TAXATION/ASSESSMENT OF CHARITABLE TRUST OR INSTITUTION

WEBINAR ON TUESDAY 6 JUNE ,2020

CA SUNIL GARG9811015509CASUNILKGARG@GMAIL.COM

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Charging sections

• INCORPORATION OF CHARITABLE TRUST/SOCIETY /SEC 8 COMPANY • CHARITABLE PURPOSE : SECTION 2(15)• Voluantary contribution sec 2(24)• Section 10(23C)• SECTION 11/12/13 exemption /application/Registration/violation• ANONYMOUS DONATION U/S 1115 BBC • SECTION 115 TD –TAX ON ACCRETED INCOME (EXIT TAX )• RECEIPT OF DONATION BY UNREGISTERED TRUST EXCEEDING : 56(2) (X)• Section 164 (2)-Rate of tax

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CHARITABLE PURPOSE : 2(15)

I) RELIEF TO THE POORII) EDUCATIONIII) MEDICAL RELIEF IV) YOGA (V) PRESERVATION OF ENVIRONMENT (INCL WATERSHEDS, FOREST etc)(VI) PRESERVATION OF MONUMENTS OR PLACES OR OBJECTS OF ARTISTIC

OR HISTORIC INTEREST (VII) ADVANCEMENT OF ANY OTHER OBJECTS OF GENERAL PUBLIC UTILITY ( in the last limb , receipt from commercial activity should not exceed 20 % )

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11 (1) (a) Applied /accumulated /set apart in INDIA (85 %)

11(1)(d) Corpus donation (with specific direction from donor ) exempt

Explanation (1)1 15 % of income of trust as well as donation except corpus

Explanation (1)2 Application falls short due to non receipt/or any other reason may be spent in the year of receipt/immediately following year

11 (1B) Apply with AO in form 9 before due date of ITR But if not applied at the time of receipt , than it will be taxable

Explanation 2 Corpus donation out of current year income to other trust u/s 12 AA , will not be application

Explanation 3 Provision of 40 A(3) /3A & 40(a)(ia) shall apply mutatis mutandis for calculating application . If default , will not be treated as application

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11 (1) 1A Capital gain on transfer of capital asset -

11 (2) Income if not applied can be accumulated up to five year , for specific purpose

File form 10 with AO before due date of ITR

Amount accumulated to be invested in modes given in 11 (5)

11(3) Consequences of violation of accumulation/ application / purpose / donation to other charitable trust : taxable in the year immediately following , when violation occurs

11 (3A) AO may allow change of purpose ( if there is valid reason) Donation to other charitable trust , in case dissolution

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11 (4) Assessment of business undertaking of assets

11 (4A) If the business is not incidental to the main object , no deduction u/s 11

11 (5) Modes of investment 11(6) No deprecation allowance , id capital expenditure has been taken as application

11 (7) Income exempt u/s sec 10 , other than 10(1) & 10 (23C) shall have to be applied as per 11(1)

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13 (1) (a & b)

Private religious trust or for the benefit of any particular religious community or caste

1(c) Trust deed or bye laws ensures or any income /property used or applied for the benefit of interested parties (except in case trust incorporated before commencement of this act , and the deed has such a clause

1(d) Income not to be invested in any other mode than 11 (5) , except in the case , where trust has business undertaking

13 (2) Benefit to trustees /interested parties to be at arms length price mentioned in 13 (3)

13(3) a) Author/ trustees /founder/manager and their relative b) Concern , where above person has substantial interest

c) Person who has made contribution exceeding 50 K

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• Once a charity is always a charity

• Business (section 2(13) vs charitable purpose (section 2(15)

• Two important aspect to be followed : Object and Application

• Violation either in object or application will lead to taxability .

• Diversion of income (sec 13(1)) & non compliance of any other law will lead to cancellation of registration (sec 12 AA(4) (circular 21/2016)

• Change of object (apply afresh ) vs change of management will not effect the status

• Two important condition : irrevocable transfer and no benefit to interested parties

• Both revenue and capital expenditure can be taken as application u/s 11 (1)

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• Once exemption is available u/s 11 (1) : income not to be charged head wise .

• Once income of trust categorize as business income : section 28 to 44 C will be applicable including TAX AUDIT

• Accumulation allowed up to 15 % allowed of Gross receipt (including donation ) but excluding corpus donation

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• Excess application more than 100 % in a year can be carry forward .

• To claim deduction u/s 11 , registration u/s 12 AB (earlier 12 AA ) is must

• Educational /medical institution having receipt up to 100 lac can claim deduction u/s 10(23C) (iiiad & iiiae ) without any registration or application .

• Corpus donation to other charitable trust out of current income is not allowed as application ,and donation to other trust out of accumulated fund is violation .

• A charitable or religious trust or both can be registered u/s 11 & 12 AB .

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REGISTRATION PROCESS :12 A (1) AC

i) All the existing registered trust , to apply fresh registration up to 31 august ii) New registration will be five years , hence to apply again six month prior the

period of five years expires (four and half year )iii) New trust can apply for prov registration to be granted for three years ,

apply for permanent registration within six month of commencement or six month prior to expiry of three years

iv)Change in object , apply within 30 days v)New trust , one month prior to commencement of AY

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SECTION 12 AB (REPLACING SEC 12 AA)

i) Existing registered trust will be renewed automaticallyii) in case of renewal , PCIT will enquire about

a)Genuineness of the object b)compliance with any other law , mandatory for the object (like FCRA,

ESI/EPF)iii) Pending application shall be provided provisional registrationiv) Time period for passing order

a) provisional –one monthb)existing registered –three monthc)Renewal – six months

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CANCELLATION

12 AB(4) – object not followed /activities not genuine , PCIT may cancel (5) benefit to trustee or violation or non compliance of any law may lead to cancellation

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TAX ON ACCREDITED INCOME :115 TD

115 (1)A trust or institution registered under 12 AA has i) Converted in any form , which is ineligible for 12 AAIi) Merged with any other entity , not having similar object & 12 AAIii) In case of dissolution , fails to transfer assets with entity registered in 12

AA/10(23) (c) with in 12 month from dissolution Than additional tax on accreted income will be charged at MMR on specified

date 115(2)Accreted income means FMV of assets minus liability as per rule 17 CBAccreted income will not include , assets created out of (i) agricultural income Ii) income , when trust was not registered u/s 12 AA

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SECTION 115 TD

In case of dissolution of trust, if a part of assets has been transferred, those assets will not be included to calculate accredited income

115 (3) : a trust shall be deemed to be converted to ineligible entityi) if registration granted u/s 12 AA has been cancelled Ii) trust changed the object and either could not apply for fresh registration or

application been rejected

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Income received d by trust / institution registered u/s 11 and 10 (23)(c) sub clause (iii ad) (iii ae) (iv & v)(vi & via)Tax @ 30 % on anonymous donation i) 5 % of total donation orii) Rs one lac , whichever is higher Not applicable to religious trust or institutionFA 2020 mandates furnishing of detail of donor by done.Fee u/s 234 G (Rs 200 per day ) and penalty u/s 271 K up to 1 lac

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WHEN TAX IS LEVIED AT MMR

i) if trust deed ensures any income to the benefit of specified person in section 13

Ii)any income or property is actually applied for the benefit of specified personsIii) the trust funds invested other than mode of 11 (5)

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1 Amount of income of the previous year applied to charitable or religious purposes in India during that year

2 . Whether the trust/institution * has exercised the option under clause (2) of the Explanation to section 11(1) ? If so, the details of the amount of income deemed to have been applied to charitable or religious purposes in India during the previous year

3 Amount of income accumulated or set apart* /finally set apart for application to charitable or religious purposes, to the extent it does not exceed 15 per cent of the income derived from property held under trust wholly * /in part only for such purposes.

4 . Amount of income eligible for exemption under section 11(1)(c) (Give detail )

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5. Amount of income, in addition to the amount referred to in item 3 above, accumulated or set apart for specified purposes under section 11(2)

6. Whether the amount of income mentioned in item 5 above has been invested or deposited in the manner laid down in section 11(2)(b) ? If so, the details thereof

7 .Whether any part of the income in respect of which an option was exercised under clause (2) of the Explanation to section 11(1) in any earlier year is deemed to be income of the previous year under section 11(1B) ? If so, the details thereof

Part –B

Detail of payments made u/s 13

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8 Whether, during the previous year, any part of income accumulated or set apart for specified purposes under section 11(2) in any earlier year-

(a) has been applied for purposes other than charitable or religious purposes or has ceased to be accumulated or set apart for application thereto, or

(b) has ceased to remain invested in any security referred to in section 11(2)(b)(i) or deposited in any account referred to in section 11(2)(b)(ii) or section 11(2)(b)(iii), or

(c) has not been utilised for purposes for which it was accumulated or set apart during the period for which it was to be accumulated or set apart, or in the year immediately following the expiry thereof? If so, the details thereof II. APPLICATION OR USE OF

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DIFFERENCE BETWEEN SECTION 11 & 10( 23) (C)

• Corpus not exempt from tax in sec 10 (23 (c), but FA 2020 has incorporated the change , now corpus fund is exempt u/s 10 (23) (C) also

• Full exemption u/s 10(23)(C) (iiiad &iii ae) , when receipt up to 1 cr • Approval vs registration . 12 AA is registration , while there is approval in 10

(23C). AO can not cancel approval , he can only forward case for rejection u/s 143 (3)

• Section 11 is general exemption , while 10 (23C) is mainly for education and medical , barring few religious /charitable trust notified by Govt .

• To accumulated more than 15 % , no form 10 is required in 10(23C)• Audit report u/s 11/12 is form 10 B, but in 10 (23C) is form 10 BB

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• Promotion of sports is a charitable purpose (circular 395 dt 24 sept 1984)

• CIT VS THANTI TRUST 115 TAXMANN 126 (SC) –BUSINESS INCIDENTAL TO MAIN OBJECT

• Circular 14/2015 , change of management vs change of object . Management change does not effect status of trust . Moreover surplus from activity also does not effect charitable nature . Queen’s Educational Society v. Commissioner of Income-tax [2015] 55 taxmann.com 255 (SC)

• Excess application (more than 100 %) can be carried forward and adjusted

CIT Vs Subros Educational Society [2018] 166 DTR 257 (SC)

Bhartiya Vidhya mandir trust (Chandigarh ITAT)

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• Karnatak industial development board vs DIT 2015] 55 taxmann.com 34 (Karnataka)

• Regsitarion can be cancelled only if either object not followed or activities not genuine , mere commercial activity may lead to taxability but not to cancellation

• CIT vs Society for promotion of education (SC) 67 taxmann 214

Registration application not disposed off within six month –deemed registration

• Dy CIT v. Society for Rural Improvement (ITAT Kochin )

Microfinance activity to poor is relief to poor and not advancement of general public utility

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FORM 9 A APPLICATION FOR EXCERCISING OPTION IN 11 (1) EXPLANATIONFORM 10 ACCUMULATION OF FUNDS AS PER SECTION 11 (2)FORM 10 A APPLICATION FOR REGISTRATIOM U/S 12 AA (now 12AB)Form 10 B Report of auditors ( new draft report has also been issued by CBDT , but not notified ) Form 10 BB Audit report u/s 10 (23C) clause (iv,v,vi,via)ITR -7 Return of income 139 (!A) Authour and trustee mandatory to have PAN 139 (4A) Mandatory to file return to claim exemption u/s 11

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