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Taxation of Charitable Trust & Socities

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

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Taxation of Charitable Trust & Socities

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  1. Taxation of Charitable Trust & Socities CA ASHOK SETH B. Sc, F.C.A., DISA (ICA) Lucknow as@sethspro.com

  2. 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” Ashok Seth

  3. 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 Ashok Seth

  4. 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 sub-registrar office • Act not applicable to Public Trusts Ashok Seth

  5. 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 Court- Trustee of HEH The Nizam’s Pilgrimage Money Trust v. CIT 243 ITR 676 (SC). Ashok Seth

  6. 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.” Ashok Seth

  7. 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; Ashok Seth

  8. 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 Ashok Seth

  9. 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) Ashok Seth

  10. 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) Ashok Seth

  11. 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 ParshwanathDigamber 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.) Ashok Seth

  12. 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.) SardariLalOberai Memorial Charitable Trust 3 SOT 229 (Delhi). Ashok Seth

  13. 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 Ashok Seth

  14. 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. Ashok Seth

  15. 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 servicein relation toany trade, commerce or business, for a fee, cess or any other consideration, • Section 11(4A) • Amendment not affecting relief to poor, Medical and education Ashok Seth

  16. 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” Ashok Seth

  17. 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 Ashok Seth

  18. 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) Ashok Seth

  19. 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. Ashok Seth

  20. 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)) Ashok Seth

  21. 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? Ashok Seth

  22. 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 Ashok Seth

  23. 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) Ashok Seth

  24. 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. Ashok Seth

  25. 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.). Ashok Seth

  26. 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” Ashok Seth

  27. 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 Ashok Seth

  28. 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 KalyanPratishthan 257 ITR 609 (del) • Not assessable u/s 68 Vidya Jyoti Trust ITA No 333/CTK/2012 20-July 12 Ashok Seth

  29. Corpus Donation • Donor letter being identical does not matter- Lala Kashi Ram 41 TTJ 408 (Del) • There should be positive indication of Donor PrabodhanPrakashan50 ITD 135 & Shri Digambar Jain NayaMandir 70 ITD 121- Box marked “Corpus” will not be sufficient. • Contrary view in Shree MahadeviTirath Sharda Ma Seva Sangh 133 TTJ (UO) 157 (Chd) Ashok Seth

  30. Anonymous Donation- Sec 115BBC (WEF 1-4-2007) • Anonymous donations (where are no records of the identity of the donor- name, 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% Ashok Seth

  31. 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. Ashok Seth

  32. 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%? Ashok Seth

  33. 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) Ashok Seth

  34. 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 Export- 143 ITR 579 (Bom) Ashok Seth

  35. 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. Ashok Seth

  36. 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 Ashok Seth

  37. 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. Ashok Seth

  38. 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. Ashok Seth

  39. Excess Expenditure of earlier years • Excess of expenditure in earlier years can be adjusted against income of subsequent year:- • Maharanaof Mewar Charitable 164 ITR 439 (Raj) • Shri Plot SwetambarMurtiPujak Jain 211 ITR 293 • MatrisevaTrust 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) Ashok Seth

  40. 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 Ashok Seth

  41. 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 Ashok Seth

  42. 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) Ashok Seth

  43. 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) Ashok Seth

  44. 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 Ashok Seth

  45. 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 Ashok Seth

  46. 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.) Ashok Seth

  47. Tax Audit • ICAI publication- Issues on Tax Audit • 44AB is applicable if trust carries on business even if income from business is exempt. Ashok Seth

  48. 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” Ashok Seth

  49. 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!  Ashok Seth

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