Hon’ble Finance Minister Smt Nirmala Sitharaman presented the Union Budget 2024-2025 on July 23, 2024. In her budget speech, she emphasised the government’s continued efforts to simplify taxes, enhance taxpayer services, provide tax certainty, and reduce litigation, all while increasing revenue to fund development and welfare schemes. A comprehensive review of the Income-tax Act, 1961, was also announced. The aim is to make the Act concise, clear, and easy to understand, thereby reducing disputes and litigation and providing greater tax certainty for taxpayers. This review is proposed to be completed within six months.
It was also announced that the Finance (No. 2) Bill 2024 marks the beginning of efforts to simplify the tax regime for charitable organisations. Among several amendments, the most significant change is merging the two parallel tax exemption regimes: Section 10(23C) and Section 12A. This change involves transitioning existing organisations approved under Section 10(23C) to the Section 12A regime.
Over the past years, several amendments have been made that effectively eliminated the additional privileges previously enjoyed by organisations under Section 10(23C). As a result, both regimes now offer similar benefits, and the procedures and conditions have been largely aligned. Therefore, maintaining both regimes has become redundant. However, it is crucial to understand the procedural and constitutional implications for entities shifting from the Section 10(23C) regime to the Section 11/12 exemption regime.
Section 10 of the Income-tax Act provides an exclusive list of income that does not form part of the total income of the assessee. The incomes enumerated in the section are excluded from the assessee’s total income computed under the five heads of income. Clause (23C) of Section 10 exempts income received by any person on behalf of certain specified funds, universities, educational institutions, and other similar entities.
The specified institutions eligible for exemption under Section 10(23C) are divided into two categories: First is the Non-approval Category: Institutions in this category can claim exemptions without needing approval from the PCIT/CIT. Second is the Approval Category: Institutions in this category can claim exemptions only after obtaining approval from the PCIT/CIT.
The income of the following institution approved by the Principal Commissioner or Commissioner is exempt under this category:
The approval category mentioned above is referred to as the exemption scheme under the First Regime under Section 10(23C). Sections 11 to 13 constitute the exemption scheme under the Second Regime. Currently, entities can choose either regime for tax exemption, but this option will gradually be phased out. While exact data is unavailable, most entities in India opt for the Second Regime, seeking exemption under Sections 11 to 13. There will be no change for entities under Section 10(23C) that do not require approval; they will continue to benefit from the exemptions available under Section 10(23C).
No new applications for approval or provisional approval under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) will be accepted or considered on or after 01-10-2024. Applications filed under these sub-clauses before 01-10-2024 and still pending will be processed and considered under Section 10(23C) provisions. In other words, new registrations with a validity of five years under Section 10(23C) can be issued until 31-03-2025. Consequently, the sunset timeline for all organisations approved under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) will extend to the assessment year 2029-30. The government should have shifted the assessment under the second regime from an earlier assessment year.
Approved trusts, funds, or institutions will continue to avail exemption benefits under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) until their current approval expires. Afterwards, they will be eligible to apply for renewal of registration under the Section 12A regime. Amendments have been proposed in Section 12A to facilitate this transition.
It is proposed that applications for converting provisional approval under Section 10(23C), issued before 01-10-2024, must be submitted under Section 12A(1)(ac) if filed on or after 01-10-2024.
A suitable amendment has been proposed under section 12A(1)(ac)(iii), and the proposed amended clause with emphasis is as follows:
“(iii) where the trust or institution has been provisionally registered under section 12AB or provisionally approved under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, at least six months prior to the expiry of period of the provisional registration or within six months of commencement of its activities, whichever is earlier;”
Hence, the provisional approvals under Section 10(23C) issued before 01-10-2024 will be converted to regular registration under Section 12A if the conversion application is filed on or after 01-10-2024. Once the Provisional Approval is regularised under Section 12AB, the exemptions will only be available under Section 11. Therefore, the entity must be aware of the effective date of this change.
For example, if a Provisional Approval under Section 10(23C) is valid for the Assessment Years 2023-24 to 2025-26, and an application for regularisation under Section 12AB is submitted after 01-10-2024, the entity will receive regular registration under Section 12AB. Consequently, the Income Tax Return and Audit Report for the Assessment Year 2025-26 should be filed in accordance with the provisions applicable to organisations registered under Section 12A read with Section 12AB.
In recent years, numerous amendments have been made that have minimised the differences between the benefits available under Section 10(23C) and Section 11. However, there are still specific compliance requirements that need to be taken care off after the transition from Section 10(23C) to Section 11.
The Supreme Court of India, in its landmark judgment in New Noble Educational Society v. CCIT [2022] 143 taxmann.com 276, established important guidelines for educational institutions claiming exemption under Section 10(23C)(vi). The Court ruled that a “solely” educational institution must focus exclusively on educational activities and cannot engage in any other charitable or profit-making activities. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities.
Currently, there is no formal mechanism for such educational institutions to transition to exemptions under Section 11. Therefore, the proposed amendment offers these institutions a much-needed opportunity to shift to the second regime.
Following the Supreme Court ruling in the New Noble Educational Society (supra), many organisations approved under Section 10(23C)(vi) restricted their objectives to solely educational purposes. These organisations, having amended their by-laws to focus exclusively on education purposes, are no longer bound by such limitations when they shift to the Section 12A exemption regime.
Entities that have confined their objectives to “solely” educational purposes can now transit without such restrictions, as Section 11 does not impose these constraints. It is recommended that these entities amend their object clauses accordingly before transitioning to the second regime. Notably, there is no requirement for re-approval for modifications in objectives for entities approved under Section 10(23C).
It should be noted that technically, under Section 12A(1)(ab), re-registration is required if the modification of objectives results in any violation of registration conditions. In our opinion, an additional clause for permissible charitable activities is not considered a violation of registration conditions. However, the specified violations under Section 12AB(4) include any activity (including charitable activities) that goes beyond the stated objectives of the organisation. Therefore, it is recommended that amendments to the object clause should always be subject to the approval of the PCIT/CIT.
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