TAXATION OF CHARITABLE TRUSTS

Mr. Rohit JainVaish Associates, Advocates

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KEY PROVISIONS AT A GLANCE

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CHARITABLE PURPOSE

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Scope of “charitable purpose”

Recent amendments and implications

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CHARITABLE PURPOSE

Section 2(15) of the Income Tax Act, 1961 defines ‘Charitable Purpose’ to include the following:

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;

Advancement of any other object of general public utility;

Yoga [inserted w.e.f. 01.04.2016]

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CHARITABLE PURPOSE

RELIEF OF THE POOR

•Object for the welfare of economically & socially disadvantaged or needy;

•Benefit may be for a particular section;

•Can carry on incidental commercial activities, subject to section 11(4)/(4A).

Thiagarajar Charities vs. ACIT: 225 ITR 1010 (SC)

EDUCATION

•Systematic instruction, schooling or training of students;

•Vocational training, courses in fine arts and orientation courses constitute education;

•Need not be absolutely philanthropic or at subsidized rates;

Can carry on incidental commercial activities, subject to section 11(4)/(4A).

Lok Shikshana Trust: 101 ITR 234 (SC)

MEDICAL RELIEF

•‘Medical’ – means art of healing or preventing any disease;

•Establishment and maintenance of medical facilities for the purposes of general public;

•Need not be absolutely philanthropic or at subsidized rates;

•Can carry on incidental commercial activities, subject to section 11(4)/(4A)

PRESERVATION OF ENVIORNMENT &

MONUMENTS

•Preservation of environment, which includes watershed, forests and wildlife;

•Preservation of monuments or places or objects of artistic or historic interest;

•Can carry on incidental commercial activities, subject to section 11(4)/(4A)

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CHARITABLE PURPOSEEDUCATION – WHETHER PER SE CHARITABLE?

Under the scheme of the Act ‘education’, per se, is charitable [Refer CIT vs. Krishi Utpadan Mandi Samiti, Purva, Unnao: 231 CTR 505 (All); Hiralal Bhagwati vs. CIT: 246 ITR 188 (Guj.)]

In order to claim exemption under sections 11/ 12 of the Act, what is required is that the assessee must be charitable trust/ institution. It is not at all necessary that:

(a) the services should be rendered only to the poor; and/ or

(b) the services should be rendered free and no fees should be charged

[Refer: Queen’s Educational Society vs. CIT: 372 ITR 699 (SC); St. Lawerence Educational Society (Regd.) v. CIT:197 Taxman 504 (Del)]

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CHARITABLE PURPOSEADVANCEMENT OF GENERAL PUBLIC UTILITY

•Any activity which is seen as benefiting the public in general or is found useful for them.

•‘Public’ need not mean for the benefit of the entire mankind or all persons in a particular country or State – sufficient if intention to benefit a section of the public [refer Ahmedabad Rana Caste Association: 82 ITR 704 (SC)].

•Various chambers of commerce set up to advance trade/ commerce have been held to be set up for advancement of object of general public utility [Refer: CIT vs. Andhra Chamber of Commerce: 55 ITR 722, CIT V. FICCI: 130 ITR 186 (SC), DIT V. Bharat Diamond Bourse: 126 Taxman 365 (SC)]

•State Road Transport Corporations also held to be charitable [refer CIT V. Andhra Pradesh State Road Transport Corporation: 159 ITR 1 (SC)]

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CHARITABLE PURPOSEPROVISO TO SECTION 2(15)

•Proviso to section 2(15) inserted w.e.f. 01.04.2009 provides that trust/ institution having object of general public utility shall not be charitable purpose if it involves:

a)carrying on of any activity in the nature of trade, commerce or business; or

b)rendering of service in relation to trade, commerce or business,

for cess, fee or other consideration, irrespective of the nature of use or application or retention of income derived from the aforesaid activities

•Proviso applicable only in respect of the last limb, i.e., ‘advancement of general public utility [Refer CBDT Circular No.11/2008 dated 19.12.2008: 221 CTR (St.) 1

•Proviso is, however, not applicable if aggregate receipts from such activities does not exceed 25 lacs (Rs.10 lacs upto AY 2011-12)

•Proviso will hit only such cases where a charitable institution is carrying on business activities with a profit motive in the garb of charitable purpose [refer ACIT vs. Surat Art Silk Cloth Manufacturers Association: 121 ITR 1 (SC) and India Trade Promotion Organisation vs. DGIT(E): 371 ITR 333 (Del)]

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RECENT AMENDMENTSProviso to section 2(15)

W.e.f. 01.04.2016 - Proviso to section 2(15) further provides that carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation thereto shall be treated as charitable if:

a)such activity is undertaken in the course of actual carrying out of advancement of any other object of general public utility; and

b)aggregate receipts from such activity(ies) do not exceed 20% of the total receipts of the trust/institution during the relevant previous year

Incidental activities undertaken to sub-serve primary objective of “advancement of any other object of general public utility” would, thus, be regarded as charitable.

For example, incidental activity of publication of books/ journals in the course of advancement of any object of public utility, like propagation of certain beliefs/ faith for the benefit of mankind [Refer: CST vs. Sai Publication Fund: 258 ITR 70 (SC); Baun Foundation Trust vs. CCIT & Anr: 251 CTR 237 (Bom)]

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RECENT AMENDMENTSSection 2(15)•Finance Act, 2015 has amended section 2(15) to include “Yoga” as a specific category in the definition of charitable purpose.

•Clinical Establishments (Registration and Regulation) Act, 2010 defines “recognized system of medicine” to include Yoga.

•The Delhi Bench of the Tribunal in the case of Divya Yoga Mandir Trust vs. JCIT: 60 SOT 154 held that Yoga falls in medical relief as well as education.

FORM, REGISTRATION & CANCELLATION

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Form of charitable entities

Trust Deed - Clauses

Registration of Trust

Cancellation of registration

Recent amendments

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FORM OF CHARITABLE ENTITIES

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FORM OF CHARITABLE ENTITIESPoints of Difference Trust Society Section 25 Company

Statue/Legislation The Registration Act, 1908

Societies Registration Act, 1860

Indian Companies Act, 1956

Ease of Formation Very simple, may take a week

Relatively simple, may take 1-2 months

Relatively complicated, may take 3-6 months

Jurisdiction Deputy Registrar/Charity Commissioner

Registrar of Societies Registrar of Companies

Registration As Trust As Society As a Company u/s 25 of Companies Act, 1956

Registration Document Trust Deed Memorandum of Association and Rules & regulations

Memorandum and articles of association and regulations

Members required Minimum – 2 trusteesMaximum – no limit

Minimum – 7 membersMaximum – no limit

Minimum – 2 membersMaximum – no limit

Board of Management Trustees/Board of Trustees

Governing body/executive committee

Board of directors/managing committee

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RECOMMENDED CLAUSES• Clause specifying name of the Trust and area of operation [refer section 11(1)(c)];

• Trust deed/document should clearly reveal the predominant charitable object;

• Each and every object of the Trust to be charitable in nature;

• Specific and separate classification of objects and powers;

• To avoid inclusion of general objects/ clauses;

• Deed of creation should be specific about the utilization of income for charitable

purposes;

• No clause for, direct or indirect, application of any part of the income or property of

the trust for the benefit of any of the members or their relatives or any related party;

• Specific prohibitory clause excluding any benefit to related party/ member to avoid

ambiguity;

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RECOMMENDED CLAUSES• Specific clause prohibiting distribution of any income/ profit to the members [refer

CIT vs. Delhi Stock Exchange Association Ltd: 248 ITR 258 (Del)]

• Specific clause prohibiting distribution of net assets after meeting all liabilities, on

dissolution, to founder, member(s), director(s) or donor(s), etc.

• Specific clause for transfer, on dissolution, of all the assets/ funds to another trust/

institution with similar charitable object;

• If business is intended to be carried on by the Trust/ Institution, then, clause enabling

the trust to carry on business with caveat that object of such business is only to sub-

serve the main/ predominant charitable object(s) of the trust/institution and the entire

profits to be utilized for such charitable objects.

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REGISTRATIONRegistration & Compliance Section 12A/12AA Section 80G Section 10(23C)

When application is required to be made

Required to be made by all charitable trust/institution to claim exemption u/s 11/12 of the Act

Required to be made by all charitable trust/institution who wish to avail the benefit therein

Required to be made by educational institutes who wish to claim exemption u/s 10(23C) of the Act.

Form for application Form 10A Form 10G Form 56D

Rules Applicable 17A 11AA Rule 2CA

Time limit for filing of application

Before the expiry of one year from formation - Even if registration is delayed, exemption can be claimed for earlier years.

No specific time frame No specific time frame

Time limit for approval 6 months from end of the month in which application is received.

Within 6 months from date of application

Within 6 months from date of application

Time period of exemption Lifetime – Unless revoked u/s 12AA Lifetime Lifetime

Withdrawal of approval By PCIT/CIT Is granted simultaneous with registration u/s 12AA/10(23C)

By CCIT

Exemption w.e.f. The year in which it is granted and thereafter - In case of delayed registration, if objects in earlier years remain same as on date of registration, then exemption can be claimed for earlier years also (w.e.f. 01.10.2014)

Assessment year as specified in the order

The year in which it is granted and thereafter

Appeal on rejection Appeal to Income Tax Appellate Tribunal

Appeal to Income Tax Appellate Tribunal

Not provided – Constitutional Remedy of Writ

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CANCELLATIONCancellation of Registration

•Registration granted under section 12A/ 12AA can be revoked/cancelled under the following situations, viz.,

a)Activities undertaken not genuine; or

b)Activities not carried on in accordance with objects of the trust.

w.e.f. 1.10.2014

a)Income of Trust does not enure for the benefit of general public; or

b)Trust created for benefit of any particular religious community or caste (in case it is established after commencement of the Act); or

c)Any income or property of the trust is applied for benefit of specified persons like author of trust, trustees, etc.; or

d)Funds of Trust are invested in prohibited modes or are not invested or deposited in the modes specified in section 11(5).

•No exemption can be claimed under section 11/12, in the absence of a valid registration u/s 12A/12AA of the Act.

TAXATION & OTHER

REQUIREMENTS

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Taxation of charitable trust

Audit and other legal compliances

Recent amendments

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TAXATIONIncome of a charitable trust/ institution:

Includes:

(a)Voluntary contributions [refer section 2(24)(iia) and section 12];

(b)Any income from property(ies) held under trust for charitable purposes;

(c)Any income earned/ received while pursuing objects;

(d)Income from business [refer section 11(4)/ (4A)];

(e)Any other income

But Excludes: (a)Corpus donations [Refer section 11(1)(d) and section 12]

Income of charitable trust/ institution is computed as per normal commercial principles and not under/ as per the principles laid down in any of the five heads of income. [Refer Rao Bahadur Calavala Cunnan Chetty Charities: 135 ITR 485 (Mad), CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust: 198 ITR 598(Guj), CIT v. Raipur Pallottine Society: 180 ITR 579 (MP), CIT v. Society of the Sisters of St. Anne: 146 ITR 28 (Kar), CIT V. Programme for Community Organisation: 228 ITR 620 (Ker.)]

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TAXATIONIncome of a public charitable trust/ institution is not chargeable to tax if the following conditions are fulfilled:

Certificate of registration is granted to the trust under section 12A/ 12AA;

Trust/ Institution applies at least 85% of its income for the charitable purposes for which it is set up [refer section 11(1)(a)]

Balance 15% of income is allowed to be accumulated for application for charitable purposes in future;

In case of non-application of 85% of income, the trust/ institution is allowed under section 11(2) to accumulate and apply the unutilized surplus within 5 years for specified purposes, subject to fulfilment of following conditions:

Trust applies in Form No.10 before the assessing officer, specifying the amount, purpose and period of accumulation; and

Accumulated money is invested or deposited in the forms or modes specified in section 11(5) of the Act.

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TAXATION

Income eligible for exemption

Income not eligible for exemption u/s 11/12

Exemption u/s 11/12 forfeited

Not taxableTaxable at rates applicable

to AOPTaxable at Maximum

Marginal Rate (MMR)

Taxation of Charitable Trusts

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TAXATIONSources of Income Under Section Tax Rates

Voluntary Contribution (being corpus donation) 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 utilisation but not utilised 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/utilised specified purposes

11(3) AOP Rate

Excess business income as assessed by 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 Donation u/s 115BBC [referred infra] 30%

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RECENT AMENDMENTS [TAXATION]Finance (No.2) Act, 2014, w.e.f. 1.04.2015

• Depreciation would not be admissible in respect of cost of asset which is claimed as application of income.

• Aforesaid amendment nullifies the decision of the Bombay High Court in CIT vs. Institute of Banking Personnel Selection: 264 ITR 110, wherein it was held that depreciation is allowed as deduction, notwithstanding the fact that cost of asset is earlier allowed as application of income.

• If trust/ institution is registered under section 12A/12AA, then, such trust/ institution benefit of exemption under section 10 [other than agricultural income under clause (1) or clause (23C)] would not be admissible.

• Aforesaid amendment nullifies various decisions holding that if any part of income of charitable trust/ institution is not exempt under section 11/12, then, benefit of exemption under section 10 may be claimed, e.g. Dividend income exempt under section 10 [refer Jamsetji Tata Trust vs. JDIT (Exemption): 161 TTJ 742 (Mum)

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RECENT AMENDMENTS [TAXATION]

Accumulation of income – Section 11(2)

•Sections 11 and 13 amended by the Finance Act, 2015, to make it mandatory for the charitable trust/ institution seeking to accumulate 85% of its income to comply with the following conditions:

a)Return of income must be filed by the trust/ institution on or before due date specified in section 139(1); and

b)Statement of accumulation must be furnished before the AO before the due date of filing return

•If the aforesaid conditions are not satisfied, then, benefit of accumulation shall not be available and such income would be taxable under the provisions of the Act.

•Aforesaid amendment nullifies the decision of the Supreme Court in CIT v. Nagpur Hotel Owners Association: 247 ITR 201, wherein it was held that intimation of accumulation in Form No.10 can be filed before the assessing officer prior to completion of assessment.

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OTHER LEGAL COMPLIANCES Mandatory requirement to file return of income under section 139(4A) if trust/

institution has taxable income before claiming exemption under sections 11 and 12.

Return of income must be furnished in Form ITR 7 and such return must be furnished within the time prescribed under section 139(1) of the Act.

W.e.f. 01.04.2016, non-filing of return of income within prescribed time limit would result in denial of benefit of accumulation and such income would be taxable under the provisions of the Act.

Charitable entities claiming exemption under section 11/12 should get their accounts

audited by an Accountant in Form No.10B, which is to be filed along with the return of income.

All charitable institutions should apply for a permanent account number in Form No. 49A.

DONATIONS

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Anonymous Donations

Applicability of Foreign Contribution Regulation Act (‘FCRA’) on donations

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ANONYMOUS DONATIONSAnonymous Donation: Defined to mean any voluntary contribution, where the identity of the person making the contribution (in terms of name, address and other prescribed particulars) are not known.

Anonymous donations of the following entities is includable in the total income u/s 115BBC of the Act and liable to be taxed at 30%:

Charitable trusts /institutions referred u/s 11;Universities and other educational institutions referred to u/s 10(23C)(iiiad) and (vi);Hospitals and other medical institutions referred to u/s 10(23C)(iiiae)(via);Notified funds or institutions referred to u/s 10(23C)(iv);Notified trusts or institutions established wholly for public religious purposes or wholly for public religious or public charitable institutions referred to u/s 10(23C)(v).

Exclusions

Donations received by wholly religious trust.Wholly religious and charitable trust, (but will apply to donations made with specific direction that it is for any university, educational institute or hospital, etc.)

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DONATIONSThe Foreign Contribution Regulation Act, 2010 (‘FCRA Act’)

The avowed purpose of the FCRA Act is to regulate and prohibit acceptance and utilisation of foreign contribution for any activities detrimental to national interest.

Funds received from a foreign source, whether in India or outside India and whether in Indian or foreign currency is considered as ‘foreign contribution’

The definition of the term ‘foreign contribution’ is wide enough to include donations received in kind.

Funds received from Non-resident Indians, United Nations & World Bank not covered within the definition of ‘foreign source’.

Organisations having definite cultural/social/educational/religious/economic object can accept foreign contribution only after satisfying the following two conditions viz.:

a)It must register itself with the Central Government;

b)It must agree to receive foreign contribution only through one specific bank account

If the person referred as above has been found guilty of violation of any of the provisions of the FCRA, the unutilized or un-received amount of foreign contribution shall not be utilized or received, as the case may be, without the prior approval of the Central Government.

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THANK YOU

ROHIT@VAISHLAW.COMROHIT@VAISHLAW.COMVaish Associates, Advocates

Corporate, Tax, and Business Advisory Law Firm

New Delhi,1st & 11th Floor, Mohan Dev Building,13, Tolstoy Marg, New Delhi - 110001 IndiaPh: 91 11 4249 2525Fax: 91 11 2332 0484

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