CBDT notifies Rules and Procedure for renewal and new registration of charitable institutions

Background

Charitable Institutions in India enjoy a tax-exempt status if they are registered with the Income-tax Authorities under section 10(23C) or section 12A of the Income-tax Act, 1961 (“ITA”). Donors of such institutions also enjoy a tax deduction on the donations given by them if the institution is registered under section 80G.

With effect from FY 2021-22, the ITA introduced certain requirements to provide that:

a) Existing charitable institutions that are registered under section 10(23C) or section 12A and section 80G shall apply for renewal of registration. The renewed registration shall be valid for a maximum period of 5 years

b) Charitable institutions should file with the Tax Authorities, an Annual statement of donations received (Form 10BD)

c) Charitable institutions should issue to its donors, an Annual Certificate of donations received (Form 10BE)

In light of the COVID-19 pandemic, these requirements were deferred to 1 April 2021. The CBDT has now notified[1] the Rules and the procedure to comply with the above requirements. The salient features of the same are discussed in this write-up.

This note focusses on institutions that are presently registered under section 12A and section 80G of the ITA. We shall share a separate note for institutions seeking registration with the Tax Authorities for the first time.

The requirements of filing of Annual statement of donations and issuance of Annual Certificate of donations are fairly self-explanatory. These statements and certificates are required to be filed and issued by 31 May 2022.

Requirements for entities that are presently registered

§ Entities presently registered under section 12A and section 80G are required to apply for renewal of the registration to the Principal Commissioner or Commissioner of Income-tax.

§ This application needs to be made latest by 30 June 2021.

§ Application should be made in Form 10A.

§ Form 10A should be verified by one of the Trustees/Directors of the entity and is to be submitted electronically

Key aspects of Form 10A

The Form 10A is largely self-explanatory. There are certain pertinent aspects in Form 10A that applicants should take note of, as follows:

1. Objects of the applicant

Form 10A requires the applicant to specify the objects of the applicant. The selection has to be made as per description in the drop-down menu. The options available are as follows:

a) Religious

b) Relief of the poor

c) Education

d) Medical Relief

e) Yoga

f) Preservation of the environment

g) Preservation of Monuments or Places or Objects of Artistic or Historic interest

h) Advancement of any other object of general public utility

The applicant can select one or more of the above options.

Key takeaways:

1. Applicants should ensure that the object selected in Form 10A confirms to the objects specified in the existing order of registration under section 12A and the Return of Income filed in Form ITR – 7 over the years.

2. For instance, if the registration under section 12A was granted for “objects of general public utility” and the applicant specifies the object as “Relief of the poor”, the Tax Authorities could consider that there has been a change of objects compared to the considered for the existing section 12A registration and the consequences of the same shall follow. Such situations could require the applicant to separately seek authorisation for the modified objects from the Income-tax Authorities.

2. Irrevocable Trust

Form 10A requires the applicant to specify in Yes/No form whether the Trust Deed contains a clause that the trust is irrevocable.

An “irrevocable trust” means that the Trust has been set up by the Settlor in such a manner that no part of the Trust property shall result in a direct or indirect benefit to the Settlor. This term is generally used in the context of private trusts/family trusts. The law does not expressly define the term “irrevocable trust” in the context of charitable trusts. In a different context, the ITA defines “revocable transfer” as a transfer which:

a) Contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or

b) In any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets ;

Key takeaways:

1. The Trust Deed should be carefully perused to examine whether it contains a specific clause that the Trust shall be irrevocable

2. In cases where the Trust Deed does not expressly contain a clause that the Trust is irrevocable, in our view, it shall not, by itself, result in a conclusion that the Trust is not irrevocable. Much would depend on the overall terms and clauses of the Trust Deed, facts and circumstances of the case and the provisions of the applicable Central/State law governing the Trust

3. In cases where the Trust pays remuneration or any other consideration to the Settlor, closer scrutiny and justification shall be required to demonstrate that the pay-out to the Settlor is for services rendered and is not paid in the capacity of the Settlor. The Trust may be called upon to demonstrate that the pay-out is commensurate to the open market prices and that the Settlor has not paid any role in determining the pay-out.

4. Form 10A requires the applicant to specify whether the Trust Deed has a clause that the Trust is irrevocable. It does not ask the applicant to specify whether the Trust is irrevocable. Therefore, where the Trust Deed does not contain a clause that the Trust is irrevocable, but the applicant seeks to establish the irrevocability of the Trust through conduct, the applicant needs to take a conscious position of what answer should be given in the application in Form 10A.

5. This clause seems to be applicable only for Trusts and not for section 8 companies.

3. Whether the Tax Authorities shall re-examine the eligibility of the applicant for exemption from income-tax?

On an overall perusal of the ITA and the Rules made thereunder, the answer seems to be “NO”. The law and the Rules do not provide the power to the Tax Authorities to question the eligibility of the applicant for registration under the ITA. In that sense, the renewal of the section 12A and section 80G registration is a procedural requirement and not a substantive one.

The Tax Authorities do have the power to initiate proceedings questioning the continuation of registrations under the ITA. However, such an enquiry shall be a separate proceeding.

4. Documents to be enclosed with Form 10A

The following documents are required to be submitted with Form 10A:

a) Self-certified copy of the instrument of creation (e.g., Trust Deed, Memorandum of Association)

b) Self-certified copy of Certificate of Registration issued by the Registrar of Companies/Societies/Public Trusts, as applicable

c) Self-certified copy of Certificate of Registration under the Foreign Contribution (Regulation) Act, 2010, if the applicant is so registered

d) Self-certified copy of existing order granting registration under section 12A and section 80G of the ITA

5. Particulars of Assets, Investments and Liabilities

Form 10A requires the applicant to provide the amounts of assets, investments and liabilities as on the date of application. This information is required to be specified only if the applicant has not filed its Return of Income for FY 2019-20.

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The above discussion is for academic guidance and does not constitute a professional advice

[1] Notification No. G.S.R. 212(E) dated 26 March 2021