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Budget Highlights
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Business Provisions applied to NGO's

February 1, 2018 16566 Views
Suresh Kejriwal
FCA
Dr. Manoj Fogla
FCA

Summary of Changes

The Finance Bill 2018 has made radical changes with regard to computation of application/expenditures of NGOs. Amendments have been made to section 10(23C) and section 11 in order to apply the provisions of section 40(a)(ia) and 40A(3).

Now onwards, while computing amount of application subject to Sec. 11 section 10(23)(C), the following amount shall not be considered as application:

  –  If any payment is made in excess of Rs.10,000/- other than by way of A/c Payee cheque or A/c payee bank draft or use of Electronic Clearing System through a bank account or

  –  If any application of income is claimed on the basis of provision as liability and subsequently the liability in execess of Rs 10000/- is discharged other than by paying by way of A/c Payee cheque or A/c payee bank draft or use of Electronic Clearing System through a bank account.

  –  If the payments are subject to TDS provision and if TDS is not deducted thereon, then 30% of such sum payable shall not be considered as application. However the same amount shall be considered as application in the year in which the corresponding tax is deducted & deposited with the Govt.

These changes reflect a paradigm shift in the taxation and assessment of NGOs as provisions under the head "Business and Profession" will apply to the assessment of Trust and NGOs. It may be noted that under the current scheme of the Income Tax Act, Trust and NGOs are not assessed under five head of income and section 14 which provides for computation under five heads of income does not apply to them.

Proposed Amendment in Detail

The Finance Minister in his budget speech has said that at present, there are no restrictions on payments made in cash by charitable or religious trusts or institutions. There are also no checks on whether such trusts or institutions follow the provisions of deduction of tax at source under Chapter XVII-B of the Act. This has led to lack of an audit trail for verification of application of income.

Hence in order to encourage the less cash economy and reduce the generation and circulation of black money, it is proposed to insert a new Explanation to the section 11 to provide that for the purposes of determining the application of income under the provisions of sub-section (1) of the said section, the provisions of sub-clause (ia) of clause (a) of section 40, and of 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".

It is also proposed to insert a similar proviso in clause (23C) of section 10 so as to provide similar restriction as above on the entities exempt under sub-clauses (iv), (v), (vi) or (via) of said clause in respect of application of income.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent years.

Penalising expenditures made in cash above Rs. 10,000/-

The Finance Act 2018 has linked Section 40A(3) with the Trust and NGOs. Section 40A(3) is about the requirement of payment of any expenditure exceeding Rs.10,000/- in a day by A/c Payee cheque or use of Electronic Clearing System through a bank account.

Similarly Sec. 40A(3A) provides that whenever expenditures claimed on the basis of a liability then subsequently such liability is also required to be paid by A/c Payee cheque or A/c payee bank draft or use of Electronic Clearing System through a bank account provided a payment in a day exceeds Rs.10,000/-.

However, both the sections also provides that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession if such payment is justified based on circumstances, nature and extent of the banking facility available and other relevant factors. With regard to NGOs the following implications are foreseen:

  –  All cash payment exceeding Rs. 10,000/- shall not form part of Application of Income.

  –  Where an expenditure is claimed as Application on the basis of liability, then such liability which exceeds Rs. 10,000/- in a day should not be paid in cash otherwise it will be disallowed.

Firstly, any disallowance a subject to the facts and circumstances under which cash payments were made under Rule 6DD of the Income Tax Rules, 1962.

Secondly, any disallowance would not imply that such disallowance will result in increase in taxable income. Because unlike business entities for NGOs any disallowance does not result in taxable income. Therefore even after disallowance the NGOs income will not become taxable unless the total unspent income including such disallowance exceeds 15% of total income. It may be noted that trusts and NGOs are required to apply 85% of the total income during the year.

If TDS is not deducted Section 40(a)(ia) will apply

Section 40(a)(ia) provides that 30% of any sum payable should be disallowed on which TDS should have been deducted and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139.

The law allows deduction if tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. In other word the 30% disallowance can be claimed in subsequently.

NGO makes various payments which are subject to TDS provisions and therefore NGO should deduct Tax and deposit the same to the credit of Government within the specified date.

The proposed amendment provides that if any payment on which tax is required to be deducted but not deducted or tax has been deducted but not paid within the due date of filing of Income Tax Return, then, such amount on which tax was liable to be deducted shall not be considered as Application during the financial year.

30% of the amount shall not be treated as application however any such disallowance would result in increase in taxable income. Because unlike business entities for NGOs any disallowance does not result in taxable income. Therefore even after disallowance the NGOs income will not become taxable unless the total unspent income including such disallowance exceeds 15% of total income. It may be noted that trusts and NGOs are required to apply 85% of the total income during the year. However if the total unspent income and disallowance put together exceed 15% then such excess amount shall be subjected to tax.

No disallowance if assessee is not in default

The amount disallowed due to non-deduction of TDS or non payment of TDS can be considered as an Application in the year in which corresponding tax is deducted and paid or if the NGO can establish that they are not assessee in default under the first proviso to sub-section (1) of section 201 as the person to whom payment has been made:

 a.  has furnished his return of income under section 139

 b.  has taken into account such sum for computing income in such return of income

 c.  has paid the tax due on the income declared by him in such return of income

and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed.

Hence, though the NGO can rectify the default of non deduction of TDS or non payment of TDS as per Section 40(a)(ia) and reclaim the amount as application in the year of correction of default but any default of Section 40A(3) & 40A(3A) shall be permanent in nature and shall not be considered as Application in any subsequent year.

Section 14 and five heads of income do not apply to NGOs

The law makers should have understood that Section 14 and five heads of income do not apply to NGOs. It is a settled law that the computation of income of NGOs should be made only under section 11 to 13 the other provisions of the Act are not applicable. It may be noted that under the current scheme of the Income Tax Act, Trust and NGOs are not assessed under five head of income and section 14 which provides for computation under five heads of income does not apply to them. In CIT v. Estate of V. L. Ethiraj [1982] 136 ITR 12 (Mad.), it was held that income from properties would have to be arrived at in the normal commercial manner without reference to the provisions which were attracted by section 14. In this case the Court observed that the language of section 11(1)(a) makes it clear that the income derived from the property held under trust wholly for charitable and religious purposes, to the extent to which such income is applied to such purposes in India, is excluded. When once the income from the property, as such, is excluded, there is no question of computing the income from the property by applying the provisions of section 14.

Concluding Remarks

Linking a section from the chapter pertaining to business and profession will result in needless confusion and controversies. Further in case of NGOs, unlike other assessees, the taxable income is not computed. The exempt income is only computed therefore any increase of decrease in expenditure does not result in a change in taxable income.

This amendment will create lot of assessment controversies as AOs have a tendency to tax the additions which will not be sustainable in case of NGOs. CBDT will have to come up with adequate clarificatory circulars to capacitate both the AOs and Asseesses with regard to the application of these amendments.

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