Explained: Meaning of the Application of Funds by Charitable Trusts under section 11 & 10(23C)
- #itsyourCASH
- No Comments
Charitable Trust or institutions under both the section 11 and section 10(23C) are required to apply 85% of their income for the purposes specified. The word application, w.e.f. 01st April 2022 will without any doubt means, actually payment for the expenses / specified purposes of the Trust. The same was the view held by various courts.
Therefore, the funds will actually be considered as application on actual payment only and not on accruing it for the specified purposes. Accordingly any sum payable by any trust under the section 11 or 10 (23C) shall be considered as application of income in the previous year in which such sum is actually paid by it irrespective of the previous year in which the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed by it. It is further proposed to insert proviso to the proposed Explanations [Explanation 3 to clause (23C) of section 10 and Explanation to section 11] to provide that where during any previous year, any sum has been claimed to have been applied by such trust, such sum shall not be allowed as application in any subsequent previous year.
Note – This is a dynamic content and will be updated from time to time for the applicable amendments. Any corrections or suggestions or inputs or support are welcome from the reader either by filing the form at the end of this wonderful post or through the mail at hello@fiscalnow.com. (Last Updated on 31st August 2022)
What is the real meaning of the word “Application” under section 11 or 10(23C)?
Trust or institutions under both the regimes are required to apply 85% of their income for the purposes specified. The word application, w.e.f. 01st April 2022 will without any doubt means, actually payment for the expenses / specified purposes of the Trust. The same was the view held by various courts. Therefore, the funds will actually be considered as application on actual payment only and not on accruing it for the specified purposes. Accordingly any sum payable by any trust under the section 11 or 10 (23C) shall be considered as application of income in the previous year in which such sum is actually paid by it irrespective of the previous year in which the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed by it. It is further proposed to insert proviso to the proposed Explanations [Explanation 3 to clause (23C) of section 10 and Explanation to section 11] to provide that where during any previous year, any sum has been claimed to have been applied by such trust, such sum shall not be allowed as application in any subsequent previous year
Case A
In March 2022, certain expenditures were provided for / incurred by the trust or institutions but not paid in the month of March 2022 itself, however, instead paid subsequently in FY 2022-23. In this case, if in absence of the newly inserted application the amount provided in March 2022 was considered as application u/s 11 for the FY 2021-22, then by virtue of the Proviso to the explanation quoted above the same cannot be treated again as application for the FY 2022-23 i.e., in the year in which it is being paid.
Case B
In March 2023, certain expenditures were provided for / incurred by the trust or institutions but not paid in the month of March 2023 itself, however, instead will be paid subsequently in FY 2023-24. In this case, by virtue of new explanation inserted w.e.f. 01st April 2022, the amount provided in March 2023 will be considered as application u/s 11 for the FY 2023-24 only (only if paid subsequently in FY 2023-24) i.e., on payment basis
Amendments through Finance Act 2022
After Section 11(7), the following Explanation is inserted
“Explanation – For the purposes of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it):
Provided that where during any previous year, any sum has been claimed to have been applied by the trust or institution, such sum shall not be allowed as application in any subsequent previous year.”
After Section Explanation 2 to Section 10(23C), the following Explanation is inserted
“Explanation 3.––For the purposes of this clause, any sum payable by any fund or institution or trust 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) shall be considered as application of income during the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the fund or institution or trust or any university or other educational institution or any hospital or other medical institution according to the method of accounting regularly employed by it:
Provided that where during any previous year any sum has been claimed to have been applied by the fund or institution or trust or any university or other educational institution or any hospital or other medical institution, such sum shall not be allowed as application in any subsequent previous year”
What is the rationale behind the amendment?
Trust or institutions under both the regimes are required to apply 85% of their income for the purposes specified. As is evident from the word “application”, it means actually paid. This is the position which has been held by different courts also. Accordingly it is being clarified by inserting Explanations “[Explanation 3 to clause (23C) of section 10 and Explanation to section 11] to provide that any sum payable by any trust under the first or second regime shall be considered as application of income in the previous year in which such sum is actually paid by it irrespective of the previous year in which the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed by it. It is further proposed to insert proviso to the proposed Explanations [Explanation 3 to clause (23C) of section 10 and Explanation to section 11] to provide that where during any previous year, any sum has been claimed to have been applied by such trust, such sum shall not be allowed as application in any subsequent previous year.
PoV
The amendment will help the taxmen in collecting the tax with improved accuracy, however, at the cost of more documentation and records at the assessee’s end. This could have been well addressed by the asking more details in audit reports of the trusts.
