The amended registration scheme under the Finance Act 2023 has made a significant distinction between trusts or institutions that have commenced their activities and those that have not. Earlier, all trusts applying for first-time registration had to follow a two-stage process regardless of whether they had commenced operations. In the first stage, the application for provisional registration was filed in Form 10A, at least one month before the commencement of the previous year relevant to the assessment year from which the registration was sought. In the second stage, provisional registration had to be converted into regular registration by filing Form 10AB at least six months before the expiry of the provisional registration or within six months of commencing activities, whichever was earlier. This created unnecessary compliance for trusts that had already begun operations, as they had to apply for both provisional and regular registration simultaneously.
From 1 October 2023, only trusts or institutions that have not commenced activities are required to apply for provisional registration. If the trust has already started its activities, it can apply directly for regular registration without going through the provisional stage. Direct regular registration is allowed if two conditions are met. First, the trust or institution must have commenced activities. Second, it must not have claimed any exemption under Section 10(23C)(iv), (v), (vi), or (via), or under Sections 11 or 12, for any previous year ending on or before the date of application, after commencing its activities. This ensures that only new entities without a history of claiming exemptions can bypass provisional registration. However, questions remain on how “commencement of activities” will be defined and interpreted, especially in cases where minimal operations have started. Another concern is the treatment of organisations whose registration or approval was cancelled in the past, and whether they can take advantage of direct regular registration.
Impact of Incomplete, False, or Inaccurate Information in Registration Applications
Previously, the Principal Commissioner or Commissioner of Income Tax (Exemptions) could initiate cancellation proceedings if a specified violation occurred, even if it was noticed outside the assessment process. If registration was obtained based on incomplete, false, or incorrect information, the Commissioner could cancel it after giving the applicant an opportunity to be heard. This was already provided under Rule 17A(6).
From assessment year 2023-24, the definition of “specified violation” in the Explanation to Section 12AB(4) has been expanded to explicitly include cases where an application under Section 12A(1)(ac) is incomplete or contains false or incorrect information. This reinforces the need for accuracy and completeness in applications, as any such lapse can now lead to immediate cancellation of registration.
Consequences of Non-Filing of Application for Re-Registration or Renewal
Under the re-registration requirement introduced in recent years, every organisation registered under Sections 12A or 12AA must re-register under Section 12AB. The registration is valid for five years, after which it must be renewed. Similarly, provisional registration must be converted into regular registration. If a trust fails to apply for re-registration, renewal, or conversion within the prescribed time, it will be deemed to have been converted into a form not eligible for registration or approval in that previous year. This is a significant change from assessment year 2023-24.
For such cases, the conversion date is treated as the last date on which the application for registration or approval could have been filed. This triggers the levy of accreted tax under Section 115TD on the fair market value of the trust’s assets, on the assumption that the assets are being transferred to a non-charitable purpose. The implications are especially severe for trusts that were granted perpetual registration or approval before April 1, 202,1, but did not apply for re-registration by the due date of 25 November 2022. Questions also arise about whether an organisation that missed the deadline can still apply for fresh registration, and the tax treatment of organisations that were not re-registered before 31 March 2022 but later obtained provisional registration.
Withdrawal of Retrospective Benefit of Exemption Under Sections 11 and 12
Previously, the proviso to Section 12A(2) allowed a newly registered trust to claim exemption for earlier years if assessment proceedings for those years were pending. The Assessing Officer was also barred from reopening assessments for earlier years solely because the trust did not have registration at the time. This was a beneficial provision for trusts obtaining registration late.
From 1 April 2023, the second, third, and fourth provisos to Section 12A(2) have been omitted. This means that the exemption under Sections 11 and 12 will only be available from the year of registration onwards. There will no longer be any retrospective relief, and pending assessments for earlier years will not be eligible for exemption based on subsequent registration. This change creates potential hardship for NGOs that may have applied for registration after their activities began but before assessments were completed, as they will now lose the ability to claim exemption for those earlier years.
Restrictions on Application of Income
The Finance Act 2023 introduces important changes regarding the application of income by charitable and religious trusts, particularly focusing on donations made between trusts and the use of corpus and borrowed funds. These amendments impact how trusts can utilize their income while preserving their tax-exempt status under the Income Tax Act.
Restriction on Inter-Charity Donations
Before the amendments, inter-charity donations—that is, donations made by one registered trust or institution to another—were fully treated as application of income for charitable purposes under Section 11(1)(a). This allowed trusts to transfer funds to other charitable entities and claim the entire amount as applied income.
Starting from assessment year 2024-25, only 85% of donations made by a registered trust or institution under Section 12AB to another trust or institution registered under Section 12AB or approved under Section 10(23C) will be considered as application of income. The remaining 15% will not qualify, effectively reducing the amount that can be claimed as applied income.
A critical issue arising from this amendment is whether donations made to unregistered trusts will be recognized as an application of income. The amendment explicitly addresses donations made only to registered or approved entities, which suggests that gifts or donations to unregistered bodies may no longer qualify for exemption. This poses challenges for trusts that support unregistered or smaller charitable organizations.
Application Out of Corpus and Loans and Borrowings
Previously, application of income out of corpus donations or loans and borrowings was not allowed in the year of application. However, when such corpus donations were invested or deposited back, or loans and borrowings were repaid, the amount was allowed as application of income in the year of deposit, investment, or repayment.
From assessment year 2023-24 onwards, applications out of corpus or loans and borrowings made before 1 April 2021 are disallowed. Moreover, there is now a strict cap requiring that corpus restoration or loan repayment occur within five years. Amounts restored or repaid beyond this period will not be considered application of income.
Additionally, the application for corpus or loans is only allowed to the extent of the eligible application of the concerned year, preventing trusts from applying amounts beyond the permissible limit.
Several new conditions have been prescribed for claiming the application of income:
- Applications should not be in the form of corpus donations to another trust.
- Tax Deducted at Source (TDS), if applicable, must be deducted on such application.
- Payments exceeding Rs 10,000 in a day must not be made in cash or non-specified modes to be eligible.
- Carry forward and set-off of excess application of income is prohibited.
- Application of income is recognized only in the year it is paid.
- Applications should not directly or indirectly benefit any person specified under Section 13(1).
- The income of the trust should not inure to the benefit of such persons.
- Applications should be made within India unless prior approval is obtained from the Board as per Section 11(1)(c).
These amendments impose stricter compliance and limit the flexibility trusts previously had in applying income from corpus or loans. They particularly affect large mother trusts or corporate foundations that frequently donate to subsidiary or smaller entities.
Impact of Restrictions on Inter-Charity Donations on Mother NGOs and Corporate Foundations
The reduction of allowable application from 100% to 85% on inter-charity donations means that trusts with extensive grant-making activities will see a decrease in the amount they can claim as applied income. This impacts mother NGOs or corporate foundations that function primarily as funding arms distribu,ting grants to multiple other trusts or institutions.
Such trusts will need to reassess their funding structures and possibly retain the disallowed portion of donations as income, affecting their overall financial and tax planning. The 85% rule may also encourage trusts to ensure their grantee organizations maintain valid registration and approvals to maximize the allowable application of income.
Preponement of Time Limit to File Form 9A and Form 10
Under earlier rules, trusts and institutions that did not apply the mandatory 85% minimum application of income could submit Form 9A to specify where the shortfall was spent, or accumulate the shortfall for up to five years by filing Form 10. These forms had to be filed by the due date of filing my tax return.
From assessment year 2023-24, the Finance Act mandates that Forms 9A and 10 must be filed at least two months before the due date specified under Section 139(1) for filing the return of income. This preponement tightens compliance deadlines and requires trusts to prepare and submit details of application of income well in advance of the return filing date.
This change impacts trusts’ operational timelines and necessitates earlier reconciliation of income application. It will require better planning and accounting controls to ensure timely filing and avoid penalties or disallowances.
Restriction on Filing Updated Income Tax Returns
The Finance Act 2022 introduced the facility to file updated returns under Section 139(8A). However, trusts claiming exemption under Sections 11 and 12 were not specifically restricted from filing updated returns.
From assessment year 2023-24, trusts can claim exemption only if the return is filed within the time allowed for filing the original return under Section 139(1) or the belated return under Section 139(4). Updated returns filed under Section 139(8A) will no longer satisfy the conditions of Section 12A(1)(ba), and therefore, the exemption will not be available for returns filed after these deadlines.
This restricts trusts’ ability to revise returns once the original filing period has passed, imposing stricter timelines on tax compliance and exemption claims.
Impact of Registration under Sections 11/12 or Approval under Section 10(23C)/(23EC)/(46)/(46A)
The Finance Act 2023 has clarified the interplay between registrations under Section 12AA/12AB and notifications under clauses 10(23EC) and 10(46A). An entity registered under Section 12AA/12AB is also entitled to claim exemption under clauses 23EC and 46A of Section 10.
However, if the trust or institution is notified under clauses 23EC or 46A, the registration under Section 12AB becomes inoperative from the date of such notification. The trust may apply to reactivate its registration under Section 12AB, but doing so will cancel the notification under 10(23EC) or 10(46A), and the trust will no longer be entitled to exemption under those clauses.
This provision provides clarity on dual registrations and ensures that trusts cannot claim multiple overlapping exemptions, maintaining the integrity of tax benefits.
Present Provision and Implication of Violation of Section 2(15)
The definition of charitable purpose under Section 2(15) of the Income Tax Act includes relief to the poor, education, medical relief, preservation of monuments or places of artistic or historic interest, and preservation of the environment, forests, and wildlife. Additionally, it covers the advancement of any other object of general public utility (GPU).
However, the proviso to Section 2(15) clarifies that advancement of any other object of general public utility shall not be considered a charitable purpose if it involves activities like trade, commerce, or business, or any service related to such activities for a fee or consideration, irrespective of how the income from such activity is used or retained.
Initially, a monetary threshold allowed business-like transactions up to certain limits (Rs. 10 lakh from April 1, 2009, increased to Rs. 25 lakh from April 1, 2012) without affecting charitable status. From April 1, 2016, this was replaced by a percentage-based threshold allowing business activities if undertaken in the course of carrying out GPU activities and if receipts from such activities do not exceed 20% of the total receipts of the trust or institution for the previous year.
Implications of Violation of Proviso to Section 2(15)
Section 13(8) states that if a trust violates the proviso to Section 2(15), exemptions under Sections 11 and 12 shall not be available. In other words, if the trust carries on business activities exceeding the allowed threshold, the exemption will be withdrawn.
From assessment year 2023-24, the Finance Act 2022 introduced Sections 13(10) and 13(11), which provide a different method for the computation of income in cases of violation of Section 2(15). While exemptions under Sections 11 and 12 are withdrawn, income will be computed as per these newly inserted provisions, reflecting a more structured approach to taxation of such trusts.
Questions arise whether violation of Section 2(15) leads to cancellation of registration and if it impacts approval under Section 80G. These remain important considerations for trusts engaged in business-like activities.
Analysis of Supreme Court Judgements
A landmark ruling delivered by the Supreme Court on 19 October 2022 in Assistant Commissioner of Income Tax versus Ahmedabad Urban Development Authority clarified the restrictions related to business-like activities under the proviso to Section 2(15).
The case involved appeals from various state Income Tax authorities challenging decisions of High Courts, which had held that carrying on trade, commerce, or business is not a per se bar for a GPU category charitable trust to claim exemption. The Supreme Court reviewed 42 cases spanning statutory corporations, regulatory bodies, trade promotion councils, non-statutory bodies, state cricket associations, and private trusts.
For statutory corporations such as the Ahmedabad Urban Development Authority engaged in housing accommodation, the Finance Act 2023 inserted Section 10(46A) to address commercial activities specifically.
History of Legislation and Interpretation
The Supreme Court examined the legislative history, preamble, object clauses, parliamentary debates, and departmental circulars to interpret Section 2(15). The court noted that while circulars guide authorities, they are not binding on courts regarding statutory interpretation.
The court also analyzed the synergy between Section 2(15) and operational provisions such as Sections 11(4) and 11(4A), which deal with incidental business income and maintenance of separate accounts.
Summary of Key Takeaways
Understanding General Public Utility (GPU)
A GPU cannot engage in any activity involving trade, commerce, business, or related services for consideration, including statutory fees. This prohibition is clearly stated in the negative language of Section 2(15).
Limited relief ex,,ists allowing business activity up to Rs. 10 lakh from April 1, 2009, increased to Rs. 25 lakh from April 1, 2012, and 20% of total receipts from April 1, 2016, if such activities are in the course of carrying out GPU objects.
Understanding the Meaning of Business
Charging a nominal amount or cost-based fee for services advancing GPU activities generally does not amount to trade, commerce, or business.
Charitable Activity in Commercial Line
If charges exceed cost significantly, the activity is deemed incidental business to the primary charitable activity. Separate books of account must be maintained for such business activities.
For GPU trusts, the threshold for business income is 20% of total receipts.
Check List for Applicability of Section 2(15)
To determine applicability, the following steps are taken:
Confirm if the activity falls under general public utility and is covered in the object clause.
If yes, assess whether it involves trade, commerce, or business activities or related services.
If yes, verify if the activity is undertaken in the actual course of carrying out the GPU object. If not, the proviso to Section 2(15) applies, making it non-incidental business income subject to Section 12AB(4).
If yes, check if charges are significantly above cost. If yes, Section 11(4A) applies and separate bbooks mustbe maintained.
Determine if business receipts exceed 20% of total receipts. If yes, violation applies.
Key the Issues and Clarifications
Debates continue on whether the 20% threshold applies to total receipts of the organisation or only the GPU activity portion. Distinguishing casual income from business-like income is important.
Determining when charges are significantly above cost to constitute business is also critical.
Questions exist about the possibility of cross-subsidy after this judgment.
Key Implications of the Supreme Court Ruling
The Supreme Court, in New Noble Educational Society v. Chief Commissioner of Income Tax, held that business is incidental to the organisation’s main objectives only if related to the primary activity. Selling books to students is incidental, but selling to non-students is not.
A business cannot be incidental simply because profits are applied to charitable purposes.
Commercial charitable activities charged significantly above cost require separate accounts.
For GPU category trusts, the 20% threshold applies.
Business carried out under a trust must be originally settled under trust or created from the settlor’s contribution.
Clarification on Applicability of Judgment
In a subsequent ruling, the Supreme Court clarified that its judgments apply to assessment years decided before it and future applications depend on facts of each case. The authorities must consider this when applying Sections 154, 147, or 263.
Remaining Key Issues
Identifying which types of business or business-like activities fall under Section 2(15).
Whether NGOs can engage in consultancy services.
Whether charitable activities in commercial lines for per se charities can also be incidental business if charges exceed cost significantly.
Supthe the reme Court Judgment on New Noble Educational Society v. Chief Commissioner of Income Tax
The Supreme Court reaffirmed the meaning of the term ‘education’ in the context of the Income Tax Act in the case of New Noble Educational Society v. Chief Commissioner of Income Tax. The judgment referred to the earlier ruling in Loka Shikshana Trust v. Commissioner of Income Tax, which clarified that ‘education’ under Section 2(15) means instruction, schooling, or training given to the young in preparation for life. The term does not cover every acquisition of further knowledge.
The court emphasized that education, as recognized for tax exemption purposes, primarily relates to formal schooling and imparting scholastic learning to develop the knowledge, skillss, mind, and character of students. The character’s education remains narrow and confined to formal education and does not extend to broader or informal learning.
Implications for Educational Trusts
This clarification is significant for educational institutions claiming exemption under the Income Tax Act. It means trusts or institutions engaged in activities beyond formal education, such as vocational training or adult education without formal recognition, may not qualify for exemption under Section 2(15).
Trusts must ensure that their activities align with the traditional understanding of education as defined by the court to maintain tax exemption status. The judgment also influences the interpretation of objects in trust deeds and the activities undertaken by educational institutions.
Impact on Charitable and Religious Trusts
The judgment, along with amendments introduced by the Finance Act 2023, underscores the need for charitable and religious trusts to carefully assess their activities and compliance with the Income Tax Act’s provisions. Trusts involved in business-like activities must evaluate whether such activities fall within permissible limits or risk losing exemption.
Trusts shoultheir their d maintain separate books of accounts for incidental business activities, monitor thresholds for business receipts, and comply with registration and reporting requirements under Sections 12AB, 11, and 13.
Conclusion
The Finance Act 2023 and the recent Supreme Court rulings represent a tightening of the regulatory framework governing charitable and religious trusts in India. The amendments focus on ensuring that trusts genuinely apply their income for charitable purposes and restrict commercial or business activities that may threaten their tax-exempt status.
Trusts must be diligent in complying with new registration norms, application of income restrictions, reporting timelines, and filing requirements. The clarifications provided by the Supreme Court emphasize the narrow interpretation of charitable purposes and the conditions under which business activities may be incidental.
The evolving jurisprudence and legislative changes call for careful planning, transparency, and adherence to prescribed norms by charitable and religious trusts to continue enjoying tax benefits and fulfill their social objectives effectively.