RECENT AMENDMENTS IN TAXATION OF CHARITABLE INSTITUTIONS by CA Rajesh Kadakia Pune Branch of WIRC of...

RECENT AMENDMENTS IN TAXATION OFCHARITABLE INSTITUTIONS

by

CA Rajesh Kadakia

Pune Branch of WIRC of ICAI

6th June, 2015

206-06-2015 Recent amendments in taxation of Charitable Institutions

Synopsis

1. Definition of charitable purpose - Yoga2. Definition of charitable purpose - Proviso to section 2(15)3. Double deduction of depreciation and cost of acquisition not available

[section 11(6)]4. Exemption under section 10 not available [section 11(7)]5. Cancellation of registration [section 12AA(4)]6. Exercising of option for deemed application of income in prescribed form

[Explanation (2) to section 11(1)]7. Period within which Form 10 relating to secondary accumulation is required

to be filed [section 11(2)]8. No benefit of secondary accumulation if return of income / Form 10 is not

submitted within due date of filing of return [section 13(9)]

306-06-2015

Definition of charitable purpose - Yoga

Law prior to amendment [up to assessment year 2015-16]

Definition of “charitable purpose" in section 2(15) included relief of the poor, education, etc. but not Yoga.

Amendment [with effect from assessment year 2016-17]

The activity of ‘Yoga’ is specifically added in the definition of charitable purposes.

Recent amendments in taxation of Charitable Institutions

406-06-2015

Definition of charitable purpose - Yoga (cont.)

Analysis

(a) “Yoga” would cover teachings of yoga, books on yoga, yoga health camps.

(b) activities in relation to yoga constitute charitable purpose only if private gain is excluded.

(c) Business activity in pursuit of yoga : (i) proviso to section 2(15) will not apply. (ii) business profits may be exempt under section 11(4A), if specified conditions are fulfilled.


506-06-2015

Definition of charitable purpose –proviso to section 2(15)

Law prior to amendment [up to assessment 2015-16]

Advancement of any object of general public utility was not a charitable purpose, if it involved carrying on of (a) any activity in the nature of trade, commerce; or (b) any activity of rendering any service in relation to any trade, commerce or

business [first proviso to section 2(15)]

Exception

Aggregate value of receipts from the activities < Rs. 25 lakhs in a previous year [second proviso to section 2(15)].


606-06-2015

Definition of charitable purpose –proviso to section 2(15) (cont.)

Amendment [with effect from assessment year 2016-17]

Advancement of any object of general public utility is not a charitable purpose, if it involves carrying on of

(a) any activity in the nature of trade, commerce; or (b) any activity of rendering any service in relation to any trade,

commerce or business

Unless

(c) The activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(d) aggregate receipts from such activity < 20% of the total receipts of that previous year, of the institution.

[proviso to section 2(15)]


1st Limb

2nd Limb

706-06-2015


Analysis/Issues

1. Applies only to “advancement of any other object of general public utility”.

2. First limb of the amendment

(a) The expression “carrying on of any activity in the nature of trade, commerce and business” is identical as the expression in pre-amendment first proviso.

(b) Business

Profit motive – whether essential?


806-06-2015


3. Second limb of the amendment

(a) activity to be undertaken in the course of actual carrying out of advancement of any other object of general public utility”.

“actual” means real, genuine and not fictional, collusive or illusory [See ITO v. M.M. Aqua Technologies Ltd., (2005) 143 Taxman 43 (Del); CIT v. Poulose & Mathen (P.) Ltd., (1999) 236 ITR 416 (Ker); CIT v. Dalmia Dadi Cement Ltd., (1980) 125 ITR 510 (Del)].

Hence, • the institution should really and genuinely carry out the advancement of

object of general public utility; and• the activity should be undertaken in the course of such carrying out.


906-06-2015


(b) aggregate receipts from the specified activities ≤ 20% of the total receipts.

Illustration:(Rs. in lakhs)

a. Net sales :20

b. Other receipts :79

c. Aggregate receipts (a+b) :99

d. % of business receipts (net sales) to total receipts (a*100c.) :20.2%

“Total receipts” does it include capital receipts, corpus donations, etc.?


1006-06-2015


(c) interpretation of the expression “and”

View 1: the expression ‘and’ imposes cumulative conditions

• exception to the proviso (first limb) will not apply unless both the conditions are cumulatively fulfilled.

that is,

the activity of business, etc. undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

the aggregate receipts from such activity or activities do not exceed 20% of the total receipts of the institution in the previous year.


1106-06-2015


Consequences:

Intention not fulfilled

intent is to give relief to genuine charitable institution• undertaking activities as part of actual carrying out of the objects which

are of charitable nature; and • protect them from hardship under first and second proviso to section

2(15) To ensure appropriate balance being drawn between

• the object of preventing business activity in the garb of charity and• at the same time protecting the activities undertaken by a genuine

organization as part of actual carrying out of the primary purpose of the institution

[Memorandum explaining the provisions of the Finance Bill 2015]


1206-06-2015


If “and” construed as imposing cumulative conditions, then, intent not fulfilled:

e.g. institution solely promoting arts and crafts of rural artisans. the higher the receipts of an institution in the actual course of carrying on

the activity, four times higher is the requirement of other receipts! even if an institution is solely engaged in a business in the course of actual

carrying out of the object, then inspite of the intent expressed in the Memorandum, it will not be satisfying the definition of charitable purpose!!

the activities mentioned in the Memorandum such as publishing books will continue to be put to hardship.

may not even cover charitable institutions whose gross receipts < Rs. 25 lakhs.


1306-06-2015


View 2: the expression ‘and’ refers to alternative conditions

“and” could be construed as “or”• to carry out the intention of the legislature [Ishwar Singh Bindra v. State

of U.P., AIR 1968 SC 1450 cited in P. V. Devassy v. CIT, (1972) 84 ITR 502 (Ker)]

• to avoid absurd consequences that would follow if the words are taken in their literal meaning. [CIT v. Puthuthotam Estates (1943) Ltd., (1981) 6 Taxman 65 (Mad), (1981) 127 ITR 481 (Mad)]

literal interpretation to be avoided if it produces an absurd and unjust result [K. P. Varghese v. ITO, (1981) 131 ITR 597 (SC); CIT v. J. H. Gotla, (1985) 156 ITR 323 (SC)].

Applying the above rules of interpretation, in view of the harsh, unjust and absurd results under view 1 and to fulfil the intent ‘and’ should be read as ‘or’.

Conscious use of ‘unless’ v. second proviso


1406-06-2015

Law prior to amendment (up to assessment year 2014-15)

Predominant view of Courts that charitable institution eligible for

• deduction of full cost of acquisition of asset as application of income.• depreciation on the same asset in subsequent years.

Amendment (w.e.f. assessment year 2015-16)

Where cost of acquisition claimed as application of income, no deduction by way of depreciation in computing income [section 11(6)].

Double deduction of depreciation andcost of acquisition not available [section 11(6)]


1506-06-2015

Consequences of depreciation not being allowed as a deduction

(a) The ‘income’ of the charitable institution for tax purposes will increase to this extent.

(b) Language suggests embargo on deduction while computing income. Not clear whether depreciation can be considered as application of income.

(c) The income could be applied for other charitable purposes under section 11(1)(a).

(d) The income would be eligible for basic exemption of 15% under section 11(1)(a).(e) The income could be applied in next year under Explanation to section 11(2).(f) The income could be accumulated for secondary application under section 11(2).

Double deduction of depreciation andcost of acquisition not available (cont.)


1606-06-2015

Law prior to amendment (up to assessment year 2014-15)

Income of a charitable institution was eligible for exemption under section 10.

Law after amendment (from assessment year 2015-16)

• If registration of the charitable institution was in force, no income shall be eligible for exemption under section 10 except agricultural income and exemption under section 10(23C) [section 11(7)].

• If the registration is not in force, then the entire income under section 10 shall be eligible for exemption.[section 11(7)]

Exemption under section 10 not available[section 11(7)]


1706-06-2015

Consequences of income under section 10 not considered as exempt

(a) The ‘income’ of the charitable institution for tax purposes will increase to this extent.

(b) The income could certainly be applied for charitable purposes under section 11(1)(a).

(c) The income would be eligible for basic exemption of 15% under section 11(1)(a).(d) The income could be applied in next year under Explanation to section 11(2).(e) The capital gains could be applied by reinvestment in accordance with section

11(1A).(f) The income could be accumulated for secondary application under section 11(2)

Exemption under section 10 not available[section 11(7)]


1806-06-2015

1. Law prior to amendment

Registration was not liable to cancellation upon violation of section 13(1).

[CIT v. Leuva Patel Seva Samaj Trust, (2014) 42 taxmann.com 181 (Guj), (2014) 221 Taxman 75 (Guj);Ashoka Education Foundation v. CIT, (2014) 42 CCH 0090 (Pune)(Trib);Kul Foundation v. CIT, (2015) 54 taxmann.com 143 (Pune)(Trib)].

2. Amendment (with effect from 1st October 2014)

Registration is liable to cancellation upon violation of section 13(1) [section 12AA(4)].

Cancellation of registration [section 12AA(4)]


1906-06-2015

3. Summary

Preconditions for applicability

(a) A trust is granted registration under section 12AA(1)(b) or section 12A(b) After the registration, it is noticed that

(i) section 13(1) applies to the charitable institution;(ii) the activities of the charitable institution are being

carried out in a manner that the section 11/12 do not apply to whole or any part of the income due to operation of section 13(1)

(c) The charitable institution cannot prove that there was reasonable cause for the activities to be carried out in the said manner.

Cancellation of registration [section 12AA(4)] (cont.)


2006-06-2015

Consequences of applicability

(a) The Principal Commissioner or the Commissioner may cancel the registration of such charitable institution.(b) Such cancellation shall be done by an order.(c) Such order shall be in writing.



2106-06-2015

Analysis / Issues

1. Cancellation is independent of assessment

2. Provision is penal in nature

(a) must be interpreted strictly;(b) if two views are possible, the benefit must go to the assessee

[CIT v. Panduranga Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]



2206-06-2015

3. Does a default under section 13 automatically lead to cancellation of registration?

(a) The Principal Commissioner “may” cancel the registration. ‘May’ means discretionary. [J. M. Sheth v. CIT, (1965) 56 ITR 293 (Mad) (in the context of section 186 of the Act)](b) “May” in section 12AA(4) v. “shall” in section 12AA(3).(c) No cancellation of registration if there was a reasonable cause for violation.

4. Cancellation only if “activities are being carried out in the specified manner”

(a) Activities – singular or plural?(b) Are “being” carried out – meaning?



2306-06-2015

5. Reasonable cause

Registration cannot be cancelled if the assessee proves that there was reasonable cause for the activities to be carried out in a particular manner.

(a) Ignorance of law

Ignorance of law may constitute a reasonable cause [see ACIT v. Vinman Finance & Leasing Ltd., (2008) 115 ITD 115 (Visk)(TM), para 13; Kaushal Diwan v. ITO (1983) 3 ITD 432 (Del)(TM)].



2406-06-2015

(b) Bonafide belief

(i) A mistaken bonafide belief that section 13(1) is not violated may constitute a reasonable cause [DCIT v. Dasari Narayana Rao, (2011) 15 taxmann.com 208 (Chennai Trib); ACIT v. Dargapandarinath Tuljayya & Co. (1977) 107 ITR 850 (AP) followed in Thomas Muthoot v. ACIT, (2014) 52 taxmann.com 114 (Coch Trib); IL & FS Maritime Infrastructure Co. Ltd. v. ACIT, (2013) 37 taxmann.com 297 (Mum Trib), para 8].

(ii) Intent is to cover institution ‘deliberately’ committing violation (Memorandum explaining the provision of the Finance Bill; para 9.2 of CBDT Circular No. 1/2015 dt. 21/01/15).

(c) Expert opinion

Reliance on expert opinion may constitute reasonable cause for the default.

[CIT v. Viswapriya Financial Services & Securities Ltd., (2008) 303 ITR 122 (Mad) (in the context of section 271C of the Act)].



2506-06-2015

6. Order by CIT

(a) must be speaking order(b) discretion must be exercised fairly [CIT v. Standard Mercantile Co., (1985) 23 Taxman 452 (Pat) (in the context of section 186 of the Act)]

7. Whether cancellation can be with retrospective effect before 1st October 2014?

Mumbai Cricket Association v. DIT, (2012) 24 taxmann.com 99 (Mum).

8. On cancellation, whether the charitable institution is debarred from making fresh application for registration?

9. Impact on cancellation order upon deletion of applicability of section 13(1) in merits.



2606-06-2015

10. Implications under other sections

(a) Section 56(2)(vii)

(i) Contribution / aid by a charitable institution whose registration is cancelled would be regarded as income of the recipient individual

(ii) shall be taxable beyond the basic exemption of Rs.50,000.

(b) Section 80G

Institution would not be eligible to obtain an approval under section 80G(5)(i) or its existing approval would be liable for cancellation.

(c) Exemption under section 10 would be available [section 11(7)].



2706-06-2015

1.1 Law prior to amendment [up to assessment year 2015-16]

(a) If income applied in a previous year to charitable or religious purposes in India <`85% of the income of the trust, the trustees may exercise an option to regard the amount of income applied in a subsequent year as application in the previous year.

(b) Option to be exercised by intimating the AO in writing before expiry of the time allowed under section 139(1) for furnishing the return of income [Explanation (2) to section 11(1)].

1.2 Amendment in Explanation to section 11(1) (with effect from assessment year 2016-17)

Option to be exercised in a form and manner as may be prescribed.

Exercising of option for deemed application of income in prescribed form [Expl. (2) of section 11(1)]


2806-06-2015

1.1 Law prior to amendment [up to assessment year 2015-16]

(a) a charitable institution can accumulate income not applied during the previous year for a period not exceeding 5 years provided it gives notice to the AO in prescribed form (Form 10); (b) rule 17 provides that the Form 10 has to be filed before the expiry of time allowed under section 139(1) for furnishing the return of income; (c) section 11(2) was silent on the time limit.

1.2 Amendment in section 11(2) (with effect from assessment year 2016-17)

The prescribed form (Form 10) should be filed by the charitable institution on or before the due date of filing return of income under section 139 (1).

Period within which Form 10 relating to secondary accumulation is required to be filed [section 11(2)]


2906-06-2015

1.1 Provision prior to amendment

None.

1.2 Amendment in section 13 (with effect from assessment year 2016-17)

Exemption under section 11(2) will not be available to a charitable institution if-

(a) it does not file Form 10 before the due date of filing of return of income under section 139(1); or(b) it does not file the return of income before the due date of filing of return of income under section 139(1).[section 13(9)]

No benefit of secondary accumulation if return of income / Form 10 is not submitted within due date of filing of return [section 13(9)]


3006-06-2015

Thank You


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