Hope this email finds you well and in good health !
I want to understand the following:
We have 12A registered entity that does not plan to apply for upcoming renewal in 2025-26 and continue to file ITR as AOP.
What are the implications for its accumulated unrestricted funds and building property. Will the IT department charge tax or penalize in any way?
Please Help
Thanks and Regards
Amrut Mistry
IBTADA
In case a charitable entity’s S.12AA is cancelled or not renewed, then the entity is likely to attract provisions of S.115TD at Maximum Marginal Rates.
Therefore before opting for non-renewal, please take suitable Tax advise to minimise your tax impact.
As per Finance Act, 2016 ‘accreted income’ of a trust or institution registered under Section 12AA would be taxed under prescribed circumstances.
For the purposes of the Act, ‘accreted income’ is the difference between the fair market value of the assets and the liabilities of the trust or institution.
Accordingly, trusts and institutions will be subject to the tax on accreted income under the following circumstances:
1) If the trust or institution gets converted into any form which is not eligible for exemption under Section 12AA (e.g., the nonprofit is converted into a for-profit form);
2) If the trust or institution is merged with any entity ineligible under Section 12AA (e.g., the nonprofit merges with a for-profit company);
3) If the trust or institution, in the case of dissolution, fails to transfer its assets to exempt entities under Section 12AA and Section 10(23C)(iv), (v), (vi), and (via) (e.g., the
residuary funds are given to a for-profit entity after dissolution).
(See Section 115TD of Income tax Act 1961)
The tax on accreted income is to be paid in addition to the income tax on the total income of the trust or institution.
The Finance (No. 2) Act, 2019 amended Section 12AA of the Income Tax Act, 1961 to allow the Principal Commissioner or Commissioner of Income Tax to deregister a charitable trust or institution under certain circumstances; once deregistered, the organization would be taxed at the maximum marginal rate of thirty percent on the trust’s income from the assessment year and also on accreted income.
If you do not apply for renewal, section 115TD will apply.
Regards.
Noshir