TAX ON ACCRETED INCOME -NGO

An Introduction for Accreted Tax (Exit Tax) U/S 115TD :-

Before the introduction of section 115TD,no provision in the Income Tax Act ensured that the corpus and asset base of the trust over some time is used for charitable purposes with a promise to be used for charitable purposes and is not used for any other purpose.

The Finance Act 2016 has introduced a new chapter after Chapter XII-EB of the Income Tax Act with effect from the 1st day of June 2016 namely “Special provisions relating to tax on earned income of certain trusts and institutions” and introduced a section 115TD. This chapter has been introduced to ensure that the profits given over the years by way of exemptions claimed by charitable trusts are not misused by converting them into non-charitable organizations.

It is a levy like an exit tax. This tax is in addition to the income tax chargeable in the hands of the entity and is leviable at the maximum marginal rate on the income earned. No deduction under any other provision of this Act shall be allowed to the trust or institution or any other person in respect of income which has been taxed or charged thereon.

We will discuss the Following issues in our Further discussion:-

• When does section 115TD applies?
• Meaning of accreted income
• What is the rate of tax on accreted income u/s 115TD?
• What is the Method of Calculation of Accreted Tax?
• What is due date of payment of exit tax u/s 115TD?
• Assets and Liability to be Included for accreted Income?
• Understanding for Computation of FMV of Assets and Liabilities as per rule 17CB
• What is the consequence in case of late payment of exit tax u/s 115TD?
• Interest payable for non-payment of tax by trust or institution: Section 115TE: 
• When trust or institution is deemed to be assesse in default: Section 115TF:
• Open issues related to Accreted Tax:

• When does section 115TD apply?

Section 115TD Earned income of trust or institution is taxable in the following circumstances after finance act 2022 if a specified person has :

1. The trust is converted into any form which is not eligible for grant of registration u/s 12AA or 12AB , or approval under clause (iv) or Sub clause(v) or Sub clause(vi) or Sub clause (via) of clause of Section 10.
2. The registration granted to them under section 12AA has been cancelled or
3. The Trust has adopted or modified its objects which are not in conformity with the conditions of registration and that.

2) Trust is merged with an entity that does not have similar objectives and is not registered under section 12AA or Section 12AB or Approved under clause (vi) or Sub clause (via) of clause (23c) of Section 10. 3) The trust has failed to transfer all its assets to any other trust or institution registered under section 12AA or or Section 12AB or Approved under clause (vi) or Sub clause (via) of clause (23c) of Section 10 within twelve months from the end of the month in which it is dissolved.

• Meaning of Accreted Income:

Total FMV of total assets and liabilities of trust/institutions as on specified date

Less: The total liability of such trust is computed by the prescribed method of assessment (Rule 17CB inserted by the Income-tax (Eighth Amendment) Rules, 2017, determining the method of valuation, w.e.f. 1-6-2016.)

Following items to be excluded while calculating accreted income:

1.  Earned income relating to any asset which has been directly acquired by the trust or institution out of its agricultural income of the nature referred to in clause (1) of section 10. Liability in respect of such property is also to be excluded.
2. Income earned in respect of any property by the trust or institution during the period commencing from the date of its creation or establishment and ending with the date of effect of registration under section 12AA if no profit is allowed to the trust or institution of section 11 and 12 of the said period. Liability in respect of such property is also to be excluded.

Exclusion of such assets shall be allowed only if the Trust or Institution has not been allowed any benefit of Section 11 and 12 During the Said Period.

3. The assets and liabilities, if any, relating to such assets which have been registered within the specified period to any other trust or entity are excluded while computing the income registered within the specified period.

• What is the rate of tax on income earned under section 115TD?

. Tax on accreted income is to be paid at ‘Maximum Marginal Rate’ (MMR). This levy is chargeable to additional income tax in the hands of the trust. This tax will be  imposed even if the Trust or institution does not have any other income chargeable to tax in the relevant pervious year .

Further there is no credit can be taken for such accreted income.

Meaning of MMR

Maximum marginal  rate is defined the rate of income tax applicable in relation to highest slab of income in  case of Individual, AOP or BOI.  MMR for AY 2023-24 will be 42.744%

• What is the Method of Calculation of Accreted Tax?

The method of calculation of accreted tax is as follows:

This levy is chargeable to additional income tax in the hands of the entity and is calculated as: Accreted Tax = Accreted Income * Maximum Marginal Rate

What is due date of payment of exit tax u/s 115TD?

The trust or institution shall be liable to pay tax on the income earned to the credit of the Central Government within fourteen days from the date specified in section 115TD(5).

Tax and Interest payable Timeline

• “Specified date” means, as follows under:-

SCENARIO	DATE OF PAYMENT
Cancellation of Registration- No appeal filed	14 days shall be counted from the date of Expiry of time allowed under section 253 Appeal filed.
Appeal is filed but cancellation of registration is confirmed in the appellate proceeding	14 days from the date of receipt of the appellate order. (To be counted from the date of order cancellation of registration by the Commissioner)
Adoption or modification of goods and not applying for new registration	End of last year
Adoption or modification of items and not applied for registration but application rejected	No appeal filed – Expiry of time allowed under section 253 Appeal filed – Date of receipt of order by Trust
Merger	Date of Merger
Dissolution	Date of expiry of 12 months

• Assets and Liability to be Included for accreted Income:-

Before we understand the How the value derived for the Assets and Liablities we have to understand which items shall be included while computing :-

PART A – ASSETS:

For the purpose of section 115TD, the total FMV of the total assets of the trust or institution shall be the sum of the FMV of all the assets in the balance sheet, as reduced by—

• any amount of TDS/TCS or advance tax paid as less than the amount of income-tax claimed as refund under the Act, and
• Any amount shown as an asset that does not represent the value of an asset, including the amortized amount of deferred expense.

PART B- LIABLITIES

The total liabilities of the trust or institution shall be the book value of the liabilities in the balance sheet as on the *specified date, but shall not include the following amounts, namely:-

• Capital Fund or Consolidated Fund or Corpus, by whatever name called.
• Reserve or surplus or income in excess of expenditure, by whatever name called.
• Any amount representing a contingent liability
• Any sum representing provisions made to meet liabilities, other than assured liabilities.
• Any amount representing a provision for taxation by way of advance tax payment, other than the amount of TDS/TCS, less the amount of income-tax claimed as a refund under the Act, to the extent of excess of the income-tax payable.

  * The Specified date shall be the Following :-

• The date of  the order cancelling the Registration or approval as the case may be.
• The date of adoption or modification of any Object.
•  The date of Merger with an entity which is not having similar objectives and not registered or approved.
• The date of Dissolution where the trust fails to Transfer all the assets to any other Registered trust or Institution.

• Understanding for Computation of FMV of Assets and Liabilities as per rule 17CB:-

FMV of assets

1.  Quoted Shares and Securities: Average of the lowest and highest price as on the           valuation date on a recognized stock exchange.

NOTE:  If no trading of such shares and security takes place on the valuation date, the average of the lowest and prices immediately preceding the valuation date when such shares and security are traded on the stock exchange highest.

• Unquoted Equity Shares:

A+B-LXPV

   PE

NOTES:

A = Book value of all assets (other than those included in B) except TDS, income tax refund claimed plus advance tax and deferred expenditure shown on asset side

B= FMV of bullion, jewellery, precious stones, artistic works, shares, securities and immovable property determined in the manner provided in this rule

L= Book value of liabilities, but not including the following amounts, namely:-

• Paid-up capital in respect of equity shares.
• Amount set aside for payment of dividend on preference shares and equity shares.
• Reserves and surplus, by whatever name called, even if the resulting figure is negative, set aside for depreciation.
• Any sum representing a provision for taxation, other than the amount of income-tax paid, if any, less than the amount of income-tax claimed as refund, if any, to the extent of the excess of the tax payable.
• Any amount representing provisions made for uncertain liabilities.
• Any amount that represents contingent liabilities rather than arrears of dividends payable in respect of cumulative preferences shares.

            PE = Total amount of paid up equity share capital as shown in the balance sheet

            PV = The paid up value of such equity shares

• Unquoted share or security date based on the valuation report of the merchant banker or an accountant.

• Immovable Property :

•  SDV on Valuation date                             XXX
•  FMV/ NRV on valuation date                                XXX

Whichever is higher

• A business undertaking: (A+B-L)

• Any other assets: FMV/ NRV on valuation date

• What is the consequence in case of late payment of exit tax u/s 115TD-115TE?

As per section 115TE, if the principal officer or trustee or institution and trust fails to pay the whole or any part of the tax on the earned income referred in section 115TD (1) within the time allowed under section 115TD (5), such Simple interest shall be payable at the rate of 1% for every month or part thereof on the amount of tax.

The period of interest shall be calculated commencing from the date immediately following the last date on which such tax was payable and ending with the date on which the tax was actually paid.

• When trust or institution is deemed to be Assesse in default: Section 115TF:

• The trust or institution and the principal officer or trustee of the trust or institution shall be deemed to be an assesse in default for non-payment of tax.
• In case of transfer of assets on dissolution of the trust or institution, which is not a charitable organisation, the recipient of the assets of the trust shall also be liable to be held as the assesse in default. The liability of the recipient shall be limited to the extent to which the property received by him is capable of meeting the liability.

• Open Issues related to Accreted Tax:

• Corpus fund created over the time usually for specific purpose , in case of any specified violation and attracting accreted tax on the same is against the Various Judicial pronouncements in the Past. 
• The tax earned shall be in addition to any income chargeable to tax in the hands of the entity. There is no explicit provision for refund of tax deposited even if it is deemed invalid. Thus, the institution will have to recourse to constitutional measures.
• Organisation usually paid the taxes on various income like :-
• Anonymous Donation under section 115BBC.
• Business activity under section 11(4a).
• Tax for violation in Investment Beyond Section 11(5).
• Tax for Forfeiture of exemption under section 13(8).
• Tax for forfeiture of Exemption for Providing benefit to Trustee and Board members under section 13(1), (2) and (3) Etc.

Any assets created out of this income and again charge the accreted tax on the same will be Double taxation on such organisation.

Disclaimer : The information contained in this article is intended solely for the dissemination of information and does not aim at solicitation of work. Though meticulous care has been taken but the author assumes no liability in respect of any loss/ damage incurred while acting on the information provided in this article. The author can be reached at sanjeev@semantictaxgen.in and can be called at +91-8126700005.