No exemption for Specific corpus donation by exempt entities to other exempt entities w.e.f AY 2018-19

By | February 20, 2017
(Last Updated On: February 20, 2017)

No exemption for corpus donation by exempt entities to other exempt entities

[ Amendment in Section 11 of Income Tax Act – Applicable from Assessment Year 2018-19]

Relevant extracts from Explanatory memorandum to the provisions of Finance Bill 2017

Restriction on exemption in case of corpus donation by exempt entities to other exempt entities

As per the existing provisions of the Act, donations made by a trust to any other 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, except those made out of accumulated income, is considered as application of income for the purposes of its objects.

Similarly, donations made by entities exempted under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 to any trust or institution registered under section 12AA, except those made out of accumulated income, is also considered as application of income for the purposes of its objects.

However, donation given by these exempt entities to another exempt entity, with specific direction that it shall form part of corpus, is though considered application of income in the hands of donor trust but is not considered as income of the recipient trust. Trusts, thus, engage in giving corpus donations without actual applications.

Therefore, it is proposed to insert a new Explanation to section 11 of the Act to provide that any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1) of section 11, being contributions with specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income.

It is also proposed to insert a proviso in clause (23C) of section 10 so as to provide similar restriction as above on the entities exempt under sub-clauses (iv), (v), (vi) or (via) of said clause in respect of any amount credited or paid out of their income.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

[Clauses 6 & 8]

Relevant Note on Clause 6 of Finance Bill 2017

Clause (23C) of said section provides that donations made by entities referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) to any trust or institution registered under section 12AA, except those made out of accumulated income, is considered as application of income for the purposes of its objects.

It is also proposed to insert a new proviso in the said clause (23C) so as to provide restriction in respect of any amount credited or paid out of income, being voluntary contributions with specific direction that they shall form part of the corpus, to any trust or institution registered under section 12AA by not treating the said contribution of amount as application of income to the objects of such entities.

This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-2019 and subsequent years.

Relevant Clause 6 of Finance Bill 2017

6. In section 10 of the Income-tax Act,—

Amendment of section 10.

…….

(c) in clause (23C),—

(II) after the eleventh proviso, the following proviso shall be inserted with effect from the 1st day of April, 2018, namely:—

“Provided also that any amount credited or paid out of income of 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), to any trust or institution registered under section 12AA, being voluntary contribution made with a specific direction that they shall form part of the corpus of the trust or institution, 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 other medical institution, as the case may be, is established:”;

Relevant Note on Clause 8 of Finance Bill 2017

Clause 8 of the Bill seeks to amend section 11 of the Income-tax Act relating to income from property held for charitable or religious purposes.

Sub-section (1) of the said section provides that voluntary contributions made by a trust to any other trust or institution, except those made out of accumulated income, is considered as application of income for the purposes of its objects.

It is proposed to insert a new Explanation 2 under the said sub-section so as to provide that in respect of any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, being contributions with a specific direction that they shall form part of the corpus of the trust or institution shall not be treated as application of such contribution to charitable or religious purposes.

This amendment will take effect from 1st April, 2018 and will, accordingly, apply to the assessment year 2018-2019 and subsequent years.

Relevant Clause 8 of Finance Bill 2017

Amendment of section 11.

8. In section 11 of the Income-tax Act, in sub-section (1), the Explanation below clause (d) shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted with effect from the 1st day of April, 2018, namely:—

“Explanation 2.—Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to any other trust or institution registered under section 12AA, being contribution with a specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income for charitable or religious purposes.”.

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