Changes in Charitable Trust and Exempt Institution Taxation

Changes in Charitable Trust and Exempt Institution Taxation - CA Dinesh R. Shah & CA Shreya A. Doshi

The present process of registration of trusts, institutions, funds, university, hospital etc under section 12AA or under sub-clauses (iv), (v), (vi) or (via) of section 10(23C) and approval of association, university, college, institution or company etc need improvement with the advent of technology. Also, regular renewal of registration of trusts will help the Department to closely monitor its activities and will lead to reduction in roving inquiries in the activities of the trust. Hence, inorder to monitor and streamline the activities of the trust certain amendments were proposed by way of Finance Act, 2020.

PART I- SECTION 12AB

All the charitable and religious trusts have to be registered u/s 12AB of Income Tax Act, 1961 with effect from 1st June 2020 and consequently earlier section 12AA may
become redundant. The amendments and the related issues are discussed as under:-

1. Registration norms for already existing Trusts
i) All the existing trusts which hold registration u/s 12A / 12AA have to make new application within 3 months of 01-06-2020 means on or before 31-08-2020.
ii) This fresh registration u/s 12AB will be granted for the five years i.e. from 01-06-2020 – 31-05-2025 (we are presuming that registration will be granted w.e.f.
01-06-2020 even if the application is made anytime within prescribed time i.e. on or before 31-08-2020)
iii) An order for registration under Section 12AB will be passed within 3 months from end of month in which application was received.
iv) Suppose an application is made for an existing trust holding certificate u/s 12AA on 01-10-2020, shall the new registration be granted w.e.f. 01-10-2020 to
30-09-2025 or from 01-06-2020- 31-05-2025? What will be the consequences of delay in making an application?

2. Renewal of registration
i) Every public trust has to renew registration u/s 12AB and section 10(23C) every 5 years atleast 6 months prior to the expiry of registration and such application for renewal should be made online to the designated authority i.e. Principal Commissioner of Income Tax (Exemption).
ii) The application for registration of public trust may have to be filed in accordance with rule 17A of Income Tax Rules, 1962 (i.e. may be in prescribed Form 10A).
iii) When an application is made to PCIT then its office might call for documents to satisfy himself about the genuineness of activities of the trust and compliance
of laws applicable to the trust.
iv) Depending upon the outcome of examination of documents, mentioned in pointno. (iii), an order granting or rejecting renewal will be passed within 6 months
from the end of the month in which an application is made.
v) Suppose if the public trust has been given registration upto 30-05-2025. The renewal application must be made on or before 30-11-2024. If application is made after 30-11-2024 there is possibility that the public trust may not get renewed for the Financial Year 01-04-2025 – 31-03-2026. It may be granted as per decision of the DIT.

3. Residual circumstances (Eg- New Public Trust,etc)
i) In circumstances not specifically provided for in the act, the application for registration in prescribed form (at present in Form 10A) should be made to the
PCIT(E) atleast 1 month prior to the commencement of the previous year relevant to the assessment year from which the registration is sought. Suppose the trust got registration under Mumbai Public trust act on 30-09- 2020, it has to make application form 01-10-2020 to 28-02-2021 i.e. before 01- 03-2021 if it wants to commence activities from 01-04-2021 inorder to get benefit of Section 11.
ii) The PCIT(Exemption) has to pass order granting or refusing provisional registration before the expiry of 1 month from the end of the month in which the application is made. If application is made on 01-10-2020, then PCIT(E) has to mostly disposed off the application on or before 30-11-2020. If the PCIT(E) grants provisional registration u/s 12AB on 01-04-2021 then the provisional certificate will be valid for period of three assessment year i.e. above provisional certificate will be valid for the AY 2022-23, AY 2023-24 and AY 2024-25 i.e. upto previous year ending 31st March 2024.
iii) Where such provisional registration is granted for 3 years, the public trust will have to apply for registration 6 months prior to expiry of the period of the provisional registration or within 6 months of commencement of its activities whichever is earlier. Example- The new public trust has made an application on 01-10-2020 and the provisional registration u/s 12AB will be granted by the PCIT(E) for AY 2022-23, AY 2023-24 and AY 2024-25. The trust has commenced the activities w.e.f. 01-01-2021, the public trust must make application for regular registration u/s 12AB within six months latest by 30-07-2021.
iv) At the time of making application as per point no. (iii) then its office might call for documents to satisfy himself about the genuineness of activities of the trust and compliance of laws applicable to the trust.
v) Also, kindly note that the pending registrations u/s 12AA(1)(b) as on 31st May 2020 will be dealt with as per the time limits mentioned in this point.

4. Modification in objects
In case there are modifications in the objects of the trust which are not confirming to the regular objects of the trust then such trust shall make an application for registration u/s 12AB within 30 days of such change. An order in respect of registration shall be made within 6 months from end of the month when such application was made provided he is satisfied in respect of genuineness of activities of such trust and its compliance with other laws and regulations.

5. Essentials for Registration
So, to comprehend PCIT(E) grants registration to trusts when the following conditions are satisfied
(a) The activity of the trust is in accordance with the objects set out in the constitution of trust or institution i.e. activities must be genuine.
(b) The activities of trust are not illegal or defiant of the purposes of granting exemption.
(c) It is not opposing to public policy.

6. Documents for registration
The formal procedure for registration u/s 12AB i.e. in respect of documents and exact procedure in terms of electronic filings have not been notified yet by the CBDT. However, keeping in view the documents required for registration u/s 12A /12AA one can make a reasonable judgement of what documents would be required for registration u/s 12AB and accordingly a list of such documentshave been made

i)Name of Trust, PAN copy, its registration no. under Bombay Public Charitable Trust, Copy of Certificate and Date of Establishment (If such trust is registered under Society Registration Act, 1860 then copy of such certificate)
ii) Copy of 12A registration certificate under Income Tax Act, 1961 (if it’s an already existing trust)
iii) Name of Managing Trustee and Chairman alongwith their address and PAN
iv) Details of authors / founders of the trust like PAN, Aadhar, etc
v) Name of the trustees / office bearers of the trust like Name, address, designation, PAN, Aadhar, contact details, occupation etc.
vi) If the trust is not owning any office / premises and its carrying out activities from trustee’s place of work/ residence then consent letter from trustees / persons
vii) Certified copy of Trust Deed from Charity Commissioner’s office for ascertaining the objects of the trust mainly public charitable trust or religious trust (also keep the original ready)

viii) Two Copies of audited financial statements of the trust for last 3 years, if the trust was in existence any year prior years.


7. Effect of Non Registration u/s 12AB
i) The application of income for charitable or religious purposes will not be considered as application of income within the meaning of Section 11(1)(a). Suppose trust has got gross receipt of Rs 1 crores and Rs 30 lakhs were spent on administration expenses of the trust i.e. rent, salary, electricity,etc. and Rs 70 lakhs were spent on object of the trust like education, relief of poverty and medical help. In the absence of registration u/s 12AB, Rs 70 lakhs will be taxable and the tax will be levied at the normal rates applicable to the individual as per AO i.e. at Maximum Marginal Rate. This means that expenditure utilised for charitable purposes will not be considered while computing income of the trust even when its amounts were actually spent for the objects of the trust.
ii) The benefit of setting aside income not exceeding 15% for charitable or religious purposes or accumulation of funds for specific purpose will not be available and tax will be paid at MMR as explained in the above point on amounts in surplus of running expenses.
8. Refusal to Grant Registration by CIT(E) The CIT(E) will pass an order either granting or refusing the registration within respective time limits as specified in the aforementioned paragraphs. If the CIT(E) refused registration of trust u/s 12AB the public trust would have to file an appeal before the ITAT within 60 days of the receipt order rejecting such registration and filing fees would be Rs 500(Section 253(6)(d)).

PART II- AMENDMENTS IN RELATION TO 80G
1. Earlier certificate granted u/s 80G was valid for a period of 5 years. Finance Act (No.2), 2009 deleted this requirement w.e.f. 01-10-2009. Consequent to this omission, only those trusts that need to get approval renewed due to expiry before 01-10-2009 had to get approval renewal due to expiry of time before 01-10-2009. Those cases where expiry of registration was due after 01-10-2009 were not required to apply for fresh registration. Hence, registration was perpetual unless it was cancelled. So, there was no need for periodical renewal. This position was affirmed in various judgement Babu Hargovind Daya Trust Vs ITAT Lucknow (2011) 199 Taxmann 138 (All) and Harman Singh Herbam Kaur Vs DIT(E) (2012) 49 SOT 387 (Delhi ITAT).

2. Renewal of registration for existing Trusts
i) Old provision of perpetual registration is deleted and a new procedure w.e.f. 01-06-2020 is provided as per the procedure as under:- 

The trust holding certificate u/s 80G will have to make a fresh application for a new certificate on or before 31-08-2020 to the PCIT(E) or the designated authority and a 80G certificate will be issued for which will be valid for 5 years within 3 months from the end of the month in which such application was made. Such certificate shall be valid from the AY in which earlier approval was granted.

ii) Example- XYZ is a trust registered with Charity Commissioner and holds 80G and 12A registration under the Income Tax Act, 1961. If renewal application is made on 02-07-2020 then an order granting registration u/s 80G will be passed by 31-10-2020 and 80G will be valid for AY 2021-22 to AY 2025-26.
For such renewal of 80G certificates, the assessee trust can keep the following documents ready (This list has been made as per requirements of issue of 80G provided in the old law):-
a) Copy of existing 80G certificate
b) Annual audited financial statements for the 3 years
c) Updated Bank statements of above 3 years alongwith the books of accounts
d) Copy of registration granted u/s 12A
e) Note on activities of trust since its inception or during the last 3 years whichever is less and
f) Copy of trust deed

iii) Once the application of 80G is made (online), the PCIT(E) will give an opportunity to produce the list of documents given above.

iv) As per amended law the assessee trust holding 80G certificate is required to make application for 80G certificate before 31-08-2020. Suppose such application is made after 31-08-2020 i.e. let’s say on 01-10-2020 then its probable that the benefit of 80G will not be available for AY 2021-22 and will be available for next 5 years after AY 2021-22 ? i.e. the donor who gives donation to such trust for AY 2021-22 will not get any benefit u/s 80G for that period?

3. Renewal of 80G registration (after 5 years)
i) For subsequent renewal of 80G certificate granted for 5 years, an application has to be made atleast 6 months prior to date of expiry of such certificate. Such
registration will be renewed within 6 months from the end of the month in which an application was made. Such approval for 80G will be granted for assessment year immediately following the financial year in which such application is made.
ii) Example- Trust holding 80G certificate under old provisions (i.e. Prior to Finance Act 2020) has applied for renewal on or before 31-08-2020 in accordance with the new law. Accordingly, the trust has been granted 80G certificate for 5 years i.e. for AY 2021-22 to AY 2025-26. At the time of subsequent renewal, if the trust is makes application on 05-08-2024 (last date-30-09-2024), an order granting or rejecting such renewal shall be passed on or before 28-02-2025. Renewal will be granted for AY 2025-26 to AY 2029-30.
iii) Now suppose the trust is making application for 80G renewal on 01-01-2025 then what will be consequences? Will there would not be 80G benefit for some part of the next AY? (a clarification from CBDT is expected to come).
iv) The order for renewal u/s 80G may be positive or negative. In case of renewal u/s 80G is rejected by PCIT(E), the trust may file an appeal before ITAT within 60 days of receipt of order of rejection (Filing fees = Rs 500).

4. Final registration after provisional Registration
i) Where the institution or fund has been provisionally approved, then an application must be made at least 6 months prior to expiry of the period of the provisional approval or within 6 months of commencement of its activities, whichever is earlier in order to seek final registration u/s 80G for a period of 5 years. Such order shall be passed within 6 months from the end of the month in which such application was made. Such final registration shall be granted with effect from the first AY in which provisional registration was granted.
ii) The order for renewal u/s 80G may be positive or negative. In case of renewal u/s 80G is rejected by PCIT(E), the trust may file an appeal before ITAT within 60 days of receipt of order of rejection.

5. Residuary clause (Registration for newly formed trusts,etc )
i) Generally it is advisable to seek registration of trusts u/s 12AB before seeking registration u/s 80G. In case of new trusts, application for certificate u/s 80G will be required to be filed 1 month prior to commencement of the previous year relevant to the assessment year for which the approval is sought.
ii) In such a case, the PCIT(E) will pass order for provisional approval for 3 years. Such order shall be passed within 1 month from the end of the month in which
such application was made.
iii) Example- If a new trust is formed on 01-01-2021 then an application for registration shall be made on or before 28-02-2021 for seeking 80G certificate for AY 2022-23 to AY 2024-25.
iv) In a case, where provisional approval is given, application for renewal will have to made 6 months prior to expiry of the period of provisional approval or within 6 months of commencement of the activities whichever is earlier.
v) So, if the above example, if the activities commence on 07-04-2021, then the trust shall make an application within 06-09-2021 or 30-09-2024 whichever is
earlier i.e. 06-09-2021. So, if an application is made on 01-09-2021 then the registration for 80G will be extended to AY 2025-26 and AY 2026-27.
vi) Also, kindly note that the pending registrations u/s 80G(5)(vi) as on 31st May 2020 will be dealt with as per the time limits mentioned in this point.

6. Powers of PCIT(E)
In case of renewal of certificate after 5 years (point no. 3 above) and final approval (point no. 4 above) after the provisional approval, the Principal Commissioner has power to make an enquiry for registration u/s 80G to satisfy himself in respect of genuineness of the activities of the trust and other matters mentioned in Section 80G. Rule 11AA(3) of the Income Tax Rules, 1962 provides that the Commissioner may call for such further documents or information from the trust or cause such enquiries to be made as he may deem necessary in order to satisfy himself about the genuineness of the activities of such trust. Hence, the genuineness of the activities in accordance with the objects is very important.

7. Filing Of Statement By Trusts
The Finance Act, 2020 requires that a trust registered under 80G shall file a statement for a prescribed period to the prescribed Income Tax Authority in relation to donation received by the trusts from the donors. Also, the trust must provide a certificate to the donors in respect of the donations made. This data of donation made by the donors will appear in 26AS of the donors. The donor will get deduction under section 80G only if the trust/institution has filed the required statement with the Income tax Authority and issued the above certificate to the donor. There will be late filing fees and other consequences for delay or failure of the trust to file such statements.

PART III – FILING OF RETURNS AND AUDIT REPORT
Section 139(1) is proposed to be amended whereby the Return of Income of the Charitable/Religious Trust from A.Y.:2020-21 (F.Y:2019-20) will now be required to be filed on or before 31st October. However, an amendment to section 139(1) effective from AY:2020-21(F.Y:2019-20), provides that the Audit Report in Form 10B, Form 10 and or Form 9A will have to be filed by 30th September.

Note- These amendments are applicable to charitable and religious trusts

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