Income Tax Provisions for Trust and NGO

Taxation of Trust by GST Fever

Income Tax Provisions for Trust and NGO

Taxation of Trusts and NGOs

Taxation of “Trusts and NGOs” is an important area in the Income Tax Act. Under income tax act, there are special provisions relating to organisations which are engaged into religious or charitable activities. Logic behind these special provisions is that people was doing tax planning under the shade of non-profit organisation whether it may be trust, society or section 8 company. Since the medium of charitable trusts is widely perceived as a toll of tax planning, the government has progressively made the law (Income Tax Provisions for Trust and NGO) relating to taxation of charitable and religious trust. In the recent past there have been several amendments (Income Tax Provisions for Trust and NGO) in the Income Tax Act through which the CBDT has tried to put more restrictions to avoid tax evasion.

Through this article, we will discuss key provision of income tax act relating to:

  • Objects which classify as Charitable and Religious activities
  • Applicable Income tax rate for Charitable and Religious Institution,
  • Taxability of Anonymous donation,
  • Procedure for filing of application for exemption u/s 12AA/80G
  • Power of income tax authority to withdraw exemptions
  • Many more other relevant provisions of NGO/NPO

What is exemptions u/s 12AA of Income Tax Act: (Income Tax Provisions for Trust and NGO)

The income earned by Non Profit Organisations (it may be called as Trust, Society or Section 8 Company) is not chargeable to tax if these NPOs satisfy the conditions provided in the income tax law. Such exemptions will be available to all those organisations who have obtained registration under section 12AA of Income Tax Act.

Section 12AA of Income tax act: 12AA: The Principal Commissioner or Commissioner, on receipt of an application for registration of a trust or institution made under clause (a)  or clause (aa) of sub-section (1) of section 12A, shall

(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and

(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he

(i) shall pass an order in writing registering the trust or institution;

(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,

and a copy of such order shall be sent to the applicant :

Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.

Section 12A of Income tax act, provides the procedure and conditions for filing application for registration u/s 12AA of income tax so that income of such non-profit organisation (trust) can be exempt from levy of income tax.

Key takeaways of section 12A of Income tax act: (Income Tax Provisions for Trust and NGO)

  1. Registration process for exemption u/s 12AA:
  • Every non profit organisation (trusts) who is already availing benefit u/s 12AA will apply for fresh registration (re-registration) between 1stJune 2020 to 31st August 2020 i.e. re-registration window will be open for 3 months in which trusts are required to submit re-registration application. However due to covid 19, window for such re-registration will open now open from 1 Oct 2020
  • Income Tax Department is liable to pass an order for such approval within three months from the date of application.
  • Such approval shall be valid for 5 years. Further application for renewal after five years must be made at least 6 months prior to the expiry of the five year’s validity period.
  • Where an organisation which does not started charitable or religious activity then such NGO can apply for provisional registration u/s 12AA. If an organisation is applying for first time for registration u/s 12AA and does not commenced charitable or religious activity then he will be given a provisional registration. Such provisional registration will be valid for 3 years.
  • Such provisional registration (u/s 12AA) holder shall make a fresh application for registration at least 6 month prior to the expiry of the provisional registration (12A) or within 6 month of commencement of its activities, whichever is earlier.
  • If organisation (NGO) is apply for registration after commencement of charitable or religious activity then it will be granted for general registration which will be valid for 5 years.
  1. Other aspect of section 12A: (Income Tax Provisions for Trust and NGO)
  • where the total income of non profit organisation as computed under income tax act without giving effect to the provisions of section 11 and section 12 exceeds 2,50,000 in any previous year, the accounts for that year have been audited by an accountant
  • where registration has been granted under section 12AA then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending before the Assessing Officer (only assessing officer is covered, if case is pending in appeal then exemption cannot be granted) as on the date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year. However such benefit will not be available if trust earlier applied for registration u/s 12AA and application was refused.

After consolidated reading of section 12A and 12AA following question comes into mind:

  • What is definition of Charitable activities
  • Who can apply for registration u/s 12AA
  • What all provisions contain in section 11 and 12 of income tax act
  • What is the definition of any income derived from property held under trust

Section 2(15) defined chartable purpose as:  “Charitable purpose” includes

  • Relief of the poor
  • Education
  • Yoga
  • Medical relief,
  • Preservation of environment (including watersheds, forests and wildlife)
  • Preservation of monuments or places or objects of artistic or historic interest, And
  • The advancement of any other object of general public utility

Proviso to Section 2(15) clarifies that the advancement of any other object of general public utility shall not be a charitable purpose if:

  • if it involves the carrying on of any activity in the nature of 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

however carrying on commercial activity shall be regarded as charitable purpose if

  • such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
  • the aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

On the basis of reading of Section 2(15), it is clear that any activity which helps to general public can be classify as charitable activity.  Hence any organisation engaged in charitable activities can apply for exemption under section 12A and can get registration under section 12AA.

As per section 12AA, if registration under this section has been granted then income from charitable activities will be exempt from tax.  Further to run charitable organisation if some business activities are carried out then receipt from such business or trading activities should not exceeds 20% of total receipt of trust.

Analysis of section 11 and 12 of income tax act: 

As per section 11 of income tax act, following income of a charitable institution will be exempt from tax: 

  • 15% of income derived from “Property Held under Trust” wholly for charitable or religious purpose. It means, out of total income of an organisation, 15% income will be exempt from tax without actual incurring of expenses against such income.
  • 85% of 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. It means 85% of total receipt must be utilised as per the object of non profit organisation for charitable or religious purpose.
  • Income in form of voluntary donation received with special direction that such donation will be utilised for specific purpose as per direction.

On the basis of consolidated reading of section 11 we can say that total income of trust will be exempt if they utilised just 85% of gross receipts for charitable purpose and there is no requirement to utilise rest 15% of receipts.

Such 85% of income can be utilised for following purpose:

  • Purchase of any capital assets
  • Any kind of revenue expenses
  • Donation to other religious or charitable trust registered u/s 12AA
  • Repayment of loan

Key takeaways of section 11 of Income tax act:

  • Utilisation does not mean actual outflow of money even incurring of liability would be treated as application of funds.
  • If purchased of assets treated as application then depreciation cannot be claimed on such assets.
  • If due to any reason 85% of income did not utilised in the year of income then a declaration can be made to assessing officer before the date of filing of income tax return for assuring that such short utilised amount will be utilise in immediately following previous year in which such receipt/donation/contribution took place.
  • If utilisation is less than 85% of receipt due to non realisation of income then trust can make declaration for utilisation of such income in the year of realisation. Further if income is not utilised in the year of realisation or in succeeding year then such income will be taxable in or succeeding year of year in which actual realisation take place.
  • If in any year income is not utilised then such income will be chargeable to tax in the year of receipt.

Cases where exemption will not be available:

As per section 13(1)(a): Income of trust from “property held under trust for private religious” which does not ensure for the benefit of general public.

As per section 13(1)(b): Income from the “benefit of particular religious community”

As per section 13(1)(c): Income from the “benefit of specified person or any property is being utilised whether directly or indirectly for specified person referred in section 13(3)” of income tax act.

As per section 13(1)(d): if funds of trust invested in securities other than

  • Share of public sector company
  • Share of depository

Property Held under Trust:

Term Property Held under Trust did not defined under income tax act. However section 11(4) of income tax act talk about “property held under trust as “includes a business undertaking so held.” On the basis of consolidated reading of all relevant provisions it can be says that entire income of trust will be called as income from property held under trust and would qualify for exemption u/s 11. However if income of trust includes income from “Business” which is not incidental to object of trust then exemption u/s 11 will not be available for such income.

When registration u/s 12 A can be cancelled:

In following cases registration granted u/s 12AA can be withdrawn:

  • If trust does not file income tax return and audit report within the due date as defined u/s 139 and 11(2) respectively then assessing officer can denies the exemption available u/s 12AA.
  • If income is applied other than the purpose for which is set apart under section 11(1) i.e. 85% of income could not applied and certain part of such income was accumulated for utilisation in subsequent year and did not utilised for specified purpose.
  • Where set apart income could not utilised within 5 years from the expiry of year in which income accrued.

Anonymous donation:

Meaning of Anonymous donation: Any voluntary contribution where a person receiving such contribution does not maintain record of identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.

Taxability of anonymous donation as per section 115BBC:

Anonymous donation will be exempt from tax if

  • Anonymous donation does not exceeds 1 Lakh in a financial year or
  • Anonymous donation does not exceeds 5% of total donation received by the trust

Whichever is higher.

Other important aspects relating to anonymous donation:

  • Anonymous donation received by wholly religious trust will not be taxable u/s 115BBC
  • Anonymous donation received by trust with special direction will be liable to tax u/s 115BBC
  • If anonymous donation is not taxable under section 115BBC then exemption under section 11 can be claimed for such donation

Filing of ITR and Audit Report of Trust:

As per section 139(4A) trusts are required to file ITR 7 if its income without giving effects to section 11 & 12 exceeds 2,50,000. ITR 7 is required to be filed by 31 July of assessment year however if audit is being carried out under income tax act then due date of ITR-7 shall be 30th September. Further where income exceeds form 2,50,000 without giving effects to section 11 & 12 then trust are required to get its accounts audited by Chartered Accountant and will submit report in Form 10B on or before 30th September of assessment year.

Effective rate of Tax if income liable to tax even after claiming exemptions: 

If Trust is registered under section 8 of companies act then effective rate would be 30%/25%/22% plus applicable cess and surcharge. If it is registered as cooperative society then rate of corporate society will be applicable. Generally trusts are treated as “Association of Person” hence benefit of slab rate would be available like other individual person.

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