Income Tax 21 Jan,2020
Budget Expectations of Philanthropic Organisations
Tarun KumarChartered Accountant

Charity is a selfless act. Charity means giving something to those in need without expectation or wanting something back in return. It is doing something good to others without any expectation. Although, charitable activity does not demand any expectations but nonetheless philanthropic organisations have got some expectations from the Finance Minister, Smt. Nirmala Sitharaman who is all set to present the union budget 2020 on 01st Feb.

Here we have covered expectations and recommendations for Charitable & Religious Trusts from Budget 2020.

1. Deemed Registration under section 12AA

Section 12AA(2) provides that every order granting or refusing registration shall be passed before the expiry of six months from the end of the month in which the application was received.

In CIT v. Society for the Promotion of Education, Adventure, Sport & Conservation of Environment [2016] 67 264 (SC), the Supreme Court has held that once an application is made under the said provision and in case the same is not responded to within six months, it would be taken that the application is registered under the provision. The Supreme Court has upheld that there will be deemed registration if the application is not processed within prescribed time.

Further the CBDT has issued Instruction No. 16 of 2015 dated 06.11.2015 in which it has taken a stern view of the fact that the time limit of six months specified in section 12AA(2) of the Income-tax Act, 1961 for passing an order granting or refusing registration under s. 12AA are not being adhered to by the Commissioners of Income Tax (Exemptions). The CBDT has directed the Chief Commissioners to monitor that the Commissioners are adhering to the time limit and to take suitable administrative action in the case of laxity.

However, there is no specific provision in law which grants deemed registration to trusts if application is not disposed by Commissioner of Income Tax (Exemptions) within 6 months while passing order u/s 12AA. Hence, law shall be amended to provide that non-disposal of application for registration u/s. 12A within prescribed period will be considered as deemed registration. This shall bring clarity in law and minimize the scope of litigation.

2. No denial of Full Exemption if benefit given to interested persons

Section 13 of the Income-tax Act outlines the circumstances in which exemption of section 11 and 12 shall not be allowed to a charitable or religious trust. It restricts the exemption if any part of the income of the trust or institution or any property of the trust or institution is used or applied for the benefit of interested persons. As a practice, the Assessing Officers deny the exemption in respect of entire income under Section 11 if there was a violation of provisions of section 13.

In a recent judgment, the Bombay High Court in the case of CIT(Exemptions), Pune v. Audyogik Shikshan Mandal [2019] 101 247 (Bombay) held that where funds of assessee-trust were utilized for purchase of car in the name of its trustee, there was violation of section 13(2)(b), read with section 13(3); however, denial of exemption under section 11 should be limited only to the amount which was diverted in violation of section 13(2)(b).

Thus, it is recommended that the denial of exemption to trust should be restricted to amount which was diverted in violation of section 13. Alternatively, the same may be taxed at higher rate of tax, say MMR rather than withdrawal of entire exemption.

3. Recovery of Taxes from Trustees

Section 115TD(5) specifies that the principal officer or the trustee of the trust or the institution shall also be liable to pay the tax on accreted income to the credit of the Central Government within 14 days from the specified date. The term 'principal officer' is very widely defined in section 2(35).

"principal officer", used with reference to a local authority or a company or any other public body or any association of persons or any body of individuals, means—

 (a)  the secretary, treasurer, manager or agent of the authority, company, association or body, or

 (b)  any person connected with the management or administration of the local authority, company, association or body upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer thereof ;

Based on this interpretation, the A.O. can consider almost any person connected with the management as the principal officer of the institution. Further, it seems from the plain reading of Section 115TD(5) that primary liability to pay tax is on principal officer or the trustee and if they don't pay taxes then liability would be of the trust.

It is recommended that the applicability of recovery provisions on the trustees etc. should be made only if it is proved that non-recovery is attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the charitable institution or trust. Hence, the provisions of section 115TD(5) should be rationalised for not initiating direct recovery proceedings against the trustees etc.

4. Treatment of Deficits

At present, exemption under Sec. 11(1) is available for income that is applied for charitable or religious purposes in India. The expenditure incurred by a trust for charitable or religious purposes are considered as application of income.

The Bombay high court in the case of Director of Income-tax, Exemption V. Mumbai Education Trust [2016] 76 331 (Bombay) held that the assessee could also carry forward deficit of earlier years and set it off against income of current year. However, the Supreme Court of India [2016] 76 347 (SC) granted SLP against Bombay High Court's ruling in this case.

There is no provision in the act for carry forward and set off of excess expenditure by charitable institution. However, there are conflicting rulings of the High Court and Tribunal in this regard. Further, there is no such option provided in Form ITR 7 to carry forward and set off deficit of previous years. Other assessee are allowed to set-off and carry forward losses whereas this benefit is denied to charitable organizations. Hence, law should be amended to provide specific provisions to allow that whenever application of income towards charitable purpose exceeds the amount of gross receipts for that year, the excess amount shall be allowed to be carried forward to the following year and considered as application of that year.

5. Investment of funds in unspecified manner

A charitable or religious trust is denied the benefit of exemption under Sections 11 and 12, if funds of trust are invested or deposited otherwise than in accordance with Sec. 11(5) or in any shares in a company which is not prescribed for investment by a trust.

The income-tax department has cancelled the registration of six Tata Trusts — Jamsetji Tata Trust, RD Tata Trust, Tata Education Trust, Tata Social Welfare Trust, Sarvajanik Seva Trust and Navajbai Ratan Tata Trust. The dispute started when it was pointed out that Jamsetji Tata Trust and Navajbai Ratan Tata Trust had invested Rs 3,139 crore in "prohibited modes of investment". In this case the Assessing Officer has taken view that if the assessee was hit by the provisions of section 13(1)(d) in terms of investment in unspecified modes then the exemption under sections 11 and 12 would not be allowable in respect of any income of the assessee trust. The Finance Act 2014 has also amended Section 12AA to provide that the registration of the trust may be cancelled if it deliberately violates provisions of section 13 by investing in prohibited mode etc.

The law should be amended to specifically provide that if investment is made in violation of this provision, the value of same shall be included in the total income of the organisation for the relevant financial year. The value of investments not made in specified mode of investments may be taxed at MMR. Thus, the exemption under section 11 shall be made available to the assessee on the income to the extent the same is derived in conformity of section 11 and applied during the year for such purpose of charitable trusts.