The International Journal
of Not-for-Profit Law
Volume 4, Issue 4, June 2002
India
Implications of Finance Act 2002 for Charitable Organizations in India, by Noshir Dadrawala*
1. Scientific Research Associations. Section 10 (21) of the Income Tax Act has been amended so as to provide for disqualifying an approved scientific research association. Under the amendment, where the scientific research association is approved by the Central Government and subsequently the Government is later satisfied that one of the following conditions are met, it may withdraw the approval. Such an action will be valid if
- the scientific research association has not applied its income in accordance with the provisions contained in clause (a) of the first proviso to the said clause; or
- the scientific research association has not invested or deposited its funds in accordance with the provisions contained in clause (b) of the said proviso; or
- the activities of the scientific research association are not genuine; or
- the activities of the scientific research association are not being carried out in accordance with all or any of the conditions subject to which such association was approved.
- the Government must provide a reasonable opportunity of showing cause against the proposed withdrawal to the concerned association, but after that, it may, by order, withdraw the approval and forward a copy of the order withdrawing the approval to the association and to the Assessing Officer.
2. Fund Accumulations. Under the existing provisions of section 10 (23C), the income of any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), is not exempt under the said sub-clauses unless the income is applied or accumulated for application, wholly and exclusively to the objects for which the fund or trust or institution or university or educational institution or hospital or medical institution is established and in a case where more than twenty-five per cent of the income is accumulated on or after 1st April, 2001, the period of the accumulation of the amount exceeding twenty-five per cent of its income shall not exceed five years.
Under amended clause (a) of the third proviso the amount of accumulation to which this rule applies has been reduced to 15 pr cent. Where more than 15 per cent of income is accumulated on or after April 1, 2002, the period of accumulation of the amount exceeding 15 per cent of its income shall not exceed 5 years.
3. Gujarat earthquake funds. Under the existing provision of section 10 (23C), any amount of donation received by the fund or institution in terms of clause (d) of sub-section (2) of section 80G which has been utilized for purposes other than providing relief to the victims of earthquake in Gujarat or which remains unutilized in terms of sub-section (5C) of that section and not transferred to the Prime Ministers’ National Relief Fund on or before the 31st day of March, 2002 shall be deemed to be the income of the previous year and shall accordingly be charged to tax.
Clause (23C) has been amended so as to provide that the exemptions under this clause shall not be available if such a fund or institution does not render accounts of income and expenditure to the authority prescribed under clause (v) of sub-section (5C) of section 80G in the manner and within the time prescribed in that clause.
The time limit for utilizing the funds in terms of sub-section (5C) of section 80G and transferring the unutilized funds to the Prime Ministers’ National Relief Fund is extended from 31-3-2002 to 31-3-2003.
4. Necessity for publishing accounts eliminated. The tenth proviso to Section 10 (23C), which required that an institution or trust having total receipts of more than one crore rupees, or a university or other educational institution or hospital or other medical institution having total receipts exceeding one crore rupees, shall publish its accounts in a local newspaper and furnish a copy of such newspaper along with the application prescribed under the first proviso to clause (23C), is omitted.
5. Fund transfers not deemed to be in satisfaction of the objects. Eleventh proviso to Section 10 (23C) has been inserted so as to provide that where the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) does not apply its income during the year of receipt and accumulates it, any credit or payment out of such accumulation to any trust or institution registered under section 12AA or to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall not be treated as application of income to the objects for which such fund or trust or institution or university or educational institution or hospital or medical institution, as the case may be, is established.
6. Educational, hospital, and other institutions. Twelfth proviso to clause (23C) has been inserted so as to provide that for withdrawal of approval in the following situations. When a fund or institution referred to in sub-clause (iv) or a trust or institution referred to in sub-clause (v) of that clause or any university or other educational institution referred to in sub-clause (vi) or any hospital or other institution referred to in sub-clause (via) is approved by the prescribed authority and subsequently that Government or the prescribed authority is satisfied that such fund or institution or trust or university or other educational institution or hospital or other medical institution
has not applied its income in accordance with the provisions contained in clause (a) of the third proviso to that clause; or has not invested or deposited its funds in accordance with the provisions contained in clause (b) of the third proviso; or the activities of such fund or trust or institution or university or other educational institution or hospital or other medical institution are not genuine or are not being carried out in accordance with all or any of the conditions subject to which such association was notified or approved, the provisions of this clause my come into play. The Government may, at any time after giving a reasonable opportunity of showing cause against the proposed rescission or withdrawal to the concerned fund or institution or trust or university or other educational institution or hospital or other medical institution, rescind the notification or withdraw the approval and forward a copy of the order rescinding the notification or withdrawing the approval to such fund or institution or trust or university or other educational institution or hospital or other medical institution and to the Assessing Officer.
7. Indefinite income accumulations. The existing provisions contained in clauses (a) and (b) of sub-section (1) of section 11, inter alia, provide that an amount up to twenty-five per cent of the income of a trust can be accumulated for an indefinite period, and without any condition. The limit of 25% is now reduced to 15%.
8. Accumulations of property income. The words “seventy-five per cent of” in section 11(2) have been substituted by “eighty-five per cent” so as to provide that if the 85 per cent of the income derived from property held under trust is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, income so accumulated or set apart will not be included in the total income of the previous year of the person in receipt of the income provided the conditions specified in this sub-section are complied with.
9. Application of property income. An “Explanation” below sub-section (2) of section 11 has been inserted. It provides that any amount paid or credited out of income from property held under trust referred to section 11(1)(a)/(b) which is not applied (but is accumulated or set apart), to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to section 10(23C)(iv), (v), (vi), (via) either during the period of accumulation or thereafter, shall not be treated as application of income for charitable or religious purposes.
Thus, payment to other trusts and institutions out of income from property held under trust in the year of receipt will continue to be treated as application of income. However, any such payment out of the accumulated income shall not be treated as application of income and will be taxed accordingly.
10. “Paid or credited” language inserted in Section 11 (3). Clause (d) has be inserted in sub-section (3) of section 11 so as to provide that if any income referred to in sub-section (2) of the said section is paid or credited to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, such payment or credit shall be deemed to be the income of the person in receipt of the income from property held under trust of the previous year in which such payment or credit is made.
The words “paid or credited or”, has been inserted in sub-section (3) of section 11 after the words “set apart or ceases to remain so invested or deposited or”. The amendment is of consequential nature.
11. Discretion of Assessing Officer confined. A proviso has been inserted in sub-section (3A) of section 11 so as to provide that the Assessing Officer shall not allow application of income by way of payment or credit made for the purposes referred to in clause (d) of sub-section (3) of the said section. The amendment takes away the discretion of the Assessing Officer in sub-section (3A) to allow the trust to apply the accumulated income for payment or credit to other charitable or religious trusts and institutions.
12. Use of donations for victims of the Gujarat earthquake. Under the existing provisions contained in sub-section (3) of section 12, any amount of donation received by the trust or institution in terms of clause (d) of sub-section (2) of section 80G which has been utilized for purposes other than providing relief to victims of earthquake in Gujarat or which remains unutilized in terms of sub-section (5C) of that section and is not transferred to the Prime Minister’s National Relief Fund on or before the 31-3-2002, shall be deemed to be the income of the previous year and shall, accordingly, be charged to tax.
Sub-section (3) is amended to provide that the exemption under this sub-section shall not be available if such a trust or institution does not render accounts of income and expenditure to the prescribed authority under clause (v) of sub-section (5C) of section 80G in the manner and within the time prescribed in that clause.
Sub-section (3) is also amended to extend the time-limit for utilizing the funds in terms of sub-section (5C) of section 80G and transferring the unutilized funds to the Prime Minister’s National Relief Fund up to 31-3-2003 instead of 31-3-2002.
13. Elimination of publication of accounts requirement. Clause (c) of section 12A is omitted, dispensing with the requirement of publishing accounts in a local newspaper and furnishing a copy of such newspaper along with the return of income.
14. New provisions regarding charitable contributions.
A. Under the existing provisions contained in section 35AC, any sum paid, to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme, is allowed as a deduction during the previous year.
Sub-section (6) has been inserted in the said-section so as to provide that where the approval granted to an association or institution referred to in sub-section (1) of the aforesaid section is withdrawn under the provisions of sub-section (4) or the notification in respect of eligible project or scheme is withdrawn in the case of a public sector company or local authority or an association or institution under sub-section (5) or where a company has claimed deduction under the proviso to sub-section (1) in respect of any expenditure incurred directly on the eligible project or scheme and the approval for such project or scheme is withdrawn by the National Committee under sub-section (5), the total amount of the payment received by the public sector company or the local authority or the association or the institution, as the case may be, in respect of which such company or authority or association or institution has furnished a certificate referred to in clause (a) of sub-section (2) or the deduction claimed by a company under the proviso to sub-section (1) shall be deemed to be the income of such company or authority or association or institution, as the case may be, for the previous year in which such approval or notification is withdrawn and tax shall be charged on such income at the maximum marginal rate in force for that year.
B. Donations made to an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both shall be eligible for the purpose of section 80G from the assessment year 2003-04 [this has been made as a consequence of omission of section 10(20A)].
C. Donations by a corporate-assessee to an association or institution established in India, as the Central Government may, having regard to the prescribed guidelines, by notification in the Official Gazette, specify in this behalf shall be eligible for deduction under section 80G [this has been made as a consequence of omission of section 10(23)].
D. For the purpose of section 80G an association or institution having as its object the control, supervision, regulation or encouragement in India of such games or sports as the Central Government may, by notification in the Official Gazette, specify in this behalf, shall be deemed to be an institution established in India for a charitable purpose.
E. Under the existing provisions contained in section 80G, an assessee is allowed a deduction from his total income in respect of donations made by him. The amount of deduction is hundred per cent in respect of donations to certain funds.
The opening portion is amended to make the relevant provisions of section 80G applicable to any fund, trust or institution referred to in clause (d) of sub-section (2) in relation to amounts received for providing relief to the victims of earthquake in Gujarat.
Clause (iii) is amended to extend the time limit for utilization of donations received by the trust or institution or fund for the victims of earthquake in Gujarat, from 31-3-2002 to 31-3-2003.
Clause (iv) is substituted to extend the time-limit for transfer of the amount received by the trust or institution or fund which is not utilized, to the Prime Minister’s National Relief Fund, to 31st March, 2003 instead of 31st March, 2002.
Clause (v) is amended to extend the date of submission of accounts of such trust or institution or fund to the prescribed authority, from 30th June, 2002 to 30th June, 2003.
F. Under the existing provisions contained in clauses (c) and (cc) of sub-section (2) of section 80GGA, any sum paid by the assessee in the previous year to an association or institution, which has as its object the undertaking of any programme of conservation of natural resources or of afforestation, to be used for carrying out any programme of conservation of natural resources or of afforestation approved by the prescribed authority or to such fund for afforestation as may be notified by the Central Government, as the case may be, is allowed as a deduction.
Clause (c) has been amended so as to make the provisions of section 35CCB applicable in respect of any payments made on or before 31-3-2002. Clause (cc) has been amended so as to make the provisions of section 35CCB applicable in respect of payments made on or before 31-3-2002.
* Noshir Dadrawala is Executive Secretary of the Centre for the Advancement of Philanthropy. He can be reached at centphil@bom7.vsnl.net.in .
Pakistan
Development of a New Legal Framework
The “Enabling Environment Initiative” (EEI) of the Pakistan Centre for Philanthropy (PCP) has proceeded with the development of proposals for legal, regulatory and fiscal reforms for the citizen sector, including draft federal legislation, draft provincial legislation, and a memorandum of recommendations and rationale. The documents are presently being finalized, before their submission to the Government of Pakistan later this year.
The Federal Government, through the Ministry of Women Development, Social Welfare, and Special Education entered into a Memorandum of Understanding with PCP last September. This document recognized that the current legal and regulatory framework for the citizen sector in Pakistan is not conducive to the growth of the sector and that the development of a more enabling framework is necessary for development and poverty alleviation. Broad-based consultations have been held by PCP across the country, with the aim of seeking a wide range of inputs from citizen organizations, government officials and other interested individuals and stakeholders. National and international experts on not-for-profit law were also consulted. The resulting documents of the EEI, when they are finalized, will reflect this participative process.