Understanding Taxation and Assessment of Charitable Trusts
Explore the complexities and nuances of taxation and assessment for charitable trusts and institutions. Learn about key issues such as tax rates, income computation, tax audits, capital gains, registration surrender, and more. Discover the basic rules to follow, including exemptions, income categorization, donation guidelines, and compliance requirements. Gain insights into income from property held for charitable or religious purposes as per relevant sections.
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Taxation/assessment of Charitable Trust or Institution 98 CA SUNIL GARG 9811015509 1
MEANING & TYPES OF TRUST/NGO/NPO Trust registered under Indian Trust Act -1882 Society under the society registration Act -1860 Section 8 Companies under The Companies Act -2013 2
CHARITABLE TRUST : SOME COMPLEX ISSUES Rate of tax : Normal / special rate / MMR . Whether income of charitable trust to be computed head wise . When provisions of 28 to 44 C , will be applicable . When tax audit report u/s 44 AB is to be filed . Taxability of capital gain in case of charitable trust . whether 12 AA/ 12 AB registration can be surrendered suo moto . in case of unregistered trust , whether section 56(2)(x) will be attracted . 3
BASIC RULES : ONE`S Once a charity is always a charity Once exemption is available u/s 11 (1) : income not to be charged head wise . Once income of trust categorize as business income : section 28 to 44 C will be applicable including TAX AUDIT Once Accumulated should not be donated If donated out of normal accumulation (15 %) no application if donated out of accumulated funds (sec 11(2) taxable income 5
BASIC RULES TO FOLL0W : TWO`S Two definition : Business (section 2(13) vs charitable purpose (section 2(15) Two important aspect to be followed : Object and Application Two Violation either in object or application will lead to taxability . Two non compliance :Diversion of income & non compliance of any other law will lead cancellation of registration (sec 12 AA(4) (circular 21/2016) Two Changes : object (apply afresh ) vs change of management no effect Two important condition : irrevocable transfer and no benefit to interested parties Both revenue and capital expenditure can be taken as application u/s 11 (1) 6
11.INCOME FROM PROPERTY HELD FOR CHARITABLE OR RELIGIOUS PURPOSE Subject to provisions of section 60 to 63 , following income shall not be included in the total income of previous year of the person in receipt of the income : (a) income from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in INDIA and where any such income is accumulated or set apart for application to such purposes in INDIA , to the extent to which the income so accumulated or set apart is not in excess of 15 % of the income from such property . 7
CHARITABLE PURPOSE : 2(15) CHARITABLE PURPOSE : 2(15) I) RELIEF TO THE POOR II) EDUCATION III) MEDICAL RELIEF IV) YOGA (V) PRESERVATION OF ENVIRONMENT (INCL WATERSHEDS, FOREST etc) (VI) PRESERVATION OF MONUMENTS OR PLACES OR OBJECTS OF ARTISTIC OR HISTORIC INTEREST (VII) ADVANCEMENT OF ANY OTHER OBJECTS OF GENERAL PUBLIC UTILITY ( in the last limb , receipt from commercial activity should not exceed 20 % of total receipt ) 8
INCOME FROM PROPERTY HELD FOR CHARITABLE OR RELIGIOUS PURPOSE 11 (1) (a) Applied /accumulated /set apart in INDIA (85 %) 11(1)(d) Corpus donation (with specific direction from donor ) exempt Explanation (1)1 15 % of income of trust as well as voluntary contribution Explanation (1)2 Application falls short due to non receipt/or any other reason may be spent in the year of receipt/immediately following year 11 (1B) Apply with AO in form 9 before due date of ITR But if not applied at the time of receipt , than it will be taxable Explanation 2 Corpus donation out of current year income to other trust u/s 12 AA , will not be application Explanation 3 Provision of 40 A(3) /3A & 40(a)(ia) shall apply mutatis mutandis for calculating application . If default , will not be treated as application 9
INCOME FROM PROPERTY HELD FOR CHARITABLE OR RELIGIOUS PURPOSE EXPLAINATION 3A NOTIFIED RELIGIOUS TRUST CAN TREAT VOLUNTARY CONTRIBUTION AS CORPUS 3(B) If violation by above religious trust then deemed income in the year of violation 4 (i) Amount spend out of corpus , not to be taken as application . But if amount spend out of corpus is reinvested then it will be treated as application 4(ii) Application out of borrowed funds will not be treated as application , but repayment of such loan shall be allowed as application . 5 Not set off or deduction or allowance of any excess application of earlier year , in calculating of application for that year . 10
CAPITAL GAIN/ ACCUMULATION OF INCOME 11 (1) 1A Capital gain on transfer of capital asset - 11 (2) Income if not applied can be accumulated up to five year , for specific purpose File form 10 with AO before due date of ITR Amount accumulated to be invested in modes given in 11 (5) 11(3) Consequences of violation of accumulation/ application / purpose / donation to other charitable trust : taxable in the year immediately following , when violation occurs 11 (3A) AO may allow change of purpose ( if there is valid reason) Donation to other charitable trust , in case dissolution 11
BUSINESS INCOME OF TRUST 11 (4) Assessment of business undertaking of assets 11 (4A) If the business is not incidental to the main object , no deduction u/s 11 11 (5) Modes of investment 11(6) No deprecation allowance , if capital expenditure has been taken as application 11 (7) Income exempt u/s sec 10 , other than 10(1) & 10 (23C) shall have to be applied as per 11(1) Trust having both registration u/s 12 AA & 10(239 C) then 12 AA registration will be in operative . 12
EXPLANATION ADDED BY FA , 2022 Application .shall be allowed on payment basis only . payment should be made during the previous year , not before due date like 43B method of accounting may be cash or mercantile but application on payment basis only cash flow statement should be certified along with with audited balance sheet . 13
SECTION 11 NOT TO APPLY : IF VIOLATION DONE 13 (1)(a) (1)(b) Private religious trust or for the benefit of any particular religious community or caste 1(c) Trust deed or bye laws ensures or any income /property used or applied for the benefit of interested parties (except in case trust incorporated before commencement of this act , and the deed has such a clause 1(d) Income not to be invested in any other mode than 11 (5) , except in the case , where trust has business undertaking 13 (2) Benefit to trustees /interested parties to be at arms length price mentioned in 13 (3) 13(3) a) Author/ trustees /founder/manager and their relative b) Concern , where above person has substantial interest c) Person who has made contribution exceeding 50 K 13 (4) If Investment in related concern can be up to 5% of the capital of that concern , exemption will not be withdrawn 14
SEC 13 CONTINUED 13 (6) Trust running educational /medical institution can provide such facility to related parties , but the value of such services will be deemed to be income of such trust sec 12 (2) 13(7) Anonymous donation even after paying tax has to be applied as per 11 (1) 13 (8) If proviso to section 2(15) , becomes applicable than no exemption u/s 11 13(9) If form 10 not filed /or ITR not filed n time , section 11 (2) benefit will not be allowed Explnation 1 Relative defined (note definition is different than 2(41) 2 Benefit to SC/ST/BC/women/children are a class in itself 3 Related concern means 20% shareholding or profit beneficially owned by such person or along with relatives 15
AMENDMENT BY FINANCE ACT 2021 Corpus fund now needs to be invested in modes specified in section 11(5) Application for charitable or religious purpose out of corpus fund will not be treated as application . ( as corpus donation is not income , hence no application allowed) if amount spend from corpus fund in one year , and next year trust deposit back the amount on corpus fund out of regular income , it will be treated as income in that year . Amount spend out of borrowed fund will not be treated as application ( because borrowed fund is not a income ) Repayment of loan will be treated as APPLICATION . 16
AMENDMENT BY FINANCE ACT 2021 NO SET OFF OR DEDUCTION OR ALLOWANCE OF ANY EXCESS APPLICATION Explanation 5. to section 11(1) added by finance act 2021 For the purposes of this sub-section, it is hereby clarified that the calculation of income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding the previous year. ; 17
CHRITABLE TRUST : AMENDMENT BY FA-22 (I) ensuring their effective monitoring and implementation; (II) bringing consistency in the provisions of the two exemption regimes; and (III) providing clarity on taxation in certain circumstances.
(I)ENSURING THEIR EFFECTIVE MONITORING AND IMPLEMENTATION (1.1)Books of accounts to be maintained : now mandatory change in clause (b) of sub-section (1) of section 12A tenth proviso to clause (23C) of section 10 . Effect : if books of accounts not maintained , benefit of section 11 will not be applicable However no change in penalty provisons u/s section 271 A
(1.2) PENALTY FOR PASSING ON UNREASONABLE BENEFITS TO TRUSTEE OR SPECIFIED PERSONS.( SECTION 13(1)(C ) New provisio twenty one added to section 10(23(c), uneasonable sum will be income of such trust or fund Section 271 AAE introduced Penality @ 100 % first time & 200 % on subsequent default Quantum of penalty aggregate or unreasonable sum 20
(I)ENSURING THEIR EFFECTIVE MONITORING AND IMPLEMENTATION (1.3)Reference to the Principal Commissioner or Commissioner (PCIT/CIT) for the cancellation of registration/approval: (i) Registration or approval of non-genuine trusts or institution under automated approval system: ii) Differences in the provisions related to reference for the cancellation of trusts under the both the regimes iii) No time limit prescribed for the PCIT/CIT to decide on references for the withdrawal of approval
(I) ENSURING THEIR EFFECTIVE MONITORING AND IMPLEMENTATION : POWER TO REVOKE CANCELLATION Section 12AB(4) Replaced with new sub section 4 Where PCIT/CIT has NOTICED SPECIFIED VIOLATION Has received reference from AO under 143(3) Such case has been selected in accordance with risk management strategy formulated by the board Then PCIT/CIT shall Call for such information , as he deem necessary May Cancel or retain the registration Will send a copy to AO
POWER TO REVOKE REGISTRATION : SPECIFIC VIOLATION Meaning of Specific Violation income has been applied for other than for the object of the trust . income from PGBP from business , which is not incidental to main object . income from business , which is incidental to main object but separate books of accounts are not maintained any part of income applied for private religious purpose any part of income applied to particular religious community or cast contd:
POWER TO REVOKE REGISTRATION : SPECIFIC VIOLATION Any activity being carried out by the trust or institution (i) is not genuine; or (ii) is not being carried out in accordance with all or any of the conditions subject to which it was registered; or The trust has not complied with any law for the time being in force by the trust as are material for the purpose of achieving its object and any order , decree or direction for such non compliance has been passed and that either has not been disputed or attained the finality 12(AB)(5) : THE ORDER OF REVOCATION IS TO PASSED WITHIN SIX MONTH FROM THE END OF QUARTER IN WHICH FIRST NOTICE IS ISSUED
(II) BRINGING CONSISTENCY IN THE PROVISIONS OF TWO EXEMPTION REGIMES (2.1)Accumulation provision : Explaination added to third provisio to 10(23)(c ) There were no provision in 10(23)( c) at par with 11(3)/13 (3A) Accumulation for five year, if not utilized , taxability will be in fifth year instead of sixth year . Now form 10 has to filed in case of 10(23)(c ) also .
(II) BRINGING CONSISTENCY IN THE PROVISIONS OF TWO EXEMPTION THE REGIMES (2.2)Provions of section 13(1)(c ) incorporated in 10(23)( c) Twenty first proviso in clause (23C) of section 10 of the Act added. To provide if income or property of institution has been applied directly or indirectly for the benefit of any person referred to in sub-section (3) of section 13, Such income or part of income or property shall be deemed to be the income of such person of the previous year in which it is so applied. The provisions of sub-section (2), (4) and (6) of section 13 of the Act shall also apply to trust or institution under the first regime.
BRINGING CONSISTENCY IN THE PROVISIONS OF TWO EXEMPTION THE REGIMES (2.3 )The provisions of section 115TD to apply to any trust or institution under the first regime. Hence, it is proposed to amend the provisions of section 115TD, 115TE and 115TF of the Act to make them applicable to any trust or institution under the first regime as well.
BRINGING CONSISTENCY IN THE PROVISIONS OF TWO EXEMPTION THE REGIMES (2.4)Filing of return by person claiming exemption under clause (23C) of section 10 of the Act it is proposed to insert twentieth proviso to clause (23C) of section 10 of the Act to provide that for the purpose of exemption under this clause, any trust or institution under the first regime is required to furnish the return of income for the previous year in accordance with the provisions of sub-section (4C) of section 139 of the Act, within the time allowed under that section.
. (3)PROVIDING CLARITY ON TAXATION IN CERTAIN CIRCUMSTANCE : SECTION 13(10 &11) AND 22 ND 23 RD PROVISIO TO SECTION 10(23 ) ( C ) (3.1)When exemption is not available : (taxable at normal rates ) (a) Having commercial receipts in excess of 20% of the annual receipts in violation of the provisions of proviso to section 2(15); (b) Not getting the books of account audited; and not maintaining books of accounts (c) Not filing the return of income u/s 139 (4A)
PROVIDING CLARITY ON TAXATION IN CERTAIN CIRCUMSTANCE : CONT Computation of taxable income , if exemption is denied Receipt minus expenses ( excluding capital expenditure ) Expenditure should not done from corpus fund Expenditure should not be out of borrowed funds Depreciation on asset , which has been claimed as application Any donation or contribution made will not be allowed as deduction . Section 40(a)(ia) and 40A(3&3A) shall apply mutatis mutandis No deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee under any other provision of the Act.
2 .PROVIDING CLARITY ON TAXATION IN CERTAIN CIRCUMSTANCE (3.2)Taxation of certain income of the trusts or institutions under both the regimes at special rate ( Section 115 BBI ) now introduced Unreasonable benefit to related party (13 )(1)( c) income accumulated or set apert for more than 15 % , Funds to be invested in specified mode (13)(1)(d) Deemed income under 11(3) & clause (2) to explanation to section 11(1) : condition of form 9A violated second and third provisio to section 10(23(c ) mandates 85 % application , otherwise whole income become taxable .
2 .PROVIDING CLARITY ON TAXATION IN CERTAIN CIRCUMSTANCE Computation of tax lability on above specified income section 115 BBI to tax specified income @ 30% specified income means : income accumulated or set apart for more than 15 % deemed income u/s 11(3), 11(1B) and 3rd provisio to 10(23(c ) any income in violation of section 13(1)( c ) and (d) and 10(23) (c ) any income which is not excluded in section 11(1) (c )
PROVIDING CLARITY ON TAXATION IN CERTAIN CIRCUMSTANCE 5.3 Religious places registered u/s 80 (g)(2)(b) can treat any voluntary contribution as corpus . (a) applies such corpus only for the purpose for which the voluntary contribution was made; (b) does not apply such corpus for making contribution or donation to any person; (c) maintains such corpus as separately identifiable; and (d) invests or deposits such corpus in the forms and modes specified under sub-section (5) of section 11. If violation than it will be deemed to income
PROVIDING CLARITY ON TAXATION IN CERTAIN CIRCUMSTANCE 5.4 Clarifying that application will be allowed only when its actually paid Explanation 3 to clause (23C) of section 10 and Explanation to section 11] added any sum payable by trust shall be deemed to be application only in the year , when it is actually paid , irrespective of method of accounting followed .
IMPORTANT POINTS TO REMEMBER Excess application more than 100 % in a year can be carry forward . ( now it can not be carry forward or adjusted , amendment by FA 2021) To claim deduction u/s 11 , registration u/s 12 AB (earlier 12 AA ) is must Educational /medical institution having receipt up to 500 lac can claim deduction u/s 10(23C) (iiiad & iiiae ) without any registration or application . Corpus donation to other charitable trust out of current income is not allowed as application ,and donation to other trust out of accumulated fund is violation . A charitable or religious trust or both can be registered u/s 11 & 12 AB . Accumulation allowed up to 15 % of Gross receipt (ex corpus) not net income Corpus funds now has to be invested in modes specified in section 11(5).(FA 2021) 35
IIMPORTANT POINTS TO REMEMBER : If income can not be applied up to 85% either due to non receipt or otherwise , than apply in form 9A for deemed application . Then you can apply this income either in the year of receipt or Next year . If the trust wants to accumulate the income for five years for specific purpose , than apply in form 10 and accumulate in any mode specified in section 11(5). Both form 9A as well as form 10 has to be filed before due date of filing the return of income . The amount so accumulated has to spend for specific purpose only , the trust can apply for change of purpose with AO , but it should be within the object . 36
REGISTRATION PROCESS :12 A (1) AC i) All the existing registered trust , to apply fresh registration till 31st March, 2022. ii) New registration will be for five years , hence to apply again six month prior the period of five years expires (four and half year ) iii) New trust can apply for provisional registration to be granted for three years , Apply for permanent registration within six month of commencement or six month prior to expiry of three years iv)Change in object , apply within 30 days v)New trust , one month prior to commencement of AY 37
SECTION 12 AB (REPLACING SEC 12 AA) i) Existing registered trust will be renewed automatically but have to apply. ii) in case of renewal , PCIT will enquire about a)Genuineness of the object b)compliance with any other law , mandatory for the object (like FCRA, ESI/EPF) iii) Pending application shall be provided provisional registration iv) Time period for passing order a) Provisional one month b)Existing registered three month c)Renewal six months 38
CANCELLATION OF REGISTRATION Section 12 AB(4) replaced by Finance Act 22 Where PCIT/CIT has NOTICED SPECIFIED VIOLATION Has received reference from AO under 143(3) Such case has been selected in accordance with risk management strategy formulated by the board PCIT may cancel registration after giving opportunity of being heard. Section 12 AB (5) undue benefit to trustee as given in section 13 violation or non compliance of any law may lead to cancellation 39
TAX ON ACCREDITED INCOME :115 TD 115 (1)A trust or institution registered under 12 AA /12 AB has i) Converted in any form , which is ineligible for 12 AA Ii) Merged with any other entity , not having similar object & 12 AA Iii) In case of dissolution , fails to transfer assets with entity registered in 12 AA/10(23) (c) with in 12 month from dissolution Than additional tax on accreted income will be charged at MMR on specified date 115(2)Accreted income means FMV of assets minus liability as per rule 17 CB Accreted income will not include , assets created out of (i) agricultural income Ii) income , when trust was not registered u/s 12 AA 40
SECTION 115 TD In case of dissolution of trust, if a part of assets has been transferred, those assets will not be included to calculate accredited income 115 (3) : a trust shall be deemed to be converted to ineligible entity i) if registration granted u/s 12 AA has been cancelled Ii) trust changed the object and either could not apply for fresh registration or application been rejected 41
SECTION 115 BBC ANONYMOUS DONATION Income received d by trust / institution registered u/s 11 and 10 (23)(c) sub clause (iii ad) (iii ae) (iv & v)(vi & via) Tax @ 30 % on anonymous donation i) 5 % of total donation or ii) Rs one lac , whichever is higher Not applicable to religious trust or institution FA 2020 mandates furnishing of detail of donor by done. Fee u/s 234 G (Rs 200 per day ) and penalty u/s 271 K up to 1 lac 42
WHEN TAX IS LEVIED AT MMR i) If trust deed ensures any income to the benefit of specified person in section 13 Ii)Any income or property is actually applied for the benefit of specified persons Iii) The trust funds invested other than mode of 11 (5) 43
IMPORTANT FORMS FORM 9 A APPLICATION FOR EXCERCISING OPTION IN 11 (1) EXPLANATION FORM 10 ACCUMULATION OF FUNDS AS PER SECTION 11 (2) FORM 10 A APPLICATION FOR REGISTRATIOM U/S 12 AA (now 12AB) Form 10 B Report of auditors ( new draft report has also been issued by CBDT , but not notified ) Form 10 BB Audit report u/s 10 (23C) clause (iv,v,vi,via) ITR -7 Return of income 139 (1A) Authour and trustee mandatory to have PAN 139 (4A) Mandatory to file return to claim exemption u/s 11 44
Important Section for Charitable Trust Important Section for Charitable Trust /institution /institution Charitable Purpose : Section 2(15) Voluntary contribution: Section 2(24) Educational/medical institution : Section 10(23C) Application/registration/violation : Section 11,12,13 Anonymous Donation Section 1115 BBC Tax on Accredited Income (EXIT TAX ) : Section 115 TD When tax is to be charged at MMR : Section 164(2) provisio 45
THANK YOU Please feel free to contact us CA SUNIL GARG, 9811015509 CA RAJ CHAWLA , 9811081083 DELHI *GURUGRAM *FARIDABAD
