One of the key preconditions for charitable trust and institutions seeking to Claim exemption under section 11 and 12 of the income Tax Act is registration under the Act. Section 12A enacts that the provisions of section 11 and 12 which provide for exemption of income to such trusts and institutions, will not be applicable unless such trusts and institution has made an application in the prescribed from for registration to the Commissioner of the Director, and it has been registered by the Commissioner of the Director.
Under the amended provisions of this section which have come into effect from 1.6.2007, the earlier requirement of filling such an application within one year of creation of the trust (or establishment of the institution) has been removed. Similarly, the power of the commissioner or Director to condone the delay in filling such application to grant the benefit of exemption retrospectively from the date of creation of trust or establishment of the institute has also been done away with.
Under the amended provisions, where an application is field on or after the 1st day of June, 2007, exemption under section 11 and 12 shall be available only on a prospective basis from the assessment year which immediately follows the financial year in which the application is made.
- The Finance Act 2014 has made some further amendments stating that where Eligible institution which have been granted registration under section 12AA of the Act will be eligible for benefits under section 11 and 12 of the Act even for any earlier year which is pending assessment on the date of such registration. Further, no reopening of an assessment permitted, merely if such trust or institution has not obtained registration for the earlier assessment year. These benefits will not apply n a case where the registration was either refused or cancelled. Eligible educational institutions hospitals and other institutions under section 10 (23C) of the Act to be considered as substantially financed by the government only if the government grant to be institution exceeds such percentage (to be prescribed ) of the total receipts (including voluntary contribution )during the previous year .
- Commissioner of Income –tax has been empowered to cancel registration granted to trust or institution deriving income for property held under trust under specified circumstances, such as investing in prohibited modes, applying income for benefit of trustees, etc.
Section 12AA of the income Tax Act and rule 17A of the income Tax rules prescribed the procedure for registration of a trust where an application for registration under section 12A has been received by the Commissioner or Director. The application for registration has to be made in form No. 10A (Annexure –I). It should be accompanied by the following documents:-
- Copy of the instrument by way of which the trust or institution etc. is cleared ;
- If it has been in existence in the years prior to the year in which application is made, accounts of the prior year (not exceeding three years).
On receipt of the application, the CIT/DIT (E) has to pass an order either registering the trust or institution or rejecting the application. The registration may be rejected on the ground that the trust or its activities are not genuine. Under sub-section (2) of the section 12A such an order registering or refusing registration has to be passed within a period of six months from the end of the month in which the application is made.
The conditions required for registration have been started briefly and in simple language. It mandates that the Commissioner or Director should satisfy himself about:-
- The objects of the trust or institution , and
- The genuineness of its activities.
If follows that the Commissioner or director will enquire whether the objects of the trust or institution constitute religious or charitable purpose (s) within the meaning of the section 2(15).
Section 12A (b) prescribed another important condition for claiming exemption under section 11 and 12. It requires a trust or an institution whose comes for the previous year before claiming the deduction contemplated under section 11 and 12 falls with the tax bracket (I.e., its income exceeds the maximum amount which is not chargeable to income –tax without giving effect to the provisions of section 11 and 12), to get its accounts audited by an accountant. The Accountant’s report on Form No. 10B (Annexure-ii) has to be field along with the return of the income. A Charted Accountant or other person mentioned in the explanation of section 288(2) of the Act is authorized to carry out such an audit.
The following points should ordinarily be kept in mind at the time of making an application for registration:-
- There should be a legally existent entity which can be registered ;
- It should have written instrument of creation or written document evidencing its creation ;
- All its objects should be charitable or religious in nature;
- Its income and assets should be made applicable exclusively towards the objects mentioned in the objects clauses, and the rules and by-laws;
- No part of its income should be distributed, directly or indirectly, to its members, directors or founders, related person or relatives etc. claiming through them;
- In case of dissolution, its net assets after meeting all its liabilities ,should not be revertible to its founder, members, directors or donors etc., but used for the objects by transfer to other trust/institution having objects of charitable purpose.