Overhaul of tax rules for charitable trusts, educational institutions a mixed bag

A significant overhaul of the income tax (I-T) provisions relating to charitable trusts, including educational institutions and hospitals, is a mixed bag.
To begin with, the circumstances under which the I-T registration of a trust can be cancelled are being expanded. The purpose of the registration is to enable claims of tax exemption of income.
Gautam Nayak, tax partner at CNK & Associates, points out that "the expanded scope would now also cover situations where a trust spends for purposes other than its objects, and where separate books of accounts are not maintained for incidental business.The assessing officer can also now recommend cancellation of the registration to the commissioner".
Tax exemption to institutions such as universities and hospitals is available under section 10 (23C) and that for charitable trusts under section 12AA and 12AB. These two regimes are being aligned and similar obligations under the I-T Act will apply in both cases
"As regards the books of accounts, even if a charitable trust is following the mercantile system of accounting, it will now be able to claim expenditure incurred for charitable purposes, only on a cash basis (on actual payment). It will, however, continue to get the benefit of opting to spend the income in the subsequent year, or accumulating such income for spending in subsequent years," states Nayak.
A favourable proposal is that only that part of income which is invested in violation of the I-T provisions, will be included in total income (in other words, only this specific portion of income will be taxable). This amendment follows a Supreme Court decision and will mitigate litigation to a large extent.
Earlier, a trust lost its tax exemption if it provided a benefit to a trustee or other specified person, said Nayak. This has been replaced by a penalty mechanism. Section 271AAE has been introduced to provide for a penalty on trusts or institutions under both regimes, which is equal to the amount of income applied for the benefit of the trustee. If the violation is repeated, in any subsequent year, the penalty is 200%.
If a minimum of 85% of the income of trust or institution has not been applied, it is allowed to accumulate it and can be invested in eligible instruments. "Unspent accumulation for five years, which was so far taxable in the sixth year, is now proposed to be made taxable in the fifth year itself," states Nayak.