Recent Updates Related To Charitable Trusts
Introduction-
The income of a charitable trust is exempt from income tax under Section 10 & 11 of the Income Tax Act, 1961. However, there are certain conditions that must be met in order to qualify for this exemption. These conditions have been becoming more and more stringent day by day and obtaining and maintaining a registration for charitable trust has become very difficult. The difficulty level has increased to such an extent that to comply with each and every condition would require tremendous manpower and experience. And since everything comes at a cost small trust and societies would have to pay huge fees to professionals just to maintain their status. Further since the compliance burden has increased to such an extent that a professional who earlier was willing to make compliances for the trust on free of cost or on charity basis would now hesitate as his cost would also significantly increase.
The work of a charitable trust has become more of a chase to meet the deadline without failure as the consequences of even a single day delay in adhering to the deadline would mean loss of exemption or even worse loss of registration. Through this article let us dive deep into the recent changes that are applicable to the AY 2023-2024.
1. Section 115BBI-
“115BBI. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any specified income, notwithstanding anything contained in any other provision of this Act, the income-tax payable shall be the aggregate of,—
(i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of such specified income; and
(ii) 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 (i).
2) ….
Explanation.—For the purposes of this section, "specified income" means,—
(a) income accumulated or set apart in excess of fifteen per cent of the income where such accumulation is not allowed under any specific provision of this Act; or
(b) ….
(c) ….
(d) ….
(e) …. ”
Analysis-
Section 115BBI provides for taxation of specified income which is explained there to be taxed at the rate of 30%. As per explanation to the section any accumulation which is not in accordance with law shall be taxed at the rate of 30%. Previously charitable trusts used to enjoy a basic exemption limit of Rs. 2.5 lakhs and lower tax based on slab applicable. With this amendment not only the benefit of slab rate has been withdrawn, the benefit of initial basic exemption has also been withdrawn. This would significantly hurt the finances of small religious and charitable trusts.
Now the cases were in accumulation shall be considered in accordance with law are reproduced as under-
i. |
“Section 11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—
(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;”
Strategy deduction of 15% shall be considered as accumulation in accordance with law. |
ii. |
Accumulation in accordance with Explanation 1 for which Form 9A is filed within the due date of filling the same. Extracts of the provisions are reproduced as under-
“Explanation 1.—For the purposes of clauses (a) and (b),—
(1) in computing the fifteen per cent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income;
(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount—
(i) for the reason that the whole or any part of the income has not been received during that year, or
(ii) for any other reason,
then—
(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and
(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount,
may, at the option of the person in receipt of the income (such option to be exercised [at least two months prior to the due date specified] under sub-section (1) of section 139 for furnishing the return of income, in such form and manner as may be prescribed) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.” |
iii. |
Accumulation made u/s 11(2) in modes prescribed u/s 11(5). Relevant extracts are reproduced as under-
“(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:—
(a) such person furnishes a statement in the prescribed form and in the prescribed manner to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years;
(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5);
(c) the statement referred to in clause (a) is furnished at least two months prior to the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year:” |
Any accumulation made in modes that are not in accordance with law shall therefore be taxed at the rate of 30%. So, for example if a trust’s income from property is Rs. 1,00,000 and the trust incurs an expenditure of Rs. 50,000 the resulted accumulation that is 35,000 (1 Lakh – 50 Thousand – 15% of 1 Lakh) shall be taxed as accumulation not in accordance with law at the rate of 30% under section 115BBI.
2. Changes in Format of Audit Report
Previously Charitable and Religious trusts were required to obtain an audit report in form 10B. Now the previous form 10B has been done away with and a new form 10B has been introduced along with another form 10BB. Both the froms are applicable on and from the AY 2023-2024 and onwards. Rule 16CC and Rule 17B is reproduced as under for ready reference-
Rule 16CC-
“[Form of report of audit prescribed under tenth proviso to section 10(23C).
16CC. The report of audit of the accounts of a fund or institution or trust or any university or other educational institution or any hospital or other medical institution which is required to be furnished under clause (b) of the tenth proviso to clause (23C) of section 10 shall be in—
(a) Form No. 10B where—
(I) the total income of such fund or institution or trust or university or other educational institution or hospital or other medical institution, without giving effect to the provisions of the sub-clauses (iv), (v), (vi) and (via) of the said clause, exceeds rupees five crores during the previous year; or
(II) such fund or institution or trust or university or other educational institution or hospital or other medical institution has received any foreign contribution during the previous year; or
(III) such fund or institution or trust or university or other educational institution or hospital or other medical institution has applied any part of its income outside India during the previous year;
(b) Form No. 10BB in other cases.
Explanation.— For the purposes of sub-clause (II) of clause (a), the expression "foreign contribution" shall have the same meaning assigned to it in clause (h) of sub-section (1) of section 2 of the Foreign Contribution (Regulation) Act, 2010 (42 of 2010).”
Rule 17B-
“Audit report in the case of charitable or religious trusts, etc.
17B. The report of audit of the accounts of a trust or institution which is required to be furnished under sub-clause (ii) of clause (b) of sub-section (1) of section 12A, shall be in—
(a) Form No. 10B where—
(I) the total income of such trust or institution, without giving effect to the provisions of sections 11 and 12 of the Act, exceeds rupees five crores during the previous year; or
(II) such trust or institution has received any foreign contribution during the previous year; or
(III) such trust or institution has applied any part of its income outside India during the previous year;
(b) Form No. 10BB in other cases.
Explanation.— For the purposes of sub-clause (II) of clause (a), the expression foreign contribution shall have the same meaning assigned to it in clause (h) of sub-section (1) of section 2 of the Foreign Contribution (Regulation) Act, 2010 (42 of 2010).”
In short the report of audit of the accounts of a trust, shall be furnished in
(a) Form No. 10B where,
(i) the total income of trust, exceeds Rs five crores during the previous year; or
(ii) such trust has received any foreign contribution during the previous year; or
(iii) such trust has applied any part of its income outside India during the previous year;
(b) Form No. 10BB in other cases.
CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.
He is also socially active on LinkedIn at linkedin.com/in/capranayjain |
CA Pranay Jain |
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