RECENT AMENDMENTS IN TAXATION OF CHARITABLE INSTITUTIONS

Transcription

1 RECENT AMENDMENTS IN TAXATION OF CHARITABLE INSTITUTIONS by CA Rajesh Kadakia National Tax Convention, Ahmedabad 7 th August, 2015

2 Synopsis 1. Definition of charitable purpose - Yoga 2. Definition of charitable purpose - Proviso to section 2(15) 3. Cancellation of registration [section 12AA(4)] 4. Double deduction of depreciation and cost of acquisition not available [section 11(6)] 5. Exemption under section 10 not available [section 11(7)] 6. Exercising of option for deemed application of income in prescribed form [Explanation (2) to section 11(1)] 7. Period within which Form 10 relating to secondary accumulation is required to be filed [section 11(2)] 8. No benefit of secondary accumulation if return of income / Form 10 is not submitted within due date of filing of return [section 13(9)] 2

3 Definition of charitable purpose - Yoga Law prior to amendment [up to assessment year ] Definition of charitable purpose" in section 2(15) included relief of the poor, education, etc. but not Yoga. Amendment [with effect from assessment year ] The activity of Yoga is specifically added in the definition of charitable purposes. 3

4 Definition of charitable purpose - Yoga (cont.) Analysis (a) Yoga would cover teachings of yoga, books on yoga, yoga health camps. (b) activities in relation to yoga constitute charitable purpose only if private gain is excluded. (c) Business activity in pursuit of yoga : (i) proviso to section 2(15) will not apply. (ii) business profits may be exempt under section 11(4A), if specified conditions are fulfilled. 4

5 Definition of charitable purpose proviso to section 2(15) Law prior to amendment [up to assessment ] Advancement of any object of general public utility was not a charitable purpose, if it involved carrying on of (a) any activity in the nature of trade, commerce, business; or (b) any activity of rendering any service in relation to any trade, commerce or business [first proviso to section 2(15)] Exception Aggregate value of receipts from the activities < Rs. 25 lakhs in a previous year [second proviso to section 2(15)]. 5

6 Definition of charitable purpose proviso to section 2(15) (cont.) Amendment [with effect from assessment year ] Advancement of any object of general public utility is not a charitable purpose, if it involves carrying on of (a) any activity in the nature of trade, commerce, business; or (b) any activity of rendering any service in relation to any trade, commerce or business 1 st Limb Unless (c) The activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (d) aggregate receipts from such activity < 20% of the total receipts of that previous year, of the institution. [proviso to section 2(15)] 2 nd Limb 6

7 Definition of charitable purpose proviso to section 2(15) (cont.) Analysis/Issues 1. Applies only to advancement of any other object of general public utility. 2. First limb of the amendment (a) The expression carrying on of any activity in the nature of trade, commerce and business is identical as the expression in pre-amendment first proviso. (b) Business Profit motive whether essential? 7

8 Definition of charitable purpose proviso to section 2(15) (cont.) 3. Second limb of the amendment (a) activity to be undertaken in the course of actual carrying out of advancement of any other object of general public utility. actual means real, genuine and not fictional, collusive or illusory [See ITO v. M.M. Aqua Technologies Ltd., (2005) 143 Taxman 43 (Del); CIT v. Poulose & Mathen (P.) Ltd., (1999) 236 ITR 416 (Ker); CIT v. Dalmia Dadi Cement Ltd., (1980) 125 ITR 510 (Del)]. Hence, the institution should really and genuinely carry out the advancement of object of general public utility; and the activity should be undertaken in the course of such carrying out. (b) aggregate receipts from the specified activities 20% of the total receipts. Total receipts does it include capital receipts, corpus donations, etc.? 8

9 Definition of charitable purpose proviso to section 2(15) (cont.) (c) interpretation of the expression following unless : View 1: exception to the proviso (first limb) will not apply unless both the conditions are cumulatively fulfilled that is, the activity of business, etc. undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and the aggregate receipts from such activity or activities do not exceed 20% of the total receipts of the institution in the previous year. 9

10 Definition of charitable purpose proviso to section 2(15) (cont.) Consequences: Intention not fulfilled Memorandum explaining the provisions of the Finance Bill 2015 intent is to give relief to genuine charitable institution undertaking activities as part of actual carrying out of the objects which are of charitable nature; and protect them from hardship under first and second proviso to section 2(15) To ensure appropriate balance being drawn between the object of preventing business activity in the garb of charity and at the same time protecting the activities undertaken by a genuine organization as part of actual carrying out of the primary purpose of the institution 10

11 Definition of charitable purpose proviso to section 2(15) (cont.) If and construed as imposing cumulative conditions, then, intent not fulfilled: may not even cover charitable institutions whose gross receipts from business < Rs. 25 lakhs. Illustration: (Rs. in lakhs) a. Net sales : 20 b. Other receipts : 79 c. Aggregate receipts (a+b) : 99 d. % of business receipts (net sales) to total receipts (a*100c.) : 20.2%.even if an institution is solely engaged in a business in the course of actual carrying out of the object, yet it will not be satisfying the definition of charitable purpose!! 11

12 Definition of charitable purpose proviso to section 2(15) (cont.) the higher the receipts of an institution in the actual course of carrying on the activity, four times higher is the requirement of other receipts! Exemption to genuine charitable activity depends on quantum of unrelated donations and other receipts!!! the activities mentioned in the Memorandum such as publishing books will continue to be put to hardship. 12

13 Definition of charitable purpose proviso to section 2(15) (cont.) View 2: exception to the proviso (first limb) will apply even if one of the conditions is fulfilled and could be construed as or to carry out the intention of the legislature [Ishwar Singh Bindra v. State of U.P., AIR 1968 SC 1450 cited in P. V. Devassy v. CIT, (1972) 84 ITR 502 (Ker)] to avoid absurd consequences that would follow if the words are taken in their literal meaning. [CIT v. Puthuthotam Estates (1943) Ltd., (1981) 6 Taxman 65 (Mad), (1981) 127 ITR 481 (Mad)] literal interpretation to be avoided if it produces an absurd and unjust result [K. P. Varghese v. ITO, (1981) 131 ITR 597 (SC); CIT v. J. H. Gotla, (1985) 156 ITR 323 (SC)]. Applying the above rules of interpretation, in view of the harsh, unjust and absurd results under view 1 and to fulfil the intent and should be read as or. Conscious use of unless v. second proviso 13

14 Cancellation of registration [section 12AA(4)] 1. Law prior to amendment Registration was not liable to cancellation upon violation of section 13(1). [CIT v. Leuva Patel Seva Samaj Trust, (2014) 42 taxmann.com 181 (Guj), (2014) 221 Taxman 75 (Guj); Ashoka Education Foundation v. CIT, (2014) 42 CCH 0090 (Pune)(Trib); Kul Foundation v. CIT, (2015) 54 taxmann.com 143 (Pune)(Trib)]. 2. Amendment (with effect from 1st October 2014) Registration is liable to cancellation upon violation of section 13(1) 12AA(4)]. [section 14

15 Cancellation of registration [section 12AA(4)] (cont.) 3. Summary Preconditions for applicability (a) A trust is granted registration under section 12AA(1)(b) or section 12A (b) After the registration, it is noticed that (i) section 13(1) applies to the charitable institution; (ii) the activities of the charitable institution are being carried out in a manner that the section 11/12 do not apply to whole or any part of the income due to operation of section 13(1) (c) The charitable institution cannot prove that there was reasonable cause for the activities to be carried out in the said manner. 15

16 Cancellation of registration [section 12AA(4)] (cont.) Consequences of applicability (a) The Principal Commissioner or the Commissioner may cancel the registration of such charitable institution. (b) Such cancellation shall be done by an order. (c) Such order shall be in writing. 16

17 Cancellation of registration [section 12AA(4)] (cont.) Analysis / Issues 1. Cancellation is independent of assessment 2. Provision is penal in nature (a) must be interpreted strictly; (b) if two views are possible, the benefit must go to the assessee [CIT v. Panduranga Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)] 17

18 Cancellation of registration [section 12AA(4)] (cont.) 3. Does a default under section 13 automatically lead to cancellation of registration? (a) The Principal Commissioner may cancel the registration. May means discretionary. [J. M. Sheth v. CIT, (1965) 56 ITR 293 (Mad) (in the context of section 186 of the Act)] (b) May in section 12AA(4) v. shall in section 12AA(3). (c) No cancellation of registration if there was a reasonable cause for violation. (d) Cancellation only if activities are being carried out in the specified manner (i) Activities singular or plural? (ii) being carried out meaning? 18

19 Cancellation of registration [section 12AA(4)] (cont.) 4. Reasonable cause Registration cannot be cancelled if the assessee proves that there was reasonable cause for the activities to be carried out in a particular manner. (a) Ignorance of law Ignorance of law may constitute a reasonable cause [see ACIT v. Vinman Finance & Leasing Ltd., (2008) 115 ITD 115 (Visk)(TM), para 13; Kaushal Diwan v. ITO (1983) 3 ITD 432 (Del)(TM)]. 19

20 Cancellation of registration [section 12AA(4)] (cont.) (b) Bonafide belief (i) A mistaken bonafide belief that section 13(1) is not violated may constitute a reasonable cause [DCIT v. Dasari Narayana Rao, (2011) 15 taxmann.com 208 (Chennai Trib); ACIT v. Dargapandarinath Tuljayya & Co. (1977) 107 ITR 850 (AP) followed in Thomas Muthoot v. ACIT, (2014) 52 taxmann.com 114 (Coch Trib); IL & FS Maritime Infrastructure Co. Ltd. v. ACIT, (2013) 37 taxmann.com 297 (Mum Trib), para 8]. (ii) Intent is to cover institution deliberately committing violation (Memorandum explaining the provision of the Finance Bill; para 9.2 of CBDT Circular No. 1/2015 dt. 21/01/15). (c) Expert opinion Reliance on expert opinion may constitute reasonable cause for the default. [CIT v. Viswapriya Financial Services & Securities Ltd., (2008) 303 ITR 122 (Mad) (in the context of section 271C of the Act)]. 20

21 Cancellation of registration [section 12AA(4)] (cont.) 5. Order by CIT (a) must be speaking order (b) discretion must be exercised fairly [CIT v. Standard Mercantile Co., (1985) 23 Taxman 452 (Pat) (in the context of section 186 of the Act)] 6. Whether cancellation can be with retrospective effect before 1 st October 2014? Mumbai Cricket Association v. DIT, (2012) 24 taxmann.com 99 (Mum). 7. On cancellation, whether the charitable institution is debarred from making fresh application for registration? 8. Impact on cancellation order upon deletion of applicability of section 13(1) in merits. 21

22 Cancellation of registration [section 12AA(4)] (cont.) 9. Implications under other sections (a) Section 56(2)(vii) (i) Contribution / aid by a charitable institution whose registration is cancelled would be regarded as income of the recipient individual (ii) shall be taxable beyond the basic exemption of Rs.50,000. (b) Section 80G Institution would not be eligible to obtain an approval under section 80G(5)(i) or its existing approval would be liable for cancellation. (c) Exemption under section 10 would be available [section 11(7)]. 22

23 Double deduction of depreciation and cost of acquisition not available [section 11(6)] Law prior to amendment (up to assessment year ) Predominant view of Courts that charitable institution eligible for deduction of full cost of acquisition of asset as application of income. depreciation on the same asset in subsequent years. Amendment (w.e.f. assessment year ) Where cost of acquisition claimed as application of income, no deduction by way of depreciation in computing income [section 11(6)]. 23

24 Double deduction of depreciation and cost of acquisition not available [sec. 11(6)] (cont.) Consequences of depreciation not being allowed as a deduction (a) The income of the charitable institution for tax purposes will increase to this extent. (b) Language suggests embargo on deduction while computing income. Not clear whether depreciation can be considered as application of income. (c) The income could be applied for other charitable purposes under section 11(1) (a). (d) The income would be eligible for basic exemption of 15% under section 11(1)(a). (e) The income could be applied in next year under Explanation to section 11(2). (f) The income could be accumulated for secondary application under section 11(2). 24

25 Exemption under section 10 not available [section 11(7)] Law prior to amendment (up to assessment year ) Income of a charitable institution was eligible for exemption under section 10. Law after amendment (from assessment year ) If registration of the charitable institution was in force, no income shall be eligible for exemption under section 10 except agricultural income and exemption under section 10(23C) [section 11(7)]. If the registration is not in force, then the entire income under section 10 shall be eligible for exemption. [section 11(7)] 25

26 Exemption under section 10 not available [section 11(7)] (cont.) Consequences of income under section 10 not considered as exempt (a) The income of the charitable institution for tax purposes will increase to this extent. (b) The income could certainly be applied for charitable purposes under section 11(1)(a). (c) The income would be eligible for basic exemption of 15% under section 11(1)(a). (d) The income could be applied in next year under Explanation to section 11(2). (e) The capital gains could be applied by reinvestment in accordance with section 11(1A). (f) The income could be accumulated for secondary application under section 11(2) 26

27 Exercising of option for deemed application of income in prescribed form [Expl. (2) of section 11(1)] 1.1 Law prior to amendment [up to assessment year ] (a) If income applied in a previous year to charitable or religious purposes in India <`85% of the income of the trust, the trustees may exercise an option to regard the amount of income applied in a subsequent year as application in the previous year. (b) Option to be exercised by intimating the AO in writing before expiry of the time allowed under section 139(1) for furnishing the return of income [Explanation (2) to section 11(1)]. 1.2 Amendment in Explanation to section 11(1) (with effect from assessment year ) Option to be exercised in a form and manner as may be prescribed. 27

28 Period within which Form 10 relating to secondary accumulation is required to be filed [section 11(2)] 1.1 Law prior to amendment [up to assessment year ] (a) a charitable institution can accumulate income not applied during the previous year for a period not exceeding 5 years provided it gives notice to the AO in prescribed form (Form 10); (b) rule 17 provides that the Form 10 has to be filed before the expiry of time allowed under section 139(1) for furnishing the return of income; (c) section 11(2) was silent on the time limit. 1.2 Amendment in section 11(2) (with effect from assessment year ) The prescribed form (Form 10) should be filed by the charitable institution on or before the due date of filing return of income under section 139 (1). 28

29 No benefit of secondary accumulation if return of income / Form 10 is not submitted within due date of filing of return [section 13(9)] 1.1 Provision prior to amendment None. 1.2 Amendment in section 13 (with effect from assessment year ) Exemption under section 11(2) will not be available to a charitable institution if- (a) it does not file Form 10 before the due date of filing of return of income under section 139(1); or (b) it does not file the return of income before the due date of filing of return of income under section 139(1). [section 13(9)] 29

30 Thank You 30