TAXATION OF TRUSTS

DAY 6

SESSION III & IV

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MEANING OF IMPORTANT TERMS

“trust” is 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

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MEANING OF IMPORTANT TERMS

Author of trust - The person who reposes or declares the confidence is called the “author of the trust”.

Trustee - The person who accepts the confidence is called the “trustee”.

Beneficiaries - The person for whose benefits the confidence is accepted is called the “beneficiary

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MEANING OF IMPORTANT TERMS

Trust property - The subject-matter of the trust is called “trust property” or “trust money”.

Instrument of trust - The instrument, if any, by which the trust is declared is called the “instrument of trust”.

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REGISTRATION OF TRUSTS Conditions for registration (section 12A)

Application is to be submitted by the trust to the commissioner in form 10A

Accounts should be maintained in the prescribed manner and the same is to be audited

Application is to be submitted within one year from the creation of the trust

Commissioner can also admit belated applications in special cases

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REGISTRATION OF TRUSTS Procedure of registration (section 12AA)

Chief commissioner would grant registration after calling for such information and documents as are found necessary.

Registration can be refused after giving the trust an opportunity for being heard

Registration to be granted within 6 months Copy of the order granting registration to be issued to the

assessee

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REGISTRATION OF TRUSTS

Registration is one of the conditions for claiming exemption under section 11 but not the only condition [Surat Tennis Club v. CIT [2000] 75 ITD 362 (Ahd.)]

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Representative assessee Section 160 of Income Tax Act Representative assessee means-  in respect of income which a trustee appointed under a

trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any Wakf deed which is valid under the Mussalman Wakf Validating Act,1913 (6 of 1913),]receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees;

 in respect of income which a trustee appointed under an oral trust receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees.

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Representative assessee A trust which is not declared by a duly executed instrument in

writing [including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913)], shall be deemed, for the purposes of clause (iv), to be a trust declared by a duly executed instrument in writing if a statement in writing, signed by the trustee or trustees, setting out the purpose or purposes of the trust, particulars as to the trustee or trustees, the beneficiary or beneficiaries and the trust property, is forwarded to the Assessing Officer,-

(i)where the trust has been declared before the 1st day of June, 1981, within a period of three months from that day; and

in any other case, within three months from the date of declaration of the trust.

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Liability of Representative assessee section 161 of the Income Tax Act.

(1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.

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Liability of Representative assessee section 161 of the Income Tax Act.

(1A) Notwithstanding anything contained in sub-section (1), where any income in respect of which the person mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate:

Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him.

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Liability of Representative assessee

section 161 of the Income Tax Act. (2) Where any person is, in respect of any income,

assessable in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of the Income Tax Act.

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Taxability of trusts a public charitable would be liable to tax in the

following situationsany part of the trust’s property or any income of the

trust, including income by way of voluntary contributions, is used or applied directly or indirectly, for the benefit of any person referred to in section 13(3) of the Income-tax Act, e.g., the settlor, the trustee, their relatives etc

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Taxability of trusts any part of the income of the trust, created on or after April

1, 1962, including income by way of voluntary contributions, enures directly or indirectly, for the benefit of any of the persons referred to in section 13(3) of the Income-tax Act 

any funds of the trust are invested or deposited or any shares in a company are held by the trust in contravention of the investment pattern for trust funds laid down in section 13(1)(d) read with section 11(5) of the Income-tax Act

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Taxability of trusts Income of public charitable trusts is not

chargeable to tax if the following conditions are fulfilled:

Certificate of registration is granted to the trustThe trust applies not less than 85% of its income for the

purposes for which it was registeredIn case of non-application of 85% of income the trust

applies in form 10 that the unutilized surplus would be utilized within 5 years (10 years upto A.Y 2001-02) for specified purposes and the money set apart is invested in the manner prescribed under section 11(5)

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