THE FINANCE BILL, 2015 -Charitable trusts

[CA DEV KUMAR KOTHARI]

The Finance Bill, 2015 proposes some amendments relating to charitable trusts and institutions. These are discussed below with proposed changes, notes thereon reproduced with highlights for easy understanding, analysis and catchwords:

Amendment of section 2

3. In section 2 of the Income-tax Act, with effect from the 1st day of April, 2016,-

(b) in clause (15),-

(i) after the word “education,”, the word “yoga,” shall be inserted;

(ii) for the first and the second provisos, the following proviso shall be substituted, namely:-

           “Provided that 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 activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-

(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 twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;”;

Notes

It is proposed to amend clause (15) of the aforesaid section to provide that the definition of charitable purpose shall include “yoga” as a separate category on the lines of education and medical relief.

It is further proposed to amend the said clause (15) to provide that 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 activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless--

(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 twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.

These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to assessment year 2016-17 and subsequent assessment years.

Observations of author:

Providing   “yoga”, as a separate class of activity w.e.f. 01.04.2016 is to leave lot of scope of disputs and litigation. Notes in this regard says’

“  after the word “education,”, the word yoga” as a separate category on the lines of education and medical relief.

As per taxpayers/ assesses this means that  “yoga” was included in education now it has been considered  a special class of education. Therefore, amendment is only a clarification and apply to earlier years also.

Appellate authorities and courts have held that “yoga” is also an educational activity. The amendment may lead to further disputes because the proposal says that it will be w.e.f. 01.04.2016, therefore, tax authorities are likely to take view that before that  “yoga” was not included in “education”.

The amendment should be described as an explanation and to have retrospective effect.

Limit of specified limits was earlier ₹ 25 lakh. This was applicable to all institutions- big or small. Now it is proposed to be 20% of total receipts. This amendment will help big institutions, however, smaller institutions will be adversely effected. In starting any institution is small and grows over a period of time. Some institutions are small and likely to remain small due to various constraints. Therefore it is desirable that relief provided earlier by prescribing limit of ₹ 25 lakh should not be withdrawn and the amendment should be   on the following lines:

the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year, or  Rs. Twenty five lakh whichever is higher”;

Amendment of section 11.

8. In section 11 of the Income-tax Act,( Amendment of section 11) with effect from the 1st day of April, 2016,-

(I) in sub-section (1), in Explanation, in clause (2), after sub-clause (b), in the long line, for the brackets and words “(such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income)”, the brackets and words “(such option to be excercised before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income, in such form and manner as may be prescribed)” shall be substituted;

(II) in sub-section (2), for clauses (a) and (b) and the first and second provisos, the following shall be substituted, 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 on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year:

Provided that in computing the period of five years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.”.

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Notes on Clauses:

Clause 8 of the Bill seeks to amend section 11 of the Income tax Act relating to income from property held for charitable or religious purposes.

Sub-section (2) of the aforesaid section provides that where eighty-five per cent. of the income 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, for application to such purposes in India, then, such income accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income. However, the said exemption is subject to fulfilment of the following conditions that :

(i) such person specifies by notice in writing in Form 10, prescribed for such purpose, providing details of the purpose for which the income is being accumulated or set apart and that the period for which the income is to be accumulated or set apart does not exceed five years; and

(ii) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5) of section 11.

With a view to amend the conditions specified in sub-section (2) of the aforesaid section, it is proposed to insert a new clause to provide that the statement referred to in the said clause (a) is required to be furnished on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year. It is also proposed to substitute the existing first and second provisos with a new proviso to provide that in computing the period of five years referred to in the said clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.

This amendment will take effect from 1st April, 2016 and accordingly apply in relation to the assessment year 2016-17 and subsequent years.

Amendment of section 13.

9. In section 13 of the Income-tax Act,( Amendment of section 13.) after sub-section (8) and before Explanation 1, the following sub-section shall be inserted with effect from the 1st day of April, 2016, namely:-

“(9) Nothing contained in sub-section (2) of section 11 shall operate so as to exclude any income from the total income of the previous year of a person in receipt thereof, if-

(i) the statement referred to in clause (a) of the said sub-section in respect of such income is not furnished on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year; or

(ii) the return of income for the previous year is not furnished by such person on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the said previous year.”.

Notes on Clauses:

Clause 9 of the Bill seeks to amend section 13 of the Income tax Act relating to section 11 not to apply in certain cases.

It is proposed to insert a new sub-section to provide that nothing contained in sub-section (2) of section 11 shall operate so as to exclude any income from the total income of the previous year of a person in receipt thereof, if--

(i) the statement referred to in clause (a) of the said subsection in respect of such income, is not furnished on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year; or

(ii) the return of income for the previous year is not furnished by such person on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the said previous year.

This amendment will take effect from 1st April, 2016 and accordingly apply in relation to the assessment year 2016-17 and subsequent years.

Observations of author:

The amendments are to avoid some relief provided by judicial rulings about procedural and limitation aspects. Now one must be particular in timely compliance and filing of declaration and application of accumulated funds etc. in prescribed form and manner and care should be taken to meet requirements fully and attempt should be to avoid any limitations provided, technical and procedural lapses.