NEW DELHI: The Select Committee of Lok Sabha scrutinising the proposed Income Tax Bill, 2025, has recommended a crucial amendment to Clause 335, urging the reintroduction of the term "income" instead of "receipts" when defining "regular income" for registered non-profit organisations (NPOs). This change is aimed at ensuring that only the net earnings of these entities are subject to taxation and accumulation rules, a concept currently absent from the Income-Tax Act, 1961.
Clause 335 of the new Bill seeks to introduce a definition for "regular income" for NPOs, a move intended to streamline their taxability. However, during its deliberations, the Committee voiced significant concerns over the Bill's use of "receipts" where the existing 1961 Act referred to "income."
The committee has emphasised that taxing "receipts" contravenes the fundamental principle of real income taxation. Representations received by the committee in this regard argue that "Receipts" can encompass capital recoveries or gross inflows, which do not necessarily represent a net profit or surplus.
For instance, if an NPO sells an asset for Rs 10,00,000 that was acquired at ₹9,50,000, taxing the entire ₹10,00,000 as a receipt would be incorrect; only the Rs 50,000 gain should be considered taxable.
The panel firmly believes that for the purposes of taxation and accumulation, rules should apply to net income, not gross receipts.
Experts/stakeholders seeking the amendment highlighted that the existing 15% accumulation limit for NPOs under Section 11(1)(a) is calculated based on income, not gross receipts. Applying this limit to "receipts" would unfairly reduce the amount NPOs can retain and carry forward, potentially hindering their long-term financial stability and charitable objectives.
The committee's recommendation aims to prevent such interpretational disputes and align the new law with long-standing jurisprudence and the spirit of exempting charitable entities from undue tax burdens.
Subject to this critical amendment, the Committee has approved Clause 335, underscoring the necessity for modifications to reflect their recommendation.
In contrast, the Tax Department had argued that the new IT Bill simplifies NPO provisions by consolidating them into a single chapter. It noted that the existing IT Act did not distinguish between revenue and capital receipts for trusts or institutions, and the new Bill intended to clarify this. The department stated that Clause 337 lists 11 items as "specified income" for NPOs and that the "apprehension expressed by the stakeholder is not included in the specified income," thus finding the suggestion unclear.
Despite the Tax Department's view, the Select Committee's firm stance underscores its commitment to ensuring fairness and preventing unintended tax burdens on non-profit organizations under the new legislation.