Amendment in Section 12A or 10(23C) Registered Organizations & FCRA Provisions

SUB-GRANTING UNDER INCOME TAX ACT

Major changes have been brought in under the Finance Budget 2023 through insertion of clause (iii) in Explanation 4 to sub-section (1) of section 11 AND clause (iii) in Explanation 2 to the third proviso of clause (23C) of section 10 of the Income Tax Act.

PRESENT SCENARIO

At present, the income of charitable organizations (being trust or institution) registered u/s 12A/ 12AB is exempt subject to the fulfilment of certain conditions. Some of such conditions are as follows:

a. at least 85% of income of the trust or institution should be applied during the year for the charitable or religious purposes to ensure bare minimum application for charitable or religious purposes.

b. Trusts or institutions are allowed to either apply mandatory 85% of their income either themselves or by making donations to other trusts or institutions with similar objectives.

c. If donated to other trusts or institutions, the donation should not be towards corpus to ensure that the donations are applied by the donee trust or institutions.

d. The trusts or institutions are allowed to accumulate the remaining 15% of the income for application in subsequent years without payment of any tax on that.

NEW SCENARIO W.E.F. 1ST APRIL, 2024

As per Finance Bill 2023, the Finance Minister Smt. Nirmala Sitharaman has inserted a new clauses i.e., clause (iii) in Explanation 4 to sub-section (1) of section 11 and clause (iii) in Explanation 2 to the third proviso of clause (23C) of section 10 of the Income Tax Act to provide that, any amount credited or paid out of the income of any trust or institution registered u/s 12A or 10(23C) to any other trust or institution registered u/s 12A or 10(23C), other than the amount transferred specifically towards the corpus of such trust or institution, shall be treated as application for charitable or religious purposes only to the extent of 85% of such amount credited or paid.

That means, only 85% of the total amount being a donation or grant transferred to other similar institutions shall be treated as expenditure/ application of income towards the stated object of such institution.

For Example: ABC Foundation is a 12A registered organization working towards welfare of underprivilege children. It sub-grants Rs. 1,00,000/- out of its funds to another 12A registered organization XYZ Foundation which is also working towards the similar object. In such case, ABC Foundation can show only Rs. 85,000/- as application/ expenditure in its Income Tax Computation however the whole amount of Rs. 1,00,000/- shall be shown in the Income & Expenditure Account of financial statements.

Here, this need to be noted that the financial statements are prepared based on actual outflows or accruals however, the income tax computation is different from the financial statements which is prepared in line with the income tax provisions.

SUB-GRANTING UNDER FCRA

The Foreign Contribution (Regulation) Amendment Act, 2020 came into effect on 29th September, 2020 whereby many major amendments have been done by the Ministry under FCRA. This act has amended the Foreign Contribution (Regulation) Act, 2010 and has brought many radical changes having far reaching impact. The amended section 7 of the Act prohibits inter charity donations (sub-granting) i.e. one FC registered organization cannot sub-grant, further, to another FC registered organization.

It can be seen that foreign contribution can no longer be transferred to another organization as was permissible earlier. The FCRA law is very particular that there should not be any direct or indirect involvement of any other entity in utilization of FC funds.

CONCLUSION

To conclude the above we can say the now the trusts or institutions who are registered u/s 12A or 10(23C) of the Income Tax Act, 1961 can transfer the local/ domestic funds to other registered trusts or institutions with similar object wherein the donor institution will be allowed to take benefit of such donation as its expense/ application of income only up to 85% of the donation amount. However, the trust or institution is strictly prohibited to transfer its FCRA funds to any other trust or institution irrespective of the nature of activity of such trust.