Highlights of Finance Act 2020, Charitable trusts and institutions.

Section 12AB | Finance Act 2020 | Amendment in Section 12AA/ 80G/ 80GGA

The Finance Act 2020 had made significant changes to the taxation and the governance of Charitable trusts and institutions existing as well as new.

The changes pertain to:

Procedure for obtaining registration / re-registration for claiming exemption by entities registered under section 12AA of the Income Tax Act, 1961 (‘IT Act’) as well as for obtaining registration /re-registration under section 80G of the IT Act; and requirement of additional compliances to be made by Charitable entities which are registered under section 80G of the IT Act pertaining to donations made by the donor.

A new section 12AB has come into force which will replace the provisions of registration under section 12AA or section 12A of the IT Act.

All existing Charitable trusts registered under section 12A or section 12AA shall be required to make an application of re-registration 1st October, 2020.

Similarly, the provisions of section 80G(5) of the IT Act are amended wherein all registered charitable institutions are required to make an application for re-registration and its procedure and time limit is same as the procedure for registration under Section 12AB.

Also every charitable trust or institution registered u/s 80G shall be required to submit a statement of donations received in such form & manner as may be prescribed & the benefit of 80G shall be available to donors only on the basis of information relating to donation furnished by the corresponding charitable trust or institutions.

In the cases of delay in filing of these statements the defaulting entity will be liable to pay a Fee of Rs 200/- per day of delay.

The defaulter will be further punishable by penalty varying between Rs 10,000/- to Rs. 100,000/-

Highlights

Prior to the Finance Act, 2020, registration under section 12A or 12AA is granted by the CIT, DIT or the Principal CIT and only the twin conditions of the ‘objects being charitable in nature’ and ‘the activities being genuine’ are to be checked by him at the time of granting registration.

However, Finance Act (No. 2), 2019 added the provision w.e.f. 01.09.2019 adding another aspect to be checked while granting registration, which is ‘compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects’.

This condition of complying with requirements of any other law is in addition to the power of the Principal Commissioner or Commissioner to call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the objects of the trust or institution and the genuineness of its activities.

In the new provision section 12AB, this condition of complying with the requirements of any other law is now designated under Sub-clause (i) to clause (b) of section 12AB.

This is to ensure that the trusts or institutions do not deviate from their objects and comply with all the other laws which are material for the purpose of achieving their objects.

Prior to this amendment, there was no provision in the Act wherein non-compliance of any provisions of any other Act would lead to denial of registration under this Act and the income tax authorities had to restrain themselves within the provisions of this Act only.

With this amendment as discussed above, every charitable trust or institution shall have to comply with the provisions of all the other laws which are material to its objects.

Any non-compliance otherwise of which would pose the risk of cancellation of registration and consequent tax liability under Section 115TD.

With Finance Act 2020, the provisions of Section 12AA are entirely expunged and are replaced by Section 12AB.

This new provision was originally made applicable from 01.06.2020. But due to the ongoing COVID-19 worldwide pandemic, the cut-off date has been extended by 4 months and the entire procedure to obtain registration by a trust stands changed with introduction of a new Section 12AB into the Act w.e.f 01.10.2020.

Under the amended provisions, the time limit of granting registration to the trust has been restricted to five years as against indefinite period in the earlier provision, where the registration was granted in perpetuity until the same gets cancelled.

Now,in every five years, all such entities will be required to renew their registration by submitting a fresh application.

Further, while granting the registration, the Principal Commissioner or Commissioner shall call for documents or information which he thinks are necessary in order to satisfy himself about the compliance of above stated three conditions.

For the first time registration, under the new provisions section 12AB of the Act, 3-Year ‘Provisional Registration’will be provided which will later be converted to‘Normal Registration’.

Also the trusts or institutions existing as on the date of the applicability of Section 12AB, i.e. 01.10.2020,and are already registered under section 12A/12AA of the Act, shall be required to obtain fresh registration in accordance with the new procedure.

It has also been specificallyprovided that all the applications for obtaining registration which are pending as on 01.10.2020 (those made under section 12A/12AA) shall be deemed to have been made under the new section12AB and registration will be granted accordingly as per the new law.

TIME LIMIT

Section 12A has been amended to insert a new clause (ac) to sub-section 1.

This new clause prescribes time limit for making application to obtain registration under section 12AB.

1. Where trust or institution is already registered under Section 12A/12AA before 01.10.2020 [Section 12A(1)(ac)(i)]– Fresh application has to be made within 3 months starting from 1st October 2020 under Section 12AB of the Act.
2. Where trusts or institutions applying for fresh registration[Section 12A(1)(ac)(vi)]–Application to be filed at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought. In this case, provisional registration will be granted for three years.

3. Where the trust or institution is provisionally registered under Section 12AB [Section 12A(1)(ac)(iii)] –Application shall have to be filed to obtain regular registration at least six months prior to expiry of period of provisional registration or within six months of commencement of its activities, whichever is earlier.
4. Where trust or institution has obtained regular registration under Section 12AB [Section 12A(1)(ac)(ii)] – Application to obtain re-registration has to be filed once the period of five years is about to expire. It has to be made atleast six months prior to the expiry of the said period of five years.
5. Where trust or institution has adopted or undertaken modifications to its objects [Section 12A(1)(ac)(v)] – Application has to be made for getting registration to the modifications to the object. It should be made within thirty days from the date of the said adoption or modification.

Procedure for Registration:

1. For existing trusts or institutions applying for registration under Section 12AB [application made under section 12A(1)(ac)(i)]– Principal Commissioner or Commissioner shall pass an order granting registration under Section 12AB of the Act for a period of 5 years. Principal Commissioner or Commissioner shall have the power to call for such documents or information which he considers necessary and after satisfying himself about the three conditions i.e.,

– objects of the trust or institution and

– the genuineness of its activities and

– compliance of such requirements of any other law for the time being in force as are material for the purpose of achieving its objects.

2. For trusts or institutions applying for fresh registration under section 12AB [application made under section 12A(1)(ac)(vi)] – Principal Commissioner or Commissioner shall pass an order granting provisional registration for 3 years.

As it is provisional, The trust or institution shall have to then make separate application for obtaining regular registration.

3. For trusts or institutions applying for re-registration after 5 years or which are provisionally registered applying for regular registration or which has adopted modifications to the objects [application made under section 12A(1)(ac)(ii)/(iii)/(v)]– Principal Commissioner or Commissioner shall pass an order granting registration under Section 12AB only after calling for such documents or information which he considers necessary and after satisfying himself about the three conditions i.e.,

– objects of the trust or institution and

– the genuineness of its activities and

– compliance of such requirements of any other law for the time being in force as are material for the purpose of achieving its objects.

If he is not satisfied with any of the above three conditions, then an order may be passed rejecting such application. The registration already granted may also be cancelled. However, it shall be imperative for the concerned authority to afford a reasonable opportunity of being heard to the applicant before taking any such adverse action. This concept of re-registration has empowered the revenue to keep the functioning of the trusts and the genuineness of their activities in check every 5 years.

This would also mean that the strenuous task of obtaining the registration or re-registration would get more onerous and burdensome.

TIME LIMIT IN WHICH ORDER GRANTING REGISTRATION SHALL BE PASSED

1. For existing trusts or institutions applying for fresh registration under Section 12AB [application made under section 12A(1)(ac)(i)]– Order granting registration under section 12AB(1)(a) shallbe passed within three months from the end of the month in which the application was received.
2. For trusts or institutions applying for fresh registration under section 12AB [application made under section 12A(1)(ac)(vi)]– Order granting provisional registration under section 12AB(1)(c) shall be passed within one month from the end of the month in which the application was received.
3. For trusts or institutions applying for re-registration after 5 years or which are provisionally registered applying for regular registration or which has made modifications to the objects[application made under section 12A(1)(ac)(ii)/(iii)/(v)]– Order granting registration under section 12AB(1)(b) shall be passed within six months from the end of the month in which application was received.

ASSESSMENT YEAR FOR APPLICATION OF THE PROVISIONS OF SECTION 11 AND 12

1. Where existing trusts or institutions has applied registration under Section 12AB [application made under section 12A(1)(ac)(i)] – Exemption under Section 11 and 12 shall be available from the year in which the trust or institution was earlier granted registration under the erstwhile provisions of Section 12A/12AA.
2. Where trusts or institutions has applied fresh registration under Section 12AB [application made under section 12A(1)(ac)(vi)] – Exemption under Section 11 and 12 shall be available from the year immediately following the financial year in which the application is made by the trust or institution.
3. Where trusts or institutions has applied provisional registration under Section 12AB[application made under section 12A(1)(ac)(iii)]-Exemption under Sections 11 and 12 shall apply starting from the year in which the provisional registration was granted.
4. Where trust has applied for re-registration after 5 years or has adopted or undertaken modifications to its objects [application made under section 12A(1)(ac)(ii)/(v)] – Exemption under Section 11 and 12 shall be available from the year immediately following the financial year in which the application is made by the trust or institution.

It must be noted here that similar amendments have also been made to the provisions of Section 10(23C) and 80G to incorporate the procedural changes made in regard to the filing of application to obtain approval, time limit within order for approval is to be made, parameters to award approval, assessment year from which exemption could be availed.

POWER TO CANCEL REGISTRATION

Certain powers have been granted to the Principal Commissioner or Commissioner for cancelling the registration granted to the trust or institution under sub-section (4) and (5) to Section 12AB of the Act.

The action of cancelling the registration can be taken under the following scenarios:

– Where he is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution [Section 12AB(4)]or

– Where the trust or institution is not eligible for exemption under Section 11 or 12 due to the violation of Section 13(1) of the Act [Section 12AB(5)(a)] or

– Where the trust or institution has not complied with the requirement of any other law [Section 12AB(5)(b)],

Upon satisfaction of any of the conditions as stated above, the Principal Commissioner or Commissioner shall pass an order in writing cancelling the registration of such trust or institution after affording it a reasonable opportunity of being heard.

KEY POINTS:

Amendments under Section 80G

The Charitable/religious trusts institution etc. shall file an application before the Commissioner or Principle Commissioner within the prescribed time limits to sought registration under Section 80G. Procedure and time limit to file an application for registration under Section 80G is same as the procedure for registration under Section 12AB.

Further, the Charitable/religious trusts institution etc. shall file a statement of receipts of donation to the prescribed Income tax authority in the prescribed time.

Further, the charitable/religious trusts institution etc. shall furnish to the donor, a certificate specifying the

amount of donation in such manner, containing such particulars and within such time from the date of receipt of donation, as may be prescribed.

Furthermore, the donor shall be provided the deduction under 80G directly in the return of income on the basis of the prescribed statements

♦ Amendments under Section 80GGA

Clause 34 of Finance bill, 2020 has specified that no deduction shall be allowed to the donor under Section 80GGA in respect, of donation exceeding amount of Rs. 2,000/- unless donation is paid in any mode than than cash.

♦ Furnishing of Statements and Certificate

Charitable/religious trusts institution etc. shall furnish the following statements: –

Statement as prescribed under Section 35(1) to the prescribed Income tax authority or furnishing certificate as prescribed under clause (ii) of Section 35(1A)
Statement for receipt of donation under Section 80G to the prescribed Income tax authority or furnishing certificate as prescribed under clause (ix) of sub section 5 of Section 80G.
In case of failure to file the above statements the Charitable/religious trusts institution etc. shall be levied the fees of Rs. 200/- for each day during which the failure continues.

Further, the Assessing office may levy penalty of amount not less than Rs. 10,000/- which may be extended to an amount of Rs. 1,00,000/-.

♦ Amendment under Section 115TD

After the introduction of Section 12AB, nothing contained in Section 12AA shall be applicable to the trust or institution registered under Section 12AA.

Hence in order to make the provisions of Section 115TD applicable Clause 33 of the Finance Bill, 2020 have substituted the word, figures and letters “under section 12AA” with the words, figures and letters “under section 12AA or section 12AB” in Section 115TD which shall be effective from June 01,2020.

DUE DATE FOR FILING OF RETURN OF INCOME BY TRUSTS OR INSTITUTIONS:

The trusts or institutions whose total income, without giving effect to the provisions of exemption claimed under Section 11 and 12, exceeds the maximum amount of income not chargeable to tax shall be required to get their books of accounts audited by a Chartered Accountant. The audit report in Form No. 10B has to be filed one month prior to the due date of filing of return of income under Section 139 of the Act. Since the due date u/s 139 of the Act, as amended by Finance Act, 2020, stands to be 31st October of the AY, the cutoff date for furnishing audit report in Form No. 10B now stands to be 30th September of the AY. This amendment for change in due dates is effective from AY 2020-21 and onwards.

However, owing to worldwide pandemic COVID-19, the Ministry of Finance has extended the due date of filing of return of income u/s 139(4A)/(4C) to 30th November, 2020 and accordingly, the revised due date for auditing the books of accounts and furnishing audit report stands to be 31st October, 2020. This extension is only for the previous year ending 31.03.2020 i.e., AY 2020-21.

IMPORTANT ISSUES:

Chapter XII-EB in the Act imposes liability of additional tax under Section 115TD on the existing trusts or charitable institutions on their failure to make or on delay in filing of application for registration under Section 12AB

There is a clause in the section and would be in addition to the tax liability arising in the hands of trusts or institutions under any other provisions of the Act.

This section will be applicable when the charitable trust ceases to exist or ceases to carry on charitable activities, in such case, the tax liability would arise on the accreted income i.e., fair market value of its assets reduced by fair market value of its liabilities.

However, the provisions of Section 115TD, distinctively mentions three circumstances –

– Where the trust is converted into any form which is not eligible for registration under Section 12AA/12AB i.e., cancellation of registration or modifications of objects not approved rejected by CIT or not approved from CIT.

– Where the trust is merged with any entity which is not registered under Section 12AA/12AB and has different objects

– Where the trust has dissolved and has not transferred its assets to any trust or institution registered under Section 12AA/12AB or which is approved under Section 10(23C)(iv)/(v)/(vi)(via) within 12 months from the end of the month in which dissolution takes place.

The trust which fails to make application by 31.12.2020 (if not extended any further) would cease to be registered under 12A/12AA and would not be able to entail the benefit of Section 11 & 12 anymore.

Further, deeming the unregistered trust as an AOP under Income Tax Laws and taxing its income at MMR can be one repercussion.

Also, at present there seems to be no provision for filing the application for fresh registration with condonation of delay. It is not certain whether the applications for registration filed after the due date would be accepted and whether the delay therein would be condoned by the concerned authority or not.

Even if the application is made with condonation of delay, it has to be supported with splendid and genuine cause of delay.

It can only be inferred that the registered trust or institution if it fails to obtain fresh registration under Section 12AB, there registration earlier granted under Section 12A/12AA would stand cancelled which will eventually bring in the taxation of income at MMR.

Procedure for entities enjoying dual registration at present

To claim exemption of income under Section 11 & 12, one must be registered under Section 12A/12AA/12AB.

While, on the other side, there is Section 10(23C) specifically for trusts or institutions like university or other educational institutions, hospitals or medical institutions which are engaged in the activities of education or medical facility for charity and not for making profit.

Earlier there were entities engaged in the activities of education or medical facility, which had obtained the registration under Section 12A/12AA as well as the approval under section 10(23c) or 10(46).

Now, first proviso to Section 11(7), has been inserted by Finance Act 2020, making even the registration of trust or institution, under section 12A/12AA inoperative from the date on which the trust or institution is approved under Section 10(23C) or 10(46) of the Act or on 01.10.2020, whichever is later.

This can be interpreted to state that the Act now restricts the trust or institution which are registered under Section 12AB from not only claiming exemption under Section 10(23C) or 10(46), but also the approval under these sections.

Now when this registration becomes inoperative due to operation of first proviso to Section 11(7), the trust shall be required to make fresh application for registration under section 12A(1)(ac)(iv), at least six months prior to the commencement of the assessment year from which the said registration is sought to be made operative.

The Principal Commissioner or Commissioner shall pass an order granting registration under Section 12AB(1)(b) only after calling for such documents or information and after satisfying himself about the prime three conditions i.e.,

– objects of the trust or institution, and

– the genuineness of its activities, and

– compliance of such requirements of any other law for the time being in force as are material for the purpose of achieving its objects.

If he is not satisfied with any of the above-mentioned conditions, then an order may be passed rejecting such application.

The registration already granted may also be cancelled. However, it shall be imperative for the concerned authority to afford a reasonable opportunity of being heard to the applicant before taking any such adverse action.

This order shall be passed before the expiry of six months from the end of the month in which the application was received and the exemption under Section 11 and 12 shall be available from the year immediately following the financial year in which the application is made by the trust or institution.

If these trusts or institutions, having approval under section 10(23C) or 10(46) seek to renew their registrations under Section 12AA (now Section 12AB), they would have to give up their approval under section 10(23C) or 10(46), for which, the law has provided certain time limit in Section 12A(1)(ac)(iv) to make application which is at least six months prior to the commencement of the assessment year from which the said registration is sought to be made operative.

Now, if the registration granted under Section 12AA becomes inoperative on 01.10.2020 due to this proviso to 11(7), the trust would have to file an application at least 6 months prior to the commencement of the AY for which registration is sought to be made i.e, upto 30.09.2020 (to revive the registration for PY 2020-21); which is not practically possible as the cut off date would have already lapsed.

In such circumstance, the only possible approach is that the trust gets its approval under the amended provisions of Section 10(23C) or 10(46) and claims exemption thereon for PY 2020-21 only and for PY 2021-22 onwards, the registration under Section 12AB is revived by making application under Section 12A(1)(ac)(iv).

Where application for registration was made under Section 12AA on or before 31.03.2020 and is yet to be disposed off

Section 12AA(2)of the Act states that the order granting or refusing registration shall be passed before the expiry of six months from the end of the month in which the application was received.

If the application for obtaining registration is not disposed of within six months, the trust or institution shall be deemed to have been granted.

In view of some of the SC decision and as the provisions of Section 12AA, applicable upto 30.09.2020, it can be deemed that the registration to the trust shall be deemed to have been granted if not disposed of within the prescribed time limit, and thus, the charitable trust or institution would be able to make fresh application for registration under Section 12A(1)(ac)(i) as an existing trust.