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Union Budget: Uncertainty over tax exemption for trust – All eyes on Union Budget 2017

January 14, 2017 9109 Views
Vimal Desai
Senior manager, Deloitte Haskins and Sells.
Kajesha Shah
Assistant Manager, Deloitte Haskins & Sells LLP

Charitable Institutions play an important supplementary role, apart from govt., in uplifting the people of the country. In order to encourage such charitable public welfare activities, income of such charitable trusts is granted exemption u/s. 11, 12 and 13 of the Income-tax Act, 1961. In order to claim exemption, the trust should be one established in accordance with law and its objects should fall within the definition of the term 'charitable purpose' as defined u/s. 2(15). Originally it included Relief of the poor; education, Education, Medical relief, and the advancement of any other object of general public utility. Preservation of the environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest were included later on.

Subsequently, first and second proviso was inserted to section 2(15) by Finance Act 2010 w.e.f 1-4-2009 and amended from time to time. At last, both the proviso are substituted by one proviso by Finance Act 2015 w.e.f 1-4-2016. There is no dispute that Proviso would be applicable only to sixth limb of the definition of charitable purpose i.e. the advancement of any other object of general public utility. According to proviso the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any other activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration. This restriction is, however, not applicable if

 (i)  such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

 (ii) the aggregate receipts from such activity or activities, during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, for the previous year.

Proviso has provided wide power to the department to challenge the activities undertaken by institution as charitable activities. If activities of organization/institute are falling under any other category/limb other than the advancement of any other object of general public utility department has very limited scope of getting out of it. However, due to open ended proviso, organization carrying out activities falling under sixth limb are facing high amount of uncertainty of getting exemption. There appears to be an element of subjectivity in the proviso. For an example huge litigation is going on across India in case of various Rural Development and Urban Development Authority formed under respective State Act for developing the infrastructure facilities of particular area. On one side appellate authority is allowing the registration u/s. 12A and on other side denying benefit u/s. 11. If issue gets finalized against the developing authority after 6 to 7 years by the Hon'ble High Court or Apex court this could result in to huge cost in form of tax, interest, penalty etc which ultimately affects the development of infrastructure facilities and others. Similarly many charitable organizations are also brought within the ambit of proviso to Section 2(15) merely because while carrying out the activities for the purpose of achieving the objects of the trust, certain incidental surpluses are generated. This causes hardship to many genuine charitable trusts and thus, corrective steps in this regard need to be taken.

Further, the amendment in the proviso to Section 2(15) by the Finance Act, 2015 that replaced the monetary limit of Rs.25 lacs with a percentage of total receipts may adversely affect small charitable institution. For an example nonprofit institute having annual receipt of Rs. 100 Cr will not be hit by the proviso even if its receipts from business activities is less than 20%, on the other hand organization with gross annual receipts of Rs.1 Cr will lose the benefit of section 11 if the receipts from business activities exceed 20% of total turnover.


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