ICAI suggests changes in the Income tax Act for charitable organisations

Institute of Chartered Accountants of India (ICAI) has given various suggestions to the Ministry of Finance, Government of India, in the ‘Pre-Budget Memorandum – 2018’ (Direct Taxes). We are excerpting some suggestions made by ICAI relevant to charitable organisations in India.

Section 2(15) relevant to “charitable purpose” and “business income”

Section 2(15) provides that the “advancement of any other object of general public utility” shall not be treated as “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:

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

b) 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, for the previous year.

Prior to the effectiveness of the amendment made under Finance Act 2015, Section 2(15) provided for a monetary limit of twenty-five lakh Rupees up to which the receipts as may be derived from activities in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business may still be regarded as ‘charitable purpose’, in case of a trust whose object fell under “advancement of any other object of general public utility”.

The amendment by the Finance Act, 2015 replaced this monetary limit with a percentage of total receipts. Inadvertently, this amendment adversely impacted small charitable trusts and benefited charitable trusts having higher turnover. For example, a charitable organisation operating on an annual budget of fifty lakh rupees would be allowed business income only up to ten lakh Rupees at the rate of twenty per cent whereas an organisation operating on a budget of five crore Rupees would be allowed business income of one crore Rupees at the rate of twenty per cent.

Further, there appears to be an element of subjectivity in the first condition in the proposed proviso requiring such activity to be undertaken in the course of actual carrying out of such advancement of any other object of general public utility, which may give rise to unnecessary litigation.

In this context, it may also be noted that there is already a requirement u/s 11(4A) that the business should be incidental to the attainment of the objects of the trust or institution and separate books of account should be maintained by such trust or institution in respect of such business.

ICAI’s Suggestion

ICAI has suggested that the proviso should also include a monetary limit, of say Rs. 25 lakhs, in line with the erstwhile second proviso so that charitable trusts with lower turnover continue to get the benefit available to charitable trusts under the current law. The same may be given effect to by amending the condition given here below:

“the aggregate receipts from such activity or activities, during the previous year, do not exceed twenty percent of the total receipts, of the trust or institution undertaking such activity or activities, or twenty-five lakh rupees, whichever is higher, for the previous year.”

Since section 11(4A) already encompasses a similar condition for grant of exemption, the condition specified in clause (i) of the proviso to section 2(15) may be removed.

Further, appropriate guidelines/clarification may be issued in respect of clause (i) of the proviso to section 2(15) to enable trusts to comply with the condition requiring such activity to be undertaken in the course of actual carrying out of advancement of any other object of general public utility for claim of exemption.

Section 2(15) Define Yoga

The definition of “charitable purpose” under section 2(15) has been amended to include ‘Yoga’ as a specific category thereunder. However, ‘yoga’ is not defined in section 2(15). Generally, the term ‘yoga’ is used in a wide sense to encompass different forms of meditation and physical, mental and spiritual practices. In the absence of specific definition, the scope and ambit of what constitutes yoga would be a subject matter of litigation, especially in the context of claiming exemption under section 11.

ICAI’s Suggestion

It is suggested that the term ‘yoga’ be defined in order to confine its scope and prevent abuse of the provision by institutions engaged in other activities of similar nature not constituting yoga.

Defining Annual receipts u/s 10(23C) read with Rule 2BC of Income-tax Rules

Under section 10(23C)(iiiad) and (iiiae) of Income-tax Act, it is provided that the income of University/Educational institutions/hospitals/ other institutions specified therein will be exempt provided they comply with the conditions stipulated therein.

Also, it is provided that “aggregate annual receipts” of such institutions shall not exceed the amount of annual receipts as may be prescribed. Though annual receipts have been prescribed as one crore Rupees vide Rule 2BC of Income-tax Rules, the term “annual receipts” has not been defined in the Income-tax Act.

It is not clear as to whether:

(a) for computing “annual receipts” the receipts of such institutions from educational / hospital activities alone are to be considered each year;

(b) Certain receipts of such institutions that are not received on annual basis e.g. receipts from sale of property, equity shares and other proceeds on divestment are to be excluded from the computation of “annual receipts”;

(c) In certain cases where such charitable institutions receive donations in kind in the form of land, movable assets etc. whether “annual receipts” would exclude such receipts since they are not received annually.

ICAI’s Suggestion

It is suggested that “Annual Receipts” be clearly defined as income of the hospitals / educational institutions arising regularly/every year but excluding value of donation received in kind by way movable assets, land, hospitals/educational equipment, sale consideration received on disposal of land, shares or other movable property, hospital/educational equipment etc.

Further, it may be specifically provided that donations received towards corpus by way of land, movable assets are excluded from computation of “Annual Receipts” as prescribed under Rule 2BC of Income-tax Rules.

Amend Section10(23C) to specifically exclude ‘corpus donations’ from requirement of mandatory application of income

Application of income is mandatory by charitable trusts/institutions including those enjoying benefits under section 10(23C) to its objects, subject to accumulation of not more than 15% of its income including income from voluntary contributions.

Similar provisions under section 11(1) read with section 12(1) exclude ‘corpus donations’ (voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution) from the mandatory requirement of application of the income. No such provision has been made in section 10(23C). This would compel the Institutions coming within the scope of section 10(23C) to apply even their corpus donations to the day today activities for getting tax exemption. This would be detrimental to such institutions because it would preclude them from building up corpus fund.

ICAI’s Suggestion

Section 10(23C) should be amended to specifically exclude ‘corpus donations’ from the requirement of mandatory application of income by such trusts / institutions.

Financial Year

Under Section 2(9) of the Income Tax Act, 1961 (the Act) “assessment year” means the period of twelve months commencing on the 1^st day of April every year.

As per section 2(34) of the Act, “previous year” means the previous year as defined in section 3.

As per Section 3 of the Act “previous year” means the financial year immediately preceding the assessment year:

Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.

The average Indian is not aware of the difference between terms like ‘financial year’, ‘accounting year’, ‘previous year’ and ‘assessment year’. To the ordinary person all these terms mean one and the same thing though in effect it is not. For example, under the Union Budget or Finance Act if a change is proposed from assessment year 2018-19, it actually relates to ‘Financial Year’/ ‘Previous Year’/’Accounting Year’ 2017-18. However, a lay person takes it as effective from the year 2018-19.

ICAI’s Suggestion

In line with the provision of section 320(92) read with section 2 of the Direct Taxes Code, 2013 the concept of “previous year” and “assessment year” may be replaced with the term “financial year” 

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