Income Tax matters of Charitable Trust

MY THINKING

TAXATION OF UN-REGISTERED (UN-REGISTERED IN INCOME TAX) CHARITABLE TRUSTS AND 12AA REGISTERED CHARITABLE TRUST ON OR AFTER 01.04.2017.

Charitable purpose in the eye of Income Tax Act, 1961: According to section 2(15) of Income Tax Act,”charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

Source of earning of those trusts: Most of the cases these kind of trusts collect money as donations and by using the money, trusts organize various charitable activities like organizing of free health check up camps, distributing of blankets to poor etc. Now the question is income tax treatment of such donations and for understand that, we have to go through section 2(24)(iia) of the Income Tax Act. Section 2(24)(iia) says income includes voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust.

Explanation.For the purposes of this sub-clause, “trust” includes any other legal obligation ;

Chargeability of that type of Income generated from that types of donations as per Income tax Act:

In simple word, we can say, that kind of donations are just like the treatment of gift received in the form of money as received without consideration by the trust. In other sources of income as per newly introduced section 56(2)(x)(a) that kind of donations are chargable to Income tax if any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017, any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum. But Before 1st day of April, 2017, section 56(2)(vii) was in force and at that time as per section 56(2)(vii)(a), where an individual or a Hindu undivided family receive, in any previous year, from any person or persons any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum are chargable to income tax. We can clearly see that in section 56(2)(x)(a), use the words any person receives, in any previous year, from any person so Trust (AOP) are falling in that provision as according to section 2(31) Trust (AOP) is a person. So if the trust receive that kind of donation exceeding Rs. 50,000/- from one or more than one persons then the the whole of the aggregate value of such sum is considered as income in the head of Others Sources

Deductions from that income: As the income is not from the head of Income from business or profession, so no questions of deductions from section 30 to 37. We all know that in time of in time of income chargeable in section 28, deductions of 30 to 37 are subject matter but in that case our income chargeable to Other Sources According to Section 56 and for computing the chargeability, some deductions u/s 57 of income tax act is subject matter. Section 57(iii) is subject matter in our case. The language used in section 57(iii) is any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income; so clearly we can say that we can deduct only those amount which are subject matter for earning of those donations. Just like a little travelling expenses etc expenses made by trust for the purpose of collecting, earning that donations but if we watch the debit side of income and expenditure account of the trust, we can see various charitable activities are reflected in various heads of accounts just like free health check up camps, blankets distributions etc. so that kind of expenditures are not deductable u/s 57(iii).

Difficulties appear for not taking exemption u/s 12AA in income tax act
Actually that types of donations are used for doing various charitable activities and the expenses are occurred but as per IT law the disbursement is not deductable. As per GAAP, the expenditures of Income and expenditure Statement (Accounts) also not claimable in income tax in that cases.

Need For Taking Registration U/S 12AA For Taking Benefit Of Exemption Of And Facilities U/S 11 And 12 As Application Of Income (Including Deemed Application)

Now for claiming exemption according to section 11 and 12 the trust must have to apply for registration u/s 12AA of the IT act. And form 10A have to submit online with required documents and statements and after taking hearing notice from Principal Chief Commissioner or Commissioner, the trust have to prove that its activity going on according to section 2(15) and the trust need proper clauses like irrationality, true and fair dissulation clause etc for granting the exemption. Now after getting registration effect, the trust can claim the incomes and take facility of exemption according to section 11 and 12 though some criteria’s are subject matter including criteria’s of section 13 for claiming exemption. Trusts have to apply 85% of its income (capital expenditure payment, repayment of principal amount of loan used for charitable or religious purpose also eligible for application along with revenue expenditure payment) as section 11(1)(a) says, income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property and that 15% is not a part of total income income of the previous year. If 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 and as per section 11(1)(d) that is also not a part of total income of the trust received that contribution from donor. [ Be careful, Now, any trust having 12AA regd. can not enjoy exemption of income according to section 11(1)(a) or 11(1)(b) for any donation made to another 12AA regd trust as Corpus donation so it is very clear that for that transaction of donation, government can not give duel benefit I mean donor trust taking application of income, exemption u/s 11(1)(a) or 11(1)(b) and receiver trust also not declare it as its income according to section 11(1)(d).] Now the deemed application provision which is applicable only 12AA regd. (Sec 10(23C) do not give that facility) trust if in any previous year, application of income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be for many reasons like Income taken place but realization of money from that income not taken place at that time, the trust can apply that income by using deemed application process according to section 11(2) and have to full fill some criteria for that. As per section 11(1A) capital gain is subject to not a part of total income after fulfilling the given criterias. Now if a trust not applied 85% of its income or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but accumulated or set apart either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income as per section 11(2) and some critaria’s have to maintain for that just like the money have to deposited or invested according to the provisions u/s 11(5). Presently section 11(1)(a) and 11(1)(b) have liability to maintain limit of section 40(a)(ia), section 40(3) and section 40(3A) although application u/s 11(1)(a) and 11(1)(b) not like business transactions but have to apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession” w.e.f. 01.04.2019.

Business activities (if applicable) applicability and income : Section 11(4) and 11(4A) talks about it. As per section 11(4) “property held under trust” includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes. And according to section 11(4A), if 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, then the income may attract as application for charity or religious purpose in India or deemed application as per applicability. Now definition of charitable purpose as per section 2(15) have some activities and for saying as charitable purpose and business activities covered in advancement of any other object of general public utility Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

Not Applicability of Exemptions of Income In Section 11 according to section 13: Some criteria’s are given in section 13 for refusing the benefit of section 11 and 12. Just like if any part of the income from the property held under a trust for private religious purposes which does not enure for the benefit of the public.

If any part of income or any property of the trust used or applied directly or indirectly for the benefit of the

a) the author of the trust,

b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees,

c) where such author, founder or person is a Hindu undivided family, a member of the family

cc) any trustee of the trust or manager (by whatever name called) of the institution

d) any relative of any such author, founder, person, member, trustee or manager as aforesaid

e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest

According to section 13 there are many others provisions also for denying exemption of income u/s 11.

Need apply 12AA for trusts and take facility according to law:

No Action Taken by A.O. u/s 147 for previously pending assessment in some cases where the trust getting 12AA registration.

Return of Income provisions of 12AA registered Trust: According to section 139(4A) of income tax act, that kind of Trusts have to file return of Income through ITR-7. Be careful new sub clause that is (ba) in sub section (1) of section 12A was introduced and now according to that sub clause, all conditions of section 11 and 12 will consider within the time allowed under section 139(4A) so that kind of cases, must have to file return of income within time prescribed u/s 139(1) otherwise no effect of section 11 and 12 was given to that trust.

Audit of Book of Accounts for 12AA registered Trust: According to the section 12A(1)(b), if a the total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year, the accounts of the trust or institution for that year have been audited by an accountant and have to have to file audit report that is Form No.-10B duly signed and verified along with return of Income.

Cancellation of 12AA Registration: According to section section 12AA(3) Principal Commissioner or Commissioner shall pass an order in writing cancelling the registration of such trust for non genuineness of activities and activities not being done according to the objects of the trust but before cancelling, assessee have to given opportunity for hearing and according to section 12AA(4), Principal Commissioner or Commissioner may pass an order in writing cancelling the registration of such trust for provisions regarding section 13 but if the trust show the reasonable ground then the registration shall not be cancelled.

Tax On Accreted Income Of Certain Trusts And Institutions: Very careful point of 12AA regd trusts are now covered under section 115TD for sudden cases, So in time of 1) conversation of any non elegable for 12AA form and for that, cancellation of 12AA regd also treated as non elegable for 12AA form, 2) merged with other entity having no 12AA regd and having no similar objects and 3) in time of dissolution fail to transfer all assets o any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, within a period of twelve months from the end of the month in which the dissolution takes place then additional income tax have to pay at maximum marginal rate on accreted income.

IT IS VERY SMALL PRESENTATION. PLEASE READ SECTION 11, 12 AND 13 VERY CAREFULLY AND TAKE THE RIGHT JUDGEMENT ACCORDING TO THE LAW.

**The write up is just like a them presentation, all cases depends on total case studies.

Mridul (Mrinal Kanti Das).
B.Com(Honours).
Sr. Accounts And Taxation Manager
S. K. Sinha Ray & Co.
Advocate And Tax Consultant.
[email protected]