Taxation of Charitable Trust

TAXATION OF CHARITABLE TRUSTS:

1 TAXATION OF CHARITABLE TRUSTS Under the guidance of CA.CHANDRESH NAYAK Presented by MASHKOOR MURAD ABHISHEK BHARAT KUNDAN

Meaning of ‘Trust’:

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 trust agreement and local law. The entity (one or more individuals, a partnership or a corporation) that creates the trust is called the settlor . 2

“Public Trusts”:

“ Public Trusts” Public trusts are however governed by general law, though the principles forming the basis of the Indian Trusts Act 1882 can be applied in the case. It is a trust established for charitable purpose, must be for the benefit of public at large or a class of beneficiaries . Public trusts are an exception to the well settled rule that there is no valid trust unless the objects there of are specified . The trusts is not allowed to fail for uncertainty . 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. 3

“Private Trusts”:

“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 .Trust created by will does not require any stamp Private trusts are void for perpetuity 4

Who can form a Trust ?:

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 an association of persons , an institution , a limited company , a Hindu undivided family through it's karta , can also form a trust. It may, however, be noted that the Indian Trusts Act does not apply to public trusts which can be formed by any person under general law. Under the Hindu Law, any Hindu can create a Hindu endowment and under the Muslim law, any Muslim can create a public trust. Public Trusts are essentially of charitable or religious nature, and can be constituted by any person . 5

Taxability of a Public Trust at a glance:

Taxability of a Public Trust at a glance 6 Sources of Income Under Section Tax Rates Voluntary Contributions (being corpus donations) 11(1)(d) Exempt Income not applied / accumulated to the extent > 15% 11(1)(a) AOP Rate Income received on 31 st 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 Private Trust:

Taxability of Private Trust 7 Taxability 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

“Charitable purpose” :

“Charitable purpose” The definition of charitable purpose is sec2(15) inclusive The expression “object of general public utility”. Eg . Relief for poor, Education, Medical camp etc. A trust is not charitable, unless it benefits the community or a section of the community . A trust would not be charitable, if it only conferred private benefits . The owner have to show that his object are of general public utility and there is no involvement in activities for his own profit.

“ Religious Purpose “:

“ Religious Purpose “ The term religious purpose has not been defined in the Income-tax Act. ‘Religious Purposes’ are necessarily associated with religion. ‘Religious Purpose’ includes the advancement, support or propagation of religion or its tenets. A charitable trust created after 01.04.1962 would lose exemption if it is for the benefit of any particular religious community or caste. [Sec. 13(1)(a)]

Section 12A “Condition as to Registration”:

Section 12A “Condition as to Registration” There are two conditions for registration of trust have been provided, namely : An application to be made for registration in the prescribed form (Form 10A) and in the prescribed manner to the Commissioner of Income tax before 1st July 2010 However, an application for registration made after 01.06.2010 , the provisions of section11 and 12 shall apply in relation to income of such trust or institute from the assessment year . Where the total income of the trust or institution without giving effect to the provisions of section 11 & 12 exceeds 50,000/- in any previous year, the accounts of the trust or institution for that year has to be audited by a chartered accountant or any other accountant entitled to be appointed as an auditor of companies. The report of audit should be in Form No. 10B prescribed in the Income-tax Rules, 1962 and said audit report has to be furnished along with the return of income.

Section 12AA “Procedure for registration of Trust”:

Section 12AA “ Procedure for registration of Trust” On receipt of application for registration, Commissioner shall call for such documents or information from the trust/institution as he thinks necessary and also make such inquires as he may deem necessary. On being satisfied he shall grant the registration. In case, he is not satisfied, he may refuse to grant such registration. Every order granting or refusing registration shall be passed within 6 months from the end of the month in which application is made. At the stage of granting registration, the Commissioner is not to examine the application of income . All that he may examine is whether the application is made in accordance with the requirement 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 trust are charitable or not.

“Income of Trust exempted under Section 11”:

“Income of Trust exempted under Section 11” 12 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.

No exemption under Section 11 :

No exemption under Section 11 13 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 in respect 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).

“Accumulation of Income” :

“Accumulation of Income” If a trust/institution for any reason cannot utilize its income wholly or partially, or wants to accumulate its income for some project or scheme, it can obtain exemption under section 11(2) by accumulating the income subject to the following conditions The trustee must apply in Form No. 10 as per Rule 17 to the Income-tax Officer for permission to accumulate the income , stating the purpose and period of accumulation, which shall, in no case , exceed 5 years . Section 11(2)(b) provides that the money so accumulated should be invested or deposited in any mode or form prescribed under section 11(5). 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 Rule 17.

Section 12 : Income from contributions:

Section 12 : Income from contributions Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly . However, any contributions received with a specific direction that they shall form part of the corpus of the trust or institution shall not be income of the trust or institution

Slide 16:

Income from Contribution : (Contd…) Section 11(1)(d) grants exemption to donations made with a specific direction that they shall form part of the corpus , but the benefit of this section is available only to trusts enjoying the benefit of exemption under section 11 . If a trust loses exemption under section 11, corpus donations would be taxable as income. In order to prove that a donation is towards the corpus of a trust, it would be advisable to obtain a specific letter from the donor mentioning clearly that the donation is given towards the corpus of the trust and that only the interest arising on the investment of the corpus donation is to be utilized for the objects of the trust.

Income in commercial sense ::

Income in commercial sense : The income arising from property held under trust constitutes the income of the trust. It will mean income from property, business, dividends, interest on securities etc. It will also include donations received by the trust , by virtue of the provisions of section 12. The total income as per section 2(45), of the trust is its actual income, but so long as the trust has utilized its actual income, it will not be liable to tax, If it has not utilized part of 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 liable to tax.

Forfeiture of Exemption (Section 13):

Forfeiture of Exemption (Section 13) The exemption will not be available u/s. 11 & 12 in the following circumstances: If the trust is a private religious trust which does not ensure for the benefit of the public. In the case of a Charitable Trust created after 01.04.1962, it should not be for the benefit of any particular religious community or caste , unless it is a trust for the benefit of scheduled castes, backward classes, scheduled tribes or women and children . In the case of a Trust or Institution set up for Charitable or Religious purposes after 31st March, 1962 if : ( i ) under the terms of the Trust or rules of the Institution any part of its income enures directly or indirectly for the benefit of certain ‘excluded’ persons specified in section 13(3)

Slide 19:

Section 13(2):- specifies the following categories of transactions which would be deemed as the income or property of the Trust for the benefit of the excluded persons : Lending any part of the income or property of the Trust to ‘excluded’ persons without adequate security or adequate interest or both . It may be noted that both rate of interest and security must be adequate. Making available any land, building or other property of the Trust for the use of ‘excluded’ persons without adequate rent or compensation. Payment of excessive remuneration to the ‘excluded’ persons for service rendered to the Trust. Forfeiture of Exemption : (Contd…)

Slide 20:

Forfeiture of Exemption : (Contd…) Purchasing any shares, securities or other properties for the Trust from such persons for more than adequate consideration. Selling any shares, securities or other properties of the Trust to such persons for less than adequate consideration. Diverting any income or property of the Trust in excess of Rs. 1,000/- to such persons. Investing any funds of the Trust in any concern in which such person has a substantial interest.

Slide 21:

Forfeiture of Exemption : (Contd…) Section 13(3):- specifies the following categories of “excluded persons” :- The author of the trust or founder of the Institution. The person who has made substantial contribution to the trust. Where the author, founder or substantial contributor is a HUF, a member of the family, Any trustee of the trust or manager of the institution. Any concern in which any of the aforesaid persons has substantial interest.

Assessable Status:

Assessable Status A Charitable trust would become liable to tax if it has not utilized 85% of its income on its objects nor applied for accumulation. Similarly the trust would be liable to tax if it has forfeited exemption on account of violation of the conditions laid down in section 13. Explanation to section 2(31) w.e.f 01.04.2002 relevant to A. Y. 2002-03 and subsequent year provides that an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profit or gains. After the amendment made by the Finance Act, 2002, effective from 2002-2003, the status will be that of AOP.

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