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Presented by Subash Agarwal, Advocate

TAXATION OF CHARITABLE TRUST AND NGOs. Presented by Subash Agarwal, Advocate. CHARITABLE PURPOSE - MEANING 1. Dissecting the meaning as contained in section 2(15)- It includes- ( i ) Relief to the poor (ii) Education (iii) Medical Relief (iv) Preservation of Monuments etc.

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Presented by Subash Agarwal, Advocate

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  1. TAXATION OF CHARITABLE TRUST AND NGOs Presented by Subash Agarwal, Advocate

  2. CHARITABLE PURPOSE - MEANING • 1. Dissecting the meaning as contained in section 2(15)- • It includes- • (i) Relief to the poor • (ii) Education • (iii) Medical Relief • (iv) Preservation of Monuments etc. • (v) Advancement of any other object of general public utility (AGPU)

  3. (B) First Proviso: AGPU is not charitable purpose w.e.f. A.Y.: 2009- 2010 when- (i) Involves carrying on trade, commerce or business or (ii) Any service in relation to trade, commerce or business for consideration irrespective of the nature of use / application of income from such activity.

  4. Second Proviso: • The embargo under (B) will not apply if the aggregate of receipts from the activities referred is Rs. 25 lacs or above.

  5. 2. What is the effect of amendment (w.e.f. A.Y.: 2009-2010) :??? i.e. insertion of the first proviso.

  6. 2.1 Whether the institutions carrying on “any other object of general public utility (AGPU) will lose the entire exemption or only on income from business for violation mentioned in first proviso??

  7. 2.2 Ans: It will lose exemption from the entire income. The Act has specifically provided wherever partial exemption is lost i.e. in section 13, clause (a). The instant amendment has been placed in the definition of “charitable purpose” and not in section 13.

  8. Special Comment Provision of Section 11(4A) remains applicable to first four clauses of “charitable purpose” but not the residuary clause i.e., AGPU. Section 11(4A) provides – Benefit of exemption is available if business is incidental to the attainment of the objective and separate books of accounst are maintained.

  9. 3. Amendment in the definition of “charitable purpose”- A critique – (a) AGPU covers some very important objects presently being pursued by the NGOs / charitable institutions.

  10. (b)Some of these objects are even covered by Article 51A of Part IV – A of the Indian Constitution like –   (i) Promotion of ideals of national sovereignty and unity. (ii) National Service. (iii) Promoting Brotherhood among the citizens. (iv) Upholding the dignity of women.

  11. (c) Objectives of some institutions are also in conformity with the “Directive Principles of State Policy” enshrined in the Constitution like-   (i) Free legal aid. (ii) Promotion of agriculture, animal husbandry. (iii) Promotion of International peace and security.

  12. (d) All such cases will be affected if such institutions charge some fee / consideration for small services rendered.   It may be construed as – (i) Carrying on trade, commerce or business or   (ii) Any service in relation to trade, commerce or business. 

  13. (e) The Hon’ble Finance Minister in reply to the debate in the Lok Sabha on the Finance Bill, 2008 had stated in regard to the Chambers of Commerce and similar organisations rendering service to their members that they would not be affected by the amendments. The CBDT would issue a clarificatory circular containing guidelines in this regard.

  14. (f) Circular No. 11/2008 dated 19.12.2008 was issued with reference to the amendment in Section 2(15). Gist of the Circular is –   (i) Trade Associations are covered under “ any other object of general public utility” (AGPU).   (ii) Those following the principle of mutuality and confining their activity within their members will not be affected by the proviso to section 2(15). (iii) Those dealing with non-members will be affected by the proviso. So, the Finance Minister has reneged on the promise made on the floor of the House.

  15. 4. Is ICAI vulnerable to the new amendment in section 2(15)???

  16. 4.1 Yes.

  17. Reason •   The Department has already taken a view in the Institute’s case that imparting coaching to the students amount to carrying on trade, commerce or business. •   In Writ petition filed before the Delhi High Court, court has analysed the expression appearing in section 2(15) upto 31.03.1984 – • “AGPU not involving carrying on any activity for profit”.

  18. Contrasted it with the current expression – • “Carrying on trade, commerce or business”. • Held, • “Profit motive” is not the sole determinative factor. In some cases, even without profit motive, an activity may be considered to be “business” if it is continued on sound and recognized business principles, and pursued with reasonable continuity. • Matter was remanded back with these observations. • The issue is still open and may go either way.

  19. My Suggestion • ICAI and Trade Bodies should make a strong representation to the government that even genuine and bonafide charitable activities are being affected due to the amendment.

  20. Formation of charitable organisation • Normally seen in the following forms – • Sec. 25- company under the Companies Act. • A Society registered under the Societies Registration Act, 1860 or any other state or Central Law • A Charitable Trust

  21. 7. Income of Charitable Organisations Whether “income for the purpose of computation under the Act is “total income” under the Act or the income in the commercial sense???

  22. 7.1 Answer: Section 11(1) provides that the following income shall not be included in the total income- (a) income derived from property held under trust wholly for charitable or religious purpose, 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 fifteen per cent of the income from such property; Thus, the reference is to “Income” and not the “total income” Thus, income here means income in the commercial sense.

  23. 7.2 Important case-laws on the subject • CIT vs. Jayashree Charity Trust 159 ITR 280 (Cal) • Held, • “Income” here is confined to real income. • TDS which has been deducted cannot be taken as income. • Same view in- • CIT vs. Birla Janahit Trust 208 ITR 372 (Cal.)

  24. (b) CIT vs. Trustees of H.E. H the Nizam’s Supplemental Religious Endowment Trust 127 ITR 378 (A.P.) • Held, • In computing income of a trust, accounts alone can be taken into consideration. • (ii) Payment of income-tax and wealth-tax are incidental to the carrying out of the charitable purpose.

  25. CIT vs. JanakiAmmalAyyaNadar Trust 153 ITR 159 (Mad.) • Expenditure incurred by way of payment of tax has to be considered as application for charitable purpose.

  26. CIT vs. RaoBahadurCalavalaCunnanChetty Charities 135 ITR 485 (Mad.) • “Income” has to be arrived at after taking into account the receipts and deduction of establishment expenditures. The net amount will be available for application for charitable purposes and will be considered as income for the purpose of section 11.

  27. 7.3 A case Study Azimji Trust incurred a loss of Rs. 55,000/- on sale of preference shares, which is debited in the I & E A/c under the head “Loss on sale of Investment”. Whether loss can be reduced from the gross income? Note: The sale was made by the ‘a’ to comply with the amended provision of section 13(1)(d) of the Act.

  28. 7.4 Answer Calcutta High Court in the similar circumstances in the case of Hindustan Welfare Trust vs. DIT (E) 201 ITR 564 held - “The real income has to be taken into account for the purpose of considering the exemption u/s 13 of the Act. If there is any loss that cannot form part of the real income of the trust and it has to be excluded from consideration”.

  29. 8. An important Question A Charitable / Religious Trust’s income is exempt by virtue of section 11(1), according to which, such income is exempt as is derived from property held under trust wholly for charitable / religious purpose to the extent to which such income is applied to such purposes in India.

  30. Then, how come income from sources other than property like – (a) voluntary donations (b) interest from F.Ds (c) interest from loans (d) dividends (e) subscriptions (f) rental income from self acquired property are claimed as exempt u/s 11(1)???

  31. 8.1 Answer (a) India Spinners Association vs. CIT 12 ITR 482 (PC) “Property does not necessarily mean certain movable or immovable assets in the name of the organisation from which the income is to be derived. The goodwill of the organisation by virtue of which donations are raised can also be considered as property. Similarly, all lawful income would be considered for the purposes of section 11 subject to other provisions”.

  32.  (b) CIT vs. Cotton Textiles Export Promotion Council 67 ITR 539 (Bom.) “We have already held that the property held under trust was the business or organisation itself and whether we consider either of the two sources of income of this company, namely, the grant or the subscription from its members, both arose directly and substantially from that business or organisation. If the organisation has not existed, the grants would not have been paid to the company nor would the subscriptions have been received by the company. Therefore, even upon the construction put upon the word "derived" the income would be derived from the business or organisation which we hold was the property held under trust in this case. Under the circumstances, therefore, we think that view taken by the Tribunal was the correct view and the income of the assessee would be exempt under the provisions of section 4 (3) (i) of the Act.”

  33. 9. Some Important Issues In the Computation of Income of Charitable Organisations

  34.  (A) Depreciation • Issues • Whether depreciation debited to accounts is to be deducted to arrive at the income available for application to charitable purpose? • Whether amount spent on acquiring an asset be treated as application of income in the year of acquisition? • If the answer in (b) is yes, whether depreciation of such asset be claimed in the subsequent years?

  35.   9.1 Answer • (i) CIT vs. Society of the Sisters of St. Anne 146 ITR 28 (Karn.) • - Allowance of depreciation is essential for the purpose of arriving at income available for distribution for application to charity. • - The amount of depreciation is not the income available for application with the assessee. • - Reliance placed on Spicer & Pegler’s Book Keeping & Accounts

  36. (ii) CIT vs. Sheth Manilal Ranchhoddas Vishram Bhavan Trust 198 ITR 598 (Guj.) “The amount of depreciation debited to the accounts had to be deducted to arrive at the income available for application to charitable purpose.”

  37. (iii) CIT vs. Tiny Tots Education Society 330 ITR 21 (Pun. & Har.) • ITA No. 93 of 2010 for A.Y.: 2006 – 2007 • Deptt. Placed reliance on Escorts Ltd.’s case 199 ITR 43 (SC) • Held, • In CIT vs. Market Committee 330 ITR 16 (P & H.), the judgement in Escorts’ case was considered and was held not to be applicable to the situation where depreciation was claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects.

  38. Yes, the entire cost of acquisition of a capital asset may be treated as application of funds if such acquisition is incidental to the charitable object of the Trust. • This view finds support from a recent judgement in – • CIT vs. Manav Mangal Society 328 ITR 421 (P & H) • However, ICAI’s Guidance Note on • Audit of Public Charitable Institutions, Annexure VI (pages 121 and 122) considers the issue debatable.

  39. Yes, depreciation can be claimed in subsequent years. • - DIT(E) vs. Framjee Cawasjee Institute 109 CTR 463 (Bom.) • - CIT vs. Manav Mangal Society (Supra) – Same view • - CIT vs. Institute of Banking 264 ITR 110 (Bom.) • Also held, depreciation was deductible even when cost of acquisition to the assessee was NIL.

  40. (B) Another important issue on Computation of Income • Whether “Income” means gross or net income?? • A Case-Study • Azimji Trust’s gross income is Rs.1 cr. Establishment cost is Rs. 90 Lacs.

  41. Option 1 Income: Rs.1,00,00,000/- Less: Application: Rs. 90,00,000/- (Estab. Cost) Surplus Rs. 10,00,000/- Amount available for Accumulation @ 15% Rs. 1,50,000/- Taxable Rs. 8,50,000/-

  42. Option 2 Income: Rs.1,00,00,000/- Less: Amount available for Accumulation @ 15% Rs. 15,00,000/- Available for application Rs. 85,00,000/- Application for charitable Purpose (Estab. Cost) Rs. 90,00,000/- Taxable Rs. NIL

  43. Which is the correct Option?

  44. Answer: Option 2 is correct. Supporting Judgement CIT vs. Programme for Community Organisation 248 ITR 1 (SC)

  45. 10. Application of Income • FAQS ON APPLICATION OF INCOME • (a) Is it necessary to “spend” the amount? • (b) Example • The trustees passed resolution sanctioning payments to various donees. On passing the resolution, the amount was taken to I & E A/c. and credited to outstanding payment A/c. Payments made in subsequent years. • The Trust claimed • When resolutions were passed, the amounts were earmarked for the charitable purpose, it should be considered as • application of income u/s. 11(1)(a)

  46. Answer: • (i) (a) In the case of CIT vs. Trustees of H.E.H Hizam’s Charitable Trust 131 ITR 497 (A.P.) it was held - • - It is not correct to equate the word “applied” with the word “spent”. • Even if the fund has been earmarked and allocated for the purpose, it might be deemed to have been applied for the purpose. • (b) IT was held in CIT vs. Thanthi Trust 239 ITR 502 (SC) that application need not mean parting with cash.

  47. FAQS ON APPLICATION OF INCOME • (a) Can a trust apply surplus income from one activity for investment in another activity? • (b) Example • A trust is running a health centre for the benefit of ill persons and earned a surplus of Rs.3.70 lacs. Trust spent Rs.12 lacs for purchasing land for establishing another health centre. • ITO holds, the Trust violates provision of sec.13(2) (benefit to specified persons / concerns) • Answer: • Yes, it can do so. • This finds support from CIT vs. Economic & Entrepreneurship Development Foundation 188 ITR 540 (Cal.)

  48. FAQS ON APPLICATION OF INCOME • (a) Is advance application possible? • (b) Example • A resolution was passed on 21.05.2013 that the profits of the association for the year ended 31.03.2014 so permitting, a sum of Rs.2.50 lacs be given as a donation to a trust out of the profits of the said year. • The claim of the association • As soon as the profits emerged on the closing of the books on 31.03.2014, these profits are impressed with fiduciary character to the extent of Rs.2.50 lacs due to resolution and must be deemed to be application of income.

  49. Answer: The claim of the assessee was not found tenable in Nachimuthu Industrial Associationvs. CIT 123 ITR 611 (Mad.) affirmed in 235 ITR 190 (SC) Held, A trust is an obligation annexed to the ownership of a specified property, and not with reference to a non-existent property.

  50. FAQS ON APPLICATION OF INCOME • Can excess application in an earlier be adjusted against short fall in a subsequent year?? • Answer: • Yes, it was so held in – • - CIT vs. Gajrati Samaj (Regd.) 349 ITR 559 (MP) • - CBDT Circular dtd. 24.01.1973 88 ITR (St.) 66

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