TAXATION OF CHARITABLE TRUSTS

Transcription

1 TAXATION OF CHARITABLE TRUSTS A summarized insight into the taxability of Indian Charitable Trusts, as per the provisions of the Income Tax Act, A s p e r t h e F i n a n c e A c t,

2 TABLE OF CONTENTS Introduction and Definitions..2 Section 11(1) : Income..4 Section 11(2) : Accumulation of Income..6 Section 11(3) : Withdrawal of Exemption 6 Section 11(1A) : Capital Gains...7 Section 11(4) : Business undertaking of the Trust.7 Section 11(5) : Specific modes of investing funds of the Trust.8 Rule 17C : for investments..10 Section 12A : Conditions for applicability of Sections 11 & Section 12AA : Procedure for Registration..11 Section 13(1) : Section 11 not to apply in certain cases.12 Section 13(3) : Meaning of Specified Persons..13 Section 12(2) & 13(6) : Educational and Medical Facilities to Specified Persons..13 Anonymous Donations..14 Format for computing taxability of a Trust s income.15 1

3 TAXATION OF CHARITABLE TRUSTS (as per the Income Tax Act, 1961) Section 2(15): Charitable Purpose defined :- Charitable Purpose includes -relief of the poor - education - medical relief - preservation of environment (including watersheds, forests and wildlife) - preservation of monuments or places or objects of artistic or historic interest, and - the advancement of any other object of general public utility First proviso: 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 business, for a cess or fee or any other consideration irrespective of the nature or use or application or retention of the income from such activity. Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year. (inserted by Finance Act, 2010) Note: However, as per Finance Act, 2009, the preservation of environment (including watersheds, forests and wildlife) and the preservation of monuments or places or objects of artistic or historic interest shall be regarded as charitable purpose even if it involves carrying on of any activity in nature of trade, commerce or business. 2

4 Examples: A charitable trust has receipts of Rs.100 lakhs from activities of charitable nature. The trust also has a business which is not incidental to the attainment of main objects of the trust and the total receipts from such business are: Case 1: Receipts 10 lakhs, Expenses 2 lakhs The Trust remains to be a charitable trust as per the amendment made by the Finance Act, 2010 since its receipts (i.e. 10 lakhs) from commercial activities do not exceed the limit of Rs. 10 lakhs. The trust will claim exemption under section 11 on the receipts of Rs. 100 lakhs and Rs. 8 lakhs business income shall be taxable at the normal rate. (Note: The business income is not exempt) Case 2: Receipts 25 lakhs, Expenses 16 lakhs The Trust ceases to be a charitable trust since the receipts (i.e. 25 lakhs) from commercial activities exceeds Rs. 10 lakhs. Exemption under section 11 shall not be available. The Trust shall be taxable on its income at the rates applicable to AOP/BOI. SECTION 11: Income from property held under trust will be exempt if: (1) Trust is registered with Commissioner of Income Tax u/s 12AA (vide application Form 10A). (2) Books are audited (vide form 10B) if income (including corpus donations) exceeds Rs. 1,80,000 before claiming section 11 & 12 exemptions. (3) At least 85% of income (excluding corpus donations) must be applied towards the approved objects of the Trust. (4) Unapplied Income + Accumulated Income + Corpus Donations shall all be invested in specified modes of investments as u/s 11(5) Further conditions to note: The property from which income is derived should be held under a trust. The property should be held for charitable purposes. The trust should not be created for the benefit of any particular religious community or caste. No part of the income should enure directly or indirectly for the benefit of any specified person. [For list of specified persons, refer to Section 13(3)] The trust can carry out business activities if the business activities are incidental to the attainment of its objectives, and separate books are maintained. 3

5 Voluntary contributions (not being corpus donations) shall be deemed to be income derived from property held under the trust. SECTION 11(1) : INCOME FROM PROPERTY HELD FOR CHARITABLE PURPOSE The following incomes shall not be included in the total income of the charitable trust: (a) 15% of income derived from property held under trust wholly for charitable purposes (to be computed on the gross receipts) i.e. Standard Deduction (b) 85% of income derived from property held under trust wholly for charitable purposes, to the extent to which such income is applied to such purposes in India (c) Income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust, i.e. corpus donations. Note 1: Income derived from property held under trust wholly for charitable purposes includes voluntary contributions i.e. donations except corpus donations. Note 2: The words applied to charitable purposes includes - Purchase of capital assets - Revenue expenses - Donations to religious/charitable trust registered under section 12AA or section 10(23C) * - Repayment of loans taken for purchase of capital assets - Depreciation on capital assets * However once the trust decides to accumulate its income then contribution to another trust out of its accumulated income will not qualify for exemption. An exception to this would be for the year of dissolution of the trust, wherein the Assessing Officer may permit contribution to another trust, without denying exemption. In taxation lingo, a previous year is the financial year in question, and the year that follows is the assessment year. For example, for the financial year April 2010 to March 2011, the previous year is , and the assessment year is Tax returns are filed in the assessment year, as per tax provisions relevant to the assessment year, for the income earned in the previous year. 4

6 Note 3: If, in the previous year, the income applied to charitable purposes in India falls short of 85% of the income derived during that year from property held under trust, by any amount (i) For the reason that the whole or any part of the income has not been received during that year, and the assesse submits a declaration to the Assessing Officer on or before the due date of filing of return that such income shall be applied to such purposes in the year of receipt or in the immediately succeeding year, then the amount for which such declaration is given shall be deemed to be applied to such purposes during the previous year in which income was derived. If such sum is not applied to such purposes in the year of receipt or in the immediately succeeding year, then the amount not so applied shall be deemed to be the income of the previous year immediately succeeding the previous year in which such income is received. Eg: Out of the total income, say Rs. 20 lakhs has not been received in the current year, but has been received in the 5 th year : 1 st Year 5 th Year Net Income 100 lakhs 200 lakhs (-) Basic Exemption 15% (15 lakhs) (30 lakhs) Balance to be Applied 85 lakhs 170 lakhs (-) Not Received (20 lakhs) 20 lakhs (now received) Net to be Applied 65 lakhs 190 lakhs (ii) For any other reason, and the assesse submits a declaration to the Assessing Officer on or before the due date of filing of return that such income shall be applied to such purposes in the immediately following previous year, then the amount for which such declaration is given shall be deemed to be applied to such purposes in the previous year in which such income was derived. If such sum is not applied to such purposes in the immediately succeeding previous year, then the amount not so applied shall be deemed to be the income of such immediately succeeding previous year. Note: The general provision is that if the 85% could not be applied by the end of the previous year, then it can still be applied in the next previous year, but BEFORE the due date for filing the tax returns. If it is not likely that this will be possible, then the specific declaration to the AO has to be filed, as given in point (ii) above. 5

7 SECTION 11(2) : EXEMPTION IF INCOME ACCUMULATED FOR SPECIFIC PURPOSES Where 85% of the income referred to above is not applied to charitable purposes in India during the previous year but is accumulated or set apart, either in whole or part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely: (a) Such person specifies, by notice in writing given to the Assessing Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed 5 years. (This notice is required to be given before the assessment is complete) and (b) The money so accumulated or set apart is invested or deposited in the forms or modes specified in Section 11(5) Accumulated funds shall be spent for specified purposes within a period of 5 years, failing which they will be treated as income of the 6 th year to be spent in the 6 th year itself, failing which they can be spent in the 7 th year by the date of filing the tax returns for the 6 th year. SECTION 11(3) : EXEMPTION WITHDRAWN IF SPECIFIC CONDITIONS NOT SATISFIED Any income referred to in section 11(2) which (a) Is applied to purposes other than the purpose for which it was accumulated or set apart, then it shall be deemed to be the income of the previous year in which it is so applied, or (b) Ceases to remain invested in modes specified in section 11(5), then it shall be deemed to be the income of the previous year in which it so ceases, or (c) Is not utilized for the purpose for which it is so accumulated or set apart during the 5 year period or in the year immediately following the expiry thereof, then it shall be deemed to be the income of the previous year immediately following the expiry of the 5 th year, or (d) Is donated to any trust registered under section 12AA or to any specified institutions referred to in section 10(23C), then it shall be deemed to be the income of the previous year in which it is so donated. 6

8 SECTION 11(1A): CAPITAL GAINS DEEMED TO BE APPLIED FOR CHARITABLE PURPOSES For the purposes of subsection (1), - Where a capital asset, being property held under trust wholly for charitable purposes, is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:- (i) (ii) Where the whole of the net consideration is utilized in acquiring the new capital asset, the whole of such capital gain; Where only a part of the net consideration is utilized for acquiring the new capital asset, then the following capital gains is exempt: Cost of the new asset minus cost of the transferred asset SECTION 11(4): PROPERTY HELD UNDER TRUST INCLUDES BUSINESS UNDERTAKING Income from business shall be treated as income derived from property held under trust and shall be eligible for exemption under section 11(1) & 11(2) provided the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained by such trust in respect of such business. If in the assessment, the Assessing Officer finds any concealed income in respect of the above business then, exemption under section 11(1) & 11(2) shall not be available in respect of such concealed income. 7

9 SECTION 11(5): SPECIFIED MODES FOR INVESTING FUNDS OF THE TRUST The forms and modes of investing or depositing the money shall be the following, namely: (i) investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government (ii) deposit in any account with the Post Office Savings Bank (iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a cooperative land development bank) (iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (v) investment in any security for money created and issued by the Central Government or a State Government (vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government (vii) investment or deposit in any public sector company: Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company, (A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company; (B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company (viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India (ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes. 8

10 (ixa) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India. Explanation. For the purposes of this clause, (a) long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years; (b) public company 98 shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956); (c) urban infrastructure means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport (x) investment in immovable property. Explanation. Immovable property does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth (xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (xii) any other form or mode of investment or deposit as may be prescribed. (Under Rule 17C) 9

11 Rule 17C : The forms and modes of investment or deposits under clause (xii) of sub-section (5) of section 11 shall be the following, namely : (i) (ii) investment in the units issued under any scheme of the mutual fund referred to in clause (23D) of section 10 of the Income-tax Act, 1961; any transfer of deposits to the Public Account of India; (iii) deposits made with an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; (iv) investment by way of acquiring equity shares of a depository. (v) investment made by a recognised stock exchange in the equity share capital of a company (hereafter referred to as investee) - (A) which is engaged in dealing with securities or mainly associated with the securities market; (B) whose main object is to acquire the membership of another recognised stock exchange for the sole purpose of facilitating the members of the investor to trade on the said stock exchange through the investee in accordance with the directions or guidelines issued under the Securities and Exchange Board of India Act, 1992; and (C) in which at least fifty-one per cent of equity shares are held by the investor and the balance equity shares are held by members of such investor; (vi) (vii) investment by way of acquiring equity shares of an incubatee by an incubator. investment by way of acquiring shares of National Skill Development Corporation. 10

12 SECTION 12A : CONDITIONS FOR APPLICABILITY OF SECTIONS 11 & 12 The income of a charitable trust is exempt under sections 11 and 12 if the following conditions are satisfied:- (a) The person in receipt of the income has made an application for registration of the trust to the Commissioner and such trust is registered under section 12AA. The provisions of section 11 and 12 shall apply in relation to income of such trust from the financial year in which such application is made. (b) Where the total income of the Trust computed without giving effect to the provisions of sections 11 and 12 exceeds Rs.1,80,000/- in the previous year (relevant to AY 11-12; check for applicable exemption limit in the case of any other assessment year) then the accounts of the Trust for that year should be audited by a Chartered Accountant and the report of such audit should be furnished along with the return of income of the relevant assessment year. SECTION 12AA: PROCEDURE FOR REGISTRATION The Commissioner, on receipt of an application for registration of a Trust made under Section 12A, shall (a) Call for such documents and information from the Trust as he thinks necessary in order to satisfy himself about the genuineness of the activities of the Trust and may make further enquiries. (b) After satisfying himself about the objects of the Trust and the genuineness of its activities: a. Pass an order in writing registering the Trust, b. If he is not satisfied, pass an order in writing refusing to register the Trust or Institution. No order of refusal to register the Trust shall be passed unless the applicant has been given a reasonable opportunity of being heard. Every order granting or refusing registration shall be passed before the expiry of six months from the end of the month in which application was received under Section 12A. If no order is passed within the said six months then it shall be deemed that the Trust has been registered. Where a trust or an institution has been granted registration under section 12AA and subsequently the Commissioner is satisfied that the activities of such trust are not genuine or are not being carried out in accordance with the objects of the trust, as the case may be, he shall pass an order in writing cancelling the registration of such trust. 11

13 SECTION 13(1): SECTION 11 NOT TO APPLY IN CERTAIN CASES Exemption under sections 11 & 12 shall not be available in the following cases: Section 13(1)(a): Income for private religious purposes: Entire income from property held under a trust for private religious purposes which does not enure for the benefit of the public is not eligible for exemption under section 11 or 12. Section 13(1)(b): Income for the benefit of particular religious community: Entire income of a charitable trust/institution created for the benefit of any particular religious community or caste is not eligible for exemption under section 11 or 12. A trust created or established for the benefit of Scheduled Castes, Backward Classes, Scheduled Tribes or women and children shall not be deemed to be a trust created or established for the benefit of a religious community or caste for this purpose. Section 13(1)(c): Income for the benefit of specified persons: If any part of income of a religious/charitable trust/institutions enures directly or indirectly for the benefit of any person specified in section 13(3) or any property of the trust is during the previous year applied or used directly or indirectly for the benefit of any person referred to in section 13(3), then entire income of such trust is not eligible for exemption under section 11 or 12. Section 13(1)(d): Funds not invested in section 11(5) securities/deposits: Entire income of a trust/institution is not eligible for exemption u/s 11 & 12, if its funds are invested/deposited otherwise than as specified under section 11(5). It has been clarified that investment in (i) (ii) Shares of public sector company; and Shares of depository will not amount to contravention to section 13(1)(d). Also not eligible for exemption under section 11 or 12: - Income from that business for which separate set of books are not maintained. - Income from that business which is not incidental to the attainment of the objects of the trust. 12

14 SECTION 13(3): MEANING OF SPECIFIED PERSONS For the purposes of section 13 the following are specified persons: (a) The author of the trust or the founder of the institution (b) Any person who has made a total contribution (up to the end of the relevant previous year) of an amount exceeding Rs.50,000 (substantial contributor) (c) Where such author or founder or substantial contributor is an HUF, a member of HUF (cc) Any trustee of the trust or manager (by whatever name called) of the institution (d) Any relative of such author, founder, substantial contributor, member, trustee or manager (e) Any concern in which any of the persons referred to above has a substantial interest. SECTIONS 12(2) AND 13(6): EDUCATIONAL AND MEDICAL FACILITIES TO SPECIFIED PERSONS Sections 12(2) and 13(6) provide as follows 1. As per section 13(1), income of a charitable trust will not be exempt if any part of such income or any property of the trust is used or applied directly or indirectly for the benefit of any person specified in section 13(3). Subsection (6) provides that a charitable trust running an educational institution or a medical institution or a hospital shall not be denied the benefit of exemption under section 11 or section 12, in relation to any income by reason only that such trust has provided educational or medical facilities to specified persons. 2. Section 12(2) provides that the value of any medical or educational services made available by any charitable trust running a hospital or medical institution or any educational institution to any specified person shall be deemed to be the income of such trust derived from property held under trust wholly for charitable purposes during the previous year in which such services are so provided and shall be chargeable to income-tax and exemption under section 11(1) & 11(2) shall not be available for such income. 13

15 ANONYMOUS DONATIONS SECTION 115BBC: ANONYMOUS DONATIONS TO BE TAXED IN CERTAIN CASES SECTION 13(7): SECTION 11 or 12 NOT TO APPLY IN CASE OF ANONYMOUS DONATIONS Anonymous Donations means any voluntary contribution where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed. 30% FLAT RATE OF TAX ON ANONYMOUS DONATION IN EXCESS OF THE HIGHER OF THE FOLLOWING AMOUNTS, NAMELY: (a) 5% of the total donations received by the assessee; or (b) Rs. 1,00,000. Anonymous donations are not taxable under section 115BBC if: (i) (ii) Such donations are received by any trust/institution established wholly for religious purposes. Therefore in case of a trust owning a temple, the offerings/donations made by the devotees etc. shall not be taxable under this section even if the names/addresses of donors are not there. Such donations shall be subjected to provisions of section 11 & 12. Such donations are received by any trust/institution established wholly for religious and charitable purposes. However such donations shall be taxable under section 115BBC if the anonymous donation is made with specific direction that such donation is for any university/school/educational institution/hospital/medical institution run by such trust. For example: Anonymous donations received by a trust wholly for charitable purposes are taxable under section 115BBC. Anonymous donations which are not taxable under section 115BBC shall be taxable under the normal provisions and shall be subjected to section 11 and 12. Anonymous donations which are taxable under section 115BBC shall not be entitled to exemption under section 11 and 12 as per provision of section 13(7). 14

16 Wholly Charitable Trust --- Anonymous donations to be taxed u/s 115BBC Wholly Religious Trust --- Anonymous donations not to be taxed u/s 115BBC Wholly Religious & Charitable Purposes --- Anonymous donations not taxable u/s 115BBC. Taxable if donation made with a specific direction that such donation is for any university/educational institution/hospital/medical institution run by such trust/institution. FURTHER NOTES: Even if the trust does not carry on business, or have business assets, it can claim depreciation on assets. This can be on Straight Line Method basis or Written Down Value basis. Depreciation will be reduced from Gross Income. Loan advanced within the objects of the trust cannot be treated as an application or expense unless it cannot be recovered and is written off in the books. It is treated as an application in the year of write-off. Reimbursements of expenses of earlier years are treated as application of funds in the year of reimbursement. Deficit of income can be carried forward indefinitely and set off. FORMAT: Gross Income (including Business Income and Capital Gains) xxx (-) Direct Expenses and Depreciation (xxx) Net Income xxx (-) 15% Basic Exemption (xxx) Balance 85% to be applied towards approved objects xxx (-) Income not received during the year (xxx) (-) Amount spent towards approved objects (xxx) (-) Amount accumulated for spending (xxx) TAXABLE INCOME (Taxed at slab rates) xxx Anonymous Donations taxed as per section 115BBC 30% after exemptions) xxx 15