Taxation of Charitable & Religious Trust: Concept, Confusions & Clarifications

Charitable Trust, Religious trust, Non Grant Organization (NGO), Non Profit Organisation (NPO) etc are all not for profit organizations which are governed by special provision under the Income Tax Act – 1961.

It needs to be distinguished from the normal provisions as applicable to other assessee. There are a lot of mistakes which are committed by the tax professionals while filing income tax returns of the trust. Let us try to know few common errors in the ITR of the Charitable Trust (wherever charitable trust is mentioned, it may be read so as to include religious trust, NGO, NPO, Societies etc).

1. The biggest confusion in the case of charitable trust lies as to the availability of basic exemption limit & the rate of Income Tax. Many professionals believe that charitable trusts are liable for taxation at 30% tax plus surcharge/ cess. It is an admitted fact that the trust is liable to be assessed as “Association of Person”. Part I of the First schedule to the Annual Finance Act prescribes the rate of taxes at which different persons will be liable to pay taxes. Here clause (I) of the first schedule prescribes AOP to be taxed as same as on the basis of individual.Confusion arises when one refers to section 167-B. One may note that section 167-B is applicable in the case of AOP & so few professionals form an opinion that since Trust or institutions are liable to be assessed as AOP, section 167B is applicable. This is not true.

   Section 167B will not apply in case of charitable trust for the following reasons:
   (i) Section 167B provides exclusions to Companies and societies registered under societies registration Act, 1980 or any other similar legislation.
   (ii) The logic of providing different rates in section 167B is based on the presumption of determination of share of individual members. In case of charitable trust, there is no surplus or income which is belonging to any of the members & liable for distribution.

   In short, charitable trusts are subject to tax at the rate applicable to individual assessee. This is subject to few exceptions provided in section 13(1) of Income Tax Act, 1961 in which case income is subject to maximum marginal rate;
   (i) Income for private religious purpose – U/s 13(1)(a)
   (ii) Income for the benefit of particular religious community U/s 13(1)(b)
   (iii) Income for the benefit of persons specified in section 13(3) U/s 13(1)(c)
   (iv) Funds not invested in accordance with the mode prescribed in section 11(5) U/s 13(1)(d)
   (v) Anonymous donation U/s 115.

   Except in 5 situations discussed above, Charitable Trust are liable to income tax at the rate applicable to individual assessee subject to stipulations of sections 11 or 12 of 10(23C).

2. The concept of income is different for regular assessee vis a vis charitable trust. For regular assessee, the surplus or net profit is treated as “Income” whereas in case of trust, the gross receipt is treated as “income” and not surplus (i.e., excess of income over expenditure) of the income and expenditure a/c.

It must be noted that section 2(24) of Income Tax Act defines Income. U/s 2(24)(iia), Income includes “ Voluntary contribution received by a trust created wholly or partly for charitable or religious purposes or by an institution establishes wholly or partly for such purposes or by an association or institution referred to in clause (21) or (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”.

In short, it’s entire voluntary contribution received is liable to be treated as “income” without deduction towards any allowance or expenses.

Even income received in the form of voluntary contribution is the part of “Income from Other sources” against which deduction permissible is only under section 57 towards “any expense laid out or expended wholly and exclusively for the purpose of making or earning such income and should not be in the nature of capital expenditure”.

It is reasonable to say that in case of trust, the expenses are not for earning donation. That’s why the terminology used in section 11/12 is “application of income” and not expenditure.

3. Another important question which emerges is whether regular expenses like salary, electricity, etc can be treated as “application of income”. It may be noted that Calcutta High court in the case of CIT Vs Birla Janhit Trust (1994) 208 ITR 372(Cal)” has held that “Expenditure on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust must be considered as application of Income” In short, while determining whether a particular expense is application of income or not due regard should be given to the nexus of expenditure with the objects of institution. Both either direct or indirect expense will be treated as application of income if it is incurred for the purpose of carrying out the object and purposes of the trust or institution i.e. Charitable or religious activities.

4. Some Educational institutions, hospitals, etc are eligible for full exemptions by virtue of various clauses and sub clauses of section 10(23C)of income Tax Act, 1961. This are as under:(i) University or educational institution existing solely for the educational purposes and not for the profit purpose, substantially financed by government – sub clause (iiiab)

   (ii) Hospital or other institution for the reception and treatment of illness and mental defectiveness and not existing for the purpose of profit, substantially financed by government – Sub clause (iiiac)

   (iii) University or educational institutions and hospitals or other similar institutions not substantially financed by the government but the total receipt not exceeding Rs. 1 Cr – Sub clause (iiiad) and (iiiae)

   (iv) University or educational institutions and hospitals or other similar institutions not substantially financed by the government but the total receipt exceeding Rs. 1 Cr – sub clause (vi) and (via).

   It may be noted that institutions covered from (i) to (iii) are not required to obtain approval from the income tax department to avail exemption. However, institutions referred to (iv) are required to obtain approval from the Income Tax department in Form 56D, in terms of rule 2CA of Income Tax Rules, 1962.

5. The concept of provisional registration and permanent registration is now introduced by the Finance Act – 2020. Now, every new trust will not be required to get the provisional registration first and permanent registration thereafter. There was no such concept earlier.

6. Another important confusion is with regard to Audit reports in form 10B in case of unregistered institutions. It may be noted that for claiming exemption under section 11 and 12 of income tax Act, 1961 charitable trusts are mandatorily required to get their accounts audited if the total income without giving effects to provisions of section 11 and 12 exceed the maximum amount not chargeable to tax. In such cases, an audit report in form 10B is required to be uploaded. If charitable trust is not registered u/s 12AB then the benefit of application of money u/s 11 & 12 is not at all available. Resultantly, such trusts are required to obtain an audit report in form 10B. Even if such trust wish to get their books audited, it may not be in Form No. 10B since 10B is a statutory format for Income Tax Act for a specified purpose as mentioned as heading of form 10B which reads as under:
   “Audit Report under section 12A (b) of the Income Tax Act, 1961, in the case of charitable or religious trusts or institutions. In short, Form No. 10B is not applicable in case of unregistered trust.
7. Capital Gain in the case of Trust:
   As far as capital gains is concerned, there is a special provision contained in section 11(1A) which provides exemption on the basis of extent of sale consideration utilized for acquisition of another capital asset to be applied for the same purposes for which former asset was being used. In short, the normal provisions of indexation, exemptions are not available in such cases.
8. Even charitable trust can also carry out the business. U/s 11(4) of Income Tax Act, 1961 “property held under trust” includes Business Undertaking also. U/s 11(4A) exemption under sec 11 is available to a trust or institution in respect of the profit and gains of the business if
   a) The business is incidental to the attainment of objectives of the trust or institution and
   b) Separate books of accounts are maintained by such trust or institution in respect of such business.
   Further, U/s 2(15), 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.

With above discussion, one can reasonably conclude that even the charitable trust can carry out the business to achieve its objectives.