No Charity by Income Tax Department for charitable trust: An overview of the tax provisions




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No Charity by Income Tax Department for charitable trust: An overview of the tax provisions

“My business is the enforcement of the tax laws and the integrity of the tax code and making sure that trustees of charitable giving are true trustees.”-Chuck Grassley

Indians are kind hearted persons who often believe in giving rather than taking. Charitable Trust is often a medium to serve the society in such cases. However, with instances of misuse of funds by trusts owned by some big names, the Government is very tightening the law to bring more transparency in the working of charitable trusts.

Trusts are considered as charitable under the Indian Income Tax Act – 1961 if its objects are for the benefit of the society at large and not for an individual or group of individuals. Section 2(15) of the Income Tax Act, 1961, defines the expression “charitable purpose” as under:

Section 2(15) :

“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;

However, though the object is noble, the treatment under the Income Tax Act is not very liberals. Txation of charitable trusts is governed by Chapter III of the Income Tax Act which contains sections 11, 12, 12A, 12AA and 13. It is section 12A/12AA/12AB which contains the provisions regarding the Registration of trust, its exemptions and other conditions / restrictions. Section 11 and 12 provides for the conditions to be fulfilled by the charitable trusts in order to claim exemption from income tax. Section 13 provides for the conditions stipulates the provisions which may result in denial of the exemption provided u/s 11 & 12. Let us see how the trusts are governed by stringent provisions:

  1. To get the benefit of deduction towards expenditure incurred (it is referred to as the “Application of Income”) for the noble cause, it is mandatory for the trust to get itself registered u/s 12A/12AA/12AB of the Income Tax Act – 1961.
  2. If the total income of the trust or institution, exceeds the basic exemption limit, that is, Rs.2, 50,000/- in any previous year then the books of accounts of the trust or institution is required to be audited by a qualified Chartered Accountant, and the audit report in Form No. 10B is required to be furnished electronically before filing the e-return of income. Further, the audit report is required to be furnished one month before the due date of filing income tax returns. If the audit report is not filed then also the benefit of deduction (i.e., application of money) is denied to the trusts.
  3. If the total income of the trust before allowing exemption under sections 11 and 12 exceeds the maximum amounts which is not chargeable to tax (i.e. Rs.2,50,000 as of now) then it is required to file the ITR in Form ITR-7 before the date specified in section 139(1). The due date specified under section 139 is 30th November every year where the trust is required to get its accounts audited under any provision of the Act / under provisions of any other Act and 31st July every year in other cases. If the return is not filed by prescribed date then the benefit of accumulation u/s 11(2) will not be available by virtue of section 13(9) as introduced w.e.f. 1.4.2016.
  4. Section 11(1) of the Income Tax lays down that any income, profits and gains derived from property held under trust wholly for religious and charitable purposes, (or held in part only for such purposes-in case of trust created before 1/4/1962) shall not be included in the total income of the trust or institution (including a society or any other legal obligation) to the extent such income is applied or accumulated for application to such purposes. The exemption is, allowable under specified circumstances, on fulfillment of certain conditions. In order to be eligible for claiming exemption, it is essential that the income of the trust is applied to such objects. A charitable trust or institution will have to apply at least 85 % of the income to charitable purposes. If the income spent on charitable or religious purposes, during the previous year, falls short of 85 % of the income derived during the year, such shortfall will be liable to tax. Voluntary contribution or donations (not being contributions made with a specific direction that they will form part of the the corpus) will be deemed to be a part of income derived from property held under trust.
  5. If 85% of income derived from trust property is not applied or is not deemed to have been applied for charitable purposes but it is accumulated or set apart for application for such purposes in India then exemption can be claimed for the income so accumulated or set apart in excess of 15% limit subject to the following conditions:
    (i) A statement in form No. 10B is required to be uploaded electronically within the time allowed for furnishing the return u/s 139(1). In this statement, the purpose for which the amount is sought to be accumulated as well as the period of accumulation is required to be mentioned. In case the form No. 10B is not uploaded before the specified date, the benefit of accumulation will not be available and such income will be taxable at appropriate rate.
    (ii) It may be noted that the period of accumulation does not exceed 5 years
    (iii) the money so accumulated is invested or deposited in modes or forms specified u/s 11(5).
    (iv) As discussed above, now the benefit of accumulation is not available if return of income is not furnished before due date of filing return as per Sec 139(1).
  6. It may be noted that the Charitable Trusts are allowed to carry forward their losses/deficits of the earlier years for set-off against their incomes of subsequent years. The issue of allowability of the claim of loss u/s 11 and carry forward of the same to subsequent years to be set off against incomes of subsequent years by the charitable trusts is no longer disputable and controversial. It has become “Res Intigra” by virtue of pronouncements of  the Hon’ble Supreme Court in the case of “CIT(Exemptions) vs. Subros Educational Society”(2018) 303 CTR 1 / 166 DTR 257 (SC) wherein the court has categorically dismissed the SLP being filed by the Revenue Authorities against the said judgement. In the said judgement the Hon’ble Supreme Court have categorically answered the following question of law in favour of assessee trust.
    The question involved was
    “Whether any excess expenditure incurred by the trust/charitable institution in earlier assessment year could be allowed to be set off against income of subsequent years by invoking Section 11 of the Income Tax Act, 1961?”

In short, in view of the binding judgement of the Hon’ble Supreme Court in the case of “CIT(Exemptions) vs. Subros Educational Society” (2018) 303 CTR 1 / 166 DTR 257 (SC), as above, the issue of allowability of the claim of loss u/s 11 and carry forward of the same to subsequent year to be set off against incomes of subsequent years by the charitable trusts, has attained finality in favour of charitable trusts assessees and as such from now onwards, there should not be any question of any disallowance in this regards, by the ld. Assessing Authority.

  • The corpus would include funds of a capital nature, by whatever name called, such as the Building Fund, as well as funds for capital expenditure of the trust. Any donation made for a capital purpose or with a direction that donation be kept intact and only the interest received on the investment of such donation be utilized for the objects of the trust, would be a donation towards the corpus of the trust. Corpus donations being capital receipt in the hands of the recipient trust are not income of the trust. Section 11(1)(d) expressly grants exemption to corpus donations Contributions to corpus fund kept in fixed deposit cannot be taxed as income even if corpus fund is misused -CIT v Sri Durga Nimishambha Trust [2012] 205 Taxman 59 (Mag) (Kar). Corpus Donations towards Corpus Funds are fully exempt and there is no requirement of stipulated criteria of application of at least 85% for such Corpus Donations [Sec 11(1)(d)]. Normally, Corpus donations refer to the donations made by a donor to a trust with a specific direction that they shall form part of the corpus of the recipient trust. The donor alone can give a specific direction that the donation made by him shall form part of the corpus of the trust. Trustees have no power to treat in their discretion any donation as corpus donation. Such direction may preferably be given by the donor in writing by a letter addressed to the trust. If he has not done so, trustees may request him to give such directions in writing. If any contribution is made with a specific direction, that it shall be treated as the capital of the trust for carrying out a particular charitable activity, it satisfies the definition part of the corpus. Corpus donations need not be applied to charitable purposes and these may be retained as forming part of the corpus of the trust without attracting any tax liability in the matter. The trustees must however utilize the income accruing from the corpus for charitable purposes of the trust.
  • There are the occasion which may result in withdrawal of Exemption granted to Income accumulated u/s 11(2). The income which is accumulated or set apart in accordance with the provision of Section 11(2), shall become taxable if-
    (a) It is applied to purpose other than charitable or religious purposes;
    (b) It ceases to remain invested in the specified form or modes of deposit; or
    (c) It is not utilized for charitable or religious purposes within the specified accumulation period (which shall not exceed 10 years/5 years in respect of income accumulated on or after 1.4.2001); or
    (d) It is paid or credited to any trust/institution registered u/s12AA or to any fund/institution/trust/university/other educational institution/hospital/any other medical institution referred to in clauses (iv), (v), (vi), and (via) of Section 10(23C).

 

In the aforesaid circumstances, the amount involved shall be deemed to be income of the previous year in which it is so misapplied or ceases to be so accumulated or ceases to remain invested or is credited or paid or the previous year immediately following the expiry of the specified accumulation period, as the case may be. [Sec 11(3)].

  1. It may be noted that there is no prohibition on a charitable trust carrying on a business. A charitable trust can be settled in relation to any property including a business undertaking. The income from such business shall also qualify for exemption provided the other conditions of sections11 and 12 are fulfilled.The income of such business shall be determined in accordance with the provisions of the Act. i.e Section 28 to 44 DB. Where the income from such business as determined by the Assessing Officer is found to be in excess of the income shown in the accounts, then such excess shall be deemed to have been applied to non-charitable or non-religious purposes and such excess income shall not qualify for exemption . As per sec 11(4) income of any business held in trust for charitable purpose shall be eligible for exemption. Further, any income of a trust being profits and gains of business, shall not qualify for exemption unless the business is incidental to the attainment of the objects of the trust and separate books of account are maintained in respect of such business as per Sec 11(4A). Hon’ble Supreme Court in the case of Asst. CIT vs. Thanthi Trust (2001) 247 ITR 785 (SC) has held that all that is required for the business income of a trust or institution to be exempt from tax is that the business should be incidental to the attainment of objective of the trust or institution. A business whose income is utilised by the trust or the institution for the purposes of achieving the objectives of the trust or the institution is a business which is incidental to the attainment of the objectives of the trust or institution.
  2. In case of trust, there is no concept of offering income under the head “Capital gain” as such. The amount of exemption in relation to capital gains arising on transfer of a capital asset of charitable trusts shall be different u/s 11(4A). Where the capital asset is held under trust wholly for charitable or religious purposes & if the whole of the net consideration is utilised for acquisition of a new capital asset, the entire capital gain shall be exempt; and
    if only a part of the net consideration is so utilized , the amount of capital gain exempt shall be equal to the Cost of Acquisition of the New Capital Asset as reduced by the cost of Capital Asset Transferred. While examining this question, the Board had clarified that investment of the net consideration in fixed deposit with a Bank for a period of 6 months or above would be regarded as utilization of the net consideration for acquisition of another capital asset within the meaning of section 11(1A) [Vide CBDT’s Instruction No:883 dated 24.9.1975. InCIT vs. East India Charitable Trust (1994) 2016 ITR 152, the Calcutta High Court has also held that in view of section 11(5)(vii), deposits with public sector companies, shall qualify as ‘new capital asset’ within the meaning of section 11(1A).

It may be very relevant here to point out that that the charitable trusts have an option to either claim specific exemption u/s 11(1A) in relation to the capital gains or to claim an exemption u/s 11(1)(a) by applying at least 85% of the total income including the sale proceeds of sold capital assets towards their charitable objectives.

  • There are some Trusts which may not eligible for exemption under Section 11 and 12, as under:
    (a) A trust for private religious purposes, which endures no public benefit: [Sec 13(1)(a)]
    (b) A charitable trust created or established on or after 1.4.1962 for the benefit of any particular religious community or caste [Sec 13(1)(b)] (other than scheduled castes/tribes, back-ward classes or women and children). (Explanation 2)
    (c) A trust or institution for charitable or religious purposes, if any part of its income or property is used or applied, or enure, directly or indirectly for the benefit of a person specified u/s 13(3) viz.(i) the author or founder of the trust ; (ii) a substantial contributor whose total contributions to the trust upto the end of the relevant previous year exceed Rs.50,000; (iii) where the author or contributor is an HUF, a member of the family; (iv) the trustee or manager of the trust; (v) any relative of such author, founder, contributor, member, trustee or manager; and (vi) any concern in which any of the persons aforesaid has a substantial interest. [Sec 13(1)(c)]
    (vii) When Application of Funds deemed to have been made for the benefit of specified Persons- [Sec 13(2)]     Applications of the trust-income or the trust-property for the following purposes is deemed to have been made for the benefit of specified persons.
    (a) If a loan is given to a specified person for any period during the previous year without either adequate security or adequate interest or both;
    (b) If any land, building or other property of the trust, is allowed to be utilized by a specified person, without charging adequate rent or other compensation:
    (c) If payment is made by way of salary, allowance, etc. to a specified person for services rendered by him to the trust or institution, in excess of what may be reasonably paid for such services;
    (d) If the trust renders its services to a specified person without adequate remuneration or other compensation; (Exception Medical/Educational Institution)
    (e) If any share, security or other property is transferred to the trust from a specified person, for a consideration which is more than adequate;
    (f) If any share, security or other property is transferred by the trust to a specified person, for inadequate consideration;
    (g) If any income or property of the trust, exceeding Rs. 1000 in value, is diverted to a specified person; and
    (h) If the trust-funds are invested, or remain invested, for any period in any concern wherein any of the specified persons has a substantial interest.[Sec 13(2)]
  • In order to ensure that the benefit conferred over the years to charitable trust is not misused, section 115TD is now inserted with effect from June 1, 2016. It provides for levy of additional income tax in case of conversion into, or merger with, any non- charitable form or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution.
    The accretion in income (accreted income) of the trust or institution shall be taxable on
    a) Conversion of trust or institution into a from not eligible for registration under section 12 AA ; or
    b) Merger into an entity not having similar objects and which is not registered under section 12 AA; or
    c) Non –distribution of assets on dissolution to any charitable institution registered under section 12AA or approved under section 10(23C) within a period of 12 months for dissolution.
    Deemed conversion – For the above purpose, a trust or institution shall be deemed to have been converted into any from (not eligible for registration under section 12 AA ) in a previous year, if-
    -The registration granted to it under section 12AA has been cancelled ; or
    -It has modified its objects and not applied for fresh registration (or fresh registration application has been rejected).
    Meaning of accreted income – Accreted income shall be amount of aggregate of fair market value of total assets as reduced by the liability as on the specified date (i.e., the date of conversion, merger or dissolution ). Mode of valuation to be notified.

    Exclusions from accreted income     – So much of the accreted income as is attributable to the following asset and liability, if any, related to such asset shall be ignored for the purpose of computation of accreted income –

 

1. Any asset which is established to have been directly acquired by the trust or institution out of agricultural income as is referred to in section 10 (1).
2. Any asset acquired by the trust/institution during the period beginning from the date of its creation and ending on the date from which the registration under section 12 AA became effective or deemed effective (however , this rule is valid only if the trust/ institution has not been allowed any benefit of sections 11 and 12 during the said period). “Deemed “ effective covers a case where due to first proviso to section 12 A (2) the benefit of section 11 and 12 have been allowed to the trust/ institution in respect of any previous year prior to the year of registration.

Further, the asset and the liability of the charitable organisation, which have been transferred to another charitable organisation within specified time, will be excluded while calculating accreted income.

Accreted income shall be taxable at the maximum marginal rate. This levy shall be in addition to any income chargeable to tax in the hands of the entity and this tax shall be final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it shall be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.

  1. Now, Section 139A is amended so as to provide that every person, being the trustee, author, founder, chief executive officer, principal officer or office-bearer or any person competent to act on behalf of such entities shall also apply to the Assessing Officer for allotment of PAN. This is done obviously to link the financial transactions with the natural persons.
  2. Section 11 provides for exemption in respect of income derived from property held under trust for charitable or religious purposes to the extent to which such income is applied or accumulated during the previous year for certain purposes in accordance with the relevant provisions. A new Explanation to the said section has been inserted so as to provide that for the purposes of determining the amount of application under clause (a) or clause (b) of sub-section (1) thereof, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.Non-deduction of tax at source would now attract disallowance in the hands of the charitable trust also. Thus, now trusts will be mandatorily required to deduct TDS as per provisions of Chapter XVII-B of the Act to claim expense as the application of Income. Else the same will be taxable in the hands of Trusts.
  3. Now, the provisions of section 40(3) and 40(3A) will be mutatis mutandis apply to the Trusts. Earlier, charitable trusts were availing benefits even in respect of the application of income by way of cash payments. This amendment is again in line with the dream of digital India and cashless economy.
    In short, payment exceeding Rs. 10,000 in cash will not be considered as the application of income and the same will be taxable in the hands of trusts.
  4. Restrictions are now imposed on cash donations by the donor on donation to the charitable trusts. If the donor wishes to claim deduction under section 80G, then the donation for an amount exceeding Rs. 2,000 is required to be done through account payee instruments only.
  5. There was no power to carry out a survey on charitable trust earlier. Now, the tax authorities conduct surveys under section 133A on trustees and places of activity for charitable purposes. The required amendment has been carried out in the Act to this effect.
  6. Section 35AC which allowed 100% tax deduction to individuals and companies making contributions to specific charitable organizations for specific schemes, shall no longer be available to donors starting April 1, 2017.




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