Mandar Vaidya and Jitendra Singh, Advocates

Tax on voluntary contribution received by Trusts or institutions – Section 12

The provisions of section 12 prior to its amendment by the Finance Act 1972 granted blanket exemption which was unconditional an independent of section 11 to the income of a trust derived from voluntary contribution and applicable solely to charitable or religious activities. However, the Finance Act 1972 inserted section 2(24)(ii-a) to include voluntary contribution in the definition of income. However, the parliament in its own wisdom has omitted the section 12 from the statute book by the Direct Tax Laws (Amendment) Act, 1987.

The Direct Tax Laws (Amendment) Act, 1989 w.e.f. 01.04.1989 reintroduced section 12 in the Act to tax the voluntary contributions received by the trust. Thus, as per the present section 12 any voluntary contribution received by a trust wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall be deemed to be the income derived from property held under trust wholly for charitable or religious purposes and will qualify for exemption to the extent such income is utilised for the purposes of the trust or set apart for future application as referred to in section 11 and also subject to the fulfilment of conditions laid down in section 12A of the Act.

Registration of Trust – Section 12A

Section 12A provides for the conditions to be fulfilled by any trust or institution subject to which exemption under sections 11 and 12 shall be available to it. Thus, every trust or institution who intends to claim the benefit available under section 11 and 12 shall make application in Form No. 10A or 10AB, as the case may be, to Pr. CIT or CIT for registration of trust. The procedure for registration was earlier specified in section 12AA. However, section 12AA is inoperative with effect from 01.04.2021. Hence, a new section 12AB has now been inserted w.e.f. 01.04.2021 providing the registration procedure of trusts and institutions. Thus, all trusts which were earlier registered under section 12A or 12AA shall now have to obtain fresh registration under section 12AB of the Act.

Section 12A: Recent Amendments

Maintenance of books of accounts: The Finance Act, 2022 amended the provisions of Section 12A to provide that, if the total income of the trusts, NGOs, or welfare institutions exceeds the basic exemption limit (Rs 2.5 lakh), they are required to maintain books of accounts and other documents in such form and manner, and place as may be prescribed as per the income tax rules. Earlier, there was no specific reference regarding maintenance of books of accounts.

Audit: If the income exceeds the basic exemption limit, they must get their accounts audited. This will come into effect from assessment year (AY) 2023-24. This will result in streamlining the format of books and accounts.

The amount which is paid to any other trust or organisation which is registered under Section 12AA will not be considered as an application of income for any religious or charitable purpose.

Corpus donations are not considered as an application of income for the trusts and organisations registered under Section 12A.

The second amendment states that when a trust or organisation registered with Section 12A has undertaken certain modifications which will further not conform to the registration guidelines should have to obtain a new registration by applying within thirty days period from the date of undertaking modifications.

The next amendment states that if any person receives property from the trust or organisation without any consideration then the property amount will be considered as taxable under ‘income from other sources’ head.

If the property is received from any foundation or university or institution or hospital or Section 12A registered trusts then this clause in Section 56 will not be applied to any property or funds. to develop a cashless economy and practices, the government has set a limit of Rs 2,000 for the tax deduction done through the donation. It means that no deduction will be allowed under Section 80G where the donation exceeds Rs. 2,000 is paid by any other mode rather than cash. Before the amendment the limit was Rs.10,000/-.

Procedure for fresh registration – Section 12AB

The procedure for fresh registration is introduced in the Act by Taxation and Other laws (Relation and Amendment of Certain Provisions) Act, 2020 w.e.f. 01.04.2021. The income of trust would not be exempt under section 11 unless it has obtained registration under section 12AB of the Act.

Significant features of the Scheme of Exemption of income of trusts and institutions under the Income Tax Act, 1961

The definition of ‘charitable purpose’, under section 2(15), states the following activities as ‘charitable’.

  • Education

  • Yoga

  • Medical relief

  • Preservation of environment including forests and wildlife and preservation of monuments or places or objects of artistic or historic interest.

  • Advancement of any other object of general public utility.

The exemption is applicable to education but the word ‘education’ is of such a wide import that it can even include the knowledge that a person gains while travelling. That certainly couldn’t have been the intention of the Legislature. And hence the Hon’ble Apex Court in the case of Sole Trustee Lok Shikshan Trust 101 ITR 234 (SC), observed that the word education in Section 2(15) of the Income tax Act can mean search education that is provided in schools. However, the facts in that case were that the assessee was running a newspaper and other profitable ventures of publications, camouflaged as an ‘educational activity’ but the real intention was to conduct a profitable business venture under the grab of ‘education’; there was no expenditure incurred by it which was not an expenditure ordinarily incurred by a business enterprise. On these facts, it was held that ‘education’

for the purpose of sec.2(15) means regular schooling. But this does not necessarily mean that the exempted activity should be such that it is confined to schools, as otherwise no university/institute would qualify for the exemption u/s. 11 of the Act. What the word ‘education’ means is regular coaching/training imparted for development of pupils without any profit motive but not necessarily imparted only in schools.

In the facts before the Hon’ble Bombay High Court, in the case of CIT(E) v. Indian Institute of Banking & Finance 408 ITR 558 (Bom.), the facts were as follows. The principal objects of the assessee, as per the Memorandum of Association was inter- alia to conduct educational activities in respect of the banking and kindred subjects by holding courses and also disbursing knowledge by lectures, discussions, books, correspondence with public bodies and individuals or otherwise etc. The assessee therein imparted education to the candidates who were connected with the banking industry; it had a library facility, organized lectures, seminars and undertook examinations for promoting bank officers. The Hon’ble High Court held that the Institute existed for advancement of learning in the field of banking and hence it was involved in the field of ‘education’- it was held that the assessee’s activities cannot be compared with the private coaching classes. It was held that an assessee’s activities need not necessarily benefit the entire public at large, in order to qualify as ‘educational activities’. Similarly, in the case of DIT (E) v. Samudra Institute of Maritime Studies Trust 369 ITR 645, the Hon’ble High Court held that the assessee’s ( therein) activities were to train/ groom person in pre- sea and post- sea training and hence it was in the field of ‘education’ within the meaning of sec.2(15) of the Act. On similar lines is the decision in the case of CIT v. Pratham Institute for Literacy Education & vocational Training [2019]108 312 (Bom.): SLP dismissed by the Apex Court in [2019] 108 313 (SC.): 265 Taxman 546 (SC).

The Hon’ble Jurisdictional High Court in the case of Director of Income-tax v. Womens India Trust (2015) 379 ITR 506 (Bom) had upheld the observations of the Tribunal that where a trust formed to carry out the object of education and development of natural talents of the people having special skills, more particularly the women in the society, had in the course of imparting to them training in the field of catering, stitching, toy making, etc., therein carried out sale of certain finished products, viz. pickles, jams, etc. which would be produced by them, through shops, exhibitions and personal contracts, the same could not be held to be activities in the nature of trade, commerce or business as contemplated in the proviso of Sec. 2(15).

In the case of ICAI v. DIT(E) [2013] 358 ITR 91 (Del.), it was observed that the ICAI was engaged in the activity of ‘education’ within the meaning of sec.2(15) of the Act and hence the proviso was not applicable. It was held that there was a clear difference between coaching classes conducted by private persons and coaching conducted by the ICAI (para 61 of the decision). It was further held that ‘education’ does not cease to be so merely because it is imparted for professional courses or commercial courses (para 64 of the decision). It was observed that where an activity is conducted as per a statutory mandate viz. the activity of regulating a profession by prescribing norms, holding qualifying exams etc, as required by a particular Act (the ICAI Act), such activity shall NOT fall in the realm of ‘commercial/ business activity’ (para 56 of the judgment). To the same effect is the decision of the Hon’ble Madras High Court in CIT v. Chartered Accountants Study Circle [2012] 347 ITR 321 (Mad.).

The Finance Act 2008, inserted a proviso to sec.2(15) of the Act, by which the scope of exempted charitable activity under the last/ residuary clause (viz. ‘Advancement of any object of general public utility’), was restricted. The purport of the first proviso to section 2(15) of the Act is not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or fees. The first proviso is applicable ONLY to the residuary head and NOT to other clauses (Circular No.11 of 2008 of the CBDT reported in {2009} 308 ITR (St.) 5). In this circular, the Board has observed (in para 2.1, page 6) that the proviso will not apply to the activities of ‘relief to poor’, ‘education or medical relief, even if the assessee/trust incidentally carries out commercial activities and that the proviso shall apply only to the residual category viz. ‘advancement of any object of general public utility’.

Similarly, the CBDT Circular No. 19/2015, dated 27.11.2015, explaining the amendment to the proviso w.e.f. A.Y. 2016-17, states that the purpose behind the amendment to Sec. 2(15) of the Act, vide the Finance Act, 2015 , was to, inter alia protect the activities undertaken by a genuine organization as part of actual carrying out of the primary purpose of the trust or institution. The said circular states that institutions which, as part of genuine charitable activities, undertake activities like publishing books or holding program on yogaor other programs as part of actual carrying out of the objects which are of charitable nature were being put to hardship due to first and second proviso to section 2(15).

The crux of the matter is to understand the object of carrying on the activity which resulted into income. If the object is to simply earn income de hors the promotion of objects for which it was set up, it will fall within the ambit of proviso to section 2(15) and if the object of the activity is to promote the objects for which it was set up, then it will not be caught within the sweep of the proviso notwithstanding the fact that there results some income from carrying out such activity. The core of the matter is to see whether the activity which resulted into some income or loss was carried on with the object of doing some trade, commerce or business, etc., or it was in furtherance of the objects (non- business) etc., for which the assessee was set up. In other words, the predominant object of the activities should be seen as to whether it is aimed at carrying on some business, trade or commerce or the furtherance of the object for which it was set up. If it falls in the first category, then, the case would be covered within the proviso to section 2(15) and, in the otherwise scenario, the assessee will be construed to have carried on its activities of general public utility.

To put it differently, if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity. Ref: CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 SC and ACIT v. Surat Art Silk Cloth Manufacturers Association [1979] 121 ITR 1 SC. The common thread running through all the decisions is that if the dominant activity is ‘charitable’ then the ancillary activities would also be treated as in furtherance of education and will NOT partake the character of ‘commercial/business’ venture.

The Hon’ble Apex Court held in the case of CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 that only the predominant object for which the organization was created is alone to be considered for the purpose for determining whether the nature of activities fall within the scope and ambit of ‘charity’. In the said case, the Hon’ble Apex Court held that if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity. The test which has, therefore, to be applied is whether the object which is said to be non-charitable is a main or primary object of the trust or institution or it is ancillary or incidental to the dominant or primary object which is charitable.

As observed in ACIT v. Surat Art Silk Cloth Manufacturers Association [1979] 121 ITR 1 (SC) that where the predominant object of the activity/ies is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. It was held that existence of a surplus does not necessarily mean that the assessee was set up for a profitable activity; in fact, it would be impossible to carry out the activities in such a manner where the expenditure exactly balances the income and there is no resulting surplus/deficit. What is to be seen is the purpose of the trust. In other words, existence of surplus from the activity will not mean absence of educational purpose; the test is the nature of activity.

The promotion of professional education has been held to be falling under ‘education’ for the purpose of charity {See: CIT v. Jodhpur Chartered Accountants Society 258 ITR 548 (Raj.)}. In this case, the Hon’ble Court observed that the predominant object of the society is dissemination of knowledge and education of commercial laws, tax laws for the benefit of general public to inculcate a sense of responsibility towards the nation and foster law-abiding citizens. The object clause of constitution of the assessee emphasized to propagate and disseminate knowledge about the auditing, accounting, direct and indirect taxes by holding seminars, conferences and workshops, etc.

In DIT(E) v. Ahmedabad Management Association 366 ITR 85 (Guj.)., the activities of the assessee- trust were Continuing Education Diploma and Certificate Programme; Management Development Programme; Public Talks and Seminars and Workshops and Conferences etc. These activities were held to be falling under the head ‘Education’.

In a recent decision of Hon’ble Apex Court in the case of ACIT v. Ahmedabad Urban Development Authority [2022] 449 ITR 1 (SC) it has been observed that the charitable nature of an entity will have to be examined and analysed by the assessing officer for every assessment year in question by making a reference to the prices and charges levied by the entity. In other words, the entity claiming the charitable exemption benefit has to establish that the costs and charges levied by it are below the prevailing market prices.

Significant issues in the legal position vis-à-vis Charitable trusts under the Income Tax Act.

  1. Some of the salient features introduced

    by the Finance Bill, 2023 relating to taxability of charitable trusts are as follows: –

    1. At present, the position is that where application of income is claimed on the basis of utilization of funds from the corpus, the application shall be allowed in the year in which amounts are invested / deposited under the modes specified in section 11(5) of the Act. However, by way of an amendment, a proviso is introduced in Explanation (2) to the third proviso to section 10(23C) clause (via), which provides that where application is made from the corpus fund or through loan, on or before March 31, 2021, re- investment / repayment shall not be allowed as application of income of the assessee trust. If trusts/institutions have already claimed the exemption in the year of actual application, the exemption will not be available again in the year of reinvestment/ redeposit to the corpus or repayment of loan/borrowing. This is obviously to avoid double- exemption

    2. In case where utilization of funds is made out of any loan raised after March 31, 2021, re-investment / repayment shall be allowed only if the repayment of the loan is made within five years and no violation of specified provisions. It can be recalled that under an earlier amendment, if a charitable organisation decides to use its corpus or borrow by way of a loan, that amount would be considered as application of income only in the year the amount is put back into the corpus fund or the loan is repaid.

    3. At present, voluntary donation to other charitable institutions / trusts covered under sub- clauses (iv), (v), (vi) or (via) or an institutions / trusts covered under section 12AB of the Act is allowed as application for charitable purposes. The Finance Bill, 2023 introduced an amendment by which, in case of voluntary donation to other charitable institutions, application is proposed to be restricted to 85%. What this amendment signifies is that where any amount is paid out of income of the assessee trust to any other fund or trust which are covered under sub-clauses (iv), (v), (vi) or (via) or an institutions / trusts covered under section 12AB, shall be treated as application for religious or charitable purposes, to the extent of 85 per cent credited or paid. It should be noted that this would be applicable only if payment to other trusts is made out of income of assessee trust and this clause can have no application where payment to other trusts is made out of corpus. This amendment is applicable from Assessment Year 2024-25 and has been introduced by way of insertion of a clause (iii) after clause (ii) to Explanation (2) to the third proviso to section 10(23C) of the Act.

A.  Form 9A and 10 to be filed prior to the date of filing of return.

  1. Every financial year, a charitable organisation entitled for exemption under section 11, is required to spend at least eighty five per cent of its total income. In case income is received late in the financial year the trust can exercise option under section 11(1) to use the income in the immediately following financial year by filing Form 9A or accumulate the unspent income u/s 11(2) for up to five years by filing Form 10.

  2. Both Form 9A and Form 10 could earlier by filed by 31st October. However, Finance Bill 2023 has now proposed that Form 9A and Form 10 must be filed two months before the last date for filing the tax return in ITR 7.

  3. As such, the last date for filing Annual Tax Return in ITR-7 is 31st October. Audit Report in Form 10B must be filed by 30th September and now Form 9A or Form 10 must be filed by 31st August.

B.  Relaxation of Time for filing of returns

  1. Presently, trusts are required to file their returns within the due date under section 139(1) of the Act- this is mandated by sec.139(4A) of the Act. The Finance Bill 2023 states that tax exemption under sections 10(23C) and 12AB shall be available if the return of income is filed by the trust or institution within the time prescribed under section 139(4A) [i.e., the time limit specified by sec.139(1)] or as prescribed under sec.139(4) of the Act. In other words, return filed within the extended time limit under section 139(4) would be treated as valid return for claiming the benefit of section 10(23C) and section 11. This is a welcome provision and would reduce hardships to the assessee-trusts.

  2. In the second regime, this amendment has been introduced by way of amendment to clause (ba) to sec.12A (1) of the Act. And hence, trusts while filing the return for Assessment Year 2023-24, can avail of this benefit. This amendment will be applicable from Assessment year 2023-24.

C.  Simplification of registration procedures

  1. To simplify the registration process, the Finance Act, 2021, had introduced a new provision wherein, a trust/institution newly formed or incorporated must apply for provisional registration at least one month prior to the commencement of the previous year for which the exemption is sought and not one month before the commencement of Previous Year. This had resulted in hardships to various trusts/institutions which are formed or incorporated during the Previous Year, since the exemption is available only when an application is made one month prior to the commencement of Previous Year, causing practical difficulties for trusts/ institutions formed or incorporated during the Previous Year. To rationalize the provisions and eliminate undue hardships, it is proposed that the application for provisional registration shall be made before the commencement of activities

  2. At present trusts claiming the benefit of tax exemption under section 10(23C) or 12A / 12AA of the Act are mandatorily required to re-validate their registration for tax exemption and also for tax deduction under section 80G of the Act. Further, newly trusts can also apply for provisional tax exemption and tax deduction for a period of three years. It is now proposed that Trusts that have not commenced its activities can only apply for provisional registration under section 10(23C) or 12AB and section 80G of the Act. Trust and institutions that have already its commenced activities can apply for regular registration under section 10(23C) or 12AB and section 80G of the Act. Such applications shall be examined by the Principal Commissioner or Commissioner as per prescribed procedure and where the Principal Commissioner or Commissioner is satisfied about the objects and genuineness of the activities and compliance of other requirements provided in law, registration or approval in such cases shall be granted for three or five years.

D.   Time bound disposal for applications

  1. The Principal Commissioner or the Commissioner shall pass an order granting or rejecting such applications within six months calculated from the end of the month in which such application was received.

E.  Cancellation of registration

  1. The provisional registration or re- registration granted or incomplete or incorrect applications shall be treated as ‘specified violation’ and such provisional registration or re-registration orders can be cancelled by Principal Commissioner or Commissioner after providing opportunity of being heard.

  2. The above amendments will be applicable from 1st October 2023.

F.  Exit tax under section 115TD of the Act

  1. The trust/institutions under the existing provisions are required to pay exit tax under section 115TD, in the event of:

    • conversion into a form which is not eligible for registration or approval.

    • merger with any entity other than an entity which is a trust or institution having objects similar to it & registered u/ss. 12AA or 12AB.

    • failure to transfer upon dissolution all its assets to any other trust or institution registered u/ss. 12AA or 12AB.

  2. There have been cases where the trusts/ institutions under both the regimes exit by not applying for registration after the expiry of provisional/regular registration or re-registration from old provisions to new provisions, resulting in easy route of exit in a way to escape the levy of tax. To avoid such consequences, it is proposed that, if the trust/institution fails to make application for registration or approval it shall be deemed to have been converted into a form not eligible for registration or approval, on the last date for making such application, thereby, attracting the provisions of exit tax in such event.

  3. Another important amendment by Finance Bill 2023 is that it has proposed an ‘Exit Tax’ under section 115TD of the Income tax Act even for a trust or institution registered under section 10(23C); hitherto the exit tax under section 115TD was applicable only for a trust registered under section 12AA/12AB. The proposed amendment states that if the trust has not applied for re-registration or does not apply for renewal after expiry of five years or the trust or institution registered provisionally, does not apply for regular registration after expiry of three years.

  4. The above amendment will be applicable from Assessment year 2023-24.

G.   Benefit of section 80G withdrawn for three trusts

  1. Benefit of tax deduction under section 80G has been withdrawn for contribution to:

    1. Jawahar Lal Nehru Memorial Fund,

    2. Indira Gandhi Memorial Trust, and,

    3. Rajiv Gandhi Foundation.

Thus the Finance Bill 2023 has introduced far reaching changes to the provisions relating to the charitable trusts, under the Income Tax Act, 1961 . Several amendments have been proposed for rationalising the provisions relating to charitable trusts and institutions, including amendments to Section 10(23C) and Section 11 to 13 of the Act.