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Union Budget – 2021: Uncharitable to the Charitable Trust
Every budget in recent years has been uncharitable to the charitable trust. Budget – 2021 is not an exception. There have been 3 adverse changes as far as charitable trust is concerned.
First one is related to the treatment of the corpus donation in the hands of the trust. Second one is related to the treatment of Expenditure incurred out of borrowed funds. Third one is related to treatment of excel application of earlier years for adjustment in subsequent years.
Let us know more about all three adverse amendments proposed in the Union Budget – 2021.
Trusts registered u/s 12AB are not allowed to accumulate more than 15% of their income (or in specific cases, accumulate to specific purpose up to 5 years) from the voluntary contributions other than corpus donations referred above in terms of Section 1191)(b) read with clause (2) of explanation-1 to Section 11.
As far as corpus donation is concerned, presently corpus donations received by trusts, institutions funds etc. is subject to the tax treatment as under:
- a)Explanation to third proviso to Section 10(23C) provides that income of the fund or trust or institution or any university or any other educational institution or any hospital or other medical institution, shall not include income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus.
b) Section 11(1)(d) provides that voluntary contributions made with specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of the trust or institution.
Though corpus donation is exempt, Trusts were eligible to claim it as part of the mandatory 85% application from income other than such corpus. Such treatment was effectively resulting in double deduction in the hands of the trusts. In order to ensure that there is no double claim by charitable institution while calculating application or accumulation, following amendments are proposed by way of insertion of sub clause(a) to explanation 2 to section 10(23C) and sub clause (a) or clause (b) of section 11:
- Voluntary contributions made with a specific direction that it shall form part of Corpus are required to be invested or deposited in one or more of the forms or modes specified in sub section(5) maintained specifically for such corpus.
- Application for charitable or religious purpose from the corpus as referred to in clause (d) of this subsection, shall not be treated as application of income for charitable or religious purposes. However , the amount not so treated as application, or part thereof, will be treated as application for charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or deposited back, in to one or more of the forms or modes specified in sub section (5) maintained specifically for such corpus, from the income of that year and to the extent of such investment or deposit.
Treatment of Expenditure incurred out of Loans & borrowed funds:
There are instances where charitable activity is carried out by borrowed funds. At the first instance, when the expenses were incurred the benefit of application of income is taken by the trust. Few trusts were also taking further deduction at the time of repayment of the loan. Effectively, few trusts were claiming dual deduction in such cases. The matter was full of litigation and disputes which is now put to an end by Budget – 2021 wherein amendments are proposed by way of insertion of sub clause(b) to explanation 2 to section 10(23C) and sub clause (ii) to explanation 4 to section 11 for the purposes of determining the amount of application under clause (a) or clause (b) of section 11 which provides as under:
“Application from loans and borrowings shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) and clause (a) and (b) of Section 11. However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as application in the previous year in which it is repaid to the extent of such repayment”.
Adjustment of Excess Application of earlier years against subsequent years income:
The Supreme Court & Various courts have already ruled that the trusts are eligible to set off excess application of earlier years against income of subsequent years. The issue already settled by the judiciary has been nullified by the Union Budget 2021 by introducing new explanation -2 to Section 10(23C) and explanation – 5 to Section 11 as under:
- For the computation of income required to be applied or accumulated during the previous year no set off or deduction or allowance of any excess application, of any of the year preceding the previous year shall be allowed.
- This amendment have overruled the decision of Supreme Court in the case of CIT vs. Rajasthan and Gujarat Foundation,(2018) 300 CTR where in it was held that the deficit arising out excess of expenditure over income during the earlier previous year can be set off against the surplus income over expenditure relating to subsequent year.
There is one beneficial amendment as far as trusts are concerned. The prescribed limit for exemption to certain entities U/S 10(23C)(iiiad) & (iiiae) has been enhanced. Section 10(23C)(iiiad) and (iiiae) provides for exemption for the income received by any person on behalf of university or educational institution/ hospital as the case may be, as referred in the relevant clause . The exemption is available to the referred entities if their annual receipt does not exceed the prescribed amount of Rs.1 Cr. It is proposed to increase the prescribed limit from Rs.1CR. to Rs. 5Cr.