Taxation of Charitable Trust
& Socities
CA ASHOK SETH
B. Sc, F.C.A., DISA (ICA)
Lucknow
as@sethspro.com
What is Trust
 Sec 3 of the Indian Trusts Act, 1882
 “ 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”.
 This section only for “Private Trusts”
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Formal Deed
 Not necessary -Radhasoami Satsang
193 ITR 321, 326 (SC)
 In public trust- there should be an
unambiguous expression of intention
to divest & actual divestment of the
interest of the donor.
 To prove intention deed would be
better evidence
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Registration of Trust- Section 5 of
Indian Trust Act
 In case of private trust Registration of
deed is required, if the trust property
is immovable property, unless: the trust is created by a will, or the
owner – settler himself is the sole
trustee
 Registration to be done at local subregistrar office
 Act not applicable to Public Trusts
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Amendment in Deed
 If power to amend deed is given trust
may become discretionary trust
attracting the provision of section 61
and 63 – Naresh Sengupta Foundation
v. CIT 207 ITR 340
 Deed of Public Charitable Trust could be
amended only by the High CourtTrustee of HEH The Nizam’s Pilgrimage
Money Trust v. CIT 243 ITR 676 (SC).
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SUGGESTIVE CLAUSE


Nothing contained in this deed shall be deemed to
authorize the trustees to do any act which may in
any way be construed as violative or contrary to the
provisions of sections 2(15), 10(23B), 10(23C), 11,
12, 12A, 12AA, 13 and/or 80G of the Income Tax
Act, 1961 and/or any statutory modifications thereof
and all activities of the trust shall be carried out with
a view to benefit the public at large, without any
profit motive and in accordance with the provisions of
the Income Tax Act, 1961, or any statutory
modification thereof.
The Trust is hereby expressly declared to be a public
charitable trust and all the provisions of this deed are
to be constituted accordingly.”
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Scheme of Income Tax
 Section 2(24)- “income” includes
 (iia) voluntary contributions received
by a trust created wholly or partly for
charitable or religious purposes or by
an institution established wholly or
partly for such purposes, or by an
association or institution……………….
Explanation : For the purposes of this
sub-clause, "trust" includes any other
legal obligation;
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Other Legal Obligations
 Legal obligations means obligations
which is enforceable by law.
 Examples: Company u/s 25 of Companies Act, 1956
 A society under Societies Registration
Act (sec 6- is legal entity)
 A Hindu Endowment
 A Muslim Wakf
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Income when exempt
 In terms of Section 11, 12, 12A & 13
 The trust should be one which is
established in accordance with law,
and its objects should fall within the
definition of the term 'Charitable
purpose‘ [Sec 2(15)]
 Registered u/s.12A with the
Commissioner of Income Tax. (UP
Forest Corp 297 ITR 1 (SC)
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Registration – Sec 12-A & 12AA
 From 1.6.2007 benefit available from
the FY in which application made.
 CIT has no power to condone delay
 CIT can call for documents &
information & hold enquiry to satisfy
about genuineness of activities and how
manner of application of funds of the
trust do not fall within the purview of
the Commissioner Spring Dale Education
Society 204 Taxman 11 (P&H)
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Registration – Sec 12-A & 12AA
 The trust, whose objects are religious as
well as charitable, would be entitled for
grant of registration and also to claim
exemption u/s. 11 the same would be
allowed subject to provision of sec.
13(1)(a) & (b) Shri 1008 Parshwanath
Digamber Jain Mandir Trust ITAT ‘I’
Bench, Mumbai, ITA No. 5544/M/09,
dated 8-2-12, BCAJ Pg. 41, Vol. 44-A
Part 1, April 2012(Mum.)(Trib.)
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Time Limit for order – 12A
 The order to be passed within six
months from the end of the end of the
month in which the application for
registration is received.
 If order not passed within a period of 6
months, presumed that registration has
been granted – Karnataka Golf
Association v 91 ITD 1 (Bang.) Sardari
Lal Oberai Memorial Charitable Trust 3
SOT 229 (Delhi).
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Part Object Not Charitable
 If primary or dominant object of the
trust is charitable, then any ancillary
non-charitable object will not make
trust ineligible for exemption CIT v
Andhra Chamber of Commerce 55 ITR
722 (SC), & Addl CIT v Surat Art Silk
121 ITR 1 (SC), Bharat Diamond
Bourses 259 ITR 280 (SC)
 Differentiate between Objects and
Power
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Charitable purposes
 Section 2(15) "charitable purpose"
includes
 relief of the poor, Education, medical
relief,
 Preservation of Environment (including
watershed, 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
Contd.
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Amendment in 2(15)- 1.4.2009
 ‘ 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 of any service in
relation to any trade, commerce or business,
for a fee, cess or any other consideration,
 Section 11(4A)
 Amendment not affecting relief to poor,
Medical and education
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Further Amendment in 2(15)retrospectively from 1.4.2009
 Further Proviso inserted by Finance
Act 2010 with retrospective effect
from 1st April 2009 providing that: “the first proviso shall not apply if the
aggregate value of the receipts from the
activities referred to therein is ten Lacs (25
Lacs from Asstt Yr. 2012-13) rupees or less
in the previous year”
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Issues because of amendments
 The aspect of business income settled
in 1992 is now totally unsettled
because of insertion of proviso to
Section 2(15) and further proviso
 If it involves carrying on any activity
in the nature of trade, commerce or
activity of rendering any services in
relation to said business – the entire
income of the trust will be taxable
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Meaning of business for
purposes of s. 2(15)
 Institute of Chartered Accountants of
India v. DGIT(E) 202 Taxman 1(Del)Utilisation of the funds or income
earned, whether for charitable
purpose or otherwise, is not relevant
now in view of the first proviso and
cannot be a determining factor for
deciding whether assessee is covered
by section 2(15)
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2(15)- Amendment- Issues
 Whether Trust for religious purposes
will be hit by the amendment.
 Religious purpose is distinct from
charitable purposes
 Public religious trust cannot be
considered to be the trust for general
public utility.
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Issues- Further proviso
 “Aggregate value of Receipts” (not
net income) from business activity
should be less than 25 Lacs.
 It is value of Receipts and not value
of services
 If receipt is in kind- valuation issues?
 One year exempt next year not? (Sec
13(8))
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Issues- Further proviso
 If come to know in end year that Rt.
>25 Lacs what about 80G receipts
already issued.
 Position of Registration U/s 12AA?
 Registration is one time process
 Section 12AA(3)- it can be cancelled only of
activities are not genuine.
 How to monitor each year
 If one applied in 2008-09 but was refused
registration?
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Objects & Powers
 Objects must be distinguished from
powers
 Powers should not affect
determination of charitable nature
 Trustees Of Breach Candy Swimming
Bath Trust 0039/Bom/92 Special
Bench Dated 26.12.2000
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Bussiness
 Business settled in trust as a property
or
 Business carried on by trust for attaining
the objects of trust
 Thanti Trust 247 ITR 785 (SC)
 Business should be incidental to attainment
of the objectives
 If income from business utilized for the
purposes of objects- then it would be
considered as incidental
 Books Maintained separately 11(4)
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General Public Utility
 General means pertaining to whole
class or a section of public–not the
whole world – Bar Council of
Maharasthra 130 ITR 28 (SC)
 Public means the body of people at
large
 Andhra Chamber of Commerce 55 ITR
722 (SC)
 Contd.
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General Public Utility
 Examples: State Bar Council 30 ITR 28 (SC)
 Running Stock exchange 66 ITR 195
(AP)
 Maintenance of Dharamshalas 158 ITR
32
 Promotion of Commerce & Trade- Sarafa
Association v. CIT 294 ITR 262 (MP).
 CA Society Jodhpur Chartered
Accountants Society 258 ITR 548 (Raj.).
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Corpus Donation
 Corpus donations upto 88-89 were outside
the purview of income u/s 2(24)(iia)
 Section 11 “income derived from property
held under trust” exempt
 U/s 11(1)(d) Corpus Donations are still out
of the preview of Definition of Income
 Section 12(1) lays that Donations received
by trust (Other than Corpus donations)
shall be deemed to be “income derived
from property held under trust”
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Corpus Donation
 Refer Shri Dwarkadheesh Charitable
Trust v ITO 98 ITR 557 (Alld) & Trustees
of Kilachand and Devchand Foundation v
CIT 172 ITR 382 (Bom)
 IT act can not convert a capital receipt
into an income in absence of specific
words in section 2(24)(iia)- 119 ITR 137,
127 ITR 227, 172 ITR 382, 128 ITR 456,
145 ITR 29, 149 ITR 470, 160 ITR 729,
166 ITR 214
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Corpus Donation
 Not duty of the Trust to produce
Donors of Corpus Donation only letter
is required to be produced ITAT
(Mumbai Bench) in case of Ghatkopar
Jolly Gymkhana ITA 3069/Mum/02 and
also DIT (Exemptions) v Bharat Kalyan
Pratishthan 257 ITR 609 (del)
 Not assessable u/s 68 Vidya Jyoti Trust
ITA No 333/CTK/2012 20-July 12
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Corpus Donation
 Donor letter being identical does not
matter- Lala Kashi Ram 41 TTJ 408 (Del)
 There should be positive indication of
Donor Prabodhan Prakashan 50 ITD 135
& Shri Digambar Jain Naya Mandir 70 ITD
121- Box marked “Corpus” will not be
sufficient.
 Contrary view in Shree Mahadevi Tirath
Sharda Ma Seva Sangh 133 TTJ (UO)
157 (Chd)
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Anonymous Donation- Sec
115BBC (WEF 1-4-2007)
 Anonymous donations (where are no
records of the identity of the donorname, address and other particulars
as may be prescribed) received by
charitable trusts or institutions, etc.,
in excess of higher of
 5% of total donations or
 One Lacs
 will be taxed @30%
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Anonymous Donation- Not to
apply to
 Received by any trust or institution
created or established wholly for
religious purposes.
 Anonymous donations made with a
specific direction that such donation
is for any university or other
educational institution or any hospital
or other medical institution run by
such trust or institution.
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Anonymous Donation- Contd
 Consequential amendments have
been made in section 10(23C) and
section 13 to provide that amounts
taxable as aforesaid shall not be
excluded from the total income of the
assessee.
 Issue- Whether anonymous donation
to be considered for accumulation of
15%?
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Admission Fees
 Admission\entry fees is capital receipts
 Life membership fees- portion of fees
attributable to entrance fees- capital
receipt. Balance was commuted value of
annual subscription taxable as income.
WIAA Club Ltd 136 ITR 569 (Bom)
 Membership Fees is exempt- Divine
Light Mission 278 ITR 659 (Del)
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Tied up Grants
 To utilize in manner dictated by the
donor within a specified time and if
not spend to be refunded back.
 Nirmal Agricultural society- 71 ITD
152 (Hyd), Sukhdeo Charity Estate
149 ITR 470 (Raj) and 192 ITR 615
(Raj)
 Against- Gem and Jewelry Export143 ITR 579 (Bom)
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Depreciation




Income to be computed applying commercial
principals- Depreciation provided should be
deducted 146 ITR 28 (Kar), 180 ITR 579 (MP), 198
ITR 598 (Guj) etc
Assets acquired for the purposes of carrying out its
objectives, is to be treated as application of the
income for section 11(1) Tirupanni Trust 230 ITR
636 (SC)
Double deduction? No as per ITO v Trustees of
Marathi Mission 1 ITD 539 (Bom) as both operate
of different fields.
CIT v Institute of Banking Personnel 264 ITR 110
(Mumbai)- held that depreciation should be
allowed even on assets, the cost of which has been
allowed as exempt u/s 11 in the preceding years.
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Depreciation- Contd
 BUT in Escorts Ltd v Union of India
19 ITR 43(SC) held that unless
there is an specific provision
permitting double deduction in
respect of any item, it can not be
presumed that the law intends to
grant double deduction
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Income
 Must be understood in commercial
sense and not as “total income” as
assessed.
 Taxes deducted paid have to be
excluded from income 127 ITR 378
 Heads of income under sec 14 have
no relevance and question of allowing
statutory deductions does not arise.
199 ITR 215.
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15% of Gross Income or net
Income
Whether 15% accumulation should be applied
on Gross Income as reduced by the
administrative expenses or on Gross Income.
Refer CIT v Program for Community
Organization 228 ITR 620 (ker)-held that 15%
can be applied before making deduction for
Administrative expenses- confirmed by SC on
248 ITR 1. Also Birla Janhit Trust 208 ITR 372
(Cal)- held that any administrative
expenditure incurred should also be regarded
as expenditure on the objects of the trust.
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Excess Expenditure of earlier years
 Excess of expenditure in earlier years
can be adjusted against income of
subsequent year:



Maharana of Mewar Charitable 164 ITR 439 (Raj)
Shri Plot SwetambarMurti Pujak Jain 211 ITR 293
Matriseva Trust 242 ITR 20 (Mad)
Institute of Banking Personnel 264 ITR 110 (Bom)
 Against Delhi ITAT in Pushpawati
Singhania 29 SOT 316 (Del) relied
upon 305 ITR 149 (Del HC)
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85% not applied
 If income not received then amount
can be spent in the year of Receipt or
next year (Explanation 2 to 11(1))
 If application filed before time
allowed us/ 139(1) to spend amount
in next year
 Accumulated for specific purpose u/s
11(2) for 5 years Max
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Accumulation of Income
 Application u/s 11(2) read with rule 17 to
be filed before time u/s 139(1)
 Specify purpose and period – Singhania
Charitable Trust 199 ITR 819 (Cal)
 In 120 ITR 4 and Nagpur Hotel Owners
Asso 209 ITR 441 held that rule 17 to the
extent of providing time limit is ultra virus.
 Hence can be filed before assessment –
Nagpur Hotel owners Association 247 ITR
201 (SC)
 To invest in specified securities
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Exclusions – Sec 13
 1(a)- Private Religious Trust
 1(b)- for the benefit of particular
religious community or caste.
 From the different phraseology used by
the Legislature in clauses (a), (b) and (c)
in section 13(1),Clause for Charitable
trust and not for composite Trust and
purely religious trust. 213 ITR 492, 317
ITR 342 (MP)
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Assessment of Taxable Income
 Under Section 164(2) as an AOP
 At Normal Rate applicable to the individual
DIT (Exemptions) v Sheth Mafatlal
Gagalbhai Foundation Trust 249 ITR 533
(Bom)
 If income of the trust becomes taxable by
virtue of violation of section 13(1)(c)/(d)
then such Income would be taxable at
Maximum Marginal Rate 164(3)
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Wealth Tax
 Section 3 and 21AA of the WT Act
 “Every Individual, HUF and Company”
 21AA- where assets held by AOP, other
than Company, coop society, or society
registered under Societies Registration
Act, and the Individual shares of
members indeterminate
 However section 21AA was not
applicable to registered societies
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Accounts
 Significant Accounting Policies should
be attached with final accounts.
 ASB is of the view if ANY activity of
Trust are commercial in nature then
AS will apply to ALL activities
 AS 12
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Report in form 10-B
 Audit report in form 10-B to be filed
with return
 Can be filed upto assessment 198 ITR
511 (Cal), 195 ITR 825 (Cal).
 Provisions of section 12A (b) are
directory in nature and audit report, if
not furnished with return can be
furnished at appellate stage –228 ITR
292 (P & H.)
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Tax Audit
 ICAI publication- Issues on Tax Audit
 44AB is applicable if trust carries on
business even if income from
business is exempt.
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Report
It is the policy of the NPO to prepare its financial
statements on the cash receipts and disbursements
basis. On this basis, revenue and the related assets
are recognised when received rather than when
earned, and expenses are recognised when paid
rather than when the obligation is incurred. In our
opinion, the financial statements give a true and fair
view of the assets and liabilities arising from cash
transactions of ---------------- at --------------------, and of the revenue collected and expenses paid
during the year then ended on the cash receipts and
disbursements basis as described in Note “X”
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THANK YOU- QUESTIONS ?
If you wait for happy moments, you will
wait forever.
But if you start believing that you are
happy,
you will be happy forever.
Good Day!
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