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Query No. 1: (Wakf and Religious Endowment)
Please throw some light on “Muslim Wakfs” and “Religious Endowments under the Hindu Law” as one of the charitable purpose as there are no judicial decisions covering the said topic that have come to our notice.
Answer
Mulla’s Mohammedan Law defines Wakf as “Wakf means the permanent deduction by a person professing the Mussalman faith of any property for any purpose recognised by the Mussalman Law as religious, pious or charitable.”
Mohmmedan Law realises “religious, pious or charitable” purposes for a valid Wakf. The following have been held to be valid objects:
1. Mosques and provisions for imams to conduct worship therein;
2. Educational institutions;
3. Aqueducts, bridges and care caravansaries;
4. Distribution of alms to poor persons and assistance to poor to enable them to perform the pilgrimage to Mecca;
5. Celebrating the birth of Ali Murtaza;
6. Facilitating religious rites in the month of Muharram, and provisions for camel and duldul for religious of immambaras;
7. Repairs of immambaras;
8. The maintenance of a Khankah;
9. Celebrating death anniversaries (barsi) of the settler and the members of his family;
10. Performance of ceremonies known as Kadam Sharif;
11. Burning lamps in mosques;
12. Reading the Koran in public places and also at private houses;
13. Performance of annual fateha of the settler and of the members of his family. The ceremony of fateha consists in the recital of prayers for the welfare of the souls of deceased persons, accompanied with distribution of alms to the poor;
14. The construction of a robat or free boarding house for pilgrims of Mecca,
15. Maintenance of poor relations and dependents;
16. Payment of money to fakirs i.e. poor;
17. Grant to an Idgah;
18. A durgah or shrine of a pir which has long been held in veneration by the public.
Similarly, endowment is the dedication of property by gift or device to religious or charitable uses. An endowment has to be certain both to the subject and the object. A dedication of property to an endowment may be partial or complete when the property is dedicated absolutely and no person has any beneficial interest therein.
A religious endowment is one which has for its object the establishment, maintenance or worship of an idol or deity or any object or purpose subservient to religion. A charitable endowment is one which has for its object the benefit of the public or a mankind.
Query No. 2: [Difference between Explanation to Sections 11(2) and 11(3)]
What is the difference between the explanation given under Sections 11(2) and 11(3)?.
Answer
Explanation below Section 11(2) provides that any amount paid or credited out of income from property held under wholly charitable trust or partly charitable trust which is not applied but accumulated or set apart to any trust or institution or to any fund either during the period of accumulation or thereafter shall not be treated as application of income for charitable or religious purposes. Thus, payment to other trusts and institutions out of income from property held under trust in the year of receipt will continue to be treated as application of income. However, any such payment out of accumulated income shall not be treated as application of income and will be taxed.
While Section 11(3) provides that if in any year the income which is accumulated for the specified purpose or purposes of the trust is applied to purposes other than charitable or religious purpose or ceases to be accumulated or set apart for such application to such purposes, it will become chargeable to tax as the income of that year. Further, if in any year, the accumulations cease to remain invested in Government securities or other approved securities or deposited in any account in the Post Office Savings Bank or with a banking company, co-operative bank etc.; or with a financial corporation, then also the income so accumulated will become chargeable to tax as income of that year. It further provides that if accumulations are not utilised for the specified purposes during the period of accumulation or in the year immediately following the expiry of that period, then, the accumulations to that extent they are not so utilised, shall be chargeable to tax as income of the previous year immediately following the expiry of that period.
Query No. 3: (Benefit of indexation to Charitable Trust)
Section 11(IA) is not meant for calculation of capital gains tax but is to operate after capital gains are worked in accordance with the provisions of Sections 45 to 55
[Akhara Ghamanda Dass v. Asstt CIT [68 TTJ 244 (Asr)]
In the light of above, whether a charitable trust will get the benefit of indexation?
Answer
Yes, Explanation (ii) to this sub-section provides that “cost of the transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of Sections 48 and 49) of the capital asset which is subject to transfer and cost of any improvement there with the meaning assigned to that expression in Section 55(1)(b) of the Act.
Further, second proviso to Section 48 provides that where long term capital gain arisens from the transfer of a long term capital asset, other than capital gains arising to non-resident from the transfer of shares in, or debentures of an Indian company referred to in the first proviso, the provision of clause (ii) [i.e. the cot of acquisition of the asset and the cost of improvement thereto] shall have effect as if for the words “cost of acquisition” and cost of any improvement the words “indexed cost of acquisition” and “indexed cost of any improvement had respectively been substituted.
Thus reading the above, it is clear that capital gains has to be calculated by the assessee including trust as Per provisions of Section 45 to 55 of the Income tax Act, 1961. This is also supported in para 14 of
Akhara Ghamanda Das v. ACIT [114 Taxman 27 (Asr)], which reads as under:
“In fact this section is to operate after capital gains are worked in accordance with Chapter E of the IT Act. This gives an additional benefit to the appellant, if, he has to make a claim that income arising out of capital gains is to be exempted under section 11(1) then he has to fulfil various conditions mentioned in section (1A).”
Query No. 4: (Taxability of Charitable Trust in case exemption is forfeited)
In case of violation of Section 13(1)(c) or 13(1)(d) what are the repercussions and how the tax is calculated in above situations as there is some confusion in that?
Answer
Section 164(2) of the Income-tax Act, 1961 provides that in case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, tax shall be charged on so much of the relevant income as is not exempt under Section 11, as if the relevant income not so exempt were the income of an association of persons.
Proviso to the said sub-section provides that in case where the whole or any part of the relevant is not exempt under section 11 by virtue the provisions contained in clause (c) or clause (d) of Section 13(1), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate.
The CBDT vide circular No. 387 dated July 06, 1984 has clarified the legal position as regards the taxability of the income of a charitable or religious trust forfeiting exemption by virtue of the investments made not in conformity with the prescribed pattern under Section 13(1)(d) or the income being spent on any of the persons excluded under Section 13(1)(c) of the Income tax Act. The CBDT has interpreted the proviso to Section 164(2) and Section 164(3) to mean that, in the case of trusts contravening the provisions of Section 13(1)(c) and (d) “the maximum rate of income tax will apply to that part of the income of which has forfeited the exemption under the said provisions.”
Query No. 5: (No threshold limit if exemption is forfeited)
If a Section 25 company is registered as charitable trust whether threshold limits of
₹ 2,50,000/- will be available to the company as charitable trusts are assessed as AOP? Similarly what will be the threshold limit applicable in case a society is registered as charitable trust?
Answer
Income derived by charitable or religious trust is exempt from tax to the extent to which such income is applied to charitable or religious purposes or is accumulated or set apart, in accordance with the provisions of Income-tax Act, for application to such purpose.
Charitable or religious trust loses the exemption if any part of the income or any property of the trust is used or applied during the relevant year, directly or indirectly for the benefit of specific categories of persons or trust fund is invested in contravention of the investment pattern for such funds as laid down under the Act.
If the whole or any part of the income of a charitable or religious trust is not eligible for exemption in the circumstances mentioned above tax is charged on such income at maximum marginal rate applicable to individuals, AOP, etc. without threshold limit.