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Taxability of Trusts and Institutions

JULY 06, 2020

By Ravindra Agrawal, CA, CS, LLB, Tax Partner & Gaurav Gidwani, CA, Tax Executive, SGCO & Co LLP

THIS article summaries the taxability and registration related aspects of public trusts and institutions especially in light of the recent amendments.

I. Registration related aspects

- Procedure of registration

The registration procedure for Trusts and Institutions has recently undergone a revamp. This was set to change w.e.f. 01st June 2020, however, in view of Covid-19, CBDT has recently deferred the new procedure of registration to 1 st October 2020. This means the trust can apply for registration within 3 months from 01.10.2020 i.e., up to 31.12.2020. The application has to be made in the prescribed form and manner before the Pr. Commissioner or Commissioner. The said registration process and other ancillary statutory provisions are listed below -

Particulars
Time limit for making an application
Time Limit for passing of Order
Applicability of Registration
Trust or Institution registered u/s 12A or 12AA (Clause 1) Within 3 months from 01.06.2020. Now 01.10.2020 Within 3 months form the end of the month in which application is made AY from which the trust was earlier granted reg.
Trust or Institution registered u/s 12AB and is about to expire (Clause 2) Atleast 6 months before the date of expiry Within 6 months form the end of the month in which application is made AY in relation to FY in which application is made
Trust or Institution registered u/s 12AB provisionally (Clause 3)

Earlier of the following -

a) 6 months before the date of expiry of provisional registration

b) 6 months from date of commencement of its activities

Within 6 months form the end of the month in which application is made AY from which it is provisionally registered
Registration becomes inoperative where Trust or Institution is approved u/s 10(23C) or 10(46) (Clause 4) At least 6 months before start of any AY form which the said registration sought to be made operative Within 6 months form the end of the month in which application is made AY in relation to FY in which application is made
Modification / Adoption of the objects not in conformity with the conditions of registration (Clause 5) Within 30 days from the date of such modification / adoption Within 6 months form the end of the month in which application is made AY in relation to FY in which application is made
Any other cases i.e. fresh registration (Clause 6) At least 1 month prior to the commencement of Previous year Within 1 month form the end of the month in which application is made AY in relation to FY in which application is made
Note - All pending applications for registration before PCIT/CIT will before the operation of this section will be considered as application made under clause 6 above.

- Validity of Registration

All the registrations granted above are to be valid for a period of 5 years except in case fresh applications the registration will be first granted on provisional basis for a period of 3 years and the assessee has to make an application within 6 months before the expiry of such provisional registration and such registration will be granted for 5 more years.

- Cancellation of Registration

Registration of trust will be cancelled under the following conditions -

1) Where the activities of the trust are not genuine, or activities are not being carried out as per the objects of the trust.

2) Where due to operation of sec 13(1), the provisions of section 11 and 12 are not applicable to exclude any income from the total income. Section 13(1) covers the following provisions -

a. Income of private religious trust is not applied for the benefit of public

b. Income of charitable trust is applied for a specific community or caste. However, trust created for Scheduled Castes, backward classes, Scheduled Tribes or women and children will be not covered.

c. Income of charitable / religious trust is applied for the direct or indirect benefit of -

i. author or founder

ii. person having substantial contribution (>Rs. 50,000)

iii. member in case of HUF being the author or founder

iv. trustee or manager

v. any relative of the above persons

vi. concern in which the above persons has a substantial interest

d. Income of the Trust / Institution is invested or deposited in modes other than the modes specified u/s 11(5)

3) Non-compliance of any other law which is material for achieving the objects of the trust and such non-compliance has not been disputed or has not attained finality

4) Where the registration has been obtained under 12AA / 12AB / 12A, the same shall become inoperative on the date the registration of trust if approved u/s 10(23C) or 10(46) of the Act. To conclude registration under 12AA / 12AB / 12A and 10(23C) or 10(46) will not be operative simultaneously.

Note - The above provisions of cancellation are not applicable in case where registration has been granted provisionally under clause (c) of Section 12AB (1).

II. Taxability under Income Tax Act

- Income Not forming Part of Total Income

Following income not to be included in the total income of the trust -

1) Income to the extent of 15% which will be applied for charitable or religious purposes in India - 11(1)(a).

a. As per Explanation (1) any voluntary contributions received shall be deemed to the income from property held by trust and the same will be considered for calculation of 15%.

2) Voluntary contributions received with a specific direction that the same shall form the part of Corpus fund - 11(1)(d)

3) For income from business undertaking to be exempt such income should be incidental to the objects of the trust and separate books of accounts are maintained for such business. - Sec 11(4A)

4) Income to the extent of 85% applied for charitable or religious purposes. Where such application falls short of 85% assessee may choose the following one of the options -

Particulars
Option 1
Option 2
Option 3
Option Income has not been received during the year Income has not been derived during the year Income has been accumulated or set apart
Section Clause 2 of Explanation 1 to sec 11(1) Clause 2 of Explanation 1 to sec 11(1) 11(2)
Application of such Income Year of Receipt of income or Immediately following the year of receipt Previous year Immediately following the year in which such income was derived In the year in which as decided by the assessee, but the period shall not exceed 5 years
Form to be filed Form 9A Form 9A Form 10
Due date of filing of Form Before the due date of return of income u/s 139(1) Before the due date of return of income u/s 139(1) Before the due date of return of income u/s 139(1)
Income not utilized Such income shall be deemed to be income of the PY immediately following PY in which such income was received - 11(1B) Such income shall be deemed to be income of the PY immediately following PY in which such income was derived - 11(1B) Refer Note 1
Conditions NA NA Amount so accumulated remains to be invested or deposited in the securities mentioned u/s 11(5)

Note - Where due to any reasons beyond the control of the person, the income for the purpose for which it was accumulated could not be applied for specified purpose then on an application made to AO, the AO may allow such person to apply income for other charitable or religious purposes in India in conformity with the objects of the trust. Further, such application shall not include payment made to trust registered u/s 10(23C) or 12AA. - Section 11(3A)

5) For the purpose of application of income, charitable purpose is defined u/s 2(15) as follows -

a. relief of the poor,

b. education,

c. yoga,

d. medical relief,

e. preservation of environment (including watersheds, forests and wildlife)

f. preservation of monuments or places or objects of artistic or historic interest, and

g. the advancement of any other object of general public utility.

Advancement of any other object of general public utility does not include any activity in the nature of trade, commerce or business for a consideration irrespective of use or application of such income except where such activity is carried on in the actual course of advancement of any other object of general public utility and receipts from such activity does not exceed 20% of the total receipts. A trust can carry on business and utilize profits from such business for charitable purpose as defined above like relief of poor., etc.

Further, any amount paid to any trust registered under 10(23C) or 12AA as corpus donation will not be considered as application of income.

- Capital Gains from property sold by Trust / Institution

1. If the net consideration on transfer is invested into another capital asset, then Capitals gains arising from transfer of property held by the trust will be deemed to be considered as applied for charitable or religious purposes as under -

Scenario
Exemption
Entire sale consideration utilized for new asset Whole of Capital Gains
Part of the sale consideration utilized for new asset Amount utilized minus Cost of the transferred asset

- Denial of Exemption

1. Where registration u/s 12AA / 12AB / 12A has been granted and the same is in force during the PY, then no exemption u/s 10 will be granted from any income derived from the property held under trust - Sec 11(7).

2. Sec 13 (1) states the conditions under which the exemption u/s 11 and 12 will not be granted which are listed below -

a. Income of private religious trust is not applied for the benefit of public

b. Income of charitable trust is applied for a specific community or caste. However, trust created for Scheduled Castes, backward classes, Scheduled Tribes or women and children will be not covered.

c. Income of charitable / religious trust is applied for the direct or indirect benefit of -

i. author or founder

ii. person having substantial contribution (>Rs. 50,000)

iii. member in case of HUF being the author or founder

iv. trustee or manager

v. any relative of the above persons

vi. concern in which the above persons has a substantial interest

d. Income of the trust / Institution is invested or deposited in modes other than the modes specified u/s 11(5)

3. The following will be considered as deemed to be applied for the benefit of persons referred to in 13(3) (specified persons) and exemption will not be granted u/s 11 as per section 13(2) -

a. Any income or property lent to specified persons without any adequate security or interest

b. Any land, building or property made available to specified persons without any adequate rent or compensation.

c. Any salary or allowances paid to specified persons for the services rendered in excess of reasonable amount

d. Any services of the trust made available to the specified persons without adequate remuneration or compensation

e. Any share or security or other property purchased / sold from / to specified persons for more than adequate / less than adequate consideration

f. Any income or property in excess of Rs. 1,000 is diverted to specified persons

g. Any funds continue to remain invested or deposited in any concern where the specified persons are having any substantial interest.

4. No exemption u/s 11 against any anonymous donation received and taxable as per the provisions of section 115BBC - section 13(7)

5. No exemption u/s 11 against any income which was derived where aggregate receipts from business activity exceeds 20% of the total receipts as required under first proviso to sec 2(15) - Section 13(8)

6. No exemption u/s 11(2) will be available where the FORM no. 10 and Return of income for PY is not filed before the due date specified u/s 139(1) - Section 13(9)

- Exemption not denied in certain cases

1. No exemption u/s 11 will be denied where aggregate of the funds invested or deposited in specified concern does not exceed 5% of the capital of that concern. However, exemption shall be denied to income generated from such investment - Section 13(4)

2. No exemption u/s 11 will be denied to trust running educational or medical institution or hospital for providing services to specified persons. However, as per sec 12(2) value of any services provided by the said trust to specified persons shall be deemed to be income of the trust and no exemption will be available against such deemed income - Section 13(6)

- Taxability at Special Rates

- Anonymous Donation - Sec 115BBC

- Anonymous donation received by any trust / institution except religious trust & charitable and religious trust* will be taxed @ 30% in excess of higher of 5% of total donation received or Rs. 1,00,000/-

- *In case of charitable and religious trust where donation is made with a specific direction that it is for a university / hospital / educational or medical institution, the above provision will be applicable.

- Taxability of Non - Exempt Income

Section 164(2) 164(3)
Condition No Exemption has been granted u/s 11 or 12 for the below mentioned incomes Income for purposes other than charitable or religious purposes not specifically received on behalf or benefit of any person or Individual share of beneficiary is unknown
Relevant Income (A) Income derived from property held for charitable or religious purpose or Voluntary contribution as referred to section 2(24)(iia) or Business Income which is not incidental, and no separate books of accounts are maintained as referred in 11(4A) Income derived from property held applicable in part for charitable or religious purpose or Voluntary contribution as referred to section 2(24)(iia) or Business Income which is not incidental, and no separate books of accounts are maintained as referred in 11(4A)
Taxability of (A) above The above income will be taxed as income of Association of Person (AOP) For charitable or Religious purpose, relevant income after exemption u/s 11 will be considered as income of an AOP For other than Charitable or Religious purposes, relevant income will be taxable @ MMR
Relevant Income (B) Income applied for the benefit of specified persons - 13(1)(c) or Income not invested or deposited as required u/s 11(5) - 13(1)(d) Income applied for the benefit of specified persons - 13(1)(c) or Income not invested or deposited as required u/s 11(5) - 13(1)(d)
Taxability of (B) above Income will be taxable at Maximum Marginal Rate (MMR) Income will be taxable at Maximum Marginal Rate (MMR)

- Tax on Accreted Income - Sec 115TD

1. Where any trust or institution falls under the following circumstances, it has to pay an additional tax on accreted income as on the specified date at Maximum Marginal Rate MMR -

a. Converted into any form not eligible for registration u/s 12AA -

i. Cancellation of registration granted

ii. Adoption or modification of objects which are not conforming with the registration granted and not applied for fresh registration or applied for registration, but the application has been rejected

b. Merged with any other trust not having similar objects and registration

c. On dissolution failed to transfer its assets to trust registered u/s 12AA or 10(23C) within 12 months from the end of the month in which dissolution takes place.

2. Tax on accreted income shall be paid with 14 days from the following dates -

Scenario
Date of Payment
Cancellation of Registration No appeal filed - Expiry of time allowed u/s 253 Appeal filed - Date of receipt of order by trust
Adoption or Modification of objects and not applied for fresh registration End of the Previous Year
Adoption or Modification of objects and not applied for registration but application gets rejected No appeal filed - Expiry of time allowed u/s 253 Appeal filed - Date of receipt of order by trust
Merger Date of Merger
Dissolution Date of expiry of 12 months

3. Accreted Income means Fair Market Value of Assets Minus Liabilities on a specified date as per Rule 17CB. Further, no deduction shall be allowed against such accreted income. However, the following assets will not to be considered for Accreted Income -

a. Assets acquired out of agricultural income

b. Asset acquired from the date of creation of trust to the date of registration u/s 12AA and no exemption availed during such period u/s 11 or 12. Where the exemption has been granted based on application made for registration the provisions of this clause shall be ignored.

c. On dissolution, assets transferred to trust registered u/s 12AA or 10(23C)

4. Tax so paid on accreted income will not be allowed as credit to the trust or any other person. Further, no deduction will also be allowed against tax on accreted income.

[The views expressed are strictly personal.]

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

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