Section 352 Tax on accreted income

Income-tax Act, 2025

At a Glance 

The document is Clause 352 of the Income Tax Bill, 2025 - Old Version proposing taxation of "accreted income" of specified persons (principally registered non-profit organisations or similar entities). It matters because it creates a special additional income-tax charge at the maximum marginal rate on accreted income in specified events (cancellation of registration, modification of objects, merger, dissolution, etc.), affecting registered non-profits, their trustees/principal officers and transferees of assets. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 352 of the Income Tax Bill, 2025. Context: the clause proposes a special charging provision titled "Tax on accreted income" targeting specified persons when certain triggering events occur (e.g., cancellation/withdrawal of registration, modification of objects inconsistent with registration, failure to apply for registration, conversion, merger, dissolution, and prescribed non-compliances). Coverage includes the specified person and principal officer or trustee; in limited circumstances, asset transferees can be deemed assessee in default. The Bill defines the quantum of accreted income using a formula (A = B - C) where B is aggregate fair market value of total assets on a specified date and C is total liabilities on that date, both to be computed in accordance with prescribed valuation methods. Definitions or detailed scope of "specified person", "specified provision" and "specified assets" are Not stated in the document.

Statutory Provision Mode

Text & Scope

Clause 352 establishes an additional tax for "every specified person" in addition to income-tax on total income, at the maximum marginal rate, in cases enumerated in the Table in sub-section (5). The accreted income is the excess of aggregate fair market value of total assets (B) over total liabilities (C) as on the specified date (A = B - C). The assets and liabilities are to be valued "in accordance with such method of valuation, as prescribed." The accrual is reduced by amounts attributable to specified assets and related liabilities. The person and the principal officer or trustee are liable to pay the tax within 14 days from the due date in column D of the Table or the date of order passed under sub-section (2) - the Bill expressly contemplates that the Assessing Officer will compute accreted income after affording a reasonable opportunity of being heard and pass an order charging such income to tax under sub-section (1).

Interpretation

The Bill indicates legislative intent to treat conversion, loss of registration, improper modification of objects, failure to seek registration, disqualifying mergers, and incomplete transfers on dissolution as events triggering a wealth-like charge (an anti-abuse/exit taxation on net assets). The use of fair market value and prescribed valuation methods signals an intent to tax economic accrual rather than book results. The provision of a hearing via the Assessing Officer before charging suggests a procedural safeguard consistent with principles of natural justice in tax assessment.

Exceptions/Provisos

No express exceptions or provisos beyond the reduction of accreted income "attributable to specified assets, and liabilities, if any, related to such assets." Specific carve-outs, thresholds or exemptions are Not stated in the document. The Bill does not set out definitions for "specified assets" or detail when and how attribution is to occur - Not stated in the document.

Illustrations

• Example 1: A registered entity's registration is cancelled; on the date of cancellation, aggregate FMV of assets is 100 and liabilities 30; accreted income A = 70. The AO, after hearing, computes A and an additional tax at maximum marginal rate is levied and payable within 14 days from due date / AO order. (Numerical values illustrative and consistent with the formula; the Bill does not provide numeric examples.)
• Example 2: A specified person modifies its objects in a tax year to non-conforming objects, applies for fresh registration but is rejected and appeals; the specified date is the date of adoption/modification and payment falls due on receipt of the appellate order confirming cancellation. (The Table entries set the relevant dates and due dates.)

Interplay

The Clause cross-refers to other provisions: section 10(23C) first proviso, section 12(1)(ac) and section 332(3) (Table: Sl. No. 3,4,5 or 7). The Bill anticipates prescribed valuation methods - implying subordinate legislation (rules) will be required. The Bill does not mention notifications, circulars or transitional machinery. The interplay with general assessment provisions is explicit via Assessing Officer function; the Bill also states that "all the provisions of this Act shall apply for the collection and recovery of income-tax" indicating use of existing recovery and default mechanisms.

Differences between the two texts and practical impact

Comparison of Section 352 (Document 1 - Income-tax Act, 2025) and Clause 352 (Document 2 - Income Tax Bill, 2025 - Old Version) reveals the following material differences and likely practical impacts:

• Authority to compute accreted income: Document 2 (Bill, old version) expressly empowers the Assessing Officer to compute accreted income after affording a reasonable opportunity of being heard (sub-section (2) of the Bill). Document 1 (enacted Section) omits any express provision vesting computation with the Assessing Officer or the hearing requirement; it directly prescribes the formula and computation by reference to dates and valuation methods.
  • Practical impact: removal of explicit AO role and hearing safeguard may reduce procedural protection for the specified person and centralise computation or leave its administrative locus to rules or practice. If the enacted text is silent, uncertainty arises as to procedural steps prior to charging the additional tax.
• Cross-reference/placement of table sub-section: The Bill locates the Table in sub-section (5); the enacted Act locates the Table in sub-section (4).
  • Practical impact: purely drafting/ numbering change with no substantive tax effect.
• Prescription language for valuation methods: The Bill states valuation "as prescribed;" the enacted Section uses "as may be prescribed" (Document 1 uses "as may be prescribed" in sub-section (2)).
  • Practical impact: wording is substantially equivalent - both permit delegated legislation; no significant difference in legal effect.
• Time of payment where AO passes order: In the Bill, payment is due "within fourteen days from the due date specified in column D of the Table below, or the date of order passed under sub-section (2)." The enacted Section (Document 1) does not include the alternative "or the date of order passed under sub-section (2)" because it lacks an AO-order provision.
  • Practical impact: Bill expressly ties payment timing to AO order; enactment omits that pathway, altering procedural timelines if AO role is not present in enacted text.
• Minor drafting differences and punctuation/wording: Several clauses show small differences in phrasing, e.g., "computed in accordance with such method of valuation, as prescribed" (Bill) vs "computed in accordance with such method of valuation, as may be prescribed" (Act).
  • Practical impact: negligible substantive difference.
• Overall structure and sequencing: The Bill contains an express step granting the AO authority and specifying a hearing; the enacted provision removes that explicit adjudicatory step and frames the computation and payment obligations directly on the specified person and principal officer/trustee.
  • Practical impact: substantive procedural change that may affect natural justice guarantees, dispute resolution process, and litigation risk regarding retrospective computation and assessment of accreted income.

Practical Implications

• Compliance and risk areas: registered non-profit organisations face a potential one-time tax exposure at the maximum marginal rate upon certain adverse events. Key compliance triggers are timely awareness of changes in registration status, modifications to objects, mergers, conversions, failure to apply for registration, and dissolution procedures. Failure to follow prescribed application windows or to transfer assets upon dissolution risks a tax charge.
• Procedural risk and dispute: because the Bill vests the Assessing Officer with the power to compute accreted income after affording a reasonable opportunity of being heard, disputes over valuation methodology, asset identification, date of computation and attribution of liabilities will likely arise. The absence of detailed valuation rules in the Clause means reliance on future rules; litigation over valuation standards is foreseeable.
• Record-keeping/evidence: specified persons should retain contemporaneous records of asset valuations, liabilities, minutes evidencing changes of objects, applications for registration, merger/dissolution documentation and transfer records. The Bill's reliance on FMV and potential AO scrutiny makes documentary support for valuation critical.

Key Takeaways

• Clause 352 creates an additional tax at the maximum marginal rate on "accreted income" measured as FMV of assets less liabilities upon specified triggering events.
• The Assessing Officer is expressly empowered (in the Bill) to compute accreted income after a hearing and pass an order charging tax; payment is due within 14 days from the table-specified due date or AO order.
• The provision applies to the specified person and its principal officer/trustee; transferees of assets can be deemed assessee in default in dissolution cases, limited to asset value received.
• Valuation methods are to be prescribed, but the Bill itself gives no technical valuation guidance or definitions for key terms - delegated legislation will be decisive.
• Significant procedural and valuation disputes are likely; proper record-keeping and timely procedural steps (applications for registration, transfers on dissolution) are crucial.

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Full Text:

Section 352 Tax on accreted income

Tax on accreted income: exit charge on nonprofit net assets measured by fair market valuation after triggering events. Special additional tax levies a one time charge on accreted income of specified persons (principally registered non profits) upon enumerated triggering events, measured as aggregate fair market value of total assets less total liabilities on a specified date, computed in accordance with prescribed valuation methods. Liability extends to the specified person and principal officer or trustee, and transferees may be assessee in default in limited dissolution cases. The earlier bill expressly empowered the Assessing Officer to compute accreted income after a hearing; the enacted text omits that express AO computation/hearing provision, and procedural timing and valuation rules await delegated legislation.