bhilai branch 12th june 2010 1 taxation of charitable trusts & societies a presentation by ca...

Bhilai Branch 12th June 2010 1

Taxation of Charitable Taxation of Charitable Trusts & SocietiesTrusts & Societies

A presentation byA presentation by

CA Rajesh B. DoshiCA Rajesh B. Doshi

RaipurRaipur

2Bhilai Branch 12th June 2010

ScopeScope

Section 11 to 13 and 10(23C) of Section 11 to 13 and 10(23C) of I.T.Act, 1961I.T.Act, 1961

Private, discretionary trusts Private, discretionary trusts excludedexcluded


IntroductionIntroduction Private philanthropy playing important role in Private philanthropy playing important role in

educational, social, medical field. In turn State educational, social, medical field. In turn State gives generous tax concessionsgives generous tax concessions

Law relating to charity – very complexLaw relating to charity – very complex Provisions less in numberProvisions less in number Aimed at preventing abuse of tax relief & Aimed at preventing abuse of tax relief &

ensuring that public money is used for ensuring that public money is used for intended purpose.intended purpose.

Trusts/institutions for charitable and religious Trusts/institutions for charitable and religious purpose enjoy exemption u/s 11purpose enjoy exemption u/s 11

Nature of provision- exemption provisionsNature of provision- exemption provisions-- Rule of strict as well as liberal Rule of strict as well as liberal constructionconstruction


CharitablePurposeincludes

Relief to poor Education Medical relief

Preservationof environment,

monuments& general

Public utility


Benefit to general public is the Benefit to general public is the baseline for all the four limbs of baseline for all the four limbs of charitable purposecharitable purpose


Relief to poorRelief to poor

Is it necessary that something should Is it necessary that something should be provided for nothing or for less be provided for nothing or for less than cost?than cost?

Identification of benefit with Identification of benefit with particular individual not necessary.particular individual not necessary.

Cross subsidization will not disentitle Cross subsidization will not disentitle for exemption , examples of hospital for exemption , examples of hospital and home for aged.and home for aged.


EducationEducation Systematic imparting of knowledge, training in Systematic imparting of knowledge, training in

preparation for the work of life. Every acquisition preparation for the work of life. Every acquisition of further knowledge not included. Publishing of further knowledge not included. Publishing news papers not ‘education’ 101 ITR 234(SC).news papers not ‘education’ 101 ITR 234(SC).

Developing the knowledge, skill, mind and Developing the knowledge, skill, mind and character of students by normal schooling.character of students by normal schooling.

Coaching imparted for appearing in a particular Coaching imparted for appearing in a particular competitive exam is not education [208 ITR 608, competitive exam is not education [208 ITR 608, 615 (Pat.)]615 (Pat.)]

Education would include raising artistic taste by Education would include raising artistic taste by dramas, musical shows etc. [188 ITR 160 (Mad.)]. dramas, musical shows etc. [188 ITR 160 (Mad.)]. In this sense, cultural education would also be In this sense, cultural education would also be included.included.


Educating public in safety, is it Educating public in safety, is it education ?education ?-- 305 ITR 257 (Bom.), in context of sec. 305 ITR 257 (Bom.), in context of sec.

10(22), wordings being similar, will 10(22), wordings being similar, will apply. apply.


Medical reliefMedical relief

Is it necessary to provide treatment Is it necessary to provide treatment free or on concessional basis to all ?free or on concessional basis to all ?

Case of cross subsidization.Case of cross subsidization.


General public utilityGeneral public utility

Public means body of people at large Public means body of people at large and includes a class of persons or a and includes a class of persons or a well defined section of the public. well defined section of the public. Benefit to whole mankind not Benefit to whole mankind not perceived.perceived.

Objects which promote welfare of Objects which promote welfare of general publicgeneral public

Objects for welfare of a trade or Objects for welfare of a trade or industry vs welfare of persons industry vs welfare of persons managing trade or industry.managing trade or industry.


General public utility contd…….General public utility contd…….

Expenses on giving monetary help Expenses on giving monetary help on marriage of poor girls of one on marriage of poor girls of one community or on thread ceremony – community or on thread ceremony – public objects, eligible for exemption public objects, eligible for exemption [222 ITR 252 (All.)][222 ITR 252 (All.)]

Promotion, protection, aiding trade, Promotion, protection, aiding trade, commerce & industry is a general commerce & industry is a general utility purpose [ 55 ITR 722 (SC), utility purpose [ 55 ITR 722 (SC), 121 ITR 1 (SC), 245 ITR 437 (Bom.)]121 ITR 1 (SC), 245 ITR 437 (Bom.)]


General public utility contd……..General public utility contd……..

Section of public - Quality which binds a Section of public - Quality which binds a group of persons should not depend group of persons should not depend upon their relationship with a particular upon their relationship with a particular individual i.e. personal or impersonal.individual i.e. personal or impersonal.

Object beneficial to a section of public Object beneficial to a section of public vs. whole mankind. Benefit to public as vs. whole mankind. Benefit to public as against specified individualsagainst specified individuals

CA Society covered 258 ITR 548 (Raj.)CA Society covered 258 ITR 548 (Raj.)


Recent amendment in Recent amendment in sec. 2(15)sec. 2(15)

Proviso added to sec. 2(15) w.e.f. 1.4.2009. Proviso added to sec. 2(15) w.e.f. 1.4.2009. Amendment targets business incomeAmendment targets business income

Letting out of auditoriums, dharamshalas etc. not Letting out of auditoriums, dharamshalas etc. not business - 130 ITR 181 (SC). These would business - 130 ITR 181 (SC). These would continue enjoying benefit.continue enjoying benefit.

Amendment would hit Chamber of commerce, Amendment would hit Chamber of commerce, trade organisations, clubs.trade organisations, clubs.

Whether business income or entire income would Whether business income or entire income would be taxable?be taxable?

Retrospective amendment by Finance Act, 2010 Retrospective amendment by Finance Act, 2010 – Value of receipts less than Rs. 10.00 lacs.– Value of receipts less than Rs. 10.00 lacs.


Amendment in sec. 2(15)Amendment in sec. 2(15)

Club – activity of running canteen, hiring Club – activity of running canteen, hiring ground would be hit.ground would be hit.

Medical relief/educational activities as Medical relief/educational activities as also objects of general public utility also objects of general public utility undertaken. Whether income will be undertaken. Whether income will be taxable excluding medical/educational taxable excluding medical/educational income? income? 103 ITR 777(SC).103 ITR 777(SC).

Gaushalas selling milk, Lions club Gaushalas selling milk, Lions club running school for disabled.running school for disabled.

Controversy between sec. 2(15) and Controversy between sec. 2(15) and 11(4), (4A).11(4), (4A).


Religious purposeReligious purpose

Religious purpose must be public in Religious purpose must be public in naturenature

If access to religious purpose is not If access to religious purpose is not for people belonging to a particular for people belonging to a particular faith, it would be a private religious faith, it would be a private religious purpose, not entitled to exemption.purpose, not entitled to exemption.


Scheme of sec. 11Scheme of sec. 11

It provides for exclusion of certain incomeIt provides for exclusion of certain income Other than “excluded” income, all other Other than “excluded” income, all other

income chargeable to tax.income chargeable to tax. Exclusions providedExclusions provided

(a)(a) Income of Income of whollywholly charitable & religious trust charitable & religious trust

( to the extent applied for such ( to the extent applied for such purposes in purposes in India India + + upto 15% of upto 15% of income, out of unspent incomeincome, out of unspent income

(b)(b) Income of trust Income of trust partlypartly for charitable & for charitable & religious religious purposespurposes


Section 11 contd…………Section 11 contd…………

(if created before 1.4.1961, to the extent applied (if created before 1.4.1961, to the extent applied for for such such purposes + upto purposes + upto 15% of income, out of 15% of income, out of unspent unspent income.If created after 1.4.1962, income.If created after 1.4.1962, NIL)NIL)(c)(c) - Charitable trust created after 1.4.1952 - Charitable trust created after 1.4.1952

which tends to promote which tends to promote international international welfare, to the welfare, to the extent applied outside extent applied outside IndiaIndia - Charitable & religious trust created before - Charitable & religious trust created before

1.4.1952, to the extent applied 1.4.1952, to the extent applied outside Indiaoutside India

Rider : Board should direct that income is Rider : Board should direct that income is exemptexempt

(d) Voluntary contributions being Corpus donations(d) Voluntary contributions being Corpus donations


Section 11 contd…………Section 11 contd…………

If application falls short of 85% due If application falls short of 85% due toto income not having been received orincome not having been received or for any other reasonfor any other reason

Option to be exercisedOption to be exercised Amount specified in option shall be Amount specified in option shall be

deemed to be applied for charitable deemed to be applied for charitable or religious purposesor religious purposes


Accumulation or setting Accumulation or setting apartapart

If any amount of income is If any amount of income is accumulated or set apart for specific accumulated or set apart for specific purpose, notice of accumulation to purpose, notice of accumulation to be given to AO be given to AO

Accumulated income shall be Accumulated income shall be excludedexcluded


Meaning of “income”Meaning of “income” Whether commercial income or income computed Whether commercial income or income computed

under the provisions of I.T.Act ?under the provisions of I.T.Act ?-- Word used in sec. 11(1)(a) is “income” Word used in sec. 11(1)(a) is “income” and and

not not “total income” “total income” -- Head-wise computation provided in sec. 14 Head-wise computation provided in sec. 14 is for is for taxable income (for the purpose of charge of taxable income (for the purpose of charge of

income tax)income tax)-- Sec. 11(4) dealing with business income of Sec. 11(4) dealing with business income of

trust trust empowers AO to compute business empowers AO to compute business income as income as per per provisions of Act.provisions of Act.-- 136 ITR 12 (Mad.), 162 ITR 612 (Guj.), 208 136 ITR 12 (Mad.), 162 ITR 612 (Guj.), 208 ITR 372 ITR 372 (Cal.),Cir. No. 5-P (LXX-6) dt.19.6.1968(Cal.),Cir. No. 5-P (LXX-6) dt.19.6.1968-- For capital gain, specific provision made in For capital gain, specific provision made in Ss.(1A).Ss.(1A).


Meaning of “income” contd….Meaning of “income” contd….

Standard deduction like u/s 24 etc. would Standard deduction like u/s 24 etc. would not be applicable while calculating the not be applicable while calculating the ‘income’ for application 199 ITR 215 ‘income’ for application 199 ITR 215 (Cal.)(Cal.)

If any part of income becomes taxable, If any part of income becomes taxable, whether then normal provisions will whether then normal provisions will apply?apply?

Conclusion : Conclusion : For the purpose of sec. 11, For the purpose of sec. 11, commercial income is relevant.commercial income is relevant.


Meaning of “applied”Meaning of “applied” Income to be applied to charitable & religious Income to be applied to charitable & religious

objectsobjects ‘‘Income’ to be construed in its normal Income’ to be construed in its normal

meaning – net of expenses on administrationmeaning – net of expenses on administration All outgoings like salary, maintenance, travel, All outgoings like salary, maintenance, travel,

Income Tax etc. to be deducted. Out of Income Tax etc. to be deducted. Out of residual amount only, application is needed. residual amount only, application is needed.

Percentage of spending to be with reference Percentage of spending to be with reference to the income remaining after meeting admin to the income remaining after meeting admin expenses.expenses.

Should ‘applied’ be equated with ‘spent’?Should ‘applied’ be equated with ‘spent’?


Application can be both in revenue Application can be both in revenue and capital field.and capital field.

Since application is in commercial Since application is in commercial sense, prior period expenses would sense, prior period expenses would be eligible.be eligible.


Exercising option u/s 11(1) Exercising option u/s 11(1) Expl.(2)Expl.(2)

Option exercised but amount not Option exercised but amount not utilised – deemed income.utilised – deemed income.

Whether again option can be exercised Whether again option can be exercised or accumulation can be made ?or accumulation can be made ? Words of Explanation rules out any such Words of Explanation rules out any such

viewview Time limit fixed in Expl. 2 will be Time limit fixed in Expl. 2 will be

redundantredundant Unlimited time cannot be availedUnlimited time cannot be availed Accumulation – permitted only of income Accumulation – permitted only of income

of the year, not of deemed income.of the year, not of deemed income.


Accumulation u/s 11(2)Accumulation u/s 11(2) Need to specify object for which income Need to specify object for which income

accumulated – plurality of objects permittedaccumulated – plurality of objects permitted Payment to sec. 12AA/10(23C)(iv) to (via) Payment to sec. 12AA/10(23C)(iv) to (via)

institutions out of accumulated income not institutions out of accumulated income not permissible w.e.f. 1.4.2003 (Except in permissible w.e.f. 1.4.2003 (Except in dissolution year)dissolution year)

Payment to 10(23C)(i) to (iiiae) permissible.Payment to 10(23C)(i) to (iiiae) permissible. If to be used for any other object not specified If to be used for any other object not specified

in application, with specific permission of AO in application, with specific permission of AO (Ss. 3A)(Ss. 3A)

Option and accumulation, both possible.Option and accumulation, both possible. Can the AO reject accumulation application? 4 Can the AO reject accumulation application? 4

ITD 642 (Bom.)ITD 642 (Bom.)


Some specific issuesSome specific issues Is business income eligible for exemption?Is business income eligible for exemption? If any part of income is taxable, how is it If any part of income is taxable, how is it

to be computed?to be computed?-- Normal mode of computation, sec. Normal mode of computation, sec. 14.14.-- Tax shall be payable as if the trust Tax shall be payable as if the trust was was an AOP [ an AOP [ Sec. 164(2)]Sec. 164(2)]-- Sec. 13(1)(c) & 13(1)(d) income to be Sec. 13(1)(c) & 13(1)(d) income to be

assessed at assessed at MMRMMR Trust carrying on business, unrelated to Trust carrying on business, unrelated to

objects. Surplus utilised only on objects. objects. Surplus utilised only on objects. Tax implications.Tax implications.


Some specific issues contd……..Some specific issues contd……..

One object out of many, non-charitable/ non-One object out of many, non-charitable/ non-religious. Whether exemption admissible? religious. Whether exemption admissible? 103 ITR 777 (SC), 65 ITR 611(SC), 236 ITR 23 (SC)103 ITR 777 (SC), 65 ITR 611(SC), 236 ITR 23 (SC)

Agricultural income – whether needs to be Agricultural income – whether needs to be “applied”?“applied”?-- 113 ITR 889 (Mad.) says no while 192 113 ITR 889 (Mad.) says no while 192 ITR ITR 186 186 (All.) says yes(All.) says yes-- Special excludes generalSpecial excludes general

Donation to another trust which itself is not Donation to another trust which itself is not a charitable trust – deemed to be applied a charitable trust – deemed to be applied if if given for charitable purpose.given for charitable purpose.


Some specific issues contd…….Some specific issues contd…….

Excess spending in earlier year, will it be Excess spending in earlier year, will it be available as set off in subsequent year? available as set off in subsequent year? 177 Taxation 177 Taxation 19 (Bom.), 242 ITR 20 (Mad.), 242 ITR 457 (Kar.), 133 ITR 779 19 (Bom.), 242 ITR 20 (Mad.), 242 ITR 457 (Kar.), 133 ITR 779 (Mad.). Cir. No. 100 dt. 24.1.1973.(Mad.). Cir. No. 100 dt. 24.1.1973.

Repayment of loan originally taken for objects of Repayment of loan originally taken for objects of trust – will amount to application, cir no. 100 dt. trust – will amount to application, cir no. 100 dt. 24.1.1973.24.1.1973.

Ss. (1A), trust Ss. (1A), trust “acquiring”“acquiring” another capital asset another capital asset on sale of asset. on sale of asset.

Agricultural & non agricultural income. Combined Agricultural & non agricultural income. Combined accounts. How outgoings to be apportionedaccounts. How outgoings to be apportioned

Time limit for filing Form 10 is directory 208 ITR Time limit for filing Form 10 is directory 208 ITR 568, 572 (Raj.) & 209 ITR 441 (Bom.) 568, 572 (Raj.) & 209 ITR 441 (Bom.)


Some specific issues contd…….Some specific issues contd…….

Deemed income u/s 11(3) – whether 15% Deemed income u/s 11(3) – whether 15% accumulation is possible out of this income accumulation is possible out of this income also? also? 189 ITR 656 (Cal.)189 ITR 656 (Cal.)

Whether disallowance/addition has any Whether disallowance/addition has any repercussions?repercussions?

-- If based on positive material If based on positive material unmistakably unmistakably showing adversity, showing adversity, application may reduce thereby application may reduce thereby inviting inviting taxabilitytaxability

Sports association entitled to exemption u/s Sports association entitled to exemption u/s 11- cir.no. 395 dated 24.9.198411- cir.no. 395 dated 24.9.1984


Registration of trustRegistration of trust

Application to be disposed off within 6 months Application to be disposed off within 6 months from end of month in which application madefrom end of month in which application made-- If not rejected, deemed registration- If not rejected, deemed registration- 91 91 ITD 1 (Bang.), ITD 1 (Bang.), 111 ITD 175 (Del.)(SB), 216 CTR 167 111 ITD 175 (Del.)(SB), 216 CTR 167 (All.)(All.)

CIT’s certificate conclusive proof of charitable CIT’s certificate conclusive proof of charitable or religious objects and genuineness of objects or religious objects and genuineness of objects – 110 ITR 392 (Mad.), 90 ITD 569 (Chd.), 81 ITD 31 (Pune)(TM)– 110 ITR 392 (Mad.), 90 ITD 569 (Chd.), 81 ITD 31 (Pune)(TM)

After registration u/s 12AA, further probe into After registration u/s 12AA, further probe into objects not permissible objects not permissible – 300 ITR 214(SC).Powers – 300 ITR 214(SC).Powers of AO limited.of AO limited.


Registration of trust contd………Registration of trust contd………

Powers of CITPowers of CIT-- Enquire into genuineness of Enquire into genuineness of activities activities and and objects. To make objects. To make enquiry enquiry in this in this regard.regard.-- If activities found to be genuine, If activities found to be genuine, probe probe into into the accounts (huge the accounts (huge surplus) not surplus) not permissible – permissible – 90 ITD 477 90 ITD 477 (Luck.)(Luck.)

Can a trust which has not carried out Can a trust which has not carried out any activity be registered u/s 12AA?any activity be registered u/s 12AA?


Registration of trust contd………Registration of trust contd………

U/s 12AA(3) CIT empowered to U/s 12AA(3) CIT empowered to cancel registration.cancel registration.

Effect of cancellation on Effect of cancellation on future/earlier years.future/earlier years.

Registration with other appropriate Registration with other appropriate authorities, is it essential? authorities, is it essential? 260 ITR 118 260 ITR 118 (Amr.),291 ITR 419 (Bom.), 159 ITR 324 (AP)(Amr.),291 ITR 419 (Bom.), 159 ITR 324 (AP)

Registration itself not sufficient for Registration itself not sufficient for exemptionexemption


Denial/withdrawal of Denial/withdrawal of exemptionexemption

Hospital or educational institute – value of medical Hospital or educational institute – value of medical or educational services provided to 13(3) persons or educational services provided to 13(3) persons liable to be taxed. No effect on other income [sec. liable to be taxed. No effect on other income [sec. 13(6)]13(6)]

Charitable trust, if for particular religious Charitable trust, if for particular religious community or caste [sec. 13(1)(b)]community or caste [sec. 13(1)(b)]- Bar not to apply to religious trust.- Bar not to apply to religious trust.

If any part of trust income or property used for the If any part of trust income or property used for the benefit of 13(3) persons.benefit of 13(3) persons.-- Building used for residence of trustee.Building used for residence of trustee.-- Even if used for 1 day, exemption lost [sec. Even if used for 1 day, exemption lost [sec. 13(2)].13(2)].-- FDs of trust used for personal purpose.FDs of trust used for personal purpose.


Denial/withdrawal of exemption Denial/withdrawal of exemption contd……..contd……..

Investment in any mode other than 11(5).Investment in any mode other than 11(5).-- ExceptionsExceptions

-- Assets forming part of corpus as Assets forming part of corpus as on 1.6.1973on 1.6.1973

-- Accretion to shares forming part of Accretion to shares forming part of corpus (bonus shares only)corpus (bonus shares only)

-- Debenture acquired before Debenture acquired before 1.3.19831.3.1983

Anonymous donations u/s 115BBCAnonymous donations u/s 115BBC Withdrawal only on two counts – activities not Withdrawal only on two counts – activities not

genuine or activities not carried out in genuine or activities not carried out in accordance with objects. accordance with objects.


Anonymous donationAnonymous donation Anonymous donations liable to be taxed at 30%.Anonymous donations liable to be taxed at 30%. ExclusionsExclusions

-- wholly religious trust.wholly religious trust.-- Wholly religious and charitable trust, (but Wholly religious and charitable trust, (but will apply will apply to donations made with specific to donations made with specific direction that it is for direction that it is for any university, educational any university, educational institute or hospital etc.)institute or hospital etc.)

Will anonymous donation be considered for Will anonymous donation be considered for application of 85%?application of 85%?

If names/address are subsequently found false?If names/address are subsequently found false? Tax liability in respect of anonymous donation Tax liability in respect of anonymous donation

treated as application?treated as application? How anonymous donation can be said to be with How anonymous donation can be said to be with

specific direction?specific direction?


Sec. 10(23C)Sec. 10(23C) Entity should exist Entity should exist solely for solely for

philanthropic purposes and not for the philanthropic purposes and not for the purpose of profitpurpose of profit

Object should not be to make profit. Profit Object should not be to make profit. Profit may arise. If profit used only for the may arise. If profit used only for the purposes of trust, no adversity can be held.purposes of trust, no adversity can be held.

Spending wholly & exclusively on objects, Spending wholly & exclusively on objects, spending of 85% and accumulation of more spending of 85% and accumulation of more than 15% - conditions apply only to Ss. (iv) than 15% - conditions apply only to Ss. (iv) to (via) entities (3to (via) entities (3rdrd proviso) proviso)


Sec. 10(23C) contd………Sec. 10(23C) contd………

77thth proviso – business income of specified proviso – business income of specified entities exempt only if business is incidental to entities exempt only if business is incidental to objectsobjects

11stst proviso – specified entities only required to proviso – specified entities only required to apply for exemption, unlike sec. 12A where apply for exemption, unlike sec. 12A where registration is mandatoryregistration is mandatory

1313thth proviso – if specified entities do not spend proviso – if specified entities do not spend income on objects or do not spend 85%, income on objects or do not spend 85%, accumulate etc., approval granted may be accumulate etc., approval granted may be withdrawn.withdrawn.

99thth proviso – order to be passed within 1 year proviso – order to be passed within 1 year


Sec. 10(23C) contd………Sec. 10(23C) contd………

Once approval withdrawn, no Once approval withdrawn, no exemption in subsequent year. In exemption in subsequent year. In sec. 11, no such withdrawal. Next sec. 11, no such withdrawal. Next year benefit of sec. 11 available, if year benefit of sec. 11 available, if conditions complied.conditions complied.

Can sec. 11 & 10(23C) operate Can sec. 11 & 10(23C) operate simultaneously?simultaneously?

143 ITR 584 (All.), 150 ITR 142 (Kar.)143 ITR 584 (All.), 150 ITR 142 (Kar.) No condition like sec. 13(1)(c).No condition like sec. 13(1)(c).


Specific issues relating to Specific issues relating to educational instituteseducational institutes

Capitation fee banned by Government. Trust Capitation fee banned by Government. Trust still charges. Can exemption be denied? still charges. Can exemption be denied? 304 304 ITR 20 (P & H)ITR 20 (P & H)

If surplus results incidental from educational If surplus results incidental from educational activities, can exemption be denied? activities, can exemption be denied? 224 ITR 224 ITR 310 (SC), 117 ITR 284 (AP)310 (SC), 117 ITR 284 (AP)

It is not the requirement that the activity It is not the requirement that the activity should be conducted in a way not to yield should be conducted in a way not to yield surplus.surplus.

Basic test – application of profitBasic test – application of profit If predominant activity is charitable If predominant activity is charitable

purpose, benefit cannot be denied purpose, benefit cannot be denied


Cir. No. 194/16-17-IT (AI)Cir. No. 194/16-17-IT (AI)

Where all objects are educational Where all objects are educational and surplus is used for educational and surplus is used for educational purpose only, it can be said that purpose only, it can be said that institution is existing for educational institution is existing for educational purposes and not for the purpose of purposes and not for the purpose of profit profit (reproduced in 68 ITD 1, 6 (Del) (TM)(reproduced in 68 ITD 1, 6 (Del) (TM)..


Thank YouThank You

bhilai branch 12th june 2010 1 taxation of charitable trusts & societies a presentation by ca...

Documents

bhilai branch

religious purpose

intended purpose

cultural education

exemption provisions

abuse of tax relief

public money

complex provisions