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TAXATION OF PRIVATE BENEFICIARY AND CHARITABLE TRUST

TAXATION OF PRIVATE BENEFICIARY AND CHARITABLE TRUST

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TAXATION OF PRIVATE BENEFICIARY AND CHARITABLE TRUST

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  1. TAXATION OF PRIVATE BENEFICIARY AND CHARITABLE TRUST Verendra Kalra August 9, 2008 Nangia and Company

  2. Structure of a Non Profit Organization in India In India non profit organizations can be registered as: Trusts Societies Section 25 Companies • The Income Tax Act gives all categories equal treatment, in terms of exempting their income and granting 80G certificates, whereby donors to non-profit organizations may claim a rebate against donations made. Foreign contributions to non-profits are governed by FC(R)A regulations and the Home Ministry

  3. Comparison among Trust, Society & Section 25 Company

  4. Meaning of ‘Trust’ A trust is a relationship in which : • a person or entity (the trustee) holds legal title • to certain property (the trust property or trust corpus), but is bound by a fiduciary duty to exercise that legal control • for the benefit of one or more individuals or organizations (the beneficiary), who hold ‘beneficial’ or ‘equitable’ title. • The trust is governed by the terms of the (usually) written trust agreement and local law. • The entity (one or more individuals, a partnership or a corporation) that creates the trust is called the settlor.

  5. Types of Trusts • Bare Trust A trust where the beneficiary is absolutely entitled to the assets, and the trustee is obliged simply to pay them over to the beneficiary. ‘Resulting’ and ‘Constructive’ trusts are usually bare trusts. Bare trusts generally do not continue for any length of time, unless they arise out of protracted litigation, or the beneficiaries are minors (in which case the bare trust must continue till they reach majority) • Constructive Trust It is imposed by law as an equitable remedy. It generally occurs due to some wrong doing, where the wrong doer has acquired legal title to some property and cannot in good conscience be allowed to benefit from it. • Resulting Trust It is a form of implied trust which occurs where a trust fails, wholly or in part, as a result of which the settlor becomes entitled to the assets.

  6. Types of Trusts • Discretionary Trust It is an arrangement where the trustee may choose, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent, so long as the decision is made based on the beneficiaries best interests. The purpose of such a trust is that no individual can claim to be entitled to any specific interest in the trustee’s assets, which often has tax advantages or asset protection advantages. • Fixed Trust the entitlement of the beneficiaries is fixed by the settlor. The trustee has little or no discretion. E.g. • a trust for a minor (to X if she attains 21) • a life interest (to pay the income to X for her lifetime)

  7. Types of Trusts • Hybrid Trust It combines elements of both fixed and discretionary trusts. The trustee must pay a certain amount of the trust property to each beneficiary fixed by the settlor. But the trustee has the discretion as to how any remaining trust property, once these fixed amounts have been paid out, is to be paid to the beneficiaries. • Express Trust It arises where a settlor deliberately and consciously decides to create a trust, over his or her assets, either now or upon his death. In these case this will be achieved by signing a trust instrument which will either be a will or a trust deed. • Implied Trust It is created where some of the legal requirements for an express trust are not met, but an intention on behalf of the parties to create a trust can be presumed to exist.

  8. Types of Trusts • Intervivos Trust A settlor who is living at the time the trust is established creates an intervivos trust. • Testamentary Trust A trust created in an individual’s will. • Irrevocable Trust It is the one that will not come to an end until the terms of the trust have been fulfilled. • Revocable Trust A trust of this kind can be revoked (cancelled) by its settlor at any time.

  9. Public Trusts • Like private trusts, public trusts may be created inter-vivos or by will. • Public trusts are however governed by general law, though the principles forming the basis of the Indian Trusts Act can be applied in the case. It was held in the case of State of UP Vs. Bansi Dhar, AIR (1974) SC 1084, 1090 that “it is true that Indian Trusts Act relates only to private trusts, public charitable trust have been expressly excluded from its ambit. But while provisions of section 83 of the Trusts Act proprio vigore do not apply, there is a common area of principles which covers all trusts, private and public, and merely because they find a place in the trusts Act, they cannot become untouchable where public trusts are involved. • It is a trust established for charitable purposes; normally must be for the benefit of public at large or a class of beneficiaries. • These are entitled to special treatment under the law of taxation.

  10. Public Trusts • These are exempt from the rule against perpetuities, which would otherwise require a trust to come to an end after a certain period. Charitable trusts may continue indefinitely. • A formal deed is not necessary to constitute a public trusts, even where immovable property is dedicated because section 5 of Indian Trusts Act 1882 is not applicable on public Trusts. • Public trusts are an exception to the well settled rule that there is no valid trust unless the objects thereof are specified. The trusts is not allowed to fail for uncertainty .

  11. Public Trusts • A charitable trust is synonymous with public trust. There is nothing called as a private charitable trust. • Charitable trusts come under the doctrine of cy pres, under which if the charitable purposes of the trust cannot be fulfilled, then they can be replaced by new and more appropriate charitable purposes. • Management or Control may vest in private hands. In the case of Smt. Ganesha Devi Rami Devi Charity Trust Vs. CIT (1969) 71 ITR 696, 704 (Cal) it was held that “the implication, therefore, is that if the trust or fund is controlled by a body of persons which is not a public body, but if it enures to the benefit of a public it will still be a charitable trust or fund

  12. Private Trusts • Private trust may be created inter vivos or by will. • Private trust are governed by the provisions of the Indian Trust Act 1882 • It has one or more particular individuals as its beneficiary. • Where immovable properties worth more than Rs. 100 are transferred, trust will not be operated unless it is registered (Gostha Behari Gose Vs. University of Calcutta, AIR 1972 Cal 61 ) .Trust created by will does not require any stamp • Private trusts are void for perpetuity

  13. Partly Private and Partly Public Trusts? • Dedication may be absolute , or it may be partial. Where the dedication made by a settler in favor of an idol covers the entire beneficial interest which he had in the property, the debutter is an absolute or complete debutter. Where, however, some proprietary or pecuniary right or interest in the property is either indisposed of or is reserved for the settlor’s family or relations, a case of partial dedication may arise.( K.Mukherjea’s Hindu Law of Religious and Charitable trusts, 4th edition page 174-5)

  14. Partly Private and Partly Public Trusts? • If the dedication is partial ,a trust in favor of a charity is not created but a charge in favor of charity is attached to , and follows, the property which retains its original private and secular Character ( Menakuru Dasaratharami Reddi V. Duddakuru Subba Rao, AIR 1957 SC 797) • In cases of partial debutter endowment , it is a question of construction whether idol is true beneficiary….. Or whether heirs are true beneficiaries…. ( Lord Shaw in Har Narayan V. Surya Kunwari, AIR 1921 PC 20)

  15. Charitable Trusts Vs. Religious Trusts. • Private Religious trusts Vs. Private charitable trusts? What is to be noted is that there might be a private trust for religious purposes, but there can be no private charitable trust. [(CIT Vs. M. Jamal Mohamad Sahib (1941) 9 ITR 375 (Mad)] • Partly Charitable & Partly Religious Trusts? In Hindu system there is no line of demarcation between religion and charity. But what a purely religious purposes and what religious purposes will be charitable must be entirely decided according to Hindu Law and Hindu Notions (Malayammal Vs. A.Malayalam Pillai (1991) Supp (2) SCC 579, 584)

  16. Legislations in India Governing Trusts A BRIEF SUMMARY OF THEIR PREAMBLES • THE INDIAN TRUSTS ACT, 1882“An Act to define and amend the law relating to Private Trusts and Trustees. The Indian Trusts Act was passed in 1882 to define law relating to private trusts and trustees.” • CHARITABLE AND RELIGIOUS TRUSTS ACT,1920“An Act to provide more effectual control over the administration of Charitable and Religious Trusts .Whereas it is expedient to provide facilities for the obtaining of information regarding trust created for public purposes of a charitable or religious nature,….

  17. Legislations in India Governing Trusts • RELIGIOUS ENDOWMENTS ACT 1863 An Act to enable the Government to divest itself of the management of Religious Endowments” • CHARITABLE ENDOWMENTS ACT, 1890 “An Act to provide for the Vesting and Administration of property held in the trust for charitable purposes. Whereas it is expedient to provide for the vesting and administration of property held in trust for charitable purposes; It is hereby enacted as follows:”

  18. Legislations in India Governing Trusts • THE SOCIETIES REGISTRATION ACT ,1860. “An Act for the Registration of Literary, Scientific and Charitable Societies Whereas  it is expedient the provision should be made for improving the legal condition of societies established for the promotion of literature, science, or the  fine arts, or for the diffusion of  useful knowledge, the diffusion of political education or for charitable purposes; it is enacted as follows:-”

  19. Legislations in India Governing Trusts • Apart from these central legislations , a number of statute have been enacted by the state legislatures dealing with religious and charitable trusts and endowments, For example: • The Madras Hindu Religious & Charitable Endowments Act (19 of 51) • The Bombay Public Trusts Act (29 of 1950) • The Orissa Hindu Religious Endowments Act (4 of 1939) • The Bihar Hindu Religious Trusts Act (1 of 1951) A trust which is registered in a state having a legislation for that purpose has to follow the provisions of the State Act . The registration is done with the sub-registrar / civil court.

  20. How to form a Trust - Law & Procedure • Essentials of a Trust • Who can form a trust ? • Capacity to create a Trust. • Who can be a trustee ? • Who can be a beneficiary ? • Subject matter of trust. • Instrument of Trust

  21. Essentials of a Trust • The existence of the author/settlor of the trust or someone at whose instance the trust comes into existence. • Clear intention of the author/settlor to create a trust. • Purpose of the Trust. • The Trust property • Beneficiaries of the Trust. • There must be divesting of the ownership by the author / settlor of the trust in favour of the beneficiary or the trustee. • Unless all these requisites are fulfilled a trust cannot be said to have come into existence.

  22. Who can form a Trust ? • As per section 7 of the Indian Trusts Act, a trust can be formed – • by every person competent to contract, and • by or on behalf of a minor, with the permission of a principal civil court of original jurisdiction. • Besides individuals, a body of individuals or an artificial person such as an association of persons, an institution, a limited company, a Hindu undivided family through it's karta, can also form a trust. • It may, however, be noted that the Indian Trusts Act does not apply to public trusts which can be formed by any person under general law. Under the Hindu Law, any Hindu can create a Hindu endowment and under the Muslim law, any Muslim can create a public wakf. Public Trusts are essentially of charitable or religious nature, and can be constituted by any person.

  23. Capacity to create a Trust • As a general rule, any person, who has power of disposition over a property, has capacity to create a trust of such property. According to section 7 of the Transfer of Property Act, 1882, a person who is competent to contract and entitled to transfer the property or authorized to dispose of transferable property not his own, either wholly or in part and either absolutely or conditionally, has 'power of disposition of property'. • Thus, two basic things are required for being capable of forming a trust • power of disposition over property; and • competence to contract.

  24. Who can be a Trustee ? • Every person capable of holding property can become a trustee. However, where the trust involves the exercise of discretion, he can accept or act as a trustee only if he is competent to contract. • No one is bound to accept trusteeship. Any number of persons may be appointed as trustees. • However, no trust is defeated for want of a trustee. Where there is no trustee in existence, an official trustee may be appointed by the court and the trust can be administered. An executor of a Will may become a trustee by his dealing with the assets under the provisions of the Will.

  25. Who can be a Beneficiary ? • In a private trust the beneficiaries are one or more ascertainable individuals. • In a public trust the beneficiaries are a body of uncertain or fluctuating individuals and may consist of a class of the public or the whole public.

  26. Subject matter of Trust • Any property capable of being transferred can be a subject matter of a trust. • Section 8 of the Indian Trust Act, however, provides that mere beneficial interest under a subsisting trust cannot be made the subject matter of another trust. • In the case of J.K. Trust vs. CIT (1957) 32 ITR 535 (S.C.), the Supreme Court had held that the word " property" under the Trusts Act is of the widest import and a business undertaking will undoubtedly be a property so that a running business can be made a subject matter of trust. This view has been followed in the case of in CIT vs. P. Krishna Warriar (1964) 53 ITR 176 (SC).

  27. Instrument of trust • The instrument by which the trust is declared is called instrument of Trust, and is generally known as Trust Deed. • It is well settled that no formal document is necessary to create a Trust as held in Radha Soami Satsung vs. CIT- (1992) 193 ITR 321 (SC).But for many practical purposes a written instrument becomes necessary under following cases – • When the trust is created by a will irrespective of whether the trust is public or private or it relates to movable or immovable property. This is because as per Indian Succession Act, a will has to be in writing • When the trust is created in relation to an immovable property of the value of Rs.100 and upwards, in case of a private trust. In case of public trusts, a written trust deed is not mandatory, even in respect of immovable property, but is optional. • Where the trust/association is being formed as a society or company, the instrument of trust; i.e., the memorandum of association, and Rules and Regulations has to be in writing.

  28. Instrument of trust • A written trust-deed is always desirable, even if not required statutorily, due to following benefits : • a written trust deed is a prima facie evidence of existence of a trust ; • it facilitates devolution of trust property to the trust; • it clearly specifies the trust-objectives which enables one to ascertain whether the trust is charitable or otherwise; • it is essential for registration of conveyance of immovable property in name of the Trust; • it is essential for obtaining registration under the Income-tax Act and claiming exemption from tax; • it helps to control, regulate and manage the working and operations of the trust; • it lays down the procedure for appointment and removal of the trustee(s), his/their powers, rights and duties; and • it prescribes the course of action to be followed under any eventuality including dissolution of the trust.

  29. Types of Instrument of Trust • Trust deed, where a trust is declared intervivos; i.e., by settling property under Trust. • A will, where a trust is declared under a will; • A memorandum of association along with rules and regulations, when the association/institution is being formed as a society under the Societies Registration Act, 1860. • A memorandum and articles of association where the association /institution is desired to be formed as a Company.

  30. Essentials of a valid Charitable or Religious Trust • There are four essential elements of a valid charitable or religious trust • Charitable or Religious Object : The object or purpose of the trust must be a valid religious or charitable purpose according to law ; • Capacity to create Trust : The founder or settlor should be capable of creating a trust and dedicating his property to that trust; • Certainty of Object and Dedication thereto : The settlor should indicate precisely the object of the trust and the property in respect of which it is made. The property should be dedicated to the trust and the owner must divest himself of the ownership of that property. • Concurrence with the law : The trust or its objects must not be opposed to the provisions of any law for the time being in force.

  31. Provisions in the Income Tax Act, 1961 impacting Trusts- Brief overview • Section 2(15)Defines a charitable objective • Section 10(23C)Provides exemption to educational, medical, charitable and public religious institutions, existing not for the purposes of profit • Section 11-13Provides for tax treatment in case of charitable trusts • Section 80GDeals with deduction in respect of donations to certain funds , charitable institutions etc. • Section 161-164Deals with liability in special cases i.e. of representative assessee, which includes taxation of private discretionary trusts.

  32. Method of Computation of Income • Income from the properties of the trust have been held to be arrived at in the normal commercial manner without classification under the various heads set out in section 14 (CIT Vs. Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135 ITR 485 (Mad) • Real income has to be taken into account for the purpose of considering the exemption u/s 11 (CIT Vs. Birla Janhit Trust (1994) 208 ITR 372, 375-76 (Cal)

  33. Method of Computation of Income • In that view of the matter, the loss incurred by the charitable trust on sale of investment is not allowable in computing the income of the trust because of the fact that such loss can not formed part of the real income of the trust. (Hindustan Welfare Trust Vs. Director of Income Tax (exemption) (1993) 201 ITR 564, 566 • It may also be noted that where provisions of section 11 are attracted, the provisions of section 28(iii) cannot be invoked. [CIT Vs. South Indian Film Chamber of Commerce (1981) 129 ITR 22 (Mad)]

  34. Charitable Purpose as per Income Tax Act 1961 • According to Section 2(15), ‘charitable purpose’, includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. • Amendment made in A.Y. 2009-10 Proviso added “Provided that 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 any service in relation to any trade, commerce or any business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity”

  35. Charitable Purpose • Action flowing from charitable thought should not be for benefiting once own self. The action should always be for benefit of others. [Sole Trustee, Lok Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)] • The Court may disallow a project as being charitable even if the trust deed declares it to be so. [All India Spinners Association v. CIT [1944] 12 ITR 482 (PC)]

  36. Charitable Purpose • Inclusive Definition The statutory definition is not exhaustive or exclusive. Even if the object or purpose may not be regarded as charitable in its popular signification as not tending to give relief to the poor or for advancement of education or medical relief, it would still be included in the expression “charitable purpose” if it advances an object of general public utility. [CIT v. Andhra chamber of Commerce [1965] 55 ITR 722(SC)] • Concept of charity The very concept of ‘charity’ denotes altruistic thought and action. Its object must necessarily be to benefit others rather than one’s self. The action which flows from charitable thinking is always directed at benefiting others. It is this direction of thought and effort and not the result of what is done in terms of financially measurable gain which determines that it is charitable. [Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)]

  37. Charitable Purpose • Relief for the poor • The relief in order to be charitable must, in every case, be to such section of the community, which may be well defined and identified by some common quality of public nature. If the class were vague and ill defined, the institution would not be a valid charitable trust. • The object need not be to benefit all persons living in a particular country or province. It is sufficient if the object is to benefit a section of the public as distinguished from specified individuals. [CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC)]

  38. Charitable Purpose • Education • As per wider and extensive meaning, the word ‘education’ would connote every acquisition of further knowledge. However section 10(22) of the I. T. Act, which grants exemption to the income of a ‘university or other educational institution, existing solely for educational purposes not for profit’ the word ‘education’ would connote the process of training and developing the knowledge, skill, mind and character of students by normal schooling. [CIT Vs. Oxford University Press (Bom) 221 ITR 77] • Education is the systematic instruction, schooling or training to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction, which a persons receives in the process of training and developing the knowledge, skill, mind and character of students by normal schooling [Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)]

  39. Charitable Purpose • The coaching of students in an institutions is not imparting education, which can be said to be a process of training and developing of students and character of students by normal schooling. A coaching institution cannot be said to be an institution where normal schooling is done. Coaching institute was held not to be entitled to exemption from Income Tax U/s 10(22) of the Act. [Institute of Mining and Mines surveying Vs. CIT, (1994) 208 ITR 608 (Pat)] • Education is per se regarded as an activity that is charitable in nature. The fee structure must take into consideration the need to generate funds to be utilized for the betterment and growth of the educational institution, the betterment of education in that institution and to provide facilities necessary for the benefit of the students [T.M.A Pai & Others vs. State of Karnataka & others]

  40. Charitable Purpose • Medical relief Hospital/Other Institution for the reception and treatment of persons suffering from illness or mental defectiveness or for reception and treatment of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit. • General public utility • An object of general public utility means an object of public utility, which is available to the general public as distinct from any section of the public. The expression “object of general public utility” includes all objects which promote the welfare of the general public. Therefore when the principal object of a chamber of commerce is to promote and protect trade, commerce and industry in India or any part of India, the said object can be said to be general utility and therefore a charitable purpose. [CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC)]

  41. Charitable Purpose • The State Bar Council is a body constituted for general public utility since the advancement of any object beneficial to even a section of public as distinguished from an individual or group of individuals would be an object of public utility and consequently a charitable purpose. [CIT v. Bar Council of Maharashtra [1981] 130 ITR (SC)] • Society of Chartered Accountants being engaged in activities of general public utility, is a charitable society. [CIT v. Jodhpur Chartered Accountants Society [2002] 258 ITR 548 (Raj.)] • Delhi Stock Exchange is non charitable institution. [Delhi Stock Exchange Association Ltd. V. CIT [1997] 224 ITR 235] • Where primary or dominant purpose of institution is charitable and other objects which, by themselves, may not be charitable, but are merely ancillary or incidental to primary or dominant object, same would not prevent institution from validly being recognized as charitable trust. [Director of Income Tax v. Bharat Diamond Bourse [2003] 259 ITR 280]

  42. Religious Purpose • It means a religious purpose within the meaning of the personal law applicable to the assessee. [Bai Hirbai Rahim Trust v. CIT [1968] 68 ITR 821 (Bom)] [Saraswathi Ammal v. Rajagopal Ammal, AIR [1953] (CS) 491] • Starting and maintaining a Sanskrit Pathshala or a Dharamshala or a temple accessible to the public, or a Sadabrata i.e food distributed to the public whoever may come and take it, or a piyau or kund where water was available to everybody, hospitals or other charitable or religious institutions are all charitable or religious purposes. [Smt. Ganeshi Devi Rami Devi Charity trust v. CIT [1969] 71 ITR 696 (al)]

  43. Religious Purpose • Holding and maintaining of samadhs in reverence of guru where people at large come and pay homage and worship at the samadhs, also holding of mela at such samadhs to propagate and remind the people of the teachings of the guru in whose memory the mela is held. [CIT v. Guryani Brij Balabh Kaur trust [1980] 125 ITR 381 (Punj.)] [CIT v. Guryani Brij Balabh Kaur trust [1989] 178 ITR 615 (Punj.)] • Provision of dinner to Brahmins on specified occasions is religious purpose. [CIT v. Ahmedabad Rana Caste Association [1973] 88 ITR 354 (Guj.)] [CIT v. Ahmedabad Rana Caste Association [1983] 140 ITR 1 (SC)]

  44. Religious Purpose • Public worship by itself will be a public religious object, but not if it is linked with other objects like conduct of marriage, staging dramas. [Ochira Temple Administration Board v. State of Kerala [1988] 171 ITR 429 (Ker.)] • Reciting prayers is a religious object but renovation of public hall for purposes of settlor will lose benefit. [Court Receiver v. CIT [1964] 54 ITR 189 (Bom.)] • Charities undertaken during religious occasions like Ramzan do not become religious solely on this account. [CGT v. Mecotronics Pvt. Ltd. [2000] 242 ITR 542 (Mad.)]

  45. Religious Purpose • Ceremonies for repose of soul of founder and his wife alonwith other religious objects cannot be treated as private because such ceremonies like ‘raogar’ and ‘muktad’ are for benefit of mankind. [CWT v. Trustees of the J.P. Pardiwala Charity Trust [2965] 58 ITR 46 (Bom.)] • Section 13(1)(b) applied only to a charitable trust and not to a religious trust.. The test of this section will not be applicable to a religious trust who will, therefore, be entitled to exemption under Section 11(1)(a) [Income tax Officer v. Catholic Church [1982] 13 TTJ 200(Ahd.)]

  46. Profit Motive • Justice Bhagwati, who delivered the majority judgement of the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust (1975) 101 ITR 234, 256 observed that “But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity.” In the same case the Ld. Judge observed that “it would indeed be difficult for persons in charge of a trust or institutions to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principal of management”. • In CIT Vs. Thyaga Brahma Gana Sabha (Sri.) (1991) 188 ITR 160 (Mad.), the court held that the exclusionary clause does not require that the activity must be carried on in a such a manner that it does not result in any profit at all. Charitable purpose would not loose its character merely because some profit had arisen from the activity- Director of Income Tax (Exemption) vs. Shilpam (1998) 230 ITR 126 (Cal.)

  47. Care in Drafting of main objects of a Trust • The objectives should be clearly defined. • Where a trust is formed and the trust deed does not reveal any specific object of a public, religious or charitable nature it shall not be entitled to claim exemption under the Act (Additional CIT Vs. Ganga Bai Charities (1983) 142 ITR 718 (Mad). • Where the deed of creation of the voluntary organization was not specific as regards the utilization of the income, the organization was not entitled to claim any exemption under the provisions of section 11 of the Act. (Assembly Rooms Vs. CIT (2000) 241 ITR 76 (Mad)

  48. Care in Drafting of main objects of a Trust • Objectives partly charitable • A trust created for providing benefit first for the relatives and balance amount for charities and after death of the relatives to the applied totally for charities was held not to have been formed for charitable purposes as the trustees had absolutely discretion to apply the income [Sarah Cherian Trust Vs. ITO (1987) 173 ITR 656 (Ker] • When there are several objects of a trust some of them being charitable and some non charitable, and if the trustee could have discretion in applying the trust income to any of the objects , whole of the trust must be treated as non charitable and no part of the income would be exempt from tax [South Indian Athletic Association Ltd. Vs. CIT (1975) 107 ITR 108 (Mad)]

  49. Care in Drafting of main objects of a Trust • Objectives partly charitable • Care should be taken as section 13(1) (c )(ii) also provides that any part of the income or any part of the property of the trust or the institution was during the previous year used or applied directly or indirectly for the benefit of the members or their relatives or any institution I in which the members have substantial interest, then the exemption shall not be available .

  50. Care in Drafting of main objects of a Trust • Beneficiaries should be properly defined. • It would be sufficient if the objects are for the benefit of a section of the public as distinguished from individuals. It may be noted that in order to become charitable, the relief should be for section of the community which could be well defined and identified by some common quality of public nature. If the class is not properly defined or is ambiguous , then the object will not be a valid charitable object. Refer decision in the case of Sherwani Charitable Trust Vs. CIT (1968) 79 ITR 750( All)