Preliminary: There have been large number of amendments nearly amendments since 1961. The amendments have been made to eliminate the double deductions while calculating application or accumulation. These amendments rather than bringing clarity on the subject have created more chaos in the regulation of charity section.

Finance Act, 2021 have made following amendments in section 10 (23C) and Section 11.

1. Threshold limit availing exemption increased for educational institutions and hospitals from Rs. 1 crore to 5 crores;

2. Restrictions on the application out of corpus Funds;

3. Restrictions on the application out of loans and borrowings

4. Change in due date for filing of belated income tax return.

Amendment to Section 10(23C) under sub-classes (iiiad) and (iiiac)of Section 10(23C) provides for exemption of receipts removal of such university or education institution receipts of such hospital or institution do not exceed the amount of annual receipts of Rs.1 crore vide rule 2BC.

Finance Act, 2021 with effect from assessment year 2022-23 sub-clause (iiiad) and (iiiac), it has been clarified that if the person has receipts from university or universities or educational institution or institutions as referred to in sub-clause (iiiad) as well as from hospital or hospitals or institution or institutions as referred to in sub-clause (iiiac). the exemptions under these clause shall not apply, if the aggregate of annual receipts of the person from such university or universities or educational institution or institutions or hospital or hospitals or institution or institutions exceed five crore rupees. In short, under the amended section 10(23C). sub-clause (iiiad) and (iiiac), university or universities or educational institution or institution or hospitals or institution or institution whose aggregate annual receipt does not exceed Rs. 5 crores.

Meaning of Annual Receipts: Neither the existing provisions/nor in the amended provisions of section 10(23c) (iiiad) and 10(23c) (iiiac) defines the meaning of “annual receipts” since no guidance is available in this respect under the Act, we have to rely on the judicial pronouncement in this regard.

CIT v. Madrasa E. Bakhiyath – US – Salihath Arabic College 226 Taxman 372 (Mad.) held that sale proceeds of lad and bonds could not be equated to annual receipts while considering the monetary limit under section 10(23c) (iiiad) as the said sale went in nature of conversion of capital asset from one form to another. The Jaipur Tribunal in the case of Indian Medical Trust v ITO [2012] 18 taxmann.com 223 (Jaipur Tribunal) hold that the annual receipt is to be considered without excluding contribution towards the corpus of the trust.

Rupees 5 crores limit to be applied in aggregate and not per institution. The Finance Act, 2021 provides that the revised threshold limit of Rs.5 crores shall apply for an assessee with respect to aggregate receipts from university or educational institution as referred to in sub-clause (iiiad) and hospital or institution as referred to in sub-clause (iiiac). In short, it a trust is running both educational and medical institutions, the annual receipt from all such institutions should be aggregated and if does not exceed Rs 5 crores, the exemption will be available.

Earlier the provisions were silent about this aspect though there were various Courts rulings providing that limit of Rs. 1 crore to be available for each of the institution run by an organization. However there were contrary ruling as well.

Illustration: If an organization is running 10 schools and the turnover of each school is less than Rs. 1 crore then the exemption was available for all ten schools without any registration or approval.

CIT v. Children’s Education Society (2013) 34 Taxmann.com 285 (Kar) held that if an assessee is having more than one educational institution then the ‘aggregate annual receipt” of each such educational institutions then each of such institution will enjoy the Rs. 1 crore limit.

PKP Trust v. ITO (2017) 79 Taxmann.com 282 (Chennai Trib.) held that each educational institution should be considered separately for applying threshold annual receipt of Rs. 1 crore for allowing exemption under section 10 (23C).

Asst. CIT v. Shiksha Samiti (2015] 60 taxman 428 (del. Trib)

Delhi Tribunal hold that for exemption under section 10(23C) (iiiad) “aggregate annual receipts” refers to receipts by a particular institution.

Now Finance Act, 2021 has over ruled these judgments. The Finance Act, 2021 has instituted the words “receipts of each university or educational institution…….” with “receipts of the person from such university or universities or educational institutions ….” in sub-clause (iiiad) and sub clause (iiiac).

Explanation: Explanation has been inserted with effect from 1-4-2022. Explanation is inserted to clarify that if the person has received from educational institution referred to in sub-clause (iiiad) and from medical institution referred to in sub-clause (iiiae), the exemption under shall not apply, if the aggregate of annual receipts of the person from such educational and medical institutions exceed Rs. 5 crores. In other words, if a charitable trust runs both a medical and educational institution, the total receipts from all such institutions shall be aggregated to compute the annual total receipt of Rs. 5 crores. This amendment has overruled various court rulings wherein it was held that limit of Rs.1 crore is to be seen separately for each medical and educational institutions. Above amendment affirms the ruling of Amritsar Tribunal in the case of ITO v. Vivekanand Society of Educational & Research [2014] 49 taxmann.com 386 that if the receipt of an assessee society from two institution run and run by it exceeds Rs. 1 crore, in the absence of exemption certificate, the receipts under section 10(23c) was rightly brought to tax.

Amendment to section 10(23C) and section 11:

Investment of corpus donations in the modes specified in Section 11(5). The voluntary contributions with a specific direction that they shall not form part of the “Corpus donations” received by the trust or institutions, funds etc., are exempt from tax as the following provisions.

Explanation to third proviso to section 10(23C) provides that income of a fund or trust or institution or any university or other educational institution or any hospital or other educational institution shall not include income in the form of Corpus donations.

(b) Similarly Section 11(1) (d) provides that Corpus donation shall not be included in the total income of the trust or institution.

The Fiancé Act, 2021 provides that the corpus donation shall be invested or deposited in one or more of the forms or mode specified in section 11(5) maintained specifically for such purpose. Thus the corpus donations received by an organization shall not be treated as exempt income unless it is invested or deposited to one or more of the forms or modes specified to section 11(5) maintained specifically for such corpus. It may be noted that the condition of investing the corpus fund in section 11(5) investment shall apply to that part of the corpus fund which has been created from corpus donations exempted under section 11(1)(d), because organizations may have corpus funds invested in business assets under section 11(4) or section 11(4A) which do not confirm to the requirements of section 11(5).

It may be noted that the corpus fund of an organization may be created through many sources and may also include assets which do not confirm to the provisions of Section 11(5). The sources from which a corpus fund could be created are broadly as under:

1. Corpus donation received with a specific direction;

2. 15% accumulations after applying 85% of income;

3. By payment of taxes e.g. an organization pays taxes against anonymous donations above 5%;

4. At the time of creation of a trust, the corpus may come as cash, property or business;

5. Corpus donation from any other exempt income not subject to an application under section 11.

It may be noted that only the corpus fund to the extent created out of corpus donation received under section 11(1)(d) should remain invested as per section 11(5). Thus such corpus fund cannot be used for incidental business activity.

There is no specific amendment as to the consequences if investment is made out of corpus donation is liquidated in the subsequent year and not reinvested in my opinion, in such a situation the amount realized should be treated as income subject to application otherwise the amendment made is useless.

No application out of corpus donation:

Finance Act, 2021 with effect from 1-4-2022 has provided

(i) that application for charitable or religious purposes from the corpus shall not be treated as application for charitable or religious purposes. However when it is invested or deposited back into one crore or more of the forms specifically for such corpus from the income of that year and to the extent of such investments or deposit and such amount shall be allowed as an application in the previous year in which it is deposited back to the corpus to the extent of such deposit or investment.

Application out of loan and borrowings:

As per section 11(1), the exemption is available for income derived from property held under the trust or for the voluntary contributions, provides the organization applies the income for charitable purposes.

As long as the expenditure is incurred out of the income of the trust on the objects of the trust, it would be considered as a valid application of income, even if such expenditure is for capital purposes. Thus all expenditure whether revenue or capital for charitable purposes shall be considered as on application of income. Finance Act, 2021 provides that an application from loans and borrowings shall not be considered as an application for charitable or religious purposes. However, when such loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as an application in the previous year in which it is repaid and to the extent it is repaid.

It is to be noted that an organizations used to claim expenditure made out of corpus fund or borrowed funds as an application of current year’s income. After the amendments, the application towards charitable purposes shall be valid into following cases:

1. Application out of current year income;

2. Application out of corpus or the unconditional available funds of the organization; and

3. Application made out of loans & borrowings.

After the amendment, no application other than an application made out of income shall be allowed to be claimed as an application to the extent new investment is made under section 11(5) and repayment of the loan is made.

Set off & Carry forward of past deficits:

There is a considerable legal controversy surrounding whether a charitable institution is allowed to carry forward the deficit and set it off against the income of a subsequent year. There is no such provision in the Income-tax Act to carry forward the deficit in subsequent year and set it off against the income of a subsequent year. There is no provision in the Income-tax Act to carry forward and set-off the excess expenditure by a charitable institution. Further there are conflicting decisions of the High Court and Tribunal in this regard.

The Supreme Court of India in case of CIT(E) v. Subros Educational Society [2018] 96 Taxmann.com 652 has set to rest the controversy in favour of the assessee. Consequently, a charitable institution was held to be entitled to carry forward and set off the excess application of income of earlier years against income of the subsequent year.

The Finance Act, 2021 has made an amendment to both sections 10(23C) and section 11, that for the computation of income required to be applied or accumulated during the previous year, no set off or deduction, of any of the year preceding the year shall be allowed. Thus pursuant to this amendment, the charitable trust shall not be permitted to carry forward the losses or excess application of earlier years.

Now, the set off past deficit against the current year’s income will no longer be permitted for 85% application. Therefore from assessment year 2022-23, such deficit cannot be set up against subsequent year’s income.

Due date for filing belated return:

Finance Act, 2021 reduces the time limit to file belated return of income or revised return of income, as the case may be, by three months. Thus, the belated return or revised return could now be filed three months before the end of the relevant assessment year or before the compilation of assessment, whichever is earlier. Therefore, the last date to file the revised or belated return shall be 31st December of the relevant assessment year.

The entities registered under Section 12AA/12AB are now required to file the return of income without giving effect to the provisions of sections 11 and 12 exceeds maximum amount which is not chargeable to income-tax. Thus, after the amendment in order to claim exemption under section 11 & 12, the return is required to be submitted latest by 31st December of the assessment year, failure would result in loosing the benefit of sections 61 and 62 of the Act. The benefit of section 11 and 12 shall not be available.