Issues in Taxation of Charitable Trusts
Taxability on Income of Charitable Trusts
The procedure for computing the Taxable income of a Charitable Trust is substantially different from the procedures that are followed in the cases of other assessees such as Firms, Companies, etc. Certain specific provisions contained in the Income-tax Act, 1961 (Act) give the guidelines as to how the tax liability of a Charitable Trust will have to be determined. The main provisions which are important in the matter of taxation of a Charitable Trust, are to be found in sections 2(15), 2(24)(iia), 10(23C), 11, 12, 12A, 12AA, 13, 115BBC, 139(4A), 139(4C)(e) and 272A(2)(e) of the Act. Further, section 80G deals with the deduction which a Donor will be entitled to, in respect of the donation he makes to a Charitable Trust. In this write-up only a few issues arising from the above-mentioned provisions are being referred to.
Section 2(15) : This clause gives an inclusive definition of “Charitable purpose”. Certain specific objects like relief of the poor, education, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historical interest, have been included under the category of “Charitable purpose”. In addition, the advancement of any other object of general public utility will also be considered as a Charitable purpose provided that it does not involve the carrying on any activity in the nature of trade, commerce or business, or an activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration and the aggregate value of the receipts from such activities exceeds Rs.25 lac in the relevant year. It may be noted that for determining as to whether an activity would not be considered to be of the nature of “Charitable purpose”, the use or application or retention of the income generated from the above-mentioned activities in the nature of trade, commerce, or business would not have any relevance.
The above-referred restriction in the matter of considering an object of general public utility to be of the nature of Charitable purpose, has put a number of Charitable organisations in difficulties. In a case where a Charitable organisation has the object of helping the needy people to earn their livelihood, by way of assistance in their earning activities, difficulties may arise unless such an object can be claimed to be of the nature of “relief of the poor”. Various Chambers of Commerce and/or Trade/Professional associations who are rendering services to their members, also face difficulties due to the above-referred restriction. It is not clear, as to whether one of the several objects of a Charitable organisation falling in the category of the restricted activities, will result in the denial of its status as a Charitable organisation for the purpose of the Act even if all other objects of it are clearly for the “Charitable purpose” as per the definition given in section 2(15).
Sections 12,12A, 12AA and 13 : These sections provide for the procedure to be followed in the matter of determining the taxability of a Trust/Institution carrying on the activities towards the Charitable purposes. Income to the extent applied for Charitable purposes will be considered as exempt from taxability. Moreover, unapplied income to the extent of 15% of the gross income is allowed to be Accumulated for Application towards Charitable purposes in future. Section 11 also contains provisions according to which, in certain cases, unapplied income over and above 15% can be claimed as exempt subject to the fulfillment of certain prescribed conditions. The Computation of Total Income of a Charitable Trust/Institution being different from Others, has to be made very carefully in accordance with the provisions of section 11.
Whether any particular expense constitutes Application of Income or not for the purposes of section 11, is not a matter which can be easily decided. Normally, expenses incurred towards the attainment of the objects of the Charitable Trust/Institution, are considered as Application of Income irrespective of the fact whether they are in the nature of Revenue or Capital. A donation or grant given by a Charitable Trust/Institution to another Charitable Trust/Institution, will be considered as Application of Income of the Donor Trust/Institution irrespective of the fact whether the Donee Trust/Institution spends the donation so received during the year of receipt or not. If a Charitable Trust/Institution has the object of assisting the needy persons for their studies or for entrepreneurship by way of giving loans, the amount of loans given, will be treated as Application of Income. However, when the said loans will be repaid with interest or free of interest, such receipt will be treated as income in the hands of the Trust/Institution. Where a Trust/Institution takes loan to carry out its objects and subsequently it repays the loan earlier taken, such repayment of loan will be considered as Application of Income in the hands of the Trust/Institution. There are several other instances where outgoings in different modes, are treated as Applications of Income for the purposes of section 11.
Section 12 provides that any voluntary contribution received by a Trust/Institution created wholly for charitable purposes, shall be deemed to be the income in the hands of the concerned recipient Trust/Institution. However, it is provided that if the contribution received with a specific direction that the said contribution shall form part of the Corpus of the said Trust/Institution, the concerned contribution will not be deemed to be an income.
Sections 12A(1)(a) and 12AA require registration of the Charitable Trust/Institution by the Commissioner of Income-tax. The registration that may be granted by the Commissioner will become effective from the beginning of the Financial Year in which the concerned Application for Registration is made by the relevant Trust/Institution and provisions entitling the concerned Trust/Institution to claim exemption, would also become effective from the said Financial Year. The Commissioner is empowered to withdraw the registration under certain specified circumstances.
Section 12A(b) provides that in a case where the total income of a Charitable Trust/Institution without giving effect to the provisions of sections 11 and 12, exceeds the maximum amount which is not chargeable to income(which is presently Rs.1.80 lac), the accounts of the said Trust/Institution, shall have to be audited by a Chartered Accountant, and an Audit Report in the prescribed Form No.10B should be obtained. Section 12A(b) further requires that the above-referred Trust/Institution which is required to get its accounts audited, should file its Return of Income in accordance with section 139(4A) for the relevant Assessment Year within the prescribed due date and the Return should be accompanied by the Audit Report in Form 10B.
Section 11(5) specifies the forms and modes available to a Charitable Trust/Institution for making investment of its funds. Non-compliance in the matter of investment, may result in denial of exemption of income u/s 11(1). Even if some investment has been made otherwise than as provided in section 11(5), for any period during a year, the claim of exemption u/s 11 may be denied. Hence, it is always necessary to have a continuous checking as regards the investment of funds of a Charitable Trust/Institution.
Section 13 specifies certain categories of persons to whom if any benefit is provided, then there will arise a case of denial of exemption from the tax of income of the concerned Trust/Institution. This particular provision unless carefully looked into and properly taken care of , very often put the concerned Trust/Institution into a grave danger as regards the availability of exemption.
Section 115BBC : This section provides that if a Charitable Trust/Institution receives anonymous donation which is found to be exceeding the higher of the limits of 5% of the total donation received or Rs.1 lac for a year, tax will be charged @30% on the excess of aggregate of anonymous donations that have been received in excess of the said specified limit. Here the anonymous donation means any voluntary contribution in respect of which no record has been maintained as regards the identity indicating the names and addresses of the persons making such contributions. This provision creates difficulties for a Charitable Trust/Institution where there occurs a large number of cases of receiving donations from people who do not divulge about their identity at the time of making the donations.