Guidelines regarding applicability of Sec.10(23C)(iv) & (v). - Income Tax - 1868/1990

INSTRUCTION NO. 1868/1990 Dated: December 3, 1990 Important amendments have been made in the provisions of section 10(23C)(iv) and (v) of the Income-tax Act with effect from 1st April, 1990. In view thereof, the earlier guidelines formulated in Board's letter dated 5th January, 1987 (F.No.197/1/87-ITA.II) require to be suitably updated. 2. The basic requirements for issue of notification regarding grant of exemption from income -tax under section 10(23C)(iv) are follows:- (a) the fund or institution should be established solely for charitable purpose; (b) its objects must be in consonance with the charitable purpose; and (c) it should have attained importance throughout India, or throughout any State or States. The underlying idea in this is to grant exemption to select, exceptionally deserving institutions having some stature to justify the notification. 3. Similarly, the basic requirements for issue of notification regarding grant of exemption from income-tax under section 10(23C)(v) are as follows:- (a) The trust (including any other legal obligation) or institution should be either wholly for public religious purposes, or wholly for public religious and charitable purposes; and (b) its affairs should be administered and supervised in a manner to ensure that its income is properly applied towards its objects. Here, the purpose need not be confined to India, and it may be specifically noted that "importance" is of no consequence in such cases. However, here also exemption should be allowed to select, exceptionally deserving cases. 4. Several provisions have been added to these provisions with effect from 1.4.90, and are applicable to both sub-clauses. These are: (i) The fund, trust or institution must apply in the prescribed Form No.56. The forms must contain all the information required, be correctly and completely filled, and duly verified. The various documents, etc. required to be furnished should also be attached. (ii) The genuineness of the activities of the fund, trust or institution have to be properly verified by conducting enquiries and calling for documents and other information, wherever necessary. (iii) The fund, trust or institution must apply its income, or accumulate it for application, wholly and exclusively to the object for which it is established. It should not invest or deposit its funds other than as specified in section 11(5) of the Act. (iv) The exemption will, in no case, be available to a trust, fund or institution if its investments or deposits fall outside the specifications of section 11(5) after 30th March, 1990. (v). A trust, fund or institution will not be entitled to such exemption if its income includes profits and gains from business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained for such business. (vi) The notification shall have effect only for such assessment years as are specified therein, not exceeding three assessment years at a time. 5. The conditions spelt out in the preceding paragraphs are cumulative and not independent of each other. If any one conditions is not met, the applicant will not qualify for notification under section 10(23C)(iv)/(v). 6. Assessment Year 1990-91 is the first assessment year from which the above mentioned provisions will be applicable. It is likely that once a fund, trust or institution is notified from this year onwards, the Assessing Officer may erroneously recommend a case for exemption, as in the past, on the basis of earlier notifications alone, without verifying that all other conditions are met with. In view of the precondition in paragraph 4(iv) above, examination of the final accounts for the year ended 31.3.1990 is essential before recommending the case for notification for assessment year 1990-91. Specific findings of fulfilment of each of the above mentioned conditions will have to be reflected in the reports, adequately supported with the basis for the same. 7. In the reports relating to notification under section 10(23C)(iv), a specific, factual comment on the degree of importance actually enjoyed by the applicant throughout India or throughout any State or States has to be given. In all such cases, there must be reasons and material appended in support of the comments. The underlying intention is to recognise exceptionally deserving cases having a stature and renown at least throughout a State. 8. In reports relating to exemption under section 10(23C)(v), it must be brought out clearly that an in-built mechanism exists in the trust deed/Memorandum of Association, or , in the absence of any such documents, in actual practice, which ensures that the affairs of the applicant are administered and supervised towards proper application of its income to its objects. As far as possible, local enquiries may be made to ascertain that, in actual practice also, the day-to-day affairs are being administered properly. 9. In the case of renewal of applications under the said section, it has been observed that reliance is largely placed on the Government's decision in the earlier period, and recommendation for fresh notification is mechanically made. It is reiterated that this relaxation to the normal provisions under sections 11 to 13 of the Income-tax Act is not to be treated in a routine fashion, and the applications should be carefully processed to ensure that only the exceptionally deserving institutions avail of this facility. It is, therefore, very important that detailed reports be given on the nature of activities and expenses based on a thorough examination of accounts, annual reports, etc. of past years. An attempt has to be made to ascertain whether the trust, fund or institution continues to follow its avowed objects, applies its fund properly to such objects, and does not divert its funds/activities to other directions under camouflage. Renewal will also not be justified in cases where, after notification, the institution become dormant and acts only as a fund collecting agency. It is, therefore, necessary that the Commissioner/Director of Income-tax clearly rationalise their recommendations while making them. 10. It has been opined by Ministry of Law in several cases that the same income cannot be exempted under more than one section/clause of a section of the Act. Therefore, for example, income that has been exempted under section 10(21), read with section 35 and 80GGA of the Act, cannot be considered for exemption under section 10(23C)(iv) also. 11. In order to be satisfied about the genuineness of the activities of the fund, trust or institution, the Central Government has been empowered to call for any document or information from the applicant (second proviso to section 10(23C). Under section 12A(b), it is mandatory for all trusts having income over Rs.25,000/- in the previous year to have their accounts audited. Such audited accounts must invariably be called for preferably for the past three years and various aspects of the accounts may be commented upon the reports. Through such documents/information, it must always be verified that the income or property of the trust, fund or institution is not substantially used or applied directly or indirectly for the benefit of any interested person referred to in section 13(3) of the Act. In this connection, reference is invited to paragraph (c) of Board's circular No.557 dated 19th March, 1990. 12. Normally, a fund or an institution, that has been identified as a charitable one, fulfilling the conditions of section 80G of the Act, cannot be considered for notification under section 10(23C)(v) and vice versa. This is because section 80G, unlike Section 10(23C)(v) recognises only cases that are wholly and exclusively charitable in nature. 13. The reporting officers must send their detailed comments in the standard proforma (copy enclosed). The recommendations must be adequately reasoned and supported with material to justify them. They should also cover the important aspects mentioned above, or in the letter of 5th January, 1987. These recommendations must be signed by the Commissioner/Director and not by any subordinate officer. Further, in accordance with Instruction No.1839, dated 20.2.1990, the reports must be processed and sent well within two months from the date of receipt of the petition. 14. This may be brought to the notice of all officers working in your region.