ALLOWABILITY OF BASIC EXEMPTION LIMIT

A society is registered under the Society Registration Act 1860 but is not registered under section 12 AA of the Income Tax Act and it carries out charitable objects.

Can it not claim basic exemption limit under Income Tax Act as an AOP? Is MMR Maximum Margional Rate applicable ? Further the shares of members have not been defined and members individual income is above basic exemption limit. Please advise.
With Thanks & Regards

CA Rajeev Sharma
B.Com. F.C.A.D.I.S.A.(ICA)
Lucknow 226 016
India

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7 Responses to ALLOWABILITY OF BASIC EXEMPTION LIMIT

  1. Avineesh Matta says:

    I don’t understand while discussing s. 12A, how the share of members come into play? s. 12A is applicable only on public charitable trusts, while issue of share of members being determinate of indeterminate comes forth for private trusts.
    Societies that are incorporated for charity within the meaning of s. 2(15) are in the nature of Public Charitable Trusts where, the office bearers of society are trustees only and none of the members of society have any share in the property or income of such society. Thus ‘share’ per se of members become irrelevant.

    • Subhash Mittal says:

      Mr Matta,

      My understanding is that a non-profit which does not have a 12A exemption would be taxed as an AOP at flat 30%. However the problem arises, when individual members of AOP wish to claim basic exemption limit, where the subject becomes complicated. Since query talked of how to claim basic exemption limit. I agree with you this is not an easy subject and it is possible to have two opinions on the same, I am sure your views on the subject would help in further enhancing the understanding.

      rgds

      • Avineesh Matta says:

        Dear Mr. Mittal,
        The basic difference and that is the major one, in case a trust/ society/ section 8 company, whose objects are charitable, the members thereof does not have any interest in the assets or income of the trust. Therefore, in these cases where no registration under s. 12A is available, the income of such trust shall be taxed as AOP not on MMR but on the slab rates applicable t individuals/ AOPs etc.

        S. 67A/ s. 164, to my understanding should be applicable on private trusts where shares of beneficiaries, or for that matter beneficiaries itself are indeterminate or unknown.

        I do agree that while filing tax returns online the departmental officers or the IT software does not capture this legal position. Assessments are done at MMR and even rectification applications online are not getting settled. Of late, the IT processing officers in CPC are then referring rectification applications to respective AOs of the wards where the trust’s jurisdiction lies.

        Regards,
        Avineesh

  2. Aziza Tyabji Hydari says:

    Recently we had work carried out at our NGO. We were given to understand that having 12 A exempts us from Service Tax. What is 12 AA?

    • Subhash Mittal says:

      12A does not exempt an organisation from service tax. Service Tax and Income Tax are different issues, while there are certain exemptions available for 12A registered societies. However for that one needs to understand the nature of ‘charitable activities’ as defined under Service Tax. Suggest you may attend proposed SRRF workshop on 17th which will cover Service Tax for NGOs apart from other topics.

  3. Deepak Bansal says:

    In case of Society not having 12A registration, it should be treated as a separate entity and should be allowed the benefit of basic exemption limit as available to an individual. Each year’s Finance act places AOP (a society is an AOP) at par with an individual and hence so. Nevertheless, there is a dispute and some cases , ITO has taxed the society at MMR.

    Deepak Bansal

  4. Subhash Mittal says:

    Dear Rajiv,

    This is a complicated subject. I have attempted a response, below. However I am sure, you yourself being a senior chartered accountant, you can understand it much better.

    In case a society is not registered under S.12A exemption, it becomes a registered entity. Its income will be subject to tax. The question is how the tax will be applied. An unregistered Trust will be subjected to trust as Association of Persons or also known as AOP. Taxation of such a trust would be either as individual or on Maximum Marginal Rate (MMR). This would depend upon if the share of income of the individual member of the society is determinate. Where individual members share is determinate as per S.67A of IT Act, Income Tax would be chargeable as individuals, giving benefit of exemption applicable to individual. However if any individual member is subject to maximum tax rate, without considering the share of the AOP’s income, then tax is applicable on MMR basis. Similarly in case share of individual members are indeterminate, taxes would be applicable on MMR (including any applicable surcharge).

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