Law-making in India has been taking a dangerous direction. Every scam, every fraud, every wrongdoing results in the enactment of new laws! Our law-makers believe that every wrongdoing can be prevented by bringing in new laws. They do not accept that scams can be prevented by effective implementation of existing laws. The ‘Satyam Scam’ (2009) possibly revamped Corporate Laws, but even the new laws couldn’t prevent the recently unearthed loan scams! These are knee-jerk responses. Laws have become so complex, that they require a series of clarifications, but every clarification carries with it a web of ambiguities, and every solution has inherent problems. This is what we call the legal chakraview. In the bargain, small and medium sized businessmen get burdened with complex and time-consuming compliances.   

Another such onerous compliance is the recent amendments to the Income Tax Act (1961), in so far as they relate to the registration procedure of Public Charitable Trusts. In our view, the existing procedure of initial registration of Trusts and the subsequent scrutiny assessment procedure were adequate, and effective implementation thereof, would have eliminated the need for the draconian amendments dealt with herein, later.

Registration Process Prior To Amendment:

Prior to the Finance Act 2020, all Public Charitable Trusts seeking exemption of income were required to be registered u/s 12 A / 12 AA of the Act. Hence registration is required if a Trust wants to claim exemption from Tax.  A decade ago, the procedure was fairly simple – an application with the copy of the Trust Deed, the registration certificate under the Maharashtra Public Trusts Act 1950 (the MPT Act) – were enough to secure registration. The procedure, later, became complex and arbitrary. The Income Tax Department started scrutinizing the activities of newly formed Trusts before granting registration, questioning how a newly formed Trust could start its activity without registration. Some practical solutions had to be innovated. Thereafter, the department started scrutinizing the Trust Deeds and for some inexplicable reason, started insisting that the Trust Deeds should have the following provisions:

1. That there should be a binding clause – a requirement difficult to comprehend. Presumably, what the Department wanted was that the provisions of the Trust Deed should be binding on the Trustees. It was argued that the Trustees, by executing the Trust Deed, were bound by the provisions of the Trust Deed.
2. That the Trust created should be irrevocable. It was argued that a Public Charitable Trust, by its very nature, is irrevocable!
3. That the Trust Deed should contain a clause for dissolution and amalgamation. It was argued that there is no such statutory requirement and even so, the concept of amalgamation was already provided for under the MPT Act.  

However, the arguments did not find favour and the applicants were compelled to fall in line. As professionals, we were tempted to invite rejections so that the matter would travel upwards to the High Court. However, the clients’ interest being paramount, practical solutions were explored. We hasten to clarify (less the expression, ‘practical solutions’, be misinterpreted) that practical solutions involved filing affidavits, undertakings to satisfy the illogical requirements of the Department. We understand that a few applicants even modified their respective Trust Deeds, though, according to us, such modifications may not be permissible. These ‘practical solutions’ had to be resorted to, as the consequences of rejection are draconian.  

Registration Process As Per 2020 Amendment:

Under the new regime, all Trusts, even those already registered under the old Sections 12A/12AA of the Act, are now required to register again, under the newly introduced Section 12AB of the Act. Such applications are to be made on or before 31st August, 2020. ‘Where such application for renewal of registration is made, the Principal Commissioner of Income Tax may:

(I) Call for such documents or information from the trust or institution, make such inquiries as he thinks necessary, in order to satisfy himself about:

(a) the genuineness of activities of the trust or institution; and

(b) the compliance of such requirements of any other law for the time being in force by the trust or institution, as are material for the purpose of achieving its objects;

(II) After satisfying himself about the objects of the trust or institution and the genuineness of its activities, under item (A), and compliance of the requirements under item (B), of sub-clause (I):

(a) pass an order in writing, registering the trust or institution for a period of five years; or

(b) if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its registration after affording a reasonable opportunity of being heard’;

In other words, the registration shall be valid for 5 years only, as compared to the old regime where the validity was perpetual, unless cancelled due to breach. The apparent reason provided for periodic review of registration is to have, “a non-adversarial regime and not conduct roving inquiry in the affairs of the exempt entities on day-to-day basis.” However, the above objective could have been achieved through effective implementation of the existing law, which already provides for yearly scrutiny assessments.

What is significant is the punitive consequences of cancellation of registration, as provided for, in another Section 115 TD of the Act, that is payment of tax at the maximum marginal rate on the market value of the assets of the Trust. Imagine the plight of a Trust, in the event it is called upon to pay tax, at say, 30% on the market value of Rs. 100 crores of the immovable property owned by it! The Trust would have rather never opted for exemption of its income. 

This leads us to an interesting interpretation of this new amendment – what happens if a Trust does not apply for registration before 31st August, 2020? The registration granted earlier would lapse and the Trust would not be entitled to exemption. But will this amount to cancellation of registration? This has been a very critical point of debate for some large Trusts, which, as per media reports, have decided to give up exemption rather than face the consequences of cancellation. However, the Department contested this approach by contending that there is no provision for voluntary surrender of exemption. So, then, will this new amendment pave the way for indirect surrender of exemption?

It will be interesting to see how the Department will insist on the above three requirements – in case of Trust Deeds, which have been drafted decades ago and where such specific provisions do not exist. Further, how will the Department justify its earlier conduct of accepting the very same Trust Deeds for the purpose of granting registration under the old regime?!

With this new requirement of periodic review of registration, some of the Trusts would particularly  be in serious trouble and we find them committing innocent delinquency – as some, which are camouflaged as cosmopolitan, but a scratch on the surface would reveal their communal identity; or other Trusts, which are meant to impart education to students of a particular community only, but have, over the years, admitted students of all communities. 

One would say the latter is a laudable act. We agree, secular education should be encouraged, but the same, in a given situation, will definitely not be in accordance with the objects of the Trust, resulting in probable cancellation of registration! Hence, every such application for registration will have to be carefully presented with proper study, by a competent professional, of the relevant documents and information in each case. It may well be that in a particular case, non-registration could prove to be a better option in the long run, but this alternative also requires further consideration and endorsement by experts in the field.  

The author is a Chartered Accountant in practice.  

Disclaimer: The contents of the above write up are for informational purpose. It does not constitute professional advice or a formal recommendation.