JULY 15, 2014

By Pravin Agrawal, Deloitte Haskins & Sells LLP

THE activities of NGOs and charitable institutions have been much talked about and under the radar of Government recently due to apprehensions regarding genuineness of their role and activities in society. Union Budget 2014 has made an attempt to regulate the operations of charitable institutions through certain tax proposals.

Specific versus general exemption

In the existing taxation regime, charitable institutions registered under section 12AA of the Income-tax Act, 1961 ("Act") can claim exemption from income tax under the provisions of section 11 subject to fulfilment of specified conditions. If conditions are not fulfilled, the income is taxable in the hands of such charitable institutions.

Further, section 10(23C) of the Act provides for exemption to specified funds, educational institutions, hospitals, etc. which have been granted approval by the prescribed authority subject to fulfilment of prescribed conditions which are similar to section 11, 12 and 13.

In addition to above, certain general exemptions are also available to charitable institutions under section 10 such as under Section 10(34), 10(38), etc.

Currently, many charitable institutions which do not fulfil the conditions prescribed under section 11 or under section 10(23C) are claiming exemption under general provisions of section 10 and thus not paying taxes even though the income is not applied/ spent for their charitable objectives.

The above anomaly in the law has been sought to be addressed in the Budget 2014 by proposing that where a charitable institution has been granted registration for purposes of availing exemption under section 11, and registration is in force for a previous year, then such institution cannot claim any exemption under any provision of section 10 [other than exemption of agricultural income and income exempt under section 10(23C)].

Similarly, institutions which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 (except the exemption in respect of agricultural income).

Capital expenditure and deprecation – Claim of double benefit curtailed

Currently, income applied by a charitable institution to acquire capital asset is allowed as application of income. Further, while computing taxable income, such charitable institutions also claim a deduction of depreciation on above referred capital assets. Thus, double benefit is claimed by charitable institutions. Furthermore, certain judicial pronouncements have also supported the above claim of double benefit. [See ACIT v. Shri Adichunchanagiri Shikshana Trust, CIT v. Institute of Banking Personnel Selection]

To remove this anomaly, it is proposed that under section 11 and section 10(23C), income for the purposes of application shall be computed without any deduction or allowance for depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income in same or any other previous year.

Extension of power of Commissioner to cancel registration of charitable institutions

Under the existing provisions of section 12AA of the Act, the Commissioner of Income-tax can cancel the registration of charitable institutions under following two circumstances:

•  Activities of trust or institution are not genuine, or

•  Activities are not being carried out in accordance with objects of the trust or institution.

The power of commissioner to cancel the registration is limited to above specific cases. However, there may be instances where the charitable institutions violate the provisions of law by investing in prohibited mode, diverting income for benefit of certain interested persons or do not apply their income for charitable purposes.

Hence, in order to curb the above practices, to encourage genuine philanthropy and to ensure that benefits reach pervasively to intended recipients , it is proposed to extend the power of commissioner to cancel the registration of charitable institutions in cases where the activities of charitable institution are carried out in such a manner that:

•  Income does not inure for the benefit of general public;

•  It is for benefit of any particular religious community or caste (in case it is established after commencement of the Act);

•  any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or

•  its funds are invested in prohibited modes

Applicability of registration for earlier years

Currently, the registration granted to charitable institutions under section 12A of the Act applies from the date on which the registration is granted. The prospective applicability of registration causes genuine hardship to charitable organizations as absence of registration attracts tax liability even though such charitable organizations are otherwise eligible for exemption.

In a welcome move, in order to provide relief to such charitable institutions, it is proposed that where registration is granted to a charitable institution under section 12AA of the Act, benefit of sections 11 and 12 shall be available to such charitable institution in respect of any assessment year preceding the year in which registration is granted for which assessment proceedings are pending before the Assessing Officer as on the date of such registration. However, to avail this benefit, the objects and activities of such charitable institution in the relevant earlier assessment year(s) should be same as those on the basis of which such registration has been granted. The amendment is proposed to be effective from October 01, 2014. Clarity is required as to what will happen to cases where aforesaid condition of registration was met at the time of assessment proceedings but matter is pending before the appellate authorities.