Decoding Various Tax provisions for Charitable Trust/Institutions

Charitable Trust or Institutions

Background

Charitable Trust/institutions are non-profit organisation whose primary objective is to serve society. Now a day’s these institutions play a very important role in economic development. These institutions are integral part of society.

Charitable Trust or institutions are serving to the society and in order to promote them Certain Exemptions, deductions and incentives are provided/offered to them by The Income Tax Act, 1961. Trust/society registered under section 12A/12AA can avail benefit of exemption from paying income tax by following certain provisions and conditions specified under Section 11, 12 & 13 of Income Tax Act, 1961.

Decoding the Various Taxation provisions- For Charitable Trust/Institutions

Section 12A/12AA of The Income Tax Act, 1961 deals with registration of Charitable Trust/Institutions. In order to get the Trust/institution registered under Section 12A/12AA, the application should be submitted to Commissioner of Income Tax.

On receipt of an application for granting registration under section 12A, Commissioner or principle Commissioner of Income tax may call for such information and documents to satisfy himself about the genuineness of activities of trust/institution. If he is satisfied with the object and genuineness of trust then he grant registration otherwise reject the application. The timeline to dispose the application for registration is 6 months from end of month in which application is submitted by trust/institution.

Registration of Newly Formed charitable Trust/Institutions: In case of newly formed charitable Trust/institution, the application for registration under section 12A gets rejected on the ground that charitable Trust/institution had not started any activity. The main reason of such rejection is that, it is not possible to satisfy about genuineness of activity if activity is not started by Trust. Recently in the case of Ananda Social and Educational Trust, Supreme Court/Apex Court provides relief to those trust whose registration rejected solely on the ground for not undertaking any activities prior to registration.

So newly formed trust entitled for registration on the basis of objects of trust. To check whether the activities/object of trust genuine or not, it is not necessary to undertake activity. Major relief to the newly formed trust. The APEX Court also clarified that here “activity” includes Proposed activities of Trust.

Section 12AB: In Finance Act, 2020, Section 12AB has been introduced with a view to track the activities of trust. To curb misuse of funds by the trust. This section deals with the procedure and timeline to apply for re-registration of existing trust/institution and registration of newly formed trust/institution.

Timelines for Re-Registration of Existing Trust (Registered under 12A/12AA): Existing trust/ institutions registered under 12A/12AA should apply within 3 months from 1^st Jun 20 i.e. by 31^st Aug 20. They will get registration under section 12AB. This Registration will be valid for 5 years. When the period of 5 years about to expire, Trust needs to apply for renewal prior to 6 months of expiry date in order to avail benefits of exemption.

Newly Formed Charitable Trust/institution will be granted a provisional Registration for a period of 3 years under section 12AB. Trust/institution should apply for permanent registration within 6 months of commencement of activities or 6 months prior to the date of expiry whichever is earlier.

Timeline for granting registration under Section 12AB: In case of Existing Trust, the Commissioner of Income tax grant registration within 3 months. In case of Provisional registration, the registration will be granted within 6 months.

Note: Due to COVID-19, CBDT has deferred the implementation of new procedure for registration introduced under section 12AB to 1^st Oct 2020. Through the press note, it is also clarified that existing trust/institutions required to apply for registration under 12AB within a period of 3 months starting from 1^st Oct 20.

Section 11 of The Income Tax Act, 1961 deals with the exemption of income derived from property held under Trust. So to avail the exemption under section 11 the conditions are

• Property should be held under Trust
• Income should be derived from property held under trust; and
• It should be applied for charitable purpose* in India

*Charitable Purpose defined under section 2(15) of The Income Tax Act. Charitable purpose includes

√ Relief of Poor

√ Education

√ Medical Relief

√ Yoga

√ Preservation of Environment (Including Forest, wildlife & watershed)

√ Preservation of Monuments or Places

√ Advancement of any other object of General Public Utility**

** Advancement of any other object of General Public Utility would not be considered as charitable purpose if it involves carrying of any activity in the nature of Trade, commerce or business, or any activity of rendering service in nature trade, commerce or business for a fees/consideration irrespective of its application.

However, In Following condition activity shall be regarded as for charitable purpose if

a. If such activity is undertaken in the course of actual carrying out for Advancement of any other object of General Public Utility; and

b. The receipts from such activity doesn’t exceeds 20% of the total receipt of such trust/ institution.

Note: There is no restriction in carrying out any activity related to trade or commerce for consideration, if the main object of trust and institution is other than “Advancement of any other object of General Public Utility”.

Second condition to claim exemption under section 11 is application of Income. To promote charitable activity in society, the Act gives concession, that 15% of total receipts can be accumulated or set apart by institution/trust subject to the condition that 85% of total receipts are applied for charitable purpose.

If Trust unable to apply 85% of total receipts in previous year due to :

1. Part of income or whole income not received during previous year: In such case period of application of income can be extends to such year in which income is received and the previous year immediately following the year.

2. Any other reason: in such case period of application will be previous year immediately following the previous year.

To avail the benefit of time extension for Application of income, Trust/institutions needs to file Form 9A before the expiry of time allowed for filing the Income Tax return under section 139(1). {As per clause 2 to explanation of Section 11(1)}. Then the income will be deemed to be applied in previous year.

This is to note that , if Trust/institution unable to apply such income in the previous year in which it is received or in other case in previous year immediately following the year, then the income will be taxable in that previous year.{Section 11(1B)}

In case Trust/Institution wants to accumulate the income apart from 15%, then Section 11(2) permits such accumulation. To avail such option Trust needs to submit form 10 on or before due date of filing of income tax return. The maximum period for such accumulation is 5 years and it should be accumulated for definite purpose. The amount accumulated should be deposited or invested in modes specified under section 11(5) ***.

*** To avail benefit Form 10 & return should be filled on or before due date as specified under section 139(1).

Consequences of Default under section 11(2), the accumulated income will be taxable in the year of such default, the cases are specified below:

♦ If Accumulated amount not invested in modes specified under section 11(5)

♦ If , any amount or whole amount out of accumulated Income is given to any other trust will not be deemed as application

♦ If, accumulated amount not applied for the specified purpose during accumulation period or in a year immediately following the expiry of period

Cases/Items which are not considered as application of Income:

1. According to Section 11(6), Depreciation on assets is cannot be considered as application of income in respect of such assets whose cost has been claimed as application of income.

2. Any Amount paid to any trust registered under section 12A/12AA by way of Corpus is not considered as application of income.

3. If TDS is not deducted on expenditure, then 30% of such expenses is not considered as application of income. {Section 40(a)(ia)}

4. If Trust incur expenses in respect of which payment made to a person in a day otherwise than by way of Account payee cheque/Draft/ECS exceeds RS. 10,000/- , then such expenses would not be considered as application of income.{Section 40A(3)}

5. If any liability incurs in respect of any expenditure and considered as application of income in previous year, the payment of such liability made in next FY exceeds Rs. 10,000/-(to a single person) otherwise than by way of Account payee cheque/Draft/ECS then such will be considered as income of that previous year in which payment is made. {Section 40A(3A)}

In Nutshell, The following income should not be included in Income of Previous year of Trust/Institution for computing Tax liability:

♦ Income derived from property held in trust and applied for charitable purpose in India

♦ The amount accumulated or set apart not exceeding 15% of income from such property

♦ Income in form of voluntary contribution with specific direction/application as form part of Corpus fund.

♦ Income for which form 9A is filled {as per clause 2 to explanation of Section 11(1)}.

♦ Income for which Form 10 is filled under section 11(2)

Section 12 of The Income Tax Act, 1961 deals with the voluntary contribution (Except the contribution received with specific direction) received by the Trust/institutions created for charitable or religious purpose. For availing the benefits of Exemption provided by section 11, it will be deemed as derived from property held under trust.

Audit of Charitable Trust/Institutions: When the Total Income of Trust exceeds the minimum taxable limit i.e. Rs. 2,50,000/- then it is mandatory for Trust/Institution to get their accounts audited from Chartered Accountant and electronically Furnish audit report in Form 10B on or before the due date of Filing return of Income under section 139(1).

Filing of Income Tax Return: If the Income of Trust/Institution exceeds the basic exemption limit chargeable to tax, then it is mandatory to file Income Tax return in form ITR-7 before the due date specified under section 139. The due date will be 30^th Sept, if the accounts needs to be audited and in other case it will be 31^st July.

Section 13 of The Income Tax Act, 1961 deals with conditions where the benefit of exemption provided to Trust/institutions under section 11 can be denied. The conditions are explained below:

1. Part of Income derived from property held under trust created for private religious purpose and the benefit of such income not passed to general public.

2. Income of Trust created for the benefit of particular religious community

3. Part of Income or income applied directly or indirectly for the benefit of specified person referred under section 13(3) of the Income tax act.

4. Income of a Trust, if funds of Trust are invested or deposited in funds otherwise than the forms specified under section 11(5) of Act (i.e. if funds invested in impermissible deposits then exemption denied).

Section 13(3) of The Income Tax Act, 1961 specifies the list of person, if any direct or indirect benefit provided to them, it will result in denial of exemption under section 11. The person includes

• Author of Trust,
• Person who has made substantial contribution to trust i.e Rs.50, 000/- or more during previous year.
• If Author of Trust is HUF, then any member of family
• Trustee of Trust
• Relative of person specified above
• Any concern in which the person mentioned above having substantial interest.

Section 13(6) of the Income Tax Act, 1961 specifies that exemption of Section 11 will not denied merely on that ground that Medical or Educational institution providing facilities to specified person (defined under section 13(3)). If the facilities are provided free of cost in such case fair market value of such services will be added to the income of trust/institution. If facilities are provided at concessional rate then the difference of consideration received and FMV will be added to income and the benefit of exemption will not be available on such income.

Anonymous Donation : Anonymous donations includes voluntary contribution received by Trust/Institution from a person whose identity records are not maintained by trust such as name, address, PAN number.

Taxability of Anonymous Donation (Section 115BBC): The anonymous donation will be taxed at the rate of 30%. It will be taxable to the extend such donation exceeds

a. 5% of Total Receipt of Institution

Or

b. 1, 00,000/- , whichever is higher.

However, Anonymous donation received by the Trust registered for wholly religious purpose then it will not be taxable under section 115BBC.

In case Trust/Institution doing charitable as well religious activities then anonymous donation received by religious trust will not be taxable and anonymous donation received by charitable trust will be taxable as per the provision of Section 115BBC.

Section 80G of The Income Tax Act, 1961 deals with the provisions of deduction to donor who has made donation to the registered charitable Trust/institution. Earlier there was no provision which puts an obligation on done to report the details of donor. Only Donor who is claiming deduction provides the detail of done while filing income tax return. Sometime, people get backdated receipt from Trust/institution to get deduction.

To curb such type of practices and to keep track of donation, Section 80G has been amended to cast obligation on the done to provide details of donation received in prescribed format and manner to income tax authorities before stipulated time.

Lates fees and penalty provision introduced on late submission of donor details/ non submission of donor details by charitable institution/Trust.

Late fees will be lower of Rs. 200 per day or amount of donation for which reporting delayed.

Penalty on non-submission of statement by charitable institution/trust is Rs. 10,000/- to Rs. 1, 00,000. This is in addition to the late fees.

In order to get benefit of deduction, details of donor should be reported to income tax authorities. While filing the return of Income, the details of such donation will automatically reflects in their return utility.

With the introduction of new mechanism, the authorities will track the donor details and also verify the income of trust. If the details of Donor is not maintained by the Trust then such amount will be classified as Anonymous donation and it will lead to attract taxability at Maximum Marginal rate.

Note: Restriction on Cash donation, the maximum amount one can donate in cash is Rs. 2,000/-. Earlier the limit was Rs. 10,000/-, this limit is reduced to ensure that unaccounted money not flow to charitable trust/institutions. There is no such limit prescribed by the provisions on accepting the cash donation by the trust. But in order to get 80G deduction by donor, the maximum limit of cash donation is Rs. 2,000/-.

Section 115TD deals with the provisions of levy of additional Income tax on Trust/institution at the time of its dissolution, merger with Non-charitable organisation or conversion to Non-Charitable organisation. In order to ensure that the benefits offered to charitable institutions over a period of time not misused, section 115TD introduced.

Circumstances where levy of additional tax on accreted income attracted, When trust/institution:

• Voluntarily dissolve
• Merged with Non Charitable Organisation
• Converted into Non-Charitable Organisation
• Registration under section 12A/12AA is cancelled
• Modified the Object but not applied for Fresh registration under 12A
• Modified the object and applied for fresh registration but application rejected.

In Above mentioned instances Accreted Income of Trust/institution is charged at Maximum Marginal rate in force. This tax will be levied in addition to the normal tax on income of Trust. This will be final tax also known as Exit Tax. No credit will be available of such additional tax.

Accreted Income: For the purpose of Section 115TD, Accreted income can be computed as Fair Market value of Total asset reduced by amount of liability as on specified date#.

#Specified date will be the date of Conversion, merger or dissolution of Charitable Trust.

The rationale/idea behind providing various benefits and incentive to Charitable Trust/institution is to encourage them to serve society. In order to prevent misuse of funds various provisions introduced over a period of time. With the recent amendment through Finance Act, 2020 Section 12AB introduced to keep regular check on activities of Trust/institutions.