presentation on trusts- final

8/2/2019 Presentation on Trusts- Final

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TAXATION OF PRIVATEBENEFICIARY AND CHARITABLE

TRUST


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Structure of a Non Profit Organization in India

In India non profit organizations can be registered as:

Trusts Societies Section 25 Companies

The Income Tax Act gives all categories equal treatment, in terms ofexempting their income and granting 80G certificates, whereby donors

to non-profit organizations may claim a rebate against donations made.

Foreign contributions to non-profits are governed by FC(R)A

regulations and the Home Ministry


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3

Comparison among Trust, Society & Section 25 Company

Points of Differences Trust Society Section 25 Company

Statute / Legislation Relevant State Trust Act or

Indian Trust Act, 1882

Societies Registration Act, 1860 Indian Companies Act, 1956

Jurisdiction Deputy Registrar/Charity

commissioner

Registrar of societies (charity

commissioner in Maharashtra).

Registrar of companies

Registration As trust As Society

In Maharashtra, both as a society

and as a trust

As a company u/s 25 of the

Indian Companies Act.

Registration Document Trust deed Memorandum of association and

rules and regulations

Memorandum and articles of

association. and regulations

Stamp Duty Trust deed to be executed

on non-judicial stamp

paper, vary from state to

state

No stamp paper required for

memorandum of association and

rules and regulations.

No stamp paper required for

memorandum and articles of

association.

Members Required Minimum two trustees.

No upper limit.

Minimum seven managing

committee members. No upper limit.

Minimum three .No upper limit.

Board of Management Trustees / Board of

Trustees

Governing body or council/managing

or executive committee

Board of directors/ Managing

committee

Mode of Succession on Board

of management

Appointment or Election Appointment or Election by members

of the general body

Election by members of the

general body


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Meaning of Trust

A trust is a relationship in which :

a person or entity (the trustee) holds legal title

to certain property (the trust property or trust corpus), but is bound

by a fiduciary duty to exercise that legal control

for the benefit of one or more individuals or organizations (the

beneficiary), who hold beneficial or equitable title.

The trust is governed by the terms of the (usually) written trustagreement and local law.

The entity (one or more individuals, a partnership or a corporation)

that creates the trust is called the settlor.


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Types of Trusts

Bare Trust

A trust where the beneficiary is absolutely entitled to the assets, and the trustee is

obliged simply to pay them over to the beneficiary. Resulting and Constructive

trusts are usually bare trusts. Bare trusts generally do not continue for any length

of time, unless they arise out of protracted litigation, or the beneficiaries are

minors (in which case the bare trust must continue till they reach majority)

Constructive Trust

It is imposed by law as an equitable remedy. It generally occurs due to some

wrong doing, where the wrong doer has acquired legal title to some property and

cannot in good conscience be allowed to benefit from it.

Resulting Trust

It is a form of implied trust which occurs where a trust fails, wholly or in part, as a

result of which the settlor becomes entitled to the assets.


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Types of Trusts

Discretionary Trust

It is an arrangement where the trustee may choose, from time to time, who (if

anyone) among the beneficiaries is to benefit from the trust, and to what

extent, so long as the decision is made based on the beneficiaries best

interests. The purpose of such a trust is that no individual can claim to beentitled to any specific interest in the trustees assets, which often has tax

advantages or asset protection advantages.

Fixed Trust

the entitlement of the beneficiaries is fixed by the settlor. The trustee has little

or no discretion. E.g.

a trust for a minor (to X if she attains 21)

a life interest (to pay the income to X for her lifetime)


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Types of Trusts

Hybrid Trust

It combines elements of both fixed and discretionary trusts. The trustee must pay a

certain amount of the trust property to each beneficiary fixed by the settlor. But the

trustee has the discretion as to how any remaining trust property, once these fixed

amounts have been paid out, is to be paid to the beneficiaries.

Express Trust

It arises where a settlor deliberately and consciously decides to create a trust, over

his or her assets, either now or upon his death. In these case this will be achieved

by signing a trust instrument which will either be a will or a trust deed.

Implied Trust

It is created where some of the legal requirements for an express trust are not

met, but an intention on behalf of the parties to create a trust can be presumed to

exist.


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Types of Trusts

Intervivos Trust

A settlor who is living at the time the trust is established creates an intervivos

trust.

Testamentary Trust

A trust created in an individuals will.

Irrevocable Trust

It is the one that will not come to an end until the terms of the trust have been

fulfilled.

Revocable Trust

A trust of this kind can be revoked (cancelled) by its settlor at any time.


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Public Trusts

Like private trusts, public trusts may be created inter-vivos or by will.

Public trusts are however governed by general law, though the principles

forming the basis of the Indian Trusts Act can be applied in the case. It was

held in the case of State of UP Vs. Bansi Dhar, AIR (1974) SC 1084, 1090

that it is true that Indian Trusts Act relates only to private trusts, public

charitable trust have been expressly excluded from its ambit. But whileprovisions of section 83 of the Trusts Act proprio vigoredo not apply, there is

a common area of principles which covers all trusts, private and public, and

merely because they find a place in the trusts Act, they cannot become

untouchable where public trusts are involved.

It is a trust established for charitable purposes; normally must be for the

benefit of public at large or a class of beneficiaries.

These are entitled to special treatment under the law of taxation.

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Public Trusts

These are exempt from the rule against perpetuities, which would

otherwise require a trust to come to an end after a certain period.

Charitable trusts may continue indefinitely.

A formal deed is not necessary to constitute a public trusts, even

where immovable property is dedicated because section 5 of Indian

Trusts Act 1882 is not applicable on public Trusts.

Public trusts are an exception to the well settled rule that there is no

valid trust unless the objects thereof are specified. The trusts is not

allowed to fail for uncertainty .

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Public Trusts

A charitable trust is synonymous with public trust. There is nothing

called as a private charitable trust.

Charitable trusts come under the doctrine of cy pres, under which if

the charitable purposes of the trust cannot be fulfilled, then they can

be replaced by new and more appropriate charitable purposes.

Management or Control may vest in private hands.

In the case of Smt. Ganesha Devi Rami Devi Charity Trust Vs. CIT

(1969) 71 ITR 696, 704 (Cal) it was held that the implication,

therefore, is that if the trust or fund is controlled by a body of

persons which is not a public body, but if it enures to the benefit of a

public it will still be a charitable trust or fund


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Private Trusts

Private trust may be created inter vivos or by will.

Private trust are governed by the provisions of the Indian Trust

Act 1882

It has one or more particular individuals as its beneficiary.

Where immovable properties worth more than Rs. 100 are

transferred, trust will not be operated unless it is registered

(Gostha Behari Gose Vs. University of Calcutta, AIR 1972 Cal

61 ) .Trust created by will does not require any stamp

Private trusts are void for perpetuity

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Partly Private and Partly Public Trusts?

Dedication may be absolute , or it may be partial. Where the

dedication made by a settler in favor of an idol covers the entire

beneficial interest which he had in the property, the debutter is

an absolute or complete debutter. Where, however, some

proprietary or pecuniary right or interest in the property is either

indisposed of or is reserved for the settlors family or relations, a

case of partial dedication may arise.

( K.Mukherjeas Hindu Law of Religious and Charitable

trusts, 4th edition page 174-5)

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Partly Private and Partly Public Trusts?

If the dedication is partial ,a trust in favor of a charity is not

created but a charge in favor of charity is attached to , and

follows, the property which retains its original private and

secular Character ( Menakuru Dasaratharami Reddi V.

Duddakuru Subba Rao, AIR 1957 SC 797)

In cases of partial debutter endowment , it is a question of

construction whether idol is true beneficiary.. Or whether heirs

are true beneficiaries. ( Lord Shaw in Har Narayan V. SuryaKunwari, AIR 1921 PC 20)

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Charitable Trusts Vs. Religious Trusts.

Private Religious trusts Vs. Private charitable trusts?

What is to be noted is that there might be a private trust for

religious purposes, but there can be no private charitable trust.

[(CIT Vs. M. Jamal Mohamad Sahib (1941) 9 ITR 375 (Mad)]

Partly Charitable & Partly Religious Trusts?

In Hindu system there is no line of demarcation between religion

and charity. But what a purely religious purposes and what

religious purposes will be charitable must be entirely decidedaccording to Hindu Law and Hindu Notions (Malayammal Vs.

A.Malayalam Pillai (1991) Supp (2) SCC 579, 584)

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Legislations in India Governing TrustsA BRIEF SUMMARY OF THEIR PREAMBLES

THE INDIAN TRUSTS ACT, 1882

An Act to define and amend the law relating to Private Trusts and

Trustees. The Indian Trusts Act was passed in 1882 to define law relating

to private trusts and trustees.

CHARITABLE AND RELIGIOUS TRUSTS ACT,1920

An Act to provide more effectual control over the administration of

Charitable and Religious Trusts .

Whereas it is expedient to provide facilities for the obtaining of information

regarding trust created for public purposes of a charitable or religiousnature,.

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Legislations in India Governing Trusts

RELIGIOUS ENDOWMENTS ACT 1863

An Act to enable the Government to divest itself of the management of

Religious Endowments

CHARITABLE ENDOWMENTS ACT, 1890

An Act to provide for the Vesting and Administration of property held in

the trust for charitable purposes.

Whereas it is expedient to provide for the vesting and administration of

property held in trust for charitable purposes; It is hereby enacted as

follows:

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THE SOCIETIES REGISTRATION ACT ,1860.

An Act for the Registration of Literary, Scientific and Charitable Societies

Whereas it is expedient the provision should be made for improving the

legal condition of societies established for the promotion of literature,science, or the fine arts, or for the diffusion of useful knowledge, the

diffusion of political education or for charitable purposes; it is enacted as

follows:-

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Apart from these central legislations , a number of statute have beenenacted by the state legislatures dealing with religious and charitable

trusts and endowments, For example:

The Madras Hindu Religious & Charitable Endowments Act (19

of 51)

The Bombay Public Trusts Act (29 of 1950)

The Orissa Hindu Religious Endowments Act (4 of 1939)

The Bihar Hindu Religious Trusts Act (1 of 1951)

A trust which is registered in a state having a legislation for that

purpose has to follow the provisions of the State Act . Theregistration is done with the sub-registrar / civil court.

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How to form a Trust - Law & Procedure

Essentials of a Trust

Who can form a trust ?

Capacity to create a Trust.

Who can be a trustee ?

Who can be a beneficiary ?

Subject matter of trust.

Instrument of Trust

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Essentials of a Trust

The existence of the author/settlor of the trust or someone at whoseinstance the trust comes into existence.

Clear intention of the author/settlor to create a trust.

Purpose of the Trust.

The Trust property

Beneficiaries of the Trust.

There must be divesting of the ownership by the author / settlor of the

trust in favour of the beneficiary or the trustee.

Unless all these requisites are fulfilled a trust cannot be said to have

come into existence.


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Who can form a Trust ?

As per section 7 of the Indian Trusts Act, a trust can be formed

by every person competent to contract, and by or on behalf of a minor, with the permission of a principal civil court

of original jurisdiction.

Besides individuals, a body of individuals or an artificial person such as anassociation of persons, an institution, a limited company, a Hinduundivided family through it's karta, can also form a trust.

It may, however, be noted that the Indian Trusts Act does not apply topublic trusts which can be formed by any person under general law. Underthe Hindu Law, any Hindu can create a Hindu endowment and under the

Muslim law, any Muslim can create a public wakf. Public Trusts areessentially of charitable or religious nature, and can be constituted by anyperson.


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Capacity to create a Trust

As a general rule, any person, who has power of disposition over aproperty, has capacity to create a trust of such property. According tosection 7 of the Transfer of Property Act, 1882, a person who iscompetent to contract and entitled to transfer the property orauthorized to dispose of transferable property not his own, either

wholly or in part and either absolutely or conditionally, has 'power ofdisposition of property'.

Thus, two basic things are required for being capable of forming a trust

power of disposition over property; and

competence to contract.


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Who can be a Trustee ?

Every person capable of holding property can become a trustee.

However, where the trust involves the exercise of discretion, he can

accept or act as a trustee only if he is competent to contract.

No one is bound to accept trusteeship. Any number of persons may be

appointed as trustees.

However, no trust is defeated for want of a trustee. Where there is no

trustee in existence, an official trustee may be appointed by the court

and the trust can be administered. An executor of a Will may become a

trustee by his dealing with the assets under the provisions of the Will.


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Who can be a Beneficiary ?

In a private trust the beneficiaries are one or more ascertainable

individuals.

In a public trust the beneficiaries are a body of uncertain or

fluctuating individuals and may consist of a class of the public orthe whole public.


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Subject matter of Trust Any property capable of being transferred can be a subject matter

of a trust.

Section 8 of the Indian Trust Act, however, provides that merebeneficial interest under a subsisting trust cannot be made thesubject matter of another trust.

In the case of J.K. Trust vs. CIT (1957) 32 ITR 535 (S.C.), theSupreme Court had held that the word " property" under theTrusts Act is of the widest import and a business undertaking willundoubtedly be a property so that a running business can bemade a subject matter of trust. This view has been followed in thecase of in CIT vs. P. Krishna Warriar (1964) 53 ITR 176 (SC).


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Instrument of trust

The instrument by which the trust is declared is called instrument of Trust, and

is generally known as Trust Deed.

It is well settled that no formal document is necessary to create a Trust as held

in Radha Soami Satsung vs. CIT- (1992) 193 ITR 321 (SC). But for many

practical purposes a written instrument becomes necessary under following

cases

When the trust is created by a will irrespective of whether the trust is

public or private or it relates to movable or immovable property. This is

because as per Indian Succession Act, a will has to be in writing

When the trust is created in relation to an immovable property of the

value of Rs.100 and upwards, in case of a private trust. In case of public

trusts, a written trust deed is not mandatory, even in respect ofimmovable property, but is optional.

Where the trust/association is being formed as a society or company, the

instrument of trust; i.e., the memorandum of association, and Rules and

Regulations has to be in writing.


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Instrument of trust

A written trust-deed is always desirable, even if not required statutorily, due to

following benefits : a written trust deed is a prima facie evidence of existence of a trust ; it facilitates devolution of trust property to the trust; it clearly specifies the trust-objectives which enables one to ascertain

whether the trust is charitable or otherwise; it is essential for registration of conveyance of immovable property in

name of the Trust; it is essential for obtaining registration under the Income-tax Act and

claiming exemption from tax; it helps to control, regulate and manage the working and operations of

the trust; it lays down the procedure for appointment and removal of the trustee(s),

his/their powers, rights and duties; and it prescribes the course of action to be followed under any eventuality

including dissolution of the trust.


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Types of Instrument of Trust

Trust deed, where a trust is declared intervivos; i.e., by settling

property under Trust.

A will, where a trust is declared under a will;

A memorandum of association along with rules and regulations, when

the association/institution is being formed as a society under the

Societies Registration Act, 1860.

A memorandum and articles of association where the association

/institution is desired to be formed as a Company.


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Essentials of a valid Charitable or Religious Trust

There are four essential elements of a valid charitable or religious trust Charitable or Religious Object : The object or purpose of the

trust must be a valid religious or charitable purpose according to

law ;

Capacity to create Trust : The founder or settlor should be

capable of creating a trust and dedicating his property to that trust; Certainty of Object and Dedication thereto : The settlor should

indicate precisely the object of the trust and the property in

respect of which it is made. The property should be dedicated to

the trust and the owner must divest himself of the ownership of

that property. Concurrence with the law : The trust or its objects must not be

opposed to the provisions of any law for the time being in force.


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Provisions in the Income Tax Act, 1961 impacting Trusts- Briefoverview

Section 2(15)

Defines a charitable objective

Section 10(23C)

Provides exemption to educational, medical, charitable and public religious

institutions, existing not for the purposes of profit

Section 11-13

Provides for tax treatment in case of charitable trusts

Section 80G

Deals with deduction in respect of donations to certain funds , charitable

institutions etc.

Section 161-164

Deals with liability in special cases i.e. of representative assessee, which

includes taxation of private discretionary trusts.

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Method of Computation of Income

Income from the properties of the trust have been held to be

arrived at in the normal commercial manner without

classification under the various heads set out in section 14 (CIT

Vs. Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135

ITR 485 (Mad)

Real income has to be taken into account for the purpose of

considering the exemption u/s 11 (CIT Vs. Birla Janhit Trust

(1994) 208 ITR 372, 375-76 (Cal)

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Method of Computation of Income

In that view of the matter, the loss incurred by the charitable

trust on sale of investment is not allowable in computing the

income of the trust because of the fact that such loss can not

formed part of the real income of the trust. (Hindustan Welfare

Trust Vs. Director of Income Tax (exemption) (1993) 201 ITR

564, 566

It may also be noted that where provisions of section 11 are

attracted, the provisions of section 28(iii) cannot be invoked.[CIT Vs. South Indian Film Chamber of Commerce (1981) 129

ITR 22 (Mad)]

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Charitable Purpose as per Income Tax Act 1961

According to Section 2(15), charitablepurpose, includes relief of the

poor, education, medical relief, and the advancement of any other

object of general public utility.

Amendment made in A.Y. 2009-10

Proviso added

Provided that the advancement of any other object of general public

utility shall not be a charitable purpose , if it involves the carrying on of

any activity in the nature of trade, commerce or business, or any

activity of rendering any service in relation to any trade, commerce orany business, for a cess or fee or any other consideration, irrespective

of the nature of use or application, or retention, of the income from

such activity


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Charitable Purpose

Action flowing from charitable thought should not be for

benefiting once own self. The action should always be for

benefit of others.

[Sole Trustee, Lok Shikshana Trust v. CIT [1975] 101 ITR

234 (SC)]

The Court may disallow a project as being charitable even if the

trust deed declares it to be so.

[All India Spinners Association v. CIT [1944] 12 ITR 482(PC)]


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Charitable Purpose

Inclusive Definition

The statutory definition is not exhaustive or exclusive. Even if the object or

purpose may not be regarded as charitable in its popular signification as not

tending to give relief to the poor or for advancement of education or medical

relief, it would still be included in the expression charitable purpose if it

advances an object of general public utility.

[CIT v. Andhra chamber of Commerce [1965] 55 ITR 722(SC)]

Concept of charity

The very concept of charity denotes altruistic thought and action. Its object

must necessarily be to benefit others rather than ones self. The action whichflows from charitable thinking is always directed at benefiting others. It is this

direction of thought and effort and not the result of what is done in terms of

financially measurable gain which determines that it is charitable.

[Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)]


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Charitable Purpose

Relief for the poor

The relief in order to be charitable must, in every case, be to such

section of the community, which may be well defined and identified by

some common quality of public nature. If the class were vague and ill

defined, the institution would not be a valid charitable trust.

The object need not be to benefit all persons living in a particular

country or province. It is sufficient if the object is to benefit a section of

the public as distinguished from specified individuals.

[CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC)]


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Charitable Purpose

Education

As per wider and extensive meaning, the word education would connoteevery acquisition of further knowledge. However section 10(22) of the I. T. Act,which grants exemption to the income of a university or other educationalinstitution, existing solely for educational purposes not for profit the wordeducation would connote the process of training and developing theknowledge, skill, mind and character of students by normal schooling.

[CIT Vs. Oxford University Press (Bom) 221 ITR 77]

Education is the systematic instruction, schooling or training to the young inpreparation for the work of life. It also connotes the whole course of scholastic

instruction, which a persons receives in the process of training and developingthe knowledge, skill, mind and character of students by normal schooling

[Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)]


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Charitable Purpose

The coaching of students in an institutions is not imparting education, whichcan be said to be a process of training and developing of students andcharacter of students by normal schooling. A coaching institution cannot besaid to be an institution where normal schooling is done. Coaching institutewas held not to be entitled to exemption from Income Tax U/s 10(22) of theAct.

[Institute of Mining and Mines surveying Vs. CIT, (1994) 208 ITR 608(Pat)]

Education is per se regarded as an activity that is charitable in nature. Thefee structure must take into consideration the need to generate funds to be

utilized for the betterment and growth of the educational institution, thebetterment of education in that institution and to provide facilities necessaryfor the benefit of the students

[T.M.A Pai & Others vs. State of Karnataka & others]


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Charitable Purpose

Medical relief

Hospital/Other Institution for the reception and treatment of personssuffering from illness or mental defectiveness or for reception and treatmentof persons requiring medical attention or rehabilitation, existing solely forphilanthropic purposes and not for purposes of profit.

General public utility

An object of general public utility means an object of public utility, which isavailable to the general public as distinct from any section of the public. Theexpression object of general public utility includes all objects whichpromote the welfare of the general public. Therefore when the principalobject of a chamber of commerce is to promote and protect trade,commerce and industry in India or any part of India, the said object can besaid to be general utility and therefore a charitable purpose.

[CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC)]


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Charitable Purpose The State Bar Council is a body constituted for general public utility since the

advancement of any object beneficial to even a section of public asdistinguished from an individual or group of individuals would be an object ofpublic utility and consequently a charitable purpose.

[CIT v. Bar Council of Maharashtra [1981] 130 ITR (SC)]

Society of Chartered Accountants being engaged in activities of general public

utility, is a charitable society.

[CIT v. Jodhpur Chartered Accountants Society [2002] 258 ITR 548 (Raj.)]

Delhi Stock Exchange is non charitable institution.

[Delhi Stock Exchange Association Ltd. V. CIT [1997] 224 ITR 235]

Where primary or dominant purpose of institution is charitable and otherobjects which, by themselves, may not be charitable, but are merely ancillaryor incidental to primary or dominant object, same would not prevent institutionfrom validly being recognized as charitable trust.

[Director of Income Tax v. Bharat Diamond Bourse [2003] 259 ITR 280]


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Religious Purpose

It means a religious purpose within the meaning of the personal lawapplicable to the assessee.

[Bai Hirbai Rahim Trust v. CIT [1968] 68 ITR 821 (Bom)]

[Saraswathi Ammal v. Rajagopal Ammal, AIR [1953] (CS) 491]

Starting and maintaining a Sanskrit Pathshala or a Dharamshala or atemple accessible to the public, or a Sadabrata i.e food distributed tothe public whoever may come and take it, or a piyau or kund wherewater was available to everybody, hospitals or other charitable orreligious institutions are all charitable or religious purposes.

[Smt. Ganeshi Devi Rami Devi Charity trust v. CIT [1969] 71 ITR696 (al)]


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Religious Purpose

Holding and maintaining of samadhs in reverence of guru where

people at large come and pay homage and worship at the samadhs,also holding of mela at such samadhs to propagate and remind thepeople of the teachings of the guru in whose memory the mela isheld.

[CIT v. Guryani Brij Balabh Kaur trust [1980] 125 ITR 381 (Punj.)]

[CIT v. Guryani Brij Balabh Kaur trust [1989] 178 ITR 615 (Punj.)]

Provision of dinner to Brahmins on specified occasions is religiouspurpose.

[CIT v. Ahmedabad Rana Caste Association [1973] 88 ITR 354(Guj.)]

[CIT v. Ahmedabad Rana Caste Association [1983] 140 ITR 1(SC)]


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Religious Purpose

Public worship by itself will be a public religious object, but not if it is linked with

other objects like conduct of marriage, staging dramas.

[Ochira Temple Administration Board v. State of Kerala [1988] 171 ITR 429(Ker.)]

Reciting prayers is a religious object but renovation of public hall for purposes ofsettlor will lose benefit.

[Court Receiver v. CIT [1964] 54 ITR 189 (Bom.)]

Charities undertaken during religious occasions like Ramzan do not becomereligious solely on this account.

[CGT v. Mecotronics Pvt. Ltd. [2000] 242 ITR 542 (Mad.)]


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Religious Purpose

Ceremonies for repose of soul of founder and his wife alonwith other religious

objects cannot be treated as private because such ceremonies like raogarand muktad are for benefit of mankind.

[CWT v. Trustees of the J.P. Pardiwala Charity Trust [2965] 58 ITR 46

(Bom.)]

Section 13(1)(b) applied only to a charitable trust and not to a religious trust..The test of this section will not be applicable to a religious trust who will,

therefore, be entitled to exemption under Section 11(1)(a)

[Income tax Officer v. Catholic Church [1982] 13 TTJ 200(Ahd.)]


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Profit Motive Justice Bhagwati, who delivered the majority judgement of the Supreme Court in

the case of Sole Trustee, Loka Shikshana Trust (1975) 101 ITR 234, 256

observed that But where the predominant object of the activity is to carry out the

charitable purpose and not to earn profit, it would not lose its character of a

charitable purpose merely because some profit arises from the activity.

In the same case the Ld. Judge observed that it would indeed be difficult for

persons in charge of a trust or institutions to so carry on the activity that theexpenditure balances the income and there is no resulting profit. That would not

only be difficult of practical realisation but would also reflect unsound principal of

management.

In CIT Vs. Thyaga Brahma Gana Sabha (Sri.) (1991) 188 ITR 160 (Mad.),

the court held that the exclusionary clause does not require that the activity mustbe carried on in a such a manner that it does not result in any profit at all.

Charitable purpose would not loose its character merely because some profit had

arisen from the activity- Director of Income Tax (Exemption) vs. Shilpam

(1998) 230 ITR 126 (Cal.)


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Care in Drafting of main objects of a Trust

The objectives should be clearly defined.

Where a trust is formed and the trust deed does not reveal any

specific object of a public, religious or charitable nature it shall

not be entitled to claim exemption under the Act (Additional CITVs. Ganga Bai Charities (1983) 142 ITR 718 (Mad).

Where the deed of creation of the voluntary organization was

not specific as regards the utilization of the income, the

organization was not entitled to claim any exemption under the

provisions of section 11 of the Act. (Assembly Rooms Vs. CIT

(2000) 241 ITR 76 (Mad)

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Objectives partly charitable

A trust created for providing benefit first for the relatives and balance

amount for charities and after death of the relatives to the applied

totally for charities was held not to have been formed for charitable

purposes as the trustees had absolutely discretion to apply the income

[Sarah Cherian Trust Vs. ITO (1987) 173 ITR 656 (Ker]

When there are several objects of a trust some of them being

charitable and some non charitable, and if the trustee could have

discretion in applying the trust income to any of the objects , whole of

the trust must be treated as non charitable and no part of the income

would be exempt from tax [South Indian Athletic Association Ltd. Vs.

CIT (1975) 107 ITR 108 (Mad)]

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Objectives partly charitable

Care should be taken as section 13(1) (c )(ii) also provides that any

part of the income or any part of the property of the trust or the

institution was during the previous year used or applied directly or

indirectly for the benefit of the members or their relatives or any

institution I in which the members have substantial interest, then the

exemption shall not be available .

49


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Beneficiaries should be properly defined.

It would be sufficient if the objects are for the benefit of a section

of the public as distinguished from individuals. It may be noted

that in order to become charitable, the relief should be forsection of the community which could be well defined and

identified by some common quality of public nature. If the class

is not properly defined or is ambiguous , then the object will not

be a valid charitable object. Refer decision in the case ofSherwani Charitable Trust Vs. CIT (1968) 79 ITR 750( All)

50


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Scope and implication of general public utility

In Bar Council of Maharastra Vs. CIT (1980) 126 ITR 27 (Bom), these

words were extensively debated. It was observed that word general

pertained to a whole class. The word publicdenoted the body of people

at large and the word utilitymeant usefulness . Therefore, advancement

of any object beneficial to the public as distinguished from an individual or

group of individual would be considered as charitable purposes.

51


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Ancillary / incidental objects being not for a charitable

purposes

Even in such case exemption will be available so long as these

objects sub serve the main objects, which should be of religious

or charitable nature CIT Vs. Jaipur Charitable Trust (1976)

103 ITR 777 (SC)

Objects for carrying out business activity

The objects should be specified with the purpose of enabling the

trust to carry on business. At the same time, it should be clear

that the object of carrying out the business is only to subserve

the main objects of carrying out charitable work.

52


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Income of Trust exempted under Section 11

Section Nature of income Extent to which exemption allowed

11(1)(a) Income derived from property held under trust

wholly for charitable or religious purposes

To the extent income is applied to such

charitable or religious purposes in India.

Whereas such income is accumulated or set

apart for such application, to the extent of

15% of the income from such property.

11(1)(c) Income derived from property held under trust for

a charitable purpose, which tends to promote

international welfare in which India is interested

To the extent income is applied to such

charitable or religious purposes outside India.

Exemption is available only if the Board has

directed such exemption.

11(1)(d) Income in the form of voluntary contributions

made with a specific direction that they shall form

part of the corpus of the trust or institution.

100% exemption.

In computing the 15% of the income which may be accumulated or set apart, any such voluntary contributions

as are referred to in Section 12 shall be deemed to be part of the income.


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No exemption under Section 11

Section Nature & extent of income not exempt under Section11

13(1)(a) Income of private religious trust not used for public benefit.

13(1)(b) Income of charitable trust created for benefit for particular religious community.

13(1)(c) Income/ property of charitable or religious trust applied for direct or indirect benefit of person

referred in 13(3)

13(1)(d) Any income, is taxable if

If any funds are invested other than in 11(5)

Any funds invested earlier than 1983 remain invested thereafter

Shares and company are held after 1983.

11(4A) Income from business which is not incidental to the attainment of the objectives of the trust, or inrespect of which separate books of accounts have not been maintained.

12(2) Value of medial/ education services provided to specified persons by trust running hospital and

educational institution shall be income of trust and will be chargeable in the year in which

services are provided and chargeable to tax, despite section 11(1).

Conditions subject to which income derived from property held under


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Conditions subject to which income derived from property held undertrust is exempted under section11

Trust must have been created for any lawful purpose. The trust should not becreated for the benefit of any particular religious community or caste.

The trust should be registered with the Commissioner of Income Tax underSection 12A

The property from which income is derived should be held under a trust by suchcharitable or religious trust / institution. The property should be held wholly for

charitable purposes. The exemption is confined to only such portions of the trusts income which is

applied to charitable or religious purposes or is accumulated for applying to suchpurposes in India.

85% of the income is required to be applied for the approved purposes and the

unapplied income and the money accumulated or set apart (in excess of 15% ofthe income from such property) should be invested in the specified forms ormodes.

No part of the income should ensure, directly or indirectly, for the benefit of thesettler or other specified persons.


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SECTION 10(23C) vs SECTION 11-13

Since section 10(23C)(iiiad) & (vi) provides for exemption only in case the

educational institution exists for educational purposes, will this exemption beavailable to a society / trust running an educational institution as well as havingincome from other charitable objects as defined u/s 2(15)

An educational institution could be regarded as an educational institution if thesociety was running an educational institution. All the income of a society

running a college would not be exempt under section 10(22). Only the incomewhich has a direct relation or is incidental to the running of the institution, assuch, would qualify for exemption. It is not the entirety of the income of therecipient, the trust in this case, but the income of the particular source, namely,the educational institution, that comes within the purview of sub-section (22) ofsection 10 of the Act

[Birla Vidhya Vihar Trust Vs. CIT (1981) 24 CTR (Cal) 307: (1982) 136 ITR445 (Cal): TC32R. 734].


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SECTION 10(23C) vs SECTION 11-13

LETTER OF MINISTRY OF LAW , JUSTICE & COMPANY AFFAIRS-DT 22-

11-1983

The ministry in reference to a question as to whether the activities of an

association or institution engaged in promotion of sports & games can ,independently of the provision of S.23, be considered as enuring for

charitable purposes within the meaning of S.2(15) of the IT Act.

It has opined that Section 10(23) & 11 are not inconsistent with each

other and can operate simultaneously


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Concept of Corpus

There is no judicial guidance on the subject as to what amount in the funds

of a trust will constitute its corpus. According to Blacks Law Dictionary, it means an aggregate or mass; physical

substance, as distinguished from intellectual conception; the principal sum orcapital, as distinguished from interest or income; the main body orprincipal of a trust.

The corpus ingredient constituted of the originally donated or settled capitalamount in the form of money, movable property or immovable property (whichmight conveniently be termed as original corpus) plus any contributionreceived by the trust with a specific direction that it shall form part of thecorpus of the trust.

To claim a donation to be a corpus donation it is necessary that a writtendirection from donor is obtained.


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Voluntary Contributions received by a Trust

The voluntary contributions received by a charitable or religious trust are to

treated as follows: Corpus Donations

Voluntary contributions made to a charitable or religious trust with aspecific direction that they shall form part of the corpus of the trust i.ecorpus donations do not form part of the total income of the trust as perSection 11(1)(d).

Contributions other than corpus donationsSection 12(1) states that any voluntary contributions (not being corpusdonations) received by a charitable or religious trust shall be deemed tobe the income derived from property held under trust wholly forcharitable or religious purposes. Such voluntary contributions wouldtherefore be eligible for exemption under Section 11(1) provided the trust

satisfies the conditions as prescribed under Section 11 and 13.

While corpus donations do not form part of total income, other voluntarycontributions are exempt from tax as per Section 11 and 13


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Voluntary Contributions received by a Trust

Membership fees or subscriptions cannot be treated as voluntary contribution

as they are not the gratuitous payment by the member for any social purpose

or a payment without any constitution.

[Trustee of Shri Kot Hindu Stree mandal v. CIT [1994] 209 ITR (Bom.)]

Where a trust received voluntary contribution with specific direction that it

should form a part of the trust corpus, the trust will not loose exemption if the

contribution is applied for meeting running expenses.

[Dharma Pratishthanam v. ITO [1985] 11 ITD 40 (Delhi)]

Where a charitable trust received donations from different donors who had

specifically directed that the donations were to remain as corpus of the trust,

the trust will not be precluded from using those receipts for making donationsto other charitable trusts. Section 12 does not recognize such receipts as

income of the trust for the purpose of Section 11.

[ITO v. Abhilash kumari Public Charitable Trust [1987] 28 TTJ 523 (Delhi)]


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Application of Income

The exemption under Section 11 is available only if the income

derived from property held under trust is applied to the charitable orreligious purposes.

Income must be available for application. TDS cannot be consideredas income. CIT V.Jayshree Charity Trust 1985 Tax LR 247 (Cal)

The application of income need not necessarily result in expenditure.Therefore, an amount irretrievably earmarked or allocated for thepurposes of the trust or institution is also treated as applied eventhough it has not been actually spent.[CIT Vs. Trustees of the HEHNizams Charitable Trust (1981) 131 ITR 497 (AP)]

Application need not necessarily result in revenue expenditure. Evencapital expenditure is considered to be application of income for thepurposes of Section 11if it is incurred for charitable purposes.[CIT v.Kannika Parameshwari Devasthanam & Charities [1982] 133 ITR779 (Mad.)]


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Instances of Application of Income

Administrative expenses incurred for the purpose of carrying out objects and

purposes of the trust.[CIT v. Birla Janhit Trust [1994] 208 ITR 372 (Cal.)]

Capital expenditure on purchase of a building to be utilized as a hospital forpromotion of the charitable purpose.

[CIT v. S.Rm.M.ct.M. Tirupanni Trust Trust v. CIT [1998] 230 ITR 636 (SC)]

Deficit arising out of excess of expenditure over income during a particular yearshould be set off against surplus relating to subsequent year CIT Vs. Mahrana of

Mewar Charitable Foundation (1987) 164 ITR 439 (Raj)


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Instances of Application of Income Depreciation on various assets of the trust is deductible even if the cost of the

assets has been fully allowed as application of income in past years. [CIT v.

Institute of banking Personnel Selection (IBPS) [2003] 131 Taxmann 396

(Bom.)]

Repayment of loans originally taken to fulfill objects of the trust. [CIT v.

Jnambhumi Press Trust [2000] 242 ITR 457 (Kant.)]. However, the loan is

returned , it should be treated as income of the organization in the previous

year in which it is received. [CIT Vs. Kuchhi Menon Union (1985) 155 ITR

51 (Kar)]

Donation to other charitable trusts out of current years income. However,

donation out of income accumulated or set apart is not treated as application

of income and is taxed accordingly. [CIT v. Aurobindo Memorial FundSociety [2001] 247 ITR 93 (Mad.)]


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Instances of Application of Income

Section 10(1) of the Act excludes agricultural income. Agricultural income willnot form part of total income for the purpose of computing the accumulation of

income in excess of 15% of the total income as laid down in sec 11- CIT V.

Nabhinandan Digamber Jain(2002) 257 ITR 91(MP)


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Application out of composite fund

In CIT Vs. Ashoka Charity Trust (1982) 135 ITR 556 (Cal), there existed acomposite fund consisting of income from property held under trust and non

includible voluntarily contributions. Out of such fund, the expenditure /

application to charitable purposes existed the income received from property

held under trust. The entire application was allowed and the contention of the

AO to apportion such application on pro-rata basis disallowed.

Similarly, it has been held in the case of CIT Vs. Silk & Art Silk Mills

Association Ltd. (1990) 182 ITR 38 that expenditure for the objects of the

trust should be first deemed to have been made out of the assessable income

and balance, if any , should be deemed to have come out of non-assessableincome. In such circumstances pro-rata basis cannot be adopted.

65

Non Application Of Income Despite Extension Of Period-


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66

Non Application Of Income Despite Extension Of Period-taxability Thereof

11(1B): Non utilization of income in case of clause (2)(a)(i) to

explanation to section 11(1A).

11(1B)(a): Taxable in the year immediately following the

previous year in which income was received.

11(1B)(b): Taxable in the year immediately following the year in

which income was derived.

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Conditions Of Accumulation

11(2): Accumulation of unapplied income.

11(2)(a): Application for accumulation upto 10 years.

11(2)(b): Accumulated income to be invested as per 11(5)

Proviso-1:Period of stay from court to be excluded in calculating10 years.

Proviso-2:10 years to be substituted 5 years in case of incomeaccumulated after 1-4-2001.

Explanation: Accumulation for benefit of exempted institutionsu/s 12AA and 10(23) shall not be treated as application.

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Conditions of Accumulation

Section 11 (2) not to restrict operation of section 11(1)

In the case of Addl. CIT Vs. A.L.N. Rao Charitable Trust (1995)

216 ITR 697 (SC), it is been held that accumulated income which

is exempt under section 11(1)(a) need not be invested in

Government Securities.

Belated Applications For Accumulation

CIRCULAR NO. 273

The board has passed a general order U/S 119(2)(b) No.180/57/80-IT(AI) by which the CIT has been authorized to admit belated

applications U/S 11(2) r/w r.17 of the IT rules if certain conditions are

satisfied.


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69

Taxability Of Accumulated Income in which year?

11(3)(a): Applied for purposes other than charity or ceases to be accumulatedor set apart for charitytaxed in such year of application.

11(3)(b): Ceases to be invested in 11(5)taxed in year of cessation.

11(3)(c): Is not utilized for the purpose for which it was accumulated, by theexpiry of the year immediately following the period of accumulation taxed in

year immediately following expiry of period aforesaid.

11(3)(d): Is credited or paid to exempted trust taxed in year of credit orpayment.


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Application To Change Purpose Of Accumulation

11(3A): In case of 11(2), if the income can not be applied for the

purpose for which it was allowed to be accumulated, then an

application can be made to change the purpose of

accumulation.

Proviso1: The changed purpose can not be for payment to

exempted trust.

Proviso2: Accumulated funds of dissolved trust can be credited

or paid to exempted trust in the year the accumulating trust wasdissolved.

T t t f it l i


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Treatment of capital gains Section 11(1A) first caters to two main situations, viz.

where the capital asset is property held under a Trust wholly for charitableor religious purposes;

where the capital asset is held under a Trust in part only for suchpurposes

Within these main situations, the provision also caters to the following subsituations:

where the whole of the net consideration is utilized in acquiring the newcapital asset;

where only a part of the net consideration is utilized for acquiring the newcapital asset.

In respect of each of these sub-situations under the main situations, the

section spells out the quantum of income which will be deemed to have beenapplied to charitable or religious purposes.

T t t f it l i


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Treatment of capital gains

Income, as defined under section 2(24), includes Capital Gains,.Therefore, for the purposes of section 11(1)(a), Capital Gains are alsoconsidered as a part of the income. Since, Capital Gains are alsoconsidered as a part of the income, therefore, they can be applied forcharitable or religious purposes.

Under section 11(1A), if the entire amount of net consideration isinvested in another Capital Asset then, the entire Capital Gain will bedeemed to have been applied for Charitable or Religious purposes.

Under section 11(1A), if a part of the entire amount of net consideration isinvested in another Capital Asset then, the appropriate fraction of the

Capital Gain will be deemed to have been applied for charitable orReligious Purposes.

T t t f it l i


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73


The Capital Gain have to be re-invested in another Capital Asset in the sameyear, unless the assessee exercises the option available under explanation tosection 11(1), to apply the income in subsequent year.

Investment in fixed deposit is considered as an investment in Capital Asset. TheCBDT instruction no. 883, dated 24.09.1975, specifies that, such fixed depositsshould be for 6 months or more. But, various High Courts have held that, such 6

months time limit is legally not valid. The nature of asset is important and not thetime frame.

No time limit has been provided under section 11(1A), for retention of the newasset. Under the prevailing provisions each years income and application aretreated separately for the purposes of exemptions. Therefore, if the asset is held

till the end of the relevant previous year and is disposed of in the subsequentyear, then the exemptions cannot be denied nor can they be withdrawn in thenext year.



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Treatment of capital gainsIllustration 1The following illustration clarifies the treatment of capital gains under section 11(1A).

Cost of the Asset Rs. 40,000/-

Sale Proceeds/Net consideration Rs. 1,00,000/-

Re-investment in Capital Assets (i) Rs. 80,000/-

(ii) Rs. 1,00,000/-

Solution 1

The computation of capital gain deemed to have been applied for the purposes of section11(1)(a) is as under :

(i) Net consideration 1,00,000 1,00,000

(ii) Cost of the Asset 40,000 40,000

(iii) Capital gains 60,000 60,000

(iv) Investment in New Asset 80,000 1,00,000

(v) Shortfall in re-investment (i) - (iv) 20,000 Nil

(vi) Capital gains deemed to have been appliedfor charitable purposes (iii) - (v) 40,000 60,000

Business Income of a Trust


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Section 11(4) provides that a business undertaking held by a trust will betreated as a property held under a trust.

Where a claim is made that the income of any business shall not be included

in the total income, the AO shall have the power to determine the income of

such undertaking in accordance with the provisions of the Act relating to the

assessment. (i.e. as per Section 28 to 44 )

Where any income so determined is in excess of the income as shown in the

accounts of the undertaking such excess shall be deemed to be applied to

purposes other than charitable or religious purposes and thus, it will be liable

to be taxed accordingly.

.



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As per Section 11(4A), the income earned by a trust from anybusiness activity shall be exempted from tax provided the followingconditions are satisfied: The business carried on is incidental to the attainment of the objects of

the trust and Separate books of accounts are maintained in respect of such business

It has been held in [CIT v. Thanthi Trust [2001] 247 ITR 785 (SC)],that a business whose income is utilized by the trust for the purposeof achieving the objectives of the trust is, surely, a business, which isincidental to the attainment of the objectives of the trust. In any event

if there is an ambiguity, the provision must be construed in a mannerthat benefits the assessee.

Rental Income of a Trust


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Rent derived from additions to trusts buildings is exempt from taxwhen rent was used for religious purposes.

The words applied is wider in import than the word expenditure.

Expenditure means disbursement, paying out, distribution or

spending. The money or amount will not go out irretrievably when it is

applied to a purpose. The construction of the building was for the

purpose of getting some income by way of rent and such income

would be applied to the charitable or religious purposes. The purpose

was sufficient for satisfying Section 11(1).

[CIT v. St. George Forana Church [1988] 170 ITR 62 (Ker.)]



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It has been held that letting of Dharamshalas , auditoriums, runningof libraries, etc. could not be considered as business activities and

any income generated from such activities should be considered as

income from properties held under trust . In CIT Vs.Ganesh Ram

Laxminarayan Goel (1984) 147 ITR 468 (MP), it was held that lettingout of dharamshalas was an activity towards attainment of the

objects of the organisation and profit making was not the profit motive

and therefore it could not be considered as business activity.

Section 13 (1)(a)


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Section 13 (1)(a)

The exemption under the head religious trusts has always beenavailable only in respect of religious trusts which enure for the

benefit of the public.

Where the trust is for private religious purposes, the exclusion

did not and does not apply to that part of the income from

property held under trust which does not enure for the benefit of

the public.

[CIT v. Bengal Mills & Streamers Presbyterian Assn [1983]140 ITR 586 (Cal.)]

Section 13(1)(b)


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Section 13(1)(b)

This section enacts that income of a trust or charitable institutioncreated or established after 1.4.1962 for the benefit of any

particular religious community or caste is not excluded from its

total income.

In [CIT v. Shri Maheshwari Agarwal Marwari Panchayat[1982] 136 ITR 556 (MP)] it was held that since the trust was for

a particular religious community, the provisions of section

13(1)(b) were not applicable as they apply only to charitable

trusts. As per this interpretation, 13(1)(b) will not apply in case ofreligious or both Religious & charitable trusts.

Section 13(1)(c)


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Section 13(1)(c)

Where a part of income of the charitable or religious trust orinstitution enures or is used or applied, directly or indirectly, for

the benefit of the settlor, founder and certain other specified

persons is not eligible for exemption.

[Director of income tax v. Bharat Diamond Burse [2003] 259

ITR 280 (SC)]

Section 13(1)(d)


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Section 13(1)(d)

The income of any charitable or religious trust will not be entitled toexemption under section 11 or 12 if, for any period during the previous

year:

Any funds of the trust are invested after 28.02.1983, otherwise

than in any one of more of the forms specified in 11(5);

In [CIT v. ALN Rao Charitable Trust [1995] 216 ITR 697 (SC)], it was

held that accumulated income which is exempt u/s 11(1)(a) need not

be invested in the Govt. Securities; it is only in respect of any

additional accumulated income beyond 15% that, if the assessee

wants exemption of its additional accumulated income also, theassessee is required to invest the additional accumulated income in

the manner laid down in section 11(5)

Anonymous Donations


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Anonymous Donations

Anonymous donations of the following entities shall be included in the totalincome u/s 115 BBC and taxed at the rate of 30%.

(i) any trust or institution referred to in section 11;

(ii) any university or other educational institution referred to in section10(23C)(iiiad) and (vi) i.e. its annual receipts is less than or more than Rs. 1crore;

(iii) any hospital or other institution referred to in section 10(23C) (iii a e) and (via) i.e. its annual receipts is less than or more than Rs. 1 crore;

(iv) any fund or institution referred to in section 10(23C)(iv); (established forcharitable purpose)

(v) any trust or institution referred to in section 10(23C)(v). (established for publicreligious purposes or public religious & charitable purposes )

Anonymous Donations


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Anonymous Donations Anonymous donations not covered under section 115BBC

The following anonymous donations shall, however, be not be coveredunder section 115BBC:

(a) donations received by any trust or institution created or establishedwholly for religious purposes.

(b) donations received by any trust or institution created or established for

both religious as well as charitable purposes(other thananyanonymous donation made with a specific direction that such donation isfor any university or other educational institution or any hospital or othermedical institution run by such trust or institution.)

The term "anonymous donation" is defined to mean any voluntary

contribution, where the person receiving such contribution does notmaintain a record consisting of the identity of the person making such

contribution indicating the name and address of the person and such other

particulars as may be prescribed. Such anonymous donations will be taxed

@ 30% (to be increased by surcharge as applicable and education cess.)

Birds eye view of provisions of section 11


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Birds eye view of provisions of section 11Income from permissible

business activity Section 11(4A)

Capital Gains Section 11(1A)

option to apply under section

11(1)(a) can also be exercised

Investment of the capital

gain in new capital assets

Income from property

held under trust including

voluntary contributions

Section 11(1)(a)

Income from property

partly held under trust,

for trust formed before

1.4.1962 Section11(1)(b)

Income from voluntary

contributions towards

corpus Section 11(1)(d)

< 85% applied > 85% applied

Total amount to be

accumulated being > 15%

Permission u/s 11(2) for

accumulation in excess of 15%

Accumulation of income upto 15%

Accumulation for a period of 5

years only

Accumulation for indefinite period

Application after 5 years for

charitable purposes

Mode of investment as specified u/s 11(5)

Mode of investment can be other than as u/s 11(5) to the extent the income remains invested in

business as per clause (iii) of the proviso to section 13(1)(d)

Legal Compliances


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Legal CompliancesBasis of differences Section 10(23C) Section 12 AA Section 80G

When is Application

required to be made?

Required to be made by

educational institutions where:

Gross annual receipt exceeds

Rs. 1 crore; or

Is not substantially financed by

the Government.

Required to be made by all

NGOs in order to claim

exemption u/s 11

Required to be made by all

NGOs which wishes to take

the benefit under this

section

Form for the above

Application

Form 56 D Form 10 A Form 10 G

Rules applicable 2CA 17A 11AA

Time limit for filing of

application

Before the end of the previous

year

Before the end of the previous

year

NA.

Time limit for

approval

Within 12 months from the end

of the month in which

application is received

Within 6 months from date of

application

Within 6 months from date

of application

Time period for

exemption

Lifetime Lifetime Upto 5 Years

Withdrawal of

approval

By CCIT By CIT N.A


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Legal Compliances-Audit


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Legal Compliances-Audit

Audit If the income of the trust before giving effect to exemption under Section

11 and 12 exceeds Rs. 50,000 then the accounts of such trust are to be

audited and the audit report is to be furnished in the prescribed form

(Form 10B)

For the purpose of computing aforesaid limit of Rs. 50,000, corpusdonations will be included while incomes exempt under any provision

other than Section 11 and 12 (e.g. Section 10) will not be included.

A charitable institution was registered under Section 12A(a). It was held

that the AO was not justified in refusing benefit of exemption under

Section 11 on the ground that trust had violated provisions of Section

12A(b) by not filing audit report in Form No. 10B along with its report of

income.

[Calcutta Management Association v. ITO [1992] 42 ITD 62 (Cal.)]

Legal Compliances-12AA


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Legal Compliances-12AA

Procedure for Application [Section 12AA] On receipt of an application for registration of a trust made under Section

12A, the Commissioner shall:

Call for requisite documents or information from the trust or institution in

order to satisfy himself about the genuineness of activities of trust and

may also make requisite enquiries in this behalf; and

After satisfying himself about the objects of the trust and the genuineness

of its activities, he shall pass an order in writing registering the trust, or if

he is not so satisfied, pass an order in writing refusing to register the trust.

A copy of such order shall be sent to the applicant.

However, an order refusing to register the trust shall only be passed after

the applicant has been given a reasonable opportunity of being heard.

Information to be submitted for 12AA


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Information to be submitted for 12AA

90

As per Form No. 10A, the following information needs to besubmitted.

Name & Address of founders / authors

Date of creation of trust

Name & address of trustees

Certified copy of instrument of trust

Copies of accounts for last 3 years

Legal Compliances-80G


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Legal Compliances-80G

Registration [Section 80G]

An application in triplicate in Form 10G should be filed withthe CIT or DIT (Exemption), alongwith the followingdocuments:

After receiving the application the CIT or DIT(E) may call fora report from AO and if he is satisfied that the conditionsmentioned in 80G(5) (i) (v) he will issue a certificate forallowing deduction u/s 80G to the donors making donationsto the applicant trust for a period upto 5 years as may beordered by him.

After expiry of the time for which the deduction u/s 80G isgranted, a fresh application for renewal has to be made inthe manner mentioned above.

Information to be submitted for 80G


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Information to be submitted for 80G

92

As per Form No. 10G, the following information needs to besubmitted.

Legal status of the institution/ fund

Objects and geographical area of activities

Name & Address of trustees

Status of approval under 12A / 10(23)

Status of last approval under 80G

Change in objects if any since last approval

Details of assessments, arrear taxes, accumulations

Details of investments, business income, violations of section 13 etc.

Notes on activities for last 3 years alongwith accounts.

Legal Compliances


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Legal Compliances

Registration u/s 12A cannot be denied on the ground that the objectsor the activities of the trust are of public religious purposes

[New Life in Christ Evangelistic Association v. CIT [2000] 246 ITR

532 (Mad.)]

W.e.f. AY 2000-01 a trust can be registered u/s 80G even if upto 5% ofits total income of the PY is spent for religious purposes. However,

upto AY 1999-2000, registration u/s 80G could be denied if one or

more of its objects was wholly or substantially attributable to religious

purpose.

[Upper Ganges Sugar Mills Ltd. V. CIT 227 ITR 578 (SC)]

Taxability of a Public Trust at a glance


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Taxability of a Public Trust at a glance

Sources of Income Under

Section

Tax

RatesVoluntary Contributions (being corpus donations) 11(1)(d) Exempt

Income not applied / accumulated to the extent > 15% 11(1)(a) AOP Rate

Income received on 31st March carried forward to next year for utilization

but not utilized in that next year [Explanation 2(b) to Section 11(1)(d)]

11( 1B) AOP Rate

Income accumulated u/s 11(2) is not invested / utilized / donated to

another trust

11(3) AOP Rate

Excess Business Income as assessed by the AO 11(4) AOP Rate

Income derived u/s 13(1)(a) & 13(1)(b) AOP Rate

Income derived u/s 13(1)(c) & 13 (1)(d) MMR

Anonymous Donations u/s 115BBC 30%

Taxability of Public Trust


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Taxability of Public Trust

Taxability of Public trusts

Income is not exempt u/s 11 or 12

Section 164(2)

Exemption u/s 11 or 12 is forfeited

due to contravention u/s 13(1)(c) or

13(1)(d)

Section 164(2)

Taxable at the rates applicable in

case of AOP

Taxable at the Maximum Marginal rate

Tax rates applicable to Public Charitable or ReligiousT t


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Trust

Where income is not exempt under section 11 or 12 [Section 164(2)]

Taxable at the rates applicable in case of an AOP

Where exemption under Section 11 or 12 is forfeited due to contravention

under Section 13(1)(c) or 13(1)(d) [Section 164(2)]

Such income is taxable at maximum marginal rate.

However, in the case where the assessee is not entitled to exemption under

Section 11 or 12, by virtue of the provisions contained in Section 13(1)(b), the

maximum marginal rate does not become applicable. The income will then be

charged on rates specified for an association of persons as provided under

Section 164(3)

[ITO v. Gurjar Pushkarna Vidyotejak Mandal [1988] 30 TTJ 610 (Ahd.)]

Tax rates applicable to Public Charitable or ReligiousT t


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Trust

A trust will attract MMR of tax only on that part of the income which hasforfeited exemption under the above circumstances and not on the entire

income of the trust.- Director of Income tax ( Exemption) V. Sheth Mafatlal

Gagalbhai Foundation Trust (2001) 114 Taxmann 19 ( Bom)

In Gurdayal Berlia Charitable Trust V.fifth Generation Trust v. fifth ITO

(1990) 34 ITD 489, Bombay, the tribunal observed that only the income fromunapproved investment would be Taxable at MMR.

Taxability of Private Trust


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Taxability of Private TrustTaxability of Private trusts

Shares of beneficiaries are determinate [Section 161] Shares of beneficiaries are indeterminate [Section 164(1)]

Where income does not

include business profits

Where income does not

include business profits**

Where income

includes business profits

Where income

includes business profits

The trustee is assessable

at the rates applicable

to each beneficiary

The whole of the income

of the trust is taxable at

Maximum Marginal Rate

The whole of the income

of the trust is taxable at

Maximum Marginal Rate

The income of the trust is

Taxable in the hands of

trustees at the rates

Applicable to an AOP

** Note: Subject to conditions as specified in the following slides

Taxability of a Private trust


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Where shares of beneficiaries are determinate or known (Section161) Where income does not include business profits [Section 161(1)]

The trustee is assessable at the rates applicable to eachbeneficiary.

Where income includes profits from business [Section 161(1A)]The whole of the income of the trust is taxable at maximummarginal rate.

However, if such profits from business are receivable under a trustdeclared by any person by will exclusively for the benefit of any

relative, dependant on him for support and maintenance and such trustis the only trust so declared by him, then, the trustees shall beassessable at the rates applicable to each beneficiary.



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Taxability of a Private trust Where shares of beneficiaries are indeterminate or unknown i.e. in case of

discretionary trust [Section 164(1)]

Where income does not include profits from any business and if:None of the beneficiaries has taxable income exceeding maximum

amount not chargeable to tax or is a beneficiary in any other trust; or The income is receivable under a trust declared by any person by

will and such trust is the only trust so declared by him; or The income is receivable under a non testamentary trust created

before 1.03.1970 exclusively for the benefit of relatives of settlor, ormember of HUF, who are mainly dependant upon settlor; or

The income is receivable by trustees on behalf of a provident fund,superannuation fund, gratuity fund, pension fund or any other bonafide fund created by the employer carrying on business orprofession for the benefit of his employees,

Then, income of the trust is taxable in the hands of trustees at therates applicable to an AOP. In any other case, income is taxable atthe maximum marginal rate.



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Where shares of beneficiaries are indeterminate or unknown i.e.

in case of discretionary trust [Section 164(1)]

Where income includes business profits:

The whole of the income of the trust is taxable at the maximum

marginal rate.

However, if such profits from business are receivable under a trust

declared by any person by will exclusively for the benefit of any

relative, dependant on him for support and maintenance and such trust

is the only trust so declared by him, then, the trustees shall be

assessable only at the rates applicable to an AOP.


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Thank You

presentation on trusts- final

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