NON~ 12AA TRUSTS- NEVER BEFORE OPPORTUNITY

BY CA Amresh Vashisht

The Finance Act 2020 and 2021 has brought in some dynamic changes in respect of
the exempted Trusts, Societies, NGOs, Charitable Trusts, Section 8 Companies
including educational, medical, and/or religious institutions complying with the
certain rules of registration under the Income Tax Act, 1961. The registrations were
perpetuity in nature, and their registrations could be invoked in the only a certain
scenario. The registration under section 12AA of the Act has been redundant from
1st April 2021 and the new section 12 AB has replaced the old section 12 A for
registration purposes. This newly incorporated section 12AB of the Act will have a
new regime of the registration process by prescribing the time frame for processing
the application and a limited validity of such exemption for five years only. All the
existing charitable institutions are required to apply for fresh registration under the
new provisions of Sec 12AB of the Income Tax Act.

The background of such 360-degree changes is an unfortunate perception at the

Government level that public charitable trusts and religious institutions have been
used as a convenient device for evasion /avoidance of the taxes. The government has
taken remedial measures from time to time in its 100 years of trust taxation journey.
The Income Tax Act 1922 has carried a sections 16(1) (C) and section 16 (3) to
counteract such alleged evasion. Exactly after the 100th year, we are still making
regulations in the year 2021-22 to counteract such evasion by incorporating the
strict provisions to deal with the issue. The Income Tax Act 1961 also amended the
relevant provisions viz. sections 11, 12,12A,13,80G,10(23C),2915) etc . However, the
recent proposal to regulate the said provision is going to change the entire spectrum
of Charitable/Religious trusts.

Never before opportunity

The new process of reregistration or reapproval as the case may be has given a
never-before opportunity. Now, from the 1st April 2021 to 31st August 2021, all the
trusts whether registered or unregistered are standing at the same level . The Trusts
which are already registered under Sec 12 A or Section 12 AA of the Act and also
approved u/s 10(23C) or notified under 10(46) of the Act simultaneously, their
registration will be inoperative with respect to Sec 12 A or Sec. 12 AA of the Act from
the date on which proviso to Sec 11 (7) came into force. Every trust is eligible and
required to get registration u/s 12AB if registered under 12AA and also every trust is
eligible to get a provisional registration u/s 12AB if not registered earlier. This is a
unique opportunity to regularise all the trust under the new regime.
To understand it further, all the trusts registered under section 12AA will be
required to go for a fresh registration in the prescribed form 10A for registration
having validity for a term of five years. If any of the trusts have never secured
registration u/s 12AA in the past, such trusts are also required to make an
application for registration in the same prescribed form 10A. The only difference
between the two will be that earlier registered trust u/s 12AA will get a five-year
registration and this never before registered trust will get a provisional registration
for a term of three years. If such trusts are already in working then again they have to
move another application for registration in Form 10AB to get a registration having
validity of five years or they have to move such application Form 10AB within a six
months of the start of the activity.

Inoperative Trust / Institution

The two provisos introduced by Finance Act 2020 to Sec 11(7) by the Income-tax Act
1961, with effect from 01/06/2020 (Original date extended much time) gave rise to
the concept of regulating the Inoperative Trusts or Inoperative Institutions. The
second proviso to Sec 11(7) further states that the Trusts or Institutions whose
registration u/s 12A or 12 AA has become inoperative, as aforesaid under the first
proviso, may apply for restoration of registration u/s 12 AB of the Act. However, once
the registration is restored u/s 12 AB of the Act, the approval u/s 10(23C) or
notification Sec 10 (46) of the Act shall cease.

Earlier , The trust or Institution registered u/s 12 A or Sec 12 AA of the Act could not
claim any income exempt u/s 10 excepting the income covered u/s 10(1)
[Agricultural Income], u/s 10(23C) [Income of the Educational Institutions solely
operating for educational purposes/ Hospitals established for philanthropic
purposes and not for the purposes of making profits] and that u/s 10(46) [Specified
Income of the notified Body or Authority or Trust constituted under the State, Central
or Provincial Act]. It was interpreted and rightly so, that Trust registered u/s 12 A or
u/s 12 AA could also simultaneously claim income exempt u/s 10(23C) or u/s 10(46)
of the Act.

Section 11(7) prescribes

“Where a trust or an institution has been granted registration [under clause (b) of
sub-section (1) of section 12AA]] or has obtained Registration of Charitable &
Religious Institutions for Income Tax Exemption registration at any time under
section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of
1996)] and the said registration is in force for any previous year, then, nothing
contained in section 10 other than [clause (1), clause (23C) and clause (46)] thereof
shall operate to exclude any income derived from the property held under trust from
the total income of the person in receipt thereof for that previous year: [Provided
that such registration shall become inoperative from the date on which the trust or
institution is approved under clause (23C) of section 10 or is notified under clause
(46) of the said section, as the case may be, or the date on which this proviso has
come into force, whichever is later: Provided further that the trust or institution,
whose registration has become inoperative under the first proviso, may apply to get
its registration operative [under section 12AA or section 12AB ] subject to the
condition that on doing so, the approval under clause (23C) of section 10 or
notification under clause (46) of the said section, as the case may be, to such trust or
institution shall cease to have any effect from the date on which the said registration
becomes operative and thereafter, it shall not be entitled to exemption under the
respective clauses.

Exemption of Income of a charitable and religious trust

The income of a charitable and religious trust is exempt from tax subject to certain
conditions. The exemptions are provided to the trusts under various provisions,
inter-alia, Section 10, Section 11, etc. Some of the exemptions allowed to a trust are
as under:

1) Section 11 provides an exemption for income derived from property held under
trust wholly for charitable or religious purposes to the extent such income is applied
for charitable or religious purposes in India. However, this exemption shall be subject
to certain conditions.

2) In view of Section 12, income in the form of voluntary contributions received by a

trust created wholly for charitable or religious purposes or by an institution
established wholly for such purposes shall also be exempt from tax (subject to
certain conditions).

3) Any voluntary contributions received by an electoral trust shall not be included in

its total income (subject to certain conditions).

4) Income of an educational institute is subject to exemption under Sections 10(23C)

(iiiab)/(iiiad)/(vi).

5) Income of a hospital or other institution shall be eligible for an exemption if it

satisfies the conditions prescribed under Sections 10(23C)(iii)/(iii)/(vi).

Educational institutions and hospitals are eligible u/s 10(23C)

Educational institutions and hospitals are eligible for exemption from levy of income
tax in terms of sections 10(23C) of the income tax Act, 1961. However, all such
institutions are not eligible for automatic exemption and section 10(23C) categorize
institution for the purpose of exemption in the following manner;

(i) University or educational institution existing solely for the educational purposes
and not for the profit purpose, substantially financed by government {sub clause (iii)
of sec-10(23C)}
(ii) Hospital or other institution for the reception and treatment of illness and mental
defectiveness and not existing for the purpose of profit, substantially financed by the
government. {Sub clause (iii) of sec-10(23C)}

(iii) University or educational institutions and hospitals or other similar institutions

not substantially financed by government but the total receipt not exceeding Rs. One
Crore. {Sub clause (iii) and (iii) of sec-10(23C)}

(iv) University or educational institutions and hospitals or other similar institutions

not substantially financed by government but the total receipt exceeding Rs. Five
Crore. {Sub clause (vi) and (via) of sec-10(23C)}

As far as institutions covered in clauses (i), (ii), (iii) as abovementioned are

concerned; such institutions are not required to obtain approval from the income tax
department to avail exemption.

Obtaining registration u/s 12AB or 10(23C) or 10(46)

Income of the schools / Institutions could be claimed exemption u/s 12 A or 12 AA of

the Act. There was no restriction in the Act for a number of switches from Sec 12 A /
12 AA to Sec 10(23C) and vice e versa. The amendment has been brought in to curb
such practice. Now the Trust has to decide once in for all whether to take tax
exemption u/s 12 AB or u/s 10 (23C). Only one switch over is allowed as aforesaid
for ensuring the ease in administration, as stated by the Finance Minister in the
Explanatory Memorandum to the Finance Bill 2020. Universities or Educational
Institutes solely working for educational purposes or Hospitals solely working for
philanthropic purposes and not for the purposes of profit,

1) If are wholly or substantially financed by the Government, may claim their income
exempt u/s 10(23C)(iii) if those are Universities or Educational Institutions or u/s
10(23C)(iiiac) of the Act if those are Hospitals.

2) If their annual receipts are less than Rs. Five Crores (amount prescribed with
effect from 01/04/2021 i.e. A.Y. 2022-23), may claim their income exempt u/s
10(23C)(iii) if those are Universities or Educational Institutions or u/s 10(23C) (iii)
of the Act if those are Hospitals

3) If they are not substantially financed by the Government or if their annual receipts
are not less than Rs Five Crores, (that is which are not covered by Clause (1) and
Clause (2) above, may claim their income exempt u/s 10(23C)(vi) if those are
Universities or Educational Institutions or u/s 10(23C)(via) of the Act if those are
Hospitals

In other words, the exemption under Section 10(23C) is qua the institution and not
the assessee. Hence if an assessee is running several educational institutions and if
any of them is wholly or substantially financed by the Government, then the income
from such institution is not included while computing the total income although the
income from other institutions may not be exempt. Thus a charitable trust could
claim exemption from a particular institution under Section 10(23C) and other
institutions under Section 11. However, after the amendment, the institution now
will have to decide whether to claim an exemption under Section 10(23C) or Section
11 of the Act.