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Taxation of Charitable Trusts & Societies

Taxation of Charitable Trusts & Societies. A presentation by CA Rajesh B. Doshi Raipur. Scope. Section 11 to 13 and 10(23C) of I.T.Act, 1961 Private, discretionary trusts excluded. Introduction.

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Taxation of Charitable Trusts & Societies

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  1. Taxation of Charitable Trusts & Societies A presentation by CA Rajesh B. Doshi Raipur Bhilai Branch 12th June 2010

  2. Scope • Section 11 to 13 and 10(23C) of I.T.Act, 1961 • Private, discretionary trusts excluded Bhilai Branch 12th June 2010

  3. Introduction • Private philanthropy playing important role in educational, social, medical field. In turn State gives generous tax concessions • Law relating to charity – very complex • Provisions less in number • Aimed at preventing abuse of tax relief & ensuring that public money is used for intended purpose. • Trusts/institutions for charitable and religious purpose enjoy exemption u/s 11 • Nature of provision- exemption provisions - Rule of strict as well as liberal construction Bhilai Branch 12th June 2010

  4. Bhilai Branch 12th June 2010

  5. Benefit to general public is the baseline for all the four limbs of charitable purpose Bhilai Branch 12th June 2010

  6. Relief to poor • Is it necessary that something should be provided for nothing or for less than cost? • Identification of benefit with particular individual not necessary. • Cross subsidization will not disentitle for exemption , examples of hospital and home for aged. Bhilai Branch 12th June 2010

  7. Education • Systematic imparting of knowledge, training in preparation for the work of life. Every acquisition of further knowledge not included. Publishing news papers not ‘education’ 101 ITR 234(SC). • Developing the knowledge, skill, mind and character of students by normal schooling. • Coaching imparted for appearing in a particular competitive exam is not education [208 ITR 608, 615 (Pat.)] • Education would include raising artistic taste by dramas, musical shows etc. [188 ITR 160 (Mad.)]. In this sense, cultural education would also be included. Bhilai Branch 12th June 2010

  8. Educating public in safety, is it education ? - 305 ITR 257 (Bom.), in context of sec. 10(22), wordings being similar, will apply. Bhilai Branch 12th June 2010

  9. Medical relief • Is it necessary to provide treatment free or on concessional basis to all ? • Case of cross subsidization. Bhilai Branch 12th June 2010

  10. General public utility • Public means body of people at large and includes a class of persons or a well defined section of the public. Benefit to whole mankind not perceived. • Objects which promote welfare of general public • Objects for welfare of a trade or industry vs welfare of persons managing trade or industry. Bhilai Branch 12th June 2010

  11. General public utility contd……. • Expenses on giving monetary help on marriage of poor girls of one community or on thread ceremony – public objects, eligible for exemption [222 ITR 252 (All.)] • Promotion, protection, aiding trade, commerce & industry is a general utility purpose [ 55 ITR 722 (SC), 121 ITR 1 (SC), 245 ITR 437 (Bom.)] Bhilai Branch 12th June 2010

  12. General public utility contd…….. • Section of public - Quality which binds a group of persons should not depend upon their relationship with a particular individual i.e. personal or impersonal. • Object beneficial to a section of public vs. whole mankind. Benefit to public as against specified individuals • CA Society covered 258 ITR 548 (Raj.) Bhilai Branch 12th June 2010

  13. Recent amendment in sec. 2(15) • Proviso added to sec. 2(15) w.e.f. 1.4.2009. Amendment targets business income • Letting out of auditoriums, dharamshalas etc. not business - 130 ITR 181 (SC). These would continue enjoying benefit. • Amendment would hit Chamber of commerce, trade organisations, clubs. • Whether business income or entire income would be taxable? • Retrospective amendment by Finance Act, 2010 – Value of receipts less than Rs. 10.00 lacs. Bhilai Branch 12th June 2010

  14. Amendment in sec. 2(15) • Club – activity of running canteen, hiring ground would be hit. • Medical relief/educational activities as also objects of general public utility undertaken. Whether income will be taxable excluding medical/educational income? 103 ITR 777(SC). • Gaushalas selling milk, Lions club running school for disabled. • Controversy between sec. 2(15) and 11(4), (4A). Bhilai Branch 12th June 2010

  15. Religious purpose • Religious purpose must be public in nature • If access to religious purpose is not for people belonging to a particular faith, it would be a private religious purpose, not entitled to exemption. Bhilai Branch 12th June 2010

  16. Scheme of sec. 11 • It provides for exclusion of certain income • Other than “excluded” income, all other income chargeable to tax. • Exclusions provided (a) Income of wholly charitable & religious trust ( to the extent applied for such purposes in India + upto 15% of income, out of unspent income (b) Income of trust partly for charitable & religious purposes Bhilai Branch 12th June 2010

  17. Section 11 contd………… (if created before 1.4.1961, to the extent applied for such purposes + upto 15% of income, out of unspent income.If created after 1.4.1962, NIL) (c) - Charitable trust created after 1.4.1952 which tends to promote international welfare, to the extent applied outside India - Charitable & religious trust created before 1.4.1952, to the extent applied outside India Rider : Board should direct that income is exempt (d) Voluntary contributions being Corpus donations Bhilai Branch 12th June 2010

  18. Section 11 contd………… • If application falls short of 85% due to • income not having been received or • for any other reason Option to be exercised • Amount specified in option shall be deemed to be applied for charitable or religious purposes Bhilai Branch 12th June 2010

  19. Accumulation or setting apart • If any amount of income is accumulated or set apart for specific purpose, notice of accumulation to be given to AO • Accumulated income shall be excluded Bhilai Branch 12th June 2010

  20. Meaning of “income” • Whether commercial income or income computed under the provisions of I.T.Act ? - Word used in sec. 11(1)(a) is “income” and not “total income” - Head-wise computation provided in sec. 14 is for taxable income (for the purpose of charge of income tax) - Sec. 11(4) dealing with business income of trust empowers AO to compute business income as per provisions of Act. - 136 ITR 12 (Mad.), 162 ITR 612 (Guj.), 208 ITR 372 (Cal.),Cir. No. 5-P (LXX-6) dt.19.6.1968 - For capital gain, specific provision made in Ss.(1A). Bhilai Branch 12th June 2010

  21. Meaning of “income” contd…. • Standard deduction like u/s 24 etc. would not be applicable while calculating the ‘income’ for application 199 ITR 215 (Cal.) • If any part of income becomes taxable, whether then normal provisions will apply? • Conclusion : For the purpose of sec. 11, commercial income is relevant. Bhilai Branch 12th June 2010

  22. Meaning of “applied” • Income to be applied to charitable & religious objects • ‘Income’ to be construed in its normal meaning – net of expenses on administration • All outgoings like salary, maintenance, travel, Income Tax etc. to be deducted. Out of residual amount only, application is needed. • Percentage of spending to be with reference to the income remaining after meeting admin expenses. • Should ‘applied’ be equated with ‘spent’? Bhilai Branch 12th June 2010

  23. Application can be both in revenue and capital field. • Since application is in commercial sense, prior period expenses would be eligible. Bhilai Branch 12th June 2010

  24. Exercising option u/s 11(1) Expl.(2) • Option exercised but amount not utilised – deemed income. • Whether again option can be exercised or accumulation can be made ? • Words of Explanation rules out any such view • Time limit fixed in Expl. 2 will be redundant • Unlimited time cannot be availed • Accumulation – permitted only of income of the year, not of deemed income. Bhilai Branch 12th June 2010

  25. Accumulation u/s 11(2) • Need to specify object for which income accumulated – plurality of objects permitted • Payment to sec. 12AA/10(23C)(iv) to (via) institutions out of accumulated income not permissible w.e.f. 1.4.2003 (Except in dissolution year) • Payment to 10(23C)(i) to (iiiae) permissible. • If to be used for any other object not specified in application, with specific permission of AO (Ss. 3A) • Option and accumulation, both possible. • Can the AO reject accumulation application? 4 ITD 642 (Bom.) Bhilai Branch 12th June 2010

  26. Some specific issues • Is business income eligible for exemption? • If any part of income is taxable, how is it to be computed? - Normal mode of computation, sec. 14. - Tax shall be payable as if the trust was an AOP [ Sec. 164(2)] - Sec. 13(1)(c) & 13(1)(d) income to be assessed at MMR • Trust carrying on business, unrelated to objects. Surplus utilised only on objects. Tax implications. Bhilai Branch 12th June 2010

  27. Some specific issues contd…….. • One object out of many, non-charitable/ non-religious. Whether exemption admissible? 103 ITR 777 (SC), 65 ITR 611(SC), 236 ITR 23 (SC) • Agricultural income – whether needs to be “applied”? - 113 ITR 889 (Mad.) says no while 192 ITR 186 (All.) says yes - Special excludes general • Donation to another trust which itself is not a charitable trust – deemed to be applied if given for charitable purpose. Bhilai Branch 12th June 2010

  28. Some specific issues contd……. • Excess spending in earlier year, will it be available as set off in subsequent year? 177 Taxation 19 (Bom.), 242 ITR 20 (Mad.), 242 ITR 457 (Kar.), 133 ITR 779 (Mad.). Cir. No. 100 dt. 24.1.1973. • Repayment of loan originally taken for objects of trust – will amount to application, cir no. 100 dt. 24.1.1973. • Ss. (1A), trust “acquiring” another capital asset on sale of asset. • Agricultural & non agricultural income. Combined accounts. How outgoings to be apportioned • Time limit for filing Form 10 is directory 208 ITR 568, 572 (Raj.) & 209 ITR 441 (Bom.) Bhilai Branch 12th June 2010

  29. Some specific issues contd……. • Deemed income u/s 11(3) – whether 15% accumulation is possible out of this income also? 189 ITR 656 (Cal.) • Whether disallowance/addition has any repercussions? - If based on positive material unmistakably showing adversity, application may reduce thereby inviting taxability • Sports association entitled to exemption u/s 11- cir.no. 395 dated 24.9.1984 Bhilai Branch 12th June 2010

  30. Registration of trust • Application to be disposed off within 6 months from end of month in which application made - If not rejected, deemed registration- 91 ITD 1 (Bang.), 111 ITD 175 (Del.)(SB), 216 CTR 167 (All.) • CIT’s certificate conclusive proof of charitable or religious objects and genuineness of objects – 110 ITR 392 (Mad.), 90 ITD 569 (Chd.), 81 ITD 31 (Pune)(TM) • After registration u/s 12AA, further probe into objects not permissible – 300 ITR 214(SC).Powers of AO limited. Bhilai Branch 12th June 2010

  31. Registration of trust contd……… • Powers of CIT - Enquire into genuineness of activities and objects. To make enquiry in this regard. - If activities found to be genuine, probe into the accounts (huge surplus) not permissible – 90 ITD 477 (Luck.) • Can a trust which has not carried out any activity be registered u/s 12AA? Bhilai Branch 12th June 2010

  32. Registration of trust contd……… • U/s 12AA(3) CIT empowered to cancel registration. • Effect of cancellation on future/earlier years. • Registration with other appropriate authorities, is it essential? 260 ITR 118 (Amr.),291 ITR 419 (Bom.), 159 ITR 324 (AP) • Registration itself not sufficient for exemption Bhilai Branch 12th June 2010

  33. Denial/withdrawal of exemption • Hospital or educational institute – value of medical or educational services provided to 13(3) persons liable to be taxed. No effect on other income [sec. 13(6)] • Charitable trust, if for particular religious community or caste [sec. 13(1)(b)] - Bar not to apply to religious trust. • If any part of trust income or property used for the benefit of 13(3) persons. - Building used for residence of trustee. - Even if used for 1 day, exemption lost [sec. 13(2)]. - FDs of trust used for personal purpose. Bhilai Branch 12th June 2010

  34. Denial/withdrawal of exemption contd…….. • Investment in any mode other than 11(5). - Exceptions - Assets forming part of corpus as on 1.6.1973 - Accretion to shares forming part of corpus (bonus shares only) - Debenture acquired before 1.3.1983 • Anonymous donations u/s 115BBC • Withdrawal only on two counts – activities not genuine or activities not carried out in accordance with objects. Bhilai Branch 12th June 2010

  35. Anonymous donation • Anonymous donations liable to be taxed at 30%. • Exclusions - 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.) • Will anonymous donation be considered for application of 85%? • If names/address are subsequently found false? • Tax liability in respect of anonymous donation treated as application? • How anonymous donation can be said to be with specific direction? Bhilai Branch 12th June 2010

  36. Sec. 10(23C) • Entity should exist solely for philanthropic purposes and not for the purpose of profit • Object should not be to make profit. Profit may arise. If profit used only for the purposes of trust, no adversity can be held. • Spending wholly & exclusively on objects, spending of 85% and accumulation of more than 15% - conditions apply only to Ss. (iv) to (via) entities (3rd proviso) Bhilai Branch 12th June 2010

  37. Sec. 10(23C) contd……… • 7th proviso – business income of specified entities exempt only if business is incidental to objects • 1st proviso – specified entities only required to apply for exemption, unlike sec. 12A where registration is mandatory • 13th proviso – if specified entities do not spend income on objects or do not spend 85%, accumulate etc., approval granted may be withdrawn. • 9th proviso – order to be passed within 1 year Bhilai Branch 12th June 2010

  38. Sec. 10(23C) contd……… • Once approval withdrawn, no exemption in subsequent year. In sec. 11, no such withdrawal. Next year benefit of sec. 11 available, if conditions complied. • Can sec. 11 & 10(23C) operate simultaneously? 143 ITR 584 (All.), 150 ITR 142 (Kar.) • No condition like sec. 13(1)(c). Bhilai Branch 12th June 2010

  39. Specific issues relating to educational institutes • Capitation fee banned by Government. Trust still charges. Can exemption be denied? 304 ITR 20 (P & H) • If surplus results incidental from educational activities, can exemption be denied? 224 ITR 310 (SC), 117 ITR 284 (AP) • It is not the requirement that the activity should be conducted in a way not to yield surplus. • Basic test – application of profit • If predominant activity is charitable purpose, benefit cannot be denied Bhilai Branch 12th June 2010

  40. Cir. No. 194/16-17-IT (AI) Where all objects are educational and surplus is used for educational purpose only, it can be said that institution is existing for educational purposes and not for the purpose of profit (reproduced in 68 ITD 1, 6 (Del) (TM). Bhilai Branch 12th June 2010

  41. Thank You Bhilai Branch 12th June 2010

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