Presented By : CA (Dr). Akhil B.S Jindal B.Com (H),F.C.A, Ph.D, ISA(ICAI)

Transcription

1 5 th July 2014 Presented By : CA (Dr). Akhil B.S Jindal B.Com (H),F.C.A, Ph.D, ISA(ICAI) akhiljindal@jindalandcompany.com

2 What Do We Have In Hand Introduction Corporate social responsibility Formation of Trust /Society/Section 25 company etc Trust deed/moa Rules and regulation etc Registration with Income Tax Department u/s 12 AA/ 80 g 10(23)(c) Withdrawal of registration and 12AA and forfeiture of exemption Annual Compliance 2

3 Today s talk Corporate Social Responsibility Concept N.P.O s popularly called as Charitable trust exist as non-profit companies, associations, society, co operatives, social welfare association,waqf or trusts The objectives and structure is the essence. This distinguish an NPO from a commercial organization. Registered and regulated through multiple channels Income exempt of N.P.Os Tax incentives to the donors Private and Family trust not being NP outside the scope of present discussion 3

4 First Thing First Corporate Social Responsibility It is the management obligation to make choices for the well being of the organization as well as for the welfare and interest of stakeholders and society. It is a implied contract between the company and the community to work for the benefit of the community. 4

5 Core Element of CSR care for the stakeholders ethical functioning respect for workers, human, society and environment Activities for social development. 5

6 Few examples of non compliance of CSR- Coca cola bottling facilities in Plachimada has remained shut since August 2005 due to concerns about water shortages and pollution and recently fined Rs.216 Cr. Norsk Hydro tried very hard to set up an alumina plant in Orissa but ultimately had to abandon it due to pressures from communities. Tata Motors was forced to relocate its Nano plant out of Singur despite being invited there by the West Bengal govt. 6

7 CSR BY SOME COMPANIES BHARTI S Social and Community Initiatives Bharti Foundation is contributing towards social and community initiatives through following ways. Adopting Satya Bharti Schools Supporting scholars under Bharti Scholarship Scheme Conducting social, community & environmental initiative in and around villages where schools are located ONGC S CSR Initiatives Education: Ashadeep- shiksha ki jyot- an initiative for girl child Heat- support for the education of hemophilia affected children Healthcare: Setting up multi speciality bedded hospitals at Assam & Gujarat 7

8 COMPNIES BILL 2011 Companies must make every endeavor to ensure that they spend a minimum amount (2% of the average net profits for preceding 3 years) on activities pursuant to their CSR policy. Since a move to impose a mandatory requirement for CSR has come under severe criticism, the Ministry seems to have adopted a half-way house approach, short of making CSR mandatory. Ultimately, the nature of the obligation, if any, will boil down to semantics and interpretation of the expression every endeavor, and it is unlikely that such an obligation is capable of being enforced to any level of specificity. 8

9 Most important definition Charitable purpose u/s 2(15) of Income Tax Act The amended definition of charitable purpose w.e.f April 1 st 2009 means that Charitable purpose includes 9

10 1.Relief of poor 10

11 2. Education Systematic instruction schooling or training given to the young in preparation for the work of life :Sole trustee Lok shikashana trust vs CIT Supreme court 11

12 3..Medical relief Relief is not restricted to giving free treatment only to extremely poor but also giving treatment at a concessional rate to those through not extremely poor yet cannot afford to pay full and normal charges. Beach candy hospital trust 102 Trust 98 Bomb. 12

13 4.Preservation of environment (including watersheds, forest and wildlife)and preservation of monuments or places or objects of artistic or historic interest and 13

14 5. And the advancement of any other object of general public utility : Provided that the advancement of any other object of general public utility shall not be charitable purpose if it involves the carrying on of any activity in the nature of trade,commerce or business, for a cess or fee or any other consideration irrespective of nature of use or application or retention of income from such activity. 14

15 In effect the above amendment has excluded the residual category of trust for carrying on any kind of trade or business related activities. CBDT circular no 11/2008 reiterating that amendment deprive the entitles engaged in commercial activities from claiming exemption under the ground that such activities are for the advancement of the object of general public utility. The circular reaffirms the only the fifth category of NPO shall be affected The other category(1,2,3,4 ) of NPO can have incidental business activity. 15

16 Earlier there was a raging controversy going on as to whether trade or industrial associations could be regarded as charitable entities within the meaning of section 2(15) of the Income Tax Act. The amendment to Section 2 (15) of the Income Tax Act seeks to forbid "charitable organizations" like the cash-rich cricket body from engaging in commercial activities through subsidiaries. The change forms part of the Finance Act 2008 and BCCI with its coffers overflowing after the success of the IPL venture, clearly offers a tempting catch. The amended Section 2 (15) of the I-T Act makes it clear that a charitable organization cannot avail itself of tax exemption if it pursues commercial activities. The department generally frowns upon such institutions while dealing with their applications for registration u/s 12AA ibid. The matter stood resolved at the relevant point of time with the Supreme Court's decision in the case of Director of Income Tax Vs. Bharat Diamond Bourse 179 CTR 225. In the light of amendment made by finance act 2008 with effect from April 2009 it has become imperative to carefully understood the differences and implications of the scope of charitable purpose, business activity and profit motive. 16

17 A particular class of NGO will lose their recognition as charitable organization,if they have any activity in the nature of trade commerce or business irrespective of whether it is incidental activity or not. ( in the case of Asst Cit v Thantihi trust ITR 785) Supreme Court has held that if the income generated from business is totally used for charitable purposes then such business should be considered as incidental. The delicate issue to understand here was that newspaper publication as charitable activity is not permissible but if such business is held as property under trust then it is permissible. 17

18 Business or trade activities of other NGO pursuing any of the three objectives relief of poor education medical relief will not be affect the charitable nature of such NGO. Though under 11(4)A only incidental business activity is allowed but there is strong ruling where even unrelated business income if applied to charitable purposes was treated as incidental 18

19 In the definition charitable purpose the words not involving the carrying on any activity for profit were deleted by finance act 1983, there business or profit making activity per se is not excluded from over all scope of charitable purpose but debate still remains that the profit motive and activity of profit are two different notion 19

20 In recent case of cit vs. Gujarat maritime board ITR 561 (SC) it was held that the income earned and deployed for the development of minor ports in India was a charitable activity but after the amendment, business activity whose profit feed the charitable worked then the exemption will be lost. 20

21 Constitutional Provisions Constitution of India Article 19(1)( c) : gives right to all citizen of India to form association or union. Article 26 : gives freedom to manage religious affairs, subject to public order, morality and health, every religious denomination or any section thereof shall have the right (a) To establish and maintain institutions for religious and charitable purposes; (b) To manage its own affairs in matters of religion; (c) To own and acquire movable and immovable property; and (d) To administer such property in accordance with law 21

22 FORMATION OF TRUST The important law governing various type of non profit organizations are Public Trust Act applicable to different states in India (e.g. Bombay public trust Act 1950, for Maharashtra and Gujarat,Rajasthan public trust Act 1959 in the state of Rajasthan, Madhya Pradesh public trust Act 1951 and others ) Society Registration Act 1860 Indian Companies Act 1956 Income Tax Act 1961 Cooperative Societies Act 1904 Trade Union Act 1926 Indian Trust Act 1882 (essentially applicable to private trust ) Foreign contribution (Regulation )Act etc 22

23 Types of organization -Trust A public charitable trust must be understood as are constituted for the benefit either of the public at large or some considerable portion of it answering a particular description. It is clearly established principle of law of charity that a trust is not charitable unless it is directed to the public benefit. Trusts Offers a simplicity and ease in registration procedures. Two trustees are required to form a trust. The paperwork to establish a trust is less elaborate and in states like Delhi where there is no charity commissioner the trust deed can be easily registered with the sub-registrar office It is floated with some property (immovable or movable )that legally vest in trustees. Generally schools, hospitals established by well to do families are founded as trust.these institutions built on the private lands given away for public good. Offers greater control and autonomy Members of the family may remain on the board for as long as they may want to Freedom to appoint new trustees selectively. Trustees must not in any way make use of trust property or of his position 23

24 -Society Societies governed by the Societies Registration Act of Minimum 7 individual required for registration Members of general public can join society by paying fees but managing committee have the right to refuse/terminate membership. Society are legal entities. The liability of the members limited to assets of the society. Society are democratic in nature and run through managing committee are elected. Members of the general body enjoy voting rights and rights view the account and annual report of the society 24

25 Companies Indian companies Act 1956 is for profit making entities but section 25 of companies act A company with limited liability which may be formed for promoting commerce art science religion charity or any other useful object. No profit or other income from promoting the objectives is distributed by way dividend Company not required to suffix the term limited or private limited to its name. In Maharashtra and Gujarat section 25 company enjoy advantage over charitable trust as outside the purview of charity commissioner. 25

26 Cooperatives A institution that promotes economic and social betterment of its members and based on mutual cooperative principles. All states have own laws for governing cooperatives 26

27 Trade Union Trade union are institution formed for regulating the relations between workers and employers.trade union allows use of their general fund to remunerate their members, to fund legal expenses etc. 27

28 -Resident Welfare Association Resident Welfare association and similar association. These association work under the principle of mutuality, (if separately not registered as Societies ).if transaction takes place between person who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. However there has to be complete identity between the contributors and the participants. However, if such association have dealings with non members, such institutions would be hit by the amendment and would not be eligible for exemption under section 11 or section 10 (23 C) if they carry on commercial activities. 28

29 -Muslim Waqfs A waqf (pronounced ; plural wqāf; vakıf) is an inalienable religious endowment in Islam, typically denoting a building or plot of land for Muslim religious or charitable purposes. It is conceptually similar to the public charitable law trust. 29

30 REGISTRTION PROCEDURE Trust In case of trust application for registration of Public charitable trust should be submitted to the charity commissioner having jurisdiction over the state in the absence of charity commissioner application can be made to the sub registrar office along with the trust deed.the trust deed to be executed on the non judicial stamp paper. Format of trust deed Essential for creating a valid charitable trust Declaration sufficient to show an intention to create a trust Setting apart of definite property and settler depriving himself of ownership thereof Purpose or the object of the trust and Beneficiary under the trust 30

31 Society The application for registration of a society should be made to the registrar of the societies having jurisdiction over the state. To be submitted together with Memorandum of association and rules and regulation Consent letter of the members and affidavits etc Registration fee is charged 31

32 Company Section 25 company is a company with limited liability formed for promoting commerce, art, science, religion, charity or any other useful object. The company with limited liablility will be registered as without the addition to its name word limited or the words Private Limited. 32

33 REGISTRATION OF TRUSTS & INSTITUTIONS UNDER INCOME TAX Act The legal frame work, granting exemption to a Non profit organization is contained in one or more of the following sections of Income Tax Act 1961:- (i) Section 2(15); Define term Charitable object (ii) Section 2(24) (iia); Income Corpus Income (iii) Section 10(23C) (iv) Sections 11, 12, 12A, 12AA and 13; and (v) Sections 35(1)(ii) and 35(i)(iii). (vi) 80G 33

34 Section 2(15) The inclusive definition of charitable purpose provide that the relief of the poor, education, medical relief, preservation of enviourment, monuments etc and also the advancement of any other object of general public utility. 34

35 Application for Registration The application for registration has to be made in Form no. 10A The application has to be accompanied by the following documents;- (i) Certified true copy of the instrument by way of which the trust or institution etc. is created; and (ii) If it existed in years prior to the year in which application is made, accounts of the prior years (not exceeding three years) (iii) No objection certificate from the owner of the premises where registered office of the NPO is situated (iv) Consent of Trustees /Governing body (v)undertaking from trustees that there shall be no infringement of provision to 2(15) of the Income Tax Act (vi) Detail of bank account and copy of bank statement. 35

36 Director of Income Tax (Exemption ) on receipt of application has to pass an order either registering the trust etc. or rejecting the application. The necessary hearing are held with the Income Tax Office (headquarter). The registration may be rejected on the ground that the trust or its activities are not genuine. Such an order has to be passed within a period of six months from the end of the month in which the application is made. The law regarding conditions precedent for registration, so far as merits are concerned, namely, that the DIT(E) should satisfy himself about:- Objects of the trust etc; and Genuineness of its activities, support in evidence need to be submitted The object(s) of the trust etc. should constitute religious or charitable purpose(s) u/s 2(15) and this aspect will be enquired into. The genuineness of activities can be inferred only if the trust/institution etc. has started to carry out the purpose(s), mentioned in the object clauses of instrument of its creation, at the time when application is made. 36

37 Section 12A(b) also requires that if total income of a trust etc. without giving effect to provision of section 11 & 12 exceeds the maximum amount which is not chargeable to tax, then its accounts are required to be audited by an accountant and his report in Form no. 10B (Annexe-2) has to be filed along with the return of income. The following points should normally be kept in mind at the time of making An application for registration:- There should be a legally existing entity, which can be registered; It should have a written instrument of its creation or written document evidencing its creation; All its objects should be charitable or religious in nature; 37

38 Its income and assets can be applied towards its charitable objects only, as mentioned in the object clauses, No part of its income should be distributable or distributed, directly or indirectly, to its settler,members, directors or founders, related persons or relatives etc. claiming through them; and In case of dissolution, its net assets after meeting all its liabilities, should not reverted to its founder, members, directors or donors etc., but handed over to an institution having objects similar to that of the trust. 38

39 Registration for 80G Application for registration has to be made in Form no. 10G.The application has to be accompanied by the following documents;- (i) Certified true copy of the instrument by way of which the trust or institution etc. is created; and Consent of the trustees Order of registration u/s 12AA, or notification Note on the activities conducted since inception or in the last 3 years Accounts of the institution since inception or last 3 years If granted exemption u/s 80 g, a donor is entitled to a 50% deduction from taxable income from donations made to a NPO s. 39

40 Registration and Exemption u/s10(23c) It may be mentioned here that it is not as if all NPO claim exemption under section 11 the income tax act contains section 1023C which deals with available to institution engaged in the field of education or medical, public religious institution,and others.however in the present context it may be pertinent to restrict our discussion engaged in education activity and activity relating to medical welfare. While section (iiiad) relates to exemption available to university or the educational institution existing solely for educational purposes and not for purposes of profit if it its annual receipts do not exceed Rs 1 crores. (iiiae) relates to exemption to hospital or other institution for providing medical relief existing solely for philanthropic purposes and not for purposes of profit if its annual receipts do not exceed Rs 1 crores. 40

41 10(23C) (vi and via ) deals with exemption available to educational institution or medical institution as referred to above in whose case the annual receipts exceed Rs 1 crores, such institutions have to obtain approval of the prescribed authority. Necessary application has to be made in form 56D. Compliance of various conditions prescribed under the act is required in respect of the above mentioned institution. 41

42 Under Rule 2CA any University or other Educational Institution whose aggregate annual receipt exceeds Rs.1 Crore refer to in sub clause (vi) of section 10(23C) is required to file an application for approval in Form No. 56D to the Chief Commissioner or Director General of Income Tax. [First proviso to section 10(23C)]. Before approving any University or other Educational Institution, Chief Commissioner or Director General of Income Tax may call for such documents (including audited annual accounts) or information, as the case may be as it thinks necessary in order to satisfy itself about the genuineness of the activities and the prescribed Authority may also make such enquires as it deems necessary in this behalf. [Second proviso to section 10(23C)]. 42

43 Earlier (Prior to Finance Act, 2001) a. organisation registered u/s 10(23C) were not subjected to conditions as specified u/s 11,12,12A and 13. b. The organisation registered u/s 10(23C) were not required to file Income tax return or, further the clause of spending at least 75% was also not applicable Finance Act 2001 imposed the condition of spending at least 75 % of income, where Finance Act 2002 has further increased the quantum of spending of income to be at least 85%. The Finance Act 2002 has further inserted S. 139(4C) thereby requiring such institution to file their returns as per the provisions of S. 139(1). 43

44 Exemptions Basis of differences Section 10(23C) Section 12 AA Section 80G Form for the above Application Required to be made by educational institutions where: Gross annual receipt exceeds Rs. 1 crore ; or Is not substantially financed by the Government. Required to be made by all NGOs in order to claim exemption u/s 11 Required to be made by all NGOs which wishes to take the benefit under this section Rules applicable Form 56 D Form 10 A Form 10 G Time limit for filing of application Before the end of the previous year Before the end of the previous year - Time limit for approval Within 12 months from the end of the month in which application is received Within 6 months from date of application Within 6 months from date of application

45 Time period for exemption Lifetime Lifetime Lifetime Time limit of Upto 5 Years is omitted by Finance (No.) 2 Act, 2009 Withdrawal of approval By CCIT By CIT By CIT/By CCIT Exemption w.e.f. The year in which it is granted and thereafter The year in which it is granted and thereafter Appeal on rejection Not provided. However writ can be filed in the High Court Lies to Appellate Tribunal Lies to Appellate Tribunal Form of Audit Report Form 10BB (Rule 16CC) Form 10B (Rule 17B) Form of Application for accumulation Not prescribed Form 10 45

46 Last date of filing of form for accumulation Before the due date of filing of return u/ s 139 Before the due date of filing of return u/ s 139 Power to condone belated application No No Form for filing of return ITR 7 ITR 7 46

47 Income of trust The concept of income, for assessment of religious or charitable trusts, etc., is somewhat different from assessment of other entities. This is because of provisions of section 2(24)(ii), under which voluntary contributions are also taken as income. It also becomes clear from reading of this section that a trust or institution may be wholly or partly religious or charitable in nature. Various provisions will, therefore, be applicable to the activities or purposes which are charitable or religious in nature. Section 12 makes some changes in the aforesaid income. Firstly, it excludes corpus donations from the ambit of income. Thus, voluntary contributions received with a specific direction that they shall form part of the corpus are to be excluded from the definition of the term income. It may be noted here that these contributions have to be used in accordance with the directions of the donor. Section 11 permits deduction of expenditure from income. The expenditure incurred by a trust or institution by way of application of income in India towards religious or charitable purposes, as per its Memorandum, is deductible from the income. The assessee may also set apart and accumulate 15% of income for such application and such amount will also be taken as expenditure of the year. These provisions are applicable mutatis-mutandis to a partly religious or charitable trust. The word applied used in section 11 should be construed widely and not in a narrow sense. 47

48 Accounting -Purpose For Trustees /Governing Body For Government /Regulator For Contributors / fund raiser /donors 48

49 Books of Accounts Required Receipt Book Cash book Petty Cash book Bank book General Ledger Investment Register Fixed Assets Register 49

50 Method of Accounting Accural system of Accounting vs Cash System of Accounting 50

51 Specific Head of Accounts General Fund not subject to any restriction on its utilization. Restricted Fund /Corpus Fund Designated Fund Funds set apart for specific Purposes to meet future commitments such as scholarship fund,teaching award fund etc Membership Subscription Donation /Grants 51

52 Accounting of Corpus Fund Corpus is an endowment fund given to the NPO to meet specific objectives. Donation to the Corpus are not Income and not be routed through the Income and Expenditure Account but Balance Sheet directly. 52

53 General Fund General Fund represents the Excess of surplus of previous years and for the year. No entries for accumulation made under 15% or under 11(2) to be passed through General fund 53

54 Audit When required Clause (b) of sub-section (1) of section 12A of the Act requires audit if the total income of the institution for the relevant year exceeds the maximum amount which is not chargeable to income tax. This means if the total income of the institution in any previous year before giving effect to the provisions of the Act is less than the maximum amount which is not chargeable to income tax, then audit under the Act is not required. It is significant to note that contributions made with a specific direction that they shall form part of the corpus of the institution is included in the definition of income under section 2(24). However, by virtue of section 11(1)(d) they shall not be included in the total income of the previous year. The implications of the above provisions are that for determining the ceiling limit of the maximum amount which is not chargeable to income tax for the purpose of eligibility to audit under section 12A(1)(b), contributions towards the corpus of the institution are to be included. 54

55 Audit of Accounts Audit of NPO under 12A(b) of Income Tax Act Report in the form No 10 B Tax audit u/s 44AB not applicable as entity carrying on charitable activities and not business activities Form of 10B 55

56 FORFEITURE OF EXEMPTION Section 13 mentions the contains circumstances in which benefit of provisions of section 11 and section 12 shall not be available in respect of application of income or part thereof. These circumstances are listed as :- 56

57 Income is for private religious purpose and not for the benefit of public. 57

58 The income is for the benefit of any particular religious community or caste. However, income for benefit of persons belonging to Scheduled castes, Scheduled tribes, women and children will not be denied exemption u/s 11 &

59 The income is for the benefit of any interested person mentioned in section 13(3) or Explanation I to Section 13(6) except where the transaction is at fair market value. 59

60 Unlucky for some 13(3)- Author/founder Of the trust Person who made a substantial contribution. If Author is HUF, member of the family Any trustee of trust or manager Any relative of such author member, trustee or manager Any Concern In Which any Of above have substantial interest. 60

61 The income is invested or continues to be invested in forms other than the forms specified in section 11(5). 61

62 Annual Compliance Trust Society Company Income tax return To be filed Due date 31 st July, if audited than 30 th Sep To be filed Due date 31 st July, if audited than 30 th Sep To be filed Due date 30 th Sep Minutes Records of meeting of Trustees to be Kept, No need to call Annual General Meeting. Governing body meeting and annual general meeting to be held.register of Members etc to be kept. Necessary Minutes and records as per company law to be kept 62

63 Annual filing with Registrar NA To be filed minutes and list of governing body and annual accounts Annual return and financial statements be filed. Tax deduction at source Returns/Tan Number Applicable if payment exceeds limit Applicable if payment exceeds limit Applicable payment exceeds limit Audit Report Form 10 B Audit report under 10 B and Audit report under Society registration Act Audit report under 10 B and Audit report under Company law. 63

64 Significant issues and Amendments The Finance Act no 2 of 2009 and the finance act 2010 have brought about certain far reaching changes in the law relating to trusts. 1. Preservation of Environment etc The most far reaching change in law is in the definition of the term Charitable purpose. The Finance Act no 2 of 2009 has inserted the following words preservation of environment,including water sheds, forest and wildlife and preservation of monuments or places or objects of artistic or historic interest. By virtue of the above amendment charitable purpose include, the activities relating to the forgoing matters and institution pursuing such activities shall be covered under section 11. Earlier the definition of the term charitable purpose included relief of the poor, education, and medical relief and advancement of any other object of general public utility. 64

65 2. NPO s/institutions involved in activity in nature of trade commerce or business As you may be aware exemption was sought to be denied to the institution claiming exemption on the ground that they were engaged in the advancement of an object of general public utility if their activities involved carrying on the activity in the nature of any trade commerce or business or any activity of rendering any service in relation to any trade, commerce or business for cess or fee or other consideration irrespective of the nature of use or application or retention of the income from such activity. By amendment introduced by Finance Act 2010 relief has been given to such institutions by providing that the exemption to such institution will continue to be available if aggregate value of receipts from such activities is Rs 10 lacs or less in a previous year. 65

66 3. Exemption under section 80 G in perpetuity Another very important amendment made in the tax laws is with regard to donation made to charitable institution in the Section 80G of the Act. As you are aware as per rules 80Gexemption certificate could be granted for a period not exceeding 5 assessment years. In fact the commissioner s in their wisdom used to grant the exemption for period shorter than 5 years. Thus charitable trusts had to undergo regularly the exercise of applying for 80G renewal which was unduly burdensome for bonafide institution and also led to wastage of time and resources of the tax administration. The above restriction with regard to period on the grant of 80 G approvals has been removed by the Finance Act (no 2) of Accordingly exemptions expiring on or after will be deemed to be extended in perpetuity unless specifically withdrawn.however in the case of approvals expiring before these will have to be renewed and once renewed these shall continue to be valid in perpetuity unless specifically withdrawn. This is a big relief as a lot of time was wasted on pursuing the matter of these approvals with the department. 66

67 4. Anonymous Donation Another issue which has been a cause of concern to the charitable trusts was the taxation of the anonymous donations under section 115BBC.Finance act (no2) of 2009 has provided relief in this regard. Keeping in view the practical difficulty involved in maintaining the complete records of the donations received,and in order the mitigate the compliance burden the above section was amended by exempting a part of the anonymous donation from being taxed. The amendment has resulted in the following scheme. 67

68 Anonymous donation received by religious institution shall continue to remain exempt from tax In the case of partly religious and partly charitable institution, anonymous donation directed towards medical and educational institution run by such entities shall be taxable only to the extent such donations exceed 5% of the total donation received by such institution or a sum of Rs 1.0 lacs or which ever is more..other donation to partly religious and partly charitable institution shall remain exempt. In case of wholly charitable institution anonymous donation shall be taxable only to the extent such donation exceed 5% of total donation or amount as specified whichever is more. The above amendment will apply to Asst year and subsequent years. 68

69 5.Whether a trust established to carry out partly charitable purpose and partly religious purposes would be entitled to exemption under section 11. It was held in the Society of Presentation Sisters vs Income tax Officer Calicut 121 ITD 422, that it is well settled that so far as provisions of section 11(1)(a) are concerned, no distinction is made between charitable and religious purposes. A charitable institution can have religious purposes, whereas a religious institution may be partly charitable. The Supreme Court in the case of Pandit Ram Chandra Shukla v Shree Mahadeoji Mahabirji and Hazrat Ali AIR 1970 SC 458 held that charitable and religious purposes overlap in India. Even otherwise relief and help to the poor, medical help to the needy looking after deity and temples (mosques, church included) are no doubt religious purposes, but these are also considered as charitable purposes in India. Therefore view taken by the authorities below that exemption under section 11(1)(a) could not be allowed to a charitable trust as it was also carrying some purpose which termed as religious was totally unwarranted. It was held that the assessee trust was entitled to exemption under section 11(1)(a). Similar judgments have been given in Calicut Islamic Cultural society v. ACIT Sot148, Andhra Pradesh High Court in the case of CIT v Social Service Centre ITR

70 6.One of the other important provisions relates to liability to file tax returns cast on charitable institutions. According to the provision of section 139 (4A) of the Income Tax Act all charitable and religious institutions are required to file their returns of income if the total income computed under the Act without giving effect to the provisions of section 11 and 12 exceeds the maximum amount which is not chargeable to income tax. In cases where the total income of the trust or institution without giving effect to provisions of section 11 and 12 exceeds the maximum amount which is not chargeable to income tax, the accounts of such trust or institution are required to be audited and the audit report in form 10B has to be filed with the return of income. 70

71 While in the case of institutions whose accounts are not required to be audited the due date for filing of return is 31 st July of each year, in case of institutions whose accounts are to be audited the due date is 30 th September of each assessment year. It is common knowledge that educational institutions and medical institutions earlier were not even required to file their return because their income was exempt u/s 10(22) or 10(22A). However these two sub-sections stand omitted w.e.f The provisions of section 139(4C) introduced w.e.f have made it incumbent on specified entities enjoying exemption under various sub-clauses in section 10 to file their returns of income within the prescribed period. 71

72 Further even educational institutions and medical institutions enjoying exemption under section 10(23C)(vi) and (via) that is institutions whose annual receipts exceed Rs. 1 crore are also required to file their returns of income. Further by virtue retrospective amendment made by Taxation laws (Amendment) Act 2006 w.e.f even educational institutions and medical institutions enjoying exemption under section 10(23C)(iiiad) and (iiiae) that is institutions having annual receipts of less than Rs. 1 crore have been made liable for filing their return of income. 72

73 7.An area where, there has been a lot of litigation is with regard to the time limit for filing of Form No. 10 for accumulation of Income u/s 11(2) of the Income Tax Act. The department's stand all along has been that the Form No. 10 should be filed within the statutory time limit prescribed for filing of return The controversy stands resolved by the Supreme Court in the case of CIT vs. Nagpur Hotel Owners Association 165 CTR (SC)1 wherein, it has been held that the Form No. 10 could be filed before the completion of the assessment for eligibility to claim of accumulation u/s 11(2) of the Act. 73

74 Charitable trust vs. Mutuality Doubts are sometimes raised as to the applicability of the provision of section 11 and 13 Club, RWA, Cooperative society and other mutual association.the law as has emerged out of various decisions is that in order to make a claim of exemption on the basis of mutuality there should be complete identity between the contributories and the beneficiaries. An institution in which there contributories and beneficiaries are the same would be eligible to make a claim of exemption on the basis of mutuality.chelmsford club vs CIT (SC)249ITR

75 Changes on taxation of NPO in Direct Tax Code Any discussion on law relating to taxation of NPO will be meaningless unless one deliberates in such law in the Direct Tax Code.DTC, which proposes to make certain radical changes in law as it exists. In the original draft the term charitable purpose was proposed to be replaced with the phrase Permitted welfare activity however after the feedback received in the revised draft DTC the phrase charitable purpose has been retained. As regards the tax liability of NPO s the tax rate proposed is 15% of the amount of surplus and the amount of capital gains on transfer of an investment/asset being a financial assets. 75

76 In the Draft DTC the term gross receipt and outgoings has been clearly defined. It is proposed that only cash system of accounting will be recognized. It is further proposed that NPO s will be prohibited from investing any of its funds or holding any of its assets any associate concern. It is further proposed that trust institution/ recognized under the Religious Endowment Act of the Central or State government shall be fully exempt from tax however no deduction would be available to the donors of such entity 76

77 It was originally proposed that fresh registration was to be obtained by the NPO s.as a result of representation no fresh registration would be necessary However they would be required to provide additional information to facilitate the administration of the new provisions. In case of partly religious and partly charitable institution under the proposed DTC donations made to such NPO will not be eligible for deductions in the hands of the donors 77

78 As a result of feed back up to 15% of surplus or 10% of gross receipts which ever is higher will be allowed to be carried forward to be used with in 3 years from the end of the relevant financial year. It is also proposed to provide a basic exemption limit for the NPO s and its only the surplus in excess of such limit which will be subject to tax. How ever these are simply proposals and the actual shape of law will be clear only when direct tax code is finally introduced. 78

79 Questions And Answers 79

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