Taxation of Charitable Taxation of Charitable Trust/InstitutionTrust/Institution

By C.A. Jaydeep MehtaBy C.A. Jaydeep Mehta

IntroductionIntroduction

The Income-tax Act grants exemption to the The Income-tax Act grants exemption to the income from property held under trust or any income from property held under trust or any other legal obligation for religious or charitable other legal obligation for religious or charitable purposes, subject to the fulfillment of certain purposes, subject to the fulfillment of certain conditions laid down under the Act. The object is conditions laid down under the Act. The object is to encourage the role of philanthropy in relieving to encourage the role of philanthropy in relieving distress and in helping to meet the economic, distress and in helping to meet the economic, social, cultural and religious needs of the social, cultural and religious needs of the society.society.

Section 11 to 13 of the Income-tax Act, 1961 Section 11 to 13 of the Income-tax Act, 1961 deals with taxation of Charitable Trust/Institution.deals with taxation of Charitable Trust/Institution.

Introduction (Contd…)Introduction (Contd…) Section 11 provides the manner in which income Section 11 provides the manner in which income

is exempt from income-tax.is exempt from income-tax. Section 12 provides the income of trust or Section 12 provides the income of trust or

institutions from contributions.institutions from contributions. Section 12A provides the conditions as to Section 12A provides the conditions as to

registration of trusts, etc.registration of trusts, etc. Section 12AA provides the procedure for Section 12AA provides the procedure for

registration.registration. Section 13 provides section 11 not to apply in Section 13 provides section 11 not to apply in

certain cases.certain cases.

The basic condition for claiming The basic condition for claiming exemption of income by the exemption of income by the trust/institution is that trust/institution is that income income should be derived from the should be derived from the property held under a trust and property held under a trust and the said income should be applied the said income should be applied to charitable or religious purpose to charitable or religious purpose in India.in India.

Meaning of ‘Property Held under Meaning of ‘Property Held under Trust’ :Trust’ :

The expression ‘property’ used in Section The expression ‘property’ used in Section 11 has the widest amplitude. It includes a 11 has the widest amplitude. It includes a business undertaking. It certainly takes in business undertaking. It certainly takes in movable or immovable property like movable or immovable property like money, shares, securities, lands, buildings money, shares, securities, lands, buildings and houses. It may comprise of an interest and houses. It may comprise of an interest in a partnership firm.in a partnership firm.

Charitable purpose :Charitable purpose : The term “Charitable Purpose” has been defined The term “Charitable Purpose” has been defined

in section 2(15) of the Income-tax Act to include in section 2(15) of the Income-tax Act to include relief of the poor, education, medical relief and relief of the poor, education, medical relief and the advancement of any other object of general the advancement of any other object of general public utility.public utility.

w.e.f. 01.04.2009 w.e.f. 01.04.2009 PROVIDED THAT PROVIDED THAT advancement of any other object of general advancement of any other object of general public utility shall not be a charitable purpose, if public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the it involves the carrying on of any activity in the nature of trade, commerce or business, or any nature of trade, commerce or business, or any activity of rendering any services in relation to activity of rendering any services in relation to any trade, commerce or business, for a cess or any trade, commerce or business, for a cess or fee or any other consideration, irrespective of fee or any other consideration, irrespective of the use or application or retention, of the income the use or application or retention, of the income from such activity.from such activity.

Charitable Purpose : (Contd…)Charitable Purpose : (Contd…) The definition of charitable purpose is inclusive and not The definition of charitable purpose is inclusive and not

exhaustive or exclusive. The expression “object of exhaustive or exclusive. The expression “object of general public utility” was not restricted to objects general public utility” was not restricted to objects beneficial to whole of mankind. An object beneficial to a beneficial to whole of mankind. An object beneficial to a section of the public was an object of general public section of the public was an object of general public utility. [utility. [CIT v Andhra Chamber of Commerce 55 ITR CIT v Andhra Chamber of Commerce 55 ITR 722 (SC)]722 (SC)]

A trust is not charitable, unless it benefits the community A trust is not charitable, unless it benefits the community or a section of the community. A trust would not be or a section of the community. A trust would not be charitable, if it only conferred private benefits.The onus charitable, if it only conferred private benefits.The onus is on the assessee to show that his object are of general is on the assessee to show that his object are of general public utility and that in the advancement of the objects public utility and that in the advancement of the objects there is no involvement in activities for profit.there is no involvement in activities for profit.[Indian [Indian Chamber of Commerce v CIT 101 ITR 796 (SC)]Chamber of Commerce v CIT 101 ITR 796 (SC)]

Religious Purpose :Religious Purpose :

The term religious purpose has not been defined The term religious purpose has not been defined in the Income-tax Act. ‘Religious Purposes’ are in the Income-tax Act. ‘Religious Purposes’ are necessarily associated with religion. ‘Religious necessarily associated with religion. ‘Religious Purpose’ includes the advancement, support or Purpose’ includes the advancement, support or propagation of religion or its tenets. propagation of religion or its tenets.

A charitable trust created after 01.04.1962 would A charitable trust created after 01.04.1962 would lose exemption if it is for the benefit of any lose exemption if it is for the benefit of any particular religious community or caste. [Sec. particular religious community or caste. [Sec. 13(1)(a)]13(1)(a)]

Registration of trust/institution before the Registration of trust/institution before the Commissioner of Income-tax :Commissioner of Income-tax :

Registration before the Commissioner is precondition for Registration before the Commissioner is precondition for exemption. exemption.

Registration u/s. 12AA does not mean that the trust is Registration u/s. 12AA does not mean that the trust is automatically entitled to the exemption u/s. 11 each year, as automatically entitled to the exemption u/s. 11 each year, as the issue of whether there is any application of income for the issue of whether there is any application of income for charitable or religious purposes or accumulation of income charitable or religious purposes or accumulation of income during the previous year or whether any of the provisions of during the previous year or whether any of the provisions of section 13 are attracted for the year, can be examined by the section 13 are attracted for the year, can be examined by the Assessing Officer each year, before granting the exemption.Assessing Officer each year, before granting the exemption.

However, An Assessing Officer cannot deny exemption However, An Assessing Officer cannot deny exemption under section 11 to a trust registered under section 12AA, on under section 11 to a trust registered under section 12AA, on the ground that its objects are not charitable or religious in the ground that its objects are not charitable or religious in nature. This view is supported by the decision of the nature. This view is supported by the decision of the Ahmedabad Tribunal in the case of Stock Exchange of Ahmedabad Tribunal in the case of Stock Exchange of Ahmedabad vs. ACIT 74 ITD 1 (Ahd.)Ahmedabad vs. ACIT 74 ITD 1 (Ahd.)

Section 12A Section 12A Condition as to RegistrationCondition as to Registration

There are two conditions for registration of trust have been There are two conditions for registration of trust have been provided, namely :provided, namely :

1.1. An application to be made for registration in the prescribed An application to be made for registration in the prescribed form (Form 10A) and in the prescribed manner to the form (Form 10A) and in the prescribed manner to the Commissioner of Income tax either before 1st July 1973 or Commissioner of Income tax either before 1st July 1973 or within one year from the date on which the trust is created within one year from the date on which the trust is created whichever is laterwhichever is later

2.2. Where the total income of the trust or institution without Where the total income of the trust or institution without giving effect to the provisions of section 11 & 12 exceeds giving effect to the provisions of section 11 & 12 exceeds 50,000/- in any previous year, the accounts of the trust or 50,000/- in any previous year, the accounts of the trust or institution for that year has to be audited by a chartered institution for that year has to be audited by a chartered accountant or any other accountant entitled to be appointed accountant or any other accountant entitled to be appointed as an auditor of companies. The report of audit should be in as an auditor of companies. The report of audit should be in Form No. 10B prescribed in the Income-tax Rules, 1962 and Form No. 10B prescribed in the Income-tax Rules, 1962 and said audit report has to be furnished along with the return of said audit report has to be furnished along with the return of income.income.

Condition as to Registration : (Contd…)Condition as to Registration : (Contd…)

The Audit Report has to accompany the Return of Income, The Audit Report has to accompany the Return of Income, otherwise the return may be treated as incomplete. However, the otherwise the return may be treated as incomplete. However, the report may accompany a revised or subsequent return. As held by report may accompany a revised or subsequent return. As held by the the Allahabad High Court in the case of CIT vs. Shri Baldeoji Allahabad High Court in the case of CIT vs. Shri Baldeoji Maharaj Trust (1983) 142 ITR 584, Maharaj Trust (1983) 142 ITR 584, not enclosing the report not enclosing the report alongwith the return filed under section 139(4A) is an omission, alongwith the return filed under section 139(4A) is an omission, which entitles an assessee to file a revised return under section which entitles an assessee to file a revised return under section 139(5).139(5).

In case the report has remained to be filed along with the return In case the report has remained to be filed along with the return through oversight, it can be submitted at any time before the through oversight, it can be submitted at any time before the completion of assessment. In the case of completion of assessment. In the case of CIT vs. Rai Bahadur CIT vs. Rai Bahadur Bissesswarlal Motilal Malwasie Trust (1992) 195 ITR 825, Bissesswarlal Motilal Malwasie Trust (1992) 195 ITR 825, the the Calcutta High Court has affirmed this view, holding that the Calcutta High Court has affirmed this view, holding that the requirement of filing the audit report with the return is merely a requirement of filing the audit report with the return is merely a procedural requirement, and that exemption cannot be denied so procedural requirement, and that exemption cannot be denied so long as the report is available to the assessing officer before the long as the report is available to the assessing officer before the completion of assessment.completion of assessment.

Condonation of delay for filling of Condonation of delay for filling of application for registration application for registration

Before 01.06.2007, Commissioner has power to Before 01.06.2007, Commissioner has power to condone the delay in filing of application for condone the delay in filing of application for registration.registration.

However, an application for registration made However, an application for registration made after 01.06.2007, the provisions of section11 after 01.06.2007, the provisions of section11 and 12 shall apply in relation to income of such and 12 shall apply in relation to income of such trust or institute from the assessment year trust or institute from the assessment year immediately following the financial year in which immediately following the financial year in which such application is made. [Sec. 12A(2)]such application is made. [Sec. 12A(2)]

Section 12AA Section 12AA Procedure for registration of TrustProcedure for registration of Trust

1.1. On receipt of application for registration, Commissioner shall call for On receipt of application for registration, Commissioner shall call for such documents or information from the trust/institution as he thinks such documents or information from the trust/institution as he thinks necessary and may also make such inquires as he may deem necessary and may also make such inquires as he may deem necessary. necessary.

2.2. On being satisfied about the genuineness of the activities of the On being satisfied about the genuineness of the activities of the trust/institution, he shall grant the registration. In case, he is not trust/institution, he shall grant the registration. In case, he is not satisfied, he may refuse to grant such registration after giving a satisfied, he may refuse to grant such registration after giving a reasonable opportunity of being heard.reasonable opportunity of being heard.

3.3. Every order granting or refusing registration shall be passed within Every order granting or refusing registration shall be passed within 6 months from the end of the month in which application is made.6 months from the end of the month in which application is made.

At the stage of granting registration, the Commissioner is not to At the stage of granting registration, the Commissioner is not to examine the application of income. All that he may examine is examine the application of income. All that he may examine is whether the application is made in accordance with the requirement whether the application is made in accordance with the requirement of Section 12A read with rule 17A and whether Form No. 10A has of Section 12A read with rule 17A and whether Form No. 10A has been properly filled up. He may also see whether the objects of the been properly filled up. He may also see whether the objects of the trust are charitable or not. At this stage, it is not proper to examine trust are charitable or not. At this stage, it is not proper to examine the application of income. [the application of income. [Fifth Generation Education Society v Fifth Generation Education Society v CIT 185 ITR 634 (All.)]CIT 185 ITR 634 (All.)]

Incomes entitiled for Incomes entitiled for Exemption u/s. 11 & 12 Exemption u/s. 11 & 12

1.1. Income in the form of voluntary contributions towards the corpus of the Income in the form of voluntary contributions towards the corpus of the trust.trust.

2.2. Income derived from property held under trust (including voluntary Income derived from property held under trust (including voluntary contributions other than those made towards the corpus received by a contributions other than those made towards the corpus received by a wholly charitable or religious trust ) is exempt to the extent it is applied wholly charitable or religious trust ) is exempt to the extent it is applied to charitable or religious purposes or is accumulated or set apart for to charitable or religious purposes or is accumulated or set apart for application to such purposes, subject to certain conditions & limits.application to such purposes, subject to certain conditions & limits.

3.3. Income being profits and gains of an eligible business, that is, business Income being profits and gains of an eligible business, that is, business which is incidental to the attainment of the objects of the trust and which is incidental to the attainment of the objects of the trust and separate books of account are maintained in respect thereof and separate books of account are maintained in respect thereof and income of the said business is applied to charitable or religious income of the said business is applied to charitable or religious purposes or is accumulated or set apart for application to such purposes or is accumulated or set apart for application to such purposes, subject to certain conditions & limits.purposes, subject to certain conditions & limits.

4.4. Income being capital gains arising on transfer of a capital asset, where Income being capital gains arising on transfer of a capital asset, where the sale consideration is utilized in acquisition of another capital asset.the sale consideration is utilized in acquisition of another capital asset.The The Supreme Court in the case of Gangabai Charities v. CIT (1992) Supreme Court in the case of Gangabai Charities v. CIT (1992) 197 ITR 416197 ITR 416 held that the crux of the statutory exemption under section held that the crux of the statutory exemption under section 11(1)(a) of the Act is not the income earned from property held under 11(1)(a) of the Act is not the income earned from property held under trust but the actual application of the said income for religious and trust but the actual application of the said income for religious and charitable purposes.charitable purposes.

Application of Income :Application of Income : Under the provisions of section 11(1)(a), income from Under the provisions of section 11(1)(a), income from

property held under trust for religious or charitable purposes is property held under trust for religious or charitable purposes is exempt to the extent to which the income so accumulated or exempt to the extent to which the income so accumulated or set apart is not exceeding 15% of the income from property set apart is not exceeding 15% of the income from property held under trust and it is held under trust and it is applied applied for such purposes in for such purposes in India.India.

It is not correct to equate the word “applied” as used in It is not correct to equate the word “applied” as used in section 11 with the word “spent”. For instance, if the section 11 with the word “spent”. For instance, if the charitable trust debits its accounts as soon as it passes charitable trust debits its accounts as soon as it passes resolutions sanctioning donations to various donees and such resolutions sanctioning donations to various donees and such amounts, as are outstanding, are shown as liabilities in the amounts, as are outstanding, are shown as liabilities in the balance sheet (this will happen when in certain cases the balance sheet (this will happen when in certain cases the amounts, though sanctioned and debited as expenditure in amounts, though sanctioned and debited as expenditure in one accounting year, are actually disbursed in the next year) one accounting year, are actually disbursed in the next year) the amounts which are sanctioned but not actually spent in the amounts which are sanctioned but not actually spent in the relevant accounting year will constitute application of the relevant accounting year will constitute application of funds for charitable purpose with the meaning of section 11(1)funds for charitable purpose with the meaning of section 11(1)(a). (a). [CIT vs. Trustees of H. E. H. the Nizam’s Charitable [CIT vs. Trustees of H. E. H. the Nizam’s Charitable Trust [1981] 131 ITR 497 (AP)]Trust [1981] 131 ITR 497 (AP)]

Expenditure considered as Expenditure considered as application of income :application of income :

1.1. Administrative ExpensesAdministrative Expenses : It is not only the direct expenditure : It is not only the direct expenditure on objects like scholarships or medical relief which is to be on objects like scholarships or medical relief which is to be considered, but all other expenses incurred in fulfilling the considered, but all other expenses incurred in fulfilling the objects of the trust viz. rent, rates and taxes, establishment objects of the trust viz. rent, rates and taxes, establishment expenses, interest etc., as without incurring such expenses, it expenses, interest etc., as without incurring such expenses, it may not be possible for the trust to function.may not be possible for the trust to function.

2.2. Capital ExpenditureCapital Expenditure : All capital expenditure laid out in : All capital expenditure laid out in furtherance of the objects and purposes of the Trust will be furtherance of the objects and purposes of the Trust will be treated as application of income. The application of the treated as application of income. The application of the income of a trust can be for a revenue or capital purpose as income of a trust can be for a revenue or capital purpose as long as the expenditure is incurred on the objects of the trust. long as the expenditure is incurred on the objects of the trust. However, capital expenditure incurred for acquiring assets, However, capital expenditure incurred for acquiring assets, not in furtherance of the objects, but for enhancing the not in furtherance of the objects, but for enhancing the income, it is in reality an investment, and acquisition of such income, it is in reality an investment, and acquisition of such an asset cannot be regarded as an application of income for an asset cannot be regarded as an application of income for charitable or religious purposes.charitable or religious purposes.

Expenditure considered as Application of Income : Expenditure considered as Application of Income : (Contd..)(Contd..)

Repayment of loansRepayment of loans : Repayment of loans taken to fulfil : Repayment of loans taken to fulfil one of the object of trust is treated as an application of one of the object of trust is treated as an application of income for charitable purpose.income for charitable purpose.

Payment of taxesPayment of taxes : The expenditure incurred by way of : The expenditure incurred by way of payment of tax out of the current year’s income has to payment of tax out of the current year’s income has to be considered as application for charitable purposes. be considered as application for charitable purposes.

Donation to other trustsDonation to other trusts : When a donor trust which is : When a donor trust which is itself a charitable and religious trust donates its income itself a charitable and religious trust donates its income to another trust, the donor trust can be said to have to another trust, the donor trust can be said to have applied its income for religious and charitable purposes. applied its income for religious and charitable purposes. Utilisation by the donee trust in any year would not be Utilisation by the donee trust in any year would not be relevant for the purpose of deciding whether the donor relevant for the purpose of deciding whether the donor trust can exemption u/s. 11 or not – trust can exemption u/s. 11 or not – CIT v. Sarladevi CIT v. Sarladevi Sarabhai Trust (No. 2) [1988] 172 ITR 698 (Guj.), CIT Sarabhai Trust (No. 2) [1988] 172 ITR 698 (Guj.), CIT v. Thanthi Trust [1999] 239 ITR 502 (SC).v. Thanthi Trust [1999] 239 ITR 502 (SC).

Expenditure considered as Application of Income : Expenditure considered as Application of Income : (Contd..)(Contd..)

DepreciationDepreciation : Depreciation on assets of a trust is to be : Depreciation on assets of a trust is to be deducted for the purpose of calculating income of a deducted for the purpose of calculating income of a trust. This is because of the fact that the concept of trust. This is because of the fact that the concept of commercial income necessarily envisages deduction of commercial income necessarily envisages deduction of depreciation on assets of the trust.depreciation on assets of the trust.

CIT v. Framjee Cawasjee Institute (1993)109CTR 463CIT v. Framjee Cawasjee Institute (1993)109CTR 463, , CIT v. Seth Manilal Ranchhoddas Vishram Bhavan CIT v. Seth Manilal Ranchhoddas Vishram Bhavan

Trust [1992] 105 CTR (Guj.) 303.Trust [1992] 105 CTR (Guj.) 303. Bombay High Court in the case of Bombay High Court in the case of CIT v. Institute of CIT v. Institute of

Banking Personnel Selection (2003) 185 CTR 492Banking Personnel Selection (2003) 185 CTR 492 held that depreciation is allowable on the assets, even held that depreciation is allowable on the assets, even though, the cost of which has been fully allowed as though, the cost of which has been fully allowed as application of income u/s. 11 in past years.application of income u/s. 11 in past years.

Deedmed Application of IncomeDeedmed Application of Income As per Clause (2) of Explanation to Section 11(1), where the As per Clause (2) of Explanation to Section 11(1), where the

income applied to charitable or religious purposes falls short of income applied to charitable or religious purposes falls short of 85% of the income derived during the previous year because – 85% of the income derived during the previous year because –

I.I. the whole or any part of the income has not been received the whole or any part of the income has not been received during the previous year; orduring the previous year; or

II.II. for any other reasonfor any other reasonthe assessee has an option to :the assessee has an option to :

(a)(a) apply such income [referred in clause(i)] for such purposes apply such income [referred in clause(i)] for such purposes during the previous year in which it is received or during the during the previous year in which it is received or during the previous year next following the said previous year; andprevious year next following the said previous year; and

(b)(b) apply such income [referred in clause(ii)] for such purposes apply such income [referred in clause(ii)] for such purposes during the previous year next following the previous year in during the previous year next following the previous year in which the income was derived.which the income was derived.

The option is to be exercised in writing within the time The option is to be exercised in writing within the time allowed for filing return of income u/s. 139(1).allowed for filing return of income u/s. 139(1).

Deemed Application of Income : (Contd…)Deemed Application of Income : (Contd…) If the option is exercised by the assessee/trust, the If the option is exercised by the assessee/trust, the

income is regulated in the following manner :income is regulated in the following manner :1.1. such income shall be deemed to have been applied to such income shall be deemed to have been applied to

charitable or religious purposes in the previous year in charitable or religious purposes in the previous year in which it is derived;which it is derived;

2.2. such income shall not be taken into account for such income shall not be taken into account for computing the income applied to such purposes in the computing the income applied to such purposes in the year it is actually applied;year it is actually applied;

3.3. if such income, or any part thereof, is not applied to if such income, or any part thereof, is not applied to such purposes within the prescribed period aforesaid, such purposes within the prescribed period aforesaid, such income, or such part, shall be deemed to be such income, or such part, shall be deemed to be income for the previous year immediately following the income for the previous year immediately following the previous year in which the income was received or previous year in which the income was received or derived, as the case may be.derived, as the case may be.

Accumulation of Income Accumulation of Income If a trust/institution for any reason cannot utilize its income wholly If a trust/institution for any reason cannot utilize its income wholly

or partially, or wants to accumulate its income for some project or or partially, or wants to accumulate its income for some project or scheme, it can obtain exemption under section 11(2) by scheme, it can obtain exemption under section 11(2) by accumulating the income subject to the following conditions :accumulating the income subject to the following conditions :

1.1. The trustee must apply in Form No. 10 as per Rule 17 to the The trustee must apply in Form No. 10 as per Rule 17 to the Income-tax Officer for permission to accumulate the income, Income-tax Officer for permission to accumulate the income, stating the purpose and period of accumulation, which shall, in stating the purpose and period of accumulation, which shall, in no case, exceed 5 years. The notice once given need not be no case, exceed 5 years. The notice once given need not be given every year during the period of accumulation. A separate given every year during the period of accumulation. A separate notice may also be given for the surplus of each year, though the notice may also be given for the surplus of each year, though the purpose may be same.purpose may be same.

2.2. Section 11(2)(b) provides that the money so accumulated should Section 11(2)(b) provides that the money so accumulated should be invested or deposited in any mode or form prescribed under be invested or deposited in any mode or form prescribed under section 11(5), as in the case of investments of other funds.section 11(5), as in the case of investments of other funds.

3.3. The time limit for filing Form No. 10 is the same time limit as for The time limit for filing Form No. 10 is the same time limit as for filing return under section 139(1). This time limit is prescribed in filing return under section 139(1). This time limit is prescribed in Rule 17. The time limit for making investments is not laid down Rule 17. The time limit for making investments is not laid down either in the Act or the rules, but Form No. 10 contains a either in the Act or the rules, but Form No. 10 contains a declaration that the amount accumulated has been or will be declaration that the amount accumulated has been or will be invested within six months of the end of the previous year.invested within six months of the end of the previous year.

Accumulation of Income : (Contd…)Accumulation of Income : (Contd…)

Though Rule 17 states that Form No. 10 Though Rule 17 states that Form No. 10 should be filed before the expiry of the time should be filed before the expiry of the time limit u/s. 139(1), the limit u/s. 139(1), the Bombay High Court in Bombay High Court in the case of CIT vs. Nagpur Hotel Owners the case of CIT vs. Nagpur Hotel Owners Association (1994) 209 ITR 441 Association (1994) 209 ITR 441 had held that had held that this rule is beyond the scope of the section this rule is beyond the scope of the section and that the application for accumulation can and that the application for accumulation can be made even after completion of be made even after completion of assessment, at the stage when the matter is assessment, at the stage when the matter is pending before the Tribunal. The matter went pending before the Tribunal. The matter went up to the Supreme Court and it was held at up to the Supreme Court and it was held at 247 ITR 201 and 165 CTR 1 247 ITR 201 and 165 CTR 1 that Form No. 10 that Form No. 10 must be filed with the assessing officer before must be filed with the assessing officer before completion of the assessment proceedings.completion of the assessment proceedings.

Section 12 : Income from Section 12 : Income from contributionscontributions

Any voluntary contributions received by a trust created Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an wholly for charitable or religious purposes or by an institution established wholly for such purposes (not institution established wholly for such purposes (not being contributions made with a specific direction that being contributions made with a specific direction that they shall form part of the corpus of the trust or they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be institution) shall for the purposes of section 11 be deemed to be income derived from property held deemed to be income derived from property held under trust wholly for charitable or religious purposes under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall and the provisions of that section and section 13 shall apply accordingly.apply accordingly.

The term “voluntary contributions” has been defined in The term “voluntary contributions” has been defined in section 2(24)(iia) of the Income-tax Act. section 2(24)(iia) of the Income-tax Act.

However, any contributions received with a specific However, any contributions received with a specific direction that they shall form part of the corpus of the direction that they shall form part of the corpus of the trust or institution shall not be income of the trust or trust or institution shall not be income of the trust or institution. The term corpus has not been defined in institution. The term corpus has not been defined in the Income-tax Act. Various dictionary meaning says the Income-tax Act. Various dictionary meaning says that it is capital.that it is capital.

Income from Contribution : (Contd…)Income from Contribution : (Contd…)

Section 11(1)(d) grants exemption to donations made Section 11(1)(d) grants exemption to donations made with a specific direction that they shall form part of the with a specific direction that they shall form part of the corpus, but the benefit of this section is available only corpus, but the benefit of this section is available only to trusts enjoying the benefit of exemption under to trusts enjoying the benefit of exemption under section 11. If a trust loses exemption under section section 11. If a trust loses exemption under section 11, corpus donations would be taxable as income.11, corpus donations would be taxable as income.

In order to prove that a donation is towards the In order to prove that a donation is towards the corpus of a trust, it would be advisable to obtain a corpus of a trust, it would be advisable to obtain a specific letter from the donor mentioning clearly specific letter from the donor mentioning clearly that the donation is given towards the corpus of that the donation is given towards the corpus of the trust and that only the interest arising on the the trust and that only the interest arising on the investment of the corpus donation is to be utilized investment of the corpus donation is to be utilized for the objects of the trust.for the objects of the trust.

Income in commercial Income in commercial sense :sense : For the purpose of determining the income of the trust eligible for For the purpose of determining the income of the trust eligible for

exemption u/s. 11, the income arising from property held under trust exemption u/s. 11, the income arising from property held under trust constitutes the income of the trust. It will mean income from property, constitutes the income of the trust. It will mean income from property, business, dividends, interest on securities or other interest. It will also business, dividends, interest on securities or other interest. It will also include donations received by the trust, by virtue of the provisions of include donations received by the trust, by virtue of the provisions of section 12. In other words, the income for the purpose of section 11 is section 12. In other words, the income for the purpose of section 11 is the income as per the accounts of the trust. It means the income in the the income as per the accounts of the trust. It means the income in the commercial sense, without reference to the heads of income specified in commercial sense, without reference to the heads of income specified in section 14, i.e., the book income and not total income as defined in section 14, i.e., the book income and not total income as defined in section 2(45), ‘being the total amount of the income ………… computed section 2(45), ‘being the total amount of the income ………… computed in the manner laid down in the Act’.in the manner laid down in the Act’.

The total income as per section 2(45), being artificially computed The total income as per section 2(45), being artificially computed income, will normally differ from the actual income of the trust, but so income, will normally differ from the actual income of the trust, but so long as the trust has utilized its actual income, it will not be liable to tax, long as the trust has utilized its actual income, it will not be liable to tax, irrespective of the position of the total income. If it has not utilized part of irrespective of the position of the total income. If it has not utilized part of the actual income, the balance, after accumulation of 15 per cent under the actual income, the balance, after accumulation of 15 per cent under section 11(1)(a) and any additional amount under section 11(2), will be section 11(1)(a) and any additional amount under section 11(2), will be liable to tax.liable to tax.

Capital Gain :Capital Gain : Income by way of capital gain is also to be computed as per Income by way of capital gain is also to be computed as per

commercial principles in case of a charitable trust. Section commercial principles in case of a charitable trust. Section 11(1A) deals with the computation of capital gains and provides 11(1A) deals with the computation of capital gains and provides that if the entire sale proceeds are utilized for acquisition of that if the entire sale proceeds are utilized for acquisition of another capital asset, then the capital gains shall be deemed to another capital asset, then the capital gains shall be deemed to have been applied for the objects of the trust. In case only part of have been applied for the objects of the trust. In case only part of the sale proceeds are reinvested, the excess of the investment the sale proceeds are reinvested, the excess of the investment over the cost of the transferred asset is deemed to be applied for over the cost of the transferred asset is deemed to be applied for charitable purposes and qualifies for exemption.charitable purposes and qualifies for exemption.

Though the time limit for re-investement is not mention in Section Though the time limit for re-investement is not mention in Section 11(1A), it should be within the same year or the next year, as per 11(1A), it should be within the same year or the next year, as per the Explanation to section 11(1). The Calcutta High Court, in the the Explanation to section 11(1). The Calcutta High Court, in the case of CIT vs. East India Charitable Trust (1996) 206 ITR 152 case of CIT vs. East India Charitable Trust (1996) 206 ITR 152 has confirmed this view, on the ground that the term “income” has confirmed this view, on the ground that the term “income” includes capital gains, and therefore it is possible to exercise the includes capital gains, and therefore it is possible to exercise the option of spending income in subsequent year for investment of option of spending income in subsequent year for investment of the capital gains as well.the capital gains as well.

Business Income :Business Income : There is no prohibition on a charitable trust carrying on a There is no prohibition on a charitable trust carrying on a

business. A charitable trust can be settled in relation to any business. A charitable trust can be settled in relation to any property including a business undertaking. The income from such property including a business undertaking. The income from such business shall also qualify for exemption provided the other business shall also qualify for exemption provided the other conditions of section 11 and 12 are fulfilled.conditions of section 11 and 12 are fulfilled.

The income of such business shall be determined in accordance The income of such business shall be determined in accordance with provisions of the Act. Where the income from such business with provisions of the Act. Where the income from such business as determined by the Assessing Officer is found to be in excess as determined by the Assessing Officer is found to be in excess of the income shown in the accounts, then such excess shall be of the income shown in the accounts, then such excess shall be deemed to have been applied to non-charitable or non-religious deemed to have been applied to non-charitable or non-religious purposes and such excess income shall not qualify for exemption purposes and such excess income shall not qualify for exemption u/s. 11. [Section 11(4)] u/s. 11. [Section 11(4)]

Section 11(4A) provides that the business income of any Section 11(4A) provides that the business income of any Trust/Institution will not qualify for exemption unless the business Trust/Institution will not qualify for exemption unless the business it carries on is incidental to the attainment of the objectives of the it carries on is incidental to the attainment of the objectives of the Trust/Institution and separate books of accounts are maintain Trust/Institution and separate books of accounts are maintain with respect to such business.with respect to such business.

Forfeiture of Exemption Forfeiture of Exemption (Section 13)(Section 13)

The exemption will not be available u/s. 11 & 12 in the following The exemption will not be available u/s. 11 & 12 in the following circumstances:circumstances:

1.1. If the trust is a private religious trust which does not enure for the If the trust is a private religious trust which does not enure for the benefit of the public.benefit of the public.

2.2. In the case of a Charitable Trust created after 01.04.1962, it In the case of a Charitable Trust created after 01.04.1962, it should not be for the benefit of any particular religious community should not be for the benefit of any particular religious community or caste, unless it is a trust for the benefit of scheduled castes, or caste, unless it is a trust for the benefit of scheduled castes, backward classes, scheduled tribes or women and children, as backward classes, scheduled tribes or women and children, as provided by Explanation 2 to section 13.provided by Explanation 2 to section 13.

3.3. In the case of a Trust or Institution set up for Charitable or In the case of a Trust or Institution set up for Charitable or Religious purposes after 31st March, 1962 if :Religious purposes after 31st March, 1962 if :(i)(i) under the terms of the Trust or rules of the Institution any under the terms of the Trust or rules of the Institution any part part of its income enures directly or indirectly for the benefit of of its income enures directly or indirectly for the benefit of

certain ‘excluded’ persons specified in section 13(3)certain ‘excluded’ persons specified in section 13(3)(ii)(ii) in fact, any part of the income or property is used or in fact, any part of the income or property is used or applied applied directly or indirectly for the benefit of any such excluded directly or indirectly for the benefit of any such excluded person.person.

Forfeiture of Exemption : (Contd…)Forfeiture of Exemption : (Contd…)

Section 13(2) specifies the following categories of Section 13(2) specifies the following categories of transactions which would be deemed to be the use transactions which would be deemed to be the use or application of the income or property of the Trust or application of the income or property of the Trust for the benefit of the excluded persons :for the benefit of the excluded persons :

a)a) Lending any part of the income or property of the Lending any part of the income or property of the Trust to ‘excluded’ persons without adequate Trust to ‘excluded’ persons without adequate security or adequate interest or both. It may be noted security or adequate interest or both. It may be noted that both rate of interest and security must be that both rate of interest and security must be adequate.adequate.

b.b. Making available any land, building or other property Making available any land, building or other property of the Trust for the use of ‘excluded’ persons without of the Trust for the use of ‘excluded’ persons without adequate rent or compensation.adequate rent or compensation.

c.c. Payment of excessive remuneration to the ‘excluded’ Payment of excessive remuneration to the ‘excluded’ persons for service rendered to the Trust.persons for service rendered to the Trust.

d.d. Making available services of the Trust to such Making available services of the Trust to such persons without adequate remuneration or persons without adequate remuneration or compensation.compensation.

Forfeiture of Exemption : (Contd…)Forfeiture of Exemption : (Contd…)

Purchasing any shares, securities or other properties Purchasing any shares, securities or other properties for the Trust from such persons for more than for the Trust from such persons for more than adequate consideration.adequate consideration.

Selling any shares, securities or other properties of Selling any shares, securities or other properties of the Trust to such persons for less than adequate the Trust to such persons for less than adequate consideration.consideration.

Diverting any income or property of the Trust in Diverting any income or property of the Trust in excess of Rs. 1,000/- to such persons.excess of Rs. 1,000/- to such persons.

Investing any funds of the Trust in any Investing any funds of the Trust in any concern in which such person has a concern in which such person has a substantial interest, provided such investment substantial interest, provided such investment is made or continues to remain so invested on is made or continues to remain so invested on or after 1st January, 1971.or after 1st January, 1971.

Forfeiture of Exemption : (Contd…)Forfeiture of Exemption : (Contd…)

Section 13(3) specifies the following categories of Section 13(3) specifies the following categories of “excluded “persons :“excluded “persons :

a)a) the author of the trust or founder of the Institution,the author of the trust or founder of the Institution,

b)b) the person who has made substantial contribution to the person who has made substantial contribution to the trust,the trust,

c)c) where the author, founder or substantial contributor where the author, founder or substantial contributor is a HUF, a member of the family,is a HUF, a member of the family,

d)d) any trustee of the trust or manager of the institution,any trustee of the trust or manager of the institution,

e)e) any relative of the persons mentioned in (a) to (d) any relative of the persons mentioned in (a) to (d) above,above,

f)f) any concern in which any of the aforesaid persons any concern in which any of the aforesaid persons has substantial interest.has substantial interest.

Assessable StatusAssessable Status A Charitable trust would become liable to tax if it has A Charitable trust would become liable to tax if it has

not utilized 85% of its income on its objects nor not utilized 85% of its income on its objects nor applied for accumulation. Similarly the trust would be applied for accumulation. Similarly the trust would be liable to tax if it has forfeited exemption on account liable to tax if it has forfeited exemption on account of violation of the conditions laid down in section 13.of violation of the conditions laid down in section 13.

Explanation to section 2(31) w.e.f 01.04.2002 Explanation to section 2(31) w.e.f 01.04.2002 relevant to A. Y. 2002-03 and subsequent year relevant to A. Y. 2002-03 and subsequent year provides that an association of persons or a body of provides that an association of persons or a body of individuals or a local authority or an artificial juridical individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or person shall be deemed to be a person, whether or not such person or body or authority or juridical not such person or body or authority or juridical person was formed or established or incorporated person was formed or established or incorporated with the object of deriving income, profit or gains.with the object of deriving income, profit or gains.

After the amendment made by the Finance Act, After the amendment made by the Finance Act, 2002, effective from 2002-2003, the status will be 2002, effective from 2002-2003, the status will be that of AOP. that of AOP.

Levy of tax at maximum marginal rate in Levy of tax at maximum marginal rate in case of public charitable and religious trustscase of public charitable and religious trusts

Charitable or religious trusts, which may otherwise Charitable or religious trusts, which may otherwise be eligible for tax exemption, are liable to forfeit this be eligible for tax exemption, are liable to forfeit this exemption in the following circumstances, namely:exemption in the following circumstances, namely:

1.1. Where the trust is created after 31.03.1962, any part Where the trust is created after 31.03.1962, any part of the income of the trust enures, under the terms of of the income of the trust enures, under the terms of the trust deed, directly or indirectly, for the benefit of the trust deed, directly or indirectly, for the benefit of specified categories of persons.specified categories of persons.

2.2. Any part of the income or any property of the trust Any part of the income or any property of the trust (whenever created) is used or applied during the (whenever created) is used or applied during the relevant year, directly or indirectly, for the benefit of relevant year, directly or indirectly, for the benefit of specified categories of persons.specified categories of persons.

3.3. The trust funds (with certain exceptions) are invested The trust funds (with certain exceptions) are invested in contravention of the investment pattern of such in contravention of the investment pattern of such funds.funds.

Levy of tax at maximum marginal rate in Levy of tax at maximum marginal rate in case of public charitable and religious trustscase of public charitable and religious trusts

Where a charitable or religious trust forfeits tax Where a charitable or religious trust forfeits tax exemption in the circumstances mentioned above, exemption in the circumstances mentioned above, the trust shall be charged to tax at the maximum the trust shall be charged to tax at the maximum marginal rate.marginal rate.

However, a trust will attract the maximum marginal However, a trust will attract the maximum marginal rate of tax only on that part of income which has rate of tax only on that part of income which has forfeited exemption under the above circumstances forfeited exemption under the above circumstances and not on the entire income of the trust. and not on the entire income of the trust. - DIT - DIT (Exemption) vs. Sheth Mafatlal Gagalbhai (Exemption) vs. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 114 Taxman 19 (Bom.)Foundation Trust [2001] 114 Taxman 19 (Bom.)

Broad Outline of the Scheme of Broad Outline of the Scheme of TaxationTaxation

The method of computing the income of a charitable trust is The method of computing the income of a charitable trust is quite different from that followed in case of other assesses, in quite different from that followed in case of other assesses, in that, it is the commercial concept of income which is to be that, it is the commercial concept of income which is to be considered and not the income as computed under the various considered and not the income as computed under the various heads of income as specified in section 14. In other words, the heads of income as specified in section 14. In other words, the income for the purpose of section 11 is the income as per the income for the purpose of section 11 is the income as per the accounts of the trust. It means the income in the commercial accounts of the trust. It means the income in the commercial sense, without reference to the heads of income specified in sense, without reference to the heads of income specified in section 14, i.e., the book income and not total income as section 14, i.e., the book income and not total income as defined in section 2(45).defined in section 2(45).

In computing the income of the trust, the income arising from In computing the income of the trust, the income arising from property held under trust for public charitable or religious property held under trust for public charitable or religious purposes is to be first computed and thereafter, the amount purposes is to be first computed and thereafter, the amount applied for charitable purpose is determined.applied for charitable purpose is determined.

Under certain circumstances the income of the trust can be Under certain circumstances the income of the trust can be applied for charitable purposes in the subsequent year. The applied for charitable purposes in the subsequent year. The trust is also permitted to accumulate its income for a longer trust is also permitted to accumulate its income for a longer period under section 11(2) by filing a prescribed form (Form period under section 11(2) by filing a prescribed form (Form No. 10) with the assessing officer. The form must mention the No. 10) with the assessing officer. The form must mention the purpose and the period of accumulation, which shall, in no purpose and the period of accumulation, which shall, in no case, exceed five years.case, exceed five years.

Carry Forward of DeficitCarry Forward of Deficit There are no specific provisions for carry forward of deficit. There are no specific provisions for carry forward of deficit. The Court have also held that if a trust has incurred a The Court have also held that if a trust has incurred a

deficit during a particular year, then the surplus made by deficit during a particular year, then the surplus made by it in a subsequent year to make up for the past deficit it in a subsequent year to make up for the past deficit should be allowed to be set off against such deficit. CIT should be allowed to be set off against such deficit. CIT vs Maharana of Mewar Charitable Foundation 164 ITR vs Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj.), CIT vs. Shri Plot Swetambar Murti Pujak Jain 439 (Raj.), CIT vs. Shri Plot Swetambar Murti Pujak Jain Mandal, 211 ITR 293 (Guj.), CIT vs. Matriseava Trust 242 Mandal, 211 ITR 293 (Guj.), CIT vs. Matriseava Trust 242 ITR 20 (Mad.), Govindu Naicker Estate vs. ADIT 248 ITR ITR 20 (Mad.), Govindu Naicker Estate vs. ADIT 248 ITR 368 (Mad) and CIT vs. Institute of Banking 264 ITR 114 368 (Mad) and CIT vs. Institute of Banking 264 ITR 114 (Bom.).(Bom.).

The Court have taken the view that there are no words of The Court have taken the view that there are no words of limitation in section 11 of the Income-tax Act requiring limitation in section 11 of the Income-tax Act requiring that the income should have been applied for charitable that the income should have been applied for charitable or religious purposes only in the year in which the income or religious purposes only in the year in which the income has arisen. It has also been held that income derived has arisen. It has also been held that income derived from trust property is to be determined on commercial from trust property is to be determined on commercial principles and the application of such commercial principles and the application of such commercial principles also warrants the conclusion that the principles also warrants the conclusion that the expenditure incurred in an earlier year can be set off expenditure incurred in an earlier year can be set off against the income of the subsequent year.against the income of the subsequent year.

Debateable issue :Debateable issue : Income-tax Refund :Income-tax Refund :

Whether income-tax refund should be taken as part of the Whether income-tax refund should be taken as part of the income of the trust based on the principles of commercial income of the trust based on the principles of commercial income or can it be argued that refund of tax can never be income or can it be argued that refund of tax can never be considered in computation of income?considered in computation of income?

Dividend & Income from Mutual Funds :Dividend & Income from Mutual Funds :

Dividend & income from mutual funds are exempt from tax u/s. Dividend & income from mutual funds are exempt from tax u/s. 10. The question that needs to be debated is whether, in the 10. The question that needs to be debated is whether, in the context of charitable trust, the same is to be excluded in context of charitable trust, the same is to be excluded in computing the income of the trust or is the same required to be computing the income of the trust or is the same required to be included by following the concept of real income.included by following the concept of real income.

Depreciation :Depreciation :Whether Depreciation is allowable in light of the decision of the Whether Depreciation is allowable in light of the decision of the Supreme Court in the case of Escorts Ltd. vs. Union of India Supreme Court in the case of Escorts Ltd. vs. Union of India 199 ITR 43, wherein it was held that double deduction cannot 199 ITR 43, wherein it was held that double deduction cannot be presumed, unless specifically provided for by the law.be presumed, unless specifically provided for by the law.

Debateable Issue : (Contd…)Debateable Issue : (Contd…)

Carry forward of deficit :Carry forward of deficit : How many years the trust can carry forward deficit ?How many years the trust can carry forward deficit ?

Order granting or refusing for registration of the trust :Order granting or refusing for registration of the trust :Order granting or refusing for registration of the trust is not passed by Order granting or refusing for registration of the trust is not passed by the Commissioner within 6 months then what course of action is the Commissioner within 6 months then what course of action is available? Or can it be presumed to have been granted?available? Or can it be presumed to have been granted?

Capital Gain :Capital Gain :Whether the requirement of computing the income on the principles of Whether the requirement of computing the income on the principles of commercial income will preclude the trust from the benefit of commercial income will preclude the trust from the benefit of indexation contained in section 48 of the Income-tax Act.indexation contained in section 48 of the Income-tax Act.

Head of Income :Head of Income :Under which head of income , income of charitable trust is charged to Under which head of income , income of charitable trust is charged to tax?tax?