Exempt entities - Restriction on exemption in case of corpus donation (Budget 2017)

Now the Corpus donation given by exempt entities to another exempt entity out of current year receipt/income of such donor is not considered as application of income in the hand of donor trust or other exempt entity.

Earlier it considered as application of income in the hands of donor trust but is not considered as income of the recipient trust.

Budget 2017 proposed to to insert a new Explanation to section 11 of the Act to provide that any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1) of section 11, being contributions with specific direction that theyshall form part of the corpus of the trust or institution, shall not be treated as application of income.

It is also proposed to insert a proviso in clause (23C) of section 10 so as to provide similar restriction as above on the entities exempt under sub-clauses (iv), (v), (vi) or (via) of said clause in respect of any amount credited or paid out of their income.

As per the existing provisions of the Act, donations made by a trust to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, except those made out of accumulated income, is considered as application of income for the purposes of its objects.

Similarly, donations made by entities exempted under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 to any trust or institution registered under section 12AA, except those made out of accumulated income, is also considered as application of income for the purposes of its objects.

However, donation given by these exempt entities to another exempt entity, with specific direction that it shall form part of corpus, is though considered application of income in the hands of donor trust but is not considered as income of the recipient trust.

These amendments will take effect from previous year 2017-18 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

Cost of Acquisition of capital assets of entities in case of levy of tax on accreted income under section 115TD which related with special provisions relating to tax on accreted income of certain trusts and institutions.

Fair market value shall be deemed to be cost of Acquisition of capital assets in case of accreted income arises on conversion, merger, and dissolution under specified conditions of trust and institution registered under section 12AA.

The existing provisions of the section 49 of the Act provides for computation of cost with reference to certain modes of acquisition of capital asset.

Budget 2017 proposed to amend said section so as to provide that where the capital gain arises from the transfer of an asset, being the asset held by a trust or an institution in respect of which accreted income has been computed, and the tax has been paid thereon in accordance with the provisions of Chapter XII-EB (special provisions relating to tax onaccreted income of certain trusts and institutions), the cost of acquisition of such asset shall be deemed to be the fair market value of the asset which has been taken into account for computation of accreted income as on the specified date referred to in sub-section (2) of section 115TD.

The proposed amendment is consequential in nature.

This amendment will take effect retrospectively from 1st June, 2016 and will, accordingly, apply in relation to the assessment year  2016-17 and subsequent years.

Now the trust or entities required to apply for fresh registration under section 12AA where there is subsequent adoption or change in the objects.

Ø Requirement of fresh registration

Budget 2017 proposed to amend section 12A so as to provide that where a trust or an institution has been granted registration under section 12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996] and, subsequently, it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, it shall be required to obtain fresh registration by making an application within a period of thirty days from the date of such adoption or modifications of the objects in the prescribed form and manner.

The existing provisions of section 12A of the Act provide for conditions for applicability of sections 11 and 12 in relation to the benefit of exemption in respect of income of any trust or institution.

Further, the provisions of section 12AA of the Act provide for registration of the trust or institution which entitles them to the benefit of sections 11 and 12. It also provides the circumstances under which registration can be cancelled, one such circumstance being satisfaction of the Principal Commissioner or Commissioner that its activities are not genuine or are not being carried out in accordance with its objects subsequent to grant of registration.

However, at present there is no explicit provision in the Act which mandates said trust or institution to approach for fresh registration in the event of adoption or undertaking modifications of the objects after the registration has been granted.

Ø Time -limit of submission of return of income

Budget 2017 proposed to further amend section 12A so as to provide for further condition that the person in receipt of the income chargeable to income-tax shall furnish the return of income within the time allowed under section 139 of the Act.

As per the existing provisions of said section, the entities registered under section 12AA are required to file return of income under sub-section (4A) of section 139, if the total income without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax. However, there is no clarity as to whether the said return of income is to be filed within time allowed u/s 139 of the Act or otherwise.

These amendments are clarificatory in nature.

These amendments will take effect from the previous year 2017-18 and will, accordingly, apply in relation to assessment year 2018-19 and subsequent years.