Amendments Regarding Taxation of Trusts in Finance Bill, 2022

Exemption to trust or institution is available under the Income Tax Act, 1961 (the Act) under two regimes:

• Regime for the trust or institutions obtained approval u/s.10 (23C)(iv), (v), (vi) or (via) of the Act; and
• Regime for the trusts registered u/s.12AA/12AB of the Act.

Finance Bill, 2022 proposes amendments under both regimes. Some amendments are made to bring constancy in the provisions of two regimes, while some amendments are made to clarify existing provisions. Such amendments are discussed in brief hereunder.

1.    Penalty for passing on unreasonable benefit to trustee or specified persons

As specified u/s.13 of Income Tax Act, 1961, trusts or institutions under second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person. There was no such provision for the trust or institutions under first regime. Hence to bring consistency in the provisions of two regime, it is proposed to insert twenty-first proviso to section 10(23C) w .e. f. A.Y. 2023-24 to provide that where such trust or institution has applied directly or indirectly income or any part of income for the benefit of any person referred to in section 13(3) of the Act, such income or part of income or property shall be deemed to be the income of such person of the previous year in which it is so applied. Moreover, provisions of section 13(2), (4) and (6) are also applicable to trust or institution under first regime.

Moreover, before the amendment, there was provisions to tax the amount applied in violation of this provisions as deemed income. But there was no provision of penalty for misuse of funds of the trust or institutions. Hence to discourage such misuse of funds, it is proposed to insert section 271AAE in the Act. As per the section 271AAE, if during any proceedings, it is found that any trust or institution under first or second regime has violated provisions of twenty-first proviso of section 10(23C) or section 13(1)(c) , the Assessing Officer may direct such person to pay by way of penalty equal to the amount of income applied by such trust or institution for the benefit of specified person where the violation is noticed first time and twice the amount of such income where the violation is noticed again in any subsequent year. Moreover, this penalty is leviable in addition to the penalty leviable, if any under any of the provisions of Chapter-XXI.

2.    Cancellation of registration/approval in certain circumstances

Before the amendment, the provisional approval or provisional registration or re-registration or re-approval to trust or institution under both the regime was granted in certain cases in an automated manner. In order to ensure that non-genuine trusts or institutions do not get exemptions provided by these provisions, it is proposed to amend provisions of section 12AB

(4) and (5) and fifteenth proviso to section 10(23C) w. e. f. 1st April, 2022. As per the amendment proposed to section 12AB(4), where the registration or provisional registration has been granted to the trust or institution and subsequently-

1. The Principal Commissioner or the Commissioner has noticed occurrence of one or more specified violations during any previous year.
2. The Principal Commissioner or Commissioner has received a reference from the Assessing Officer under the second proviso to section 143(3) for any previous year; or

• Such case has been selected in accordance with the risk management strategy formulated by the board from time to time for any previous year,

The Principal Commissioner or Commissioner shall—

• Call for such documents or information from the trust or institution or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence or otherwise of any specified violation;
• Pass an order in writing cancelling the registration of such trust or institution, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violation have taken place;
• Pass an order in writing refusing to cancel the registration of such trust or institution, if he is not satisfied about the occurrence of one or more specified violation;
• Forward a copy of the order under clause (ii) or (iii), as the case may be to the Assessing Officer and such trust or institution.

As specified by explanation 4 to section 12AB (4), the term “specified violation” shall mean following violations;

• Where any income of the trust or institution has been applied other than for the objects for which it is established; or
• The trust of institution has income from profits and gains of business which is not incidental to the attainment of its objectives or separate books of account are not maintained by it in respect of the business which is incidental to the attainment of its objectives; or
• The trust or the institution has applied any part of its income from the property held under a trust for private religious purposes which does not ensure for the benefit of the public; or
• The trust or institution has established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste;
• Any activity being carried out by the trust or the institution
  • Is not genuine; or
  • is not being carried out in accordance with all or any of the conditions subject to which it was registered; or
• The trust or the institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of section 12AB(1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.

Moreover, it is provided to pass such order cancelling the registration before expiry of period of six months from the end of the quarter in which the first notice is issued by the Principal Commissioner or Commissioner on or after 1st April, 2022 calling for any document or information or for making any inquiry.

Moreover, as per the amendment proposed in.143(3), where the Assessing Officer is satisfied that any trust or institution under both regime has committed any specific violations mentioned above, he shall-

• Send a reference to the Principal Commissioner or Commissioner to withdraw the approval or registration, as the case may be; and

• No order making an assessment of the total income or loss of such fund or institution or trust or any university or other educational institution or any hospital or other medical institution shall be made by him without giving effect to the order passed by the Principal Commissioner or Commissioner under clause (ii) or (iii) of the fifteenth proviso to section 10(23C) or clause (ii) or (iii) of section 12AB (4).

The period commencing from the date on which the Assessing Officer makes a reference to the Principal Commissioner or Commissioner under the second proviso to section 143(3) or is deemed to have been made under Explanation 3 to the fifteenth proviso to section 10(23C), and ending with the date on which the copy of the order under clause (ii) or (iii) of fifteenth proviso to section 10(23C) or clause (ii) or (iii) of section 12AB(4), as the case may be, is received by the Assessing Officer shall be excluded in computing the period of limitation.

3.    Cancellation of registration/approval in certain circumstances

As per the provisions of section 11(2) if the trust or institution has not applied 85% of its income during any previous year, it is allowed to accumulate such income for a period not exceeding 5 years subject to filing of Form 10 before due date of filing return of income u/s.139

(1) and investing or depositing such money in forms or modes specified u/s. 11 (5) of the Act. Before the amendment, third proviso to section 10(23C) had similar provisions, but there was no provision to file Form 10 and invest money in forms or modes specified u/s.11 (5) of the Act. Hence to bring consistency between provisions under two regimes, explanation 3 to third proviso to section 10(23C) is proposed to be inserted to provide for all conditions mentioned above for accumulation of income. Also, explanation 5 inserted to third proviso to allow trust or institution to utilize the accumulated income for such other purpose in India in circumstances beyond control subject to fulfillment of specified conditions. These provisions are similar to provisions of section 11(3A) of the Act.

Moreover, as per the amendment proposed to section 11(3) and as per explanation 4 inserted to third proviso to section 10(23C), if the accumulated income is not utilized for the purpose for which it is accumulated or set apart, it shall be deemed to be the income of the previous year being the last previous year of the period of which it is accumulated. Hence, now if the accumulated income is not applied within 5 years, the same shall be taxed in the 5th year itself. Before the amendment, it was taxed in the 6th year u/s.11 (3) of the Act.

Further, before the amendment, many judicial rulings directed that the term “applied” need not necessarily imply that the amount should be actually spent. Even if the amount is irretrievably earmarked and allocated for charitable and religious purposes, it would amount to application of income. Hence to avoid litigation, it is clarified by inserting explanation 3 to section 10(23C) and explanation to section 11 w.e.f. A.Y. 2022-23 that any sum payable by trust under both the regime shall be considered as application of income in the previous year in which such sum is actually paid by it irrespective of the previous year in which the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed by it. Also, where during any previous year any sum has been claimed to have been applied by such trust, such sum shall not be allowed as application in any subsequent previous year. Hence as per the amendment, if the income is “actually” not paid, it will not be considered as application of income.

4.    Clarification on computation of income in case of denial of exemption

Under both the regime, if the trust or institution having commercial receipts in excess of 20% of the annual receipt in violation of the provisions of proviso to section 2(15) of the Act or in case of not getting the books of accounts audited or not filed return of income in accordance with provisions of section 139(4A) within time specified under that section, exemption was denied. But there was lack of clarity on computation of income in such circumstances. Hence, it is proposed to insert section 13(10) to provide that in case of non-availability of exemption in circumstances mentioned above, 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 fulfillment of following conditions.

• 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;
  • Such expenditure is not from any loan or borrowing;
  • 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
  • Such expenditure is not in the form of any contribution or donation to any person.

For the purpose of determining the amount of expenditure under this sub-section, the provisions of section 40A (ia) and section 40A(3) and (3A) are also applicable as they are applicable in computing the income chargeable under the head “Profits and gains of business or profession”. Moreover, no expenditure or allowance or set-off of any loss shall be allowed to such trust or institution under any other provisions of this Act. Also, no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed under any other provisions of this Act.

Moreover, in case of violation of provisions of section 13(1)(c), 13(1)(d) and 13(3), exemption u/s.11 can be denied. But some judicial rulings directed to deny full exemption claimed u/s.11 of the Act. Hence to remove difficulties to the trust and institution under both the regime for small amount of income applied in violation of provisions mentioned above, it is proposed to amend section 13(1)(c) and 13(1)(d) and to insert twenty-first proviso to section 10(23C) to provide that in case of violation of said section, only that part of income which has been applied in violation to the provisions of said clause shall be liable to be included in total income.

Moreover, following income of the trust or institution is taxable at special rate (maximum marginal rate).

1. Income accumulated or set apart in excess of fifteen percent of the income where such accumulation is not allowed under any specific provisions of the Act;
2. Deemed income referred to in Explanation 4 to third proviso to section 10(23C) or section 11(3) or of section 11(1B).
3. Any income which is not exempt under section 10(23C) on account of violation of the provisions of clause (b) of third proviso of section 10(23C) or not to be excluded from total income under the provisions of section 13(1)(d).
4. Any income which is deemed to be income under the twenty first proviso to section 10(23C) or which is not excluded from total income under section 13(1)(c).
5. Any income which is not excluded from total income under section 11(1)(c).

To clarify about the rate of tax on such income, section 115BBI has been inserted vide Finance Act, 2022. This section provides that the income tax payable on such income shall be aggregate of-

• The amount of income-tax calculated at the rate of thirty per cent on the aggregate of specified income; and
• The amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of specified income referred to in clause

Moreover, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act in computing specified income.

5.    Treatment of donation received for renovation and repair of temple

Public Charitable trusts or institutions under both the regime are receiving donation for repairs or renovation of temple, mosque, gurdwara, church held as trust property or for the places notified u/s.80G(2)(b) of the Act. There was no clear provision regarding treatment of such donation as corpus donation. It is proposed to insert explanation 3A in section 11(1) and explanation 1A in section 10(23C) w. e. f . A.Y. 2021-22 so as to provide that such trust may at its option treat such donation as forming part of the corpus donation subject to the condition that the trust or institution-

• Applies such corpus only for the purpose for which the voluntary contribution was made;
• Does not apply such corpus for making contribution or donation to any person; and
• Maintains such corpus as separately identifiable;
• Invests or deposits such corpus in the forms and modes specified under subsection (5) of section 11.

However, if the trust or institution has treated such donation as forming part of corpus donation and subsequently any of the conditions mentioned above are violated, such sum shall be deemed to be the income of such trust or institution of the previous year during which the violation takes place. This is proposed by inserting explanation 3B in section 11(1) and explanation 1B in section 10(23C) of the Act.

6.    Maintenance of books of accounts and filing of return by the trust or institutions

Section 12A(1)(b) provides that if the income of the trust or institution without giving effect to provisions of section 11 and 12 exceeds the maximum amount which is not chargeable to tax in any previous year, it is required to get its books of accounts audited. However, there was no specific reference for maintenance of books of accounts by such trust or institution. Hence, for proper implementation of both the exemption regime, it is proposed to amend provisions of section 12A(1)(b) and tenth proviso to section 13(1)(c) w. e. f. A.Y. 2023-24 to provide for maintenance of books of accounts and other documents in prescribed form and prescribed manner.

Further, similar to provisions of section 12A(1)(b), it is proposed to insert twentieth proviso to section 10(23C) to require to furnish the return of income for the previous year in accordance with the provisions of section 139(4C) within the time allowed under that section.

7.    Other Amendments

Provisions of section 115TD, 115TE and 115TF are proposed to be amended w. e. f .A.Y. 2023- 24 to make them applicable to first regime as well.

Also, first and second proviso to section 10(23C) provided to file application for approval before prescribed authority. It is proposed to amend these provisos w. e. f. 1st April, 2022 to provide that application for approval under first regime shall be filed before the Principal Commissioner or Commissioner.

Moreover, to remove drafting error in section 35(1A), it is proposed to amend said section w. e.

f. 1st April, 2021, to provide that only the deduction claimed by the institutions referred to in section 35(1)(ii), (iii) or (iia) shall be disallowed unless such institution filed statement of donation in Form 10BD, and not the deduction claimed by such institution.

This article is only intended towards informational purposes and should not be considered as an advice, what so ever.