Clause 352 Tax on accreted income.
Income Tax Bill, 2025
Introduction
Clause 352 of the Income Tax Bill, 2025 introduces a comprehensive framework for the taxation of accreted income in the context of registered non-profit organisations (NPOs), including trusts and institutions enjoying tax-exempt status under specified provisions. Specifically, sub-clauses (8) and (9) of Clause 352 deal with the enforcement and recovery mechanisms for tax on accreted income, identifying who is deemed an assessee in default and the extent of their liability. These provisions are critical in ensuring the effectiveness of the tax regime for NPOs, particularly when such entities deviate from their intended charitable purpose or undergo structural changes such as dissolution, merger, or conversion.
Section 115TF of the Income-tax Act, 1961, introduced by the Finance Act, 2016, and subsequently amended, contains analogous provisions regarding the liability and recovery of tax on accreted income, particularly in cases where the trust or institution fails to pay the tax due u/s 115TD. The present commentary undertakes a detailed analysis of Clause 352(8) & (9), followed by a comparative evaluation with Section 115TF, and discusses the practical, legal, and policy implications of these statutory provisions.
Objective and Purpose
The legislative intent behind Clause 352 (and its predecessor, section 115TD-115TF of the 1961 Act) is to prevent the misuse of tax exemptions by charitable entities. The accreted income tax regime targets situations where an NPO ceases to be eligible for tax exemption-by way of cancellation of registration, modification of objects, conversion, merger, or dissolution-ensuring that accumulated wealth, which benefited from tax concessions, does not escape taxation if diverted from charitable purposes. Clause 352(8) & (9) strengthen the recovery mechanisms by creating a clear chain of liability for payment of the additional tax on accreted income.
The provisions are designed both as a deterrent and as an enforcement tool, ensuring that NPOs and associated persons cannot avoid tax liability through asset transfers or structural changes, thereby safeguarding the integrity of the charitable sector and the public interest in tax-exempt donations and accumulations.
Clause 352(8): Deeming Provisions for Assessee in Default and Applicability of Recovery Provisions
Clause 352(8) provides as follows:
"All the provisions of this Act shall apply for the collection and recovery of income-tax in respect of the amount of tax payable by the specified person, principal officer or trustee and the following persons shall be deemed to be assessee in default: (a) the specified person and principal officer or the trustee of such specified person; (b) the person to whom any asset forming part of the computation of accreted income under sub-section (3) has been transferred, where the tax on accreted income is payable under the cases specified in sub-section (5) (Table: Sl. No. 9)."
This provision operates in two parts:
- General Liability: The specified person (i.e., the NPO/trust) and its principal officer or trustee are deemed to be assessees in default if they fail to pay the tax on accreted income. This triggers the application of the entire machinery of the Income Tax Act for recovery, including attachment of property, garnishee proceedings, and other enforcement actions.
- Transferee Liability in Case of Dissolution: In the specific scenario where the NPO fails to transfer its assets to another eligible NPO upon dissolution (Table Sl. No. 9), the person who has received such assets is also deemed to be an assessee in default, to the extent of the assets received. This is a significant anti-avoidance measure, ensuring that assets distributed in contravention of the law do not escape the tax net.
Clause 352(9): Limitation of Liability for Transferees
Clause 352(9) provides:
"Subject to the provisions of sub-section (8), the liability of the person referred to in clause (b) of the said sub-section shall be limited to the extent to which the asset received by him is capable of meeting the liability."
This clause introduces a limitation principle, ensuring that the transferee's liability is not open-ended but is capped at the value of the asset received. The rationale is that the transferee should not be held responsible beyond the benefit actually received, aligning with principles of fairness and proportionality in tax enforcement.
Key Features and Interpretative Issues
- Comprehensive Application of Recovery Provisions: By stating that "all the provisions of this Act shall apply," Clause 352(8) ensures that the full spectrum of the Income Tax Act's collection and recovery mechanisms are available, including sections relating to notice of demand, attachment, auction, and prosecution for wilful default.
- Multiple Assessees in Default: The provision contemplates joint and several liability of the NPO, its principal officer/trustee, and, in certain cases, the transferee. This multi-pronged approach is intended to prevent evasion through asset dissipation or transfer.
- Scope of "Asset" and "Capability of Meeting Liability": The phrase "to the extent to which the asset received by him is capable of meeting the liability" may give rise to interpretative questions, particularly where assets have depreciated, been alienated, or are otherwise encumbered. The provision appears to contemplate a tracing mechanism, but practical enforcement may require further rules or judicial clarification.
- Specificity to Dissolution Cases: The transferee liability is specifically attached to cases of dissolution and improper asset transfer (Table Sl. No. 9), not to other scenarios such as merger or conversion, reflecting a targeted anti-avoidance intent.
Section 115TF, as amended, reads:
"(1) If any principal officer or the trustee of the specified person and the specified person does not pay tax on accreted income in accordance with the provisions of section 115TD, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income-tax shall apply.
(2) Notwithstanding anything contained in sub-section (1), in a case where the tax on accreted income is payable under the circumstances referred to in clause (c) of sub-section (1) of section 115TD, the person to whom any asset forming part of the computation of accreted income under sub-section (2) thereof has been transferred, shall be deemed to be an assessee in default in respect of such tax and interest thereon and all the provisions of this Act for the collection and recovery of income-tax shall apply:
Provided that the liability of the person referred to in this sub-section shall be limited to the extent to which the asset received by him is capable of meeting the liability."
The structure is broadly similar to Clause 352(8) & (9), with sub-section (1) imposing liability on the NPO and its officers, and sub-section (2) extending liability to transferees in cases covered by section 115TD(1)(c) (i.e., failure to transfer assets upon dissolution).
Practical Implications
- For Non-Profit Organisations: These provisions create a strong disincentive against non-compliance with the rules governing tax exemption, registration, and asset transfers. NPOs must ensure that, upon dissolution or loss of registration, assets are properly transferred to eligible entities, or else face a substantial tax liability at the maximum marginal rate.
- For Trustees and Principal Officers: The deeming provisions make officers personally liable as assessees in default, exposing them to the full range of recovery proceedings. This underlines the importance of due diligence and compliance by those in managerial positions.
- For Asset Transferees: Individuals or entities receiving assets from a dissolving NPO must be cautious, as they may be held liable for the unpaid tax on accreted income, up to the value of the asset received. This may affect the willingness of third parties to accept such transfers without proper indemnities or assurances.
- For Tax Administration: The provisions facilitate effective enforcement by expanding the pool of persons from whom tax can be recovered, reducing the risk of tax loss through asset dissipation or fraudulent transfers.
Comparative Analysis: Clause 352(8) & (9) vs. Section 115TF
| Aspect |
Clause 352(8) & (9) of the Income Tax Bill, 2025 |
Section 115TF of the Income-tax Act, 1961 |
| Primary Liability |
Specified person (NPO), principal officer or trustee are deemed assessees in default for unpaid tax on accreted income. |
Specified person (NPO), principal officer or trustee are deemed assessees in default for unpaid tax on accreted income. |
| Transferee Liability |
Transferee of assets is deemed assessee in default in cases of failure to transfer assets upon dissolution (Table Sl. No. 9). |
Transferee of assets is deemed assessee in default in cases of failure to transfer assets upon dissolution (section 115TD(1)(c)). |
| Limitation of Liability |
Transferee's liability is limited to the value of the asset received and its capability to meet the liability. |
Transferee's liability is limited to the value of the asset received and its capability to meet the liability. |
| Scope of Application |
Applies to all cases of accreted income tax liability as per Clause 352(5), but transferee liability is only for dissolution cases. |
Applies to all cases of accreted income tax liability as per section 115TD, but transferee liability is only for dissolution cases. |
| Procedural Provisions |
All provisions of the Act for collection and recovery apply. Explicit mention of principal officer/trustee as liable. |
All provisions of the Act for collection and recovery apply. Explicit mention of principal officer/trustee as liable. |
| Terminology |
Uses "specified person" as defined in the Bill; aligns with modernised terminology. |
Uses "specified person" as defined in section 115TD Explanation (iia); updated from "trust or institution." |
| Structural Differences |
Presented as sub-clauses (8) and (9) under a comprehensive clause with detailed tables and timelines. |
Presented as sub-sections (1) and (2) under a standalone section cross-referenced to section 115TD. |
Key Similarities
- Both provisions establish joint and several liability for the NPO and its officers for unpaid accreted income tax.
- Both extend liability to transferees of assets in cases of dissolution, with liability capped at the value of assets received.
- Both invoke the full machinery of the Income Tax Act for recovery and enforcement.
Key Differences and Developments
- Legislative Modernisation: Clause 352 of the 2025 Bill is part of a broader legislative overhaul, with updated language, cross-references, and integration with new registration and compliance procedures. Section 115TF, while substantively similar, is embedded in the existing 1961 Act.
- Tabular and Structured Approach: The 2025 Bill uses a detailed table in Clause 352(5) to specify scenarios, dates, and due dates for tax payment, providing greater clarity and precision compared to the more general cross-referencing in the 1961 Act.
- Potential for Expanded Application: While both provisions limit transferee liability to dissolution cases, the detailed enumeration in the 2025 Bill could facilitate easier identification and administration of liability.
- Terminological Clarity: The 2025 Bill consistently uses "specified person, principal officer or trustee," reflecting a modern and inclusive approach to organisational forms.
Ambiguities and Issues in Interpretation
- Asset Tracing and Enforcement: The practical application of the limitation "to the extent to which the asset received...is capable of meeting the liability" may require further rules, especially where assets have changed form, depreciated, or been encumbered.
- Overlap with Other Laws: In cases of dissolution, merger, or winding up, other laws (such as state trust laws or company law) may also regulate asset transfers. Coordination and precedence between tax recovery and other creditors may be a source of dispute.
- Due Process and Natural Justice: The deeming provisions are subject to the procedural safeguards elsewhere in the Act (e.g., opportunity of being heard), but the summary nature of recovery proceedings may be challenged if not properly implemented.
Policy Considerations
- The regime reflects a strong public policy interest in preventing the diversion of tax-exempt accumulations for non-charitable purposes, especially upon winding up or loss of registration.
- By extending liability to transferees, the law creates a powerful deterrent against improper distribution of assets, but must balance this with fairness to bona fide recipients.
- The limitation of liability to the value of assets received is a necessary safeguard against overreach and aligns with principles of proportionality.
Comparative Perspective: International and Domestic Context
While the concept of taxing accreted income on dissolution or loss of charitable status is relatively novel in India, similar principles exist in other jurisdictions (e.g., "exit tax" regimes for charities in the UK and Australia). The detailed enforcement and recovery provisions in the Indian regime are notable for their comprehensiveness and explicit extension of liability to both organisational officers and asset transferees.
Conclusion
Clause 352(8) & (9) of the Income Tax Bill, 2025, and Section 115TF of the Income-tax Act, 1961, represent robust statutory mechanisms to ensure the effective recovery of tax on accreted income from non-profit organisations and associated persons in cases of non-compliance or improper asset transfer. The provisions are closely aligned in substance, with the 2025 Bill offering more structured and modernised language, integrated with a comprehensive compliance framework. The limitation of transferee liability to the value of assets received is a critical safeguard, ensuring fairness while maintaining the integrity of the tax-exempt sector. Future developments may focus on clarifying enforcement procedures, asset tracing, and harmonisation with other legal regimes governing dissolution and asset transfer.
Full Text:
Clause 352 Tax on accreted income.
Dated: 7-5-2025
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