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 1st 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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