Presented by Subash Agarwal, Advocate

TAXATION OF CHARITABLE TRUST AND NGOs

CHARITABLE PURPOSE - MEANING

1. Dissecting the meaning as contained in section 2(15)-

(A)It includes-

(i) Relief to the poor

(ii) Education

(iii) Medical Relief

(iv) Preservation of Monuments etc.

(v) Advancement of any other object of general

public utility (AGPU)

(B) First Proviso:

AGPU is not charitable purpose w.e.f. A.Y.: 2009-

2010 when-

 

(i) Involves carrying on trade, commerce

or business or

(ii) Any service in relation to trade, commerce or

business for consideration irrespective of the

nature of use / application of income from such

activity.

(C) Second Proviso:

The embargo under (B) will not

apply if the aggregate of receipts

from the activities referred is Rs. 25

lacs or above.

2. What is the effect of amendment

(w.e.f. A.Y.: 2009-2010) :???

i.e. insertion of the first proviso.

2.1 Whether the institutions

carrying on “any other object of

general public utility (AGPU) will lose

the entire exemption or only on income

from business for violation mentioned

in first proviso??

2.2 Ans: It will lose exemption from the entire income.

 

 

The Act has specifically provided wherever partial exemption is lost i.e. in section 13, clause (a).

 The instant amendment has been placed in the

definition of “charitable purpose” and not in section 13.

Special Comment

 Provision of Section 11(4A) remains applicable to

first four clauses of “charitable purpose” but not

the residuary clause i.e., AGPU.

Section 11(4A) provides –

Benefit of exemption is available if business is

incidental to the attainment of the objective and

separate books of accounst are maintained.

3. Amendment in the definition of “charitable

purpose”-

A critique –

(a) AGPU covers some very important objects

presently being pursued by the NGOs / charitable

institutions.

(b) Some of these objects are even covered by Article

51A of Part IV – A of the Indian Constitution like

–

  (i) Promotion of ideals of national sovereignty

and unity.

 

(ii) National Service.

 

(iii) Promoting Brotherhood among the citizens.

 

(iv) Upholding the dignity of women.

(c) Objectives of some institutions are also in

conformity with the “Directive Principles of State

Policy” enshrined in the Constitution like-

  (i) Free legal aid.

 

(ii) Promotion of agriculture, animal

husbandry.

 

(iii) Promotion of International peace and

security.

 

(d) All such cases will be affected if such institutions

charge some fee / consideration for small services

rendered.

  It may be construed as –

 

(i) Carrying on trade, commerce or business or

  (ii) Any service in relation to trade, commerce or

business. 

 

(e) The Hon’ble Finance Minister in reply to the

debate in the Lok Sabha on the Finance Bill, 2008

had stated in regard to the Chambers of Commerce

and similar organisations rendering service to their

members that they would not be affected by the

amendments. The CBDT would issue a clarificatory

circular containing guidelines in this regard.

(f)Circular No. 11/2008 dated 19.12.2008 was issued with reference

to the amendment in Section 2(15). Gist of the Circular is –

  (i) Trade Associations are covered under “ any other

object of general public utility” (AGPU).

  (ii) Those following the principle of mutuality and

confining their activity within their members will not

be affected by the proviso to section 2(15).

(iii) Those dealing with non-members will be affected by

the proviso.

So, the Finance Minister has reneged on the promise

made on the floor of the House.

4. Is ICAI vulnerable to the

new amendment in section

2(15)???

4.1 Yes.

Reason

  The Department has already taken a view in the

Institute’s case that imparting coaching to the

students amount to carrying on trade,

commerce or business.

  In Writ petition filed before the Delhi High

Court, court has analysed the expression

appearing in section 2(15) upto 31.03.1984 –

“AGPU not involving carrying on any activity

for profit”.

 Contrasted it with the current expression –

“Carrying on trade, commerce or business”.

 

Held,

“Profit motive” is not the sole determinative factor. In some cases,

even without profit motive, an activity may be considered to be

“business” if it is continued on sound and recognized business

principles, and pursued with reasonable continuity.

 

Matter was remanded back with these observations.

 

The issue is still open and may go either way.

 

5.My Suggestion

ICAI and Trade Bodies should make a strong

representation to the government that even

genuine and bonafide charitable activities are

being affected due to the amendment.

 

 

6.Formation of charitable organisation

Normally seen in the following forms –

a)Sec. 25- company under the Companies Act.

b)A Society registered under the Societies

Registration Act, 1860 or any other state or

Central Law

c)A Charitable Trust

 

7. Income of Charitable Organisations

Whether “income for the purpose of

computation under the Act is “total income”

under the Act or the income in the

commercial sense???

 7.1 Answer: Section 11(1) provides that the following

income shall not be included in the total income-

(a) income derived from property held under trust wholly for

charitable or religious purpose, to the extent to which such income

is applied to such purposes in India; and, where any such income

is accumulated or set apart for application to such purposes in

India, to the extent to which the income so accumulated or set

apart is not in excess of fifteen per cent of the income from such

property;

Thus, the reference is to “Income” and not the “total income”

Thus, income here means income in the commercial sense.

  7.2 Important case-laws on the subject 

CIT vs. Jayashree Charity Trust 159 ITR 280 (Cal)Held,

(i)“Income” here is confined to real income.

(ii)TDS which has been deducted cannot be taken as income.

Same view in- CIT vs. Birla Janahit Trust 208 ITR 372 (Cal.)

(b) CIT vs. Trustees of H.E. H the Nizam’s

Supplemental Religious Endowment Trust 127 ITR

378 (A.P.)

Held,

(i)In computing income of a trust, accounts alone

can be taken into consideration.

(ii) Payment of income-tax and wealth-tax are

incidental to the carrying out of the charitable

purpose.

 

(c)CIT vs. Janaki Ammal Ayya Nadar Trust

153 ITR 159 (Mad.)

Expenditure incurred by way of payment of

tax has to be considered as application for

charitable purpose.

 

(d)CIT vs. Rao Bahadur Calavala Cunnan Chetty

Charities 135 ITR 485 (Mad.)

“Income” has to be arrived at after taking into

account the receipts and deduction of

establishment expenditures. The net amount will be

available for application for charitable purposes

and will be considered as income for the purpose of

section 11.

7.3 A case Study

Azimji Trust incurred a loss of Rs. 55,000/-

on sale of preference shares, which is debited in

the I & E A/c under the head “Loss on sale of

Investment”.

Whether loss can be reduced from the gross

income?

Note: The sale was made by the ‘a’ to comply with the

amended provision of section 13(1)(d) of the Act.

 7.4 Answer

Calcutta High Court in the similar

circumstances in the case of Hindustan Welfare

Trust vs. DIT (E) 201 ITR 564 held -

“The real income has to be taken into account for

the purpose of considering the exemption u/s 13

of the Act. If there is any loss that cannot form

part of the real income of the trust and it has to

be excluded from consideration”.

 

8. An important Question

A Charitable / Religious Trust’s income is exempt

by virtue of section 11(1), according to which,

such income is exempt as is derived from

property held under trust wholly for charitable /

religious purpose to the extent to which such

income is applied to such purposes in India.

 Then, how come income from sources other than property like –

(a) voluntary donations

(b) interest from F.Ds

(c) interest from loans

(d) dividends

(e) subscriptions

(f) rental income from self acquired property are

claimed as exempt u/s 11(1)???

8.1 Answer

(a) India Spinners Association vs. CIT

12 ITR 482 (PC)

“Property does not necessarily mean certain movable or

immovable assets in the name of the organisation from

which the income is to be derived. The goodwill of the

organisation by virtue of which donations are raised can

also be considered as property. Similarly, all lawful

income would be considered for the purposes of section

11 subject to other provisions”. 

 (b) CIT vs. Cotton Textiles Export Promotion Council

67 ITR 539 (Bom.)“We have already held that the property held under trust was the business

or organisation itself and whether we consider either of the two sources of income of this company, namely, the grant or the subscription from its members, both arose directly and substantially from that business or organisation. If the organisation has not existed, the grants would not have been paid to the company nor would the subscriptions have been received by the company. Therefore, even upon the construction put upon the word "derived" the income would be derived from the business or organisation which we hold was the property held under trust in this case.

Under the circumstances, therefore, we think that view taken by the Tribunal was the correct view and the income of the assessee would be exempt under the provisions of section 4 (3) (i) of the Act.”

 9. Some Important Issues In the

Computation of Income of Charitable

Organisations

 (A) Depreciation

Issues

(a)Whether depreciation debited to accounts is to be

deducted to arrive at the income available for application

to charitable purpose?

(b)Whether amount spent on acquiring an asset be treated

as application of income in the year of acquisition?

(c)If the answer in (b) is yes, whether depreciation of such

asset be claimed in the subsequent years?

  9.1 Answer

(a) (i) CIT vs. Society of the Sisters of St. Anne

146 ITR 28 (Karn.)

- Allowance of depreciation is

essential for the purpose of arriving at income available

for distribution for application to charity.

- The amount of depreciation is not the income

available for application with the assessee.

- Reliance placed on Spicer & Pegler’s Book

Keeping & Accounts

(ii) CIT vs. Sheth Manilal Ranchhoddas Vishram

Bhavan Trust 198 ITR 598 (Guj.)

“The amount of depreciation debited to the accounts

had to be deducted to arrive at the income available for

application to charitable purpose.”

(iii) CIT vs. Tiny Tots Education Society 330 ITR 21 (Pun.

& Har.)

ITA No. 93 of 2010 for A.Y.: 2006 – 2007

- Deptt. Placed reliance on Escorts Ltd.’s case 199 ITR 43 (SC)

- Held,

In CIT vs. Market Committee 330 ITR 16 (P & H.), the

judgement in Escorts’ case was considered and was held not to be

applicable to the situation where depreciation was claimed by a

charitable institution in determining percentage of funds applied

for the purpose of charitable objects.

(b) Yes, the entire cost of acquisition of a capital asset may

be treated as application of funds if such acquisition is

incidental to the charitable object of the Trust.

This view finds support from a recent judgement in –

CIT vs. Manav Mangal Society 328 ITR 421 (P & H)

However, ICAI’s Guidance Note on

Audit of Public Charitable Institutions, Annexure VI

(pages 121 and 122) considers the issue debatable.

(c) Yes, depreciation can be claimed in subsequent years.

- DIT(E) vs. Framjee Cawasjee Institute 109 CTR 463

(Bom.)

- CIT vs. Manav Mangal Society (Supra) –

Same view

- CIT vs. Institute of Banking 264 ITR 110 (Bom.)

Also held, depreciation was deductible even when cost

of acquisition to the assessee was NIL.

(B) Another important issue on Computation of

Income

(a) Whether “Income” means gross or net income??

(a) A Case-Study

Azimji Trust’s gross income is Rs.1 cr. Establishment

cost is Rs. 90 Lacs.

Option 1

Income: Rs.1,00,00,000/-

Less: Application: Rs. 90,00,000/-

(Estab. Cost)

Surplus Rs. 10,00,000/-

Amount available for

Accumulation @ 15% Rs. 1,50,000/-

Taxable Rs. 8,50,000/-

Option 2

Income: Rs.1,00,00,000/-

Less: Amount available for

Accumulation @ 15% Rs. 15,00,000/-

Available for application Rs. 85,00,000/-

Application for charitable

Purpose (Estab. Cost) Rs. 90,00,000/-

Taxable Rs. NIL

Which is the correct Option?

Answer:

Option 2 is correct.

Supporting Judgement

CIT vs. Programme for Community Organisation 248 ITR 1 (SC)

10. Application of Income

FAQS ON APPLICATION OF INCOME

(i)(a) Is it necessary to “spend” the amount?

(b) Example

The trustees passed resolution sanctioning payments to various donees. On passing the resolution, the amount was taken to I & E A/c. and credited to outstanding payment A/c. Payments made in subsequent years.

The Trust claimedWhen resolutions were passed, the amounts were earmarked

for the charitable purpose, it should be considered as application of income u/s. 11(1)(a)

Answer:

(i) (a) In the case of CIT vs. Trustees of H.E.H Hizam’s Charitable Trust 131 ITR 497 (A.P.) it was held -

- It is not correct to equate the word “applied” with the word “spent”.

- Even if the fund has been earmarked and allocated for the purpose, it might be deemed to have been applied for the purpose.

(b) IT was held in CIT vs. Thanthi Trust 239 ITR 502 (SC) that application need not mean parting with cash.

FAQS ON APPLICATION OF INCOME(ii) (a) Can a trust apply surplus income from one activity

for investment in another activity?

(b) ExampleA trust is running a health centre for the benefit of ill persons and earned a surplus of Rs.3.70 lacs. Trust spent Rs.12 lacs for purchasing land for establishing another health centre.ITO holds, the Trust violates provision of sec.13(2) (benefit to specified persons / concerns)

Answer: Yes, it can do so.This finds support from CIT vs. Economic & Entrepreneurship Development Foundation 188 ITR 540 (Cal.)

FAQS ON APPLICATION OF INCOME

(iii) (a) Is advance application possible?

(b) ExampleA resolution was passed on 21.05.2013 that the profits of the association for the year ended 31.03.2014 so permitting, a sum of Rs.2.50 lacs be given as a donation to a trust out of the profits of the said year.

The claim of the associationAs soon as the profits emerged on the closing of the books on 31.03.2014, these profits are impressed with fiduciary character to the extent of Rs.2.50 lacs due to resolution and must be deemed to be application of income.

Answer:The claim of the assessee was not found tenable in Nachimuthu Industrial Association vs. CIT 123 ITR 611 (Mad.) affirmed in 235 ITR 190 (SC)Held,A trust is an obligation annexed to the ownership of a specified property, and not with reference to a non-existent property.

FAQS ON APPLICATION OF INCOME

(iv) Can excess application in an earlier be adjusted against short fall in a subsequent year??

Answer:

Yes, it was so held in –

- CIT vs. Gajrati Samaj (Regd.) 349 ITR 559 (MP)

- CBDT Circular dtd. 24.01.1973 88 ITR (St.) 66

FURTHER FAQS ON APPLICATION OF INCOME

(a) Loans advanced for the purposes of trust for example, scholarship loans is application of income even if loan is interest bearing- Circular No. 100 dated 24.01.73 88 ITR (St.) 66- 155 ITR 51 (Karn.)

(b) However, receipt of refund of loan is treated as “income” in the year of receipt.- 155 ITR 51 (Karn.)

(c) Repayment of loan taken to fulfill one of the objects is application of income.- Circular No. 100 dtd. 24.01.1973- 315 ITR 237 (Mad.)- 242 ITR 457 (Ker.)- 170 ITR 62 (Ker.)

(d) Addition to existing building is application- 170 ITR 62 (Ker.)

(e) Donation to another charitable trust is application

- Instruction No. 1132

- Saraladevi Sarabhai Trust 172 ITR 698 (Guj.)

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