`M A BAKHSHI
(Former Vice-President Income tax Appellate Tribunal)
Tax Consultant & Advocate

Request to the Hon’ble Finance Minister to be Charitable to the charitable organisations
There are various organizations such as public charitable trusts/Institutions, section 8 companies, NPOs and NGOs that have a sole mission to make the world a better place. Some organizations are set up to serve society. These organizations do not work for any personal benefits These organizations function to benefit society and General Public .In nutshell Public Charitable organisations supplement the efforts of the Government for public welfare
In appreciation of their services to the nation the Government has provided incentive to these organisations in the form of tax exemption.
It was noticed by the Government that some scrupulous organisations are taking undue advantage of the tax provisions. Therefore Hon’ble Finance Minister, ever since she has taken over as Finance Minister, has put her focus to plug the loopholes in the Income-tax Act to avoid misuse.by such organisations.
Whereas one cannot have any grouse in the amendments intended to prevent misuse yet utmost care is required to safeguard the interest of the genuine organisations.
It is in this background I have examined the proposed amendments in section 11 of the Income tax Act 1961 by the Finance Bill 2023. Following amendments in section 11 are proposed in the Finance Bill 2023. Similar amendments are proposed in section 10(23) and my comments will also apply to such proposed amendments
Finance Bill 2023
Amendment of section 11.
7. In section 11 of the Income-tax Act,––
(A) in sub-section (1),–– (a) in Explanation 1, in clause (2), in sub-clause (ii), in the long line, for the words “before the expiry
of the time allowed”, the words “at least two months
prior to the due date specified” shall be substituted;
(b) in Explanation 4,–– (I) in clause (i),–– (a) in the proviso, for the words “deposit; and”, the word “deposit:” shall be substituted;
(b) after the proviso, the following provisos shall be inserted, namely:––
“Provided further that provisions of the first proviso shall apply only if there was no violation of the conditions specified––
(a) in clause (c) of this sub-section;
(b) in Explanations 2, 3 and 5 of this sub-section;
(c) in the Explanation to this section; and (d) in clause (c) of sub-section (1) of section 13, at the time the application was made from the corpus:
Provided also that the amount invested or deposited back shall not be treated as application for charitable or religious purposes under the first proviso unless such investment or deposit is made within a period of five years from the end of the previous year in which
such application was made from the corpus:
Provided also that nothing contained in the first proviso shall apply where application from the corpus is made on or before the 31st
day of March, 2021;”;
(II) in clause (ii), after the proviso, the following provisos shall be inserted, namely:––
“Provided further that provisions of the first proviso shall apply only if there was no violation of the conditions specified––
(a) in clause (c) of this sub-section;
(b) in Explanations 2, 3 and 5 of this subsection;
(c) in the Explanation to this section; and
(d) in clause (c) of sub-section (1) of section 13, at the time the application was made from loan or borrowing:
Provided also that the amount repaid shall not be treated as application for charitable or religious purposes under the first proviso
unless such repayment is made within a period of five years from the end of the previous year in which such application was made from loan or borrowing:
Provided also that nothing contained in the first proviso shall apply where application from any loan or borrowing is made on or
before the 31st day of March, 2021; and”;
(III) after clause (ii), the following clause shall be inserted
with effect from the 1st day of April, 2024, namely:––
“(iii) any amount credited or paid, other than the
amount referred to in Explanation 2, to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, or other trust or institution registered under section 12AB, as the case may be, shall be treated as application for charitable or religious purposes only to the extent of eighty-five per cent. of such amount credited or paid.”;
(B) in sub-section (2), in clause (c), for the words “on
or before”, the words “at least two months prior to” shall be substituted;
(C) in sub-section (7), with effect from the 1st day of
April, 2024,––
(a) for the words, brackets and figures “and clause (46)”, the words, brackets, figures and letter “, clause (46) and clause (46A)” shall be substituted;
(b) in the first proviso, for the words, brackets and figures “under clause (46)”, the words, brackets, figures and letter “under clause (46) or clause (46A)” shall be substituted;
(c) in the second proviso, for the words, brackets and figures “under clause (46)”, the words, brackets, figures and letter “under clause (46) or clause (46A)” shall be substituted

Background
Out of the above proposed amendments most disturbing are proposed amendments related to corpus donation and repayment of loans / borrowings
It is pertinent to mention that earlier explanation 4 to section 11 was inserted by Act No 13 with effective from 1st April 2022 as under [Explanation 4.—For the purposes of determining the amount of application under clause (a) or clause (b),—
(i) application for charitable or religious purposes from the corpus as referred to in clause (d) of this sub-section, shall not be treated as application of income for charitable or religious purposes:
Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus, from the income of that year and to the extent of such investment or deposit; and
(ii) application for charitable or religious purposes, from any loan or borrowing, shall not be treated as application of income for charitable or religious purposes:
Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the loan or borrowing, or part thereof, is repaid from the income of that year and to the extent of such repayment
Now a limit of 5 years is proposed for reinvestment in corpus and repayment of Loans and above all the benefit is proposed to be denied in respect of application of income out of the corpus and loans before 1st of April 2021
Comments:-
Limitation of 5 years for reinvestment on account of expenditure incurred out of Corpus donation and repayment of loan
As is evident from the above, Application out of corpus shall not be considered as application for charitable or religious purposes for the purposes of clauses (a) and (b) of section 11 of the Act. However, when it is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) of section 11 of the Act maintained specifically for such corpus, from the income of the previous year, such amount shall be allowed as application in the previous year in which it is deposited back to corpus to the extent of such deposit or investment. This benefit will however be available only if the investment is made within 5 years
Similarly amendment was made earlier to provide that the expenditure on the objects of the trust/institution out of loans would not be considered as application of income for exemption under section 11.However repayment of loan would be considered as amount applied for the objects of the trust in the year of repayment. Now a limit of 5 years is proposed for repayment of loan to qualify for exemption. This proposal is also unrealistic and unreasonable.
Whereas the proposal is welcome the only question that arises is as to whether there is any justification for keeping a limit of 5 year for reinvestment in corpus funds /repayment of loans
In my humble view there is no justification for keeping a limit of 5 years for re-investment.AS mentioned earlier the trusts/institutions get exemption from taxation as they are involved in the activities for General public welfare These entities are essentially supplementing the efforts of the Government in the welfare activities The expenditure out of corpus donations would ordinarily be under compelling circumstances. Reinvestment in corpus assets would depend on the availability of funds which is beyond the control of the entities. The reason for keeping the limit of 5 year is contained in the Explanatory Memorandum on the Finance Bill 2023 tin the following words
B. Limiting the allowance under section 10 and 11 on reinvestment in corpus and repayment of loan to 5 years
“2.3 It was also noted that, a trust may invest or deposit back the amount in to corpus or repay the loan after many years of application from the corpus or loan and claim such repayment of loan or investment/depositing back in to corpus as application for charitable or religious purposes. Availability of indefinite period for the investment or depositing back to the corpus or repayment of loan will make the implementation of the provisions quite difficult.”
It is evident from the above memorandum that the amendments to restrict the benefit of investment back into corpus and repayment of loan up to the period of 5 years is only on account of apprehension that “implementation of the provisions would be quite difficult”. What are the difficulties in implementing the provision without keeping a limit of 5 years is beyond my comprehension.
It is pertinent to mention that the institution/Trusts would spend out of borrowings / corpus only under compelling circumstances. Such spending are not as a matter of any tax planning When spending out of loan is not allowable as application of income for the objects of the trust/institution what benefit would the tax payer get out of such spending. It is only under compulsion that the trusts/institutions would spend out of corpus/Loans on the objects of the trust. The trusts/institutions would reinvest in corpus or repay the loan only on the availability of funds/ income which is out of the control of the charitable organisations.
Moreover, Certain Trusts/institutions such as Hospitals/educational institutions etc. Would borrow funds for construction of buildings/ acquisition of capital assets Generally such borrowings are from financial institutions/Banks which allow the repayments in instalments spread over for a period of 20 to 25 years Therefore restricting the benefit of reinvestment in corpus or repayment of Loan within a period of 5 years of utilization is in my humble view is unfair and unjustified. This proposal will be a setback for genuine intuitions/trusts to run the charitable institutions. Plugging loopholes to prevent misuse cannot be objected to However, denying the benefit of exemption on the ground that it will be difficult to implement is misconceived. There is no visible difficulty in implementing the provision without keeping a limit for repayment of lanes or reinvestment in corpus Moreover administrative difficulties if any should not come in the way of legitimate exemption in respect of amounts spent on the General public welfare.
In my humble view there is no sound reason for keeping the limit of 5 years for qualification of exemption. Undoubtedly the onus will be on the assessee to establish the claim and not on the tax administration .Whereas any loopholes in law need to be curbed, there is no justification to unnecessarily keep hurdles on the exemption which essentially is to encourage genuine entities to supplement the efforts of the Government of public welfare .The Government needs to be charitable to the Charitable institutions Since reinvestment in corpus fund is solely dependent on availability of funds beyond the control of the entity it is suggested that keeping the limit of 5 years to qualify for exemption is uncharitable. I have no hesitation to state that the reason given for this proposed amendment is not well conceived. It is also submitted that if there are administrative difficulties the solution should be found by the Revenue to remove such difficulties instead of denying the exemption to the charitable entities on the ground of administrative difficulties
In case Revenue Department insists the exemption may be subject to the condition that the entity files a form like form No 9A within the time for filing the return of income declaring the amount applied for the objects out of corpus the deduction of which will be claimed in the year of reinvestment. In that case it will not be difficult for the revenue Department to manage the claim of exemption.
It is therefore requested that the proposal to limit the benefit only if the reinvestment/ repayment within 5 years may be dropped

Reinvestment in corpus on account of application for objects before 1st April 2021 and repayment of loans taken up to 31st of March 2021 not considered as income applied for the objects:-
The reason for the proposed amendment as given in the memorandum is as under:-
“2.2 While implementing the recent changes vide the Finance Act, 2021 to the provisions related to corpus and loan or borrowing, it has come to the notice that application from corpus or loan or borrowings have already been claimed as application prior to 01.04.2021.Hence, allowing such amount to be application again as investment or reposting back in corpus or repayment of loan or borrowing will amount to double deduction.”
As is evident from the explanation in the Memorandum the only reason for not allowing the benefit of reinvestment in corpus funds and repayment of loan is that deductions on account reinvestment in corpus and repayment of loan up to 31st of March 2021 has already been allowed and therefore the provision unless restricted would amount to double deduction.
The presumption that deduction on account of amounts utilized out of corpus donations and loans has already been allowed up to 31st of March 2021 is misconceived. This presumption does not have any foundation much less sound foundation.
The chances of claiming application out of borrowed funds and amounts spent out of corpus are remote. Under section 11 any income derived from the property of the trust is exempt if 85% of it is spent on the objects of the trust. When any borrowings is not income there would not be any compulsion on the Trust/institution to claim the amount spent out of borrowed funds as application of income on the objects of the trust. Similarly corpus donation was exempt under section 11(1) (d).
However some trusts/institutions might have claimed the amounts spent out of corpus or/and amounts applied out of loans as deficit to be carry forward for set off is the subsequent years where there is income However. It is common knowledge that until recently, the Revenue Authorities were consistently disallowing the claim of carry forward of the deficits of the earlier years for setoff against their incomes of subsequent years, on the ground that there is no provision in section 11 to 13 for the same. Though the issue of allowing the the claim of the deficit u/s 11 and carry forward of the same to subsequent year to be set off against incomes of subsequent years by the charitable trusts was decided by the Supreme Court in the case of “CIT (Exemptions) vs. Subros Educational Society” (2018) 303 CTR 1 / 166 DTR 257 (SC), in favour of the Charitable entities confirming the view of various High Courts yet Department Suggested and the Finance Minister obliged to nullify the decision with the insertion of Explanation 5 to section 11 by Act No 13 with effect from 1.4.2022 as under:-
Explanation 5.—For the purposes of this sub-section, it is hereby clarified that the calculation of income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding the previous year.
So the effect of the Court decisions was nullified by the above amendment.
Thus even if some entities had claimed a deduction on account of expenditure incurred out of corpus or loans and claimed deficit to be carried forward and set off that would not be allowed in view of the afore mentioned amendment.
It is pertinent to mention that before insertion of proviso to explanation 4 to section 11 by Finance Act 2021 in 2021 repayment of loan was considered as amount applied for the objects of the trust as per CBDT Board Circular: No. 100 [F. No. 195/1/72-IT(A-I)], dated 24-1-1973. and also as per some judicial decisions as under:-
1. CIT v. Janamabhumi Press Trust (200) 242 ITR 457
2. CIT Vs. Janmabhumi Press Trust, ( 2000) 242 ITR 703 KAR,
3. CIT v. Kannika Parmeswari Devasthana & Charities (1982) 133 ITR 779 (Mad)
4. CIT v. St. George Forana Church (1988) 170 ITR 62.(Kerala)
5. DCIT Vs Ram Asra Goyal Education & Research Society (ITAT Chandigarh) : ITA No. 1578/Chd/18 Order DATED: 25/05/2022
6. DCIT Vs Ram Asra Goyal Education & Research Society (ITAT Chandigarh)
In view of the clarity of law on the issue the provision was not capable of misuse as amount applied out of loan was not allowable as income applied for the objects of the trust similarly the amount applied out of loans on the objects of the trust.was not allowable as income applied for objects of the trust.There is thus no justification to presume that deduction on account of amounts spend out of loans/borrowed funds and corpus have already been allowed
In any case , in order to protect the interests of the revenue about possibility of undue double deduction a proviso can be added to the explanation 4 after first proviso as under:-
“Provided no deductions shall be allowed on the repayment of loan or amount applied on objects out of corpus in respect of which deduction has been allowed in any year before 1st April 2021”on the basis of expenditure incurred out of such corpus orLoan/borrowings “ It is also pertinent to mention that the above amendment unjustifiably discriminates between the trusts/institutions having spent on objects out of loans/corpus before 1st April 2021 and Trusts spending on objects out of loans after 1st April 2021.There does not appear to be any justification for this discrimination.
conclusion Thus there is no justification for restricting the benefit of repayment of loan or reinvestment in corpus funds within 5 years After all what is the loss to the revenue if any trust is unable to repay the loan within 5 years and it does not claim any deduction until the trust is able to repay even after 5 years of obtaining the loan In my respectful submissions there should be some purpose to restrict the deduction which thus far was otherwise allowable.
There is also no justification for disallowing the claim on account of reinvestment in corpus fund and repayment of loan in respect of which expenditure has been incurred on the objects of the trust/institutions before 1st of April 2021.
It is therefore requested to reconsider the proposed amendments and be charitable to the charitable institutions.
Restriction of exemption to 85% in case of Donation from one trust/institution to another trust/institution
Before the proposed amendment exemption is allowed on any voluntary donation from one trust/institution to another trust/institution .Now it is proposed to limit the exemption to the Donor trust to only 85%. It is also pertinent to mention that by an earlier amendment no exemption is allowed to the donor on the corpus donation to any trust/institution. The reasons for the amendment are found in the Memorandum explaining the proposed amendments in the Finance Bill 2023 as under
“3.1 The income of the trusts and institutions under both regimes 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 the trusts 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) Thus, every trust or institution under both the regimes is allowed to accumulate 15% of its income each year.
3.2 Instances have come to the notice that certain trusts or institutions are trying to defeat the intention of the legislature by forming multiple trusts and accumulating 15% at each layer. By forming multiple trusts and accumulating 15% at each stage, the effective application towards the charitable or religious activities is reduced significantly to a lesser percentage compared to the mandatory requirement of 85%.
3.3 In order to ensure intended application toward charitable or religious purpose, it is proposed that only 85% of the eligible donations made by a trust or institution under the first or the second regime to another trust under the first or second regime shall be treated as application only to the extent of 85% of such donation”
As is clear from the above the proposed amendment is prompted by the undue advantage certain Trust/institutions were taking by circulating the donations from one trust/institutions to other/institutions each trust claiming the benefit of 15% accumulation at every level of donation.

. The perception that multiple trusts are created with a view to take advantage of the provision may be partially correct. It cannot be denied that undue advantage was taken by some trusts/institutions under the existing provision. In my view there may be few bad apples in the box to be sorted out however, care need to be taken that good apples are not spoiled while treating the bad apples. It is common knowledge that there are several Group trusts/institutions operating in the field. In most of the cases one main trust acts as a Financier to the other trusts .In that case the main trust would be making voluntary donations to the other trusts of the group without any intention of taking undue advantage of the exemption provisions .The proposed provision will hit hard such Group trusts. In order to prevent the undue advantage by some trusts/institutions without affecting the genuine cases it is suggested not to disallow 15% accumulation in the case of the First donor but make it compulsory for the Donee trusts to spent 100% instead of 85% of the donations received from other trusts/institutions, required under section 11 of the Act of the Act .. In my humble view if my suggestion is accepted the mischief will be plugged without hearting the genuine trusts/institutions
Time limit for filing declarations for extension of time for spending out of 85%
Exemption under section 11 is allowed on the income though accrued but not received during the year for any reason; if such income is spent in the year of receipt exemption is also allowed on the amount not spent out of the income for any other reason provided form 9A is filed before the time allowed for filing the return and the amount is spent in the next year
Now the time for filing the above mentioned form is proposed to be curtailed as it has to be filed two months before the time allowed for filing of the return of income. What purpose is served by this amendment is beyond my comprehension. I could not find any reasons mentioned in the Memorandum explaining the proposed amendments I would only request the Finance Minister and the officers assisting her in this task to avoid complicating the compliance provision for exemption in order to encourage genuine operators in the field of public welfare. The Government is committed to simplify tax laws as such the proposed amendment may be dropped

Posted on: February 16th, 2023