Intensive Workshop on Direct Taxes

Tax Exemptions for Charitable Trusts

SIRC, Chennai

6th May 2016

CA M. Kandasami, FCA, DISA

Kandasami & Associates Chennai, India

Session – 1

An overview of provisions for

NPO exemptions

The Context and Background

An overview of IT Act for NPOs

Queries & Problems – Afternoon

A Plan of this Presentation

Legal Forms of NPOs 3

Public Trusts Societies Companies (Sec 8/25) Created by Courts

Regulatory Framework

Incorporation Laws

Other laws and Regulations

Social Security Laws

Incorporation Laws

Indian Trusts Act, 1882

Societies Registration Act,

1860 or respective State Laws

Section 8/25 companies under Companies Act,

2013/1956

Cooperative Societies Act / Mutually Aided

Cooperative Societies Act (MACs)

Other Laws and Regulations

Service Tax, Land & Building Tax

etc.

Foreign Contribution

(Regulation) Act, 2010

Income Tax Act, 1961

Social Security Laws and Regulations

The Employees’ Provident Fund And Miscellaneous Provisions Act, 1952

Payment of Gratuity Act, 1972

The Employees State Insurance Act, 1948

The Payment of Bonus Act, 1965

The Minimum Wages Act, 1948

Income Tax Act And Charity

Chapter XII-EB Tax on accreted income of Trusts

Section 115TD,

Definition of Accreted Income, Levy of income Tax etc.

Sections 115TE

Interest on the above tax

Sections 115TF

When the assessee in default

Definitions of key terms

S. 2(15), 2(24)

Organisational Exemptions

S. 10(23C), 11 – 13

Donor Exemptions

S. 80G & 35, 35AC

Tax Deduction at Source and

E-filing

Brief Overview of Provisions

EVOLUTION OF DEFINITION OF CHARITABLE PURPOSE

Section 4(3) of the IT act 1922 corresponds with Section 2(15)

Section 2(15) at the time of enactment of the 1961 act:

“Charitable purpose includes “relief of the poor, education, medical relief and

advancement of any other object of general public utility not involving the carrying on of any activity

for profit”.

Only one amendment to section 2(15) so far in 1983. “Not involving the carrying on of any activity for

profit” removed and thus pre 1962 position restored

13

Section 2(15) defines “Charitable Purpose”

Relief of the Poor

Education

Yoga (in Finance Act 2015)

Medical Relief

Preservation of Environment/ Monuments

Advancement of any other objects of GPU

Section 2(15) Proviso Advancement of any other object of general public utility shall not be a charitable purpose, if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service to above, 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 Unless (i) such activity is undertaken in the course of actual carrying out of such AO AO OO GPU and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts of the trust or institution undertaking such activity or activities of that PY. 14

something for nothing or something less than the cost is eligible

Work at living wages can be provided to poor and middle class people

Jaipur Charitable Trust v. CIT (1981) 127 ITR 620 (Del) Cross subsidisation is also eligible. Help to the settlor’s “poor relations” not eligible.

CIT v. Jamal Mohamad Sahib [1941] 9 ITR 375 (Mad)

Mullick Somnath Charitable Trust V.CIT (1986) 160 ITR 3 (Cal)

15

Relief of the poor- First limb of Section 2 (15)

Education Systematic instruction, schooling or training given

is education.

Every acquisition of further knowledge not included. Publishing news papers not ‘education’.

Training and developing the knowledge, skill, mind and character of students by normal schooling.

Sole Trustee, Loka Shikshana Trust Vs. CIT (1975) 101 ITR 234(SC)

Education would include raising artistic taste by dramas, musical shows etc. In this sense, cultural education would also be included.

CIT vs. Sri Thyaga Brahma Gana Sabha (1991) 188 ITR 160 (Mad.)

Education Educating public in safety, protection and health among

industrial workers is education. Sec 10(22) DIT Vs. National Safety Council (2008) 305 ITR 257 (Bom) Coaching imparted for appearing in a particular

competitive exam is not education for the purpose of sec 10(22)

Bihar Institute Of Mining & Mine Surveying Vs. CIT (1994) 208 ITR 608, 615 (Pat.)

Vocational Training is education CIT Vs. Shri Ram Educaition Foundation (2001) 250 ITR

504, (Del) Imparting instruction to craftman was public utility Victoria Technical Institute Vs. Addl.CIT (1991) 188 ITR 57,

(SC)

Medical Relief does not mean that it is to be

provided at a free of cost.

It is permissible if the medical institution charges the market price for patients.

18

Medical Relief -Third limb of Section 2 (15)

“General” means pertaining to a whole class. “Public” means the body of people at large and “Utility” means

usefulness . Beneficial to the public or a section of public as distinguished

from an individual or group of individual would be a charitable purposes.

Objects for welfare of a trade or industry Vs welfare of persons managing trade or industry.

Association to promote, aid, help, encourage and develop hire purchase business is public utility

It promotes the development of trade and commerce and industry in a part of this country

CIT Vs. South India Hire purchase Association ( 1979) 116 ITR 793 (Mad)

General Public Utility

Promotion, protection, aiding trade, commerce & industry is a general utility purpose

CIT Vs. Andhra Chamber of Commerce (1965) 55 ITR 722 (SC) ACIT Vs. Surat Art Silk Cloth Manufacturers Association (1980)

121 ITR 1 (SC) CIT vs. Bharath Diomand Bourse (2000) 245 ITR 437 (Bom)

Expenses on giving monetary help on marriage of poor girls of one community and on thread ceremony – public objects, eligible for exemption CIT Vs. PT Ram sankar mishra trust (1996) 222 ITR 252 (All)

General Public Utility

Practical issues

Micro Finance Activities Vocational Education Benefit only to members Consultancy by NPOs

A system of belief and worship usually in a supreme being

A religion is not merely an

opinion, doctrine or belief but involves an outward expression in acts as well. AIR 1952 SC 282

Religious Purpose

For IT purpose, Trusts include any other legal obligation (Society, Company etc.)

Charitable Trusts

Religious Trusts

Religious cum Charitable Trusts

Religious cum Charitable Trust

Practical issues

Religious cum Charitable

Whether 12AA possible? If so, then as Religious/ Charitable?

80G status (Religious cum Charitable)

Definition of "Income" Sec 2(24(iia)

(i) Profits and Gains

(ii) Dividend

(iia) Voluntary Contributions

Practical Issues

Foreign Contributions

Specific Funds

Income Vs Receipts

Govt. Salaries in NPOs

Organisational Exemptions

Total Exemptions

Annual / Conditional Exemptions

Income Tax

Income Tax

• Research Institutions - U/s 10(21)

• Educational Institutions - 10(23C)(iii ab )(iii ad)(vi)

• Medical Institutions - 10(23C)(iii ac )(iii ae)(via)

• Public Charitable Institutions - 10(23C)(iv)

• Public Religious Institutions - 10(23C)(v)

Income Tax

Total Exemptions?

Educational – 10(22) –

Removed from 1-4-1999 Medical (10(22A) Removed from 1-4-1999 Govt. Salaries in NPOs No exemption

Sec Education

Medical

Conditions

10 (23C)

(iii ab) (iii ac) Substantially financed by Government (Exceeds 50%-Rule 2BBB wef 1.4.2015)

10 (23C)

(iii ad) (iii ae) Gross Receipts below 1 Crores

10 (23C)

(vi) (via) Gross Receipts above 1 Crore

10 (23C)(iv)

Charitable Institution of importance through out India or through out the state

10 (23C)(v) Religious institution

Total Exemption Income Tax

Total Exemptions-Section 10 (23C) Continued…

Section 10(23C) - Proviso 14 to 17

14 – Application on or before 30th Sept.

15 - Anonymous donation u/s 155BBC

16 - Prescribed Authority CCIT wef -1-6-2007/CIT wef Nov 2014 17 - Applicability of 1st Proviso to amended

section 2(15) of the Income Tax Act 1961

Annual / Conditional Exemptions

Income Tax

Sl. No.

Annual Exemptions Sections

1 Registration

12A / 12 AA

2 Compulsory Audit of Accounts 12A(b)]

3 Application of Income (85%) 11(1)(a)

4 Accumulation of Income 11 (1) and 11(2)

5 Investment under section 11(5)

6 Filing Return of Income 139(4A)

Annual Exemptions

Income Tax

• Introduced by Finance Act 1972 w. e. f 1.4.1973

• Application in Form No. 10A with attachments

• Procedure prescribed under section 12AA

• Time limit for order- six months from date of filing

• Wef 1-6-2007, no condonation but wef 1-10-2014, registration granted helps in getting exemption for earlier years .

Income Tax

• Cancellation of registration (1.10.2004- U/s 12AA(3)

• Reasons for cancellation - Activities not genuine, Not carried out in accordance with its objectives

• Power for cancellation expanded – Income does not enure for the public, for particular religious community or caste, Income/property applied for interested persons and investments are not in accordance with section 11(5) & 13(1)(d) of the Act

Income Tax

• Compulsory Audit - U/s 12(A)(b)

• Audit Report in Form No. 10B – Sec 11 Exemption

• Report in Form No. 10BB - Sec 10(23C) Exemptions

Income Tax

39

Mandatory audit Compliance

Limit for compulsory Audit Basic Exemption Corpus donations includible

Time limit for filing the Report can be filed anytime before completion of

assessment or even at the time of appeal (Electronic filing regime – 10B filed before

uploading return)

Computation

Gross income

Minus

Automatic Accumulation

15%

Minus

Application of income (Expenses)

Balance

Can be FULLY accumulated

and spent over 1 or 5 years

S. 11

Operation of Section 11 Exemption

Particulars Rs. lacs

Gross receipts 100

Less: Deduction u/s 11(1)(a) (15)

Balance income to be applied 85 Less: Income applied Revenue expenses 70 Capital expenses 15 (85) Total Income Nil

Computation of income Fully spent

Gross receipts 100

Less: Deduction u/s 11(1)(a) (15)

Balance income to be applied 85

Less: Income applied Revenue expenses 50 Capital expenses 25 (75) Balance Income 10 Less: Acc. & set apart – Exp 2 to Sec 11(1)(a) for 1 year

10

Total Income Nil

Acc. 1 year Computation of income

Gross receipts 100

Less: Deduction u/s 11(1)(a) (15)

Balance income to be applied 85

Less: Income applied Revenue expenses 40 Capital expenses 10 (50) Balance Income 35 Less: Acc. & set apart – Sec 11(2) 5 years

(35)

Total Income Nil

Acc. 5 years Computation of income

Gross receipts 100

Less: Deduction u/s 11(1)(a) (15)

Balance income to be applied 85

Less: Income applied Donation to another Trust 85 (85) Balance Income 0 Total Income Nil

Acc. 5 years Computation of income

Accumulation of Surplus Income Tax

Option 1: Exp 2 to Sec 11(1)(a) Accumulate and spend in one year

Option 2: 11(2) Accumulate for 5 years – for specific purposes GB resolution, application in Form 10, invt. In specified modes If not spent in this time span, then taxable as income

Earlier Provision

• Minimum application was 75% of the total income up to AY 2002-03

• Accumulation was possible up to 10 years from the year of accumulation

• Inter trust transfer was possible up to assessment year 2002-03

Later developments

• The minimum application was raised to 85% from the AY 2003-04 by the Finance Act 2002

• The limit of 10 years for accumulation was decreased to 5 years w.e.f. 1.4.2002 by the Finance Act 2001

• Inter trust transfer from the accumulated surplus is prohibited from 1.4.2003 by the Finance Act 2002

Accumulation of Surplus

Income Tax

U/s 11(1) for one year

• First time, new form introduced

• Form No. 9A wef 1.4.2016

• No further formalities

U/s 11(2) for 5 years

• Resolution of the Governing Body or Board of Trustees

• Investment of surplus in modes prescribed U/s 11(5)

• Filing of Form No. 10 amended wef 1.4.2016

• Tracking timely utilisation

Accumulation of Surplus U/s 11

Income Tax

Capital Gains (11(1A)

Sale of properties Capital Gain arises To be invested in another asset FDs for 6 months

Earlier Provision • Filing of return of income

was mandatory u/s 139(4A) of the Act w.e.f 1.4.1973 for Trusts and institutions claiming exemption under section 11 of the Act

Later developments • Finance Act 2002 through139(4C)

made filing of return mandatory for Scientific research Association Sec 10(21) and Fund or institution exempted under section 10(23C)(iv), (v), (vi) and (via)

• TLA Act 2006 made filing of return mandatory for institutions exempt under section 10(23C)(iiiad) and (iiiae) and

• From 1.4.2016, entities exempt under section 10(23C)(iiiab) and (iiiac) should also file the returns mandatorily.

Filing of returns U/s 139(4C)

Income Tax

Assessment Process?

Good preparation is a must Questionnaire - Educative Understand and answer it Positive/ useful experience

Donor Exemptions

Section 80G Section 35 AC

& Section 35 (1) (ii)

Income Tax

Recognition u/s 80 G (50%, 100%)

Exemption u/s 35 (1) (iii)

Expenditure on eligible project or scheme u/s 35AC

Income Tax

DONOR EXEMPTIONS TYPES OF DONOR EXEMPTIONS AND REBATES

S. No.

Section Particulars Eligibility for Donor

Amount of relief for donor

1 35(1) (iii) Expenditure on research in Science/ Social Science

Assessees carrying on business

175% / 125%

2 35AC Expenditure on eligible projects or schemes for promoting social and economic

Assessees carrying on business

100%

3 80G(50% RELIEF)

Donations to charitable Institutions

All assessees 50% Restricted to 10% of Gross Total Income

Income Tax

TYPES OF DONOR EXEMPTIONS AND REBATES S.

No Sec Particulars Eligible Donors Amount of

relief for donor 4 80G

(100% relief)

Donation to • P.M. National Relief

Fund • P.M. Armenia

Earthquake fund and others; • approved university

or educational Institution

All assessees 100%

5 80GGA Donation for Research in social science or in Rural Development

For non business assessees

100%

Income Tax

Tax Deduction at Source and

Non Deduction

On Payments On Receipts

Income Tax

Tax Deduction at Source

Assessee expected to comply with all TDS provisions

No special exemptions to charitable organisations

However, Sec 40 (a) (ia) disallowance doesn’t apply as on date

Interest and Penalty (incl. late filing fee u/s 234E) applicable

Income Tax

Issue of Certificate u/s 197 for Non deduction of Tax at Source

Assessee Files application in Form No. 13

Certificate u/s 197 for non deduction issued by TDS ward

Assessee provides certificate to deductor

IF not obtained by assessee then refund claim submitted along with return

Income Tax

58

Not defined

written direction from donor is required.

Corpus Donations, is it income?

Corpus donations up to 1988-1989 were outside the purview of income

u/s 2(24)(iia), from 1.4.1989, exempted u/s 11(1)(d).

Can corpus donations be received through offertory boxes?

Corpus Donations (Section 11(1)(d)

There are no specific provisions for carry forward of deficit.

The Courts have held that if a trust has incurred a deficit during

a particular year, then the surplus made by it in a subsequent

year to make up for the past deficit should be allowed to be set

off against such deficit.

CIT vs Maharana of Mewar Charitable Foundation 164 ITR 439

(Raj.),

CIT vs. Shri Plot Swetambar Murti Pujak Jain Mandal, 211 ITR

293 (Guj.)

Carry Forward of Deficit

60

Anonymous donation Section 115 BBC introduced w.e.f. 1.4.2007

Section 115 BBC (3): Anonymous donation means

Where a person receiving contribution does not maintain a record of identity (Name and address of the donor), any other particulars

Anonymous donations liable to be taxed at 30% plus SC.

Exclusions

- wholly religious trust - Wholly religious and charitable trust, (but will apply to

donations made with specific direction that it is for any university, educational institute or hospital etc.)

Trust covered by s.10(23C)(iiiab)/(iiiac)

..the income tax payable shall be aggregate of 1) 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:

a) 5% of total donations received by the assessee; or b) One lakh rupees, and

2) 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 B of clause (i)

61

62

Section 11 (4A) Business Income of a Trust

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:

The business carried on is incidental to the attainment of the

objects of the trust and

Separate books of accounts are maintained in respect of such

business

Audit is required if income > maximum amount not chargeable to income tax

This is an audit necessary under the Income Tax Act and is

distinct from an audit, which may be necessary under the

Bombay Public Trust Act or a similar statute under the

relevant State law

An audit has to be conducted under the Income tax Act and

an audit report furnished in form 10B

While computing the limit for conducting an audit, exempt

gross receipts have to be considered

63

Section 11 (4A) Business Income of a Trust continued…

Allowable as per commercial concept of income –

Several decisions

Now allowable – Also decisions and department

has not been allowing

Finance Bill 2014

If the capital asset already has been claimed as application, then no depreciation can allowed

Status of Depreciation

6

Denial of Exemption

Lending funds without adequate security or interest

Land, building other property made available without adequate

compensation

Salary / remuneration in excess of reasonable amount

Services of the trust made available without adequate

compensation

Sale or purchase of shares or security for other than market value

Funds invested in a concern in which the person has a substantial

interest

66

Section 13(2) – Income /Property used for person mentioned in Sec 13(3)

6

Denial of exemption Denial of Exemption

1. While claiming exemption u/s 11, one cannot claim any other exemption u/s 10 other than 10(1) and 10(23C)

2. Depreciation not allowed as application if the asset has already been claimed as application

3. 12A(2)–If granted, no need to reopen the

assessment for earlier years Proviso 1 & 2 – Cancellation powers expanded – Violation 11(5) & 13(1)(d)

Amendments by Finance Act 2014

4. 115BBC – Rs. 1 lakh or 5% whichever is

higher will be added to other income for

application purposes

5. Substantially funded by the Govt. – Finance

Bill 2014 says that the Govt. will decide such

percentage as may be notified – (Rule 2BBB

already notified wef 12.12.2014)

Amendments by Finance Act 2014

1. Yoga included in the definition of

Charitable purpose

2. Form No. 10 for accumulation of income

to be filed on or before filing the return of

income and return of income should be

within the time limit or else accumulation

will not be allowed

Amendments by Finance Act 2015

Chapter XII-EB Tax on accreted income of Trusts

Section 115TD,

Definition of Accreted Income, Levy of income Tax etc.

Sections 115TE

Interest on the above tax

Sections 115TF

When the assessee in default