Benefits to related persons.

445(1)

If during any proceedings under this Act, it is found that a registered non-profit organisation has any specified income which is chargeable to tax as per section 337 (Table: Sl. No. 2), the Assessing Officer may impose on such person, a penalty of—

• (a) a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for the benefit of any related person referred to in section 355(i), if the violation is noticed for the first time during any tax year; and
• (b) a sum equal to 200% of the aggregate amount of income of such person applied, directly or indirectly, by that person for the benefit of any person referred to in section 355(i), if the violation is noticed again in any subsequent tax year.

Explanation

Section Summary:

Section 445(1) of the new income tax law addresses penalties imposed on registered non-profit organizations (NPOs) if they are found to have used their income for the benefit of related persons, as defined under section 355(i). This income is taxable under section 337 (Table: Sl. No. 2). The section aims to ensure that NPOs use their income for their stated charitable or non-profit purposes and not for the undue benefit of related individuals or entities.

Key Changes:

1. Introduction of Penalty for Misuse of Income: Previously, there may not have been a specific penalty structure for NPOs found diverting income to related persons. This section now explicitly imposes penalties for such actions.
2. Graded Penalty Structure: The penalty is higher for repeat violations (200% of the misused income) compared to first-time violations (100% of the misused income).

Practical Implications:

• For NPOs: NPOs must ensure that their income is used strictly for their stated objectives and not for the benefit of related persons. Failure to comply could result in significant financial penalties.
• For Assessing Officers: This section provides a clear framework for imposing penalties, ensuring consistency in enforcement.
• For Related Persons: Individuals or entities defined as "related persons" under section 355(i) must be cautious about receiving benefits from NPOs, as this could trigger penalties for the NPO.

Critical Concepts:

• Specified Income: Income that is chargeable to tax under section 337 (Table: Sl. No. 2). This typically includes income not used for the stated charitable purposes of the NPO.
• Related Persons: Defined under section 355(i), these are individuals or entities closely associated with the NPO, such as trustees, founders, or their relatives.
• Income Applied for Benefit: This refers to income used, directly or indirectly, to provide benefits (e.g., payments, gifts, or services) to related persons.

Compliance Steps:

1. Internal Audits: NPOs should conduct regular internal audits to ensure income is used appropriately and not diverted to related persons.
2. Documentation: Maintain detailed records of all income and expenditures to demonstrate compliance with the law.
3. Training: Educate trustees and staff about the restrictions on benefiting related persons to avoid inadvertent violations.

Examples:

• First-Time Violation: An NPO is found to have paid a trustee's personal expenses using its income. Since this is the first violation, the Assessing Officer imposes a penalty equal to the amount misused (e.g., ₹1,00,000).
• Repeat Violation: The same NPO is found again using its income to benefit a related person in a subsequent tax year. This time, the penalty is 200% of the misused amount (e.g., ₹2,00,000 for ₹1,00,000 misused).

This section reinforces the principle that NPOs must operate transparently and in alignment with their stated objectives, ensuring public trust and compliance with tax laws.