Amendment for Corpus Donation.

1.     AMENDMENTS MADE TO SECTION 10(23C) TO REMOVE CONFLICTING PROVISIONS

1.1.  Corpus donations received by Section 10(23C) institutions will be exempt from tax

If institutions, registered under section 12AA, receive any income in the form of voluntary contributions with a specific direction that it should form part of the corpus of the trust or institution, it shall not be included in the total income of such trust or institution. However, no such specific exemption was available to entities registered under section 10(23C). Hence, it was always a matter of litigation, compelling the institutions coming within the scope of section 10(23C) to apply even their corpus donations for getting the benefit of exemption. This was prejudicial to them because they cannot build up the corpus fund in the absence of specific exemption available to them.

The Finance Bill 2020 (as passed by the Lok Sabha) inserted an Explanation to the Third Proviso to Section 10(23C) to clarify that the corpus donations shall not  form part of  the income of such institutions. It has been provided that any corpus donations received by such fund or institution or any university or other educational institution or any hospital or other medical institution, shall not be included in the income of such entities.

Hence, institutions or funds availing exemption under section 10(23C)  now specifically get the exclusion from the requirement of mandatory application of  income in respect of ‘corpus donations’. This amendment brings exemption available to institutions registered under section 10(23C), for the corpus donations, at par with exemption available to trusts or institutions registered under section 12A/12AA/12AB.

1.2.           Corpus donation not to be considered as an application of Income

As per extant provisions, entities registered under section 12A/12AA are provided with the benefit of exemption in respect of corpus donations. Any contribution by a charitable or religious trust to any other trust registered under Section 12AA, with a specific direction that it shall form part of the corpus of recipient trust is not  considered as an application of income for the donor trust.

A similar provision is contained in the Twelfth Proviso to Section 10(23C) that any contribution by fund or trust or institution or any university or other educational institution or any hospital or other medical institution [as referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of Section 10(23C)], with a specific direction to the trust or institution registered under section 12AA that it shall form part of the corpus of recipient trust, consequently, it shall not be treated as application of income for the donor. Currently, this restriction was only in respect of corpus donations made to entities registered under section 12AA.

The Finance Bill, 2020 (as passed by the Lok Sabha) provides that the corpus donations shall not form part of the income of the funds or institutions availing the benefit of

section 10(23C). A consequential amendment has also been made that corpus donations by one such entity to another entity shall not be treated as application of income. In other words, the corpus donation by fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) to another such fund shall not be considered as an application of income. This has been done to ensure that these institutes do not avail the dual benefit, i.e., exemption of income as well as the application of income.

2.     NO DEDUCTION OF CORPUS DONATIONS MADE TO SECTION 10(23C) APPROVED INSTITUTIONS

[Section 11]

Income derived from property held under trust, wholly for charitable or religious purpose, is exempt from tax to the extent such income is applied to such purposes in India. Where any such income is accumulated or set apart for application to such purposes in India, the income so accumulated or set apart is also exempt to the extent it is not in excess of 15% of the income from such property. However,  the donations  by a charitable institution to another trust are considered as an application of income except the donation made with a specific direction that it shall form part of the corpus of the donee. At present, any contribution by a charitable or religious trust registered under section 12AA to any other trust registered under Section 12AA, with a specific direction that it shall form part of corpus of recipient trust shall not be treated as application of income for the donor trust.

The Finance Bill 2020 (as passed by the Lok Sabha) provides that any corpus donation made by trust or institution registered under section 12AA to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of section 10(23C) shall not be treated as an application of income.

In view of this amendment, corpus donation given by a Section 12AA registered institution to section 10(23C) approved institution will not be treated as an application of income. This amendment has been introduced so that these institutions do not avail the dual benefit of exemption as the corpus donations received by institutions approved under section 10(23C) shall not be treated as an income in their hands.

Example, A charitable institution approved under section 12AA has an income  of Rs. 5 Lakh during the year. It applied income for charitable purposes to the tune of Rs.

3.75 Lakhs. It also made corpus donation of Rs. 50,000 to an educational institution approved under section 10(23C). The income in such case, before and after amendment shall be computed as under:

Particulars	Before Amendment (Rs.)	After Amendment (Rs.)
Income	5,00,000	5,00,000
Less: Application of Income	3,75,000	3,75,000

Less: Corpus donation	50,000	-
Less: 15% Exemption	75,000	75,000
Taxable income	Nil	50,000

3.      SCOPE OF EXEMPTION UNDER 10(23FE) EXPANDED

The Finance Bill, 2020 proposed to introduce a new section 10(23FE) under the Income-tax Act to attract investment and promote infrastructure facilities in India. It provides  exemption to income of Sovereign Wealth Fund or wholly owned  subsidiary of Abu Dhabi Investment Authority, in the nature of dividend, interest or long-term capital gains arising from an investment made by it in  India, whether in  the form of debt or equity, in a company or enterprise carrying on the business of developing, operating or maintaining any infrastructure facility as defined in Explanation to clause (i) of section 80-IA(4) of the Act or such other business as may   be notified by the Central Government in this behalf. However, the investment is required to be made on or before 31-03-2024 and held for at least 3 years.

Sovereign Wealth Fund (SWF) as the name suggest is an investment fund which is primarily owned by the Government of any Country. SWF invests globally in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments funds (AIFs) such as private equity fund or hedge funds.

As Sovereign Wealth Fund and Abu Dhabi Investment Authority can invest in a company or enterprise either directly or indirectly through AIFs, the Finance Bill,   2020 (as passed by the Lok Sabha) has expended the scope of section 10(23FE)  whereby exemption shall be available even if investment in  infrastructure companies is made through AIFs. In this respect, it has been provided that specified persons   shall be exempt from paying tax on any income arising from investment in

Category-I or Category-II AIFs provided AIFs invest 100% of the amount in one or more specified company or entity, i.e., company or enterprise carrying on the business of developing, operating or maintaining any infrastructure facility as defined in Explanation to clause (i) of section 80-IA(4) of the Act or such other business as may be notified by the Central Government in this behalf. Exemption shall be available even if specified persons invests in preference share capital of the company.

Further, as section 10(23FE) is introduced for investment in infrastructure activities, exemption shall be available even in respect of income arising from investment in Infrastructure Investment Trusts (InVITs).

Furthermore, in addition to Sovereign Wealth Fund and Abu Dhabi Investment Authority, a pension fund created or established under the law of a foreign country is included in the list of specified persons and shall also be eligible for exemption

under section 10(23FE) provided it is not liable to tax in such foreign country and satisfy such other conditions as may be specified in this behalf.

The amended provision also provides that investment should be made during the period between 01-04-2020 to 31-03-2024. This amendment is made to clarify that no exemption shall be available in respect of income arising from investment made before 01-04-2020.

A proviso has been inserted to withdraw the exemption if specified persons subsequently fails to satisfy the conditions on basis of which exemption was claimed in earlier years. It is provided that the amount of exemption claimed in earlier years shall be deemed to be the income of the assessee of the year in which it fails to   comply with the conditions.

Section 10(23FE) after the amendment made in Finance Bill, 2020 (as passed by Lok Sabha) can be explained with the help of following questionnaire:

3.1.           Who shall be eligible to claim exemption under section 10(23FE)?

Exemption under section 10(23FE) shall be available to following persons:

a)  Sovereign Wealth Fund, i.e., Investment funds owned and controlled by the Government of a foreign country.

b)  Wholly owned subsidiary of Abu Dhabi Investment Authority.

c)   Pension fund created or established under the law of a foreign country.

3.2.  When exemption under section 10(23FE) shall be available to eligible persons?

Exemption under section 10(23FE) shall be available when eligible persons (as referred above) make investment in following:

a)  Debt or share capital (equity as well as preference) of a company or enterprise carrying on the business of developing, operating or maintaining any infrastructure facility as defined in Explanation to clause (i) of section 80-IA(4).

b)  Units of Category-I or Category-II AIFs who made 100% investment in above companies or entity.

c)   Units of Infrastructure Investment Trusts (InVITs).

Further, the investment should be made between 01-04-2020 to 31-03-2024 and held for at least 3 years.

3.3.           Which type of income shall be eligible for exemption under section 10(23FE)?

Exemption under section 10(23FE) shall be available in respect of income arising in the nature of dividend, interest and long-term capital gain from investment as specified above.