Jun 032021
 

Meaning of non-for-profit entities:

Not-for-Profit entities and small educational, medical institutions or hospitals, etc. existing solely for educational and/or philanthropic intentions enjoy tax exemption subject to meeting certain conditions These organizations are highly dependent on donations, as it is the primary source of funding for their activities

Meaning of corpus fund:

The corpus is never meant to be utilized and remains parked separately. Income accruing on such corpus funds is generally utilized towards the organization’s activities.

Taxation of corpus fund in light of FB 2021 amendment:

Existing tax treatment: Donations earmarked as Corpus are excluded from income for the year without any further compliance requirement and/or conditions. There are restrictions regarding the utilization of such funds. It does not matter whether corpus funds are used for activities or for making investments.

The issue in existing treatment: The above treatment leads to double deduction in the case of such organizations. For instance, an NGO received a corpus fund and construct a building out of that fund. Now, NGO for monies expended in the construction of the building would claim deduction two times, firstly at the time of construction of building and utilization of corpus fund for construction of building as monies expended in the construction of the building and secondly, as depreciation on the so constructed building. The Finance Bill, 2021 (the ‘FB’) has proposed significant changes in the provisions governing such institutions to eliminate the possibility of unintended double deduction / double-counting while calculating application or accumulation of funds

Thus, due to the proposed amendment, Corpus contributions received after 1 April 2021 are to be mandatorily invested in a specified manner by such qualifying organizations. This is a pre-requisite to avail tax exemption in respect of Corpus contributions.

Some of the key features of the proposed changes are:

Corpus funds should be earmarked and invested separately. It should not be mixed with other general/ non-corpus funds.
Investment condition applies only in respect of corpus contributions which are claimed as tax-exempt. Corpus created at the time of formation of the institution or out of basic accumulation, anonymous donations, etc. would remain outside the purview of this.
Corpus contribution could be freely utilized by organizations for their incidental business activities, operational expenses, etc. so far. However, going forward, they may have limited flexibility in using corpus donations.
Corpus donations utilized towards the objects can be considered as the tax-deductible applications only in the year of re-investment in the corpus.
Such funds will no longer be available as a part of free cash. Means such funds can not be held as cash in hand in the institutions.
Investment in immovable property out of such corpus contribution is one of the permissible modes of investment provided the asset is used only for the advancement of charitable or religious objectives of the institution.
Any shortfall in investments out of the current corpus donations would be fully taxable. The advantage of tax exemption on minimum utilization (as applicable to other voluntary contributions) is not available to such corpus contributions.

These changes will affect corpus donations received after 1 April 2021. Thus, Corpus donations received up to 31 March 2021 are not required to be statutorily invested and can be used in any manner whatsoever.

Jun 012021
 

Facts:

Return filed on income         31.10.2010  

Rs. 6,24,900/-

Gross receipts More than Rs. 100,00,000/-
Expenses claimed

Freight

 

Rs. 6.46,472/-

Salaries and wages Rs. 68,34,073/-
Traveling expenses Rs. 5,05,981/-
Other expenses Rs. 7,82,700/-

 

Whether profits of the above taxpayer can be estimated @ 8% in the case supporting documents, i. e., books of accounts, bills, and vouchers, etc. for claiming the above expenses are not submitted?

Relevant rule section 44AD:

44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight percent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed :

Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.

(3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.

(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under subsection (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

Analysis & conclusion:

As per sec. 144 of the Act, if the assessee fails to comply with the terms of a notice issued under sub-sec. (1) of sec. 142 and if the assessee fails to provide the necessary information, the Assessing Officer had liberty to pass the order on the best judgment assessment.

Secondly, if the assessee produced the books of accounts where the Assessing Officer is not satisfied with the correctness or completeness of the accounts of the assessee, or where the method of accounting provides standards as notified under sub-sec. (2), have not been regularly followed by the assessee, the Assessing Officer may make the assessment in the manner provided in sec. 145 of the Act.

Thus, in case the assessee has not produced any evidence before the Assessing Officer, therefore Assessing Officer is justified in estimating the profit at 8% even in cases of gross receipts are more than Rs, 1 crore.