Section 115TD – An overview of the applicability of tax where the charitable institution ceases to exist or converts into a non-charitable organization


Section 115TD – An overview of the applicability of tax where the charitable institution ceases to exist or converts into a non-charitable organization


11.1 Section 2(24) of the Income-tax Act defines “Income” in an inclusive manner. Any voluntary contribution received by a charitable trust or institution or a fund is included in the definition of income. Sections 11 and 12 of the Income-tax Act provide for exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions, subject to various conditions contained in the said sections. The primary condition for grant of exemption is that the income derived from property held under trust should be applied for the 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 various conditions provided in the section. 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 Income-tax 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.

11.2 A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its activities and dissolve or may also merge with any other charitable or non-charitable institution, or it may convert into a non-charitable organization. In such a situation, the existing law does not provide any clarity as to how the assets of such a charitable institution shall be dealt with. Under provisions of Section 11, certain amount of income of prior period can be brought to tax on failure of certain conditions. However, there was no provision in the Income-tax Act which ensured that the corpus and asset base of the trust accreted over 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. In the absence of a clear provision, it was always possible for charitable institutions to transfer assets to a non-charitable institution. Therefore, there was a need to ensure that the benefit conferred over the years by way of exemption is not misused and to plug the gap in law that allowed the charitable trusts having built up corpus/wealth through exemptions being converted into non-charitable organisation with no tax consequences.

11.3 In order to ensure that the intended purpose of exemption availed by trust or institution is achieved, a specific provision in the Act is required for imposing a levy in the nature of an exit tax which is attracted when the organisation is converted into a non-charitable organisation or gets merged with a non-charitable organisation or a charitable organisation with dissimilar objects or does not transfer the assets to another charitable organisation.

11.4 Accordingly, a new Chapter XII-EB consisting of Sections 115TD, 115TE and 115TF has been inserted in the Income-tax Act. This chapter contains specific provisions for levy of additional income-tax in case of conversion into, or merger with, any non-charitable form or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution. The main elements of this regime are:

(i) The accretion in income (accreted income) of the trust or institution shall be taxable on conversion of trust or institution into a form not eligible for registration u/s 12 AA or on merger into an entity not having similar objects and registered under Section 12AA or on non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved under Section 10(23C) within a period of twelve months from the end of the month of dissolution. (ii) Accreted income shall be amount of aggregate of Fair Market Value (FMV) of total assets as reduced by the liability as on the specified date. The method of valuation is to be prescribed in rules. However, for the purposes of computation of accreted income, the following asset and related liability, if any, shall be excluded:

(a) any asset which is established to have been directly acquired from agricultural income;

b) any asset acquired during the period from the date of creation or establishment of the trust or institution to the date of registration under Section 12AA, if benefit of Sections 11 and 12 were not allowed during said period. However, where the trust or institution has been allowed benefit under Section 11 and 12 for any previous year on the basis of registration under Section 12AA, then, asset to be excluded shall be those which trust or institution had at the beginning of the earliest of such previous years;

(c) any assets which have been transferred to another charitable organisation within specified time.

(iii) The taxation of accreted income shall be at the maximum marginal rate.

(iv) This levy shall be in addition to any income chargeable to tax in the hands of the entity.

(v) This tax shall be final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it shall be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year. (vi) The tax has to be paid within the specified period.

In case of failure of payment of tax within the specified period, a simple interest at the rate of one per cent. per month or part of it shall be applicable for the period of non-payment. (vii) For the purpose of recovery of tax and interest, the principal officer or the trustee and the trust or the institution shall be deemed to be assessee in default and all provisions related to the recovery of taxes shall apply.

Further, the recipient of assets of the trust, which is not a charitable organisation, shall also be liable to be held as assessee in default in case of non-payment of tax and interest. However, the recipient’s liability shall be limited to the extent of the assets received.