taxation of charitable trust & socities ca ashok seth b. sc, f.c.a., disa (ica) lucknow...

Taxation of Charitable Trust & Socities

CA ASHOK SETHB. Sc, F.C.A., DISA (ICA)

[email protected]

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What is Trust

Sec 3 of the Indian Trusts Act, 1882 “ is an obligation annexed to the

ownership of property and, arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner”.

This section only for “Private Trusts”30th Nov 12 Singhtali Ashok Seth 2

Formal Deed

Not necessary -Radhasoami Satsang 193 ITR 321, 326 (SC)

In public trust- there should be an unambiguous expression of intention to divest & actual divestment of the interest of the donor.

To prove intention deed would be better evidence

30th Nov 12 Singhtali Ashok Seth 3

Registration of Trust- Section 5 of Indian Trust Act

In case of private trust Registration of deed is required, if the trust property is immovable property, unless:- the trust is created by a will, or the

owner – settler himself is the sole trustee Registration to be done at local sub-

registrar office Act not applicable to Public Trusts


Amendment in Deed

If power to amend deed is given trust may become discretionary trust attracting the provision of section 61 and 63 – Naresh Sengupta Foundation v. CIT 207 ITR 340

Deed of Public Charitable Trust could be amended only by the High Court- Trustee of HEH The Nizam’s Pilgrimage Money Trust v. CIT 243 ITR 676 (SC).


SUGGESTIVE CLAUSE Nothing contained in this deed shall be deemed to

authorize the trustees to do any act which may in any way be construed as violative or contrary to the provisions of sections 2(15), 10(23B), 10(23C), 11, 12, 12A, 12AA, 13 and/or 80G of the Income Tax Act, 1961 and/or any statutory modifications thereof and all activities of the trust shall be carried out with a view to benefit the public at large, without any profit motive and in accordance with the provisions of the Income Tax Act, 1961, or any statutory modification thereof.

The Trust is hereby expressly declared to be a public charitable trust and all the provisions of this deed are to be constituted accordingly.”


Scheme of Income Tax Section 2(24)- “income” includes (iia) voluntary contributions received

by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, or by an association or institution……………….Explanation : For the purposes of this sub-clause, "trust" includes any other legal obligation;


Other Legal Obligations

Legal obligations means obligations which is enforceable by law.

Examples:- Company u/s 25 of Companies Act, 1956 A society under Societies Registration

Act (sec 6- is legal entity) A Hindu Endowment A Muslim Wakf


Income when exempt

In terms of Section 11, 12, 12A & 13 The trust should be one which is

established in accordance with law, and its objects should fall within the definition of the term 'Charitable purpose‘ [Sec 2(15)]

Registered u/s.12A with the Commissioner of Income Tax. (UP Forest Corp 297 ITR 1 (SC)


Registration – Sec 12-A & 12AA

From 1.6.2007 benefit available from the FY in which application made.

CIT has no power to condone delay CIT can call for documents & information

& hold enquiry to satisfy about genuineness of activities and how manner of application of funds of the trust do not fall within the purview of the Commissioner Spring Dale Education Society 204 Taxman 11 (P&H)


Registration – Sec 12-A & 12AA

The trust, whose objects are religious as well as charitable, would be entitled for grant of registration and also to claim exemption u/s. 11 the same would be allowed subject to provision of sec. 13(1)(a) & (b) Shri 1008 Parshwanath Digamber Jain Mandir Trust ITAT ‘I’ Bench, Mumbai, ITA No. 5544/M/09, dated 8-2-12, BCAJ Pg. 41, Vol. 44-A Part 1, April 2012(Mum.)(Trib.)


Time Limit for order – 12A

The order to be passed within six months from the end of the end of the month in which the application for registration is received.

If order not passed within a period of 6 months, presumed that registration has been granted – Karnataka Golf Association v 91 ITD 1 (Bang.) Sardari Lal Oberai Memorial Charitable Trust 3 SOT 229 (Delhi).


Part Object Not Charitable If primary or dominant object of the

trust is charitable, then any ancillary non-charitable object will not make trust ineligible for exemption CIT v Andhra Chamber of Commerce 55 ITR 722 (SC), & Addl CIT v Surat Art Silk 121 ITR 1 (SC), Bharat Diamond Bourses 259 ITR 280 (SC)

Differentiate between Objects and Power


Charitable purposes

Section 2(15) "charitable purpose" includes relief of the poor, Education, medical

relief, Preservation of Environment (including

watershed, forests and wildlife) Preservation of monuments or places or

objects of artistic or historic interest and the advancement of any other object

of general public utility Contd.30th Nov 12 Singhtali Ashok Seth 14

Amendment in 2(15)- 1.4.2009 ‘ 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 of any service in

relation to any trade, commerce or business, for a fee, cess or any other consideration,

Section 11(4A) Amendment not affecting relief to poor,

Medical and education


Further Amendment in 2(15)- retrospectively from 1.4.2009

Further Proviso inserted by Finance Act 2010 with retrospective effect from 1st April 2009 providing that: -“the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten Lacs (25 Lacs from Asstt Yr. 2012-13) rupees or less in the previous year”


Issues because of amendments

The aspect of business income settled in 1992 is now totally unsettled because of insertion of proviso to Section 2(15) and further proviso

If it involves carrying on any activity in the nature of trade, commerce or activity of rendering any services in relation to said business – the entire income of the trust will be taxable


Meaning of business for purposes of s. 2(15)

Institute of Chartered Accountants of India v. DGIT(E) 202 Taxman 1(Del)-Utilisation of the funds or income earned, whether for charitable purpose or otherwise, is not relevant now in view of the first proviso and cannot be a determining factor for deciding whether assessee is covered by section 2(15)


2(15)- Amendment- Issues

Whether Trust for religious purposes will be hit by the amendment.

Religious purpose is distinct from charitable purposes

Public religious trust cannot be considered to be the trust for general public utility.


Issues- Further proviso

“Aggregate value of Receipts” (not net income) from business activity should be less than 25 Lacs.

It is value of Receipts and not value of services

If receipt is in kind- valuation issues? One year exempt next year not? (Sec

13(8))


Issues- Further proviso

If come to know in end year that Rt. >25 Lacs what about 80G receipts already issued.

Position of Registration U/s 12AA? Registration is one time process Section 12AA(3)- it can be cancelled only of

activities are not genuine. How to monitor each year If one applied in 2008-09 but was refused

registration?30th Nov 12 Singhtali Ashok Seth 21

Objects & Powers

Objects must be distinguished from powers

Powers should not affect determination of charitable nature

Trustees Of Breach Candy Swimming Bath Trust 0039/Bom/92 Special Bench Dated 26.12.2000


Bussiness

Business settled in trust as a property or Business carried on by trust for attaining

the objects of trust Thanti Trust 247 ITR 785 (SC)

Business should be incidental to attainment of the objectives

If income from business utilized for the purposes of objects- then it would be considered as incidental

Books Maintained separately 11(4)


General Public Utility

General means pertaining to whole class or a section of public–not the whole world – Bar Council of Maharasthra 130 ITR 28 (SC)

Public means the body of people at large

Andhra Chamber of Commerce 55 ITR 722 (SC)

Contd.30th Nov 12 Singhtali Ashok Seth 24

General Public Utility

Examples:- State Bar Council 30 ITR 28 (SC) Running Stock exchange 66 ITR 195 (AP) Maintenance of Dharamshalas 158 ITR 32 Promotion of Commerce & Trade- Sarafa

Association v. CIT 294 ITR 262 (MP). CA Society

Jodhpur Chartered Accountants Society 258 ITR 548 (Raj.).


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Corpus Donation Corpus donations upto 88-89 were outside

the purview of income u/s 2(24)(iia) Section 11 “income derived from property

held under trust” exempt U/s 11(1)(d) Corpus Donations are still out

of the preview of Definition of Income Section 12(1) lays that Donations received

by trust (Other than Corpus donations) shall be deemed to be “income derived from property held under trust”


Corpus Donation

Refer Shri Dwarkadheesh Charitable Trust v ITO 98 ITR 557 (Alld) & Trustees of Kilachand and Devchand Foundation v CIT 172 ITR 382 (Bom)

IT act can not convert a capital receipt into an income in absence of specific words in section 2(24)(iia)- 119 ITR 137, 127 ITR 227, 172 ITR 382, 128 ITR 456, 145 ITR 29, 149 ITR 470, 160 ITR 729, 166 ITR 214


Corpus Donation

Not duty of the Trust to produce Donors of Corpus Donation only letter is required to be produced ITAT (Mumbai Bench) in case of Ghatkopar Jolly Gymkhana ITA 3069/Mum/02 and also DIT (Exemptions) v Bharat Kalyan Pratishthan 257 ITR 609 (del)

Not assessable u/s 68 Vidya Jyoti Trust ITA No 333/CTK/2012 20-July 12


Corpus Donation

Donor letter being identical does not matter- Lala Kashi Ram 41 TTJ 408 (Del)

There should be positive indication of Donor Prabodhan Prakashan 50 ITD 135 & Shri Digambar Jain Naya Mandir 70 ITD 121- Box marked “Corpus” will not be sufficient. Contrary view in Shree Mahadevi Tirath

Sharda Ma Seva Sangh 133 TTJ (UO) 157 (Chd)


Anonymous Donation- Sec 115BBC (WEF 1-4-2007)

Anonymous donations (where are no records of the identity of the donor- name, address and other particulars as may be prescribed) received by charitable trusts or institutions, etc., in excess of higher of 5% of total donations or One Lacs

will be taxed @30%30th Nov 12 Singhtali Ashok Seth 30

Anonymous Donation- Not to apply to

Received by any trust or institution created or established wholly for religious purposes.

Anonymous donations made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.


Anonymous Donation- Contd

Consequential amendments have been made in section 10(23C) and section 13 to provide that amounts taxable as aforesaid shall not be excluded from the total income of the assessee.

Issue- Whether anonymous donation to be considered for accumulation of 15%?


Admission Fees

Admission\entry fees is capital receipts Life membership fees- portion of fees

attributable to entrance fees- capital receipt. Balance was commuted value of annual subscription taxable as income. WIAA Club Ltd 136 ITR 569 (Bom)

Membership Fees is exempt- Divine Light Mission 278 ITR 659 (Del)


Tied up Grants

To utilize in manner dictated by the donor within a specified time and if not spend to be refunded back.

Nirmal Agricultural society- 71 ITD 152 (Hyd), Sukhdeo Charity Estate 149 ITR 470 (Raj) and 192 ITR 615 (Raj)

Against- Gem and Jewelry Export- 143 ITR 579 (Bom)


Depreciation Income to be computed applying commercial

principals- Depreciation provided should be deducted 146 ITR 28 (Kar), 180 ITR 579 (MP), 198 ITR 598 (Guj) etc

Assets acquired for the purposes of carrying out its objectives, is to be treated as application of the income for section 11(1) Tirupanni Trust 230 ITR 636 (SC)

Double deduction? No as per ITO v Trustees of Marathi Mission 1 ITD 539 (Bom) as both operate of different fields.

CIT v Institute of Banking Personnel 264 ITR 110 (Mumbai)- held that depreciation should be allowed even on assets, the cost of which has been allowed as exempt u/s 11 in the preceding years.


Depreciation- Contd

BUT in Escorts Ltd v Union of India 19 ITR 43(SC) held that unless there is an specific provision permitting double deduction in respect of any item, it can not be presumed that the law intends to grant double deduction


Income

Must be understood in commercial sense and not as “total income” as assessed.

Taxes deducted paid have to be excluded from income 127 ITR 378

Heads of income under sec 14 have no relevance and question of allowing statutory deductions does not arise. 199 ITR 215.


15% of Gross Income or net Income

Whether 15% accumulation should be applied on Gross Income as reduced by the administrative expenses or on Gross Income. Refer CIT v Program for Community Organization 228 ITR 620 (ker)-held that 15% can be applied before making deduction for Administrative expenses- confirmed by SC on 248 ITR 1. Also Birla Janhit Trust 208 ITR 372 (Cal)- held that any administrative expenditure incurred should also be regarded as expenditure on the objects of the trust.


Excess Expenditure of earlier years

Excess of expenditure in earlier years can be adjusted against income of subsequent year:- Maharana of Mewar Charitable 164 ITR 439 (Raj) Shri Plot SwetambarMurti Pujak Jain 211 ITR 293 Matriseva Trust 242 ITR 20 (Mad) Institute of Banking Personnel 264 ITR 110 (Bom)

Against Delhi ITAT in Pushpawati Singhania 29 SOT 316 (Del) relied upon 305 ITR 149 (Del HC)


85% not applied

If income not received then amount can be spent in the year of Receipt or next year (Explanation 2 to 11(1))

If application filed before time allowed us/ 139(1) to spend amount in next year

Accumulated for specific purpose u/s 11(2) for 5 years Max


Accumulation of Income Application u/s 11(2) read with rule 17 to be

filed before time u/s 139(1) Specify purpose and period – Singhania

Charitable Trust 199 ITR 819 (Cal) In 120 ITR 4 and Nagpur Hotel Owners Asso

209 ITR 441 held that rule 17 to the extent of providing time limit is ultra virus.

Hence can be filed before assessment – Nagpur Hotel owners Association 247 ITR 201 (SC)

To invest in specified securities


Exclusions – Sec 13

1(a)- Private Religious Trust 1(b)- for the benefit of particular

religious community or caste. From the different phraseology used by

the Legislature in clauses (a), (b) and (c) in section 13(1),Clause for Charitable trust and not for composite Trust and purely religious trust. 213 ITR 492, 317 ITR 342 (MP)


Assessment of Taxable Income

Under Section 164(2) as an AOP At Normal Rate applicable to the individual

DIT (Exemptions) v Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533 (Bom)

If income of the trust becomes taxable by virtue of violation of section 13(1)(c)/(d) then such Income would be taxable at Maximum Marginal Rate 164(3)


Wealth Tax

Section 3 and 21AA of the WT Act “Every Individual, HUF and Company” 21AA- where assets held by AOP, other

than Company, coop society, or society registered under Societies Registration Act, and the Individual shares of members indeterminate

However section 21AA was not applicable to registered societies


Accounts

Significant Accounting Policies should be attached with final accounts.

ASB is of the view if ANY activity of Trust are commercial in nature then AS will apply to ALL activities

AS 12


Report in form 10-B

Audit report in form 10-B to be filed with return

Can be filed upto assessment 198 ITR 511 (Cal), 195 ITR 825 (Cal).

Provisions of section 12A (b) are directory in nature and audit report, if not furnished with return can be furnished at appellate stage –228 ITR 292 (P & H.)


Tax Audit

ICAI publication- Issues on Tax Audit

44AB is applicable if trust carries on business even if income from business is exempt.


Report

It is the policy of the NPO to prepare its financial statements on the cash receipts and disbursements basis. On this basis, revenue and the related assets are recognised when received rather than when earned, and expenses are recognised when paid rather than when the obligation is incurred. In our opinion, the financial statements give a true and fair view of the assets and liabilities arising from cash transactions of ---------------- at ---------------------, and of the revenue collected and expenses paid during the year then ended on the cash receipts and disbursements basis as described in Note “X”


THANK YOU- QUESTIONS ?

If you wait for happy moments, you will wait forever.But if you start believing that you are happy,you will be happy forever.Good Day! 30th Nov 12 Singhtali Ashok Seth 49

taxation of charitable trust & socities ca ashok seth b. sc, f.c.a., disa (ica) lucknow...

Documents

trust property

registration of trust

discretionary trust

scin public trust

nizams pilgrimage money

public benefit

public trusts

intention deed