunal against certain orders by which he is aggrieved, in sub sec (i) which provides for one such order u/s. 12AA of Income Tax Act 1961, in clause (c) for the words, figures and letters “u/s. 12AA”, the words, figures and letters “under section 12AA or section 12AB” shall be substituted with effect from 1st Day of June 2020.

f) A new section 271K has been inserted. Clause (ii) of section 271K provides for enabling the officer to levy a penalty in a sum not less than ₹ 10,000/- but which may extend to ₹ 1 lakh if the institution or fund, fails to deliver or cause to be delivered a statement within time prescribed under clause (viii) of sub-section (5) of section 80(G) or furnish a certificate prescribed under clause (ix) of the said sub section.

IX. Implications of the amendments to section 12A, 12AA 10(23C), and section 80G are:—

(i) The Government intends to create a national register of all the charitable and religious institutions. Currently the registration is granted and recorded locally.

(ii) The Income Tax Department shall issue an Unique Identification Number to all the charitable and religious institutions.

(iii) The exercise of revalidation of all the charitable institutions will enable the Government to weed out all the inactive and defunct charitable institutions.

(iv) The renewal of both 12A and 12AA, every five years, will provide an opportunity to withdraw the exemptions without going through the complicated cancellation provisions.

(v) An organisation can be denied renewal even for violations under other laws as may be deemed material for the purpose of achieving its objectives. For instance, if the renewal is denied under FCRA then one can expect that the renewal of registration under Income Tax laws may also be denied.

(vi) In this context it is of relevance to note that the phrase used is “The law which are material for the purpose of achieving its objective”

(vii) The amended law should primarily apply to the violation of activity based or fiscal law which has a direct effect on the activities, however, there is a need for clarity in this regard otherwise this provision could be misused and result in hardship to the NGOs.

(viii) The Finance Bill 2020 provides a provisional registration for 3 years for all new organisations applying for exemption under the respective provisions

(ix) The Finance Bill 2020 proposes that an organisation cannot simultaneously enjoy exemptions under two provisions i.e under section 12AA and 10(23C)

(x) The Income Tax department intends to maintain record and track of Sec 80G related transactions at the national level.

(xi) The thoughts or institutions are required to apply for revalidation within 3 months from 1st June 2020.

(xii) The registration so validated shall be valid only for 5 years.

(xiii) The application for the renewal of registration, after 5 years needs to be submitted at least six months prior to the expiry of the validity period.

Conclusion

Amendments, proposed, and stated to be towards rationalisation of the process of registration, with the consequential changes wherever necessary, whether result in fulfilment of the objectives sought to be a achieved or whether they are prone to breed further litigation has to be left to the time, when the interpretation starts taking place, depending upon the facts and circumstances of each situation and how the revenue reacts to such situations. This is because the imperfections pervading in the context of series of amendments to the Income Tax act 1961, over the years never stood certified to the justness as evidenced in terms of the judicial propositions, and thus known for their non-utility.