Union Budget 2023-24 + FINANCE Bill, 2023

Rationalisation of the provisions of Charitable Trust and Institutions

1. Background

1.1 Income of any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or subclause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 of the Act or any trust or institution registered u/s 12AA or 12AB of the Act is exempt subject to the fulfilment of the conditions provided under various sections. The exemption to these trusts or institutions is available under the two regimes-

(i) Regime for any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in subclause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 of the Act (hereinafter referred to as trust or institution under first regime); and

(ii) Regime for the trusts registered under section 12AA/12AB of the Act (hereinafter referred to as trust or institution under the second regime).

1.2 Section 12A of the Act, inter alia, provides for procedure to make application for the registration of the trust or institution to claim exemption under section 11 and 12 of the Act. Section 12AB of the Act is the new section which comes into effect from the 1st April, 2021.

2. Depositing back of corpus and repayment of loans or borrowings

2.1 Under the existing provisions of the Act, corpus donations received by trusts and institutions under both regimes are exempt as follows:

a) Explanation 1 to the third proviso to clause (23C) of section 10 of the Act provides that income of the funds or trust or institution or any university or other educational institution or any hospital or other medical institution, shall not include income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) of section 11 of the Act maintained specifically for such corpus.

b) Clause (d) of sub-section (1) of Section 11 of the Act provides that voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of the trust or institution subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in subsection (5) of section 11 of the Act maintained specifically for such corpus.

c) Application out of corpus shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) of section 10 of the Act and clauses (a) and (b) of section 11 of the Act. However, when it is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) of section 11 of the Act maintained specifically for such corpus, from the income of the previous year, such amount shall be allowed as application in the previous year in which it is deposited back to corpus to the extent of such deposit or investment.

d) Application from loans and borrowings shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) of section 10 of the Act and clauses (a) and (b) of section 11 of the Act. However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as application in the previous year in which it is repaid to the extent of such repayment.

2.2 While implementing the recent changes vide the Finance Act, 2021 to the provisions related to corpus and loan or borrowing, it has come to the notice that application from corpus or loan or borrowings have already been claimed as application prior to 01.04.2021. Hence, allowing such amount to be application again as investment or reposting back in corpus or repayment of loan or borrowing will amount to double deduction.

2.3 It was also noted that, a trust may invest or deposit back the amount in to corpus or repay the loan after many years of application from the corpus or loan and claim such repayment of loan or investment/depositing back in to corpus as application for charitable or religious purposes. Availability of indefinite period for the investment or depositing back to the corpus or repayment of loan will make the implementation of the provisions quite difficult.

2.4 Further, it was noted that conditions that are required to be satisfied in the case of application for charitable or religious purposes must also be satisfied while making the application from the corpus or loan or borrowing. These conditions are as follows:

(i) Such application should not be in the form of corpus donation to another trust [twelfth proviso to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation 2 to sub-section (1) of section 11 of the Act for the trust or institution under second regime];

(ii) TDS, if applicable, should be deducted on such application [thirteenth proviso to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation 3 to sub-section (1) of section 11 of the Act for the trust or institution under second regime];

(iii) Application whereby payment or aggregate of payments made to a person in a day exceeds Rs 10,000 in other than specified modes (such as cash) is not allowed (thirteenth proviso to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation 3 to sub-section (1) of section 11 of the Act for the trust or institution under second regime);

(iv) Carry forward and set off of excess application is not allowed [Explanation 2 to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation 5 to sub-section (1) of section 11 of the Act for the trust or institution under second regime];

(v) Application is allowed in the year in which it is actually paid [Explanation 3 to clause (23C) of section 10 of the Act for the trust or institution under first regime and Explanation to section 11 of the Act for the trust or institution under second regime];

(vi) Application should not directly or indirectly benefit any person referred to in sub-section (1) of section 13 of the Act and the income of the trust or institution should not enure any benefit to such person [twenty-first proviso to clause (23C) of section 10 of the Act for the trust or institution under first regime and clause (c) of sub-section (1) of section 13 of the Act for the trust or institution under second regime];

(vii) Application should be in India except with the approval of the Board in accordance with the provisions of clause (c) of sub-section (1) of section 11 of the Act.

2.5 In order to ensure proper implementation of both the exemption regimes, it is proposed to provide that application out of corpus or loans or borrowings before 01.04.2021 should not be allowed as application for charitable or religious purposes when such amount is deposited back or invested in to corpus or when the loan or borrowing is repaid. It is further proposed to provide that if the trust or institution invests or deposits back the amount in to corpus or repays the loan within 5 years of application from the corpus or loan, then such investment/depositing back in to corpus or repayment of loan will be allowed as application for charitable or religious purposes. It is also proposed to provide that where the application from corpus or loan did not satisfy the conditions as stated in paragraph 2.4, the repayment of loan or investment/depositing back in to corpus of such amount will not be treated as application.

2.6 In view of the above, the following amendments are proposed:

(i) insert a second proviso to clause (i) of Explanation 2 to the third proviso of clause (23C) of section 10 of the Act so as to provide that the provisions of the first proviso shall apply only if there was no violation of the conditions specified in the twelfth, thirteenth and twenty- first proviso to, and Explanation 2 and Explanation 3 of, clause (23C) of section 10 of the Act, at the time the application was made from the corpus;

(ii) insert third proviso to clause (i) of Explanation 2 to the third proviso of clause (23C) of section 10 of the Act so as to provide that the amount invested or deposited back shall not be treated as application for charitable or religious purposes under the first proviso unless such investment or deposit is made within a period of five years from the end of the previous year in which such application was made from corpus;

(iii) insert a fourth proviso to clause (i) of Explanation 2 to the third proviso of clause (23C) of section 10 of the Act to provide that so as to provide that nothing contained in the first proviso shall apply where application from corpus is made on or before the 31st day of March, 2021;

(iv) insert a second proviso to clause (ii) of Explanation 2 to the third proviso of clause (23C) of section 10 of the Act so as to provide that the provisions of the first proviso shall apply only if there was no violation of the conditions specified in the twelfth, thirteenth and twenty- first proviso to, and Explanation 2 and Explanation 3 of, clause (23C) of section 10 of the Act, at the time the application was made from loan or borrowing;

(v) insert a third proviso to clause (ii) of Explanation 2 to the third proviso of clause (23C) of section 10 of the Act to provide that the amount repaid shall not be treated as application for charitable or religious purposes under the first proviso, unless such repayment is made within a period of five years from the end of the previous year in which such application was made from loan or borrowing;

(vi) insert a fourth proviso to clause (ii) of Explanation 2 to the third proviso of clause (23C) of section 10 of the Act to provide that nothing contained in the first proviso shall apply where application, from any loan or borrowing is made on or before the thirty first day of March, 2021;

(vii) insert a second proviso to clause (i) of Explanation 4 to sub-section (1) of section 11 of the Act so as to provide that the provisions of the first proviso shall apply only if there was no violation of the conditions, specified in clause (c) of, and Explanations 2, 3 and 5 of, sub-section (1) and Explanation to section 11 of the Act and clause (c) of sub-section (1) of section 13 of the Act, at the time the application was made from the corpus;

(viii) insert a third proviso to clause (i) of Explanation 4 to sub-section (1) of section 11 of the Act so as to provide that the amount invested or deposited back shall not be treated as application for charitable or religious purposes under the first proviso unless such investment or deposit is made within a period of five years from the end of the previous year in which such application was made from corpus;

(ix) insert a fourth proviso to clause (i) of Explanation 4 to sub-section (1) of section 11 of the Act so as to provide that nothing contained in the first proviso shall apply where application from corpus is made on or before the 31st day of March, 2021;

(x) insert a second proviso to clause (ii) of Explanation 4 to sub-section (1) of section 11 of the Act so as to provide that the provisions of the first proviso shall apply only if there was no violation of the conditions, specified in clause (c) of, and Explanations 2, 3 and 5 of, sub-section (1) and Explanation to section 11 of the Act or clause (c) of sub-section (1) of section 13 of the Act, at the time the application was made from loan or borrowing;

(xi) insert a third proviso to clause (ii) of Explanation 4 to sub-section (1) of section 11 of the Act so as to provide that the amount repaid shall not be treated as application for charitable or religious purposes under the first proviso unless such repayment is made within a period of five years from the end of the previous year during which such application was made form loan or borrowing;

(xii) insert a fourth proviso to clause (ii) of Explanation 4 to sub-section (1) of section 11 of the Act so as to provide that nothing contained in the first proviso shall apply where application from any loan or borrowing is made on or before the thirty first day of March, 2021.

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

[clauses 5 & 7]

Full Text:

Union Budget 2023-24 + FINANCE Bill, 2023