This article explains the challenges that 12A holders face at present from the income tax point of view. Administrators needs to keep these legal points in mind.
Until a few years ago the focus of the Assessing Officers of the Income Tax Department was on the 85% application of the annual income, but now the demands go much broader. Earlier, the officers would just check if the concerned Trust has fulfilled its obligation of applying 85% of its annual income on the objects of the Society and, if this requirement was met, then the assessment would go through. But now the situation is totally different. Now the Assessing Officers check many details, which are spelt out below:
TAXED INCOMES
- Capitation Fee or “Donation”:
It is the extra amount the institutions take for admission, besides the fees shown in the prospectus. Recently, the Income Tax Appellate Tribunal has ruled that, since the capitation fee or “donation” cannot be considered voluntary in nature, the same cannot be allowed exemption under sections 11 and 12 of the Income Tax Act. It should be noted that only voluntary donations to registered charitable societies are exempt from income tax. So the Assessing Officer takes the amount collected as capitation fee as income from other sources and taxes the same at the usual 30%. Refer to the judgment of the Income Tax Appellate Tribunal, ITA Nos 1492 & 1493/Bang/2010 for AYs2006-07 & 2007-08 and ITA No. 675/Bang/2014 for Ay 2010-11. In its judgment on May 2nd, 2016, the Supreme Court of India has termed Capitation Fee as “Illegal.”
- Anonymous Donations:
Any amount of voluntary donations to registered charitable societies are exempt from income tax in the hands of the receiver. However, sometimes there are anonymous donations too. Sometimes we find credits in our bank accounts, whose source we do not know. The Income Tax Act has set an upper limit for such anonymous donations. It cannot exceed 5% of the total annual income or Rs one lakh, whichever is higher. As per the provisions of section 115BBC of the Income Tax Act, anonymous donations too shall be taxed at 30%. It is to be noted that this provision is not applicable to religious trusts.
- Religious Expenses of a charitable society:
The benefits of a charitable society, by its very nature, are open to all, irrespective of class, creed, culture, sex or religion. When a charitable trust spends its money for the function of a particular religion, it loses its charitable nature. Secondly, religious expenses are not one of the approved expenses for a charitable society. Hence, if a charitable society were to spend more than 5% of its total annual income for a religious purpose, then the same shall be disallowed as application of income. Reference can be made to the judgment of the Hon’ble Rajasthan High Court on the Umaid Charitable Trust vs The Union of India (UoI) And Ors. on 2 May, 2008.
- Business Income:
The next important thing to consider is the income a charitable society gets from its business-like activities. Some of them, such as, canteen, bus service, bookstore, pharmacy, etc., may be incidental to attainment of the main objects of the charitable society. They are there to support the main activities of the society. The income tax department has no problems regarding such activities. But the department has a great reservation when it comes to other business-like activities, though we may be using the entire income for the objects of the charitable society. These income-generating activities are not related to the objects of the society. They are there purely to generate income. Activities such as farming, animal husbandry, dairy, poultry, handcrafts/ handicrafts, sale of religious articles and other media-related materials, sale of books, rental activities for commercial purposes (shopping complex, hoarding, playground, etc.) come under this type. The income tax laws are clear that only those activities mentioned under section 2(15) of the Income Tax Act are considered charitable in nature. The relevant paragraph of definition of Charitable purpose can be read as follows: “Charitable purpose includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, 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”. Thus the amended income tax law under section 2(15) clearly says that, irrespective of the purpose for which the income is used, any commercial or business activity for a fee or charge or any other consideration cannot be considered as charitable and hence is taxable, if the income from such activities go beyond 20% of the total income of the society. Thus, the earlier limit of Rs 25 lakhs from such business-like activities has been replaced by 20% of the total income. Hence, societies running such activities are asked to maintain a separate books of accounts.
PURELY CHARITABLE ACTIVITIES
I foresee in the coming years only the so-called purely charitable activities may qualify for tax exemption. We have to be prepared for it. This calls for a shift in the activities of our charitable societies, a shift from the well-established institutions to the more demanding needs at present, such as:
- Non-formal education in the tribal areas.
- Education and eradication of leprosy.
- Immunization against common diseases.
- Reconstructive surgery for leprosy and polio-affected children.
- Cataract surgery for the elderly.
- Farming: Activities to promote self-sufficiency in agriculture, growing vegetables and fruits, dairy milk, kitchen garden, etc.
- Hospice care for children and mothers affected by AIDS.
- Vocational training for disabled, disadvantaged, deprived and rural children.
- Non-formal education.
- Safe delivery kits and first aid kits in rural areas.
- Savings and credit scheme for the rural population.
- Reforestation by tree plantation and alternative crop seeds.
- Education of girls to reduce infant mortality rates.
- New Hope Charity Activities India has been involved in rural women’s rights and development.
- Eradication of poverty and exploitation through education
- Cataract surgery for the afflicted poor in the rural areas.
- Mentally and physically handicapped Children.
- Caring for the orphans and street children.
- Food, shelter and sponsorship for children living, working, begging and surviving on railway station platforms.
- Children of leprosy patients.
- HIV/AIDS hospice.
- Vocational training for the jobless.
- Old age homes for those who have nobody to care for them
- Working for the welfare of the sex workers
- Working for the welfare of the slum dwellers
- Education and vocational training for the slum children and rural children
- Working for the child labour and unorganized labour.
- Education for the deprived class of society.
Some of these activities may be incorporated in our existing institutional set up or freshly initiated so that they become truly charitable.
PROPOSALS:
Based on the legal requirements explained above, I want to make the following proposals:
1) Bifurcate the Charitable and Religious Activities: It may be better to start a religious trust, which is also tax-exempt, for purely religious activities.
2) Bifurcate the Charitable and the Business Activities: It is advisable to delink the business activities from the charitable societies. These business activities can be run by the AOPs (Association of Persons) and income tax can be paid for such income.
3) Bring all accounts of the institution, without any exception, into the accounts of the society and get the same audited.
4) Keep the members of the society/trustees and donors, who have contributed Rs 50,000 and more to the charitable society away from taking direct benefits of the activities of the society.
5) Avoid situations where certain expenses will be disallowed, such as, cash expenses of more than Rs 10,000, non-compliance of TDS deductions, etc.
6) Take up only those activities which are in line with the objects of the society.
The time has perhaps come for us to review our activities and do the needful to safeguard the tax-exempt status of our societies and trusts. It will also be an occasion for us to do real charitable activities worth the name.
Fr Alex Gnanapragasam SJ
