NGOs, NPOs and TRUSTs PRACTICAL ISSUES IN ASSESSMENT

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1 NGOs, NPOs and TRUSTs PRACTICAL ISSUES IN ASSESSMENT 1

2 Refreshing Important provisions 2

3 S. 2(15) Charitable Purpose includes relief of the poor, education, medical relief (preservation of environment (including watersheds, forest and wildlife) and preservation of monuments or places or objects of artistic or historic interest] and the advancement of any other object of general public utility. 3

4 S. 2(15) Contd Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on 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 of use or application, or retention, of the income from such activity. 4

5 S. 2(15) Contd 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. Does it mean it should be decided on year on year basis? 5

6 S. 10(23C) (iiiab) and (iiiac) Educational Institutes and University, Medical Institutions substantially financed by Government not for profit (iiiad) and (iiiae) - Educational Institutes and University, Medical Institutions Receipt not exceeding Rs. 1 Crore not for profit (iv) and (v) Charitable and Religious Trusts/ places of National/ State Importance. (vi) and (via)- Educational Institutes and University, Medical Institutions NOT FOR PROFIT 6

7 Important issues coming in the assessments Whether it s a public trust Registration and refusal of registration under S. 12A. What is Education? Meaning of existing for profit Meaning of Income Issues relating to application 7

8 Important issues coming in the assessments Accumulation of income Contd.. Application of provisions relating S. 13(1)(c) Withdrawal of Registration procedure etc. Rate of tax 8

9 Whether it s a public trust Supreme Court in Ahemadabad Rana Caste Association (82 ITR 704)--- A section of Public as distinguished from Specified Individual is for the benefit of `public and the benefit need not be for whole mankind. The only change thereafter is that of exclusion of Trusts for benefit of a particular religious community or caste. Linguistic based benefit does not amount to exist for particular religious community or caste. Sri. Gujarati Mandal 240 ITR 393 (Mad) also Sadhu Singh Hamdard Trust- 86 TTJ 537 (Amrtisar). 9

10 Whether it s a public trust contd.. Religious Trust naturally, those can be regarded for benefit of a particular religious community or caste. However, charitable trust (after ) if restricted to a particular religious community or caste may loose the benefit. If, entry is not restricted to any particular caste or community- effect??? 10

11 Registration and refusal of registration U/s 12A/ 10(23C) Under the new provisions, registration has to be granted within 6 months [12 months in case of S. 10(23C)] of the application. At the time of application for registration, CIT is not required to verify the application of income on the objects of the trust. Fifth Generation Education Society 185 ITR 634 (1990) (Alh). Whether the above judgment can apply after S. 12AA is introduced w.e.f which talks about enquiry and satisfaction of genuinity by CIT?? Refer- Aryan Educational Society 94 TTJ 462 (Del) (against assessee). 11

12 Registration and refusal of registration under S. 12A. Contd.. CIT should not consider how the income is derived by the trust but should only look at genuineness of activities/objects of the trust. Sanjeevamma Hanumanthe Gowda Chartitable Trust 223 CTR 533 (Kar. H.C.) Refusal cannot be on the ground that the trustees are from one family. Smt. Mansukhidevi Bihani Jan Hitakari Trust 94 ITD 1 (Jd) Once registration is granted, AO cannot go for denial of exemption looking into the objects- Stock Exchange Ahmedabad 74 ITD 1 (Ahm) However, registration u/s 12A does not mean blanket exemption Visvesvaraya Industrial Research and Development Centre 251 ITR 852 (Bom) 12

13 What is Education? Education connotes the process of training and developing the skill, mind and character of students by normal schooling -- Sole Trustee Lokshikshan Trust 101 ITR 234 (SC). Karnataka High Court in Ecumenical Christen Centre 139 ITR 226 extended the meaning to include publication of Journals and promotion of search for truth directly related to truth. 13

14 What is Education? Contd.. In Sorabji Nusserwanji Parekh 201 ITR 939 (Guj) merely giving scholarship and financial assistant to students is not education- However, what about residue object? Thyaga Brahma Gana Sabha (Regd) (Mad) 188 ITR 160 several branches of fine art such as music, dance, drama etc. are considered to be education. However, Coaching of examination is not education for 2(15) Bihar Institute of Mining- 208-ITR 608 (Pat). Education need not be for poor only- Education for elite class is also allowable. Indo American Society 96 ITD 61 (Mum). 14

15 Meaning of existing for profit Existing for Profit is different than carrying on an activity of profit. Instruction 1112 is reproduced in 8 Taxman 77 and Birla Vidya Vihar 136 ITR 445 which reads as under:- A number of instances have come to the notice of the Board where action to assess educational institutions and hospitals have been taken on the ground that they are making profit and, therefore, the exemption U/s 10(22) and 10(22A) is not available to them. 15

16 Meaning of existing for profit Instruction 1112 Contd.. U/s 10(20) income of a University or other educational institutions existing solely for educational purposes and not for purposes of profit is exempt. U/s 10(22A) income of a hospital or other institution referred to therein which exists solely for philanthropic purposes and not for purposes of profit is also exempt. The question for consideration is whether an educational institution existing solely for educational purposes but which shows some surplus at the end of the year is eligible for this exemption. If the profit of the educational institution can be diverted for the personal use of the proprietor thereof, then the income of the educational institution will be subject to tax. 16

17 Meaning of existing for profit Instruction 1112 Contd.. However, there may be cases were the educational institutions may be owned by the trusts or societies to whom the provisions of S. 11 may be applicable. Where all the objects of these trusts are educational, and the surplus, if any, from running the educational institution is used for educational purposes only, it can be held that the institution is existing for educational purposes and not for purposes of profit. However, if the surplus can be used for non-educational purposes, it cannot be said that the institution is existing solely for education purposes and such institutions will not be liable for exemption u/s 10(22). But, in such cases, the applicability of S. 11 can be examined and if the conditions laid down therein are satisfied, the income will be exempt U/s

18 Meaning of existing for profit Contd.. The principle of surplus having ploughed back for objects of the trust does not take away the benefit. Following are various case laws which support this. CIT Vs. Pullikal Medical Foundation (P) Ltd. (1994) 210 ITR 299 (Ker), Aditnar Educational Institution etc. Vs Additional Commissioner of Income Tax (1997) 139 CTR (SC): (1997) 224 ITR 310 (SC) 18

19 Meaning of existing for profit Contd.. CIT Vs. Geetha Bhavan Trust 213 ITR 296 (Ker) Rangaraya Medical College Vs. Income Tax Officer (1979) 117 ITR 284 (AP) 19

20 Meaning of existing for profit Contd.. However, Uttarakhand HC in Queens Education Soc. 319 ITR 160 decided in favour of revenue and said that if there is a revenue profit, the trust exist for profit The above judgment is not followed in Pinegrove International Charitable Trust 37 DTR 105 P&H Bombay High Court in Vanita Vishram Trust Vs. CCIT 40 DTR 225 delivered on 6 th May

21 Meaning of existing for profit Contd.. In case of disallowance of exemption in a particular year can be litigated by using the concept of consistency in assessment. Following decisions are helpful. Radhasoami Satsang 193 ITR 321 (SC) CIT vs. Darius Pandole- 330 ITR 485 City Montessori School- 27 DTR

22 Meaning of Income Voluntary contributions included Corpus donation excluded however, there should be a documented direction Donation for building fund treated as Corpus Donation. St. Ann s Home for the Aged 17 TTJ 185 (Bang) Drama show collection for new building treated as Corpus donation. Agnel Charities 27 ITD 545 (Del) Building fund and Kayami Funds donations treated as Corpus Donations Satya Kabir Shabani Gadi 50 TTJ 501 (Ahd) S. 10(23C) and Corpus Donation??? 22

23 Meaning of Income Contd.. Admission fee treated as corpus fund WIAA Club Ltd. 136 ITR 569 (Bom) Anonymous donations treated as income and directly chargeable at 30% -- religious trust excluded. Income in commercial sense and not to be worked out under Chapter IV of IT Act. S. 14A should not apply Amount exempt under other clauses of Sec. 10 can be excluded. 23

24 Issues relating to application Depreciation is deductible for arriving at amount which can be applied. Framjee Cawasjee Institute 109 CTR 463 (Bom), Institute of Banking Personnel 264 ITR 110 (Bom), Sister of St. Ann s 146 ITR 28 (Kar), Sheth Manilal Ranchhoddas Vishram Bhawan 198 ITR 598 (Guj), 24

25 Issues relating to application Contd.. Administrative expenses are application of income Capital Expenditure for object is application -- M. Ct. M. Tiruppani Trust 230 ITR 636 (SC). Loans and loans scholarship are application if such is the object. Repayment of loan is application CBDT Circular No. 100 Dt

26 Issues relating to application Contd.. Deficit of earlier years is application- Maharana of Mewar Charitable Foundation 164 ITR 439 (Guj), Shri. Plot Swetambar Murti Pujak Jain 211 ITR 293 (Mad), Matriseva Trust 242 ITR 20, Govindu Naicker Estate 248 ITR 368 (Mad), Gems and Jwellery Export Promotion Council 68 ITD 95 (Bom). The best part is to follow cash basis application method. 26

27 Issues relating to application Contd.. Donation to other trust having same objects is application. Trustees of Jadi Trust 133 ITR 494 (Bom) and Hindustan Charity Trust 139 ITR 913 (Cal). What is now restricted is the donations out of accumulated funds (from 2003). 27

28 Accumulation of income Basic provisions S. 11(1) (b) explanation up to 15% S. 11(1) explanation 2 Receipt in subsequent year/s Any other reason Intimation to be given in writing by due date of ROI S. 11(2) accumulation for 5 years- Form 10 to be furnished 28

29 Accumulation of income Issues relating to Form 10 Contd.. Form 10 not required for S. 10(23C). Form 10 should specify specific purpose Singhania Charitable Trust 199 ITR 819 (Cal). Here entire list of objects were reproduced. However, following decisions help in case of specification of broad objects Shirpur Vishwa Mandal 47 Taxation 658, Mutch Godhra Visha Oswal Jain Hamajan 18 TTJ 127 (Aha) Mere specification promotion of export not valid - Cotton Textile EPC -4 ITD

30 Accumulation of income Issues relating to Form 10 Contd.. Form 10 filing time By the time assessment is completed Nagpur Hotel Owners Association 247 ITR 201 (SC) Appeal proceedings are assessment proceedings Mayur Foundation 274 ITR

31 Accumulation of income Issues relating to Form 10 Contd.. CBDT Circular No. 273 Dt allows CIT to condone if the following conditions are satisfied. The genuineness of the Trust is not in doubt The failure to give notice to the Assessing Officer and invest the surplus in time was only due to oversight. The trustees or settlor have not benefited by such failure, directly or indirectly The trust agrees to invest the surplus before the extension of time is granted and The accumulation was necessary for carrying out the objects of the Trust. 31

32 Application of provisions relating S. 13(1)(c) The list of excluded persons is very wide. The list includes contributors of Rs. 50,000/- or more to be counted from the date of inception of the trust. is it feasible??? For parties in which excluded persons are interested are based on profit sharing or equity holding of 20% or more. 32

33 Application of provisions relating S. 13(1)(c) Contd.. Prohibited transactions include the following:- Lending without adequate security and without adequate interest (anyone of it) Property given without adequate rent Services provided without adequate fees Funds remain invested in related concerns Diversion of income or property (exceeding Rs. 1000/-) 33

34 Withdrawal of Registration procedure etc. S. 10(23C) provides for withdrawal of approval. Without such order by the Competent Authority, the exemption has to be granted. Proviso to S. 143 (3) Similarly, S. 12AA also now provides for withdrawal of registration by CIT. However, the effect of various provisions of S. 11 and S. 13 can bring income to tax in full or part even without withdrawal process. Even in all these situations principles of mutuality can still be used. 34

35 Rate of tax The provisos to S. 164(2) and (3) : Provide for Maximum Marginal Rate of tax on following part of income not exempt under Section 11 or 12 by virtue of the fact that: Any part of the income has been used or applied directly or indirectly for the benefit of any of the excluded persons as contemplated under section 13(1) (c) read with S. 13(3) (See list of excluded persons in Annexure A) or Any funds of the Trust have been invested or deposited for any part of the year in consonance with the provisions of S. 13(1)(d) read with S. 11(5). Also see circular 387 DT Anonymous 35

36 Rate of Tax Contd.. Other Income will be taxed as per normal Income of an Individual Shardaben Bhagubhai Mafatlal Public Charitable Trust 247 ITR 1 (Bom).- giving exemption and deductions etc. S. 80G was given to Saurashtra Trust 21 ITD 62 (Bom) In Gujarat Pushkarana Vidyotejak Mandal 68 CTR 86 when the trust lost exemption due to 13(1)(b) that is for the benefit of particular religious community or caste tax will be as applicable to AOP and not at MMR. Addition by Assessing Officer to the Business Income. tax rate??? 36

37 Thank You. 37

ISSUES ON ASSESSMENT OF CHARITABLE TRUSTS. Whether deficit (excess application) of earlier years can be set off against surplus of subsequent years?

ISSUES ON ASSESSMENT OF CHARITABLE TRUSTS Whether deficit (excess application) of earlier years can be set off against surplus of subsequent years? Excess application of income in earlier years should