Session 1. Compliance Under the Income Tax Act,1961 including E-filing for NPO s. By CA Durai Rengaswamy, Chennai

Transcription

1 Session 1 Compliance Under the Income Tax Act,1961 including E-filing for NPO s By CA Durai Rengaswamy, Chennai

2 Session 1 An overview of provisions for NPO exemptions

3 Legal Forms of NPOs 3 Public Trusts Societies Companies (Sec 8/25) Created by Courts

4 Income Tax Act And Charity

5 Chapter XII-EB Tax on accreted income of Trusts Section 115TD, Definition of Accreted Income, Levy of income Tax etc. Sections 115TE Interest on the above tax Sections 115TF When the assessee in default

6 Charitable Purpose 2(15) Includes Relief to the Poor Education Yoga (inserted by Finance Act 2015) Medical Relief Preservation of Environment (including water sheds, forests and wild life) Preservation of monuments or places or objects of artistic or historic interest and Advancement of any other object of general public utility 6

7 Section 2(15) Proviso Advancement of any other object of general public utility shall not be a charitable purpose, if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service to above, 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 Unless (i) such activity is undertaken in the course of actual carrying out of such AO AO OO GPU and (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 PY. 7

8 Relief of the poor- First limb of Section 2 (15) something for nothing or something less than the cost is eligible Work at living wages can be provided to poor and middle class people Jaipur Charitable Trust v. CIT (1981) 127 ITR 620 (Del) Cross subsidisation is also eligible. Help to the settlor s poor relations not eligible. CIT v. Jamal Mohamad Sahib [1941] 9 ITR 375 (Mad) Mullick Somnath Charitable Trust V.CIT (1986) 160 ITR 3 (Cal) 8

9 Education Systematic instruction, schooling or training given is education. Every acquisition of further knowledge not included. Publishing news papers not education. Training and developing the knowledge, skill, mind and character of students by normal schooling. Sole Trustee, Loka Shikshana Trust Vs. CIT (1975) 101 ITR 234(SC) Education would include raising artistic taste by dramas, musical shows etc. In this sense, cultural education would also be included. CIT vs. Sri Thyaga Brahma Gana Sabha (1991) 188 ITR 160 (Mad.)

10 Education Educating public in safety, protection and health among industrial workers is education. Sec 10(22) DIT Vs. National Safety Council (2008) 305 ITR 257 (Bom) Coaching imparted for appearing in a particular competitive exam is not education for the purpose of sec 10(22) Bihar Institute Of Mining & Mine Surveying Vs. CIT (1994) 208 ITR 608, 615 (Pat.) Vocational Training is education CIT Vs. Shri Ram Education Foundation (2001) 250 ITR 504, (Del) Imparting instruction to craftsman was public utility Victoria Technical Institute Vs. Addl.CIT (1991) 188 ITR 57, (SC)

11 Medical Relief -Third limb of Section 2 (15) Medical Relief does not mean that it is to be provided at a free of cost. It is permissible if the medical institution charges the market price for patients. 11

12 General Public Utility General means pertaining to a whole class. Public means the body of people at large and Utility means usefulness. Beneficial to the public or a section of public as distinguished from an individual or group of individual would be a charitable purposes. Objects for welfare of a trade or industry Vs welfare of persons managing trade or industry. Association to promote, aid, help, encourage and develop hire purchase business is public utility It promotes the development of trade and commerce and industry in a part of this country CIT Vs. South India Hire purchase Association ( 1979) 116 ITR 793 (Mad)

13 General Public Utility Promotion, protection, aiding trade, commerce & industry is a general utility purpose CIT Vs. Andhra Chamber of Commerce (1965) 55 ITR 722 (SC) ACIT Vs. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1 (SC) CIT vs. Bharath Diamond Bourse (2000) 245 ITR 437 (Bom) Expenses on giving monetary help on marriage of poor girls of one community and on thread ceremony public objects, eligible for exemption CIT Vs. PT Ram sankar mishra trust (1996) 222 ITR 252 (All)

14 Practical issues Micro Finance Activities Vocational Education Benefit only to members Consultancy by NPOs

15 Religious Purpose A system of belief and worship usually in a supreme being A religion is not merely an opinion, doctrine or belief but involves an outward expression in acts as well. AIR 1952 SC 282

16 Religious cum Charitable Trust For IT purpose, Trusts include any other legal obligation (Society, Company etc.) Charitable Trusts Religious Trusts Religious cum Charitable Trusts

17 Practical issues Religious cum Charitable Whether 12AA possible? If so, then as Religious/ Charitable? 80G status (Religious cum Charitable)

18 Definition of "Income" Sec 2(24(iia) (i) Profits and Gains (ii) Dividend (iia) Voluntary Contributions

19 Practical Issues Foreign Contributions Specific Funds Income Vs Receipts Govt. Salaries in NPOs

20 Income Tax Organisational Exemptions Total Exemptions Annual / Conditional Exemptions

21 Income Tax

22 Income Tax Research Institutions - U/s 10(21) Educational Institutions - 10(23C)(iii ab )(iii ad)(vi) Medical Institutions - 10(23C)(iii ac )(iii ae)(via) Public Charitable Institutions - 10(23C)(iv) Public Religious Institutions - 10(23C)(v)

23 Income Tax Total Exemption Sec Educati Medi on cal 10 (iii ab) (23C) 10 (iii ad) (23C) 10 (vi) (23C) Conditions (iii ac) Substantially financed by Government (Exceeds 50%-Rule 2BBB wef ) (iii ae) Gross Receipts below 1 Crores (via) Gross Receipts above 1 Crore 10 (23C)(iv) Charitable Institution of importance through out India or through out the state 10 (23C)(v) Religious institution

24 Total Exemptions-Section 10 (23C) Continued

25 Section 10(23C) - Proviso 14 to Application on or before 30th Sept Anonymous donation u/s 115BBC 16 - Prescribed Authority CCIT wef /CIT wef Nov Applicability of 1st Proviso to amended section 2(15) of the Income Tax Act 1961

26 Income Tax Annual / Conditional Exemptions

27 Income Tax Annual Exemptions Sl. Annual Exemptions No. 1 Registration Sections 12A / 12 AA 2 Compulsory Audit of Accounts 12A(b)] 3 Application of Income (85%) 11(1)(a) 4 Accumulation of Income 5 Investment under section 6 Filing Return of Income 11 (1) and 11(2) 11(5) 139(4A)

28 Income Tax Introduced by Finance Act 1972 w. e. f Application in Form No. 10A with attachments Procedure prescribed under section 12AA Time limit for order- six months from the end of month of filing. Wef , no condonation but wef , registration granted helps in getting exemption for

29 Income Tax Wef , registration granted helps in getting exemption for earlier years. (Section 12A (2)) Provided Where registration has been granted to the trust under section 12AA then the provisions of sections 11 and 12 shall apply in respect of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending before the assessing officer and the objects and activities of the trust remain the same for the preceding assessment year.

30 Income Tax Provided further that no action under section 147 shall be taken by the assessing officer in case of such trust or institution for any assessment year preceding the aforesaid assessment year only for non registration of such trust for the said assessment year. Shyam Mandir Committee Khatushyamji Vs ACIT (Jaipur Tribunal) SNDP Yogam Vs Asst DIT (Cochin Tribunal) 2016 Tax Pub DT 1890 Held that Proviso to subsection 2 has retrospective application

31 Income Tax Cancellation of registration ( U/s 12AA(3) Reasons for cancellation - Activities not genuine, Not carried out in accordance with its objectives Power for cancellation expanded Income does not enure for the public, for particular religious community or caste, Income/property applied for interested persons and investments are not in accordance with section 11(5) & 13(1)(d) of the Act

32 Income Tax Compulsory Audit - U/s 12(A)(b) Audit Report in Form No. 10B Sec 11 Exemption Report in Form No. 10BB - Sec 10(23C) Exemptions

33 Mandatory audit Compliance Limit for compulsory Audit Basic Exemption Corpus donations includible Time limit for filing the Report can be filed anytime before completion of assessment or even at the time of appeal filing regime 10B filed before uploading return) 33 (Electronic

34 Income Tax Accumulation of Surplus Option 1: Exp 2 to Sec 11(1)(a) Accumulate and spend in one year. Application in Form 9A. Option 2: 11(2) Accumulate for 5 years for specific purposes GB resolution, application in Form 10, invt. In specified modes If not spent in this time span, then taxable as income

35 Income Tax Accumulation of Surplus Earlier Provision Later developments Minimum application was 75% of the total income up to AY The minimum application was raised to 85% from the AY by the Finance Act 2002 Accumulation was possible up to 10 years from the year of accumulation The limit of 10 years for accumulation was decreased to 5 years w.e.f by the Finance Act 2001 Inter trust transfer was possible up to assessment year Inter trust transfer from the accumulated surplus is prohibited from by the Finance Act 2002

36 Income Tax Accumulation of Surplus U/s 11 U/s 11(1) for one year U/s 11(2) for 5 years First time, new form introduced Resolution of the Governing Body or Board of Trustees Form No. 9A wef Investment of surplus in modes prescribed U/s 11(5) No further formalities Filing of Form No. 10 amended wef Tracking timely utilisation

37 Capital Gains (11(1A) Sale of properties Capital Gain arises To be invested in another asset FDs for 6 months or balance in current account- ADIT Vs Murugappa chettiar Trust 303 ITR 360; CIT vs Hindustan Welfare Trust 206 ITR 138

38 Income Tax Filing of returns U/s 139(4C) Earlier Provision Filing of return of income was mandatory u/s 139(4A) of the Act w.e.f for Trusts and institutions claiming exemption under section 11 of the Act Finance Act 2002 through139(4c) made filingdevelopments of return mandatory Later for Scientific research Association Sec 10(21) and Fund or institution exempted under section 10(23C)(iv), (v), (vi) and (via) TLA Act 2006 made filing of return mandatory for institutions exempt under section 10(23C)(iiiad) and (iiiae) and From , entities exempt under section 10(23C)(iiiab) and (iiiac) should also file the returns mandatorily.

39 Income Tax Donor Exemptions Section 80G Section 35 AC & Section 35 (1) (ii)

40 Income Tax Recognition u/s 80 G (50%, 100%) Exemption u/s 35 (1) (iii) Expenditure on eligible project or scheme u/s 35AC

41 Income Tax DONOR EXEMPTIONS TYPES OF DONOR EXEMPTIONS AND REBATES S. Section Particulars No. 1 35(1) (iii) Expenditure on research in Science/ Social Science 2 35AC Expenditure on eligible projects or schemes for promoting social and economic 3 80G(50% Donations to RELIEF) charitable Institutions Eligibility for Amount of Donor relief for donor Assessees carrying 175% / 125% on business Assessees carrying 100% on business No longer applicable from A.Y All assessees 50% Restricted to 10% of Gross Total Income

42 Income Tax TYPES OF DONOR EXEMPTIONS AND REBATES S. Sec Particulars No 4 80G Donation to (100% P.M. National Relief relief) Fund P.M. Armenia Earthquake fund and others; approved university or educational Institution 5 80GGA Donation for Research in social science or in Rural Development Eligible Donors All assessees For non business assessees Amount of relief for donor 100% 100%

43 Income Tax Tax Deduction at Source and Non Deduction On Payments On Receipts

44 Income Tax Tax Deduction at Source Assessee expected to comply with all TDS provisions No special exemptions to charitable organisations Ho e er, Sec 40 a ia disallo ance doesn t apply as on date Interest and Penalty (incl. late filing fee u/s 234E) applicable

45 Income Tax Issue of Certificate u/s 197 for Non deduction of Tax at Source Assessee Files application in Form No. 13 Certificate u/s 197 for non deduction issued by TDS ward Assessee provides certificate to deductor IF not obtained by assessee then refund claim submitted along with return

46 Corpus Donations (Section 11(1)(d) Not defined written direction from donor is required. Corpus Donations, is it income? Corpus donations up to were outside the purview of income u/s 2(24)(iia), from , exempted u/s 11(1)(d). Can corpus donations be received through offertory boxes? 46

47 Carry Forward of Deficit There are no specific provisions for carry forward of deficit. The Courts have held that if a trust has incurred a deficit during a particular year, then the surplus made by it in a subsequent year to make up for the past deficit should be allowed to be set off against such deficit. CIT vs Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj.), CIT vs. Shri Plot Swetambar Murti Pujak Jain Mandal, 211 ITR 293 (Guj.)

48 Anonymous donation Section 115 BBC introduced w.e.f Section 115 BBC (3): Anonymous donation means Where a person receiving contribution does not maintain a record of identity (Name and address of the donor), any other particulars Anonymous donations liable to be taxed at 30% plus SC. Exclusions wholly religious trust Wholly religious and charitable trust, (but will apply to donations made with specific direction that it is for any university, educational institute or hospital etc.) Trust covered by s.10(23c)(iiiab)/(iiiac) 48

49 ..the income tax payable shall be aggregate of 1) amount of income tax calculated at the rate of 30% on the aggregate of anonymous donations received in excess of the higher of the following, namely: a) 5% of total donations received by the assessee; or b) One lakh rupees, and 2) Amount of Income tax with which the assessee would have been chargeable, had his total income been reduced by the aggregate of anonymous donations received in excess of the amount referred to in sub clause A or B of clause (i) 49

50 Section 11 (4A) Business Income of a Trust As per Section 11(4A), the income earned by a trust from any business activity shall be exempted from tax provided the following conditions are satisfied: The business carried on is incidental to the attainment of the objects of the trust and Separate books of accounts are maintained in respect of such business 50

51 Section 11 (4A) Business Income of a Trust continued Audit is required if income > maximum amount not chargeable to income tax This is an audit necessary under the Income Tax Act and is distinct from an audit, which may be necessary under the Bombay Public Trust Act or a similar statute under the relevant State law An audit has to be conducted under the Income tax Act and an audit report furnished in form 10B While computing the limit for conducting an audit, exempt gross receipts have to be considered 51

52 Status of Depreciation Allowable as per commercial concept of income Several decisions Now allowable Also decisions and department has not been allowing Finance Bill 2014 If the capital asset already has been claimed as application, then no depreciation can allowed

53 Denial of Exemption 5

54 Section 13(2) Income /Property used for person mentioned in Sec 13(3) Lending funds without adequate security or interest Land, building other property made available without adequate compensation Salary / remuneration in excess of reasonable amount Services of the trust made available without adequate compensation Sale or purchase of shares or security for other than market value Funds invested in a concern in which the person has a substantial interest 54

55 Denial of Exemption Denial of exemption 5

56 Denial of Exemption 1. Funds of the Trust diverted and misutilised for noncharitable purposes, (section 13(1)(C )(ii) read with 13(2) (b)/13(3)(cc). AWARE Vs DCIT (263ITR 13 (A.P) 2. 13(1)(c)(ii) was attracted to assessee trust which applied its income for the benefit of a trust from which it had received substantial contributions. Champa Charitable Trust Vs CIT (214 ITR 764 (Bom). 3. Micro Finance Activity- Covered by object of General Public utility and exemption under section 11 and 12 denied. ITO Vs Kalanjiyam Development Financial services

57 Amendments by Finance Act While claiming exemption u/s 11, one cannot claim any other exemption u/s 10 other than 10(1) and 10(23C) 2. Depreciation not allowed as application if the asset has already been claimed as application 3. 12A(2) If granted, no need to reopen the assessment for earlier years Proviso 1 & 2 Cancellation powers expanded Violation 11(5) & 13(1)(d)

58 Amendments by Finance Act BBC Rs. 1 lakh or 5% whichever is higher will be added to other income for application purposes 5. Substantially funded by the Govt. Finance Bill 2014 says that the Govt. will decide such percentage as may be notified (Rule 2BBB already notified wef )

59 Amendments by Finance Act Yoga included in the definition of Charitable purpose 2. Form No. 10 for accumulation of income to be filed on or before filing the return of income and return of income should be within the time limit or else accumulation will not be allowed. (Section 13 (9))

60 Chapter XII-EB Tax on accreted income of Trusts w.e.f Section 115TD, Definition of Accreted Income, Levy of income Tax etc. Sections 115TE Interest on the above tax Sections 115TF When the assessee in default

61 Accreted Income Accreted Income will be liable to additional income tax at the maximum marginal rate if the trust or institution registered under section 12AAAhas Converted into any form which is not eligible for grant of registration under section 12AA. Merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA

62 Accreted Income Failed to transfer upon dissolution all its assets to any other trust or institution within a period of 12 months from the end of the month in which the dissolution took place Accreted income for the above purpose means the amount by which the aggregate fair market value of the total assets as on the specified date exceeds the total liability computed in accordance with the method of valuation as may be prescribed.

63 Accreted Income Converted into any form means if. The registration to it under section 12AA has been cancelled. It has adopted or undertakenamodification of its objects which do not conform to the conditions of registration and it a) has not applied for fresh registration under section 12AA in the said previous year or b) has filed application for fresh registration but the application is rejected.

64 Accreted Income Accreted income attributable to the following asset and liability if any, related to such asset shall be ignored namely any asset which is established to have been directly acquired out of its income of the nature referred to in Section 10(1)- Agricultural lands. any asset acquired by the trust or institution during the period beginning from the date of creation or establishment and ending on the date on which registration under section 12AA became effective if the trust has not been allowed any benefit of Section 11 and 12 during that period

65 Assessment Process Good preparation is a must Questionnaire - Educative Understand and answer it Positive/ useful experience

66 Key Points in the Questionnaire Audited Financials with schedules along with Form 10B/10BB. Activity Report Trust Deed and amendments along with the approvals for the amendments List of Governing Body members with address and PAN

67 Key Points in the Questionnaire Registration U/s 12A/12AA/10(23C) Details of persons mentioned in Section 13(3) and any payment made with justification. 15% accumulation available on income after deducting administrative and establishment expenses

68 Key Points in the Questionnaire Accumulation Tracking status Details of Corpus donations along with Letters of the donors. FCRA financial statements and Annual Return Inter trust donations List of Bank accounts, movable investments and immovables

69 E filing In case of one year accumulation file Form 9A digitally signed. In case of Five years accumulation file Form 10 digitally signed. ITR 7 needs to be filed digitally signed in accumulation cases. Where there is no accumulation ITR 7 can be filed without digital signature

70 Some Issues in ITR 7 Status- Needs to be restricted Residential status If there is partly public utility and the aggregate annual receipt exceeds the prescribed limit, links shall be given for the taxable portion and the tax to be determined. There is no clause to assess the income on the public utility alone.