Tax on accreted income of certain trusts and institutions [Chapter XII-EB] :
Effective from: 1st June, 2016
(i) As per section 2(24), “income” includes any voluntary contribution received by a charitable trust or institution or a fund.
(ii) Sections 11 and 12 provide exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions, subject to the conditions stipulated thereunder.
(iii) The exemption is subject to the condition that the income derived from property held under trust should be applied for charitable purposes; and where such income cannot be applied during the previous year, it has to be accumulated and invested in the modes prescribed and applied for such purposes in accordance with specified conditions.
(iv) If the accumulated income is not applied in accordance with the conditions provided in the said section within a specified time, then such income is deemed to be taxable income of the trust or the institution. Section 12AA provides for registration of the trust or
institution which entitles them to be able to get the benefit of sections 11 and 12. It also provides the circumstances under which the registration can be cancelled. Section 13 of the Act provides for the circumstances under which exemption under section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.
(v) A society or a company or a trust or an institution carrying on charitable activity may –
(1) voluntarily wind up its activities and dissolve; or
(2) merge with any other charitable or non-charitable institution; or
(3) convert into a non-charitable organization.
There is, however, no specific provision in the income-tax law as to how the assets of such a charitable institution should be dealt with.
(vi) Under section 11, certain amount of income of prior period can be brought to tax on failure of certain conditions. However, there is no provision in the Income-tax Act, 1961, which ensure that the corpus and asset base of the trust accreted over a period of time, with promise of it being used for charitable purpose, continues to be utilised for charitable purposes and is not used for any other purpose.
(vii) Consequently, it is always possible for charitable institutions to transfer assets to a noncharitable institution.
(viii) In order to ensure that the benefit conferred over a period of time by way of exemption is not misused and to plug the gap in law that allows the charitable trusts having built up corpus/wealth through exemptions being converted into non-charitable organisation with no tax consequences, new Chapter XII-EB has been inserted for imposing additional income-tax in the nature of an exit tax when the organization is converted into a noncharitable organization or gets merged with a non-charitable organization or does not transfer the assets to another charitable organisation.
Salient Features:
| Section | Provision | |||||||||||||||||||||||
| (i) | 115TD(1) | Circumstances where levy of tax on accreted income is
attracted:
The accreted income of a trust or institution registered under section 12AA shall be taxable at the maximum marginal rate (@35.535%) on –
(1) conversion of the trust or institution into a form not eligible for grant of registration under section 12AA;
(2) merger with an entity not having similar objects and registered under section 12AA; or
(3) non-distribution of assets on dissolution to any charitable institution registered under section 12AA or approved under section 10(23C) within a period of 12 months from the end of the month in which the dissolution takes place. This levy of exit tax shall be in addition to income chargeable in the hands of the entity. |
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| (ii) | 115TD(3) | Deemed conversion into non-eligible form – Circumstances:
A trust or an institution shall be deemed to have been convertedinto any form not eligible for registration under section 12AA in a previous year, if,—
(i) the registration granted to it under section 12AA has been cancelled; or
(ii) it has adopted or undertaken modification of its objects which do not conform to the conditions of registration and,—
(a) it has not applied for fresh registration under section 12AA in the said previous year; or
(b) it has filed application for fresh registration under section 12AA but the said application has been rejected. |
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| (iii) | 115TD(2) | Meaning of Accreted Income :
Aggregate FMV of total assets as on the specified date
Less Total liability computed in accordance with the prescribed method of valuation
Notes – (1) Accreted income attributable to any asset which is established to have been directly acquired by the trust or institution out of its agricultural income exempt under section 10(1) would be ignored. Liability, in relation to such asset, also has to be ignored.
(2) Accreted income attributable to any asset acquired by the trust or institution during the period beginning from the date of its creation or establishment and ending on the date from which the registration under section 12AA became effective2, if the trust or institution has not been allowed any benefit of sections 11 and 12 during the said period, would be ignored. Liability, in relation to such asset, also has to be ignored.
(3) The asset and the liability of the charitable organization which have been transferred on dissolution to another charitable trust or institution registered under section 12AA or a fund/institution/trust/ university/educational institution/hospital/medical institution approved under section 10(23C) within specified time have to be ignored while calculating accreted income. |
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| Meaning of specified date [Explanation below section 115TD(7)]:
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| Case | Specified Date | |||||||||||||||||||||||
| (i) | conversion of the trust or institution
registered u/s 12AA into a form not eligible for registration u/s 12AA |
The date of
conversion |
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| (ii) | merger with an entity not having similar objects and registered u/s 12AA
|
The date of merger | ||||||||||||||||||||||
| (iii) | non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved u/s 10(23C) within a period twelve months from dissolution
|
The date of
dissolution |
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| Date of conversion [Explanation below section 115TD(7)]: | ||||||||||||||||||||||||
| (i) | Where the registration granted to it u/s 12AA has been cancelled | The date of the order cancelling registration
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| .(ii) | Where it has adopted or undertaken modification of its objects which do not conform to the conditions of registration and has not made an application for fresh registration or the application made has been rejected. | The date of adoption or
modification of any object. |
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| (iv) | 115TD(4) | Exit tax payable even if no income-tax is payable by the Trust/Institution:
Even if no income-tax is payable by the trust or institution on its total income, tax on accreted income shall be payable by the trust or institution, like any other additional income-tax. |
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| (v) | 115TD(5) | Period within which tax on accreted income has to be paid
to the credit of the Central Government:
The principal officer or the trustee of the trust or the institution, as the case may be, and the trust or the institution shall also be liable to pay the tax on accreted income to the credit of the Central Government within fourteen days from,—
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| (vi) | 115TD(6) | No credit available for tax paid on accreted income:
The tax on accreted income shall be final tax for which no credit can be taken by the trust or institution or any other person. |
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| (vii) | 115TD(7) | Non-availability of deduction under any other provision of the Act:
No deduction is allowable under any other provision of the Act to the trust or institution or any other person in respect of the income which has been charged to tax or the tax thereon. |
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| (viii) | 115TE | Interest for non-payment of tax within prescribed time:
In case of failure of payment of tax within the prescribed time, a simple interest @ 1% per month or part of it shall be applicable for the period of non-payment. |
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Beginning from |
Ending with |
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| The date immediately after
the last date on which such tax was payable |
The date on which the tax is
actually paid. |
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| (ix) | 115TF | Circumstance when trust or institution is deemed to be assessee-in-default:
The principal officer or the trustee and the trust or the institution shall be deemed to be assessee-in-default for non-payment of tax and all provisions related to the recovery of taxes shall apply. Further, in the case of transfer of assets upon dissolution of the trust or institution to a recipient, which is not a charitable organisation, the recipient of assets of the trust shall also be liable to be held as assessee-in-default in case of non-payment of tax and interest. However, in such a case, the recipient’s liability shall be limited to the extent to which the assets received by him is capable of meeting the liability. |
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