Rationalization of provisions relating to trust, institution and funds by Finance Act, 2020

AMENDMENTS MADE TO SECTION 10(23C) TO REMOVE CONFLICTING PROVISIONS

1. Corpus donations received by Section 10(23C) institutions will be exempt from tax:

If institutions, registered under section 12AA, receive any income in the form of voluntary contributions with a specific direction that it should form part of the corpus of the trust or institution, it shall not be included in the total income of such trust or institution.

However, no such specific exemption was available to entities registered under section 10(23C) before the Finance Act 2020. Hence, it was always a matter of litigation, compelling the institutions coming within the scope of section 10(23C) to apply even their corpus donations for getting the benefit of exemption. This was prejudicial to them because they cannot build up the corpus fund in the absence of specific exemption available to them.

The Finance Bill 2020 inserted an Explanation to the Third Proviso to Section 10(23C) to clarify that the corpus donations shall not form part of the income of such institutions. It has been provided that any corpus donations received by such fund or institution or any university or other educational institution or any hospital or other medical institution, shall not be included in the income of such entities.

Hence, institutions or funds availing exemption under section 10(23C) now specifically get the exclusion from the requirement of mandatory application of income in respect of ‘corpus donations’. This amendment brings exemption available to institutions registered under section 10(23C), for the corpus donations, at par with exemption available to trusts or institutions registered under section 12A/12AA/12AB.

2. Corpus donation not to be considered as an application of Income

As per extant provisions, entities registered under section 12A/12AA are provided with the benefit of exemption in respect of corpus donations. Any contribution by a charitable or religious trust to any other trust registered under Section 12AA, with a specific direction that it shall form part of the corpus of recipient trust is not considered as an application of income for the donor trust.

A similar provision is contained in the Twelfth Proviso to Section 10(23C) that any contribution by fund or trust or institution or any university or other educational institution or any hospital or other medical institution [as referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub clause (via) of Section 10(23C)], with a specific direction to the trust or institution registered under section 12AA that it shall form part of the corpus of recipient trust, consequently, it shall not be treated as application of income for the donor. Currently, this restriction was only in respect of corpus donations made to entities registered under section 12AA.

The Finance Bill, 2020 provides that the corpus donations shall not form part of the income of the funds or institutions availing the benefit of section 10(23C). A consequential amendment has also been made that corpus donations by one such entity to another entity shall not be treated as application of income. In other words, the corpus donation by 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) to another such fund shall not be considered as an application of income. This has been done to ensure that these institutes do not avail the dual benefit, i.e., exemption of income as well as the application of income.