Income of A Religious Trust under Income Tax Act

Under Income Tax Act 1961, there are only 3 sections are pertaining to Charitable and Religious Trust, i.e. Sections 11, 12 and 13.

As per section 2(15), charitable purpose includes relief of the poor, education, yoga, medical relief, preservation of environment ( including watersheds, forest and wild life ) and preservation of monuments or places or objects of artistic or historical interest, and the advancement of any other object of general public utility.

However, the advancement of any other object of general public utility shall not be treated as 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 of use or application or retention, of the income from such activity [Proviso to Sec. 2(15)].

Income of Religious Trusts:

For computing total income of the  Trust, all the sums received by the trust, being revenue receipts, from its assets whether movable or immovable are considered to be the income of the Trust. Accordingly all the donations, voluntary contributions, interest, dividends, income from property(rent), any income earned through activities of the trust etc are considered as income in the hands of trust (Section 12). However, voluntary donations with a specific direction that they shall form part of the corpus of the trust are capital receipts and hence not included in the total income of Trust. In case a trust loses exemption under section 11 of the Act, because of non compliance with the conditions of registration or other conditions as per Section 13, then corpus donation received will be considered as income and tax will be levied on the same. Further, income which though received by trust is includible in the hands of any other person for tax purposes shall not be included in the income of the trust.  For example, where property is settled in trust but the settlement is by way of revocable transfer, then, the income arising out of such property is chargeable in the hands of the settler (trustee) under section 61 of the Act and not in the hands of the trust.

Who can become a Trustees?

“ Trustee “  means a person in whom either alone or in association with other persons, the trust property is vested and includes manager.

Appointment of Trustees:

A new trustee can be appointed by

• a person nominated for that purpose by the instrument of trust or
• author of trust or
• surviving o continuing trustees or the trustee for time being or
• legal representatives of the last surviving and continuing trustee or
• with the consent of the court, the retiring trustees or the last retiring trustee or
• by the court if it is impracticable to appoint a new trustee by the aforesaid persons.

A new Trustee can be appointed if:

• any person appointed as trustee is not willing to become trustee
• any trustee dies
• any trustee is out of India for a continuous period of 6 months or leaves India for the purpose of residing abroad
• any trustee who become insolvent
• any trustee desires to be resign from the trust, not willing to continue as trustee or accepts an inconsistent trust
• if any trustee, in the opinion of a court become unfit or personally incapable to act as a trustee

Appointment of the trustee should be done formally and expressly in writing. Once the acceptance has been tendered then no court of law can prevent the trustee from holding the office, except for the breach of trust or good cause dependent upon clear and lawful necessity.

Qualification of a trustee

Any person competent to contract could be a trustee as long as he is validly appointed as a trustee. The following persons are considered as competent to a contract:

• A person who is of the age of 18 years or more,
• A person who is of sound mind and
• A person who is not disqualified from contracting by any law

To which he is subject

• A settler can be a trustee

What is Corpus Donations?

The term “Corpus“ indicate the capital of a trust. Any amounts which represent the capital of a trust would constitute its corpus. The corpus would include funds of a capital nature, by whatever name called, such as Building Fund, as well as funds for the capital expenditure of the trust. Any donation made for a capital purpose or with a direction that the donation be kept intact and only interest earned on the investment of such donation be utilized for the objects of the trust, would be a donation towards the corpus of the trust.

In order to prove that a donation is towards the corpus of a trust, it would be advisable to obtain a specific letter from the donor or take a signature of the donor in receipt mentioning that this donation shell form part of the corpus fund for specific purpose or object of the trust. The trust should specify it to be a donation towards corpus of the trust and entries in books of account must be properly passed so as to credit the amount to Trust Fund or other fund for capital objects.

Any income which-

• is applied for purposes other than charitable or religious purposes or ceases to be accumulated or set apart,
• ceases to remain deposited in any prescribed form or mode,
• not utilized for the purpose of which it is accumulated or set a part or paid/credited to any other trust or institution registered u/s12AB or institution referred in section 10(23C) shall be deemed to be the income of the trust and accordingly liable to tax.

However, the circumstances are beyond the control of the trust the assessing officer may allow the trust to apply such income for other charitable or religious purposes which are in conformity with the objects of the trust.

Any business income derived by the trust is taxable and benefit of section 11 is not available in respect of such income. However in case where the business carried out by the trust is incidental to the attainment of the objective of the trust and separate books of accounts business are maintained by the trust in respect of such business this benefit of exemption u/s 11 is available .