Recent Amendments in Provisions of Charitable Trusts and Institutions under the Income Tax Act, 1961

The Finance Act, 2020 introduced substantial amendments regarding provisions for granting exemptions to the charitable/religious trusts, institutions, etc. under section 11 of the Income Tax Act, 1961 applicable w.e.f 01^st June 2020.

In view of the COVID-19 outbreak and consequent lockdown, this timeline has been deferred by 4 months. The new provision, which was supposed to come in effect from 01^st June 2020, would now come in effect from 01^st October 2020. All existing trusts/ charitable institutions would now need to file applications for the renewal of their registrations/ approvals by 31^st December 2020 instead of earlier 31^st August 2020.

Summary of Major Amendments

1. Re-registration and Re approval of entities claiming exemption under section 11, 10(23C) and 80G of the Income Tax Act

All existing Charitable Trusts and Institutions registered/approved under Section 12A (before 1996), Section 12AA (after 1996), Section 10(23C), and section 80 G or notification issued under section 35 of the Act shall be required to re-apply to revalidate their existing registrations or approvals.  All existing exemptions granted to exempt entities would become inoperative from 1^st October 2020.

All existing trusts and institutions registered or approved under section 12A, 12 AA, 10(23C) and 80G or section 35 of the Income Tax Act shall have to apply for registration or approval under section 12AB, section 10 (23C) and section 80 G or section 35 within 3 months commencing from 1^st October 2020, i.e. 31^st December 2020 Under new provisions, the registration or approval shall be granted within a period of three months from the end of the month in which the application was received and such registration shall be valid for a period of 5 years.

2. Concept of Provisional Registration

• Entities making a fresh application for registration/ approval under Section 12AB, 10(23C), and 80G of the Act shall have to apply within one month prior to the commencement of the year from which such registration/ approval is sought. Such entities will be first granted provisional approval for three years without detailed inquiry even in cases where activities are not yet started. Later on, final registration /approval may be granted following the prescribed procedure.
• Exempt entities whose provisional approval will be granted will then have to make application of regular registration at least six months prior to the expiry of the provisional registration or within six months of the start of their activities, whichever is earlier.
• In the case of applications for the grant of regular registration/ approval under sections 12AB, 10(23C), and 80G, the Commissioner will have the power to call for documents and make necessary inquiries. On being satisfied with the objects of the applicant entity, the genuineness of its activities, and its compliance with the requirements of the other laws applicable to it the Commissioner may grant approval to it for five years.
• If the Commissioner is not so satisfied, he may reject the application and cancel its approval after giving a reasonable opportunity of being heard. An appeal will lie to Tribunal against orders rejecting grant of registration or canceling the registration.
• All pending applications under the current provisions of Sections 12AA, 10(23C), 35, and 80G shall be deemed to have been made under the new provisions and shall be processed according to the new procedure.

  3. Right to claim the dual exemption is not permissible

• Presently, an eligible assessee can possess registrations as a charitable trust and exempt institution simultaneously. By doing so, even if the condition under section 13 of the Income Tax Act is violated, such assessee has the option to avail benefit under section 10(23C) of the Income Tax Act.
• The Union Budget 2020 has inserted a new proviso in section 11 of the Income Tax Act saying that if the institution is registered for exemption under section 11 etc. as well as approved under section 10(23C) / notified under section 10(46), then the above registration shall become inoperative from the date of coming into force of the amendment. In future, an institution which is registered under section  12AA / 12AB also gets approval under section  10(23C) or becomes notified under section  10(46) after amendment, then in such case, the registration under section 12AA /12AB  shall become inoperative from the date of such approval/notification.
• Therefore, the charitable trust/Institution has the discretion to choose only one of the above exemptions either under section 12AA/12AB or under section 10(23C) and section 10(46) of the Income Tax Act.

  4. Tax on accreted Income

  New Section 12AB which provides for the procedure for fresh registrations for trusts or institution. In case, the application for re-registration or re-approval of existing exemptions or registration is not submitted by the existing charitable trusts and institutions, then the earlier granted registrations shall stand canceled on the expiry of three months i.e. after 31^st December 2020. If registration gets canceled then trust or institution will not be eligible to claim the exemption in respect of income under section 11 of the Income Tax Act.  Such trust or institution shall be required to pay tax on its accreted income i.e. the aggregate fair market value of the total assets of the trust or the institution as of 31^st December 2020) less total liabilities as per the provisions of Section 115TD of the Income Tax Act.

  5. Deduction in respect of donations under section 80G and 80 GGA

  Presently, an assessee can claim the deduction for any donation made to an institution approved under section 80G/80GGA on the basis of the receipt issued by such institution(s). To curb the practice to claim the deduction by way of bogus donation, the provisions of section 80G/80GG AA have been amended and provide that every charitable trust & specified institution registered under the Section 80G of the Income Tax Act shall be required to file a statement of donations in the prescribed manner & deduction shall be available to donors based on information relating to donation(s) furnished by such charitable trusts & specified institutions. The entities shall be liable to pay a penalty of INR 250 per day of delay in filing these statements. No deduction in cash shall be allowed in excess of INR 2,000/- (earlier INR 10,000/-) under Section 80GGA of the Income Tax Act 1961.

This article is contributed by:

Prashan Begwani Associate Director, Audit and Assurance