Dear Sir/Madam,
I am Noel Sushant Gole from Belagavi Karnataka. I would like to thank you for your website and your blog and they are very helpful. I would need a few queries to be answered by you if you do not mind.
If a Educational institution created partly out of FCRA Donations and partly put of donations from CSR funds of companies, then the income generated out of the said Educational Institution is to be treated as Foreign Source in entirely or is it to be taken proportionately as foreign source Other income?
Do the trustees need to file return under Lokpal as of 2023, The last post I saw in your website was of a 2016 post.
The school general running account needs to be reported as utilization account or not?
If new school is opened out of the profits of the original school then does the new school also fall within FCRA and the new school income is to be treated as other income in FCRA
Regards,
Noel Sushant Gole
Belagavi, Karnataka.
Dear Noel,
I would like to attempt to answer your query related to the treatment of income. I am assuming you are talking about income in the nature of school fees and fees for other educational services.
Your query belong to the same category of conundrum we have already heard in our forums, if we buy a cow from FC funds and maintain it (feed it, take care of its health) with LC funds, how do we treat the income from selling the milk produced?
There are two explanations to the definition of foreign contribution under Section 2(h) under FCRA which seem to address or rather complicate this issue:
Explanation 2 to Section 2(h) – The interest accrued on the foreign contribution deposited in any bank referred to in sub-section (1) of section 17 or any other income derived from the foreign contribution or interest thereon shall also be deemed to be foreign contribution within the meaning of this clause.
Explanation 3 to Section 2(h) – Any amount received, by any person from any FOREIGN SOURCE in India, by way of fee or towards cost in lieu of goods or services rendered by such person in the ordinary course of his business, trade or commerce whether within India or outside India shall be excluded from the definition of foreign contribution.
The dilemma is whether the income that you have mentioned falls under Explanation 2 or Explanation 3.
Let’s examine Explanation 2. Is the intention of explanation 1 to cover any and all income from use of FC funds or only specific income, for e.g. interest income or any income that can be directly attributed to the use of FC fund or e.g. sale/scrap of asset bought from FC funds?
Let’s examine Explanation 3. It is very clear that the words used are any income received from FOREIGN SOURCE in lieu of goods or services is not foreign contribution (FC). It is interesting to note here that it is not mentioned what would you treat the income as whether FC or Local Contribution (LC) if the amount received is from a LOCAL SOURCE for goods or services.
Let us take a hypothetical situation. Say a charitable hospital is built and maintained entirely with FC funds. Say it charges for its services and follows the provisions of Income Tax Act to conduct its business/commerce. Say a foreigner (foreign source) and an Indian citizen use same services of the hospital and pay the same amount for it. Now, how would the hospital treat the income received from the foreigner and income received from the Indian citizen?
As per Explanation 3, it is absolutely clear that the amount received from the foreigner is not Foreign Contribution.
As per Explanation 2, if we interpret the section as encompassing all income out of foreign contribution, then the income received from Indian Citizen is Foreign Contribution.
How is it that an interpretation of the law allows amount received from foreign source for fees towards services as Local contribution and the same amount received from Indian Citizen (Local Source) as foreign contribution?
In my opinion, it is not the intention of FCRA to treat income from services/goods as Foreign Contribution at all. They included explanation 3 to clarify that income towards fees etc for goods/services even from Foreign Source is not Foreign Contribution. They excluded to mention Local Source in this explanation because it was implied that income towards fees etc for goods and services from Local Source can by no stretch of imagination be treated as Foreign Contribution and it is not the intent of the Legislation to treat it as such.
In my opinion, we have to make a harmonious interpretation of both the explanations keeping in mind the intent of the Legislation:
a) Any income as fees towards services and goods whether received from foreign/local source is Local Contribution.
b) Only income that is directly linked/attributable to foreign contribution not being income as fees for services and goods should be treated as Foreign Contribution.
Please note that this is only my opinion. Further there is no section and/or rules under FCRA to proportionate income between FC and LC.
Further I am assuming the your educational institution carries on business/commerce as allowed under the provisions of Income Tax Act to allow the provision of Explanation 3 to work in your favour.
If the Educational institution created partly out of FCRA Donations, the assets created out of such FC Donation will be subject to regulation (see in case of cancellation of registration). The definition thro’ explanation includes the interest earned on Bank Account of Foreign Contribution.
The income generated out of the said Educational Institution is to be treated as Indian Source only in entirety if the income is fee based.
When the Income side represents the Foreign Contributions only, that is, when the school receives Foreign Contributions only and children / their wards need not pay any fee, the surplus represents the Foreign Contribution since no profit can be made from the contributions / donations.
The Operational aspect is FC Receipt Account with SBI, Delhi and Operational Account with Any Approved Bank and Branch. Non-FC receipts can not be deposited into the FC Receipt Account or the FC Operational Account. Hence, the School Fee Account for Receipts from students is not to be reported as utilization account.
If new school is opened out of the profits of the original school then the new school will not fall within FCRA EXCEPT when the new school establishment source is ONLY the FC Donations. ( fee paid for any specific student is not part of FC) .
As per me, the trustees need to file return under Lokpal before entering the office. No yearly return is required by the Trustees.
SRRF may clarify further.