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May 17, 2021

Trust / NGO No dual registration in section 10(23C) and Section 12A

by Mahesh Mara in Income Tax

Trust / NGO No dual registration in section 10(23C) and Section 12A

Income received by any university or educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government is fully exempt from tax vide Section 10(23C)(iiiab). Hence, a Government educational institution is fully exempt from income tax without any separate approvals etc. as long as it is not for profit purpose. Section 10(23C)(iiiad) provides that the income earned by any university or educational institution existing solely for educational purposes and not for the purposes of profit shall be exempt from tax if the aggregate annual receipts of such university or educational institution do not exceed Rs. 1 crore.

Section 10(23C)(vi) covers exemption in the case of an educational institution having receipts which states that income earned by any university or other educational institution existing solely for educational purposes and not for purposes of profit shall be exempt if they are approved by the prescribed authority. Thus, where the aggregate receipts of the institution exceeds Rs. 1 crore, the institution needs a separate approval for claiming the exemption u/s 10(23C).

Under previous laws a hospital or an educational institution may get them self registered u/s 12A/12AA for claiming exemption of their income u/s 10(23C). In many cases, a hospital or an educational institution may have dual benefits – registered u/s 12A/12AA and approved u/s 10(23C). The Finance act, 2020 has made amendment with respect to above facility and held that an entity cannot held both the approval i.e. u/s 10(23C) and registration u/s 12A and u/s 12AA from 1st July 2021. The current entities must decide and apply for re approval and re-registration accordingly. This amendment is applicable for all hospital, medical institutions, university or other educational institutions. It should be noted that if one does not make any choice between the two registration, then the approval u/s 140(23C) shall prevail and the registration u/s 12AB (actually registered u/s 12AA or u/s 12A) shall become inoperative from 1st July 2021.

What is section 11(7) of the Income Tax Act?

The Finance Act, 2020 made amendments and has inserted a new proviso to section 11(7) as the first proviso to provide that the registration u/s 12A or u/s 12AA or u/s 12AB shall become inoperative. As per Section 11(7) of the Act where a trust or an institution is registered u/s 12A or u/s 12AA or u/s 12AB and the said registration is in force for any previous year then exemptions contained in section 10 shall not operate on trust’s income excluding section 10(23C) and section 10(46). The period of in operation of registration shall be as follows:

1. In case of an existing registered For an existing registered trust having approval also u/s 10(23C) than the registration shall become inoperative From 1st day of July 2021

2. In case of a newly registered trust who wants to obtains approval u/s 10(23C) than the registration shall become inoperative from the date of such approval u/s 10(23C).

Therefore, in order to continue to avail the exemption u/s 11, the trust or institution having both the registration and approval has to apply for revival of the registration at least 6 months prior to the commencement of the assessment year from which registration is sought to be made operative. Section 12A(1)(ac)(iv) provides this time limit of 6 months.

Once the application for revival of inoperative registration is made within the prescribed time limit as per section 12A(1)(ac)(iv) then the CIT shall pass an order accepting the application or rejecting the application within 6 months from the end of the month in which application was received. Before rejecting the application for revival of the registration, reasonable opportunity of being heard shall be given to the trust/institution. Once the application for revival of registration is accepted, then the trust shall be registered u/s 12AB for a period of 5 years and exemption shall be available from the Assessment Year immediately following the financial year in which such an application is made. [Section 12A(2)].

The second proviso to section 11(7) provides that once the registration of such a trust or an institution of which the has become inoperative is made operative u/s 12AB then the approval under section 10(23C) shall cease to be in effect from the date on which such registration becomes operative and thereafter no exemption u/s 10(23C) can be claimed. In this manner, there will be no break or gap in the continuity for claiming the exemption u/s 11 and u/s 12 even though the registration becomes inoperative.

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