Taxation of Charitable Trusts under Income tax

Taxation of Charitable Organisations

‘Charitable Purpose’ includes relief of the poor, education, medical relief and the advancement of any object of general public utility. [Section 2(15)]. The Finance Act (No. 2), 2009 has added two more limbs to the definition with retrospective effect from Assessment Year 2009-10 i.e. "preservation of environment (including watersheds, forest and wildlife) and preservation of monuments or places or objects of artistic or historic interest", thus taking such activities outside the term "advancement of any other object of general public utility". Where predominant object of the activity is to carry out charitable purpose, it would not lose its character of charitable purpose, merely because some profit arises from such activity. The Finance Act 2009, has amended the definition of ‘charitable purpose’ to provide that ‘advancement of any other object of general public utility’ will not be considered as ‘charitable purpose’ if it involves 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 or business for any fee, cess or other consideration irrespective of nature of use or application or retention of the income from such activity. A retrospective amendment is now made in the Finance Act, 2010 with effect from A.Y. 2009-10, to the effect that if the aggregate value of the receipts from such activities is not more than Rs .10,00,000 during the year, such purpose would still be a charitable. The monetary limit of Rs. 10,00,000 has now been enhanced to Rs. 25,00,000 (A.Y. 2012-13 i.e. w.e.f. 1st April, 2011). The effect of this amendment would therefore be that in a particular year, an object of the trust may be regarded as a charitable purpose, but in a subsequent year or an earlier year, it may not be so regarded depending upon the amount of receipts from such activity. Income of the Trust Income derived from property under trust subject to sections 60 to 63 wholly for charitable or religious purposes is exempt to the extent such income is applied on the objects of the trust in India, during the previous year. The trust must apply at least 85% of such income on the objects in such cases balance 15% will deemed to be accumulated for the purpose of charity and exempt. [Section 11(2)]. If the amount applied by the trust is less than 85%, the shortfall in application is not taxable in the following cases — Income is accumulated up to 5 years (10 years if income is accumulated before 1-4-2001) and the purpose of accumulation is specified to the AO in Form No. 10. If accumulated amount could not be applied due to order/ injunction of the court, such period will be excluded. The time limit for filing Form No. 10 is the same as time limit for filing return u/s 139(1) (Rule 17). However in the case of CIT vs. Nagpur Hotel Owners Association [247 ITR 201 SC] the Hon’ble Supreme Court has held that in the absence of reference to time limit in the section itself, such form can be submitted any time before the completion of assessment. 1.1 The income accumulated must be applied for the specified purpose within the period of accumulation as per application in Form 10. Till the accumulated amount is applied, it must be invested as specified in Section 11(5). This requirement of Section 11(5) is applicable also to those trusts who are claiming exemption under clauses (iv), (v), (vi) and (via) of Section 10(23C). From A.Y. 2003-04, if the accumulated income is credited/ paid to any trust registered u/s 12AA or referred to in sub-clause (iv), (v), (vi) or (via) of 10(23C), it shall not be treated as application of income. 1.2 In the case of dissolution of the trust, the AO may allow the application of income in the year in which it is dissolved by way of transfer of the accumulation to other trust registered u/s. 12 AA or institution referred to in Section 10(23C). [2nd proviso to Section 11(3A)]. 1.3 If there is violation of any of the conditions relating to accumulation of income, such income will be deemed to be income of the previous year in which the conditions are violated or the previous year immediately following the expiry of the period of accumulation. However, with the permission of the AO, u/s. 11(3A) accumulated amount, if could not be applied for the purpose during the specified period, can be applied on other objects of the trust as permitted by AO. 2. Where due to reason that whole or any part of the income has not been received during the year, the amount can be applied in the year of receipt or in the following year. However, intimation in writing must be sent to AO before the expiry of time allowed u/s. 139(1) for furnishing the return. In case the amount is not applied, it will be deemed to be the income of previous year immediately following year of receipt. [Explanation 2 to Section 11(1)]. If due to any other reason, income is not applied during the previous year, such income can be applied in the following previous year. However intimation in writing must be sent to AO before the expiry of time allowed u/s. 139(1) for furnishing the return. If such income is not applied, it shall be deemed to be the income of previous year immediately following the year in which such income was derived [Explanation 2 to Section 11(1)]. In the case of CIT vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom), the Bombay High Court held that income derived from the trust property is to be computed on commercial principles. Accordingly, adjustment of expenses incurred by the trust for charitable purpose in the earlier years against the income earned by the trust in the subsequent year will have to regard as application of income of the trust in the subsequent year. The High Court has also held that the depreciation debited in the books should be treated as expenditure for this purpose. The concept of commercial income necessarily envisages deduction of depreciation on assets of the Trust. Section 11 provides that the income of the trust is to be computed on commercial basis i.e. as per normal accounting principles. Normal Accounting principles clearly provide for deducting depreciation to arrive at income. In the case of CIT vs. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439, the Rajasthan High Court has considered the Circular dated 24th Jan, 1973 of CBDT where CBDT has considered the question to whether "where a trust incurs a debt for the purpose of the trust, the repayment of the debt would amount to an application of income for the purpose of trust." According to said circular, if the trust wants to spend more money on charitable and religious purpose, then, in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year & the repayment of the said loan amount of the income of the subsequent year would amount to application of income for charitable & religious purpose under section 11(1)(a) of the Act. Also in recent decision of 2009 in the case of DDIT (E) vs. Govindu Naicker Estate (Mad) 227 CTR 283 it was held that repayment of loan is to be treated as application under Section 11. Income can be applied by a trust outside of india with a specific permission from CBDT as follows: Charities established on or before 1-4-1952 for charitable purpose outside india Charities established after 1-4-1952 for international welfare in which India is interested. REGISTRATION The trust shall make an application to the Commissioner for registration u/s 12A in Form 10A within one year of creation of trust in such cases registration can be granted from the date of creation of trust. In case of delay, the registration could be granted from inception if Commissioner was satisfied with the reasons of delay. Otherwise, the registration would be granted from 1st day of financial year in which application is made. W.e.f. 1-6-2007 Commissioner’s power of condonation has now been withdrawn. Every order granting or rejecting registration has to be passed within 6 months from the end of the month in which application is made. The Commissioner can revoke the registration granted to the trust after giving an opportunity of being heard. The appeal against the order u/s 12AA can be made to Appellate Tribunal. The income of the following Institutions are exempt u/s 10. Sub-section Trust or Institution 10(23C)(i) The Prime Minister’s National Relief Fund 10(23C)(ii) The Prime Minister’s Fund (Promotion of Folk Art) 10(23C)(iii) The Prime Minister’s Aid to Students Fund 10(23C)(iiia) The National Foundation for Communal Harmony 10(23C)(iiiab) Educational Institution wholly or substantially financed by the Government 10(23C)(iiiac) Medical Institution wholly or substantially financed by the Government 10(23C)(iiiad) Educational Institution — Annual receipts do not exceed 1 crore rupees 10(23C)(iiiae) Medical Institution — Annual receipts do not exceed 1 crore rupees 10(23C)(iv)** Institution of National importance notified by the Govt. 10(23C)(v)** Trust or Institution notified by the Central Government as for charitable purposes 10(23C)(vi)** Educational Institution other than those mentioned in sub-clauses (iiiab) & (iiiad) and approved by prescribed Authority 10(23C)(via)** Medical Institution other than those mentioned in sub-clauses (iiiac) & (iiiae) and approved by prescribed Authority. ** Subject to the condition of application of income to the extent of 85% of the income. Further, Investment of the Accumulation has also to be in accordance with provisions of Section 11(5) of the Act. In respect of other institutions listed above, these conditions do not apply. Charities registered for Charitable purpose u/s 12A or u/s 10(23C) may apply for recognition u/s 80G(5). Charities shall be existing for charitable purpose and not for religious purpose. The charity shall be registered under general law governing charities such as Bombay Public Trust Act, 1950 or Society Registration Act, 1860 or Company’s Act, 1956 under section 25. Upon getting this recognition any donation paid to such charities will be eligible for deduction in the hands of the donor. Recognition u/s 80G(5) is governed by rule 11AA and such recognition could be granted upto a period of five years. This position of law has undergone change w.e.f. 1.10.2009. The registration valid and subsisting as on 1.10.2009 will continue to be so recognized in perpetuity. Commissioner of Income Tax has power to recall this recognition after giving opportunity of being heard to charity whose recognition is proposed to be withdrawn. CANCELLATION OF REGISTRATION Section 12AA(3) provides for cancellation of registration of a charitable trust, where the Commissioner is satisfied that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust. The Tribunal, in the case of Bharati Vidyapeeth vs. ITO 119 TTJ (Pune) 261, had held that his provision does not empower a commissioner to cancel registration granted under Section 12A before the insertion of Section 12AA. The ratio of this decision is being reversed, by extending the right to cancel registration even to trusts registered under Section 12A. Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard. This provision comes into effect from 1st June, 2010. AUDIT Where total income before the exemptions u/ss. 11 and 12 of the trust exceeds the maximum amount not chargeable to tax; i.e., Rs. 1,80,000 (A.Y. 2012-13) (w.e.f. 1/4/2011), in order to get exemption u/ss. 11 and 12, the accounts have to be audited by an accountant as defined in explanation below sub-section 2 of Section 288, who will give his report in Form 10B. If the income of the trust/institution referred to in clause (iv), (v), (vi) or (via) of Sec.10(23C) without giving effect to the provisions of these clauses exceeds the maximum amount not chargeable to tax, such trusts will have to get their accounts audited by the accountant as defined in Explanation below sub-section (2) of Section 288. (As provided in the Taxation (Amendment) Act, 2006) in form 10BB. INVESTMENTS All investments of the trust must be in forms and modes provided in Section 11(5), which are as under — Investment in Government savings certificates/other securities/certificates issued by the Central Government under Small Savings Scheme; Deposit in any account with the Post Office Saving Bank; Deposit in any account with a scheduled/co-operative society engaged in carrying on the business of banking (including co-operative land mortgage bank or a co-operative land development bank); Investment in units of the Unit Trust of India; Investment in any security of the Central/State Government; Investment in debentures whose principal and interest are fully and unconditionally guaranteed by Central/State Government; Investment or deposit in any public sector company (PSC); Shares of PSC may be retained for three years and other investments or deposits till its maturity or PSC ceases to be a PSC; Deposits with or investment in any bonds issued by an approved financial corporation which is engaged in providing, long-term finance for industrial development in India; a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India; Investment in immovable property; Deposit with the Industrial Development Bank of India; Any other prescribed form or mode of investment or deposit (Please refer Rule 17C). Units issued under any scheme of the mutual fund referred to in clause (23D) of Section 10 of the Income-tax Act, 1961; Any transfer of deposits to the Public Account of India; Deposits made with an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; Equity shares of a depository as defined in clause (e) of sub-section (1) of Section 2 of the Depositories Act, 1996 (22 of 1996). However, this provision will not apply to: Any asset held as part of the corpus as on 1-6-1973 and any accretion thereto by way of bonus shares. Any debentures acquired before 1-3-1983. If debentures acquired between 28-2-1983 and 25-7-1991, exemption is denied only in respect of income from such debentures, provided debentures are disinvested by 31-3-1992. If investment is in contravention of the above provisions, it can be brought in its conformity within a period of 1 (one) year from the end of the previous year. CORPUS DONATION Where a trust receives voluntary contributions (Act 2(24 (iia)) made with a specific direction that they will form part of the corpus, such donation will not be included in the total income of the trust. [Section 11(1)(d) r.w.s. 12]. BUSINESS INCOME Section 11(4A) provides that tax exemption will not apply in relation to any income of a trust being profits and gains of the business unless the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained by such trust in respect of such business. ICAI has expressed the view that running of hospital by a trust is a business activity. Therefore, if gross receipts from business exceeds Rs. 60 lakhs, the accounts should be audited u/s 44AB. CAPITAL GAINS Where a capital asset is transferred and entire net consideration is utilised to acquire a new capital asset, the whole of capital gains is deemed to have been applied for charitable/religious purposes. If part of the net consideration is used to acquire a new capital asset, then the capital gains equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset, will be deemed to have been applied for charitable/religious purposes [Section 11(1A)]. Also refer Instruction 883 dt. 24.9.1975. TDS The trust is required to deduct tax at source u/Chapter XVIIB as per the provisions of the Act. The trust is may obtain certificate from the AO u/s 197 so that it can receive income without deduction of tax at source. EXEMPTION U/S 11 NOT TO APPLY IN CERTAIN CASES (SECTION 13) Section 13(1)(a) — Trust for private religious purposes. Section 13(1)(b) — Trust established for the benefit of any particular religious community or caste. Section 13(1)(c) — Income of the trust is applied directly or indirectly for the benefit of persons referred to in sub-section (3). Section 13(1)(d) — Funds are invested otherwise than in any form or modes specified in 11(5). MISCELLANEOUS POINTS If whole or part of the relevant income is not exempt u/s 11 or 12 by virtue of provisions contained in clauses 13(1)(c) and (d), the tax will be charged at maximum marginal rate. [Proviso to Section 164]. New Section 115BBC — The anonymous donations as aforesaid will be taxed @ 30% (plus Surcharge and Education Cess), except in the following two situations: The trust or institution is established wholly for religious purposes; and If it is for both religious and charitable purposes, unless the donation is specifically for the educational or medical institution run by such trust. Anonymous donation means any voluntary contribution where a person receiving such donation does not maintain record of identity indicating the name and address of person making such contribution. Filing of return [Sec. 139(4A)] on or before 30th September. Filing of return by the institutions referred to in clauses 21, 22B, 23A, 23B, sub-clauses a and b of clause 24 of Section 10 and sub-clauses (iv), (v), (vi), (via) of clause 23C [Section 139(4C)]. Application for grant of approval or continuance thereof, wherever required in Section 10(23C), shall be filed by 30th September of the relevant assessment year for the assessment year from which exemption is sought (e.g. for A.Y. 2010-11, it should be filed on or before 30-9-2010, Finance Act ( No. 2) of 2009, with effect from 1-4-2009). The Taxation (Amendment) Act, 2006, has replaced the present system of obtaining approval periodically in case the annual receipts are more than Rs. 1 crore by a one-time approval u/s 10(23C). This approval shall be granted or rejected within a period of 12 months from the end of the month in which such application is received. Penalty of Rs. 100/- per day for failure to furnish return under sub-sections 4A and 4C of Section 139 [Section 272A(2)]. Similarly penalty of Rs 100 per day can be levied for delay in submitting Audit Report in Form 10B/10BB (272A)(2)(g) 13B [Electoral Trust]: The Finance Act (No. 2) of 2009 has recognized the concept of electoral trust for tax purposes. The salient features are approved by CBDT as per scheme notified by Central Government Donations received are exempt from tax if: 95% of donations received plus surplus brought forward earlier years is distributed to registered political parties. trust functions as per rules framed by Central Government. Any charitable trust, desirous of receiving any foreign contribution from a foreign source, is required to obtain registration u/s. 6(1) of Foreign Contribution (Regulation) Act, 1976 (FCRA). Any such association which is not registered or which has been denied registration, can receive foreign contribution only after obtaining prior permission from Home Ministry of the Central Government under Section 6(1A) of (FCRA) Act. IMPORTANT CIRCULARS OF CBDT Instruction 883 dt. 24-9-1975 – Fixed Deposit exceeding 6 months is also a capital asset. No. 5-P (LXX, 6) dt. 19-6-1968 — The income of the trust is to be computed in the commercial sense; i.e., "book income". Even when the trust derives income from property, or dividends, such income will be computed on actual commercial basis and not under provisions relating to income from house property or income from other sources. No. 100 dt. 24-1-1973 — The repayment of loans originally taken to fulfil any of the objects of the trust is also considered as an application. The loan given by an educational trust is also an application for charitable purpose. No. 566 dt. 17-7-1990 — Indira Vikas Patras and Kisan Vikas Patras are permitted investments u/s 11(5)(i).