Assessment of Trust with Computation of Tax Liability

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1. Formation of a Charitable & Religious Trust

(1). Meaning of Trust

A” Trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.

A trust is a convenient method whereby a limited number of persons may hold property on behalf of other persons, who may be a large or fluctuating body or who may include persons not yet born. Once the property has been vested in the trustees, they own the property, but they are compelled by law to exercise their ownership for the benefit of the beneficiaries and for them only. It means that legal ownership vests in the trustee or trustees but beneficiaries have de facto ownership.

Assessment of Charitable Trust
Assessment of Charitable Trust
  • Author of Trust: The person who reposes or declares the confidence is called “the Author of the trust”  
  • Trustee:  The person who accepts the confidence is called the “Trustee”.
  • Beneficiaries: The person for whose benefit the confidence is accepted is called the “Beneficiaries”.
  • Trust Property: The subject matter of trust is called “Trust Property” or “Trust Money”.
  • Instrument of Trust: The instrument, if any, by which the trust is declared is called the “Instrument of Trust”.

Commonly Charitable Institutions / Trusts are formed to create and maintain the following establishments in public interest.

  • Hospitals and other health-care institutions
  • Spirituality centres like yoga centres, meditation centres etc
  • Orphanages and destitute homes
  • Schools. colleges & other educational institutions, libraries, leading rooms. etc.

(2). Types of Trusts

  1. Charitable or Public Trusts
  2. Private Trusts

A public or charitable trust is one which benefits the public at large, or some considerable portion of it. But in the case of private trusts, the beneficiaries are individuals or families and they are ascertained.

(3). Constitution of Charitable and Religious Trust

Law to be taken care of in this respect is contained in the Indian Trust Act, 1882 and the Income Tax Act, 1961. It may be noted that the provisions of the Indian Trusts Act, 1882 do not apply to public trusts.

However, the Laws (given below) are applicable to  Charitable Institution / Trusts.

  1. Indian Trusts Act, 1882
  2.  Charitable & Religious Act, 1920
  3.  WakfAct,1954
  4.  Sikh Gurudwara Act, 1925
  5. Indian Trustees Act, 1866
  6.  Religious Endowment Act, 1863
  7.  Trustees’ & Mortgagees’ Powers Act, 1866
  8.  Society Registration Act, 1860
  9.  Companies Act, 1956, for trusts registered as companies u/s. 25 of the Act.

Allied Laws: 

  1. Transfer of Property Act, 1882
  2. Indian Registration Act, 1908
  3. Income Tax Act, 1961
  4. Foreign Contribution (Regulation) Act, 1976

(4). Requisites for Creation of a Trust

  1. There is a founder/settler/author of trust;
  2. there should be person called trustee/trustees;
  3. there is a property of the trust which the settlor gives;
  4. there is a person capable to enforce that obligation called cestuique trust;
  5. there are beneficiaries who will enjoy benefits out of that property,
  6. an intention of the author or founder to create a trust;
  7. the purpose of the trust;
  8. transfer of the property to the trustees.

(5). Conditions for Creation of a Trust

  1. The settlor has to give up ownership and all beneficial interests in the property,
  2. the property should be clearly described,
  3. the objects or purposes for creation of trust should be clearly indicated,
  4. formal deed or any other writing not required – intention to create a trust may be shown through words. However, it is advisable to have a written trust deed for all practical purposes.
  5. The settlor must be a person competent to contract.,
  6. The trust property must be properly transferable to the beneficiary. It must not be a merely beneficial interest.

(6). Who may Create Trust?

As a general rule, any person, who has power of disposition over a property, has capacity to create a trust over such property.

As regards, ‘power of disposition over property’, according to section 7 of the Transfer of Property Act, 1882, a person who is competent to contract and entitled to transferable property or authorised to dispose of transferable property not his own, is competent to transfer such property either wholly or in part and either absolutely or conditionally.

Thus, two basic things are required for being capable of forming a trust —

  1. power of disposition over property; and
  2. competence to contract.

Besides individuals, a body of individuals or an artificial person such as an association of persons, an institution, a limited company, all Hindu Undivided Family through its Karta, can also form a trust.

(7). Who may be a Trustee?

Every person capable of holding property may be a trustee. Where there is no trustee in existence, an official trustee may be appointed by the court and the trust can be administered.

Based on the above analogy, following may also be trustee(s):

  • A Government, a corporation or a limited company can be a trustee
  • A woman can also be a trustee.
  • Minor: Even a minor can be appointed as a trustee, if he is to be only a passive trustee, not required to exercise discretion.
  • Beneficiary may also be a trustee.
  • Author as trustee: The author or settler of a trust may appoint!  constitute himself as the sole trustee or as one of the several trustees.

2. Exempted Incomes of Charitable or Religious Trust (Section 11)

SI. Nature of income
No.
To what extent exemption allowedConditions applicableRelevant
provisions
Remarks if any
(a) Income derived from property’ held under trust wholly for charitable or religious purposesTo the extent such income is applied in India for such purposesAccumulation allowed upto 15% of such income Accumulation in excess of 15% allowed subject to certain conditions being satisfiedSection
11(1)(a) Section
11(2)
Accumulation treated as applied for such purposes  
(b) Income derived from property’ held under trust which is applied in part only for charitable or religious purposesTo the extent such income is applied in India for such purposes –(i) – Accumulation allowed upto 15% of such income
– Accumulation in excess of 15% allowed subject to certain conditions being satisfied (i) Trust should have been created before 1.4.1962
Section
11(1)(b)
Accumulation treated as applied for such purposes
(c) Income derived from property held under trust— (i) Created on or after 1.4.1952 for charitable purposes to be used for charitable purposes outside India (Religious trust not covered)To the extent such income is applied to such purposes outside IndiaThe purpose of the trust is to promote international welfare in which India is interested.
Further General or special order of Board for exemption is necessary No accumulation allowed
Section
11(1)(c)(i)
Accumulation not exempt
(ii) Created before 1.4.1952 for charitable or religious purpose to be used for such purposes outside IndiaTo the extent such income is applied outside India for such purposesNo condition applicable but General or special order of Board for exemption is necessarySection
11(1)(c)(ii)
Accumulation not exempt
(d) Voluntary contribution forming part of corpus100% exempt with no condition of application or accumulationThere should be specific direction that such contribution to from part of corpus of the trust or institutionSection
11(1)(d)
 

(A) How to find out Exemption of Income in case of Charitable or Religious Trust under Section 11

Step-1 : Income

Find out Taxable Income of the Trust / Institution

Step-2 : Exemption

  • General Exemption : 15% of “Income from property held for charitable or religious purposes” is Exempt from the tax under Section-11 . It can be accumulated for future without any specific time-frame.
  • Exemption based upon Application of Income : – Remaining 85% of the “income from property held for charitable or religious purposes” is exempt if it is applied for charitable or religious purposes in India.
  • Exemption based upon Accumulation – Where 85% of the “income from property held for charitable or religious purposes ” is not applied for charitable purposes, etc. during the previous year, it can be accumulated or set apart for application in future.

(B) Essential Conditions for Exemption of Income under Section 11 in case of Charitable or Religious Trust

The compliance of the following main conditions is essential for claiming exemption under section 11:

  1. Trust must have been created for any lawful purposes;
  2. Such trust/institution must be for charitable or religious purposes.
  3. The property from which income is derived should be held under a trust or other legal obligation.
  4. The property should be held for charitable or religious purposes. In the case of a charitable trust created on or after April 1, 1962,
  5. The exemption is confined to only such portion of the trust’s income which is applied to charitable or religious purposes or is accumulated for applying to such purposes within the limits of accumulation permitted under section 11(1) and (2)
  6. The exemption is restricted to such portion of the income as is applied to charitable or religious purposes in India except in the cases covered by section 11(1)(c)
  7. Where trust property comprises a business undertaking, the income shown in the books of account should not be less than the income determined by the Assessing Officer according to the provisions of the Act.
  8. The trust should get itself registered online through Form No. 10A for application with the Commissioner of Income tax.
  9. Where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 for that previous year.
  10. The accounts of the trust should be audited [Form No. 10B] for such accounting year in which its income (without giving effect to the provisions of sections 11 and 12) exceeds the exemption limit. 
  11. The funds of the trust should be invested or deposited in any one or more of the modes or forms mentioned in section 11(5)
  12. Return of income of the trust/institution should be submitted within the time allowed under section 139(1), if the total income of the trust/institution (before giving exemption under sections 11 and 12) exceeds the maximum amount which is not chargeable to tax

4. Application of Income by Charitable or Religious Trust [Section 11(1)]

The following points one should note in this regard:

  1. Repayment of loans taken to fulfil one of the objects of trust is treated as an application of income for charitable purposes.
  2. Interest bearing loans, advanced by an educational trust, to students for higher studies amount to application of income for charitable purposes in the year of grant of such loans, if the object of trust is advancement of education and granting of scholarship. As and when such loan is returned to the trust, it will be treated as the income of that year.
  3. Application of the amount can be for revenue or capital purpose.
  4. The expenditure incurred by way of payment of tax out of the current year’s income has to be considered as application for charitable purposes.
  5. Donation given by a charitable/religious trust to another charitable/religious trust is treated as “application” of income for the donor trust [and eligible for exemption under section 11(1)].

However, the donor trust will not be able to avail exemption under section 11(1) (with effect from the assessment year 2018-19), in respect of donations given with a specific direction that they shall form part of the corpus of the donee trust.

  • Utilisation of income for meeting expenses of earlier years is an “application”.
  • For capital gain derived by a charitable trust.
  • For the purpose of determining application of income under section 11(1), the provisions of sections 40(a)(ia) and 40A(3)/(3A) shall apply as they apply in computing the income chargeable under the head ‘Profits and gains of business or profession’.

Consequently, for calculating “application” of income if payment exceeding Rs. 10,000 is made in cash or by bearer cheque, such payment will be disallowed from the assessment year 2019-20. Likewise, if tax is deductible but not deducted and payment is made to a resident, 30 % of such payment will be disallowed while calculating “application” of income for the assessment year 2019-20 (or any subsequent year).

5. Accumulation of Income by Charitable or Religious Trust [Section 11(2)]

Where 85 % of the income is not applied to charitable or religious purposes, the charitable trust or institution may accumulate or set apart either the whole or part of its income for future application for such purposes.

Such income so accumulated, or set apart, is not included in the total income of the trust in the year of receipt of income.

  • For this purpose, such trust has to inform the concerned Assessing Officer the purpose and period (which in no case can exceed 5 years) for which the income is accumulated or set apart. This information has to be given electronically in Form No. 10. The benefit of accumulation is not available if Form No. 10 is not uploaded before the due date of filing return of income specified under section 139(1) for the fund or institution.
  • Further, the money so set apart or accumulated should be in the modes specified in section 11(5) .
  • The benefit of accumulation is not available if return of income is not furnished before the due date of filing return of income under section 139(1).

(A). Accumulation of income in excess of 15% of the income earned [Section 11(2) and Rule 17]

As already mentioned, assessee is allowed to accumulate upto 15% of the income earned during the year for application for charitable or religious purposes in India in future. If the assessee wants to accumulate or set apart the income in addition to 15% of the income, he can do so if certain conditions are satisfied. In this case, the amount accumulated in excess of 15% shall be deemed to have been applied for charitable or religious purposes in India during the previous year itself.

Conditions to be satisfied

Exemption under section 11(2) shall be allowed subject to the following conditions being satisfied:

  1. such person furnishes a statement in Form No. 10 electronically either under digital signature or electronic verification code to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years;
  2. the money so accumulated or set apart is invested or deposited in the forms or modes specified in section 11(5);
  3. the statement referred to in clause (a) is furnished on or before the due date specified under section 139(1) for furnishing the return of income for the previous year.

(B). Consequences if such Accumulated Income in excess of 15% is not Applied / Invested in the prescribed manner [Section 11(3)]:

Where the income of the trust referred to in section 11(2)—

  1. is applied for purposes other than charitable or religious purposes, or ceases to be accumulated or set apart for application thereto, or
  2. ceases to remain invested or deposited in any mode mentioned under section 11(5) above, or
  3. is not utilized for the purpose for which it is so accumulated or set apart during the period specified (not exceeding 5 years) or in the year immediately following thereof.
  4. is credited or paid to any trust or institution registered under section 12AA or any institution or trust referred to in section 10(23C) (iv), (v), (vi) or (via),

such income shall be deemed to be the income, —

  • in case of (a) of the previous year in which it is so applied for other purpose or ceases to be accumulated or set apart, or
  • in case (b) of the previous year in which it ceases to remain so invested or deposited, or
  • in case of (c) of the previous year immediately following the expiry of period specified therein, or
  • in case of (d) of the previous year in which it is paid or credited.

(C). Circumstances where the Accumulated Income in excess of 15% can be utilized for a purpose other than that for which it was Accumulated [Section 11(3A)]:

Where the income invested/deposited in approved modes cannot be applied for the purposes for which it was accumulated or set apart, due to circumstances beyond the control of the assessee, such assessee can make an application to the Assessing Officer specifying such other purpose for which he wants to utilize such accumulated income. Such other purposes should also be in conformity to the objects of the trust. The Assessing Officer in this case, may allow the application of such income to such other purposes. On such an application being allowed by the Assessing Officer, the funds may be accumulated and/or applied for the purposes newly specified and the provisions regarding withdrawal of exemption will be applicable on the basis that new purposes were the ones that had been specified in the notice for accumulation given under section 11(2).

However, the Assessing Officer shall not allow application of such income by way of payment or credit made for donation to other trust or other institutions, but the Assessing Officer may allow application of such accumulated income for the purpose of donation to other trust or institution in the year in which such trust or institution was dissolved.

6. Voluntary Contribution’ received by Trust – Tax Treatment

Voluntary contribution can be of two types:

(1) Voluntary Contribution with a specific direction that they shall form part of the Corpus of the Trust or Institution:

Such voluntary contributions received by the trust are fully exempt under section 11(1)(d) and the condition that at least 85% of the income should be applied during the previous year in which it is earned is not applicable in this case.

Restriction on exemption in case of corpus donation by exempt entities to other exempt entities registered under section 12AA

As per the existing provisions of the Act, donations made by a trust to any other trust or institution registered under section 12AA, except those made out of accumulated income, is considered as application of income for the purposes of its objects.

However, donation given by these exempts entitles to another exempt entity registered under section 12AA, with specific direction that it shall form part of corpus, is though considered application of income in the hands of donor trust but is not considered as income of the recipient trust as per section 11(1)(d). Trusts, thus, engage in giving corpus donations without actual applications.

(2) Voluntary Contributions not being contributions made with a specific direction that they shall form part of the Corpus of the Trust / Institution:

Such contributions are covered under section 12 and shall be deemed to be income derived from property held under trust wholly for charitable or religious purposes. Exemption of such contribution shall be allowed in the same manner as is allowed for income derived from property held under trust in section 11 and all the conditions including 85% of income to be applied in the same previous year as given above are applicable in this case.

7. Taxation of Anonymous Donations received by Trust (Section 115BBC)

Section 13 has been amended from the assessment year 2007- 08 to the effect that any anonymous donation will not be eligible for deduction under sections 11 and 12.

(1). What is Anonymous Donations received by Trust [Section 115BBC(3)]

The expression “anonymous donation” has been defined as follows—

  1. It is a voluntary contribution referred to in section 2(24)(iia).
  2. The person receiving such contribution does not maintain a record of—
    1. the identity indicating the name and address of the person making such contribution; and
    1. such other records as may be prescribed.

(2). Special Rate of Tax in case of Anonymous Donations received by Trust [Section 115BBC (1)]

“Anonymous donation” would be taxable at the rate of 30 %.

However, from the assessment year 2010-11, anonymous donations are taxable only to the extent such donation exceeds Rs. 1,00,000 or 5% of total donations received by the trust, whichever is higher.

(A). Institutions Liable to pay Tax on Anonymous Donations [Section 115BBC (1)]

Any income received by way of anonymous donations by the following entities shall be included in the total income and taxed at the rate of 30%. –

  1. any trust or institution referred to in section 11;
  2. any university or other educational institution referred to in section 10(23C) (iiiad) and (vi); i.e. its annual receipts is less than or more than Rs. 1 crore;
  3. any hospital or other institution referred to in section 10(23C) (iiiae) and (via); i.e. its annual receipts is less than or more than Rs. 1 crore;
  4. any fund or institution referred to in section 10(23C) (iv); and
  5. any trust or institution referred to in section 10(23C) (v).

(B). Institutions Not Liable to pay Tax on Anonymous Donations [Section 115BBC (2)] –

The following entities shall not be liable to pay tax on anonymous donations received by them:

  1. donations received by any trust or institution created or established ‘wholly for religious purposes ‘; and
  2. donations received by any trust or institution created or established for both religious as well as charitable purposes.

However, donation mentioned in (ii) (supra) does not include any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.

The following conclusions can be drawn from the aforesaid discussion : –

Institution receiving anonymous donationsTax treatment
Case 1 – Wholly religious entitiesSection 115BBC is not applicable
Case 2 – Partly religious and partly charitable entitiesIf anonymous donation is made to an educational or medical institution run by such entity, such anonymous donation is taxable at the rate of 30%. Any other anonymous donation is not subject to tax under section 115BBC
Case 3 – Wholly charitable entitiesAll anonymous donations are taxed at the rate of 30% under section 115BBC

(C) Tax on the Total Income of the Trust which include Anonymous Donation also:

Where the total income of a trust or an institution referred to in section 115BBC (1) includes an income by way of any anonymous donations, the income tax payable shall be the aggregate of—

  1. the amount of income-tax calculated at the rate of 30% on the aggregate of anonymous donations received in excess of the higher of the following, namely:
    1. 5% of the total donations received by the assesse; or
    1. Rs. 100,000 and
  2. the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of anonymous donations received in excess of the amount referred to in sub-clause (A) or sub-clause (B) of clause (i) above, as the case may be.

Therefore, if such amount of donation which is not treated as anonymous donation is not applied like any other income, it will become taxable.

(3). When Commercial Receipts exceeds Rs. 25,00,000 the specified threshold [Sec. 13(8)] –

Where the activity of any trust or institution is of the nature of advancement of any other object of general public utility, it involves carrying on of any activity in the nature of trade, commerce or business and the aggregate value of receipts from the commercial activities exceeds Rs. 25,00,000 in the previous year, then the purpose of such institution shall not be considered as charitable. Such trust or institution will not be entitled to get benefit of exemption with effect from the assessment year 2009-10 under sections 11 and 12 [and also section 10(23C)] in respect of its income for that previous year for which such receipts exceed Rs. 25,00,000.

8. Tax Treatment of Capital Gain in case of Charitable Trusts

Any profit or gain arising from the transfer of capital asset being property held under trust shall be treated as capital gain. Since such capital gain, whether short-term or long-term, is also part of the income as per section 2(24)(vi), to claim exemption under section 11 the Charitable Trust should also apply income from such capital gain for charitable purposes during the previous year like any other income. It means that trust shall have to apply at least 85% of the income from such capital gain for charitable purposes during the previous year subject to exception given under section 11(2).

1. Cases where income from Capital Gain shall be Deemed to have been applied for Charitable Purposes [Section 11(1A)]:

Section 11(1A) deals with two situations namely:

(A) Transfer of capital asset held under trust wholly for charitable or religious purposes.

(B) Transfer of capital asset held under trust in part only for charitable or religious purposes.

(A) Transfer of Capital Asset held under Trust Wholly for Charitable or Religious Purposes Section 11(1A)(a):

Where any capital asset being property held under trust wholly for charitable or religious purposes is transferred, and

  1. the whole of the net consideration is utilised for acquiring another capital asset; or
  2. part of the net consideration is utilised for acquiring another capital asset.

then, the capital gain arising from such transfer shall be deemed to have been applied to charitable purposes to the extent specified hereunder:

Amount of net consideration utilizedAmount deemed to be applied
(i) Where the whole of the net consideration of such asset is utilized in acquiring a new capital assetthe whole of the capital gain.
(ii) Where only a part of the net consideration is utilized for acquiring the new capital assetso much of such capital gain as is equal to the amount, if any, by which the amount so utilized exceeds the cost of the transferred asset i.e. amount invested minus cost of the transferred asset.

(B). Transfer of Capital Asset held under Trust in Part only for Charitable or Religious Purposes [Section 11(1A) (b)]:

As already discussed, such trusts are eligible for exemption under section 11 only when they have been created before the commencement of the Income-tax Act, 1961.

Where capital assets being a property held under trust in part only for such purposes is transferred, the treatment of capital gains shall be as under:

Amount of net consideration utilizedAmount deemed to be applied
(i) Where the whole of the net consideration of such asset is utilized in acquiring a new capital assetthe appropriate fraction of the capital gain arising from the transfer of the capital asset
(ii) in any other casethe exemption shall be limited to so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilized for acquiring the new capital assets, exceeds the appropriate fraction of the cost of the transferred asset.

9. Forfeiture of Exemption of Incomes of Charitable / Religious Trusts / Institutions by virtue of Section-13

The following incomes of charitable/religious trusts/institutions do not qualify for exemption under Section 11 and 12 by virtue of section 13:

(1). Any part of Income of Trusts for Private Religious Purposes – which does not ensure for the benefit of the public [Section 13(1)(a)].

Section 13(1)(a) shall not be applicable if the element of public benefit has been satisfied. It does not matter where the control lies, if the benefit accrues to public at large but the control is with specific group of persons, then section 13(1)(a) will not be attracted.

Any part of income from a property held under a trust for private religious purposes which does not ensure for the benefit of the public is not eligible for exemption under section 11 or 12.

(2). Income of Trusts established on or after 1.4.1962 for the Benefit of particular Religious Community or Caste [Section 13(1)(b)] –

Any income of trust/institution created/established for charitable purposes on or after 1.4.1962, if such trust or institution is created or established for the benefit of any particular religious community or caste [Section 13(1)(b)].

The exemption is however, available to a charitable trust or institution created or established before 1.4.1962 even if it is for the benefit of any particular religious community or caste.

(3). Income of Trusts for the Benefit of Interested Persons referred to in sub-section 13(3) [ Section 13(1)(c)]

If religious/charitable trust/institution is created or established after 1.4.1962 and any part of its income ensures directly or indirectly under the rules governing the trust, for the benefit of any person specified in section 13(3) then the entire income of such trust is not eligible for exemption under section 11 or 12.

(4). Fund not Invested by Trusts in Section 11(5)

Income of a trust/institution is not eligible for exemption under section 11 or 12 if its funds are invested/deposited otherwise than in the forms specified in section 11(5).

In this regard the following points should be noted:

  1. The exemption under section 11(1)(a) is available only if at least 85 % of the income is applied for charitable/religious purposes in India during the year and the remaining amount is invested in the forms/ modes specified under section 11(5). Thus, both the requirements will have to be fulfilled before the trust can claim and avail of the exemption under section 11(1)(a).
  2. Any charitable or religious trust or institution will forfeit exemption from tax if any funds of the trust or institution are invested or deposited, after February 28, 1983, otherwise than in any one or more of the modes specified in section 11(5).

(5). Charitable Trusts not to lose Exemption if Educational or Medical Facilities provided to Specified Persons [Section 13(6)]:

Sections 12(2) and 13(6) provide as follows—

  1. Income of a charitable or religious trust will not be exempt if any part of such income or any property of the trust is used or applied directly or indirectly for the benefit of any person such as the author of the trust, trustee or any relative of such persons or any concerns in which such persons have a substantial interest .

    Sub-section (6) was inserted in section 13 with effect from the assessment year 2001-02. It provides that a charitable or religious trust running an educational institution or a medical institution or a hospital shall not be denied the benefit of exemption under section 11 or section 12, in relation to any income by reason only that such trust has provided educational or medical facilities to interested persons.
  2. Sub-section (2) was inserted in section 12 with effect from the assessment year 2001-02. It provides that the value of any medical or educational services made available by any charitable or religious trust running a hospital or medical institution or an educational institution to any interested person shall be deemed to be the income of such trust or institution derived from property held under trust wholly for charitable or religious purposes during the previous year in which such services are so provided and shall be chargeable to income-tax notwithstanding the provisions of section 11(1).

(6). EXCEPTION – In the cases given below, Exemption is Not Forfeited even if funds are invested otherwise than in the Modes specified in section 11(5): [Section 13(1)(d)]

The provisions of section 13(1)(d) shall not apply to the under mentioned:

  1. The exemption is not denied in relation to assets held by the trust or institution where such assets form a part of the corpus of the trust or institution as on June 1, 1973.
  2. Similarly, exemption is not denied in relation to any accretion to the assets, being shares of a company forming part of the corpus of the trust or institution as on June 1, 1973, where such accretion arises by way of allotment of bonus shares.
  3. Exemption is not forfeited in relation to debentures acquired by the trust or institution before March 1, 1983. Where debentures of an Indian company are acquired by the trust or institution after February 28, 1983 but before July 25, 1991, the exemption from tax under section 11 will be denied only in respect of interest on such debentures†. If, however, such debentures are not disinvested by March 31, 1992, the trust or institution will lose exemption under section 11.
  4. Exemption is not forfeited in relation to any funds representing the profits and gains of a business, if the trust/institution maintains separate books of account in respect of such business.
  5. Acceptance of donations in kind or acquiring any asset not conforming to the provision of section 11(5) will not make the fund or trust or institution lose tax exemption. The trust or institution shall be required to dispose of or convert the asset not conforming to the requirement of section 11(5) into permissible investment within one year from the end of the financial year in which such assets are acquired or March 31, 1993, whichever is later.

10. Tax treatment of Public Charitable / Religious Trust

In the following cases income of a charitable/religious trust which is not exempt under section 11 or 12 is chargeable to tax as if it is the income of an association of persons:

  1. income from property held under trust wholly for charitable or religious purposes;
  2. voluntary contributions without any direction that they shall form a part of the corpus of trust; or
  3. income of trust or institution being profits and gains of business which is incidental to the attainment of the objectives of trust and separate books of account are maintained.

(1). Levy of Tax at Maximum Marginal Rate (MMR) in case of Public Charitable and Religious Trusts which Forfeit Tax Exemption –

Charitable or religious trusts, which may otherwise be eligible for tax exemption, are liable to forfeit this exemption in the following circumstances, namely:

  1. Where the trust is created after March 31, 1962, any part of the income of the trust, under the terms of the trust deed, directly or indirectly, for the benefit of specified categories of persons such as, the author of the trust, trustee or manager of the trust, substantial contributor to the trust and any relative of such author, trustee, etc.
  2. Any part of the income or any property of the trust (whenever created) is used or applied during the relevant year, directly or indirectly, for the benefit of specified categories of persons.
  3. The trust funds (with certain exceptions) are invested in contravention of the investment pattern of such funds.

Where a charitable or religious trust forfeits tax exemption in the circumstances mentioned at (1) to (3) above, the trust shall be charged to tax at the maximum marginal rate (i.e., 35.535 % for the assessment year 2018-19 and 35.88 % for the assessment year 2019-20).

(2). Levy of Tax at the Maximum Marginal Rate (MMR) where a Charitable Trust Ceases to Exist or Converts into a Non-Charitable Entity [Section 115TD] –

Section 115TD is inserted with effect from June 1, 2016. This section provides for levy of additional income-tax in case of conversion into, or merger with, any non-charitable form or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution. The elements of the regime are—

  1. The accretion in income (accreted income) of the trust or institution shall be taxable on conversion of trust or institution into a form not eligible for registration under section 12AA or on merger into an entity not having similar objects and registered under section 12AA or on non-distribution of assets on dissolution to any charitable institution registered under section 12AA or approved under section 10(23C) within a period of 12 months from dissolution.
  2. For the above purpose, a trust or institution shall be deemed to have been converted into any form (not eligible for registration under section 12AA) in a previous year, if –
    1. the registration granted to it under section 12AA has been cancelled; or
    2. it has modified its objects and not applied for fresh registration (or fresh registration application has been rejected).
  3. Accreted income shall be amount of aggregate of total assets as reduced by the liability as on the specified date (mode of valuation is yet to be notified). The asset and the liability of the charitable organisation which have been transferred to another charitable organisation within specified time will be excluded while calculating accreted income.
  4. So much of the accreted income as is attributable to the following asset and liability, if any, related to such asset shall be ignored for the purposes of computation of accreted income –
    – Any asset which is established to have been directly acquired by the trust or institution out of agricultural income as is referred to in section 10(1).
    – Any asset acquired by the trust/institution during the period beginning from the date of its creation and ending on the date from which the registration under section 12AA became effective or deemed effective.
  5. The taxation of accreted income shall be at the maximum marginal rate (i.e., 35.535 % for the assessment year 2018-19 and 35.88 % for the assessment year 2019-20).
  6. This levy shall be in addition to any income chargeable to tax in the hands of the entity.
  7. This tax shall be final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it shall be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.
  8. In case of failure of payment of tax within the prescribed time a simple interest @ 1 % per month (or part of it) shall be applicable for the period of non-payment.
  9. For the purpose of recovery of tax and interest, the principal officer or the trustee and the trust or the institution shall be deemed to be assessee in default and all provisions related to the recovery of taxes shall apply.

(3.) Accreted income of Trust or Institution to be Taxed at the Maximum Marginal Rate (MMR) in certain cases [Section 115TD (1)]:

Notwithstanding anything contained in this Act, where in any previous year, a trust or institution registered under section 12AA has—

  1. converted into any form which is not eligible for grant of registration under section 12AA;
  2. merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA; or
  3. failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via), within a period of 12 months from the end of the month in which the dissolution takes place,

then, in addition to the income-tax chargeable in respect of the total income of such trust or institution, the accreted income of the trust or the institution as on the specified date shall be charged to tax and such trust or institution, as the case may be, shall be liable to pay additional income-tax (herein referred to as tax on accreted income) at the maximum marginal rate on the accreted income.

(4). Tax on the Accreted Income to be payable even if no Income-tax is payable on Total Income of the Trust or Institution [Section 115TD (4)]:

Notwithstanding that no income-tax is payable by a trust or the institution on its total income computed in accordance with the provisions of this Act, the tax on the accreted income under section 115TD (1) shall be payable by such trust or the institution.

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