TRUSTS -TYPES & TAXABILITY PresentationBy CA Sanjeev Verma 6 th December 2008 Lucknow Branch of CIRC of ICAI

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITY

PresentationPresentation

ByBy

CA Sanjeev VermaCA Sanjeev Verma

66thth December 2008 December 2008

Lucknow Branch of CIRC of ICAILucknow Branch of CIRC of ICAI

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYMeaning of TrustMeaning of Trust

A trust is a relationship in which :A trust is a relationship in which :A person/s or entity (the A person/s or entity (the trusteetrustee) holds legal title.) holds legal title. to to certain propertycertain property (the trust property or trust corpus), (the trust property or trust corpus), but is bound by a fiduciary duty to exercise that legal but is bound by a fiduciary duty to exercise that legal control.control. for the benefit of one or more individuals or for the benefit of one or more individuals or organizations (the beneficiary), who hold ‘organizations (the beneficiary), who hold ‘beneficialbeneficial’ or ’ or ‘‘equitableequitable’ title. ’ title.

The trust is The trust is governed by the termsgoverned by the terms of the (generally) of the (generally) written trust agreement and local law.written trust agreement and local law.

The entity (one or more individuals, a partnership or a The entity (one or more individuals, a partnership or a legal entity) that creates the trust, is called the legal entity) that creates the trust, is called the settlorsettlor..

TRUSTS -TYPES & TAXABILIYTRUSTS -TYPES & TAXABILIYType of Trusts:-Type of Trusts:-

TYPES OF TRUSTS:-TYPES OF TRUSTS:-

BARE TRUSTBARE TRUSTCONSTRUCTIVE TRUSTCONSTRUCTIVE TRUSTRESULTING TRUST RESULTING TRUST DISCRETIONERY TRUSTDISCRETIONERY TRUST FIXED TRUSTFIXED TRUSTHYBRID TRUSTHYBRID TRUSTEXPRESS TRUSTEXPRESS TRUSTIMPLIED TRUSTIMPLIED TRUSTINTERVIVOS TRUSTINTERVIVOS TRUSTTESTAMENTARY TRUSTTESTAMENTARY TRUSTREVOCABLE TRUSTREVOCABLE TRUSTIRREVOCABLE TRUSTIRREVOCABLE TRUST


Bare TrustBare TrustA trust where the beneficiaries are entitled to A trust where the beneficiaries are entitled to the assets absolutely, and the the assets absolutely, and the trustee is simply trustee is simply obliged to pay them over to the beneficiariesobliged to pay them over to the beneficiaries. .

‘‘Resulting’ and ‘Constructive’ trusts are usually Resulting’ and ‘Constructive’ trusts are usually Bare trusts. Bare trusts.

Bare trusts generally do not continue for any Bare trusts generally do not continue for any length of time, unless they arise out of length of time, unless they arise out of protracted litigation, or the beneficiaries are protracted litigation, or the beneficiaries are minors (in which case the bare trust must minors (in which case the bare trust must continue till they reach majority)continue till they reach majority)


Constructive TrustIt is imposed by law as an equitable remedy due to some wrong doing, where the wrong doer acquired legal title to some property and cannot in good conscience be allowed to benefit from it.

Resulting TrustIt is a form of implied trust which occurs where a trust fails, wholly or in part, as a result of which the settlor becomes entitled to the assets.

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYDiscretionary Trust

An arrangement where the trustee may choose, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent, so long as the decision is made based on the beneficiaries best interests. The purpose is that no individual can claim to be entitled to any specific interest in the trustee’s assets, which often has tax advantages or asset protection advantages.

Fixed TrustEntitlement of the beneficiaries is fixed by the settlor. The trustee has little or no discretion. E.g.

a trust for a minor (up to if he/she attains 21) a life interest (to pay the income to X for his/her lifetime)


Hybrid TrustHybrid Trust

A combination of elements of A combination of elements of both fixed and both fixed and discretionary trustsdiscretionary trusts. . The trustee must pay a certain amount of the The trustee must pay a certain amount of the trust property to each beneficiary fixed by the trust property to each beneficiary fixed by the settlor. settlor. But the But the trustee has the discretiontrustee has the discretion as to how any as to how any remaining trust property, once these fixed remaining trust property, once these fixed amounts have been paid out, is to be paid to the amounts have been paid out, is to be paid to the beneficiariesbeneficiaries.

TRUSTS -TYPES & TAXABILIYTRUSTS -TYPES & TAXABILIY

Express TrustExpress TrustIt arises where a It arises where a settlor settlor deliberately and deliberately and consciously decides to create a trust, over his or consciously decides to create a trust, over his or her assets, either now or upon his death. her assets, either now or upon his death. In these case this will be achieved by signing a In these case this will be achieved by signing a trust instrument trust instrument which will either be a will or a which will either be a will or a trust deedtrust deed..

Implied TrustImplied TrustIt is created where some of the legal It is created where some of the legal requirements for an express trust are not met, requirements for an express trust are not met, but an but an intention on behalf of the parties to create intention on behalf of the parties to create a trust can be presumed to exista trust can be presumed to exist. .


Intervivos TrustIntervivos TrustA A settlor who is living at the time the trust is establishedsettlor who is living at the time the trust is established, , creates an intervivos trust.creates an intervivos trust.

Testamentary TrustTestamentary TrustA trust A trust created in an individual’s willcreated in an individual’s will..

Irrevocable TrustIrrevocable TrustIt is the one that will not come to an end It is the one that will not come to an end until the terms of until the terms of the trustthe trust have been fulfilledhave been fulfilled..

Revocable TrustRevocable TrustA trust of this kind can be A trust of this kind can be revoked (cancelled) by its settlor revoked (cancelled) by its settlor at any time.at any time.


PUBLIC TRUSTSPUBLIC TRUSTS

PRIVATE TRUSTSPRIVATE TRUSTS

PARTLY PRIVATE & PARTY PUBLIC TRUSTSPARTLY PRIVATE & PARTY PUBLIC TRUSTS


PUBLIC TRUSTSPUBLIC TRUSTS

Like private trusts, public trusts may be created Like private trusts, public trusts may be created inter-vivos or by will. inter-vivos or by will.

Public trusts are however Public trusts are however governed by general lawgoverned by general law, though the principles , though the principles forming the basis of the Indian Trusts Act be applied in these trusts. forming the basis of the Indian Trusts Act be applied in these trusts.

It is a trust established for charitable purposes, normally, It is a trust established for charitable purposes, normally, must be for the must be for the benefit of public at large or a class of beneficiariesbenefit of public at large or a class of beneficiaries..

These are entitled to special treatment under the law of taxationThese are entitled to special treatment under the law of taxation..

These are These are exempt from the rule against perpetuitiesexempt from the rule against perpetuities, which would , which would otherwise require a trust to come to an end after a certain period. otherwise require a trust to come to an end after a certain period. Charitable trusts may continue indefinitelyCharitable trusts may continue indefinitely

A formal deed is not necessary to constitute a public trustsA formal deed is not necessary to constitute a public trusts, even where , even where immovable property is dedicated because section 5 of Indian Trusts Act immovable property is dedicated because section 5 of Indian Trusts Act 1882 is not applicable on public Trusts1882 is not applicable on public Trusts


Public trusts are an exception to the well settled rule that Public trusts are an exception to the well settled rule that there is no valid trust unless the objects thereof are there is no valid trust unless the objects thereof are specified. The trust is not allowed to specified. The trust is not allowed to fail for uncertaintyfail for uncertaintyA charitable trust is synonymous with public trust. A charitable trust is synonymous with public trust. There There is nothing as a private charitable trust.is nothing as a private charitable trust.Charitable trusts come under doctrine of Charitable trusts come under doctrine of cy pres cy pres in which in which if charitable purpose of trust can not be fulfilled then these if charitable purpose of trust can not be fulfilled then these can be replaced by new & more appropriate charitable can be replaced by new & more appropriate charitable objects.objects.Management or Control may vest in private handsManagement or Control may vest in private hands. . In the case of In the case of Smt. Ganesha Devi Rami Devi Charity Trust Smt. Ganesha Devi Rami Devi Charity Trust Vs. CIT (1969) 71 ITR 696, 704 (Cal)Vs. CIT (1969) 71 ITR 696, 704 (Cal) it was held that “the it was held that “the implication, therefore, is that if the trust or fund is implication, therefore, is that if the trust or fund is controlled by a body of persons which is not a public body, controlled by a body of persons which is not a public body, but if it ensures to the benefit of a public it will still be a but if it ensures to the benefit of a public it will still be a charitable trust or fundcharitable trust or fund


PRIVATE TRUSTSPRIVATE TRUSTS

Private trust may be created Private trust may be created inter vivosinter vivos or by will or by will. .

Private trust are governed by the provisions of the Private trust are governed by the provisions of the Indian Indian Trust Act 1882 Trust Act 1882

It may have one or more particular individuals, as its It may have one or more particular individuals, as its beneficiary.beneficiary.

Where immovable properties worth more than Rs. 100/- Where immovable properties worth more than Rs. 100/- are transferred, are transferred, trust will not be operated unless it is trust will not be operated unless it is registeredregistered ( (Gostha Behari Gose Vs. University of Calcutta, Gostha Behari Gose Vs. University of Calcutta, AIR 1972 Cal 61AIR 1972 Cal 61 ) . ) .Trust created by will does not require Trust created by will does not require any stamp any stamp


PARTLY PRIVATE & PARTLY PUBLIC TRUSTSPARTLY PRIVATE & PARTLY PUBLIC TRUSTS

Dedication of property may be Dedication of property may be partial or absolutepartial or absolute..

If dedication is not absolute, a trust in favour of charity is If dedication is not absolute, a trust in favour of charity is not created not created but a charge in favour of charity is attached tobut a charge in favour of charity is attached to and follows, the property retains its original private and follows, the property retains its original private character.character.

In cases of partial debutter endowment , In cases of partial debutter endowment , it is a question it is a question of construction whether idol is true beneficiary….. Or of construction whether idol is true beneficiary….. Or whether heirs are true beneficiaries….whether heirs are true beneficiaries….

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYOverview of impacting Sections of Income Tax Overview of impacting Sections of Income Tax Act,1961Act,1961Section 2(15)Section 2(15)Defines a charitable objective Defines a charitable objective

Section 10(23C)Section 10(23C)Provides exemption to educational, medical, charitable and public Provides exemption to educational, medical, charitable and public religious institutions, existing not for the purposes of profit religious institutions, existing not for the purposes of profit

Section 11-13Section 11-13Provides for tax treatment in case of charitable trusts Provides for tax treatment in case of charitable trusts

Section 80GSection 80GDeals with deduction in respect of donations to certain funds , Deals with deduction in respect of donations to certain funds , charitable institutions etc. charitable institutions etc.

Section 161-164Section 161-164Deals with liability in special cases i.e. of representative Deals with liability in special cases i.e. of representative assessee, which includes taxation of private discretionary assessee, which includes taxation of private discretionary trusts.trusts.


Section 2(15) Section 2(15) Charitable objectsCharitable objects

According to According to Section 2(15),Section 2(15), ‘charitable purpose’, includes ‘charitable purpose’, includes relief of the poor, education, medical relief, and the relief of the poor, education, medical relief, and the advancement of any other object of general public utilityadvancement of any other object of general public utility..

Recent Amendment A.Y. 2009-10Recent Amendment A.Y. 2009-10Following Proviso added:-Following Proviso added:-

““Provided that the advancement of any other object Provided that the advancement of any other object of general public utility of general public utility shall not be a charitable purposeshall not be a charitable purpose , , if it involves the carrying on of any activity if it involves the carrying on of any activity in the nature of in the nature of trade, commerce or businesstrade, commerce or business, or any activity of , or any activity of rendering rendering any service in relation to any trade, commerceany service in relation to any trade, commerce or any or any business, for a business, for a cess or fee or any other considerationcess or fee or any other consideration, , irrespective of the nature of use or application, or irrespective of the nature of use or application, or retention, of the income from such activity”retention, of the income from such activity”


Profit Motive vs Charitable ActivityProfit Motive vs Charitable ActivityCase Laws:-Case Laws:-Sole Trustee, Loka Shikshana Trust (1975) 101 ITR 234, 256Sole Trustee, Loka Shikshana Trust (1975) 101 ITR 234, 256

It was observed that “But where the predominant object of the It was observed that “But where the predominant object of the activity is to carry out the charitable purpose and not to earn activity is to carry out the charitable purpose and not to earn profit, profit, it would not lose its character of a charitable purpose it would not lose its character of a charitable purpose merely because some profit arises from the activity.” merely because some profit arises from the activity.” further “it would indeed be difficult for persons in charge of a further “it would indeed be difficult for persons in charge of a trust or institutions to so carry on the activity that the trust or institutions to so carry on the activity that the expenditure balances the income and there is no resulting profit. expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would That would not only be difficult of practical realisation but would also reflect unsound principal of management”.also reflect unsound principal of management”.Other similar JudgmentsOther similar Judgments

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

Director of I. Tax (Exemption) v. Shilpam (1998) 230 ITR Director of I. Tax (Exemption) v. Shilpam (1998) 230 ITR

126 (Cal.)126 (Cal.)

Director of I. Tax v. Bharat Diamond Bourse(2003)126 Director of I. Tax v. Bharat Diamond Bourse(2003)126 Taxman 365(SC)Taxman 365(SC)


Scope and implication of general public Scope and implication of general public utilityutility

Bar Council of Maharastra Vs. CIT (1980) 126 ITR Bar Council of Maharastra Vs. CIT (1980) 126 ITR 27 (Bom) , these words were extensively debated. 27 (Bom) , these words were extensively debated. It was observed that word It was observed that word generalgeneral pertained to a pertained to a whole classwhole class. The word . The word publicpublic denoted the body of denoted the body of people at largepeople at large and the word and the word utilityutility meant meant usefulnessusefulness . Therefore, advancement of any object . Therefore, advancement of any object beneficial to the public as distinguished from an beneficial to the public as distinguished from an individual or group of individual would be individual or group of individual would be

considered as charitable purposesconsidered as charitable purposes..Similar judgmentsSimilar judgments

CIT v.Gujrat Maritime Board(2008) 166 Taxman 56 (SC)CIT v.Gujrat Maritime Board(2008) 166 Taxman 56 (SC)

CIT v. Jodhpur Chartered Accountants Society(2002)258 ITR CIT v. Jodhpur Chartered Accountants Society(2002)258 ITR 548(Raj)548(Raj)

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYExemption u/sec 11Exemption u/sec 11

Section 11Section 11Secti

onNature of income Extent to which

exemption allowed11(1)(a) Income derived from property

held under trust wholly for charitable or religious purposes

To the extent income applied to such charitable or religious purposes in India.Whereas accumulated or set apart for such application, to the extent of 15% of the income from such property.

11(1)(c) Income derived from property held under trust for a charitable purpose, which tends to promote international welfare in which India is interested

To the extent income is applied to such charitable or religious purposes outside India.Exemption is available only if the Board has directed such exemption.

11(1)(d) Income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

100% exemption.

In computing the 15% of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in Section 12 shall be deemed to be part of the income.

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYNo Exemption u/sec 11No Exemption u/sec 11

Section

Nature & extent of income not exempt under Section11

13(1)(a)

Income of private religious trust not used for public benefit.

13(1)(b)

Income of charitable trust created for benefit for particular religious community.

13(1)(c)

Income/ property of charitable or religious trust applied for direct or indirect benefit of person referred in 13(3)

13(1)(d)

Any income, is taxable if If any funds are invested other than in 11(5) Any funds invested earlier than 1983 remain invested thereafterShares and company are held after 1983.

11(4A) Income from business which is not incidental to the attainment of the objectives of the trust, or in respect of which separate books of accounts have not been maintained.

12(2) Value of medial/ education services provided to specified persons by trust running hospital and educational institution shall be income of trust and will be chargeable in the year in which services are provided and chargeable to tax, despite section 11(1).


Section 10(23C) v. Section 11 to13Section 10(23C) v. Section 11 to13Since section 10(23C)(iiiad) & (vi) provides for Since section 10(23C)(iiiad) & (vi) provides for exemption only in case the educational institutionexemption only in case the educational institution existing for educational purposesexisting for educational purposes, , whether whether exemption be available to a society / trust running exemption be available to a society / trust running an educational institution as well as having income an educational institution as well as having income from other charitable objects as defined u/s 2(15)?from other charitable objects as defined u/s 2(15)?

Case law:-Case law:-[Birla Vidhya Vihar Trust Vs. CIT (1981) 24 CTR (Cal) 307: [Birla Vidhya Vihar Trust Vs. CIT (1981) 24 CTR (Cal) 307: (1982) 136 ITR 445 (Cal): TC32R. 734].(1982) 136 ITR 445 (Cal): TC32R. 734].An educational institution could be regarded as an An educational institution could be regarded as an educational institution, if the society was running educational institution, if the society was running an educational institution. an educational institution. All the income of a All the income of a society running a college would not be exempt society running a college would not be exempt under section 10under section 10 Only the income which has a Only the income which has a direct relation or is incidental to the running of the direct relation or is incidental to the running of the institution, as such, would qualify for exemption institution, as such, would qualify for exemption u/sec 10. It is not the entirety of the income of the u/sec 10. It is not the entirety of the income of the recipient, the trust in this case, but the income of recipient, the trust in this case, but the income of the particular source, namely, the educational the particular source, namely, the educational institution, thatinstitution, that comes within the purview of comes within the purview of section 10 of the Act section 10 of the Act


Ministry of Law in November1983 opined that Section 10(23) & 11 are not

inconsistent with each other and can operate simultaneously

The ministry in reference to a question as to whether the activities of an

association or institution engaged in promotion of sports & games can ,

independently of the provision of S.23, be considered as enduring for charitable

purposes within the meaning of S.2(15) of the Act. It has opined that Section

10(23) & 11 are not inconsistent with each other and can operate simultaneously


CONDITIONS FOR EXEMPTION U/Sec 11 Trust must have been created for any lawful purpose & should

not be created for the benefit of any particular religious community or caste.

The trust should be registered with the CIT under Section 12A The property from which income is derived should be held under

a trust by such charitable or religious trust / institution. The property should be held wholly for charitable purposes.

The exemption is confined to only such portions of the trust’s income which is applied to charitable or religious purposes or is accumulated for applying to such purposes in India.

85% of the income is required to be applied for the approved purposes and the unapplied income and the money accumulated or set apart (in excess of 15% of the income from such property) should be invested in the specified forms or modes.

No part of the income should ensure, directly or indirectly, for the benefit of the settler or other specified persons


VOLUNTARY CONTRIBUTIONS The voluntary contributions received by a charitable or religious trust are

to treated as follows: Corpus Donations

Voluntary contributions made to a charitable or religious trust with a specific direction that they shall form part of the corpus of the trust i.e. corpus donations do not form part of the total income of the trust as per Section 11(1)(d).

Contributions other than corpus donationsSection 12(1) states that any voluntary contributions (not being corpus donations) received by a charitable or religious trust shall be deemed to be the income derived from property held under trust wholly for charitable or religious purposes. Such voluntary contributions would therefore be eligible for exemption under Section 11(1) provided the trust satisfies the conditions as prescribed under Section 11 and 13.

While corpus donations do not form part of total income, other voluntary contributions are exempt from tax as per Section 11 and 13

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYSection 12 Contribution need not be in any particular manner -Sec 12

does not insist any manner in which Voluntary Contribution be made.-A deed to making single contribution or a contribution recurring from year to year would be sufficient- CIT v. Chhadami Lal Jain Trust[1977] 106 ITR 179(All)

Specific directive necessary for application on charitable/ religious purposes -R.B ShreeRam Religious & Charitable Trust v. CIT[1988] 172 ITR 373(Bom)Where a trust received voluntary contribution with specific direction to form a part of the trust corpus, it will not loose exemption if applied for meeting running expenses- Dharma Pratishthanam v. ITO [1985] 11 ITD 40 (Delhi)

Membership Fee/ Subscriptions not to be treated as voluntary contribution as same can never be considered as payments without consideration - Trustees of Shri Kot Hindu Stree Mandal v.CIT[1994] 209 ITR396(Bom)

Exemption is lost when even small portion is used for non-charitable purposes -Chairman, Andhra Pradesh Welfare Fund v. CIT[1983] 143 ITR 82(AP)


………..Sec 12 contd. Where donors had specifically directed that the donations

were to remain as corpus of the trust, the trust will not be precluded from using those receipts for making donations to other charitable trusts. Section 12 does not recognize such receipts as income of the trust for the purpose of Section 11.[ITO v. Abhilash kumari Public Charitable Trust [1987] 28 TTJ 523 (Delhi)]

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYAPPLICATION OF INCOME Exemption under Section 11 is available only if the income derived from

property held under trust is ‘applied’ to the charitable or religious purposes.

Income must be available for application. TDS cannot be considered as income. CIT V.Jayshree Charity Trust 1985 Tax LR 247 (Cal)

Application need not necessarily result in revenue expenditure. Even capital expenditure is considered to be application of income for the purposes of Section 11,if it is incurred for charitable purposes.[ CIT v. Kannika Parameshwari Devasthanam & Charities [1982] 133 ITR 779 (Mad.)]

The application of income need not necessarily result in expenditure. Therefore, an amount irretrievably earmarked or allocated for the purposes of the trust or institution is also treated as applied even though it has not been actually spent. [CIT Vs. Trustees of the HEH Nizams Charitable Trust (1981) 131 ITR 497 (AP)]

Deficit arising out of excess of expenditure over income during a particular year should be set off against surplus relating to subsequent year –treated as application CIT Vs. Mahrana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj)

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYAPPLICATION OF INCOME-Instances

Deficit arising out of excess of expenditure over income during a particular year should be set off against surplus relating to subsequent year –treated as application CIT Vs. Mahrana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj)

Depreciation on various assets of the trust is deductible even if the cost of the assets has been fully allowed as application of income in past years. [CIT v. Institute of banking Personnel Selection (IBPS) [2003] 131 Taxmann 396 (Bom.)]

Repayment of loans originally taken to fulfill objects of the trust. [CIT v. Janambhumi Press Trust [2000] 242 ITR 457 (Kant.)]. However, the loan is returned , it should be treated as income of the organization in the previous year in which it is received. [CIT Vs. Kuchhi Menon Union (1985) 155 ITR 51 (Kar)]

Donation to other charitable trusts out of current year’s income-application. However, donation out of income accumulated or set apart is not treated as application of income and is taxed accordingly. [CIT v. Aurobindo Memorial Fund Society [2001] 247 ITR 93 (Mad.)]

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITY Agricultural income will not form part of total income for the

purpose of computing the accumulation of income in excess of 15% of the total income as laid down in sec 11- CIT V. Nabhinandan Digamber Jain(2002) 257 ITR 91(MP)

If sec 11(1)(a) has been full exploited & there is still accumulated income left to be dealt with, sub sec (2) of 11 can be pressed in service and if complied with, such accumulated income beyond prescribed percentage can also earn exemption u/sec 11(2)-Addl CIT v. A.L.N. Rao Charitable Trust[1995] 216 ITR 697(SC)

Monies given to sister concern for hospital construction but lying unspent by latter could not be regarded as applied for charitable purpose.-CIT v. V.G.P. Foundation [2003]262 ITR 187

Amount given by making credit entries in books & withdrawn by later-entitled to exemption-CIT v. Thanthi Trust[1999] 239 ITR 502(SC)

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYCONDITIONS FOR ACCUMULATION

11(2): Accumulation of unapplied income. 11(2)(a): Application for accumulation upto 10

years. 11(2)(b): Accumulated income to be invested as

per 11(5) Proviso-1: Period of stay from court to be

excluded in calculating 10 years. Proviso-2: 10 years to be substituted 5 years in

case of income accumulated after 1-4-2001. Explanation: Accumulation for benefit of

exempted institutions u /s 12AA and 10(23) shall not be treated as application.

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYACCUMULATION OF INCOME Must be conscious Act & not just a mass of unspent / unapplied

profits- CIT v. SBI [1988] 169 ITR 298(Bom) Time limit for filing of Form 10 before completion of assessment is

mandatory & without particulars of this income, assessing authority can not entertain claim u/sec 11-CIT v. Nagpur Hotel Owners Association [2001] 247 ITR 201(SC)

Option can be exercised alongwith return filed u/sec 139(4), if exercised in writing-requirement satisfied -Tulsidas Gopalji Charitable & Chaleshwar Temple Trust v. CIT[1994] 207 ITR368(Bom)

If after filing Form 10, Assessee without investing applied the same to charitable purposes, exemption could not be denied on ground that sec 11(2)(b) not complied- SRMMCTM Tiruppani Trust v. CIT[1998] 96 Taxman 635(SC)

Plurality of purposes for accumulation in not precluded- Director of I.Tax v. Mitsui & co. Environmental Trust[2007] 211 CTR(Del)352

Option available for capital gain also -CIT v.East India Charitable Trust[1994]206 ITR 152(Cal)


BUSINESS INCOME OF A TRUST Section 11(4) provides that a business undertaking

held by a trust will be treated as a property held under a trust.

Where a claim is made that the income of any business shall not be included in the total income, the AO shall have the power to determine the income of such undertaking in accordance with the provisions of the Act relating to the assessment. (i.e. as per Section 28 to 44 )

Where any income so determined is in excess of the income as shown in the accounts of the undertaking such excess shall be deemed to be applied to purposes other than charitable or religious purposes and thus, it will be liable to be taxed accordingly.


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

It has been held in that a business whose income is utilized by the trust for the purpose of achieving the objectives of the trust is, surely, a business, which is incidental to the attainment of the objectives of the trust. In any event if there is an ambiguity, the provision must be construed in a manner that benefits the assessee. [CIT v. Thanthi Trust [2001] 247 ITR 785 (SC)]


Anonymous Donations Anonymous donations of the following entities shall be

included in the total income u/sec 115 BBC 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(23C) (iii a e) and (vi a) 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); (established for charitable purpose)

(v) any trust or institution referred to in section 10(23C)(v). (established for public religious purposes or public religious & charitable purposes )


Anonymous Donations Anonymous donations not covered under section 115BBC

The following anonymous donations shall, however, be not be covered under section 115BBC:

(a) donations received by any trust or institution created or established wholly for religious purposes. (b) donations received by 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.)

TRUSTS -TYPES & TAXABILITY-COMPLIANCESTRUSTS -TYPES & TAXABILITY-COMPLIANCES

Basis of differences Section 10(23C) Section 12 Section 80G

Exemption w.e.f. The year in which it is granted and thereafter

The year in which it is granted and thereafter

AY as specified in order

Appeal on rejection Not provided Lies to Appellate Tribunal

Lies to Appellate Tribunal

Form of Audit Report

Form 10BB (Rule 16CC) Form 10B (Rule 17B)

Form of Application for accumulation

Not prescribed Form 10

Last date of filing of form for accumulation

Before the due date of filing of return u/s 139

Before the due date of filing of return u/s 139

Power to condone belated application

No No

Form for filing of return

ITR 7 ITR 7

TRUSTS -TYPES & TAXABILITY-COMPLIANCESTRUSTS -TYPES & TAXABILITY-COMPLIANCES

Sources of Income Under Section

Tax Rates

Voluntary Contributions (being corpus donations) 11(1)(d)

Exempt

Income not applied / accumulated to the extent > 15%

11(1)(a)

AOP Rate

Income received on 31st March carried forward to next year for utilization but not utilized in that next year [Explanation 2(b) to Section 11(1)(d)]

11( 1B) AOP Rate

Income accumulated u/s 11(2) is not invested / utilized / donated to another trust

11(3) AOP Rate

Excess Business Income as assessed by the AO 11(4) AOP Rate

Income derived u/s 13(1)(a) & 13(1)(b) AOP Rate

Income derived u/s 13(1)(c) & 13 (1)(d) MMR

Anonymous Donations u/s 115BBC 30%

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYTAXABILITY OF PRIVATE TRUST Where shares of beneficiaries are determinate or

known (Section 161) Where income does not include business profits [Section

161(1)]The trustee is assessable at the rates applicable to each beneficiary.

Where income includes profits from business [Section 161(1A)]The whole of the income of the trust is taxable at maximum marginal rate.

However, if such profits from business are receivable under a trust declared by any person by ‘will’ exclusively for the benefit of any relative, dependant on him for support and maintenance and such trust is the only trust so declared by him, then, the trustees shall be assessable at the rates applicable to each beneficiary.

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYTAXABILITY OF PRIVATE TRUSTWhere shares of beneficiaries are indeterminate or unknown i.e. in case of

discretionary trust [Section 164(1)Where income does not include profits from any business and if:

None of the beneficiaries has taxable income exceeding maximum amount not chargeable to tax or is a beneficiary in any other trust; or

The income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; or

The income is receivable under a non testamentary trust created before 1.03.1970 exclusively for the benefit of relatives of settlor, or member of HUF, who are mainly dependant upon settlor; or

The income is receivable by trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other bona fide fund created by the employer carrying on business or profession for the benefit of his employees,Then, income of the trust is taxable in the hands of trustees at the rates applicable to an AOP. In any other case, income is taxable at the maximum marginal rate.

TRUSTS -TYPES & TAXABILITYTRUSTS -TYPES & TAXABILITYTAXABILITY OF PRIVATE TRUST Where shares of beneficiaries are indeterminate or

unknown i.e. in case of discretionary trust [Section 164(1)]

Where income includes business profits:The whole of the income of the trust is taxable at the maximum marginal rate.However, if such profits from business are receivable under a trust declared by any person by ‘will’ exclusively for the benefit of any relative, dependant on him for support and maintenance and such trust is the only trust so declared by him, then, the trustees shall be assessable only at the rates applicable to an AOP.


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Documents

TRUSTS -TYPES & TAXABILITY PresentationBy CA Sanjeev Verma 6 th December 2008 Lucknow Branch of CIRC of ICAI