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ISSUES ON TAXATION OF

CHARITABLE TRUSTS OR

INSTITUTIONS- NGOs, NPOs

- Dr. N. Suresh, B.Com, F.C.A, PhD

Mobile # 98455 45265

Email – nsuresh_ca@yahoo.com

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Definition of Trust

What is Trust? Meaning

Definition of Trust

Classification of Trust

(i) Private Trust

(ii) Public Trust

What constitutes valid trust?

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Charitable Purpose – Sec 2(15)

Concept of Charity

Charitable Purpose – Limbs

i. Relief of the poor

ii. Education

iii. Medical Relief

iv. Advancement of any other general public utility

v. Preservation of environment and preservation of

monuments or places or objects of artistic or historic

interest includible within the ambit of “charitable

purpose” under Section 2(15)

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Formation of Charitable Institution

As a Trust

As a Society

As a Section 25 Company

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Governing Enactments

Income Tax Act, 1961

Societies Registration Act, 1880

Companies Act, 1956

Charitable and Religious Trust Act, 1920

Charitable Endowment Act, 1890

Indian Trust Act, 1882

Charitable and Religious (Development) Act

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Types of Trust

Income derived from property held under trust

wholly for charitable or religious purposes

Income derived from property held under trust in

part only for such purposes

Income derived from property held under trust

created for a charitable purpose which tends to

promote international welfare

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Income from Property held for Charitable or

Religious Purposes

What is “Exempt”?

Limbs of Sec 11-

a. Income derived from the property held under

Trust

b. Wholly for charitable or religious purposes

c. to the extent such income is applied

d. to such purposes in India

e. income so accumulated or set apart

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Agricultural property held by the Trust, the Income

derived thereon whether constitutes income from

property held under trust or agricultural income ?

CIT vs Panchuiti Akhara Nirmal (1991) 192 ITR 186

(All)

Muthukumar Swamy Tambaram vs Agri ITO (1978) 113

ITR (Madras)

CIT vs Nabhinandan Digamber Jain (2002) 257 ITR 91

(MP)

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Depreciation – Whether allowable?

CIT vs Society of the Sisters of St. Anne (1984) 146

ITR 28 (Kar)

CIT vs Bhoruka Public Welfare Trust (1999) 240 ITR

513

CIT vs Indian Institute of Bankers (2003) 264 ITR 110

CIRCULAR NO. 5-P(LXX-6) OF 1968, DATED 19-6-1968

(CLARI.)

Dy.CIT & Ors Vs Market Committee, Adamar (2008)13

DTR (Del) 157.(Normal manner)

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DDIT (Exemption) v. Lissie Medical Institutions ITA No.

1010 (Coch) of 2008 (Coch-Trib)

CIT v. Market Committee, Pipli (2011) 330 ITR 16

(P&H) followed: CIT v. Tiny Tots Education Society

(2011) 330 ITR 21 (P&H)

ED Trust purchased computers for the objects of the

Trust amounting to Rs. 10 lakhs. While filing the

Return of Income, the said trust claimed depreciation

at 60% amounting to Rs. 6 lakhs as application in

addition to Rs. 10 lakhs. Totally Rs. 16 lakhs. In the

course of the scrutiny, AO has not allowed

depreciation. Is it justified?

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REGISTRATION OF TRUST OR

INSTITUTIONS-U/S 12A(a),12AA

Beth Trust filed an application for seeking registration u/s 12A(a) of the IT Act, before CIT along with proof of having bank transactions which they have created 2 years ago. The CIT has rejected the application on the grounds that Beth Trust did not produce Trust Deed for seeking registration. Is it justified?

(All India Spinners Assocn. CIT (1944) 12 ITR 482 (SC))

(Radhasoami Satsang vs CIT (1992) 193 ITR 321 (SC))

Justification for Refusal lies with the Dept.(Gurugobind Singh Educational Society Vs CIT(2009) 313 ITR 32 (Asr- Trib)

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Effect of Non Consideration of

Application within time

Deemed Registration

Society for the Promotion of Education Adventure

Sport & Conservation of Environment Vs CIT (2008) 171

Taxman 113 (ALL)

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PROCEDURE FOR REGISTRATION- 12AA

XY Trust was constituted on 10th Aug, 2008. Application for registration was filed on 10th Aug, 2008 before the DI(E). In response to call Memo, the applicant trust has furnished the information. On the activities of the trust, trustees have explained that they are developing infrastructure in the pursuit of achieving the predominant objects of the trust. DI(E) has rejected the application on the grounds that they did not carry out the activities and DI(E) could not verify the genuineness of the activities of the trust, which is necessary to be satisfied before granting the registration. Is it justified?

DIT(Exe) vs Amma Endowment Trust ( Kar) 8th Oct, 2010.

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At the stage of commencement carrying

activity not relevant. (Dharmasans

Thapak Sangh VS CIT(2008)118TTJ.

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APPLIED

i.Meaning

ii.Features of the expression ‘applied’.

(Radhasoami Satsang Sabha (1954) 25 ITR 473 (All)

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“SUCH PURPOSES IN INDIA”

Beth Trust is a National Sports club Reg u/s 12 A.The dominant object is to generate talented sports persons in India. For the F.Y 07-08, it has sponsored many sports persons to visit different countries to learn the technique and practice. In the course of the assessment the A.O. held the amount incurred out side India is not an application for purposes in India. Discuss.

(HEH Nizam 17 ITR 323 AP)

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Voluntary Contribution / Voluntary

Contribution with specific direction or Corpus

Donation

Meaning

Kinds of Corpus Donation

Features of Corpus Donation

Receipt stating “Towards Corpus Donation is sufficient”

Project Advances with instructions – Case Studies

Corpus Funds can be diverted?

From Corpus Donations, can trust give donations to other trust?

Genuineness of Donation, could not be held bogus without examining donors (CIT vs Geetanjali Edu Soc (2008) 174 Tax (Raj)

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An institution has kept two hundi boxes, called Hundi A and Hundi

B. On Hundi A, a placard was pasted saying “ Towards Corpus

Donation”. On Hundi B, it was mentioned “Donation”. It was the

practice for the banker to open the Hundis and credit to the

respective designated bank accounts. The assessee has claimed

that the funds collected in Hundi A as Corpus Donation. The

assessing officer had denied the claim.

AB Trust registered u/s 12A engaged in Charitable activities

received a Corpus Donation of Rs. 5 lakhs. In the course of the

proceedings, the AO insisted to produce documentary evidence.

The Trust could produce documentary evidence of the direction of

the owner only to the extent of Rs. 4 lakhs. On the balance of Rs.

1 lakh, the AO has levied the taxes. Is it justified?

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Diversion of Corpus fund- Whether

permissible The Corpus Fund received can be diverted for a

purpose other than the purpose for which the funds were received.

‘A’Trust received Rs 2,00,000/ from B for Building fund. A wanted to use this for buying computer. Is it permissible?

‘B’ Trust received Rs 2,00,000/ from C for Building fund to be used in 3 years. Fund could not be used with in 3 years. Are they liable for tax? If so under which provision of the act? Are there any remedy?

• ACIT v. Nagarjuna Educational Society (2011) 46 SOT 501 (Visakh-Trib)

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Income computation–whether gross or net ?

CIT vs Programme for Community Organisation

(2001) 248 ITR, affirming decision of Kerala High

Court.

Krishi Utpadan Mandi Samiti & Anr. v. DCIT (2011) 131

ITD 335 (Luck ‘A’ – Trib) : (2011) 136 TTJ (Luck ‘A’-

Trib)635

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Filing Form No.10 – whether mandatory ?

Whether filing Form No. 10 for the purposes of accumulation u/s 11 (2) read with Rule 17 A is a mandatory requirement or a procedural requirement ?

CIT vs Nagpur Hotel Owners Assn. (2001) 247 ITR 201 (SC)

CIT vs Anjuman Moina Fakharia (1994) 208 ITR 568 (RAJ)

CBDT circular no. 273 dt 03.06.1980 126 ITR 27.

STO vs KI Abraham (1967) STC 367 which held that the time limit prescribed is only directory and not mandatory.

CIT vs Andhra Pradesh Road Transport Corporation(2006)285 ITR 147(AP)

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While filing Form No. 10 whether plurality

of objects are permitted?

Plurality of objects acceptable ?

Held no in Director of IT (E) vs Trustees of Singhania

Charitable Trust (1993) 199 ITR 819 (Cal)

However, in CIT vs Hotel and Restaurant Assn. (2003)

261 ITR 190 (Del) and Sirshobha Charitable Trust vs

Asst. Director of IT(E) 251 ITR (AT) 48 held yes.

Accumulation, notice hold good not only for Current

year but also for subsequent years.( Cotton Textiles

Export Pro Council Vs ITO (Exe) (2009)308 ITR 182

(Mum-Trib)

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Whether Income can be applied for

a purpose other than purpose

mentioned in Form No.10 ?

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Audit of Accounts

Section 12A(b) requires audit of accounts when the

income exceeds maximum amount not chargeable to

tax, before giving deduction u/s 11 and 12.

The audit report should be in Form 10B.

Form 10B consists of 2 parts.

i. Expressing of an opinion

ii. Certification by providing prescribed particulars.

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Audit Report–non filing of audit report whether

can be filed by revising the return?

LN Trust registered u/s 12A has filed Return of Income before

the due date without audit report in Form 10B. However in the

course of scrutiny, the audit report was filed. AO has rejected

the audit report and passed the order denying the exemption as

the primary condition u/s 12A(b) is not satisfied. Discuss.

Appellate Authority has power to accept audit report?

CIT vs Hardeodas Agarwalla Trust (1992) 198 ITR 51 1 (Cal).

Calcutta Management Association vs ITO (1992) 42 ITD 62 (Cal-

Trib)

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Set off and carry forward of losses of earlier years

Deficit can be carried forward & set off subsequent year.

Held Yes:

a. CIT vs The Institute of Banking Personnel Selection (IBPS) (2003) 264 ITR 110 (Bom)

b. Govinda Naicker Estate vs Asst. Director of Income Tax (2001) 248 ITR 368 (Mad)

c. Dy. CIT Vs Indian Electrical & Electronics Mfrs association(2009) 31 SOT 346(Mum-Trib).

d. CIT vs Shri Plot Swetambar Murti Pujak Jain Mandal (1995) 211 ITR 293 (GUJ)

e. CIT vs Maharana Mewar Charitable Foundation (1987) 164 ITR

Held no: Pushpavathi Singhania Research Institute Vs Dy Director of IT(Exe)(2009) 29 SOT 316(Del-Trib)

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Meaning of the term ‘Deficit’ A

If income = 10,00,000

Expenses = 9,00,000

85% of income = 8,50,000

Difference = 50,000

Whether 50,000 is the deficit?

B

If income = 10,00,000

Expenses = 11,00,000

Difference = 1,00,000

Whether 100,000 is the deficit?

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Expenses incurred in excess of income

earned, whether would disentitle claim u/s

11 – position?

Akhey Ram Iswari Prasad Trust vs CIT (2004) 266 ITR

289 (RAJ)

Mohanlal Hargovindas Public Charitable Trust vs CIT

122 ITR 130.

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Whether income has to be classified into

different heads of income for charitable

trust or institution?

Commissioner of Income Tax, Tamil Nadu v. Estate of V. L. Ethiraj (By Official Trustee) (1982) 136 ITR 0012 (MAD)

Commissioner of Income Tax , Tamil Nadu -I v. Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135 ITR 0485 (MAD)

Income derived from property held under trust –Whether entails deduction u /s 24(1)

Shrimad Vallabh Vishwa Dharma Sanstha vs Addl.CIT(2006)102 TTJ 653(Ahd_Trib)

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Treatment of Establishment Expenses

Would establishment expenses be treated as application

of income ?

Nirmans Supplemental Religious Endowment Trust

(1981) 127 ITR 378 (AP)

CIT vs Janaki Ammal Ayya Nadar Trust (1985) 153 ITR

159 (Mad)

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Breach of Trust

Breach of Trust – Meaning and Concept

Circumstances that causes for breach of Trust

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Surplus is a bar to claim exemption ?

CIT vs Andhra Pradesh Road Transport Corporation

(1986) 159 ITR 1 (SC)

Addl. CIT vs Surat Arts Silks Cloth Mfg. Assoc. (1980)

121 ITR 1 (SC)

ITO vs Dharamshila Cancer Foundation & Research

Centre (2010) 128 ITD 1 (Del ‘H’-Trib) : (2010) 134

TTJ (Del ‘H’-Trib) 573

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Rectification of Trust Deed

Whether objects can be rectified?

Procedure for seeking rectification

The effect of Court Order

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- Thank You