In the aftermath of recent case laws, the landscape of trust taxation in India has undergone significant scrutiny. This article delves into the complexities surrounding trust taxation, shedding light on issues such as mutuality, corpus donations, and adherence to the principle of general public utility. The insights provided aim to guide individuals and organizations through the intricate worlfinancd of trust taxation. The recent case laws have been analysed so that a advisory or consultancy can be given for a particular transaction.
In layman language the word trust means a belief which is bestowed on someone. Typically what a teacher has on students after student securing good marks on consistent basis or what employer trust a particular employee when employee works very well in organization. Trust is a non profit organization whereby only surplus is generated or deficit may occur(the term profit or loss has no significance).
1) Business trust like real estate trust, investment trust, Alternative investment trust & securitization trust.
2) Charitable trust which are schools/college/university, Place of religious worship, trust formed for special purpose like orphanage old age home or other noble cause.
3) Partly charitable and partly business would means like professional organization(Chamber of commerce) as well club related. These organization are doing hybrid model both business charitable.
A pertain question now arises which category would regulatory bodies like ICAI ICSI (‘’Institute of Company secretary of India’’) and industry regulator like CII (Confederation of Indian Industry ) would fall. The answer is category 3 however many issues arise as regards to mutuality principle, surplus utilization and several issues remains litigative.
Before going to recent case laws analysis let me analyse 10(46) of Income-tax Act (‘’The Act’’) along with a recent Supreme court ruling which affects regulatory bodies as mentioned above.
Section 10(46) of the Income tax Act states that any specified income arising to a body or authority or Board or Trust or Commission
(a) has been established or constituted by or under a Central, State or Provincial Act, or constituted by the Central Government or a State Government, with the object of regulating or administering any activity for the benefit of the general public;
(b) is not engaged in any commercial activity; and
(c) is notified by the Central Government in the Official Gazette for the purposes of this clause.
The term specified income” means the income, of the nature and to the extent arising to a body or authority or Board or Trust or Commission (by whatever name called) or a class thereof referred to in this clause, which the Central Government may, by notification in the Official Gazette, specify in this behalf
A case law which was landmark for charitable institution and business trust has held a judgment which looks sarcastic. Based on Provision of the Act Section 2(15) defines charitable purpose as advancement of general public utility. The law states that charitable institution can be engaged in commercial activities such that commercial activities do not exceed 20% of total receipts. Supreme court has held the judgment where by consideration received at cost or notionally (some x%) above cost cannot be considered as trade or business. However above notionally mark up would be trade commerce or business. This judgment materially affects regulatory bodies Industry bodies trade organization (both where seminar are conducted like chambers or even club), sports organization and to an extent to charitable organization.
The judgment is so weird which does not define as to what is notional mark up (what percentage more than cost) lacks clarity to how give a transaction advisory but ICAI and several leading Industry organization have given representation on this issue.
An interesting question may arise to readers as how for ICAI this case law is bit heart breaking. Also several provision get triggered for ICAI like 2(15), 10(46) and issues like doctrine of mutuality donation received for funds of ICAI. This would be sorted once I qualify as member (I would address in some forum or other).
Now coming back to main topic let us see recent updates of case laws to make business advisory lucid.
1) SAE India vs Income tax officer and Income tax officer vs SAE India ( Chennai ITAT)
Issue: Whether principle of Mutuality applies? How corpus donation can be taxed? How far general public utility as defined under Section 2(15) would impact the functioning of organisation
Facts: Assessee-Trust with main object of holding technical meetings, workshops, seminars and other educational programs to encourage the profession of mobility engineering claimed exemption under Section 11 which was denied by the Revenue on the premise that Assessee’s main object is general public utility and since the gross receipts from GPU is in excess of prescribed limit as per Section 2(15), exemption under Section 11 cannot be allowed;, Revenue also taxed Assessee’s ‘corpus donation’ of Rs.12.55 Lac received towards Magazine Fund while rejecting Form 10 on the premise that once the benefit of exemption under Section 11 is denied, any income part of corpus of trust is part of total income; CIT(A) partly allowed Assessee’s appeal. But there is no clarity as to whether the funds received are utilised for the purpose it meant.
Provision: The principle of mutuality is clear is that income received such be utilised for the purpose sought after. 2(15) of the Act is clear that advancement of general public utility can be done but business receipts cannot exceed 20% of total sum.
Conclusion: Assessee failed to file any evidences to prove its arguments that it is a mutual benefit society; Accordingly, set aside CIT(A) order and remits back to AO with a direction to consider the issues pertaining to mutuality, computation of taxable income and taxability of ‘corpus donations receipts towards Magazine Fund afresh in view of Section 2(15) and SC ruling in Ahmedabad Urban Development Authority.
Issue: Whether money received for club from members(individual corporate) would be taxable and if money is invested in fixed deposit would concept of doctrine of mutuality would apply?
Facts: The assessee is a club which has received money from members but invested in fixed deposit and money collected were not merely used for members but even some commercial substance was involved.
Provision: As per Act the principle of mutuality applies only if fund are utilised for the purpose meant. If used for commercial activities the doctrine of mutuality ceases.
Conclusion: It was held in Supreme court that by depositing funds in bank the first condition for the claim of mutuality is not satisfied”; SC states that when funds are deposited with banks, identicality between the contributors to the common fund and the participators in it which is a sine qua non for the application of the principle of mutuality would get ruptured, hence interest income is taxable. This ruling distinguishes from other club ruling but the litigation in the other cases were different. I would like to add upon that if only money is received from Members and utilised for purpose of club or say a room rent given on rent and money received is utilised only for the same then principle of mutuality hold good.
Issue: Whether corpus specific contribution by way of capital receipt is taxable.
Facts: Assessee, an unregistered trust under Section 12AA received Rs.44.25 Cr towards corpus donation grant from Bandhan-Konnagar trust (donor trust) being registered under Section 12A and declared it as ‘capital receipt’ in the return of income; Revenue treated the corpus donation grant as income of the Assessee on the premise that Assessee is not eligible for exemption under Section 11(1)(d) since it is not registered under Section 12A; CIT(A) allowed.
Provision: Only a trust registered under 12A for which corpus donation is taxable for those otherwise not registered under 12A the corpus donation happens to be not taxable.
Conclusion: Corpus specific voluntary contributions are outside the scope of taxation in case of an unregistered Trust under Section 12 or 12A since their nature is capital; Accordingly, upholds CIT(A) and dismisses Revenue’s appeal.
Issue: Whether 80G registration can be allowed if a trust engaged in post consumer plastic waste contributes to preserving environment
Facts: Assessee is registered under Section 12AA thus, eligible for exemption under Sections 11 and 12 which satisfies the condition under Section 80G(5)(i); Based on trust deed, in the event of the trust failing to function for any reason or in the event of the voluntary dissolution and/or amalgamation, the same can only be with the trust having more or less similar objects to the Assessee, which satisfies condition of Section 80G(5)(ii).
Provision: 80G registration can be given for a charitable trust and not for a particular caste or community.
Conclusion: Assessee is not for the benefit of any particular religious community or caste and it maintains regular accounts of its receipts and expenditure, and satisfies all conditions of 80G therefore eligible for 80G registration.
Issue: Whether 80G registration can be granted for a trust, anonymous donation can be allowed for a trust which is charitable and religious?
Facts: Assessee, a public trust, registered under Section 12A and Section 80G, was also granted approval under Section 10(23C)(v); For AY 2015-16, Revenue observed that the Assessee received aggregate donations of Rs.228.25 Cr, out of which Rs.159.12 Cr was by way of hundi collections (anonymous donations); Revenue held that the Assessee was a charitable trust and since the anonymous donations exceeded 5% of the total donations, the same was taxable under 115BBC section.
Provision: 80G provision applies only for charitable institution. Any donation received from different class of assessee then the same can be claimed for such classes of assesee. The provision of anonymous donation applies only for religious trust.
Conclusion: Assessee’s approval under Section 10(23C)(v) carries significant evidentiary value as it shows that the affairs of the Assessee had been verified by a superior authority and the Assessee was found to exist for both religious and charitable purpose. Provisions of Section 80G lays down quantum test i.e., the amount spent for religious purposes to ascertain whether the charitable trust is eligible for registration or not, whereas for the purposes of Section 115BBC(2)(b) what is relevant is the object and nature of the trust. Remands the issue back to the Revenue with the direction to examine the details of the amount spent out of the interest from corpus funds and allow the deduction in relation thereto. The appeals of appeal is partly allowed and revenue is dismissed.
Charity for a cause not cost
Join social charitable organisation and serve the needy
Post pandemic the role of charitable organisation has been inevitable
Economy efficiency effectiveness
Profit people planet
Reduce reuse recycle
Sustainable development and think about the future
Protect preserve the flora and fauna
Ensure optimum utilisation of resources
Make the charitable trust as harbinger for growth of country and let the same serve the noble cause.
Recent case laws provide crucial insights into the nuances of trust taxation. Navigating issues like mutuality, corpus donations, and adherence to charitable status requires a thorough understanding of legal provisions. This advisory aims to assist individuals and organizations in comprehending and addressing the complexities surrounding trust taxation in India.