Levy of Tax where the Charitable Institution Ceases to Exist or Converts into a Non-Charitable Organization (Section 115TD)

Section 115TD is inserted with effect from June 1, 2016. This section provides for levy of additional income-tax in case of conversion into, or merger with, any non-charitable form or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution. The elements of the regime are—

1. Accreted income of Trust or Institution to be Taxed at the Maximum Marginal Rate (MMR) in certain cases [Section 115TD(1)]:

Notwithstanding anything contained in this Act, where in any previous year, a trust or institution registered under section 12AA has—

  1. converted into any form which is not eligible for grant of registration under section 12AA;
  2. merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA; or
  3. failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via), within a period of 12 months from the end of the month in which the dissolution takes place,

then, in addition to the income-tax chargeable in respect of the total income of such trust or institution, the accreted income of the trust or the institution as on the specified date shall be charged to tax and such trust or institution, as the case may be, shall be liable to pay additional income-tax (herein referred to as tax on accreted income) at the maximum marginal rate on the accreted income.

Assessment of 'Trust'
Assessment of ‘Trust’

2. Meaning of Accreted Income in case of Charitable Trust [Section 115TD(2)]:

The accreted income for the purposes of section 115TD(1) means the amount by which the aggregate fair market value of the total assets of the trust or the institution, as on the specified date, exceeds the total liability of such trust or institution computed in accordance with the method of valuation as may be prescribed.

Certain Assets and Liabilities to be ignored for the purpose of computing the Accreted Income:

The following assets and liabilities shall be ingnored for the purpose of computing the accreted income:

  1. So much of the accreted income as is attributable to the following asset and liability, if any, related to such asset shall be ignored for the purposes of section 115TD(1), namely:—

    1. any asset which is established to have been directly acquired by the trust or institution out of its income of the nature referred to in section 10(1) (i.e agricultural income);

    2. any asset acquired by the trust or institution during the period beginning from the date of its creation or establishment and ending on the date from which the registration under section 12AA became effective, if the trust or institution has not been allowed any benefit of sections 11 and 12 during the said period.

  2. While computing the accreted income in respect of a case referred to in clause (c) of section 115TD(1) above (i.e. transfer upon dissolution), assets and liabilities, if any, related to such asset, which have been transferred to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via), within the period specified in the said clause, shall be ignored.

3. When the Trust or an Institution shall be deemed to have been Converted into any Form not eligible for Registration under Section 12AA [Section 115TD(3)]:

For the purposes of section 115TD(1), a trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA in a previous year, if,—

  1. the registration granted to it under section 12AA has been cancelled; or
  2. it has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it,—
    1. has not applied for fresh registration under section 12AA in the said previous year; or
    2. has filed application for fresh registration under section 12AA but the said application has been rejected.

4. Tax on the Accreted Income to be payable even if no Income-tax is payable on Total Income of the Trust or Institution [Section 115TD(4)]:

Notwithstanding that no income-tax is payable by a trust or the institution on its total income computed in accordance with the provisions of this Act, the tax on the accreted income under section 115TD(1) shall be payable by such trust or the institution.

5. Time Limit for Payment of Tax on Accreted Income [Section 115TD(5)]:

The principal officer or the trustee of the trust or the institution, as the case may be, and the trust or the institution shall also be liable to pay the tax on accreted income to the credit of the Central Government within 14 days from,—

  1. the date on which,—

    1. the period for filing appeal under section 253 against the order cancelling the registration expires and no appeal has been filed by the trust or the institution; or

    2. the order in any appeal, confirming the cancellation of the registration, is received by the trust or institution, in a case referred to in clause (i) of section 115TD(3);

  2. the end of the previous year in a case referred to in sub-clause (a) of clause (ii) of section 115TD(3) (i.e. the trust has not applied for fresh registration under section 12AA in the said previous year);

  3. the date on which,—

    1. the period for filing appeal under section 253 against the order rejecting the application expires and no appeal has been filed by the trust or the institution; or

    2. the order in any appeal, confirming the cancellation of the application, is received by the trust or institution, in a case referred to in sub-clause (b) of clause (ii) of section 115TD(3);

  4. the date of merger in a case referred to in clause (b) of section 115TD(1);

  5. the date on which the period of 12 months referred to in clause (c) of section 115TD(1) expires.

6. Credit of Tax Paid on Accreted Income Not Available [Section 115TD(6)]:

The tax on the accreted income by the trust or the institution shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the trust or the institution or by any other person in respect of the amount of tax so paid.

7. Deduction under any Other Provisions of the Act not Allowed in respect of Income Charged or the Tax Paid as per Section 115TD(1) [Section 115TD(7)]:

No deduction under any other provision of this Act shall be allowed to the trust or the institution or any other person in respect of the income which has been charged to tax under section 115TD(1) or the tax thereon.

8. Interest Payable for Non-Payment of Tax by Trust or Institution [Section 115TE]

Where the principal officer or the trustee of the trust or the institution and the trust or the institution fails to pay the whole or any part of the tax on the accreted income referred to in section 115TD(1), within the time allowed under section 115TD(5), he or it shall be liable to pay simple interest @ 1% for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

9. When Trust or Institution is deemed to be Assessee in Default [Section 115TF]

According to section 115TF(1), if any principal officer or the trustee of the trust or the institution and the trust or the institution does not pay tax on accreted income in accordance with the provisions of section 115TD, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of incometax shall apply.

Further, according to section 115TF(2), notwithstanding anything contained in section 115TF(1), in a case where the tax on accreted income is payable under the circumstances referred to in clause (c) of section 115TD(1), the person to whom any asset forming part of the computation of accreted income under section 115TD(2) thereof has been transferred, shall be deemed to be an assessee in default in respect of such tax and interest thereon and all the provisions of this Act for the collection and recovery of income-tax shall apply:

Provided that the liability of the person referred to in section 115TF(2) shall be limited to the extent to which the asset received by him is capable of meeting the liability.