Charitable & Religious Trusts – Finance Act 2023 Amendments and SC Rulings

Table of Contents

1. Registration/Approval Related Amendments
2. Restrictions on Amount of Application
3. Other Amendments
4. Present provision & implication of violation of Section 2(15)
5. Analysis of Supreme Court Judgements
6. Supreme Court Judgement on New Noble Educational Society v. Chief CIT [2022]

1. Registration/Approval Related Amendments

1.1 Registration or approval based on the commencement of activities

1.1.1 Pre-Amendment Position

The new registration scheme provides that the trusts or institutions applying for first-time registration must make the application in two stages.

• In the first stage, the application is filed in Form 10A for provisional registration. This application has to be filed at least 1 month before the commencement of the previous year relevant to the assessment year from which the registration is sought.
• In the second stage, this provisional registration has to be converted into regular registration. This application for conversion has to be filed in Form 10AB at least 6 months before the expiry of the provisional registration period or within 6 months of the commencement of its activities, whichever is earlier.

Difficulty:

If a trust or institution has already commenced the activities, it is still required to apply for two registrations (provisional and regular) simultaneously.

1.1.2 Provisional registration where activities have not been commenced

W.e.f. 01-10-2023, only those trusts and institutions shall file an application for provisional registration that has not commenced its activities.

The trust or institution need not apply for provisional registration if it has commenced activities.

1.1.3 Direct Regular Registration where activities have commenced

Trusts or institutions can apply directly for regular registration without applying for provisional registration:

Condition 1: Commencement of activities: A trust/institution that has already commenced its activities.

Condition 2: No exemption has been claimed under Section 10(23C)/11/12:

No income or part thereof of the said trust or institution has been excluded from the total income on account of applicability of Section 10(23C)(iv)/(v)/(vi)/(via), or Section 11 or Section 12, for any previous year ending on or before the date of such application, at any time after the commencement of such activities.

1.1.4 Key Issues

1. What shall be considered as the Commencement of activities?
2. For institutions that apply directly for regular registration, there is a condition that no exemption has been claimed under Section 10(23C)/11/12.
3. What shall happen to organisations whose approval/registration was cancelled at any time in the past?

1.2 Impact of giving incomplete, false, or inaccurate information in the registration application

1.2.1 Cancellation of Registration on Specified Violation

Pre-Amendment Position:

• Cancellation proceedings can be initiated if the PCIT/CIT has noticed the occurrence of a specified violation and the violation need not be noticed only on assessment
• If the registration has been obtained on incomplete or false, or incorrect information, the CIT has the power to cancel the registration after giving an opportunity of being heard. [Rule 17A(6)] the registration for the said assessment

Amendment [From A.Y. 2023-24]:

Clause (g) in Explanation to Section 12AB(4):

After this amendment, “specified violation” shall also include the case where the application referred to in Section 12A(1)(ac) is not complete or it contains false or incorrect information

1.3 Consequences of non-filing of application for re-registration/ re-approval or renewal of registration/approval

1.3.1 Levy of Accreted Tax

Pre-Amendment Position:

As per the new registration requirement:

• Every existing registered organisation u/s 12A/12AA need to re-register
• The re-registration shall be valid for 5 years & thereafter, this is again to be renewed
• Once the provisional registration is granted, one needs to convert it into regular registration

Amendment [From A.Y. 2023-24]

Trust or institution registered under Section 12AB or approved under Section 10(23C) shall be deemed to have been converted into any form not eligible for registration or approval in the previous year:

• It fails to make an application for re-registration/re-approval;
• It fails to make an application to convert provisional registration/approval to regular registration/approval; or
• It fails to make an application to get the renewal of registration/approval within the specified period.

In such cases, the conversion date shall mean the last date for making an application for registration or approval expires.

1.3.2 Key Issues

1. Trusts or institutions that were granted perpetual registration or approval prior to April 1, 2021, were required to apply for re-registration. The due date for filing an application for registration was 25-11-2022.
2. What shall be the implications on trusts not applying for registration/approval by 25-11-2022?
3. What shall be the implications if trusts are not re-registered before 31-03- 2022 but get provisional registration later?
4. Can organisations that have not applied for registration up to 25-11-2022 apply for fresh registration?

1.4 Withdrawal of retrospective benefit of exemption under Section 11/12

1.4.1 No benefit of Exemption for Past Years

Pre-Amendment: Proviso to section 12A(2):

• The exemption under Sections 11 and 12 shall be available for the assessment year for which assessment proceedings are pending before the Assessing Officer as on the date of such registration.
• Assessing Officer shall not take any action for reopening of an assessment for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not obtained the registration.

Amendment [From 01st April, 2023]

The Finance Act 2023 has omitted the second, third and fourth proviso to Section 12A(2). Thus, the benefit of exemption provisions under Section 11/12 shall not be available for the earlier years.

1.4.2 Key Issue

What will be Hardships to NGOs after the omission of second, third and fourth provisos to Section 12A(2)?

2. Restrictions on Amount of Application

2.1 Restriction on inter-charity donations

2.1.1 Inter-charity donations are to be considered as the application only to the extent of 85% of the donation

Pre-Amendment Position:

Inter-charity donation (other than corpus) is treated at par with direct application for the purposes of Sections 11(1)(a).

Amendment [From A.Y. 2024-25]

Only 85% of the eligible donations made by a trust or institution registered under Section 12AB to another trust or institution registered under Section 12AB or approved under Section 10(23C) shall be treated as the application.

2.1.2 Key Issue

Whether donations to unregistered trusts will be allowed as an application of income?

2.2 Application out of corpus and loans & borrowings

Pre–Amendment Position:

• Application out of corpus donations/Loans & Borrowings shall not be considered as an application for charitable or religious purposes in the year of application.
• However, when such corpus donations are invested or deposited back/loan or borrowing is repaid, such amount shall be allowed as an application in the previous year in which it is deposited back to the corpus to the extent of such deposit or investment/to the extent of repayment of loan or borrowings.

Amendment [From A.Y. 2023-24]:

• Application out of corpus or loans & borrowings before 01-04-2021 are not allowed.
• Cap on the time limit of Five years to restore the corpus or repayment of the loan.
• Amount of application out of Corpus or Loans only to the extent of eligible application of the concerned year.

2.2.1 New conditions prescribed to claim the application of income

• Such application should not be in the form of a corpus donation to another trust          [Explanation 2 to Section 11(1)];
• TDS, if applicable, should be deducted on such application [Explanation 3 to Section 11(1)];
• Where payment or aggregate of payments made to a person in a day exceeds Rs 10,000 in other than specified modes (such as cash) is not allowed [Explanation 3 to Section 11(1)];
• Carry forward and set off of excess application is not allowed [Explanation 5 to Section 11(1)];
• Application is allowed in the year in which it is actually paid [Explanation to Section 11];
• The application should not directly or indirectly benefit any person referred to in Section 13(1) and the income of the trust or institution should not enure any benefit to such person [Section 13(1)(c)]; and
• The application should be in India except with the approval of the Board in accordance with the provisions of Section 11(1)(c).

2.2.2 Key Issue

What will be the impact of the restriction on inter-charity donations on Mother NGOs/Corporate Foundations?

3. Other Amendments

3.1 Preponement of time limit to file Form 9A & Form 10

Pre-Amendment Position:

• Minimum 85% has to be spent
• Shortfall in application –
  1. Option to spend in the subsequent year or in the year of receipt: Form 9A
  2. Accumulation for 5 years: Form 10
• Present timeline of submitting Form 9A & 10 is within the due date of furnishing of return

Amendment [From A.Y. 2023-24]

Amendments have been made in Section 11 by the Finance Act 2023 to provide that Forms 9A and 10 shall be filed at least two months prior to the due date specified under Section 139(1) for furnishing the return of income for the previous year.

3.1.1 Key Issue

What will be the impact of the change in the time limit to file Form 9A and Form 10?

3.2 Updated Return without benefit of exemption

3.2.1 Restriction on filing updated ITR

Pre-Amendment Position:

• Finance Act, 2022 has inserted sub-section (8A) in Section 139 to enable filing an updated return.
• Nothing in the law that restricts the filing of updated return by institutions claiming exemption under Sections 11 and 12.

Amendment [From A.Y. 2023-24]

The exemption shall be available only if the return of income is filed within the time allowed to file the original return of income under Section 139(1) or the belated return of income under Section 139(4).

An updated return submitted under Section 139(8A) shall not fulfil  the condition as specified in Section 12A(1)(ba). As a result, the benefit of exemption shall not be available.

3.2.2 Key Issue

Whether NGO can file an updated ITR after this amendment or not?

3.3 Impact of registration under Section 11/12 or approval/notification under Section 10(23C)/(23EC)/(46)/(46A)

3.3.1 Reference of 10(23EC) and 10(46A) in Section 11(7)

An entity registered under Section 12AA/12AB shall also be entitled to claim an exemption under clause (23EC) and (46A) of Section 10. However, the registration granted to it under Section 12AB shall become inoperative from the date on which the trust, fund or institution is notified under clause (23EC) and (46A) of Section 10.

The trust or institution whose registration has become inoperative under the first proviso may apply to get its registration again operative under Section 12AB. However, on doing so, notification under Section 10(23EC)/(46A) to such trust or institution shall cease to have any effect from the date on which the said registration becomes operative, and thereafter, it would not be entitled to exemption under the respective clause.

4. Present Provision & Implication of Violation of Sec. 2(15)

4.1 Understanding the present definition of GPU

Per se Charity –

• Relief to poor
• Education                  
• Yoga
• Medical Relief
• Preservation of monuments or places or objects of artistic or historic interest
• Preservation of Environment (including watersheds, forests and wildlife)

4.1.1 Advancement of any other object or General Public Utility (GPU)

Proviso-1 Provided that the advancement of any other object of general public utility shall not be a 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:]

Proviso 2 [Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is [ten lakh rupees] or less in the previous year;]

• Any activity of business was not with any qualification.
• (Rs. 10.00 Lac w.e.f 1-04-09
  Rs. 25.00 Lac w.e.f 1-4-12)

In place of proviso 2  allowing the business like transactions upto a certain amount, the following has been inserted:

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and [Effective from 01/04/2016 to Till date]

(ii) 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, of that previous year;

4.2 Implication on violation of proviso to Section 2(15)

• Section 13(8) provides for consequences if there are business incomes in violation of Section 2(15)

Implication upto AY 2022-23:

•  In case of a violation of proviso to section 2(15) the institution would be subjected to penal consequences under section 13(8)
• Section 13(8) provides –

the exemptions under Section 11 and Section 12 shall not be available if the trust violates the proviso to Section 2(15). In other words, the exemption shall be withdrawn if a trust is engaged in business activity and the aggregate receipts from such activity during the previous  year exceed 20% of the total receipts

Implication after AY 2022-23:

The Finance Act 2022 inserted Section 13(10) & 13(11)with effect from assessment year 2023-24

• The violation of proviso to Section 2(15) shall be subject to 13(8) w. Sec. 13(10) & Sec. 13(11)
• Section 13(10) and 13(13(11) has been inserted w.e.f. AY 2023-24 and provides for different method of computation of income in case of specified situation which includes a violation of Section 2(15)
• Hence w.e.f. assessment year 2023-24, violation of the proviso to section 2(15) will result in withdrawal of exemptions under Section 11 and Section 12 but in such cases, income shall be computed under newly inserted section 13(10 & 13(11))

4.2.1 Key Issues

1. Whether violation of Section 2(15) shall result in cancellation of registration?
2. Whether violation of Section 2(15) has any impact on 80G approval?

5. Analysis of Supreme Court Judgements

LANDMARK RULINGS on 19th October, 2022

Asstt. CIT v. Ahmedabad Urban Development Authority – [2022] 143 taxmann.com 278/[2023] 291 Taxman 11 – (SC)

[It deals with the proviso to Section 2(15) providing restrictions for business-like activities]

5.1 Issues Before the Supreme Court

The Director General of Income-tax for exemptions, commissioner of Income Tax (“CIT”) in various states and other officials of the Income Tax Department (hereafter compendiously referred to as (“the revenue”) have appealed the decisions of various High Courts, which have held that the carrying on of any trade, commerce, or business, is not a per se bar or disqualification for a GPU category charitable trust to claim to be such, precluding its tax-exempt status under the Income Tax Act.

5.2 Number of Cases Involved

There are 42 number of cases in total summarizing:

Category	No. of Cases	Name of the cases
Statutory Corporations, authorities or bodies (Page No. 98)	32	Ahmedabad Urban Development Authority, Gujarat Housing Board etc.
Statutory Regulatory bodies or authorities (Page No. 109)	03	ICAI, Rajasthan State Seed and Organic Production Certification Agency
Trade promotion bodies, councils, associations or organizations (Page No. 114)	01	APEC
Non – Statutory bodies (Page No. 116)	03	ERNET, NIXI AND GSI India
State Cricket Associations (Page No. 122)	01	State Cricket Associations (Gujarat Cricket Association and Rajasthan Cricket Association)
Private Trusts (Page No. 135)	02	Tribune Trust, Shri Balaji Samaj Vikas Samiti

For statutory incorporation like Ahmedabad Urban Development Authority dealing with need for housing accommodation, 10(46A) has been inserted by Finance Act, 2023 to address the commercial activity.

5.3 Analysis and Reasoning

1. History of Legislation: History of Legislation should be referred for interpretation like preamble, statement of object, legislative debate etc.
2. Speeches in Parliament: Speeches in Parliament can be looked into on the rational of the Amendment.
3. Departmental Circulars: Para 120 of the judgment provides

“that circulars are per se not binding upon courts, in regard to interpretation of a statutory provision and, at best guides or aid to interpretation for departmental authorities, who are bound to take them into account”

The  Supreme Court has also discussed whether definition in Sec. 2(15) is in synergy with  the operational provisions i.e. Sec. 11(4) & 11(4A)

5.4 Summary of Key Takeaways

Understanding the meaning of GPU

• Firstly a GPU cannot engage in any activity in the nature of trade, commerce, business or any service in relation to such activities for any consideration (including a statutory fee etc.). This is emphasized in the negative language employed by the main part of Section 2(15).
• Prohibition is relieved to a limited extent by allowing to a business like activity:

a) Rs.10 Lac w.e.f. 01/04/2009 & Rs.25 Lac w.e.f. 01/04/2012

b) 20% of the total receipts of the previous year w.e.f. 01/04/2016 & business like activity connected with actual carrying of GPU activities

Understanding the meaning of business

• Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto
• Charitable activity in commercial line
• If the amount charged is significantly above the cost, it will be deemed to be an incidental business to primary charitable activity (Page. 141 (A.3.))
• Separate books of accounts to be maintained

5.5 Check list for applicability of Sec. 2(15)

STEP 1 – To confirm whether the activity fall under the limb (any other objects of General Public Utility) & such activity is covered in object clause

If Yes

STEP 2 – Whether it involves any activity in the nature of trade, commerce & business or rendering any service in relation to trade, commerce or business?

If Yes

STEP 3 – Whether the activity in the nature of trade, commerce, etc. are undertaken in course of actual carrying out of such on business out of the object? (if Not,) Proviso to section 2(15) becomes applicable. It also becomes non-incidental business income, subject to Sec. 12AB(4)

If Yes

STEP 4 – Whether the charges are significant mark up over the cost?

If Yes (Then it shall be subject to Sec. 11(4A) & separate set of books of accounts should be maintained)

STEP 5 – Whether the quantum of receipt of such business like activity exceeds 20% of the total receipts

a) 20% of the total receipts of the organisation or 20% of the total receipt of GPU : Needs clarity

b) Whether gross receipt or net receipt to be compared

If Yes

STEP 6 – Violation of Proviso 2(15) is applicable

Implication under Section 13(8) and income to be computed under section 13(10) & 13(11)

5.5.1 Key Issues

1. Whether quantum of receipt of 20% should be in relation to total receipt of the organisation or total receipt of the GPU activity of the organisation?
2. How to differentiate between casual income & business like income for the purpose of Sec. 2(15)?
3. When charges can be said to be significantly above cost to constitute business?
4. Whether cross subsidy is possible after this judgement.

5.6 Key Implications

Incidental Business u/s 11(4A)

• Ruling in the case of New Noble Educational Society v. CCIT [2022] 143 taxmann.com 276/[2023] 290 Taxman 206 (SC) The Hon’ble Supreme Court of India, held that a business can be said to be incidental to the attainment of the objective of the organisation only when it is something related with the main activity/objectives of the society. For example, selling books to students can be incidental business activity but the same activity for non student will not be treated as an incidental business activity.

Independent business to feed charity

• A business cannot be said to be incidental only because the surplus from it is applied for charitable purposes.

Charitable activities in commercial line

• If the amount charged is significantly above the cost, it will be deemed to be an incidental business to primary charitable activity (Page. 141 (A.3.))
• Separate books of accounts to be maintained
• For GPU category the limit is 20%

Business held under Trust u/s. 11(4)

• In such cases business should be originally settled under Trust or business is created out of the settlor’s contribution

5.6.1 Clarification by SC on the applicability of the judgment (3-11-22)

Subsequently, in Asstt. CIT v. Ahmedabad Urban Development Authority [2022] 144 taxmann.com 78/[2023] 290 Taxman 137 (SC), the Supreme Court:

• The reference to application of the law declared by this court’s judgment, therefore, has to be understood in the context, which is that they apply for the assessment years in question, which were before this court and were decided; wherever the appeals were decided against the revenue, they are to be treated as final.
• However, the reference to future application has to be understood in this context, which is that for the assessment years which this court was not called upon to decide, the concerned authorities will apply the law declared in the judgment, having regard to the facts of each such assessment year.

HENCE: Need to understand the applicability of 154 and 147 or 263

5.6.2 Key Issues

1. What are the different types of business or business like activities being run by the NGO & which type of business hits by Sec 2(15)
2. Whether an NGO can engage in consultancy services?
3. Whether charitable activity in commercial line for Per Se charity may also fall under Incidental Business, if the charges are significantly higher?

6. Supreme Court Judgement on New Noble Educational Society v. Chief CIT [2022] 143 taxmann.com 276/ [2023] 290 Taxman 206 (SC)

6.1 Reaffirmed the meaning of term `Education’

• As to what is ‘education’ in the context of the IT Act, was explained in Loka Shikshana Trust v. Commissioner of Income Tax [1975] 101 ITR 234 (SC)
• The sense in which the word “education” has been used in section 2(15) is the instruction, schooling or training given to the young in preparation for the work of life. The word “education” has not been used in that wide and extended sense, according to which every acquisition of further knowledge constitutes education
• What education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by formal schooling

Thus, education i.e., imparting formal scholastic learning, is what the IT Act provides for under the head of “charitable” purposes, under Section 2(15). In other words the Supreme Court reaffirmed that education will continue to have a narrow scope covering only formal education.

6.2 ‘Solely’ means `exclusively ’

• The basic provision granting exemption, thus enjoins that the institution should exist ‘solely for educational purposes and not for purposes of profit’.
• Ramanath Aiyar’s Advanced Law Lexicon20 explains the term as, “‘Solely’ means exclusively and not primarily”.
• The synonyms for ‘solely’ are “alone, independently, single-handed, single-handedly,          singly, unaided, unassisted” and its antonyms are “inclusively, collectively, cooperatively, conjointly etc.”
• The term ‘solely’ is not the same as ‘predominant/mainly’. The term ‘solely’ means to the exclusion of all others.

Therefore, Solely Educational Institution can no longer engage in any other charitable or non-incidental business activity.

6.3 Object of a `solely’ educational institution should specifically related to education

• Organizations having approval under section 10(23C)(vi) cannot have any object other   than the one related to education.
• The relevant para is reproduced as under:
  

  “Para 76(a) It is held that the requirement of the charitable institution, society or trust etc., to ‘solely’ engage itself in education or educational activities, and not engage in any activity of profit, means that such institutions cannot have objects which are unrelated to education. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities.”

• In light of the above, organisations having approval under section 10(23C)(vi) have to ensure that their Memorandum of Association or Constitution document does not have any other object.

6.3.1 Key Issue

What is the impact of this ruling on definition of education under Sole Trustee, Loka Shikshana Trust v. CIT [1975]101 ITR 234 (SC)?

• Can Charitable Institutions run only formal Education Programme?
• Can they run short term educational courses?

6.4 Incidental Business Activities

• The seventh proviso to Section 10(23C)(vi) alludes to business and profits (‘being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business’).
• The interpretation of Section 10(23C) therefore, is that the trust or educational institution must solely exist for the object it professes (in this case, education, or educational activity only), and not for profit.
• The seventh proviso however carves an exception to this rule, and permits the trust or institution to record (or earn) profits, provided the ‘business’ which has to be read as the education or educational activity – and nothing other than that – is incidental to the attainment of its objectives (i.e., the objectives of, or relating to, education).
• Where institutions provide their premises or infrastructure to other entities, trusts, societies etc., for the purposes of conducting workshops, seminars or even educational courses (which the concerned trust is not actually imparting) and outsiders are permitted to enrol in such seminars, workshops, courses etc., then the income derived from such activity cannot be characterised as part of education or ‘incidental’ to the imparting education.

6.3.1 Key Issue

What is incidental for educational institution?

6.5 Power of CIT to examine Books of Accounts & Other Laws

6.5.1 Power to examine books of accounts by Commissioner

In the case of granting approval for an existing organisation, the Commissioner has the power to examine the books of accounts to verify the nature of income earned & whether it is for education or education related objects.

6.4.2 Power to check compliance with other laws

The  Commissioner shall verify the compliance of other state laws while granting approval.

6.4.3 Key Issue

At the time of approving the Provisional Registration to Normal Registration whether CIT can check Books of Accounts by following the ratio of this judgement?