Income Tax--Current Issues

Practice Update

V.K. Subramani

SPECIAL FOCUS ON CORPUS DONATIONS FOR IDENTIFICATION BY CHARITABLE TRUSTS/INSTITUTIONS

Finance Act, 2021 has made lots of changes in Income tax law and the changes include certain provisions meant for charitable trusts/institutions. One of the prominent changes relate to insertion of Explanation 2 to third proviso to section 10(23C) and a similar one by way of Explanation 4 to section 11(1). Both deal with the same subject matter. The essence of the changes are (i) amounts received by way of corpus donation must be kept separately in one or more forms or modes specified in section 11(5) and any expenditure (whether capital or revenue) out of such corpus donation shall not be treated as application of income for charitable or religious purposes; (ii) if the said amount so utilized (for application towards the objects of the trust or institutions) is subsequently replenished to the corpus fund, then that would be considered as application of income by the trust at that time; and (iii) the amount of loan borrowed for the purpose of pursuing the objects of the trust or institution shall not be treated as application and when the loan is repaid out of the income of the subsequent year, it shall be considered as application of income by the trust or institution of that ( subsequent) year;

Explanation 5 similarly inserted clarifies that for computing the income required to be applied shall be computed without any setoff or deduction or allowance of any excess application relating to any earlier year. Being clarificatory in nature this Explanation could be applied on retrospective basis. Per se this Explanation would not impact the trust and institutions since the method of computation which is in vogue got clarified in the amendment.

Explanation 4 will have great ramifications as the trusts and institutions have mixed up funds hitherto and now, corpus donations would be treated as similar to earmarked fund or conditional donation by the donors.

It also could pose some issues such as for example, a trust buys car for Rs. 9 lakhs by using corpus donation, whether it can claim depreciation only from the previous year in which the corpus donation is replenished and if so, what would happen if the said car is sold much before the corpus funds were restored? Proving the trail of funds would require more record keeping and matching explanations by the taxpayers to the administrative authorities.