TAXATION OF CHARITABLE TRUST

WHAT IS TRUST Trust is not defined in the Indian Income Tax Act, 1961 and as per India Trust Act, the meaning of trust is as under:A Trust is an obligation annexed to the ownership of property , and arising out of a confidence reposed in accepted by the owner , or declared and accepted by him , for the benefit of another or of another and the owner. Example: - Mr. Shishir Bose an old man having age of 85 years created a trust by giving his big house and Rs. 50 Lakhs to it for the purpose of giving educational benefits to the Poor and deserving students. For this purpose he gave the responsibility to 4 persons to look after the affairs of the trust. Now see here the essentials of a trust:1.The Settler 2.The instrument of Trust 3.The trust property 4. The Obligation 5.The Trustees He can be said the author of the trust. Here the settler is Mr. Shishir Bose who created the trust. The trust deed i.e. the document by which all these things regarding the property of trust, name of trustees, the purpose of trust is written . The House and Rs. 50 Lakhs given by Mr. Shishir Khandelwal is the trust property. Giving educational benefits to the poor and deserving students. The 4 persons appointed by Mr. Shishir Bose are the trustees of the trust. The persons who have the responsibility to fulfill the obligation attached with the property of the trust are called the trustees. The persons for whose benefit the trust is created are called trustees of the trust. Here the Poor and deserving students are the beneficiaries of the trust.

6. The beneficiaries

The trust can be created for any purpose say for the benefit of a family, for benefit of minor children of a family, for benefit of married daughters of a family and here note that all the trust are not exempt from Income tax. Only those trust which satisfy the conditions lay down in section 11 are only eligible for exemption and these conditions are:1. The property from which income is derived should be held under trust or other legal obligation. - Section 11(1) (a). 2. The trust should be registered with the commissioner of Income Tax. 3. The property should be held for charitable purpose and in case the trust is created on or BY CA SUDHIR HALAKHANDI 98280 67256 sudhir@halakhandi.com

after 1st. day of April 1962 the trust should fulfill the following conditions also:(i). The trust should not be created for the benefit of a particular religious community or cast. (ii). No part of the Income should be used for the benefit of Settler or other specified person.(iii). The property should be held wholly for charitable purpose. Section 11(1)(a) (iv). The condition as mentioned above under (i) i.e. the trust should not be created for the benefit of a particular religion or cast is not applicable for religious trust but the other two conditions i.e. the trust should not use any part of its income for the benefit of settler or other specified person and the property should be held wholly for charitable purpose are applicable for the religious trusts established on or after 1st. day of April 1962. 4. The exemption is limited to the income of the trust which is applied for charitable or religious purpose + the income which a trust can retain as specified in the law. The other income is Taxable. The law has permitted 15% of the income to be retained by a trust hence at least 85% of the income of the trust should be expended for religious and charitable purpose to get the exemption. - Section 11(1) (a) and (b). However in certain conditions where the application of Income is fall short of 85% can be expended in the coming years or years with certain conditions is explained below in details. 5. The income of the trust is applied for charitable and religious purpose in India: - Here see only portion of Income is eligible for exemption which is applied for charity in India. Foreign charity is not allowed. But here is one exception and which is given is Section 11(1)(c) and according to it foreign charity is allowed for exemption if the following conditions are satisfied:1. The trust is created on or after 1st. April 1952. 2. The income of the trust is applied for a charitable purpose which tends to promote international welfare in which India is interested. 3. The trust created before 1st. April 1952 can expand their income outside India for charitable or religious purpose. 4. For 2 and 3 condition it should be noted that there should be a specific or general order has given exemption to these foreign charity.- Section 11(1)(c) 6. Income from Voluntary contributions with a specific direction that they shall form part of the corpus of the trust will not form part of the income of the trust.-Section 11(1) (d). 7. The trust funds should be invested in the securities and investments prescribed under section 11(5).

What is charitable purpose Section 2(15) Section2 (15):-charitable purpose includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. The following proviso has been added to section 2(15) by the Finance Act, 2008, w.e.f. 1-4-2009 : Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade,

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commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. The charitable purpose means a purpose of charity as understood in general terms and as per definition in Section 2(15) it includes the following also:Relief to Poor Education Medical Relief any other object of general public utility Here note that the definition is inclusive definition hence besides having all the purposes which are covered under the General charity it includes the Relief to poor, Education, Medical relief and any other object of general public utility also. VOLUNTARY CONTRIBUTIONS VIS--VIS- CORPUS FUND Voluntary contribution with a specific direction that the same shall form part of the corpus fund will not be included in the total Income of the trust. Here the onus of proof is on the trust and it should have sufficient evidence to prove that the Voluntary donations are received with specific directions that they should form part of the corpus of the trust. REGISTRATION OF TRUST 1. Each trust to be eligible for exemption under section 11 should be registered with the Commissioner of Income. 2. The application of registration should be made within one year from the date of creation of the trust. 3. The application should be in Form Number 10A. 4. After receiving the application the commissioner shall call such information or documents as he considers necessary to verify the genuineness of the activities of the trust or institution. 5. If he (the commissioner) is satisfied with the genuineness of the activities of the trust he shall pass an order in writing and register the trust. 6. If he is not satisfied with the genuineness of the activities of the trust he will reject the application but before this he will have to give opportunity to the trust of being heard. 7. The order of granting or refusing the registration to the trust should be passed within 6 months from the end of the month in which the application for registration is made to the commissioner. APPLICATION OF INCOME 1. The term application of Income means disposal of Income for charitable and religious BY CA SUDHIR HALAKHANDI 98280 67256 sudhir@halakhandi.com

trust. 2. Revenue and capital expenditure both are allowed. If the expenditure is out of the income of the trust and for the charitable or religious purpose they will form part of the Application of Income irrespective of their capital or revenue nature. Here see if the expenditure for a Building which will be used for shelter of the Pilgrims it will form part of application of Income though it is capital expenditure. 3. Repayment of Loan: - If a trust has taken Loan from any source for its charitable or religious purpose then the repayment of such loan will also be taken into account while calculating the application of Income. 4. If the purpose of charitable trust is to give Loan for education to needy students than giving loan to such students will also be considered for the purpose of application of Income and when the Loan is repaid by the students back will be considered as Income of the trust. 5. Donations to the other trusts are also considered as Application of the Income. EXTENDED TIME FOR APPLICATION OF INCOME If 85% of the income is not expended during the previous year, the trust can use the extended time in the following two conditions:Application of income fall short of 85% of income of the trust due to the reasons given below a. Income has not been received during the relevant previous year b. Because of any other reason When income can be spent(Extended time for Expenditure) The income can be spent either in the year of receipt or next following year. During the previous year immediately following the previous year in which income is derived.

To avail the benefit of extended time, the trust should have applied to the Income tax officer before the due date of filling of return. WHAT HAPPENED IF INCOME IS NOT APPLIED IN EXTENDED TIME If the income is not applied in the extended time then it will be taxable as under:1. If the option is taken due to the reason that income is not received during the previous year then it will have to be spent during the previous year in which it is received and in the next following year of receipt. The balance remained will form part of taxable income of the year immediately following the year of receipt. 2. If option is taken due to any other reason then it can be spent in the previous year immediately following the year in which income is derived. The Balance of income not spent as such in the year immediately following the year of receipt shall form part of the taxable income of the year immediately following the year in which it is derived. Example: - During the previous year a charitable trust derived income of Rs. 7.70 Lakhs BY CA SUDHIR HALAKHANDI 98280 67256 sudhir@halakhandi.com

out of which Rs. 6.00 Lakhs received during the year. Further with respect to Rs. 1.50 Lakhs the trust has reason for not expending the same. The trust has not applied to ITO for its option. The trust actually spent 2, 75,000.00 during the year. Calculate the total income of the trust. What will be your answer if the trust has applied to the ITO for extended time. Answer: - (Amount in Rs.) Income of the trust from the property held for charitable purpose Less:- 15% set apart for future Balance Less:- Amount spent during the year Balance not utilised 7,70,000 1,15,500 3,80,000 2,75,000 1,05,000

If the trust has not applied to the ITO for extended time then the whole unutilised amount of Rs.1, 05,000.00 will be taxable. If the trust has applied for extension of time then since it has Rs. 1.70 as amount not received and further Rs. 1.50 Lakhs as amount not spent for any other purpose then his taxable income is NIL. MODES OF INVESTMENT Section 11(5) 1. Investment in Government savings certificates. 2. Deposit with Post office saving Bank account. 3. Deposit in any Scheduled bank or Co-operative Bank. 4. Investment in Central Government or State Government securities. 5. Investment in UTI Units. 6. Investment in Government Guaranteed Debentures of a Company- Where Interest or the principal is Guaranteed by central Government or state Government. 7. Investment or deposit in any public sector company. 8. Immovable property. 9. Debentures of a Financial corporation engaged in Long term Industrial Financing. 10. Deposit with Industrial Development Bank of India. 11. Other Investment as may be prescribed. FORFEITURE OF EXEMPTION Sec.13 1. Income for private religious purpose: - Any part of income from property held for charitable purpose spent on private religious purpose which does not ensure benefit of the public. 2. Income of the charitable trust established for the benefit of particular religious community: - Entire income of a trust which is established on or after 1st. April 1962 for the benefit of a particular religious community is taxable. 3.

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