Taxation of Trusts in India: Exemptions and Provisions

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The taxation of charitable organizations in India is governed by specific sections of the income tax law, providing exemptions to trusts serving the nation's welfare. Various provisions and entities involved in trust formations are discussed, along with the purpose and differences among trusts, societies, and companies.

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Exemptions - Taxation of Trusts by R. Devarajan, Income Tax Officer

Introduction The taxation of the charitable organisation is governed by the chapter III of the income tax which includes section 11, 12, 12A, 12AA and 13. The Government of India has given various exemptions to charitable and religious trust keeping in view of the services they render to the nation. object is to provide the services to all people in the society without discrimination of cast, creed and gender etc. However, there can be charitable trusts formed only for the benefit of Schedule Cast/Tribe or women and children. Charitable trusts are those trusts whose

The Major exemption Provisions Section 10 (23C) Section 11 Section 12 Section 12A Section 12AA Section 13 Section 13A Section 13B Section 80G

Entities: Trusts registered under Trusts Act, 1882 Section 8 companies under Companies Act, 2013 Societies registered under Societies Act Trust: Settlor Trustee Legal Obligation Beneficiaries Trust Deed

Points of Differences Trust Society Section 25 Company Statute / Legislation Relevant State Trust Act or Indian Trust Act, 1882 Societies Registration Act, 1860 Indian Companies Act, 1956 Jurisdiction Deputy Registrar/Charity commissioner Registrar of societies Registrar of companies Registration As trust As Society As a company u/s 8 of the Companies Act. Registration Document Trust deed Memorandum of association and rules and regulations Memorandum and articles of association. and regulations Stamp Duty Trust deed to be executed on non-judicial stamp paper, vary from state to state No stamp paper required for memorandum of association and rules and regulations. No stamp paper required for memorandum and articles of association.

Charitable purpose Sec 2(15) : Charitable purpose means: Relief of the poor Education Yoga Medical relief Preservation of environment(including water sheds, forests and wildlife) Preservation of monuments or places or objects of artistic or historical interest Advancement of any other object of general public utility and not involved in any activity in the nature of trade, commerce or business. Promoting welfare of farmers, promotion of sports, maintenance of swimming pools, promotion of language, art, literature, libraries, etc.

Provided that 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 of use or application, or retention, of the income from such activity, unless- (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

Sec. 11- Income from property held for Charitable or religious purpose Section 11 provides exemption for income derived from property held under trust wholly for charitable or religious purposes to the extent such income is applied for charitable or religious purpose in India. However, this exemption shall be subject to certain conditions, the main being obtaining registration u/s 12AA.

Exemptions: 11(1)(a) 85% application, 15% accumulation 11(1)(d) corpus donation Expln to Sec 11(1) Deemed applicaion, form 9A to be filed online before 139(1) wef 1.4.16 (Rule 17) 11(1A) capital gains exempt if invested in another property 11(1B)- capital gains for charitable purposes form 9A/ form 10 as applicable

Option to trusts in case 85% not utilized:- purpose of determining above 85%, the amount so much not realized is to be taken out from the total receipt. This unrealized amount is to be utilized in the year of receipt. If the trust has not received whole of the income, then for the other reason, next option to the trust is to invest in any of the modes specified in section 11(5) or alternatively the trust can accumulate the amount for any purpose within its objects either for revenue or for capital expenses. However, the trust is required to file form 9A electronically before filing the return. Such accumulation in any case should not exceed 5 years. Explanation 2 to section 11 also clarified that, application of income does not include any donation paid to other registered trust or institution in the nature of contribution towards corpus fund of such other trust or institution. If the trust cannot spend more than 85% in any year due to any

11(2) Accumulate for 5 years if invested in prescribed modes as in 11(5) - Form 10 online before 139(1) (Rule 17) 11(3) Deemed income 11(4)&(4A) business held by trust Prescribed modes of investment- FDs in scheduled banks, PO savings, UTI and immovable property. 11(6) Depreciation 11(7) only 10(1) and 23C for trusts, no other 10 exemptions wef AY 15-16

Income of Trust exempted under Section 11 Section Nature of income Extent to which exemption allowed 11(1)(a) Income derived from property held under trust wholly for charitable or religious purposes To the extent income is applied to such charitable or religious purposes in India. Whereas such income is accumulated or set apart for such application, to the extent of 15% of the income from such property. 11(1)(c) Income derived from property held under trust for a charitable purpose, which tends to promote international welfare in which India is interested To the extent income is applied to such charitable or religious purposes outside India. Exemption is available only if the Board has directed such exemption. 11(1)(d) Income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. 100% exemption. In computing the 15% of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in Section 12 shall be deemed to be part of the income.

No exemption under Section 11 Section Nature & extent of income not exempt under Section11 13(1)(a) Income of private religious trust not used for public benefit. 13(1)(b) Income of charitable trust created for benefit for particular religious community. 13(1)(c) Income/ property of charitable or religious trust applied for direct or indirect benefit of person referred in 13(3) 13(1)(d) Any income, is taxable if If any funds are invested other than in 11(5) Any funds invested earlier than 1983 remain invested thereafter Shares and company are held after 1983. 11(4A) Income from business which is not incidental to the attainment of the objectives of the trust, or in respect of which separate books of accounts have not been maintained. 12(2) Value of medial/ education services provided to specified persons by trust running hospital and educational institution shall be income of trust and will be chargeable in the year in which services are provided and chargeable to tax, despite section 11(1).

Taxability of a Public Trust at a glance Sources of Income Under Sectio n Tax Rates Voluntary Contributions (being corpus donations) 11(1)(d) Exempt Income not applied / accumulated to the extent > 15% 11(1)(a) AOP Rate Income received on 31st March carried forward to next year for utilization but not utilized in that next year [Explanation 2(b) to Section 11(1)(d)] 11( 1B) AOP Rate Income accumulated u/s 11(2) is not invested / utilized / donated to another trust 11(3) AOP Rate Excess Business Income as assessed by the AO 11(4) AOP Rate Income derived u/s 13(1)(a) & 13(1)(b) AOP Rate Income derived u/s 13(1)(c) & 13 (1)(d) MMR Anonymous Donations u/s 115BBC 30%

12AA registration: 10 A application with Trust deed/ Certification of Incorporation, MOA, Registration Certificate,objects, bye laws Along with the Accounts Before the CIT(E) Application before expiry of one year from creation of trust If after one year, registration is given from 1st date of the FY in which application is made Any modification in object fresh registration w.e.f. 01.04.2018

Compulsory clauses to be included in the deeds Charitable Trusts:- The following are the compulsory clauses to be included in the deed of a charitable Trust. The beneficiaries of the trust are general public and no discrimination for caste, creed, religion or sex. Object clause should not be changed without the prior approval of Income tax authorities. The trust should not give any benefits to its authors/founders etc and who are related parties as per sub section 3 of section 13. In case of dissolution of the trust, the assets of the trust should be transferred to a registered trust with the same object. The trust is irrevocable.

12AA applicable for PY only when assessment proceedings are pending as on the date of application wef 1.10.14 Order by CIT(E) Objects of the trust Genuineness of activities of trust Call for relevant documents Approve/reject within six months Deemed registration if order is not passed within six months. 12AA(3) and 12AA(4): Cancellation of registration

Appeal against rejection of 12AA before ITAT within 60 days CIT Vs U.P Forest Corporation (1998) 297 ITR 1 (SC) 12AA registration is a pre-requisite for claim of exemption u/s 11. 12A(1)(b): Compulsory audit if income crosses max chargeable limit before exemption u/s 11&12 ;Form 10B to be filed along with the R/I 12AA not required, for educational and medical institutions if gross receipts less than 1 crore 10(23C)(iiiad) and 10(23C)(iiiae)

10(23C) (vi) Educational and medical institutions having gross receipts above 1 crore, 12AA not required but, have to be notified u/s 10(23C)(vi) and 10(23C)(via) Application to be made before 30th September of the relevant year Before CIT(E) One time registration w.e.f. 2006 To be disposed off within 12 months from the date of application Appeal before ITAT in case of rejection Compulsory audit in Form 10BB

Recent Amendments Finance Act 2016 Chapter XII-EB Section 115TD, 115TE, 115TF (Taxing Accreted Income@MMR) Finance Act 2017 Insertion of Explanation 2 to section 11 (1), w.e.f 01.04.2018 (corpus donation given by trusts not treated as application). Insertion of clause (ab) below section 12A(1)- from 1.04.2018(if trust objects changed to register again). Insertion of clause (ba) below clause (b) of Section 12A (1) rws Circular dated 23.04.2019 (To file ITR within time u/s 139(31.03) to claim exemption) A new clause (x) has been inserted to Section 56(2) from 1.04.2018(exception clause). Sub-section 5D to section 80G has been amended to the effect that word two has been replaced for ten .(Cash donation allowable <=2000) Section 133A of the IT Act has been amended to provide powers of survey to the Income-tax Authorities, w.e.f 01.04.2018.(Power to Survey Charitable organisations) Finance Act 2018 Amendment to Sub section 1 of Section 139A (Quoting of PAN by trustees) Insertion of 13th Proviso to Section 10(23C) & Explanation 3 to Sub section (1) of 11 (TDS applicable) Disallowance of Expenditure in Cash.(above 10,000) Finance bill 2019 Substitution of clause (a) in sub section 1 of 12AA and amendments to Sub section 4 of 12AA(power of CIT to call for documents and cancel registration)

New Section 12AB New Section 12AB introduced in Finance Act 2020, following effect shall take place with effect from 1stJune 2020(now deferred and will be applicable from 1stOctober 2020 and have to complied latest by 31stDecember, 2020.):- All the existing charitable and religious institutions (including NGOs) which are registered or approved under the following sections- Section 12A Section 12AA Section 10(23C) are compulsorily required to apply under section 12AB for fresh registration in order to continue availing exemption under section 10 or 11, as the case may be.

The assessee has to apply in Form 10A and approval will be given by CIT/PCIT Time limit for the amended Sec.12AB is given below:- Category Time Limits Institutes already registered under section 12A or 12AA or having certificate under section 80G By 31stAugust (Now by 31stDecember 2020) Institutes who have obtained registration under section 12AB 6 months prior to the expiry of tenure of 5 years (refer the Validity Period of Registration Paragraph) Institutions that have provisionally obtained registrations under section 12AB 6 months prior to the expiry date of the provisional registration; or Within 6 months of the commencement of its activities; Whichever is earlier. Where institutions have modified the objectives Within 30 days from the date of such modifications. In any other case At least one month prior to the commencement of the previous year.

80G for charitable institutions: Form 10G as per Rule 11AA To enclose 12AA/10(23C) notification To CIT(E) Approval within six months Wef 1.10.09 perpetuity (W.e.f.01.10.2020- 12AB ) 115BBC anonymous donations Applicable for charitable trusts not for religious trusts Taxed at MMR Amount taxable in excess of 1 lakh or 5 % of gross receipts whichever is higher.

Exemptions will not apply if- 13(1)(a) applied for private religious group and not for public 13(1)(b) charitable trust for a benefit of a particular religious community 13(1)(c) payment to specified persons referred in section 13(3) 13(1)(d) if investment not in modes prescribed in 11(5)

13A Political parties Books of account to be maintained, identity of donors above Rs.20,000 to be maintained, compulsory audit, report under Representation of People s Act to be submitted by the Treasurer. 13B Electoral trust Distributes to political party as required under Representation of People s Act, 95% of aggregate donations distributed and follows ruled as laid by Central Government.

New Provisions Section 40(a) (ia) with regard to deduction of Tax at Source on expenses as per Chapter XII-B. That means, the Trust has to deduct, pay and file ETDS returns. Section 40A (3) which prohibits payment of cash more than Ten Thousand rupees for any expenses including expenses which are capital in nature. Section 40A(3A) which deals with if any expenditure was allowed for deduction, then any payment in cash more than ten thousand rupees will attract the disallowance of such expenses in the year in which payment is made. SECTION 115TD Tax on Accreted Income As per section 115TD, if a trust registered under section 12A does certain defaults, then the tax shall be levied on accreted income at Maximum Marginal Rate. Maximum Marginal Rate means the highest tax applicable to an individual increased by surcharge and cess.

Section 10(23C) Section 10 - Incomes not included in total income. 10(23C) any income received by any person on behalf of- (i) the Prime Minister's National Relief Fund; or (ii) the Prime Minister's Fund (Promotion of Folk Art); or (iii) the Prime Minister's Aid to Students Fund;or (iiia) the National Foundation for Communal Harmony; or (iiiaa) the swachh Bharat Kosh, set up by the CG; or (iiiaaa) the Clean Ganga Fund, set up by the CG; or (iiiaaaa) the Chief Minister s Relief Fund or the Lieutenant Governor s Relief Fund in r/o any State or UT or

Section 10(23C) ( iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit, which is wholly or substantially financed by the Government; or (iiiac) any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit and which is wholly or substantially financed by the Government(>50%); or

Section 10(23C) (iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed (1 crore); or (iiiae) any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, if the aggregate annual receipts of such hospital or institution do not exceed the amount of annual receipts as may be prescribed (1 crore); or

Section 10(23C) (iv) any other fund or institution established for charitable purposes which may be approved by prescribed authority, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States; or (v) any trust (including any other legal obligation) or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be be approved by prescribed authority, having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof:

Section 10(23C) (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in subclause(iiiab) of sub- clause(iiiad) and which may be approved by the prescribed authority; or (via) any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, other than those mentioned in sub- clause (iiiac) or sub-clause (iiiae) and which may be approved by the prescribed authority: