TaxTMI 
TaxTMI 
TaxTMI 
Penalties for defeating the policy objective of fostering genuine charitable activities by Related Parties : Clause 445 of the Income Tax Bill, 2025 Vs. Section 271AAE of the Income Tax Act, 1961
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....se 445 of the Income Tax Bill, 2025, is a statutory provision that seeks to impose penalties on registered non-profit organizations that divert their income for the benefit of related persons, thereby violating the conditions of their tax-exempt status. This provision is analogous to, and in many respects a successor of, Section 271AAE of the Income Tax Act, 1961, which was introduced by the Finance Act, 2022, and became effective from April 1, 2023. This commentary provides a detailed analysis of Clause 445, examining its objectives, structure, and practical implications. It then undertakes a comparative analysis with Section 271AAE, highlighting similarities, distinctions, and the evolving approach of the legislature toward regulating no....
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....ight of the sector. Detailed Analysis of Clause 445 of the Income Tax Bill, 2025 1. Applicability and Triggering Event Clause 445 is triggered when, during any proceedings under the Act, it is found that a registered non-profit organisation has specified income chargeable to tax u/s 337 (Table: Sl. No. 2). The reference to "specified income" and the cross-reference to section 337 are crucial, as they define the scope of the provision. Typically, "specified income" in this context refers to income that becomes taxable due to the violation of conditions attached to the tax-exempt status of the organisation, particularly the misuse of funds for the benefit of related persons. 2. Scope of "Related Persons" The term "related person" is defi....
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....to light. The use of the word "may" suggests some degree of discretion, though in practice, the circumstances under which the penalty may be waived or reduced are likely to be circumscribed by administrative guidelines or judicial interpretation. 5. Direct and Indirect Application of Income The provision covers both direct and indirect application of income for the benefit of related persons. This is significant, as it prevents attempts to circumvent the penalty by routing benefits through intermediaries or by structuring transactions to obscure the ultimate beneficiary. 6. Interaction with section 337 and Table: Sl. No. 2 The cross-reference to section 337 (Table: Sl. No. 2) indicates that the penalty is linked to the taxation of speci....
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.... all entities registered under the new regime. * Reference to Related Persons: * Section 271AAE refers to "any person referred to in sub-section (3) of section 13," which includes founders, trustees, specified relatives, and entities controlled by them. * Clause 445 refers to "related person referred to in section 355(i)," which, while likely similar, may have differences in drafting or scope under the new Bill. * Triggering Event: * Section 271AAE is triggered by violation of the twenty-first proviso to section 10(23C) or section 13(1)(c), which are substantive conditions for exemption under the 1961 Act. * Clause 445 is triggered by the finding that specified income is chargeable to tax u/s 337 (Table: Sl. No. 2), suggesting a....
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....(i) Quantum of Penalty 100% for first violation; 200% for subsequent 100% for first violation; 200% for subsequent Assessing Officer's Discretion May direct imposition of penalty May impose penalty Procedural Safeguards Not specified Not specified Ambiguities and Issues in Interpretation While the provision is broadly worded to capture a wide range of contraventions, certain interpretative challenges may arise: * Whether inadvertent or de minimis benefits to related persons attract the penalty. * The standard of proof required to establish "indirect" benefit. * The interplay between this penalty and other penal or remedial provisions, such as withdrawal of exemption or prosecution under other laws. Practical I....