Plugging the Corpus loophole – Budget 2017

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682
Charity Fund

Typically donations received under Sec 80G are considered as Income and reflected in the credit side of the Income & Expenditure Account. Further, 85% of such income is required to be spent in the same year for the charitable purposes of the NGO under Sec 11(1) of the Income Tax Act.
However, donations specified by the Donor as towards Corpus have been on a different footing. The Donor is eligible for 80G deduction on Corpus. While the recipient i.e. the NGO takes it to the Balance Sheet as a Corpus Fund, which is capital in nature and not as an Income. Now if the same NGO were to donate these funds in the same financial year to another NGO as Corpus or as a simple donation, then such a donation was hitherto considered as a valid charitable expenditure which can be expensed in the Income & Expenditure account of the first NGO. This afforded an opportunity for round-tripping donations from one NGO to another with the interplay of it being expenditure and Corpus at the same time and beating around the 85% rule on utilization under Sec 11(1).
In the current budget of 2017, this same year Corpus receipt and parking loophole are attempted to be plugged by making the onward Corpus donation as a payment from the Balance Sheet and not as a Charitable Expenditure qualifying under Sec 11(1). Although the proposed amendment is silent, one would expect there would be an exception to the distribution of an NGO’s assets on the closure to another and Sec 11(3A) would prevail.

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