Application of income.

341(1)

The following sums shall be allowed as application of income to a registered non-profit organisation:––

• (a) any sum applied by it for charitable or religious purpose in India for which it is registered where such sum is,– (i) paid during such tax year; and (ii) such payment is allowable under sections 36(4), (5), (6) and (7) and 35(b)(i);
• (b) 85% of the sum paid by way of donation made to any other registered non-profit organisation; and
• (c) nil, with respect to any sum paid as a corpus donation to any other registered non-profit organisation.

341(2)

The application of income under sub-section (1) shall include the following:––

• (a) the amount invested or deposited back during the tax year, in the modes permitted under section 350 maintained specifically for such corpus, if–– (i) such investment or depositing back is made within five years from the end of the tax year in which such application of income was made from the corpus; and (ii) the application of income from the corpus is made after the 31st March, 2021 and there was no violation of any provision of this Part, or any corresponding provision of the Income-tax Act, 1961 with respect to such application;
• (b) the amount repaid, during the tax year, towards any loan or borrowing where,–– (i) such repayment is within five years from the end of the tax year in which such application of income was made from the loan or borrowing; and (ii) the application of income from the loan or borrowing is made after the 31st March, 2021 and there was no violation of any provision of this Part, or any corresponding provision of the Income-tax Act, 1961 with respect to such application.

341(3)

The following claims shall not be allowed as application of income under sub-sections (1) and (2):––

• (a) the deduction or allowance by way of depreciation or otherwise claimed in respect of an asset acquisition of which has been claimed as an application of income in the same or any other tax year under this Part or under any corresponding provision of the Income-tax Act, 1961; or
• (b) a claim of set off or deduction or allowance of any excess application of any of the years preceding the tax year.

341(4)

An application from corpus, loan or borrowing, accumulated income, specified income or deemed accumulated income shall not be considered as application for the purpose of sub-sections (1) and (2).

Explanation

Section Summary:

Section 341 of the new income tax law outlines how registered non-profit organizations (NPOs) can claim deductions for sums applied towards charitable or religious purposes. It specifies what qualifies as "application of income" and sets conditions for such claims, including donations, investments, and repayments. The section also clarifies what does not qualify as an application of income, such as depreciation claims or excess application from previous years.

Key Changes:

1. Expanded Scope of Application of Income: The section now explicitly includes investments or deposits made back into permitted modes (under Section 350) and loan repayments as part of the application of income, provided they meet specific timelines and conditions.
2. Corpus Donations: Corpus donations to other registered NPOs are now explicitly excluded from being considered as an application of income.
3. Timeline for Repayments and Investments: Repayments of loans or investments must be made within five years from the end of the tax year in which the income was applied.
4. Exclusions: Depreciation claims and excess application from prior years are no longer allowed as part of the application of income.

Practical Implications:

• For NPOs: Registered NPOs must carefully track and document how they apply their income, ensuring compliance with the new timelines and conditions for investments, deposits, and loan repayments.
• Donations: NPOs can claim 85% of donations made to other registered NPOs as an application of income, but corpus donations are excluded.
• Compliance Burden: NPOs need to maintain detailed records of income application, including investments, deposits, and loan repayments, to avoid disallowances during tax assessments.

Critical Concepts:

• Application of Income: Refers to the use of income by an NPO for charitable or religious purposes, as permitted under the law.
• Corpus Donation: A donation made to the permanent fund or capital of an NPO, which is not considered an application of income under this section.
• Permitted Modes (Section 350): Refers to specific investment or deposit options allowed for NPOs, such as government securities or approved mutual funds.

Compliance Steps:

1. Track Income Application: Maintain detailed records of all sums applied for charitable or religious purposes, including donations, investments, and loan repayments.
2. Document Donations: Ensure that donations to other NPOs are properly documented, with 85% of such donations claimed as application of income.
3. Adhere to Timelines: Ensure that investments, deposits, or loan repayments are made within five years from the end of the tax year in which the income was applied.
4. Avoid Disallowed Claims: Do not claim depreciation or excess application from prior years as part of the application of income.

Examples:

• Scenario 1: An NPO donates ₹1,00,000 to another registered NPO. Under Section 341(1)(b), it can claim ₹85,000 (85% of ₹1,00,000) as an application of income.
• Scenario 2: An NPO invests ₹50,000 from its corpus into government securities within five years of applying the income. This investment qualifies as an application of income under Section 341(2)(a).
• Scenario 3: An NPO repays a loan of ₹2,00,000 within five years of applying the income. This repayment is considered an application of income under Section 341(2)(b).

This section ensures that NPOs use their income appropriately for charitable purposes while maintaining transparency and compliance with tax laws.