5. Providing clarity on taxation in certain circumstances

There are various conditions prescribed for availing exemption under the two regimes. There is a need for clear provisions in the Act listing out how income is to be computed in case of non-compliance. Hence, it is proposed to provide for the same so that there is no dispute and the law is applied consistently.

5.1 Allowing certain expenditure in case of denial of exemption

i) Different provisions mandate denial of exemption to the trusts or institutions under both the regimes. Some of the provisions under which exemption is not available for its violation are as follows:

(a) Having commercial receipts in excess of 20% of the annual receipts in violation of the provisions of proviso to section 2(15);

(b) Not getting the books of account audited;

(c) Not filing the return of income presently specifically provided under the second regime only;

ii) There is presently lack of clarity on computation of taxable income in case of nonavailability of exemption in these cases. For example, if the exemption is denied to the trust or institution for the late submission of the audit report, its entire receipts may be subjected to taxation and no deduction for any application may be allowed.

iii) In order to bring clarity in the computation of the income chargeable to tax in such cases, the following amendments are proposed: -

(a) It is proposed to insert sub-section (10) in section 13 of the Act to provide that where the provisions of sub-section (8) are applicable to any trust or institution under the second regime or such trust or institution violates the conditions prescribed under clause (b) or clause (ba) of sub-section (1) of section 12A, its income chargeable to tax shall be computed after allowing deduction for the expenditure (other than capital expenditure) incurred in India, for the objects of the trust or institution, subject to fulfilment of the following conditions, namely :-

(i) such expenditure is not from the corpus standing to the credit of such trust or institution as on the last day of the financial year immediately preceding the previous year relevant to the assessment year for which the income is being computed;

(ii) such expenditure is not from any loan or borrowing;

(iii) claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income in the same or any other previous year; and

(iv) such expenditure is not in the form of any contribution or donation to any person.

(b) It is also proposed to insert an Explanation to sub-section (10) to section 13 of the Act to provide that for the purposes of determining the amount of expenditure under this sub-section, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits and gains of business or profession".

(c) It is also proposed to insert sub-section (11) to section 13 of the Act to provide that for the purposes of computing income chargeable to tax, under sub-section  (10), no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee under any other provision of the Act.

(d) Similarly, it is proposed to insert twenty second proviso to clause (23C) of section 10 of the Act to provide that where any trust or institution under the first regime violates the provisions of the eighteenth proviso or violates the conditions prescribed under tenth or twentieth proviso, its income chargeable to tax shall be computed after allowing deduction for the expenditure (other than capital expenditure) incurred in India, for the objects of such trust or institution, subject to fulfilment of the following conditions:

(i) such expenditure is not from the corpus standing to the credit of such trust or institution as on the last day of the financial year immediately preceding the previous year relevant to the assessment year for which the income is being computed ;

(ii) such expenditure is not from any loan or borrowing;

(iii) claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income in the same or any other previous year; and

(iv) such expenditure is not in the form of any contribution or donation to any person.

(e) It is also proposed to insert an Explanation in the twenty second proviso to clause (23C) of section 10 of the Act to provide that for the purposes of determining the amount of expenditure under this proviso, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits and gains of business or profession".

(f) It is also proposed to insert twenty third proviso in clause (23C) of section 10 of the Act to provide that for the purposes of computing income chargeable to tax under twenty second proviso, no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee under any other provision of the Act.

These amendments will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.

[Clauses 4 and 8]