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Points for Consideration towards Assessment of Public Trusts for Charitable and Religious Purpose

1.   Voluntary Contribution Received by the Trust:

Voluntary contribution can be of two types:

(a)   Voluntary contribution with a specified direction that they shall form part of the corpus of the trust or institution (Corpus Donations):

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.

(b) 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.

2.   Taxation of certain Anonymous Donations Received by the Trust [Section 115BBC]

(a)   Entities 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%.

(i)         any trust or institution referred to in section 11;

(ii)        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;

(iii)       any hospital or other institution referred to in section 10(23)(iiiae) and (via) i.e. its annual receipts is less than or more than Rs. 1 crore;

(iv)       any fund or institution referred to in section 10(23C)(iv);

(v)        any trust or institution referred to in section 10(23C)(v) ;

(b)   Entities 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.

(i)         any trust or institution created or established wholly for religious purposes;

(ii)        any trust or institution created or established for both religious as well as charitable purposes other than 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.

(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—

(i)         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:

(A)       5% of the total donations received by the assessee; or

(B)        Rs. 1,00,000

and

(ii)        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) Exemption U/s 11(1) not to be allowed if benefit of medical or educational services is made available to any person referred to in section 13(3) [Section 12(2)] :

Notwithstanding the exemption available under section 11(1), if the charitable or religious trust is running a hospital or medical institution or an educational institution and makes available medical or educational services to any person referred to in section 13(3), the value of such services shall be deemed to be income of such trust and chargeable to income tax.

(4) Treatment of Capital Gains 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).

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 [Section 11(1A)(a)]:

Where any capital asset being property held under trust wholly for charitable or religious purposes is transferred, the treatment of Capital Gains shall be as under :

Amount of net consideration utilized

Amount deemed to be applied

(i) Where the whole of the net consideration of such asset is utilized in acquiring a new capital asset

the whole of the capital gain.

(ii) Where only a part of the net consideration is utilized for acquiring the new capital asset

so 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)]:

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 utilized

Amount deemed to be applied

(i) where the whole of the net consideration is utilized in acquiring the new capital asset

the appropriate fraction of the capital gain arising from the transfer of the capital asset

(ii) in any other case

the 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.

 

5.   Treatment of 'Donation in Kind' Received by the Trusts :

Certain funds, trusts and institutions running hospitals, creches orphanages, school, etc., often receive donation in kind from various sources for application towards their charitable purposes. These contributions may be in the shape of books, clothes for the poor, grains to feed the poor, drugs, hospital equipment's, etc.

Since the donation in kind, of a nature referred to above, received by a fund, trust or institution would be income within the meaning of section 2(24)( vi) of the Act, it is clarified that the use of these towards object for which the fund, trust or institutions is established would be regarded as application of the income of the fund, trust or institution.

Where a trust received donation in kind and the same could not be used towards objects for which the trust, fund, etc. is established, it should convert the asset in the form or mode specified in section 11(5) before the expiry of 1 year from the end of the previous year in which asset is acquired.

6.   Treatment of Business Income of a Trust

Trust can earn the following two types of business income:—

(a)   Profits and gains from a business undertaking held under a Trust [Section 11(4)]:

According to section 11(4), for the purpose of section 11 "property held under trust" includes a business undertaking so held and where a claim is made that the income of any such undertaking shall not be included in the total income of the trust, etc in receipt thereof, the Assessing Officer shall have the power to determine the income of such undertaking in accordance with the provision of the Income- Tax Act relating to the assessment and where the income determined by the 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.

(b)   Profits and Gains from incidental business [Section 11(4A)]:

Where a trust or an institution is also carrying on any business activity, the provisions of sections 11(1), (2), (3) and (3A) regarding exemption etc. shall not apply in respect of income earned from such business activity.

However, if such 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, the exemption shall be available to trust in respect of income earned from such business activity.

 

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