The term “Trust” is defined as “an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner” (Section 3 of the Indian Trust Act 1882).
A trust can be a private trust or a public trust. The current article is addressing taxation and compliance of Public Charitable or Religious trust.
The NGO / Trust operate for the benefit and upliftment of the people of the area in which they operate. They play a substantial role with the government in the development of the oppressed class. They are partners of the government in the economic development of the country.
The concept of “Dan” in Hindus or “Zakat” in Muslims is a way of life. It is a belief that the portion of one’s income should be donated for those who are less privileged. Thus in order to see that the funds which are set aside as donation year on year are utilized properly trusts/NGO’s are formed.
The operation of trusts/NGO has become difficult due to the need for increased compliance. There are huge number of amendments to the provisions governing trusts/ NGO’s. It was therefore felt that a comprehensive note be prepared to understand the law governing trusts/NGO’s. Lot of tax professionals avoid trust work due to the trusts incapability to pay market rate of professional fees, however the same has changed and the trusts today are ready to pay professional fees for the complex compliances thrust on them by the government whom they are helping.
Formation of trusts and their Registration.
A public trust can be formed by two or more
persons and is governed by the Bombay Public Trust Act in state of Gujarat and Maharashtra and by the provisions of section 92 of the Code of Civil Procedure, 1908. The NGO’s are also formed as section 8 companies under the Companies Act 2013 or a society under the State Co-operative Society Acts. However, formation of society would require seven members to form a society(Maharashtra).
A trust needs to be formed by a settlor with the first trustees through a trust deed. A trust/ NGO has to be registered before it can start operations. The registration process would differ based on the Act under which the trust is seeking registration (Bombay Public Trust Act/ Companies Act as a section 8 company or under the Co-operative Society Act of the state).
Taxation of Trusts under the Income Tax Act
The Income Tax Act 1961 provides for special
provisions to tax trusts operating for charitable and religious purposes. The intention initially seemed to be to monitor the trusts/NGO operation and give exemption if they are doing charitable or religious work. The sections of income tax which govern the trust taxation are as under
|Definition of Charitable purpose
|Exemption from taxation of income applied for charitable and religious purpose subject to conditions
|Exemption for certain Charitable or religious trusts subject to registration and conditions similar to section 11 above.
|Section 12, 12A, 12AA, 12AB
|Registration of Trusts/ NGO’s under the Income Tax Act to claim benefit under section 11
|Section 11 not to apply in certain cases
|Deduction from Income for Donor at 50% of the eligible amount of the income donated.
|Anonymous Donation to be taxed in certain cases
|Tax on accumulated Income(assets) on cancellation of registration
|Interest for nonpayment of tax under section 115TD.
*Besides above section 164 talks about charge of tax on trust income
Section 11 to 13 of the Income Tax Act 1961 is a code in itself. Section 11(1) provides ”any income, profits and gains derived from property held under trust wholly for religious and charitable purposes shall not be included in the total income”. The exemption is allowable subject to certain conditions. Thus the definition of Charitable purpose is important as only income from property held for charitable purpose is exempt.
“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:”
The definition has a proviso which was introduced from 1-4-2009 and further amended from 1-4- 2016, the proviso puts restriction on the activity of “the advancement of any other object of general public utility” by restricting the activity in the nature of trade, commerce or business for a cess or a fee or any other consideration unless the activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility and the total receipts from such activity is less than 20% of the total receipts.
It is stated that the intention was to prevent trade association and chamber of commerce from claiming exemption as charitable institutions. It was to reverse the decision of Supreme Court in the FICCI case.
The supreme court while considering the proviso in the case of India Trade Promotion Organization vs Director General of Income Tax 250 Taxman 97 held that “in deciding whether an activity is in the nature of trade, commerce or business as used in the first proviso to section 2(15) it has to be examined whether there is an element of profit making. Expression, Charitable purpose cannot be construed literally and in absolute terms. Correct interpretation of the said proviso would be that it carves out an exception and that exception is limited to activities in nature of trade, commerce or business. Thus if dominant and prime objective of the institution is profit making and activities are directly in nature of trade, commerce or business or indirectly in rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its objects to be a charitable purpose.”
One should also look at Circular No. 21/2016 dated 27-5-2016 where CBDT clarifies that temporary excess of receipts beyond the specified cut off in the year may not necessarily result in cancellation of registration. It is to be noted a literal interpretation of the proviso would lead to an unintentional result where old age homes run by a charitable trust would loose exemption under section 11 and therefore a purposive interpretation as laid down in India Trade Promotion Organization vs Director General of Income Tax has to be done.
Education-Issue and controversies.
There is also a dispute as to what constitutes “education”. The term should refer only to structured education courses approved by a university or an education board or would include in its fold the generic meaning of education starting from birth to death of a person. Sole Trustee Lokshikhshan Trust vs. CIT 101 ITR 234 the Supreme Court has taken a narrow meaning of the term education. However in the later decisions in the case of CIT vs. Thyaga Brahma Gana Sabha 52 Taxman 395 the Madras HC has taken a view that the raising the artistic taste of the country by public performances of dramas, musical programs etc. would be educational purpose. However if the trust is formed for earning profits through educational institutes on commercial lines then the deduction needs to be denied (Dawn Educational Charitable Trust 233 Taxman 204 where it was running a posh school for the elite on commercial lines) however I am of the view that the said decision needs reconsideration as otherwise all IB schools running as a trust all over India would get their exemptions revoked, one should look at the privy council decision in case of Trustees of the Tribune Trust 7 ITR 415 where it was held that the concept of providing free or concessional rate is not required for general public utility only object of private gain should be absent. Yoga classes on regular basis is held to be education activity under DIT vs. Patanjali Yogpeeth (NYAS) 87 taxmann.com 54 (DEL). Also one should read the case of Director of Income tax vs. Bharat Diamond Bourse (2013) 126 Taxman 365(SC) in which case majority of the objects were charitable and some ancillary objects were not charitable.
Registration under section 12A or 12AB. The provisions for registration of trust under the Income Tax Act has seen a see saw. It initially required renewal every few years and then in 2009 all trusts having valid registrations were told that the same was perpetual and no more renewal was required. The Finance Act 2021, reintroduced the need for all trusts to register themselves under section 12A within a period of three months. However this time was extended regularly due to covid-19 pandemic and the deadline expired on 31st March 2022. Thus all trusts which were registered earlier and who have not taken registration under the new online system, their registrations are cancelled and the consequences under section 115TD would follow.
The online registration process was a simple process where the trust was required to file a form with details attached in PDF form listed below:
- The registration under the state charity commissioner office/ Companies Act/ State Co- operative Society act.
- The Old 12A registration
- Details of Trustees giving address, PAN NO and other details.
- The last three years accounts and audit report with schedules.
- The 80G certificate and FCRA certificate if
The registration was granted either for a provisional period of three years or for a regular registration for a period of five years under section 12AB. The entire process was online without any human intervention and the department has issued certificates in almost all cases where application was made. The said certificates have been issued with specific conditions for registration and one should read the same as the registration is subject to these conditions.
One should note that the department has started sending messages to trusts who have been issued provisional registrations for three years to file form 10AB which was to be filed within six months of the commencement of activity by a new trust or within six months of the provisional registration coming to an end whichever is earlier. The difficulty arises as in certain cases where the existing trusts who had registration in earlier section are also given provisional registration which were to be issued to new trusts. The CBDT has issued circular No. 11 of 2022 dated 3rd June 2022 rectifying this mistake unilaterally and making all such registrations regular registration and also removing all conditions of registration which were not as per the provisions of the Income Tax Act “Null” by this circular.
Cancellation of registration.
The earlier power of cancellation of registration under section 12A was provided under sub clauses (3) and (4) of section 12AA. However from A.Y. 2022-23 the power to cancel registration are provided under section are provided under sub clause (4) section 12AB. The said sub clause provides for Principal Commissioner to call for information and then cancel the registration in the following cases.
- The Principal Commissioner has noticed occurrence of one or more specified violations* during the previous year.
- The Principal Commissioner has received a reference from the Assessing officer under the second proviso to sub section (3) if section 143 for any previous year.
- The case has been selected in accordance with risk management strategy, formulated by the Board from time to time for any previous year.
The Principal Commissioner after calling for information and giving an opportunity to the trust to explain, may either cancel the registration or refuse to cancel the registration and send the copy of the order to the Assessing officer of such trust or institution.
*The section provides for the specified violation in the explanation to the section
- Where any income of the fund or institution or trust or any university or other educational institution or any hospital or other medical institution has been applied other than for the objects for which it is established; or
- the fund or institution or trust or any university or other educational institution or any hospital or other medical institution has income from profits and gains of business, which is not incidental to the attainment of its objectives or separate books of account are not maintained by it in respect of the business which is incidental to the attainment of its objectives; or
- Any activity of the fund or institution or trust or any university or other educational institution or any hospital or other medical institution—
- is not genuine; or
- is not being carried out in accordance with all or any of the conditions subject to which it was notified or approved; or
- the fund or institution or trust or any university or other educational institution
or any hospital or other medical institution has not complied with the requirement of any other law for the time being in force, and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.
The Principal Commissioner is required to pass an order either cancelling the registration or an order refusing to cancel registration within six months from the end of the quarter in which the first notice is issued.
Income of the trust and its taxability.
Income for a trust has to be determined in the normal commercial sense for claiming exemption under section 11. Income arising from the property held by the trust for charitable or religious purpose is the income of the trust. It will include the interest, rent, capital gain on sale of property, voluntary contributions or other receipts from incidental business activity. Income would also include voluntary contributions received by the trust. [Section 2(24) (ilia)].
The different types of incomes are to be considered as per the method of accounting followed by the trust. However, if the income has not accrued and due the same cannot be included even if the entries are passed in the books of accounts. The mere book entries cannot make the income taxable. (CIT vs. Chamanlal Mangaldas Girdhardas Parekh Ltd 39 ITR 8, CIT vs. India Discount Co. Ltd 75 ITR 191, CIT vs. Toshoku Ltd 125 ITR 525) It is also to be noted that the classification of income under section 14 in to various heads of income is also not applicable to the trust affirmed by CIT vs. Rao Bahadur Calavala cunnan Chetty Charities 135 ITR 485.
The trust receive subscriptions, entry fees or life membership fees in certain cases, these would also be treated as income from property held by the trust. (CIT vs. Cotton Textiles Export Promotion Council 67 ITR 539, CIT vs. Divine Light Mission279 ITR 639, CIT vs. WIAA Club Limited 136 ITR569). Similarly, government grants received with specific conditions like payment of salary or other specific uses are also treated as voluntary contribution and to be included in income (Gem and Jewellery Export Promotion Council 143 ITR 579). We will deal with the allow ability of the 15% under section 11(1) (a) on the said grants separately when we deal with the application of funds.
The voluntary contributions included in income would also include contributions received with specific direction that they shall form part of corpus. The said corpus donations(contribution with specific instructions) are to be excluded from the income of the trust under section 11(1)
(d) subject to the conditions that the same are invested or deposited in one of the modes listed in section 11(5) (this condition is included from the Finance Act 2021 and is applicable from A Y 2022-23). The provisions are applicable from 1-4-2022(A Y 2022-23) and would not apply to old corpus donations taken and used over the years. We will deal with the application of the corpus donations in the following paras as the use of corpus donation is not regarded as application of income.
Section 115BBC was introduced from A Y 2007-08 The term Anonymous donation is stated to be any voluntary contribution under section 2(24)(iia) “where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed”.
The said section provides that the trusts or NGO’s registered under section 11 or under section 10(23C) [sub clauses (iiiad), (iiiae), (iv), (v), (vi), (via)] receives anonymous donations higher of 5% of the total donations or Rs 1,00,000/-, would be taxed at 30%.
The said provisions do not apply to trust which have been established wholly for religious purposes or for both charitable and religious purposes.
Gain from transfer of Capital Asset.
The transfer of a capital asset by a trust is covered by section 11(1A). The section provides that if the trust transfers a capital asset held for charitable and religious purpose and the whole or part of the net consideration is used for the used for acquisition of new capital asset, then the capital gains are deemed to have been applied for Charitable and religious purpose.
The term capital asset is not defined under section 11(1A) and as per the Calcutta High Court in the case of CIT vs East India Charitable Trust 206 ITR 152 the definition of capital asset under section 2(14) can be used to ascertain what is a capital asset.
There is no time limit for investment of the net consideration of capital asset, however it should be done by the end of the financial year. One should look at the judgment of Trustees of Dr. Sheth Charitable Trust vs. Seventh ITO 2 ITD 649 in this case the capital asset was sold at the fag end of the year and the investment in new asset was made in the following year after six months, the tribunal held that the benefit of section 11(1A) could not be taken as the trust had not availed the option of accumulation under section 11(2),
It is also not important that the capital asset should be held by the trust for a specific period. It is possible that the asset is sold and a new asset is bought and the said new asset is sold and a third asset is bought still the gain will be deemed to be invested. However if the asset is not available and the new asset is also sold then the gain cannot be said to be reinvested. Dalmia Charitable Trust vs. ITO 27 Taxman 46 (Mag)
Restriction on Investment of Trust funds.
Section 11(5) provides for investment instruments
in which a trust can invest. The said section was introduced from Finance Act 1983. In section 11(2) discussed below and also corpus donations under 11(1) (d) are to be invested in securities listed in section 11(5). The intention is to not allow the use of trust funds to be invested in any high risk instrument. The section provides clauses (i) to (xi) where various instruments are listed and clause (xii) provides for any other form or mode which may be prescribed, Rule 17C provides other list of instruments in which investments can be made.
The section 13(1) (d) provides for forfeiture of exemption under section 11 and 12 if the investment are not made as provided under section 11(5). The said withdrawal of exemption will lead to the taxation of such income at maximum marginal rate. However, would it lead to the withdrawal of exemption for the entire income or would it be restricted to the income from such investment not under section
11(5). It is to be noted that all the high courts have held in favor of trust/ NGO and held that the tax would be levied only on the income from assets which are not held in the manner specified under section 11(5) and the other income would continue to enjoy the benefit. [DCIT vs. Sheth Mafatlal Gaganbhai Foundation trust 249 ITR 533(BOM), CIT vs. Fr. Muller Charitable Institutions 363 ITR 230(KER), CIT vs. Santokha Durlabhi Trust Fund 406 ITR 457 (RAJ), also CBDT issued Circular No. 387 dated 6th July 1984 accepting that only part which is earned by violation of section 11(5) will be taxed at maximum marginal rate]
New Compliance from 1-4-2022 for voluntary contributions received.
The section 80G (5) along with section 35(1A)
has been amended and all trust/NGO’s have to now file a form 10BD annually providing details of donations received by them from A Y 22-23. The said form is in the same lines as the TDS return filed by assesse and on filling of the said form the trust/NGO will be able to download the form10BE which he can issue to a donor. The said form requires details of the donor to be uploaded. The list of details to be uploaded are as under
- Name of the Donor
- Address of the Donor
- Nature of Donation
- Mode of Receipt
- Amount of Donation
- Section code under which donation was received
- PAN NO / Aadhar / Tax Identification Number of donor
This process of uploading details will remove any bogus claim as all deduction claim under section 80G will be cross tallied by the statements filed by the trust/NGO.
The said form 10BD is an annual statement and the same was to be filled for the first time for March 2022. The due date for the filling of the said form was 31st May 2022. The PAN details are a must to file the form. The details filed late would have to pay a fees of Rs 200 per day(Section 234G). The fees is also payable if you amend the form to add a donor detail which you have missed in the first filling. This is a deviation from the Section 234E where the TDS return amendment after filling the return on time would not entail late fees. This does not seem to be the intention of the section but the system in the present levies this late fee on trust. This online filling for charitable trusts would lead to a situation where if there is any discrepancy in the amount of donation received and the amount filed in the form 10BD would be held to be anonymous donation and taxed at 30%.
Application of Income.
Section 11 provides that a trust or a NGO should apply its income for the objects of the trust/ NGO to claim exemption. It provides that the trust/NGO should spend 85% of its income for Charitable and Religious objects as per the trust deed or the Formation document like the memorandum or the bye laws. (Section 11(1) (a). The emphasis is on the application of income and it includes both revenue and capital expenses. The entire capital expenses can be claimed as application of income. The term application in common parlance would mean amount spent. However, the term under section 11(1)(a) has a wider meaning as held in the following cases CIT vs. George Forane Church 170 ITR 62, and CIT vs. Radhaswami Satsang Sabha 25 ITR 472. The Allahabad High Court in the Radhaswami Satsang Sabha had held that the amount irrevocably earmarked and allocated for future spending is also application of income.
However the law has been changed from A Y 2022-23, explanation 4 has been added to section
11(1) which provides that the amount spend from corpus donation would not be allowed as application of income, similarly the amount spend from loan taken is also not allowed as application of income. However the amount which is there after deposited for replenishing of the corpus donations or repayment of loan amount will be allowed as application of income. The law has been further amended from A Y 2023-24 by Finance Act 2022 by providing that the application of amount has to be actually spent and the mere book entries based on accounting system followed by the trust/NGO will not be allowed as application of income. (Explanation added after section 11(7).
The explanation to section 11(1) provides that the donation given by one trust to the other trust as corpus donation will not be allowed as application of income. Similarly application of funds in violation of 40A(3)[payment above Rs 10000 in cash] or 40(a)(i)/40(a)(ia) [Payment without deducting TDS as per law] is not held to be application of income.
The trust/NGO is restricted from taking depreciation on the assets where the entire amount is taken as deduction as application of income under section 11(1) (a). (Section 11(6) from A Y 2015-16. However if the trust chooses to claim the depreciation instead of the whole amount of the asset the same can be opted by the trust. However, the system I designed in such a manner that the 143(1) processing auto adds the depreciation and one would then have to struggle to get the intimation rectified.
The trust /NGO which is registered under section 12AA or 12AB is restricted from taking exemption under section 10 of income earned by it and for which deduction is taken under section 11. Prior to this amendment in A Y 2015-16 there were trusts who were taking exemption under section 10 for dividend income earned by it and thus were avoiding spending money from the trust. Many trusts surrendered their registration after the introduction of the said provisions.
Taxes Paid and Refund of Income Tax One of the common question which is raised is the tax paid by trust is it an application of income. The answer is yes, similarly is the refund of income tax refund received is it an Income. There are conflicting decisions on this issue and the reconciliation of the same is that if the tax paid is taken as application then the refund is to be taken as income, if it is not taken as application then the refund would also not be taken as income.
Option to apply the amount in the following year-Deemed application of funds.(Deemed Application of income) The trust may not be able to apply its income towards the objects due the fact that the amount is not received by it. (Interest accrued but not received, or rent accrued but not received from tenant due to Covid 19 pandemic)
The trust in such a case has an option to not take the amount as application and spend it as an when received by it or in the following year. [Explanation 2 to section 11(1)] There need not be any reason for not using the amount in the current year, so it is possible that the amount is received but the trust is not able to use it. The trust has an option to use it in the following year. If the non use of the amount is due to trust not receiving the amount, then the trust will have to take it as income in the year in which it is actually received, for example a cumulative fixed deposit of five years where the amount is to be received only in the fifth year in this case the trust will be able to use the fund in the fifth year when the money is received.
However the trust is required to file form 9A online before the due date of filling return in order to claim exemption from application of the above amount. Non filling of the above form would lead to the income being taxed as there is no application of income.
Condonation of delay in filling forms. The CBDT has issued a Circular No. 7/2018 dated 20-12-2018 for A Y 16-17 and Circular No. 19 of 2020 dated 3rd November 2020 for A Y 17-18 and A Y 18-19 for the condonation of delay in filling the above form 9A, 10, 10B and form 10BB as the same was made online and the trust may not be aware of the process. One can apply for the condonation of the delay in filling form to the Director of exemption (Income Tax) if in Mumbai or the Principal Commissioner (PCIT) having jurisdiction on the trust. However the notification of 2020 only allowed PCIT to condone delay upto 365 days, however recently by circular no. 15, 16 & 17 dated 19th July 2022, the PCIT has been allowed to condone delay upto three years for A Y 18-19 onwards. The trust who have not filed the forms and the delay is more than three years may apply to the CBDT under section 119(2)(a) for condonation. The CBDT should have allowed the PCIT to delay any delay by the trust without giving a cap on the period of delay, as the non filling of forms is a venial fault and it cannot be anyone’s case to punish the trust for this venial default. The PCIT always have the discretion to reject a malafide or fraudulent delay in filling forms.
Deemed Application by Accumulation for Project.
The trust/NGO can accumulate amounts for a
project or for particular activity of the trust for a period of five years and the said accumulation will be deemed to be an application of the income.
The trust/NGO is required to complete the project or activity from the accumulation in the five years available.
The project for which accumulation is to be made needs to be specific and can be more than one project, however there are contrary views on the singular or plural objects. Kolkata HC in CIT vs. Trustees of Singhania Charitable Trust 199 ITR 819 (against) it has held that there can be only a singular object. However the Del HC has consistently held that the objects could be plural. (CIT vs. Hotel and Restaurant Association 261 ITR 190, DIT(exemp) vs. Eternal Science of Man’s Society 290 ITR 535, Mamta Health Institute for Mothers and Children 293 ITR 380.
However accumulation by simply stating “for the objects of the trust” is held to be inappropriate and the deemed application of the accumulation is not allowed. (DIT vs. Mitsui and Co. Environmental Trust 303 ITR 111)
Conditions for claiming the Deemed Application
- The said amount is to be kept invested in any of the modes specified under section 11(5).
- The trust/NGO has to also file form 10 online to the assessing officer before the due date of filling return of income under section 139(1).
The object for which the accumulation has been done may be changed by an application to the Assessing officer if due to any reason the object for which it is set aside cannot be achieved. (Sub section 3A of section 11)
The amount accumulated will become income of the trust/NGO if the
- Income is applied for purposes other than the Charitable or religious objects.
- Amount ceases to be invested in any of the modes specified under section 11(5).
- Not utilized for the purpose for which it is accumulated with in the five years. (Income of the sixth year)
- Credited or paid to any other trust registered u/s 12AA or having exemption under 10(23C).
The said provision has been amended and from A Y 2023-24, prior to A Y 23-24 the trust would be liable to be taxed on the accumulation in the sixth year after completion of five years, however the amount not spend will be the income of the fifth year itself after the amendment.
Restriction on use of funds for specifiedpersonsn-(S.13)
Section 13(1) sub clause (a) and (b) denies benefit of section 11 and 12 to income used for the benefit of Private Religious purposes (Ghulam Mohidin Trust v CIT 248 ITR 587(J & K) or for the benefit of any particular religious community or caste. Gujarat High Court in CIT vs. Girdharram Hariram Bhagat 154 ITR 10 has discussed the distinction between public and private endowments or trusts.
“A religious endowment may be either public or private. A public religious endowment necessarily implies that it is a dedication of property for the use or benefit of the public, while on the other hand a private religious endowment is a dedication of property for worship of the family GOD in which public is not interested.” In Rajkot Vishw Shrimali Jain Samaj v ITO 292 ITR (AT) 222 (Rajkot) it was held that the benefit need not be to the entire public and may be available to a specified section of the public
Application of funds for Specified Persons
It further under sub clause (c) blocks any benefit of the trust property or income from such property being used for the benefit of the specified persons* or its relatives as defined in sub section (3) of section 13 read with explanation 1 and 3.
Person includes “another trust” (Champa Charitable trust) vs. CIT 214 ITR 764(BOM). This restriction is intended to ensure that, despite the ostensibly charitable objects of a trust or institution, its income is not diverted away to benefit persons who are closely connected with the creation, establishment and conduct of the trust and or institution.
In DIT vs. Bharat Daimond Bourse 259 ITR 280(SC) the institution established for charitable purposes advanced Rs 70 Lakhs to one of its office bearer (honorary secretary) without interest or with any security or without any agreement. Since the borrower belonged to the prohibited category within the meaning of section 13(3)(a) and 13(3) (cc) the income of the institution will be deemed to have been applied for the benefit of the prohibited category of person and consequently the benefit of section 11 was lost to the institution.
The benefit to specified persons should not arise directly or indirectly and the violation of the said clause would lead to the cancellation of benefit to the entire income of the trust except in the cases covered under sub section 4 and 5. (Welfare and Awakening in Rural Environment vs. DCIT 263 ITR13) However, the Delhi High Court rightly held
that only the dividend income would be liable to tax where the shares were held by the prohibited category mentioned in S. 13(3). (CIT vs. Narinder Mohan Foundation 311 ITR 425)
Investments in violation of 11(5)
The sub clause (d) of section 13(1) denies benefit of section 11 to income generated from investments made in any instrument not specified under section 11(5). The intention is to restrict investment in other than specified instruments. There is exemption and time period provided for those holding such investment from prior to 30th November 1983 when section 11(5) was introduced. This concession was extended till 31st March 1993. Further, there is an exception provided for such assets which are part of corpus of the trust or institution as on the 1st day of June 1973.
The violation of section 13(1) (c) being benefit directly or indirectly to specified persons the entire exemption under section 11 will be denied, however if there is a violation of 13(1)
(d) by investing in instruments other than those specified under section 11(5) then only the income from such investment would be taxed and the entire income would not entire trust income.
*The specified person in section 13(3) are listed below
- The author of the trust or the founder of the institution;
- 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;
- 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;
- Any relative of any such author, founder, person, member, trustee or manager as aforesaid;
- any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and
(d) has a substantial interest.
The explanation 1 defines the term relatives of the specified persons and explanation 3 provides that person shall be deemed to have substantial interest in the concern if he hold more than 20% of the voting rights or is entitled to 20% of the profit sharing ratio. However the above does not include the employees of the specified persons (Tata trust 203 ITR 764). It also does not include the manager of the specified persons (CIT vs. Rai Bahadur 252 ITR 84).
The sub section (2) of section 13 provides for a list of transactions which are deemed to have been used for the benefit of persons under section 13(3) if they are not entered on the principals of arms length. The list from to (h) is illustrative and not exhaustive. The nature of transaction and the facts in each case would have to be considered before one concludes that there is a violation of 13(3) [Shree Poongalia Jain Swetamber Mandir vs. CIT 168 ITR 516(RAJ)].
Onus: – Although the burden to prove exemption is on the assesse the burden to prove exclusion from exemption is on the revenue.
It is the duty of the revenue to prove beyond doubt with necessary materials and documents that a particular trust cannot avail the exemption under section 11 and falls under the ambit of S. 13 (CIT vs. Kamala Town Trust 279 ITR 89)
Taxation of Net Assets on Cancellation of Registration (S.115TD)
The said section was introduced from Finance Act 2016 from 1st June 2016. It is intended to tax the accreted income at maximum marginal rate if the trust has
- Converted into any form which is not eligible for grant of registration 98[under section 12AA or section 12AB];
- merged with any entity other than an entity which is a trust or institution having objects similar to it and registered 98[under section 12AA or section 12AB] ; or
- failed to transfer upon dissolution all its assets to any other trust or institution registered 98[under section 12AA or section 12AB] 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,
The accreted income is to be calculated at the market value of assets less the liabilities of the trust related to the assets which are available, the liabilities with regard to the assets already disposed are to be ignored.
The section would not come in to operation if the trust has filed an appeal against the rejection of the registration or has applied for the registration after the amendments to the objects. The application of the section seems to be to cases where there was malafide intention to form trust which were charitable and then to convert the said trusts in to non-charitable and enabling the trustees to enjoy the benefits of the assets which are not taxed.
The above section though introduced in 2016 there has been no amendment in the definition of income under section 2(24)-Income to include taxation of such accreted income. This is important as there is serious doubt as to whether the definition of income in the normal course would include such accreted income. The provision needs to be tested in the court of law with regard to the power to tax accreted income.
Choosing between S. 10(23C) and S. 11 The provisions of Section 10(23C) have been amended to bring the provisions of the said section in line with provisions of section 11. The need to take registration and also regular renewals, utilization of funds, to keep the funds invested in specified securities under 11(5) and restrictions for corpus donations utilization are all similar. However one has to choose between section 10(23C) and exemption under section 11, each trust will have to take in to account advantages and disadvantages before choosing one under which it wants registration. It is felt that the requirements and restrictions are more onerous under section 10(23C) but one has to look at the facts of each case before deciding.
The Finance Act 2022 had amended the section 11 to provide that books of accounts will be maintained by the trust. There was also power taken to notify the books of accounts to be maintained by the trust. The CBDT has notified the books of accounts to be maintained by the trust vide notification G.S.R. 622 dated 10th August 2022. The said notification gives a detailed list of both books and statements and records to be kept by the trust for 10 years. The said notification has made the job of trust doing charities further difficult as there is no threshold limits and small trusts will also have to maintain the entire records as stated in the notification.
The CAG has recently tabled a report on the NGO and trusts before the parliament for returns filed with income tax from A Y 2014-15 to 2017-18. The CAG has brought the attention of parliament towards the various violations by IT department and also by the trusts and the advantages taken by the NGO/ trust which according to them were to not to be granted.
There is a list of suggestions made by CAG which are likely to be brought in to the act by the next budget knowing the Government’s policy of zero tolerance for tax leakages. The report makes interesting reading. What is surprising is that the violation reported by the CAG is for a handful of cases and still there is a recommendation for amendment of the law. In one case of violation or misuse of 15% concession in spending of income received was misused by four trusts in Maharashtra. They donated funds from one trust to another and the 15% benefit was taken by all the four trusts who got the money from the previous trust. This was an aberration of the normal Nobel activity carried out by trust in general and still there is a recommendation to amend the law to not allow donation from one trust to another. The GAAR enacted under the Income tax Act 1961 (Section 96 to Laws cannot be made for exceptions. However over the years this basic principal of law making is missed by the governments. Some of the suggestion are to amend the Form ITR 7, Form 10B and other such suggestions which would lead to more compliance and running of a trust a compliance nightmare.
The compliance for charitable and religious trusts have increased over the years. Besides the compliance under the Income Tax Act, the trust needs to do compliance under the Bombay Public Trust Act / Companies Act/ Society Act. The audit and filling under those laws have also increased. The trust would be further burdened with the FCRA (Foreign Contribution Regulation Act) if it wants to receive donations or contributions from out of India. The process of doing charitable activity is not charitable anymore and the trustees and founders run the risk of being penalized and imprisoned for any error which they may make in the process of work. They should be a determined lot or crazy lot to take on such a daunting task and I on my part salute there efforts to do good work in spite of the hurdles and road blocks which keep increasing from time to time. They are really the “Sevaks” or “Heros” who need to be applauded and recognized by all.