7.—Interpretation
Interpretation.
355
In this Part,––
- (a) “anonymous donation” means any voluntary contribution referred to in section 2(49)(c), where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars, as prescribed;
- (b) “approval” means an approval under the second proviso to section 80G(5) of the Income-tax Act, 1961or section 354;
- (c) “cancellation” includes withdrawal;
- (d) “donation” means any voluntary contribution received by a registered non-profit organisation from any person;
- (e) “commercial activity” means any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity;
- (f) “registration” includes provisional registration, provisional approval or approval, as referred to in the second proviso to sections 10(23C) or 12AB(1) of the Income-tax Act, 1961 and under section 332, but shall not include approval under the second proviso to section 80G(5) of the said Act or section 354;
- (g) “registered non-profit organisation” means any person having a valid registration under any specified provision and such registration has not been cancelled;
- (h) “related person” means any of the following persons:— (i) the author or the founder of the registered non-profit organisation; (ii) any person whose total contribution to such registered non-profit organisation, during the relevant tax year exceeds one lakh rupees, or, in aggregate up to the end of the relevant tax year exceeds ten lakh rupees, as the case may be; (iii) where such author, founder or person is a Hindu undivided family, a member of the family; (iv) any trustee or manager (by whatever name called) of the registered non-profit organisation; (v) any relative of any persons referred to in sub-clause (i), (iii) or (iv); (vi) any concern in which any of the persons referred to in sub-clauses (i), (iii) or (iv) has a substantial interest;
- (i) “relative”, in relation to an individual, means— (i) spouse of the individual; (ii) brother or sister of the individual; (iii) brother or sister of the spouse of the individual; (iv) any lineal ascendant or descendant of the individual; (v) any lineal ascendant or descendant of the spouse of the individual; (vi) spouse of a person referred to in sub-clause (ii), (iii), (iv) or (v); (vii) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual;
- (j) “residual income” means the total income, as reduced by regular income and specified income;
- (k) “specified asset” means any asset which is established to have been directly acquired by the specified person–– (i) out of its income of the nature referred to in Schedule II (Table: Sl. No. 1); (ii) during the period beginning from the date of its creation or establishment and ending on the date from which the registration under specified provision became effective, if the specified person has not been allowed any benefit under this Part or under sections 11 and 12 or section 10(23C)(iv) or (v) or (vi) or (via) of the Income-tax Act, 1961 during the said period, where provisions of the first proviso or the second proviso to sub-section 12A(2) or the eighth proviso to clause 10(23C) of the said Act, are not applicable; (iii) during the period beginning from the date of its creation or establishment and ending on the date from which the registration under specified provision became effective due to the provisions of the first proviso or the second proviso to section 12A(2) or the eighth proviso to section 10(23C), where provisions of the first proviso or the second proviso to section 12A(2) or the eighth proviso to section 10(23C), of the Income-tax Act, 1961, are applicable; and (iv) which has been transferred to any other specified person within twelve months from the end of the month in which the dissolution takes place in respect of a case specified in section 352(5) (Table: Sl. No. 9);
- (l) “specified person” means any person which is registered under any specified provision at any time since its incorporation or creation;
- (m) “specified provision” means section 12A, 12AA or 12AB or section 10(23C) of the Income-tax Act, 1961 or section 332;
- (n) “substantial interest”, in relation to a person in a concern, means–– (i) where the concern is a company, its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than 20% of the voting power are, at any time during the tax year, owned beneficially by such person or partly by such person and partly by one or more of the other related persons; or (ii) in the case of any other concern, if such person is entitled, or such person and one or more of the other related persons are entitled in the aggregate at any time during the tax year, to not less than 20% of the profits of such concern; and
- (o) “value” means the value of any benefit or facility granted or provided free of cost or at concessional rate to any related person.
Explanation
Section Summary:
Section 355 of the Income Tax Act provides definitions and interpretations for key terms used in the context of non-profit organizations (NPOs) and their taxation. It clarifies terms like "anonymous donation," "commercial activity," "related person," "specified asset," and others, which are crucial for understanding the tax treatment of donations, income, and activities of NPOs.
Key Changes:
- New Definitions Introduced: Terms like "anonymous donation," "commercial activity," "related person," and "specified asset" are explicitly defined, providing clarity for NPOs and tax authorities.
- Expanded Scope of "Related Person": The definition now includes not only founders and trustees but also individuals or entities with significant contributions or interests in the NPO.
- Clarification on "Specified Asset": The section specifies how assets acquired by NPOs are treated, particularly those acquired before or after registration under specified provisions.
- Inclusion of "Substantial Interest": A clear threshold (20% voting power or profit entitlement) is provided to determine substantial interest in a concern.
Practical Implications:
For NPOs:
- NPOs must maintain detailed records of donations, including the identity of donors, to avoid classifying contributions as "anonymous donations," which may have adverse tax implications.
- NPOs engaging in "commercial activities" must ensure compliance with tax rules, as such activities may affect their tax-exempt status.
- The definition of "related person" may impact transactions between NPOs and their founders, trustees, or significant contributors, requiring careful documentation to avoid conflicts of interest or tax penalties.
For Donors:
- Donors contributing more than ₹1 lakh in a year or ₹10 lakh in aggregate must be aware that they may be classified as "related persons," potentially affecting the NPO's tax treatment.
For Tax Authorities:
- The clear definitions simplify the assessment process, enabling better enforcement of tax rules for NPOs.
Critical Concepts:
- Anonymous Donation: A donation where the NPO does not maintain records of the donor's identity, name, and address. Such donations may be taxed differently.
- Commercial Activity: Any trade, commerce, or service activity undertaken by an NPO for a fee or consideration, regardless of how the income is used.
- Related Person: Includes founders, trustees, significant contributors, and their relatives, as well as entities in which these individuals have a substantial interest.
- Specified Asset: Assets acquired by an NPO using specific types of income or during specific periods, which may have unique tax implications.
- Substantial Interest: Ownership of 20% or more of voting power in a company or entitlement to 20% or more of profits in other concerns.
Compliance Steps:
- Maintain Donor Records: NPOs must keep detailed records of all donations, including donor identity, to avoid classification as anonymous donations.
- Monitor Commercial Activities: Ensure that any commercial activities comply with tax laws and do not jeopardize the NPO's tax-exempt status.
- Identify Related Persons: NPOs should identify and document transactions with related persons to ensure compliance and avoid penalties.
- Track Specified Assets: Maintain records of assets acquired using specific income sources or during specific periods to comply with tax rules.
Examples:
- Anonymous Donation: If an NPO receives ₹50,000 in cash without recording the donor's name and address, this amount is classified as an anonymous donation and may be subject to tax.
- Related Person: A founder of an NPO donates ₹2 lakh in a year. Since this exceeds the ₹1 lakh threshold, the founder is classified as a "related person," and any transactions between the NPO and the founder must be carefully documented.
- Commercial Activity: An NPO runs a café to fund its charitable activities. The income from the café is considered "commercial activity" and must comply with tax rules, even if the profits are used for charitable purposes.
This section provides clarity and structure for NPOs and tax authorities, ensuring proper compliance and enforcement of tax laws.