taxation of charitable trusts

7/28/2019 Taxation of Charitable Trusts

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TAXATION OF

CHARITABLE TRUSTS

A s p e r t h e F i n a n c e A c t , 2 0 1 0

A summarized insight into the t axabilit y of Indian

Chari table Trusts, as per the provisions of the Income Tax

Act, 1961.


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1Source: VK Gupta Module

(As per Finance Act, 2010 relevant for Assessment Year 2011-2012)

TABLE OF CONTENTS

Introduction and Definitions..2

Section 11(1) : Income..4

Section 11(2) : Accumulation of Income..6

Section 11(3) : Withdrawal of Exemption6

Section 11(1A) : Capital Gains....7

Section 11(4) : Business undertaking of the Trust.7

Section 11(5) : Specific modes of investing funds of the Trust.8

Rule 17C : for investments..10

Section 12A : Conditions for applicability of Sections 11 & 12.11

Section 12AA : Procedure for Registration..11

Section 13(1) : Section 11 not to apply in certain cases.12

Section 13(3) : Meaning of Specified Persons..13

Section 12(2) & 13(6) : Educational and Medical Facilities to Specified Persons..13

Anonymous Donations..14

Format for computing taxability of a Trusts income.15


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TAXATION OF CHARITABLE TRUSTS

(as per the Income Tax Act, 1961)

Section 2(15): Charitable Purpose defined :-

Charitable Purpose includes

-relief of the poor

- education

- medical relief

- preservation of environment (including watersheds, forests and wildlife)

- preservation of monuments or places or objects of artistic or historic interest, and

- the advancement of any other object of general public utility

First proviso: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 or use or application or retention of the

income from such activity.

Provided further that the first proviso shall not apply if the aggregate value of the receipts from the

activities referred to therein is ten lakh rupees or lessin the previous year. (inserted by Finance Act ,

2010)

Note: However, as per Finance Act, 2009, the preservation of environment (including watersheds,

forests and wildlife) and the preservation of monuments or places or objects of artistic or historicinterest shall be regarded as charitable purpose even if it involves carrying on of any activity in nature of

trade, commerce or business.


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Examples:

A charitable trust has receipts of Rs.100 lakhs from activities of charitable nature. The trust also has a

business which is not incidental to the attainment of main objects of the trust and the total receipts

from such business are:

Case 1: Receipts 10 lakhs, Expenses 2 lakhs

The Trust remains to be a charitable trust as per the amendment made by the Finance Act, 2010 since its

receipts (i.e. 10 lakhs) from commercial activities do not exceed the limit of Rs. 10 lakhs. The trust will

claim exemption under section 11 on the receipts of Rs. 100 lakhs and Rs. 8 lakhs business income shall

be taxable at the normal rate. (Note: The business income is not exempt)

Case 2: Receipts 25 lakhs, Expenses 16 lakhs

The Trust ceases to be a charitable trust since the receipts (i.e. 25 lakhs) from commercial activities

exceeds Rs. 10 lakhs. Exemption under section 11 shall not be available. The Trust shall be taxable on itsincome at the rates applicable to AOP/BOI.

SECTION 11: Income from property held under trust will be exempt if:

(1) Trust is registered with Commissioner of Income Tax u/s 12AA (vide application Form 10A).(2) Books are audited (vide form 10B) if income (including corpus donations) exceeds Rs. 1,80,000

before claiming section 11 & 12 exemptions.

(3) At least 85% of income (excluding corpus donations) must be applied towards the approvedobjects of the Trust.

(4) Unapplied Income + Accumulated Income + Corpus Donations shall all be invested in specifiedmodes of investments as u/s 11(5)

Further condit ions to note:

The property from which income is derived should be held under a trust.

The property should be held for charitable purposes.

The trust should not be created for the benefit of any particular religious community or caste.

No part of the income should enure directly or indirectly for the benefit of any specified person.

[For list of specified persons, refer to Section 13(3)]

The trust can carry out business activities if the business activities are incidental to the attainment of

its objectives, and separate books are maintained.


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Voluntary contributions (not being corpus donations) shall be deemed to be income derived from

property held under the trust.

SECTION 11(1) : INCOME FROM PROPERTY HELD FOR CHARITABLE PURPOSE

The following incomes shall not be included in the total income of the charitable trust:

(a) 15% of income derived from property held under trust wholly for charitable purposes (to becomputed on the gross receipts) i.e. Standard Deduction

(b) 85% of income derived from property held under trust wholly for charitable purposes, to theextent to which such income is applied to such purposes in India

(c) Income in the form of voluntary contributions made with a specific direction that they shall formpart of the corpus of the trust, i.e. corpus donations.

Note 1: Income derived from property held under trust wholly for charitable purposes includesvoluntary contributions i.e. donations except corpus donations.

Note 2: The words applied to charitable purposes includes

- Purchase of capital assets- Revenue expenses- Donations to religious/charitable trust registered under section 12AA or section 10(23C) *- Repayment of loans taken for purchase of capital assets- Depreciation on capital assets* However once the trust decides to accumulate its income then contribution to another trust outof its accumulated income will not qualify for exemption. An exception to this would be for the year

of dissolution of the trust, wherein the Assessing Officer may permit contribution to another trust,

without denying exemption.

In taxation lingo, a previous year is the financial year in question, and the year that follows is

the assessment year. For example, for the financial year April 2010 to March 2011, the previous

year is 2010-11, and the assessment year is 2011-12. Tax returns are filed in the assessment year,

as per tax provisions relevant to the assessment year, for the income earned in the previous year.


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Note 3: If, in the previous year, the income applied to charitable purposes in India falls short of 85%

of the income derived during that year from property held under trust, by any amount

(i) For the reason that t he whole or any part of t he income has not been received during t hatyear, and the assesse submits a declaration to the Assessing Officer on or before the due

date of filing of return that such income shall be applied to such purposes in the year ofreceipt or in the immediately succeeding year, then the amount for which such declaration

is given shall be deemed to be applied to such purposes during the previous year in which

income was derived. If such sum is not applied to such purposes in the year of receipt or in

the immediately succeeding year, then the amount not so applied shall be deemed to be the

income of the previous year immediately succeeding the previous year in which such

income is received.

Eg: Out of the total income, say Rs. 20 lakhs has not been received in the current year, but

has been received in the 5th

year :

1st Year 5th Year

Net Income 100 lakhs 200 lakhs

(-) Basic Exemption 15% (15 lakhs) (30 lakhs)

Balance to be Applied 85 lakhs 170 lakhs

(-) Not Received (20 lakhs) 20 lakhs (now received)

Net to be Applied 65 lakhs 190 lakhs

(ii) For any other reason, and the assesse submits a declaration to the Assessing Officer on orbefore the due date of filing of return that such income shall be applied to such purposes in

the immediately following previous year, then the amount for which such declaration is

given shall be deemed to be applied to such purposes in the previous year in which such

income was derived. If such sum is not applied to such purposes in the immediately

succeeding previous year, then the amount not so applied shall be deemed to be the

income of such immediately succeeding previous year.

Note: The general provision is that if the 85% could not be applied by the end of the previous year, then it

can still be applied in the next previous year, but BEFORE the due date for filing the tax returns. If it is not

likely that this will be possible, then the specific declaration to the AO has to be filed, as given in point (ii)

above.


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SECTION 11(2) : EXEMPTION IF INCOME ACCUMULATED FOR SPECIFIC PURPOSES

Where 85% of the income referred to above is not applied to charitable purposes in India during the

previous year but is accumulated or set apart, either in whole or part, for application to such purposes in

India, such income so accumulated or set apart shall not be included in the total income of the previous

year of the person in receipt of the income, provided the following conditions are complied with,namely:

(a) Such person specifies, by notice in writing given to the Assessing Officer in the prescribedmanner, the purpose for which the income is being accumulated or set apart and the period for

which the income is to be accumulated or set apart, which shall in no case exceed 5 years. (This

notice is required to be given before the assessment is complete) and

(b) The money so accumulated or set apart is invested or deposited in the forms or modes specifiedin Section 11(5)

Accumulated funds shall be spent for specified purposes within a period of 5 years, failing which they will

be treated as income of the 6th

year to be spent in the 6th

year itself, failing which they can be spent in

the 7th

year by the date of filing the tax returns for the 6th

year.

SECTION 11(3) : EXEMPTION WITHDRAWN IF SPECIFIC CONDITIONS NOT SATISFIED

Any income referred to in section 11(2) which

(a) Is applied to purposes other than the purpose for which it was accumulated or set apart, then itshall be deemed to be the income of the previous year in which it is so applied, or

(b) Ceases to remain invested in modes specified in section 11(5), then it shall be deemed to be theincome of the previous year in which it so ceases, or

(c) Is not utilized for the purpose for which it is so accumulated or set apart during the 5 yearperiod or in the year immediately following the expiry thereof, then it shall be deemed to be the

income of the previous year immediately following the expiry of the 5th

year, or

(d) Is donated to any trust registered under section 12AA or to any specified institutions referred toin section 10(23C), then it shall be deemed to be the income of the previous year in which it is

so donated.


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SECTION 11(5): SPECIFIED MODES FOR INVESTING FUNDS OF THE TRUST

The forms and modes of investing or depositing the money shall be the following, namely:

(i) investment in savings certificates as defined in clause (c) of section 2 of the Government

Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the

Central Government under the Small Savings Schemes of that Government

(ii) deposit in any account with the Post Office Savings Bank

(iii) deposit in any account with a scheduled bank or a co-operative society engaged in

carrying on the business of banking (including a co-operative land mortgage bank or a co-

operative land development bank)

(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act,1963

(v) investment in any security for money created and issued by the Central Government or a

State Government

(vi) investment in debentures issued by, or on behalf of, any company or corporation both the

principal whereof and the interest whereon are fully and unconditionally guaranteed by the

Central Government or by a State Government

(vii) investment or deposit in any public sector company: Providedthat where an investmentor deposit in any public sector company has been made and such public sector company ceases

to be a public sector company,

(A) such investment made in the shares of such company shall be deemed to be an

investment made under this clause for a period of three years from the date on which

such public sector company ceases to be a public sector company;

(B) such other investment or deposit shall be deemed to be an investment or deposit

made under this clause for the period up to the date on which such investment or

deposit becomes repayable by such company

(viii) deposits with or investment in any bonds issued by a financial corporation which is

engaged in providing long-term finance for industrial development in India

(ix) deposits with or investment in any bonds issued by a public company formed and

registered in India with the main object of carrying on the business of providing long-term

finance for construction or purchase of houses in India for residential purposes.


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(ixa) deposits with or investment in any bonds issued by a public company formed and

registered in India with the main object of carrying on the business of providing long-term

finance for urban infrastructure in India.

Explanation.For the purposes of this clause,

(a) long-term finance means any loan or advance where the terms under which

moneys are loaned or advanced provide for repayment along with interest thereof

during a period of not less than five years;

(b) public company98

shall have the meaning assigned to it in section 3 of the

Companies Act, 1956 (1 of 1956);

(c) urban infrastructure means a project for providing potable water supply,

sanitation and sewerage, drainage, solid waste management, roads, bridges and

flyovers or urban transport

(x) investment in immovable property.Explanation.Immovable property does not include any machinery or plant (other

than machinery or plant installed in a building for the convenient occupation of the

building) even though attached to, or permanently fastened to, anything attached to the

earth

(xi) deposits with the Industrial Development Bank of India established under the Industrial

Development Bank of India Act, 1964

(xii) any other form or mode of investment or deposit as may be prescribed. (Under Rule 17C)


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Rule 17C : The forms and modes of investment or deposits under clause (xii) of sub-section (5) of section

11 shall be the following, namely :

(i) investment in the units issued under any scheme of the mutual fund referred to in clause (23D)of section 10 of the Income-tax Act, 1961;

(ii) any transfer ofdeposits to the Public Account of India;

(iii) deposits made with an authority constituted in India by or under any law enacted either for thepurpose of dealing with and satisfying the need for housing accommodation or for the purpose

of planning, development or improvement of cities, towns and villages, or for both;

(iv) investment by way of acquiring equity shares of a depository.

(v) investment made by a recognised stock exchange in the equity share capital of a company(hereafter referred to as investee) -

(A) which is engaged in dealing with securities or mainly associated with the securities market;

(B) whose main object is to acquire the membership of another recognised stock exchange for

the sole purpose of facilitating the members of the investor to trade on the said stock

exchange through the investee in accordance with the directions or guidelines issued under

the Securities and Exchange Board of India Act, 1992; and

(C) in which at least fifty-one per cent of equity shares are held by the investor and the balance

equity shares are held by members of such investor;

(vi) investment by way of acquiring equity shares of an incubatee by an incubator.(vii) investment by way of acquiring shares of National Skill Development Corporation.


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SECTION 12A : CONDITIONS FOR APPLICABILITY OF SECTIONS 11 & 12

The income of a charitable trust is exempt under sections 11 and 12 if the following conditions are

satisfied:-

(a) The person in receipt of the income has made an application for registration of the trust to theCommissioner and such trust is registered under section 12AA.

The provisions of section 11 and 12 shall apply in relation to income of such trust from the

financial year in which such application is made.

(b) Where the total income of the Trust computed without giving effect to the provisions ofsections 11 and 12 exceeds Rs.1,80,000/- in the previous year (relevant to AY 11-12; check for

applicable exemption limit in the case of any other assessment year) then the accounts of the

Trust for that year should be audited by a Chartered Accountant and the report of such audit

should be furnished along with the return of income of the relevant assessment year.

SECTION 12AA: PROCEDURE FOR REGISTRATION

The Commissioner, on receipt of an application for registration of a Trust made under Section 12A, shall

(a) Call for such documents and information from the Trust as he thinks necessary in order tosatisfy himself about the genuineness of the activities of the Trust and may make further

enquiries.

(b) After satisfying himself about the objects of the Trust and the genuineness of its activities:a. Pass an order in writing registering the Trust,b. If he is not satisfied, pass an order in writing refusing to register the Trust or Institution.

No order of refusal to register the Trust shall be passed unless the applicant has been given a reasonable

opportunity of being heard.

Every order granting or refusing registration shall be passed before the expiry of six months from the

end of the month in which application was received under Section 12A. If no order is passed within the

said six months then it shall be deemed that the Trust has been registered.

Where a trust or an institution has been granted registration under section 12AA and subsequently the

Commissioner is satisfied that the activities of such trust are not genuine or are not being carried out in

accordance with the objects of the trust, as the case may be, he shall pass an order in writing cancelling

the registration of such trust.


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SECTION 13(1): SECTION 11 NOT TO APPLY IN CERTAIN CASES

Exemption under sections 11 & 12 shall not be available in the following cases:

Section 13(1)(a): Income for private religious purposes: Entire income from property held under a trust

for private religious purposes which does not enure for the benefit of the public is not eligible for

exemption under section 11 or 12.

Section 13(1)(b): Income for the benefit of particular religious community: Entire income of a charitable

trust/institution created for the benefit of any particular religious community or caste is not eligible for

exemption under section 11 or 12. A trust created or established for the benefit of Scheduled Castes,

Backward Classes, Scheduled Tribes or women and children shall not be deemed to be a trust created or

established for the benefit of a religious community or caste for this purpose.

Section 13(1)(c): Income for the benefit of specified persons: If any part of income of a

religious/charitable trust/institutions enures directly or indirectly for the benefit of any person specified

in section 13(3) or any property of the trust is during the previous year applied or used directly or

indirectly for the benefit of any person referred to in section 13(3), then entire income of such trust is

not eligible for exemption under section 11 or 12.

Section 13(1)(d): Funds not invested in section 11(5) securities/deposits: Entire income of a

trust/institution is not eligible for exemption u/s 11 & 12, if its funds are invested/deposited otherwise

than as specified under section 11(5).

It has been clari fied that investment in

(i) Shares of public sector company; and(ii) Shares of deposit ory

will not amount t o contravention t o section 13(1)(d).

Also not eligible for exemption under section 11 or 12:

- Income from that business for which separate set of books are not maintained.- Income from that business which is not incidental to the attainment of the objects of the trust.


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SECTION 13(3): MEANING OF SPECIFIED PERSONS

For the purposes of section 13 the following are specified persons:

(a) The author of the trust or the founder of the institution(b) Any person who has made a total contribution (up to the end of the relevant previous year) of

an amount exceeding Rs.50,000 (substantial contributor)

(c) Where such author or founder or substantial contributor is an HUF, a member of HUF(cc) Any trustee of the trust or manager (by whatever name called) of the institution

(d) Any relative of such author, founder, substantial contributor, member, trustee or manager(e) Any concern in which any of the persons referred to above has a substantial interest.

SECTIONS 12(2) AND 13(6): EDUCATIONAL AND MEDICAL FACILITIES TO SPECIFIED PERSONS

Sections 12(2) and 13(6) provide as follows

1. As per section 13(1), income of a charitable trust will not be exempt if any part of such incomeor any property of the trust is used or applied directly or indirectly for the benefit of any person

specified in section 13(3). Subsection (6) provides that a charitable trust running an educational

institution or a medical institution or a hospital shall not be denied the benefit of exemption

under section 11 or section 12, in relation to any income by reason only that such trust has

provided educational or medical facilities to specified persons.

2. Section 12(2) provides that the value of any medical or educational services made available byany charitable trust running a hospital or medical institution or any educational institution to

any specified person shall be deemed to be the income of such trust derived from property held

under trust wholly for charitable purposes during the previous year in which such services are so

provided and shall be chargeable to income-tax and exemption under section 11(1) & 11(2) shall

not be available for such income.


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ANONYMOUS DONATIONS

SECTION 115BBC: ANONYMOUS DONATIONS TO BE TAXED IN CERTAIN CASES

SECTION 13(7): SECTION 11 or 12 NOT TO APPLY IN CASE OF ANONYMOUS DONATIONS

Anonymous Donations means any voluntary contribution 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.

30% FLAT RATE OF TAX ON ANONYMOUS DONATION IN EXCESS OF THE HIGHER OF THE FOLLOWING

AMOUNTS, NAMELY:

(a) 5% of the total donations received by the assessee; or(b) Rs. 1,00,000.

Anonymous donations are not taxable under section 115BBC if:

(i) Such donations are received by any trust/institution established wholly for religiouspurposes. Therefore in case of a trust owning a temple, the offerings/donations made by the

devotees etc. shall not be taxable under this section even if the names/addresses of donors

are not there. Such donations shall be subjected to provisions of section 11 & 12.

(ii) Such donations are received by any trust/institution established wholly for religious andcharitable purposes. However such donations shall be taxable under section 115BBC if the

anonymous donation is made with specific direction that such donation is for any

university/school/educational institution/hospital/medical institution run by such trust.

For example:

Anonymous donations received by a trust wholly for charitable purposes are taxable undersection 115BBC.

Anonymous donations which are not taxable under section 115BBC shall be taxable under thenormal provisions and shall be subjected to section 11 and 12.

Anonymous donations which are taxable under section 115BBC shall not be entitled toexemption under section 11 and 12 as per provision of section 13(7).


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Whol ly Chari table Trust--- Anonymous donations to be taxed u/s 115BBC

Whol ly Religious Trust--- Anonymous donations not to be taxed u/s 115BBC

Whol ly Religious & Charit able Purposes--- Anonymous donations not taxable u/s 115BBC. Taxable

if donation made with a specific direction that such donation is for any university/educational

institution/hospital/medical institution run by such trust/institution.

FURTHER NOTES:

Even if the trust does not carry on business, or have business assets, it can claim depreciation onassets. This can be on Straight Line Method basis or Written Down Value basis. Depreciation will

be reduced from Gross Income.

Loan advanced within the objects of the trust cannot be treated as an application or expenseunless it cannot be recovered and is written off in the books. It is treated as an application in the

year of write-off.

Reimbursements of expenses of earlier years are treated as application of funds in the year ofreimbursement.

Deficit of income can be carried forward indefinitely and set off.FORMAT:

Gross Income (including Business Income and Capital Gains) xxx

(-) Direct Expenses and Depreciation (xxx)

Net Income xxx

(-) 15% Basic Exemption (xxx)

Balance 85% to be applied towards approved objects xxx

(-) Income not received during the year (xxx)

(-) Amount spent towards approved objects (xxx)

(-) Amount accumulated for spending (xxx)

TAXABLE INCOME xxx

(Taxed at slab rates)

Anonymous Donations taxed as per section 115BBC xxx

(Taxed @ 30% after exemptions)

taxation of charitable trusts

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