TAXATION OF CHARITABLE TRUSTS

 

A. Introduction

Historically Charity has got lot of importance in our religious, cultural and social life. Today many leading educational institutions, medical institutions, research institutions are run by Charitable Trusts. In a developing country which is having second largest population in the world, charitable institutions play a very crucial role in improving the quality of life amongst the masses of the society. In the recent years various amendments have taken place with regard to taxation of Charitable Trust. We are going to take an overview of taxation of Charitable Trust along with the analysis of the recent amendments.

B. Charitable Purpose

Section 2(15) of the Income Tax Act gives an inclusive definition of Charitable Purpose. It says Charitable Purpose to include

Relief of the Poor

Education, Yoga

Medical Relief

Preservation of Environment (including watersheds, forests and wildlife)

Preservation of monuments or places or objects of artistic or historic interest

the advancement of any other object of general public utility.

Further proviso to Section 2(15) states that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves carrying out of any activity in the nature of trade, commerce or business for consideration or activity of rendering of any service in relation to any trade, commerce or business for a cess or fee. However if such activity is carried out as ancillary activity during the course of carrying out the main activity then such activity will also come under the purview of Charitable Purpose. In case the ancillary activities are carried out, there is a monetary stipulation provided of 20% . Thus in case the business activities are also carried out then receipts from the business activities shall be less than 20% of the Total Receipts.

Recent Judicial Pronouncements on Charitable Purpose

• Karnataka Chamber of Commerce Vs CIT (2021) 319 CTR 651

The Honorable SC Court held that since the Trust was collecting capitation fees from students while giving admissions in engineering college, it is not entitled to registration u/s 12AA.

• CIT Vs Tuticorin Port Trust (2021) 278 Taxman 364

The Honorable Madras High Court has held that development and maintenance of port can be categorized as activity in the object of general public utility and trust engaged in the said activities are eligible for the registration under 12A

• CIT Vs Contai Rotary Community Welfare Trust (2022) 285 Taxman 104

The Honorable Calcutta High Court has held that just because the Trust has surplus from the medical relief activity, that doesn’t disqualify it from registration u/s 12AA so long as the activities are charitable in nature

• Bharathaksheman Vs PCIT (2021) 320 CTR 198

The Honorable Kerala High Court has held that if the Income from the business is utilized for achieving the objectives of the Trust, then it is incidental to the attainment of the objectives of the Trust. Thus the Assessee was entitled to exemption in respect of income from its business which was fully utilized for the purpose of medical relief which is the main object of the Assessee Trust, falling under the definition of charitable purpose.

• PCIT Vs Servants of People Society (2022) 324 CTR (Del) 167

The Honorable Delhi High Court has held that Assessee society is running a printing press and publishing a newspaper, profit so generated is used for charitable purposes and apparently there is no profit motive in the activities of the Assessee and therefore proviso to Section 2(15) can’t be invoked to disallow Assessee’s claim of exemption.

C. Basics in Taxation of Charitable Trusts

There are two routes available for claiming exemptions to Charitable Trusts or Institutions. The two routes available are

1. Claim Exemption u/s 10(23C)
2. Claim Exemption u/s 11,12

To begin with the analysis of the provisions of Section 10(23C) as under :

I Section 10(23C)

Section 10 deals with exempt income.

The following types of Institutions are covered u/s 10(23C) of the Income Tax Act, 1961 where the Income is exempt from Tax.

a. Section 10(23C)

1. Any University or Educational Institution existing solely for educational purposes and not for the purpose of profit Wholly or Substantially financed by Government
2. Any Hospital or Medical Institution existing solely for medical relief wholly or substantially financed by Government
3. Any University or Educational Institution having the Gross Receipts less than the prescribed limit which is 5Cr now
4. Any Hospital or Medical Institution having the Gross Receipts less than the prescribed limit which is 5Cr now
5. Any other fund having regard to the objects of the fund or institution and its importance throughout India or throughout any state or states.
6. Any trust or institution wholly for public religious purposes or wholly for Public religious and charitable purposes.

7. Any university or other educational institution solely for the educational purposes (Not financed by government) and which maybe approved by the Principal Commissioner

8. (via) Any Hospital or other medical institution solely for the Medical purposes (Not financed by government) and which maybe approved by the Principal Commissioner.

Out of the 8 categories mentioned above in categories 1 to 4 to claim the exemption the only major compliance is filling of Income Tax return before the due date. In case of category 5 to 8 new re-approval provisions brought by Finance Act 2020 are applicable.

Recent Amendments relating to Section 10(23C)

b. Amendments by Budget 2021

Amending limit of receipts of medical/ education institutions [SECTION 10(23C)]

• Previous provisions [Section 10(23C) Clause iiiad and iiiae]:

Any income received by a person on behalf of educational or medical institution is exempt from payment of tax subject to the condition that annual receipts of such an institution do not exceed Rs. 1 crore.

• Amended provisions: (w.e.f. 1^st April, 2022)

The prescribed limit of Rs. 1 crore is to be increased to Rs.5 crore.

A new Explanation is inserted to provide that if a person receives income from one or more medical as well as educational institutions then, all such receipts in aggregate will be considered for calculating the above mentioned limit of Rs. 5 crore.

It is interesting to understand the real reason behind this amendment. In CIT vs. Children's Education Society 358 ITR 373 (SC) (2013) the apex court held that the aggregate annual receipts of other educational institutions means total annual receipts of each educational institutions and not the aggregate of annual receipts of all educational institutions run by the trust put together. It was a highly debatable issue which was settled by the supreme court judgement. Therefore, now the law is amended to clarify that the aggregate receipts of the trust or other institutions are to be considered and not the individual receipt of educational institutions. That is the reason the turnover limit also has been enhanced from Rs. 1 crore to Rs.5 crore.

Amendments by Budget 2020

Corpus Donations

It has been provided that any corpus donation received by an institution registered u/s 10(23C) shall not be considered as income of such institution. This amendment was brought to bring those institutions at par with section 12A of the Income Tax Act ,1961.

II Section 11 & 12

The second route for claiming exemption under Charitable Trusts is specified u/s 11 & 12. Various amendments have taken place recently regarding this route. In light of those amendments we are trying to understand the various intricacies.

Subject to the provisions of sections 60 to 63, income derived from property held under trust wholly for charitable or religious purposes is exempt to the extent such income is applied on the objects of the trust in India, during the previous year. Section 11,12,12A, 12AA &13 are the sections which governs the taxation of Charitable Trusts/Institutions.

(a) It is provided that the trust must apply at least 85% of such income on its objects. In such cases balance 15% will deemed to be accumulated for the purpose of charity and are considered as exempt. Income applied for charitable purpose can be for revenue or capital expenditure. In case the 85% of the funds have not been applied then the following options are prescribed under the statute.

1. Where due to reason that whole or any part of the income has not been received during the year, the amount can be applied in the year of receipt or in the following year. However, intimation in writing must be sent to Assessing Officer (AO) in Form 9A before the expiry of time allowed u/s. 139(1) for furnishing the return of income. In case the amount is not applied, it will be deemed to be the income of previous year immediately following year of receipt [Explanation 1 to Section 11(1) & section 11(1B)].
2. If due to any other reason, income is not applied during the previous year; such income can be applied in the previous year immediately following. However intimation in writing must be sent to AO in Form 9A before the expiry of time allowed u/s. 139(1) for furnishing the return of income. If such income is not applied, it shall be deemed to be the income of previous year immediately following the year in which such income was derived [Clause (2) of Explanation 1 to Section 11(1)]. This option can be exercised by uploading Form No. 9A (either under digital signature or electronic verification code) before the expiry of time allowed for submission of return of income under section 139(1).
3. Setting apart of funds with the specific purpose u/s.11(2) – for a period of 5 years:A charitable trust may opt for accumulating its income for a specific purpose to be spent in a period of 5 years. Trust should pass appropriate resolution for accumulation. The purpose of accumulation is to be specified to the Assessing Officer in Form No. 10 along with copy of resolution passed. If accumulated amount could not be applied due to order/ injunction of the court, such period will be excluded.

Form No.10 must be submitted before due date for filing return u/s. 139(1). The benefit of accumulation is not available, if the return of income and Form No. 10 is not furnished before the due date of filing of return under section 139(1).

Amendments by Finance Act, 2021

Exemption and utilization of corpus fund of charitable institutions

• Before Amendment :

Any voluntary contribution received by a charitable/religious institution, registered u/s 12AA or 12AB of the Act, with a specific direction that the same shall form part of corpus is exempt from payment of tax under section 11(1)(d) of the Act.

• After Amendment : (w.e.f. 1^st April, 2022)

The sub section is amended to provide that any voluntary contribution received towards corpus shall be allowed as exemption only if it is invested in the modes prescribed u/s 11(5) of the Act maintained specifically for such corpus.

(i) The modes prescribed for investing u/s 11(5) of the act are as given here under:

1. Investment in Government Saving Certificates and any other Securitiesor Certificates issued by the Central Government under its Small Saving Scheme.
2. Deposits with Post Office Savings Banks.
3. Deposits with Scheduled Banks or Co-operative Banks (including a Cooperative Land Mortgage Bank or a Cooperative Land Development Bank).

4. Investments in the units of Unit Trust of India.
5. Investments in Central or State Government Securities.
6. Investments in debentures issued by or on behalf of any company or corporation. However, both the principal and interest thereon must have been guaranteed by the Central or the State Government.

7. Investment or deposits in any public sector company An investment or deposit in a public sector company shall continue to be one of the eligible modes of investment for charitable or religious trusts, for a period of three years (in the case of shares), and till the date of maturity of other investments or deposit from the date a public sector company ceases to be a public sector company.

8. Investment in bonds of approved financial corporation providing long term finance for industrial development.

9. Investment in bonds of approved public companies whose principal object is to provide long term finance for construction or purchase of houses in India for residential purposes.

10. Investment in immovable property excluding plant and machinery, not being plant and machinery installed in a building for the convenient occupation thereof.

11. Deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India.

      Explanation.— For the purposes of this clause,—

1. long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years
2. public company shall have the meaning assigned to it in section 3 of the Companies Act, 1956;
3. urban infrastructure means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport.

12. Deposits with the Industrial Development Bank of India.

13. Any other form or mode of investment or deposit as may be prescribed.

Clarificatory provisions regarding application of income for charitable purposes by Finance Act, 2021.

• It is provided that application out of corpus will not to be treated as application of income for charitable purposes. The amendment is perfectly logical as corpus donations received are not considered as income.
• Such amounts shall be treated as application if in any future years the same are invested in the modes prescribed u/s 11(5) from the income of those years.
• It is provided that application for charitable purposes from loans shall be treated as application of income in the year in which the same is repaid out of the income earned in the year of repayment and not in the year in which it is borrowed. This particular issue was highly debatable and now is settled with a clarification. Loan is not an income and hence application in the form of utilization of loan can’t be called as application of income. However, later on each repayment of loan periodically shall be called as application for charitable purposes.

Amendment on set-off of losses against income for trust/ charitable institution by the Finance Act, 2021.

• Existing law by virtue of SC Judgement:

The honorable supreme court in CIT vs Subros Educational Society 303 CTR 1 (SC) (2017) held that any excess expenditure incurred by the trust/ charitable institution in earlier assessment year could be allowed to be set off against income of subsequent years. The amendment was proposed to make the above mentioned supreme court judgement redundant.

• Amendment : (w.e.f. 1^st April, 2022)

It is provided that no set-off of any excess application of previous years shall be allowed against the current year’s income.

Amendment related to Corpus Donations by Finance Act,2021

Many a times a questions comes up whether the Charitable Trust can give the donation to another Charitable Trust?

The answer to this question lies in the amendment.

• Any contribution by a charitable or religious trust to any other trust registered under Section 12AA, with a specific direction that it shall form part of the corpus of recipient trust shall not be considered as an application of income for the donor trust. Corollary to this is that the trust can donate out of the current year’s income and then it will be called as an application for the donor trust.

• Summary of the new registration/approval provisions

The Finance Act 2020 introduced the new procedure for Re-registration & Re-approval of all the Trusts registered u/s 12A & 10(23C). The new provisions were supposed to come into effect from 1^st June 2020. However due to covid those were postponed & brought into statute from 1^st April 2021

• New Rules have come into effect from 1st April 2021
• The Trusts which are already registered u/s 12 A or 12 AA will have to make a fresh application electronically under new section 12AB to the Principal Commissioner or Commissioner for its registration within 3 months from 1st April 2021 (i.e. till 30th June 2021) which was later on extended up to 31^st March 2022.
• Similar application u/s 80G(5) and Scientific research Institutions registered u/s 35 will also be required to be made before 30^th June, 2021 (extended till 31^st March 2022).
• All the Institutions approved U/S 10(23C) clauses (iv), (v), (vi), (via) will also have to apply under new section 12AB
• Registration for charitable trust u/s 12AB and u/s 80G(5) will now be valid for 5 years.
• Subsequently, application for renewal of registration has to be made at least 6 months prior to the expiry of registration.

Analysis of the newly inserted clause ac of section 12A of the Income tax act

• Clause (i) Talks about the already registered Trusts which need to re apply within 3 months from the date the section has become effective i.e 01.06.2020 However due to pandemic the New Rules have come into effect from 01.04.2021

Analysis of the newly inserted section 12AB of the Income tax act

• Procedure for Registration:

1) When an application is made for Reregistration the said certificate is valid for 5 years

2) When an application need to be made u/s 12AB

• A – Re Registration of the already registered Trust u/s 12 AB
• B- Regular Registration of the Provisionally registered Trusts
• C- Registration has become inoperative because of availing 10(23C) deduction and the Trust wants to switch to 12A
• D-In case of modification of the Objects of the Trust

then the PCIT or CIT shall verify the genuineness of the activities of the Trust shall pass an order for granting the registration the duration of which shall be for a period of five years or refuse after giving reasonable opportunity

3) The first approval for registration will be for a period of 3 years and it will be called as provisional registration

4)The Time limit for passing the Order

• First Reregistration :- 3 Months from the end of the month of the date of application
• A,B,C,D mentioned above :- 6 months from the end of the month of the date of application
• First Registration :- 1 Month from the end of the month of the date of application

5)The CIT or PCIT has powers to cancel the Registration after giving reasonable opportunity

FORM 10A

• As per the said Rule Form 10A is to be used for
• Fresh First time approval / Renewal of existing approval u/s 10(23C) i.e Educational Institutions / Hospitals
• Fresh First time approval/ Renewal of existing approval u/s 80 G
• Fresh First time application / Renewal of existing application for Registration u/s 12 A

FORM 10AB

• Application after provisional approval / Renewal of approval after 5 years u/s 10(23C) i.e Educational Institutions / Hospitals
• Application after provisional approval / renewal of existing approval after 5 years u/s 80 G
• Application after provisional Registration / renewal of existing registration after 5 years u/s 12 A
• Application to make inoperative registration operative
• Application where the Trust has modified the Bye Laws

III Amendments relating to claiming the deductions u/s 80G

It was noticed that many false claims are being made by the donors while filling the returns of Income. To curb this mischief, amendments were proposed in Finance Act 2021.

• Trust or institutions that are approved under section 80G are now required to file statement of donation received in and also to issue the certificate to the donor in form 10BE.
• Deduction on account of donation under section 80G shall be allowed to the donor only on the basis of the statement filed by the trust.
• This statement of donations must be furnished electronically and verified digitally in Form 10BD on or before 31st May subsequent to end of financial year.
• The donee has an obligation to issue a certificate in respect of donation received to the donor/s in the format to be prescribed within the prescribed time limit by the income tax department.
• Certificate in Form 10BE will have to be furnished to the donor on or before the 31st May immediately following the financial year in which donation is received.
• Certificate will have to be down loaded from web portal of the Income tax department.
• For delay in submission of Form 10BD and/ or Form 10BE, late fees under section 234G of the Act @ Rs. 200 per day, maximum to the amount of donation and penalty (minimum Rs. 10,000 and maximum Rs. 1,00,000) under section 271K of the Act, will be levied.

Amendments proposed by Finance Act, 2022

SEC 11: Application of voluntary contribution by trust

Proposed amendment – explanation inserted in sec.11(1)

• It is proposed that voluntary contribution for the purpose of renovation or repairs of temple, mosque, gurudwara, church etc. [notified u/s 80G(2)] may be considered as corpus by the trust/institution provided following conditions are fulfilled:
• Such corpus is applied only for the purpose for which it is received;
• Does not apply the corpus for making contribution or donation to any person;
• amount is invested is specified mode u/s 11(5) and same is separately identifiable
• This amendment is retrospectively applicable from AY 2021-22.
• It is also proposed that for the purpose of above provision, where any trust or institution has treated any sum received by it as forming part of the corpus and subsequently any of the conditions specified above are violated, such sum shall be deemed to be the income of such trust or institution of the previous year during which the violation takes place.

SEC 11(2)/(3): Taxation of unutilized income of trust

• Proposed amendment
• Presently, where the trust/institution does not utilize accumulated income within period of 5 years, then such income is chargeable to tax in the 6th year.
• It is now proposed to tax income remaining to be utilized in the 5^th year itself.

Maintenance of books of accounts

• Proposed amendment
• Presently, there is no specific provision for maintenance of books of accounts by trusts/institutions covered by section 12A whose income exceeds Rs.2,50,000.
• It is proposed to provide for maintenance of specified books of accounts for the above trusts/institutions.

Power to pass order of cancellation

• Section 12AB (4) is proposed to be amended giving powers to the Principal Commissioner or Commissioner to pass an order in writing cancelling the registration of such trust, or institution after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violation have taken place;
• The term “specified violation” is proposed to be defined by inserting an Explanation to section 12AB (4) of the Act to mean the following violation:
• where any income of the trust or institution has been applied other than for the objects for which it is established; or
• the trust of institution has income from profits and gains of business which is not incidental to the attainment of its objectives or separate books of account are not maintained by it in respect of the business which is incidental to the attainment of its objectives; or
• the trust or the institution has applied any part of its income from the property held under a trust for private religious purposes which does not ensure for the benefit of the public; or
• the trust or institution established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste; or
• any activity being carried out by the trust or the institution, is not genuine; or is not being carried out in accordance with all or any of the conditions subject to which it was registered; or
• the trust or the institution has not complied with the requirement of any other law and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.

Penalty for passing on unreasonable benefits to trustee or specified persons

• Proposed amendment
• Under section 13 of the Act, trusts or institution under the second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person.
• In order to discourage such misuse of the funds of the trust or institution by specified persons, it is proposed to insert a new section 271AAE in the Act to provide for penalty on trusts or institution under both the regimes which is equal to:
• amount of income applied by such trust or institution for the benefit of specified person where the violation is noticed for the first time during any previous year and
• twice the amount of such income where the violation is notice again in any subsequent year.
• If any penalty is leviable under any of the other provisions of this chapter, in addition to the proposed penalty, that penalty would also be applicable
• These amendments will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years

Application allowed only on actual payment [Explanation to sec 11]

• It is also proposed to insert an Explanation to the said section so as to provide that for the purposes of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it).
• It is further proposed to insert a proviso to the said Explanation to provide that where during any previous year any sum has been claimed to have been applied by the trust or institution, such sum shall not be allowed as application in any subsequent previous year.
• This amendment is applicable from AY 2022-23.

Applicability of TDS Provisions to Charitable Trusts.

Earlier the disallowance for default in complying the TDS provision were applicable only to Income from business. However, disallowance u/s 40(a)(ia) & 40 A(3.1) / (3A) are applicable to Charitable Trust w.e.f AY 2019-20.

• Finance Act, 2018 brought these amendments effective from AY 2019-20
• If there is non-compliance of section 40(a)(ia) dealing with TDS provisions or sections 40A(3)/(3A) dealing with expenditure in cash, appropriate adjustment would be made to the application of income while computing the total income of trusts.
• To summarize all the charitable institutions are at par with the income from business for the disallowances u/s 40(a)(ia) & 40A(3)/(3A) disallowance of expenditure in respect of which payment is made otherwise than by way of account payee cheque or an account payee bank draft or electronic banking exceeding Rs. 10,000. Entire expenditure will be disallowed as deduction under this provision.
• From A.Y. 2015-16,depreciationis not allowed in computing the income of the trust in respect of an asset where its cost of acquisition has already been claimed as application of income in the current or any of earlier years. If a charitable institution desires to make a claim of depreciation it will have to establish that it had not made the claim of the cost of the asset as application in an earlier year.

Applicability of Provisions of Section 56(2)(x) to Charitable Trusts.

• Unregistered Trust is very much covered under this section
• It says any person receives a sum exceeding 50,000 is liable to tax.
• Earlier the scope of the section was limited as it was applicable to Individuals and HUF, now its widened from 1.4.2017
• So, all Trusts receiving the donations but which are not registered u/s 12A the income would be liable to tax

In case of individuals specific exemption is provided in the Proviso(g) to Section 56(2)(vii) which says if you are getting any assistance from a registered trust then the said income is exempt from tax.