Taxation of Public Charitable Trusts

PKF Sridhar & Santhanam LLP

www.pkfindia.in Local Perspective, Global Focus

Confidential – Not for Circulation

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TAXATION OF CHARITABLE TRUSTS

CA Ankur Agarwal




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In India NPO can be registered as :

Trusts SocietiesSection 8 Companie

s

Structure of Non Profit Organizations in India

The Income Tax Act gives equal treatment to all categoriesThe object is to encourage the role of philanthropy and in helping to meet the economic, social, cultural and religious needs of the society.




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Provisions in the Income Tax Act – Overview

Section 11 to 13 – Provides for tax

treatment in case of Charitable Trusts

Section 139 – Due date and filing of Return of

Income

Section 80G – Deals with deduction in

respect of donations to certain funds,

charitable institutions etc.

Section 2(15) – Defines a charitable objective




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Due Date and Form of Income Tax Return

Section 139(4A) – If total income before giving exemption u/s 11 & 12 exceeds the maximum amount not chargeable to tax, mandatory to file ROI

Clause (a)(ii) of Explanation 2 to Section 139(1) – "due date" means, where the assessee is a person (other than a company) whose accounts are required to be audited under this Act or under

any other law for the time being in force – 30th September of the AY

Clause (b) of subsection (1) of section 12A - Requires audit if total income before exemptions is more than the maximum amount not chargeable to tax (2,50,000)

DUE DATE – 30th September




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Due Date and Form of Income Tax Return….contd.

ITR 7 applicable

ITD issued a notification - compulsory to file e-Return for all the entities registered u/s 12A

Audit Report in 10B to be e-filed along with e-Return




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Income of a Charitable Trust

Income of Charitable

Trust

Voluntary Contribution

Income From

Property Held under

Trust

Capital Gains From

Trust Property

Anonymous Donations

Incidental Business




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Voluntary Contributions

Voluntary contributionforming part of corpus

• There should be specific direction that such contribution to form part of corpus of the trust

• 100% exempt with no condition of application or accumulation

• Section 11(1)(d)

Other Contributions

• Donations received without such specific instruction

• Deemed to be income derived from property held under trust

• To be included in the limit of 85%

Voluntary contributions are basically the donations received by the charitable/religious trust which form part of income of the trust. They are of two types:




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The expression ‘property’ used in Section 11 has the widest amplitude. It includes a business undertaking. It certainly takes in movable or immovable property like money, shares, securities, lands, buildings and houses.

Income From Property Held under Trust – What is Property?




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Income From Property Held under Trust – Bird’s Eye View

Income from property held under

trust for charitable/religious

nature15% of the gross receipt from such

property

85% of the gross receipt from such

property

Income Applied for charitable purpose

in India

Income not applied for charitable

purpose in India

Accumulated for specified purpose in

India

Not accumulated for specified

purpose in India




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Expenditure considered as Application of Income

Administrative Expenses : Apart from direct expenditure on objects like scholarships or medical relief, but all other expenses incurred in fulfilling the objects of the trust viz. rent, rates and taxes, establishment expenses, interest etc., as without incurring such expenses, it may not be possible for the trust to function.

Capital Expenditure : All capital expenditure laid out in furtherance of the objects and purposes of the Trust will be treated as application of income.

Repayment of loans : Repayment of loans taken to fulfill one of the object of trust is treated as an application of income for charitable purpose.

Payment of taxes : The expenditure incurred by way of payment of tax out of the current year’s income has to be considered as application for charitable purposes.

Donation to other trusts : When a donor trust which is itself a charitable and religious trust donates its income to another trust, the donor trust can be said to have applied its income for religious and charitable purposes.

Depreciation : Depreciation shall be allowed on the assets, the cost of which had been fully allowed as application of income under section 11

Excess expenditure of an earlier year can be adjusted against income of subsequent year and such adjustment is to be treated as application of income in subsequent year.




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Deemed Application of Application

When an organisation is unable to apply 85% of its income because it has not been received any portion thereof or for any other reason, then it can exercise the option under Explanation- 2 to section 11(1).

Income is accrued but not received

Income is received, but it could not be applied

Can spend it in the year of receipt or the year succeeding the year in which

the income accrued, which ever is later.

Can spend the income in the year succeeding the year in which the

income is received

Application to the assessing officer in writing before the time limit specified under section 139(1) for filing return of income.




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Accumulation of Income

Where 85 per cent of the income is not applied/deemed to have been applied to charitable or religious purposes, the trust may accumulate either the whole or part of its income for future application in India. Such income will not be included in the total income of the trust in the year of receipt of income subject to conditions.




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Accumulation of Income…contd.

The period of accumulation shall

not exceed 5

years

Application in Form No. 10 to the AO before due

date of return filing u/s 139(1)

Section 11(2)(b) - money

accumulated should be invested in

mode prescribed

under section 11(5)

Conditions for accumulation of Income u/s 11(2)




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Withdrawal of Exemption for accumulated amount u/s 11(2)

In the following cases, any income which has been accumulated u/s 11(2) shall be deemed to be a part of income and exemption will be withdrawn :

Particulars Year of TaxabilityApplied for purpose other than the purpose for which it is accumulated or set apart

Income of previous year in which so applied

Ceases to be invested in the forms specified u/s11(5)

Income of previous year in which it so ceases

If not utilized till 5 years or immediately succeeding year

Income of previous year immediately following expiry of 5th year.

Donated to trust registered u/s 12AA or 10(23C)

Income of previous year in which income is so donated




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Treatment of Capital Gains

Income’, as defined under section 2(24), includes Capital Gains,. Therefore, for the purposes of section 11(1)(a), Capital Gains are also considered as a part of the income. Since, Capital Gains are also considered as a part of the income, therefore, they can be applied for charitable or religious purposes.

Under section 11(1A), if the entire amount of net consideration is invested in another Capital Asset then, the entire Capital Gain will be deemed to have been applied for Charitable or Religious purposes.

Under section 11(1A), if a part of the entire amount of net consideration is invested in another Capital Asset then, the appropriate fraction of the Capital Gain will be deemed to have been applied for charitable or Religious Purposes.

Cost of new Asset >=

Net Consideration from asset sold

Entire capital gain exempt

Cost of new Asset <

Net Consideration

from asset soldCapital gain exempt = Cost

of New Asset – Old Asset




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Anonymous Donations

Anonymous donations are basically the donations where the person receiving the donations doesn’t maintain any record of the person giving the donation. E.g. – Offerings given in temple in donation box.

Step 1 •Compute the total amount of anonymous donation received by the charitable/religious institution

Step 2 •Compute 5% of the total donations(corpus donations + anonymous donations + other donations not forming part of corpus)

Step 3 •Select the higher of the following two:•a) Amount computed in step 2•b) 1,00,000

The amount computed in step 3 shall be exempt and the remaining amounts of anonymous donations are taxable in the hands of such charitable/religious institution @ flat 30% (115BBC)




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Types of Accumulation – Lets Compare and Contrast

Accumulation u/s 11(1) Accumulation u/s 11(2)

Accumulation upto 15% of income Accumulation beyond 15% of income

Not subject to application within a maximum permissible period of 5 years

Subject to application within a maximum permissible period of 5 years

Can be a part of corpus Has to be invested in modes specified u/s 11(5)




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Exemptions not allowed under section 11

Section

Nature & extent of income not exempt under Section11

13(1)(a) Income of private religious trust not used for public benefit13(1)(b) Income of charitable trust created for benefit for particular

religious community13(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 funds are invested other than in Section 11(5)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)




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ICAI – Whether charitable motive?

DGIT (EX)

Facts of the Case

ICAI applied for registration under section 10(23c)(vi) Rejected by the DGIT (Ex) It was charging fees for holding coaching classes and campus placements, which amounted to carrying on business.

ICAI was not maintaining separate books of account with respect to the activity of coaching students AO denied ICAI claim under section 11.

On appeal, the matter was remanded back to the DGIT (Ex)

DGIT (Ex) Institute was carrying on business and rejected its claim

HI

GH COURT

SUPREME COURT

SUPREME COURT OF INDIA [2016] 65 taxmann.com 63 (SC)Director General of Income-tax vs. ICAI




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Taxation of Public Charitable Trusts

Law

Transcript of Taxation of Public Charitable Trusts