Introduction
1. The Finance Bill, 2020 has made several important changes in the taxation system of charitable trusts availing of the benefit of exempting their incomes from the charge of income tax. The objective of the changes is to curb the malpractices that have been noticed in the functioning of some of such trusts.
2. Ten clauses in the Bill, namely, Clauses 7(1), 9 to 12, 29(A) and 29(B)(ii), 33, 34, 54(b) and 61 have made changes in sections 10(23C), 11, 12A, 12AA, 12AB, 56, 80G, 80GGA, 115BBDA and 115TD of Income-tax Act, 1961 (the Act) respectively. These changes mainly relate to the grant of registration requiring every approved registered charitable trust to apply for re-registration and subsequently after every five years. New charitable trusts will be granted provisional registration for a period of three years and full/final registration later by adopting the prescribed procedure.
3. Simultaneous registration for tax exemption to charitable institutions in accordance with the procedure prescribed in section 12AA or approved u/s 10(23C) or exemption through notification u/s 10(46) of the Act will not be permissible. Section 12AA dealing with the procedure for registration of a charitable trust will cease to be applicable from 01.06.2020; instead a new section 12AB has been inserted prescribing the procedure for fresh registration. Instead of the CIT(Exemption), application would need to be made to the Principal Commissioner of Income-tax or Commissioner of Income-tax (CIT).
4. Conditions for the applicability of sections 11 and 12 to the income from property held for charitable or religious purposes or income from contributions have also been changed by amendments in section 12A of the Act. The important amendments are explained below:—
(i) Provisions of section 12A prescribing the conditions for the applicability of sections 11 and 12 have been amended to provide that all the trusts which have already been registered have to file application for registration again in the prescribed form with the Principal Commissioner or Commissioner within a period of 3 months from the date when the amended provisions will come into force, which would mean by 01.09.2020. Even a charitable trust, educational or medical institution already granted exemption, will also have to submit such an application.
(ii) With the substitution of the newly inserted section 12AB, w.e.f. 01.06.2020 prescribing the procedure for grant of registration, the earlier section 12A will become inoperative from that date.
(iii) Subsequent application for renewal of registration will need to be made at least six months prior to the expiry of the period of the earlier registration.
(iv) Where the earlier registration has become in-operative in terms of section 11(7) of the Act by virtue of claiming deduction by the trust u/s 10(23C) or 10(46) of the Act and the trust again opts to get the registration operative, application will need to be made at least 6 months prior to the commencement of the assessment year for which, the said registration is sought to be made operative.
(v) Like-wise, where a provisional registration was granted earlier being a new trust, the application is to be made at least 6 months prior to the expiry of the period of provisional registration or within 6 months from commencement of the activities of the trust.
(vi) Where any modification is made to the objects of the trust which do not conform to the conditions for registration, an application is to be made within a period of 30 days from the date of the modification.
(vii) In any other case, application is to be filed at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought.
5. Section 12AB of the Act provides for the procedure for grant of the registration on receipt of the application by the Principal Commissioner or the Commissioner of Income-tax. The main requirements are as follows:-
(i) In the case of an existing registered trust, which has to file application on coming into force the new procedure, the order for registration shall be passed within a period of 3 months from the end of the month in which the application is received and the registration shall remain valid for a period of 5 years.
(ii) For subsequent registration, the Principal Commissioner or Commissioner, after being satisfied on the genuineness of the activities of the trust, shall pass the order within a period of 6 months from the end of the month in which application is received and registration shall be operative for a period of 5 years.
(iii) In the case of new trusts, provisional registration shall be granted within one month and same will continue for a period of 3 years.
6. Provisions of section 11(7) of the Act provide that if a charitable trust was granted registration u/s 12AA of the Act, it has to claim exemption only in terms of sections 11 & 12 of the Act and not under various clauses of section 10 except under clauses (1) & (23C) of section 10 of the Act.
7. On the lines of the exemption available to a charitable trust u/s 10(23C), option is also being provided to claim exemption u/s 10(46) of the Act in case of trusts established by a Central or State Act or by the Central or State Government as are notified for the purpose of this section.
8. It is also being provided that in case the trust obtained approval u/s 10(23C) or is notified u/s 10(46) of the Act, registration u/s 12A of the Act will become in-operative with the option that subsequently such a trust can get its registration u/s 12A operative by making an application and thereafter, its approval or notification under section 10(23C) or 10(46) will cease to be effective.
9. The amendments u/s 56 of the Act, which deal with the taxation of income from other sources, are consequential in order to give effect to the changes made in the procedure for grant of exemption to charitable trusts.
10. Section 80G permits deduction from the income of the donor in respect of donation to the prescribed fund or approved charitable institution. This section is being amended to include a few more conditions for the deduction of donations to an institution or fund to which this section applies. They are as follows:-
(i) An institution or fund already approved u/s 80G of the Act shall also apply for approval and on doing so, the approval/registration/notification in respect of the entity shall be valid for a period of upto 5 years at any one time.
(ii) Any application pending for approval of registration shall be treated as an application in accordance with the new provisions wherever they are being provided
(iii) The institution or fund will prepare a statement of donations for the period as may be prescribed and deliver or cause it to be delivered to the prescribed Income-tax Authority.
(iv) The institution or fund has to furnish to the donor a certificate certifying the amount of donation and also furnish to him such other information as may be prescribed.
11. Section 80GGA of the Act prescribes for deduction of donations for scientific research or rural development. Deduction to the donor from his income u/s 80G or 80GGA of the Act will be allowed only if a statement is furnished by the donee recipient who will be required to furnish a statement in respect of the donations received. In case of failure to do so, a fee and penalty will be levied. Where the name of the donor does not appear in the report furnished by the donee or where no report is furnished by him, the deduction u/s 80G will not be allowed to the donor. A heavy burden has, therefore, been placed on the donor to ensure that the donees furnish the prescribed statements to the tax authorities.
12. Section 115BBDA deals with the taxation of dividend received by an assessee from a domestic company exceeding Rs. 10 lakhs while section 115TD levies tax on the income of a trust or an institution which has ceased to be eligible for exemption as a registered charitable institution. Consequential changes have been made in these two sections to make reference to the new provisions included in the Bill for the registration of a charitable trust and the grant of exemption of its income from income tax.
13. To sum-up, a major overhaul has been attempted not only in the procedure for the grant of registration to the charitable trusts but the prescription of a periodical review of their functioning as bonafide charitable institutions has been prescribed by the Finance Bill, 2020 to ensure that they function only to promote the cause of charity and not for private profit.
14. Hopefully, this strengthening of the law relating to charitable trusts and charitable institutions will go a long way in removing the malpractices that have been on the increase in recent years by which institutions, running for private profits, have been escaping income tax on their incomes under the garb of approved charitable institutions.