In India, there are lots of charitable and religious trusts works for the benefits of the society. Charitable trusts are those trusts whose object is to provide the services to all people in the society without discrimination of cast, creed and gender etc. However, these charitable trusts can be formed only for the benefit of Schedule Cast/Tribe or women.
The taxation of the charitable trust is governed by the chapter III of the income tax which includes section 11, 12, 12A, 12AA and 13. The Government of India has given various exemptions to charitable and religious trust keeping in view of the services they render to the nation.
Definition of Charitable Purpose under Income Tax Provisions:-
Before we get into the discussion, let us analyze the ‘charitable purpose’ as per the Income Tax Act. Sub-section 15 of Section 2 of the Income Tax defined charitable purpose includes:-
(a) Relief of the poor,
(c) Medical relief, and
(d) Advancement of any other object of general public utility.
The receipts from the clause (d) should not exceed 20% of the total receipt of the trust.
The section used the word “includes” hence it is an wider definition. An inclusive definition is one, which is giving illustrative list of the things covered. One has to liberally interpret the section to ‘include’ the other things which are in same line.
Director of Income Tax Exemptions V/s ICAI Study circle, 347 ITR 321 (2012) (Chennai), It was held that Charitable purpose includes publication of books of professional interest to be used as a reference material by general public including professionals.
Mussoorie Dehradun Development Authority VS Commissioner of Income Tax, ITA NO 180/DEL/2013, It was held that, Activities of assessee (a local area development authority) of developing roads, lighting and sewage, sale & purchase of lands, etc held not ‘charitable activities’.
Director of Income Tax Exemptions V/s Samudra institute of maritime studies trust, 369 ITR 645, (2014)(Bombay), It was held that, Pre sea and post sea training for ships and maritime industry – the object of trust educational hence, the trust entitled to exemption
Creation and Registration of Charitable or religious Trusts:-
A trust can be formed by a founder/author along with other trustees. A deed is to be drafted and duly registered with the registrar of trusts. In case of a charitable trust, even only founder can create the trust for the benefit of the society. The trustees should contribute the amount for the objects of the trust.
Compulsory clauses to be included in the deeds Charitable Trusts:-
The following are the compulsory clauses to be included in the deed of a charitable Trust.
1. The beneficiaries of the trust are general public and no discrimination for caste, creed, religion or sex.
2. Object clause should not be changed without the prior approval of Income tax authorities.
3. The trust should not give any benefits to its authors/founders etc and who are related parties as per sub section 3 of section 13.
4. In case of dissolution of the trust, the assets of the trust should be transferred to a registered trust with the same object.
5. The trust is irrevocable.
Registration of Charitable or religious Trusts:-
A trust should make application in form 10A in triplicate to the income tax authority who has jurisdiction on the trust. In the case of a charitable trust, if they wish to apply for80G, an application in form 10G(in triplicate) is required to filed. Along with the application/s, the following documents are to be enclosed.
1. Registration Certificate and Trust Deed
2. No Objection Certificate from Landlord (if the registered office is situated in rented premises);
3. Copy of PAN card of Trust,
4. Copy of Electricity Bill/House tax Receipt/Water Bill for proof of address.
5. Evidence of welfare activities carried out & Progress Report since inception or last 3 years such as photographs, paper cuttings etc.
6. Financials & ITR (if any), since inception or last 3years
7. List of donors along with their address and PAN
8. List of governing body board of trustees members with their contact details
9. Bio data of all the trustees (2 sets)
10. Photos of all the trustees (2 each)
The applicant should furnish Original Registration Certificate and Trust deed for verification of the income tax department.
Taxation of Charitable or religious Trusts:-
Section 11 deals with taxation of the income from the property held for charitable purposes. As per the said section, if the charitable or religious trust spends more than or equal to 85% of its total receipts towards its object in India, then there is no tax on balance 15%. It is worthwhile to note that, the amount spend even for the fixed asset of the trust is also eligible to include in 85%.
Option to trusts in case 85% not utilized:-
If the trust has not received whole of the income, then for the purpose of determining above 85%, the amount so much not realized is to be taken out from the total receipt. This unrealized amount is to be utilized in the year of receipt.
If the trust cannot spend more than 85% in any year due to any other reason, next option to the trust is to invest in any of the modes specified in section 11(5) or alternatively the trust can accumulate the amount for any purpose within its objects either for revenue or for capital expenses. However, the trust is required to file form 9A electronically before filing the return. Such accumulation in any case should not exceed 5 years. Explanation 2 to section 11 also clarified that, application of income does not include any donation paid to other registered trust or institution in the nature of contribution towards corpus fund of such other trust or institution.
Allowance for Depreciation:-
CIT V/s Devi shakuntala tharal charitable foundation,358 ITR 452, (MP) It was held that, depreciation on fixed asset of the charitable or religious trust of which cost had already been claimed as application of income are allowable. This view was earlier supported by Honorable Madhya Pradesh High Court in the case of Govindram Saksaria Charity Trust v. ITO  168 ITR 387.
The Central government of India has formed an opinion that this would amount to double deduction of fixed assets. The finance act 2014 has inserted sub-section 6 to section 11 which states that, the application of income by a charitable or religious trust is to be determined without deducting depreciation on fixed assets which has been claimed as an application at the time acquisition of such assets.
Section 12, Taxes on Voluntary contributions: –
A trust may receive voluntary contributions for its objectives. Such contribution is also treated as receipt under section 11 and the application for its objective of 85% or more is equally applicable.
The value of services provided to the founder or trustees or their relatives will be treated as income in the hands of the trust. The trust has to comply with section 11 of the income Tax Act.
Conditions for applicability of section 11 and 12:-
1. The trust should have registration u/s 12AA.
2. Activities undertaken should be in accordance with the objects of the trust which was approved by the income tax.
3. If the receipts of the trust exceeds Rs.2,50,000/- for the AY 2018-19, it is to be audited by a chartered accountant and obtained a audit report in form 10B.
4. From the AY 2018-19 onwards, the return is to be filed in within due date under section 139(1). The due date for a trust without audit is 31st July of every year. In case, audit is to be conducted, due date is 30th September every year.
Situations where section 11 and 12 are not applicable:-
1. Any part of the income of the trust for private religious purpose which does not give benefits to the public.
2. If the trust is for any particular religious or community or caste.
3. Any income or benefit directly or indirectly given to the related person or his relatives.
4. If the investment is not in accordance with section 11(5) of the Income Tax Act 1961.
Consequences of non- applicability of section 11 and 12:-
The consequences of non applicability of section 11 and 12, will be such that, the trust will be assesses as association of persons. As explained above, the trust will not get any tax benefit even though it has applied more than 85% of its receipt. The Income is taxable at maximum marginal rate (MMR).
Taxation of anonymous donations received by a trust:-
Anonymous donation means the identity of the donor is not available with the trust. A trust which is receiving donation shall keep the records of name, address and such other particulars to be maintained.
The anonymous donation received by any university, education institution, hospital etc is taxed as follows:
Amount in excess of 5% of the total donations received by the assessee or Rs.1,00,000/- is treated as income and on which tax is payable at 30%.
This provision is not applicable in the case of a religious trust. A corpus fund received by the religious or charitable trust is also outside the purview of this section.
Taxation of Hundis at temple, church etc:-
In a temple or church etc there may be a Hundi for the purpose of devotees to deposit their offerings. In this case, the identity of the donor is not traceable. If such temple or church is run by the religious trust, the above mentioned provisions in relation to anonymous donation is not applicable as the religious trusts are exempted from the purview of section 115BBC. If such donation box is for specific purpose such as for feeding poor people, feeding school children, then even for charitable trust, it becomes corpus fund and it is not taxable.
Changes in Budget 2018:-
The Honorable central Government of India has amended that
1. Section 40(a) (ia) with regard to deduction of Tax at Source on expenses as per Chapter XII-B. That means, the Trust has to deduct, pay and file ETDS returns.
2. Section 40A (3) which prohibits payment of cash more than Ten Thousand rupees for any expenses including expenses which are capital in nature.
3. Section 40A(3A) which deals with if any expenditure was allowed for deduction, then any payment in cash more than ten thousand rupees will attract the disallowance of such expenses in the year in which payment is made.
Charitable Trust is meant for public service and not for profit. Hence the Honorable Government has given exemptions in the form section 11 and 12. It will bring lot of tax benefits to the trusts and it can utilize the funds for its objectives. From the assessment year 2018-19 onwards, filing of return is to be done within the due date to claim the benefit section 11 and 12.