Additional tax to be levied where the charitable institution ceases to exist or converts into a non-charitable organization

A new Chapter XII-EB has been introduced vide Finance Bill, 2016, laying down special provisions relating to tax on accreted income of certain trusts and institutions. 

A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its activities and dissolve/ or merge with any other charitable or non-charitable institution. It may also convert into non-charitable organization. As per Section 11 of the Income Tax Act, 1961 ("the Act"), certain amount from prior period can be brought to tax on failure of certain conditions but as per the existing law there is no clarity on how the corpus or asset base of the trust accreted over period of time to be utilized for charitable purposes but has not been used for the said intended purpose. 

Charitable Trusts built up corpus/ wealth through exemptions and to ensure that the benefit conferred over the years by way of exemption is not misused and the intended purpose of such exemption is achieved, a specific provision has been introduced imposing a levy in the nature of an exit tax which gets attracted when the institution is converted into a non-charitable organization or gets merged with a non-charitable organization or does not transfer the assets to another charitable organization.

It is clear that the primary condition for grant of exemption is that the income derived from property held under trust is utilized for the charitable purposes and where such income could not be applied during the previous year, it has to be accumulated and invested in the modes prescribed for such purposes as per the conditions. 

As discussed above, due to this gap in law, this levy seems justifiable. 

Briefly, the elements of this chapter are as follows:

• Accreted income of the trust or institution shall be taxable on conversion of trust or institution into a form not eligible for registration under Section 12AA of the Act or on merger into an entity not having similar objects and registered under Section 12AA or on non-distribution of assets on dissolution to any charitable institution registered under Section 12AA or approved under Section 10(23C) within a period 12 months from dissolution. (accreted income shall be the amount of aggregate of total assets as reduced by the liability as on the specified date. Method of valuation has been proposed to be prescribed in rules. While calculating the accreted income, the asset and liability of the charitable organization that have been transferred to another charitable organization within specified time shall be excluded.)
• Levy is in addition to any income chargeable to tax in the hands of the entity and since the tax is a final tax, no credit can be taken by the trust or the institution or any other person. This is leviable even if there is no other income chargeable to tax in the relevant previous year. 

Simple interest @1% per month or part of it is applicable for the period of non-payment, in case there is a failure to pay tax within the prescribed time-limit. For the purpose of recovery of tax and interest, the principal officer or the trustee and the trust or the institution is deemed to be assessee in default and other provisions related to recovery of taxes shall apply. 

These amendments are said to take effect from 1st June, 2016.