Procedure of Assessment of Trust

Procedure of

Assessment of Trust

Presented by

Ram Dutt Sharma

Income Tax Officer (Retd.)

Mobile No : 9910055143

Objects or Purposes for establishing a

trust

In general, trusts may register for one or more of the following purposes:—

(i) Relief of the poor

(ii) Education

(iii) Yoga

(iv) Medical Relief

(v) Advancement of any other object of general public utility

(vi) Preservation of environment

(vii) Preservation of monuments

Income Tax Act’s Sections dealing with

trusts/ Institutions

(i) Section 10(23C)

(ii) Section 11

(iii) Section 12

(iv) Section 13

(v) Section 80G

Source of Income of a Trust

[1] Income from property held under trust for charitable and religious

purposes (including a business undertaking so held).

[2] Donations

Trust or institutions are received donations in following forms:—

(i) Voluntary contributions not forming part of corpus

(ii) Voluntary contributions forming part of corpus

(iii) Anonymous Donations [Section 115 BBC]

For example: offering given in temple in donation box.

Anonymous donations are not covered under section 115BBC [Section 115BBC(2)]

WHOLLY RELIGIOUS TRUST

[3] Capital gains on transfer of a capital asset held under trust property [Section

11(1A)]

[4] Income from a business carried on by the trust [Section 11(4)]

Assessing Officer exceeds the income as shown in the books of account of the

undertaking, such excess shall be deemed to be applied to purposes other

than charitable or religious purposes and hence would not be exempt.

[5] Incidental Business Income shall be eligible for exemption [Section

11(4A)]

Benefit of sections 11(1), 11(2), 11(3) & 11(3A) should not be available to any

business income unless—

The business is incidental to the attainment of the objects of the trust/institution,

and

Separate books of account are maintained by such trust/institution in respect of

such business, such exemption shall be available to trust in respect of income

earned from such business activity.

Conditions for Claiming Exemption under Section 11

(i) Condition as to registration [Section 12A(a)]

Person in receipt of income must make an application for registration of the trust or the institution to the CIT(E) in Form No. 10A

Exemption under sections 11 to 13 cannot be claimed in absence of registration

under section 12AA

(ii) Condition as to Audit [Section 12A(b)]

Section 12A(b) of the Act read with the Rule 17B of the Income-tax Rules, 1962 provides that where the total income of the trust or institution (without giving effect to the provisions of sections 11 and 12 exceeds Rs. 2,50,000/- in any previous year, the accounts of the trust or institution for that year must be audited by a Chartered Accountant.

Trusts created wholly for charitable or religious purposes and applying (or

accumulating) their income to such purposes, in India [Section 11(1)(a)]

To avail exemption under section 11(1)(a),

(i) the organization has to apply at least 85% of its income for charitable or

religious purposes, and

(ii) If it does so it can accumulate the remaining 15% for an indefinite period.

Trust created before 1.4.1962 in part only for charitable or religious

purposes and applying (or accumulating) their income to such purposes, in

India (Partial Trust) [Section 11(1)(b)]

Trust created before 01.04.1952 for charitable or religious purposes, authorized

by a general or special order of the Board, and applying its income to charitable

or religious purposes outside India [Section 11(1)(c)]

Income in the form of Voluntary contributions made with a specific direction that

they shall form part of the corpus of the trust or Institution fully Exempt [Section

11(1)(d)]

Corpus of the Trust [Sections 11(1)(d)]

• ―CORPUS‖ is the capital fund of the trust.

• Sources of Corpus Funds

• Corpus Funds are generally created out of corpus donations.

• A Corpus Fund denotes a permanent fund kept for the basic expenditures needed for the

administration and survival of the organization.

• Written documentary is necessary

• Corpus Donation – onus to prove is on the assessee

• Donor has no right to call-back the amount of contribution to the Corpus Fund

made by him

Donation through charity boxes

Donation received through charity boxes are not considered as corpus donation even if

the donation box is marked with the words ―donation towards corpus‖.

Corpus donation given by a Section 12AA registered institution to section

10(23C) approved institution will not be treated as an application of income.

[With effect from assessment year 2018-19]

• Corpus donations will be taxable income in absence of exemption under

section 11

• A corpus donation is not required to be spent and can be accumulated

indefinitely.

• Income generated from Corpus Fund is a part of Income

Accumulation of Income

[Section 11(2)]

According to section 11(2) of Income Tax Act, 1961, if 85% of income of a charitable or religious trust is not utilised in the previous year, then it can be accumulated for 5 years.

Under the existing provisions, two kinds of accumulation are possible :

(a) Accumulation upto 15% of income under section 11(1).

This 15% accumulation is an indefinite accumulation and the organisation

does not have to apply it for charitable purposes in subsequent years. It

can be retained as a part of its corpus of capital.

(b) Accumulation beyond 15% of income under section 11(2).

If the income is not spent in the current year then the assessee is

permitted to spend it within the next 5 years. The trust/institution must

apply in Form 10 as per rule 17 (online)

Withdrawal of exemption granted to income

accumulated under Section 11(2) [Section 11(3)]

(i) Applied for purpose other than the purpose for which it is accumulated or set apart

[Section 11(3)(a)]

(ii) Ceases to be invested in the forms specified under section 11(5) [Section 11(3)(b)]

(iii) If not utilised till 5 years or immediately succeeding year [Section 11(3)(c)]

(iv) Donated to trust registered under section 12AA or 10(23C) [Section 11(3)(d)]

Business Income of a Trust [Section 11(4)]

As per section 11(4), where ―property held under trust‖ includes a business undertaking

and the Income of the business is computed as per the accounts maintained—

(a) The Assessing Officer shall have power to determine the income of such business

(b) Any excess between the income as determined by the Assessing Officer and the

income as per accounts shall be deemed as not applied for charitable or religious

purposes

Excess Business Income as assessed by the Assessing Officer under section 11(4) -

AOP Rate applicable.

Incidental Business Income of a Trust

[Section 11(4A)]

As per section 11(4A), the income earned by a trust from any business activity shall be

exempted from tax provided the following conditions are satisfied:—

(a) The business carried on is incidental to the attainment of the objects of the trust; and

(b) Separate books of accounts are maintained in respect of such business.

Letting of property is not a business activity. - [CIT v. Sri Rao Baghadur Adk

Dharmaraja Educational Charity Trust (2008) 300 ITR 365 (Mad); CIT v. Jyoti Prabha

Society (2009) 177 Taxmann 429 (Uttarakhand)]

Modes of Investment or Deposits by a Charitable

or Religious Trust or Institution [Section 11(5)]

Surplus fund of the Charitable entities should be invested as per forms and modes

prescribed under section 11(5).

Failure to invest the income will amount to violation as per section 13(1)(d) of the Act.

Therefore, the exemptions that are available under section 11(1)(a) will not be

available.

Income of Trusts or Institutions from

Contributions [Section 12]

Income from property held under trust shall include—

(i) Voluntary contributions received by a wholly charitable or religious trust (excluding

corpus donations). [Section 12(1)]

(ii) Value of any medical or educational services, provided free of cost or at concessional rate, by a charitable or religious trust running a hospital or medical institution or an educational institution to person specified under section 13(3). However, such value shall be treated as taxable income and it shall not be eligible for exemption under section 11. [Section 12(2) and Section 13(6)]

In other words, Exemption under section 11 shall not be available for services provided to specified persons[Section 12(2)]

(iii) Amount of donations received by a trust or institution, set up for the purpose of providing relief to the earthquake victims in Gujarat, in respect of which the accounts of income and expenditure have not been rendered to the prescribed authority in the prescribed manner, or which is utilised for some other purpose or which remains unutilised and is not transferred to the Prime Minister’s National Relief Fund on or before 31.03.2004, shall be deemed to be taxable income for the previous year. [Section 12(3)]

Forfeiture of Exemption to Charitable

Trust [Section 13]

Only those organizations which are claiming exemption under section 11 are subject to the provisions of section 13.

[1] Income not applied for public benefit [Section 13(1)(a)]

[2] Income of Charitable Trust/Institution created for the benefit of particular religious community or caste [Section 13(1)(b)]

Section 13(1)(b) is applicable to organization created on or after 01.04.1962

Denial of exemption will not be applicable to organizations created for the benefit of scheduled castes, backward classes, and scheduled tribes, or woman and children. (As per Explanation 2 to section 13)

[3] Income for the benefit of Specified Persons [Section 13(1)(c)]

[4] If the funds are applied in modes other than those specified in section 11(5) [Section 13(1)(d)]

Application of Income

Application of income means utilisation of income for the charitable or religious

purposes as enumerated in the instrument of the trust.

Application of income may not result into revenue expenditure

Investment utilised for purchase of building is application of income

Administrative expenditure

Establishment expenses

Repayment of loans

Inter-Charity Donation (one charitable trust to another)

Donation out of current year’s income only

Payment of taxes (including Income Tax)

Trust Deed for Trust and Institutions

Essential Contents of a Trust Deed

Objects of the trust

The object for which the trust is created is specified in this clause. This is very important clause as all the activities are undertaken for the fulfillment of these objectives only

Utilization clause

The income and funds of the Trust will be solely utilized towards the objects and no portion of it will be utilized for payment of trustees by way of profits

Acceptance of funds

shall not accept any such funds received with the condition which is inconsistent with the objectives of the trust.

Investment clause

Invesements shall be in accordance with the provision of Section 13(1) read with Section 11(5) of the Income Tax Act, 1961 as well as of any other law for the time being in force as are applicable to charitable trust.

Power of the Trustees

The trustees cannot do any act which is beyond their powers mentioned in the trust

deed.

Beneficiary clause

To whom the Trust income/corpus is intended for

Winding up

In the event of winding-up of the company, the assets of the trust shall not be

transferred to the trustees. They shall be transferred to some other similar trust or

organization whose objects are similar to those of this trust.

Dissolution Clause

On dissolution of the Trust, the net assets of the Trust shall be transferred to an

association of persons or trust or society having similar objects of this Trust.

Irrevocable clause in the trust deed

Irrevocable trust cannot be cancelled. - Offers not full flexibility for amendment of

trust deed. - Irrevocable trust is for public/general trust.

Maintenance of books of accounts &

Audit Report

Though there is no provision under section 44AA compelling the charitable trust for

maintenance of accounts, however, section 80G(5)(iv) requires maintenance of regular

accounts of receipts and expenditures only.

Audit Report under section 12A(1)(b), in the case of charitable or religious trusts or

institutions required in Form No. 10B.[Rule 17B]

Where the total income of the Trust computed without giving effect to the provisions of

section 11 and section 12 exceeds the maximum chargeable to tax (i.e. Rs. 2,50,000/- for

assessment year 2021-22) in any previous year, the accounts of the trust for the year shall

be audited by Chartered Accountant.

Under section 44AB of the Income Tax Act

It would apply only if the trust has income chargeable under the Business head.

E-filing of audit reports mandatory with returns of income [Proviso to Income

Tax Rule 12(2)]

The failure to furnish such report in the prescribed from along with the return of

income results in disentitlement of the trust or institution from claiming exemption

under sections 11 and 12 of the Act. [CBDT Circular No. 02/2020 dated 03.01.2020]

Obligation as to filing of the return The trust must furnish its return of income in Form No. ITR – 7 electrically under

digital signature in accordance with the provisions of section 139(4A) of the Act for its

income of Rs. 2,50,000/- (without giving effect to the provisions of sections 11 of the

Act) exceeded the maximum amount, which is not chargeable to tax.

From assessment year 2018-19, Exemption under sections 11 and 12 to the trust to be

allowed only if it furnishes return of income within the time allowed under section 139

[Section 12A(1)(ba)]

Due Date of filing return of a Trust

Where the accounts are required to be audited by any law for the time being in force - 31st

day of October of the assessment year;

Where the accounts are not required to be audited - 31st of July of the assessment year.

Tax Rates applicable to Trusts

(A) Normal Rates [As applicable to AOP]

(i) Voluntary contribution (other than corpus donation)

(ii) Income derived from property held under trust, to the extent

not exempt under section 11 and 12.

(iii) Income not applied/accumulated to the extent more than

15%

(iv) Income accumulated under section 11(2) is not invested/

utilized

(B) Maximum Marginal Rate [at present 30%]

(i) Any income of private religious trust which does not ensure for the

benefit of the public [Section 13(1)(a)]

(ii) Income of Trusts established on or after 01.04.1962 for the Benefit of

particular Religious Community or Caste [Section 13(1)(b)]

(iii) Income of Trusts for the Benefit of Interested Persons referred to

in sub-section 13(3) [Section 13(1)(c)]

(iv) Funds not invested in section 11(5) [Section 13(1)(d)]

(v) Anonymous donations to be taxed in certain cases under section

115BBC(3) (Where the recipient does not maintain any records of

the name, address of the donor in its books) [Section 115BBC(2)]

Unregistered Trust

No exemption under section 11 to charitable trust in case it was not registered

under section 12AA

Audit report in form 10B not required in case of unregistered institutions

Unregistered Trust - Taxed as AOP on the slab rates applicable to individuals/

AOPs etc.

If the trust is not registered, exemption under section 11 or 12 cannot be claimed and

the tax will be taxed in terms of section 164(2) as AOP on the normal tax rate