Section 13 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.
The sections 11, 12, 12A, 12AA and section 13 constitute a complete code governing the grant or withdrawal of registration and its cancellation, providing exemption to income, and also the conditions under which a charitable trust or institution needs to function in order to be eligible for exemption. They also provide for withdrawal of exemption either in part or in full if the relevant conditions are not fulfilled. Several issues have arisen in respect of the application of exemption regime in cases of trusts or institutions in respect of which clarity in law is required. The Finance (No. 2) Act, 2014 has made the following clarifications in this regard:
(A) Trust or institution claiming exemption under section 10(23C) or section 11 and 12 cannot claim exemption under any other clauses of section 10 other than section 10(1) [W.e.f. A.Y. 2015-16]
The general provision of exemptions are contained in section 10, whereas the specific and special exemption are covered in sections 11 to 13 and 10(23C). The primary objective of providing exemption in case of charitable institution is that income derived from the property held under trust should be applied and utilised for the object or purpose for which the institution or trust has been established. In many cases it has been noted that trusts or institutions which are registered and have been claiming benefits of the exemption regime do not apply their income, which is derived from property held under trust, for charitable purposes. In such circumstances, when the income becomes taxable, then a claim of exemption under general provisions of section 10 in respect of such income is preferred and tax on such income is avoided. This defeats the very objective and purpose of placing the conditions of application of income etc. in respect of income derived from property under trust in the first place.
Sections 11, 12 and 13 are special provisions governing institutions which are being given benefit of tax exemption, it is therefore imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigations.
Similar situation exists in the context of section 10(23C) which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. The provision of section 10(23C) also have similar conditions of accumulation and application of income, investment of funds in prescribed modes etc.
Therefore, the Finance (No. 2) Act, 2014 has inserted section 11(7) w.e.f. A.Y. 2015-16 to provide specifically that where a trust or an institution has been granted registration under section 12AA or 12A for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any clauses of section 10 [other than that relating to exemption of agricultural income under section 10(1) and income exempt under section 10(23C)].
Similarly, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other clauses of section 10 (except the exemption in respect of agricultural income under section 10(1)). [Eighteenth proviso inserted w.e.f. A.Y. 2015-16].
(B) Depreciation not to be allowed as application of income in case of an asset acquisition of which has been claimed as application of income under section 10(23C) or section 11, as the case may be.
The existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law.
Depreciation has been held to be an application of income in many judgments of the Courts. Some of the important judgments are as under:
1. CIT v Sheth Manilal Ranchhoddas Vishram Bhavan Trust (1992) 198 ITR 598 (Guj).
2. CIT v Bhoruka Public Welfare Trust (1999) 240 ITR 513 (Cal).
3. CIT v Institute of Banking Personnel Selection (IBPS) (2003) 264 ITR 110 (Bom).
4. CIT v Market Committee, Pipli (2011) 330 ITR 16 (P&H).
5. CIT v Tiny Tots Education Society (2011) 330 ITR 21 (P&H).
6. DIT v Vishwa Jagriti Mission (2012) Income Tax Review -Sept - P. 83 (Del).
7. Escorts Cardiac Diseases Hospital Society v Asst DIT (2012) 18 Taxmann.com 104 (ITAT-Del).
8. CIT v Shri Gujarati Samaj (Regd.) (2011) 64 DTR 76 (MP).
However, there is a contrary judgment of Kerala High Court in this regard in the case of Lissie Medical Institution v CIT (2012) 348 ITR 344 (Ker).
The provisions have been rationalised to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose. In view of the above, the Finance (No. 2) Act, 2014 has inserted section 11(6) and an Explanation under eighteenth proviso to section 10(23C) w.e.f. A.Y. 2015-16 to provide that under section 11 and section 10(23C), income for the purposes of application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year. Consequently, if acquisition of an asset has not been claimed as application of income, then depreciation on that asset can be claimed as application of income under section 11. E.g. if a charitable trust has received specific corpus donation (say for construction of building) then such corpus donation is exempt under section 11(1)(d). In that case, the depreciation on such building can be claimed as application of income as the acquisition of the asset has never been claimed as application of income under section 11(1)(a) in this case. This is not possible u/s 10(23C) as corpus donations are not exempt under section 10(23C).
(C) Applicability of section 11 and 12 to earlier years if the registration is granted to a trust or institution in the subsequent year [Section 12A] [W.e.f. 1-10-2014]
The existing provisions of section 12A provide that a trust or an institution can claim exemption under sections 11 and 12 only after registration under section 12AA has been granted. In case of trusts or institutions which apply for registration after 1-6-2007, the registration shall be effective only prospectively.
Non-application of registration for the period prior to the year of registration causes genuine hardship to charitable organisations. Due to absence of registration, tax liability gets attached even though they may otherwise be eligible for exemption and fulfill other substantive conditions. The power of condonation of delay in seeking registration is not available under the section.
In order to provide relief to such trusts and remove hardship in genuine cases, the Finance (No. 2) Act, 2014 has w.e.f. 1-10-2014 inserted the following three provisos under section 12A:
(a) Where a trust or institution has been granted registration under section 12AA, the benefit of sections 11 and 12 shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration, if the objects and activities of such trust or institution in the relevant earlier assessment year are the same as those on the basis of which such registration has been granted.
(b) No action for reopening of an assessment under section 147 shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not obtained the registration under section 12AA for the said assessment year.
(c) The above benefits, however, would not be available in case of any trust or institution which at any time had applied for registration and the same was refused under section 12AA or a registration once granted was cancelled.