Charitable Trust: Know your Donor to avoid taxation as Anonymous Donation

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Charitable Trust: Know your Donor to avoid taxation as Anonymous Donation

 

The flow of unaccounted income or black money is regulated at multiple levels in the income tax law. The law for taxation of unexplained income and unexplained expenditure is already there in the Income tax Act-1961. Often, charitable institutions accept donations without maintaining a record of the names and addresses of the donors.

 

Even the channelization of unaccounted money to charitable trust for the noble cause is also regulated by providing for its taxation as an “Anonymous Donation” u/s 115BBC of the Income Tax Act-1961.  Let us know more about it:

 

Anonymous Donation:

The expression “anonymous donation” has been defined under section 115BBC(3) as under:

  1. It is a voluntary contribution received by the trust [as referred to in Section 2(24)(iia)].
  2. The person receiving such contribution does not maintain a record of:
    a) the identity indicating the name and address of the person making such contribution, and
    b) such other records as may be prescribed.(At present, no records are prescribed by the CBDT)

 

Taxation of Anonymous Donation:

Anonymous donations are taxable only to the extent such donation exceeds ₹ 1,00,000/- or 5% of total donations received by the trust, whichever is higher. In short, total donation up to Rs. 1 Lakh shall not be liable for taxation as anonymous donation. However, if the amount of aggregate donation is more than Rs. 1 Lakh but less than 5% of the total donation then such higher amount would not be treated as anonymous donation.

 

To avoid the rigour of income tax, the charitable trust must maintain the records & document with details of the donor. Alternatively, if the trust is receiving anonymous donations then it must ensure to keep a tab of the limits of RS. 1 Lakh or 5% as discussed above

 

Exclusion from taxation of Anonymous Donation U/s 115BBC:

Amount shall not be taxable as Anonymous Donation in the following cases:

  1. If the anonymous donation is received by a wholly religious institution, such donation shall not be taxable u/s 115BBC. In short, the anonymous donations received by wholly religious institutions shall remain exempt from tax. No amount can be taxed as anonymous donation in the case of Religious trust. [One may note that the religious trusts are also not eligible to be registered as an eligible entity for the purpose of section 80G.]
  2. Anonymous donations made to party charitable and partly religious purposes (i.e., hybrid trusts) shall be taxed only if it is for any university or other educational institution or any hospital or other medical institution run by them.
  3. Any university or other educational institution covered u/s 10(23C) (iiiab) wholly or substantially financed by the Government.
  4. Any hospital or other institution covered under section 10 (23C) (iiiac) wholly or substantially financed by the Government.The taxation provision of section 115BC can be summarized as under:-
S. No. Trust Receiving Anonymous Donation Tax treatment
1 Wholly religious entities Section 115BBC is not at all applicable
2 Partly religious and partly charitable entities If an anonymous donation is made to an educational or medical institution run by such an entity, such anonymous donation is taxable @30%. Any other anonymous donation is not subject to tax u/s 115BBC
3 Wholly charitable entities All anonymous donations are taxable @ 30 % subject to 5%or Rs. 1 Lakh limit as discussed above.

 

Whether anonymous donations (taxable portion) are subject to
conditions as to application and accumulation?

  1. Every trust registered U/s 12A for income tax exemption is required to apply 85% of its income for charitable purposes. The question arises as to whether this 85% application is also required for the amount treated as anonymous donation.
  2. One must note that new sub-section (7) has been added to Section 13 as a result of which amount taxed as anonymous donations shall not be subject to 85% application for charitable purposes. However, the exempted portion of anonymous donations (i.e., Rs 1 Lakh or 5%) shall be subject to the rule of 85% application for charitable purposes.

 

Anonymous donation and provisions of Section 68, 69 and 69A to 69C

Sections 68 to 69D provides for taxation of unexplained cash credits, money investment, expenditure etc. All such amounts are liable to be taxation U/s 115BBE @ 78%. There was a controversy as to whether section 68 to 69D can be invoked in the case of trusts which are eligible for deduction/exemption U/s 10(23C) or Section 11. In my view, with section 115BBC, all the controversies have been settled as a special & separate mechanism to deal with such amounts exists in the income tax law. The provisions of Sections 68 and 69 can be invoked only when the trust does not treat a particular receipt as income. However, in the case of charitable trust, if the anonymous donation is already shown as income, it may not be right for the Assessing Officer to invoke the provisions of 68 to 69D of the Income-tax Act. Delhi High Court in DIT (Exemption) v. Keshav Social and Charitable Foundation 278 ITR 152 (Delhi) has held that anonymity of the donors cannot lead to the inference that unaccounted money has been introduced. Section 68 had no application to the facts of the case because the assessee had disclosed the donations as a part of its income. Thus, there was full disclosure of its income and its application by the assessee. One may further note that the Hon’ble Supreme Court has in Laxmipat Singhania v. CIT 72 ITR 291 (SC), Jain Brothers 77 ITR 107 (SC) & various other cases have held that the same income cannot be taxed twice.

 

Cash Donation to the trust:

To regulate the bogus claim of deduction U/s 80G by way of donation to charitable Trust, it is now provided that the deduction U/s 80G  shall be allowed to the donor only if the donation of an amount exceeding Rs. 2,000/- is done by any mode other than cash.

 

Cash Receipt by the trust:

Trust cannot accept more than Rs. 2 Lakh of the cash from any person. Section 269ST of the Income Tax Act-1961 restrict a person from receiving Rs. 2 lakh or more in cash from a person
a) in aggregate in a day or
b) in respect of a single transaction or
c) in respect of transactions relating to one event or occasion from a person.

 

Conclusion:

Every year, radical changes are being carried out in the provision related to the taxation of charitable trust. Every trust needs to keep themselves updated while doing the noble task of charity so as to avoid the rigour of income tax provision.

 

 

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Charitable Trust: Know your Donor to avoid taxation as Anonymous Donation

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