What is a trust?
Trust in the normal course is referred to as the
confidence which one person reposes in another person to whom he transfers the property
with an obligation that the funds so generated therefrom shall be utilised for the
charitable and religious purposes .
How are the trusts
normally created?
Trusts are created when the settlor of the property
transfers a property to the trustees for its usage in the public purposes.
Four essential conditions are necessary to bring into
being a valid trust.
- The person who creates a trust (settlor) should make an unequivocal
declaration binding on him.
- He must transfer an identifiable property under irrevocable arrangement
and totally divest himself of the ownership and the beneficial enjoyment of the income
from the property .
- The objects of the trust must be defined and specified.
- The beneficiaries are specified.
What is the tax treatment
of the income of the private religious trusts and public religious trusts?
The income of the wholly religious trusts shall be
exempt from income tax . The income of a private religious trust not ensuring to the
benefit of the public at large shall not be exempt from tax.
What is the distinction
between a public trust and a private trust?
The essential distinction between a public and a private
endowment (trust) is that the beneficial endowments vests in an uncertain and a
fluctuating body of the persons either the public at large or some considerable portion of
it answering a particular description. On the other hand , in a private endowment the
beneficiaries are definite and ascertained individuals .
What is meant by
accumulation of funds by trusts?
Trusts have an option of accumulating (setting apart),
some of the funds received from the voluntary contributions, in every previous year, for
certain purposes.
The tax advantage is that the part of the contributions
so set apart for the accumulation shall never be considered as the income for the previous
year; accordingly, the expandable amount for the charitable purposes shall be reduced.
What is the procedure of
obtaining permission for accumulation of funds under the Income Tax Act?
The Trust(s) is required to apply in Form 10 under the
Income Tax Rules specifying the objects for which the accumulated sums shall be applied.
The filing shall be within the time allowed for the filing of its income tax return.
Whether stating general purposes will suffice, or
specific objects are required to be stated, has been a subject of dispute and different
courts have adopted different stands.
What incomes are not included for computation of taxable incomeof a
trust/ society?
Following incomes are not to be included in the income
of the trusts /society:
- Income
derived from the property held under trust wholly for the charitable and religious
- purposes
actually spent in these purposes in India .
- Income
set apart to the extent it does not exceed 25% of the total income from the property.
- In
case of trusts created before 1/4/61 , the income derived from the property held under
trust partially for the charitable and religious purposes which has been actually spent in
India .
- In the
above case , the income being set apart to the extent not exceeding 25% of the income from
such property.
- The
income as derived by a trust created after 1/4/52 and spent out side India for the
charitable purposes . These trusts shall be specified by the CBDT.
- In
case of the trusts created before 1/4/52 , the income is allowed to be spent out side
India for the charitable and religious purposes.
- Income
by way of voluntary contributions towards the corpus of the trust.
Whether the amount donated
to other charitable trusts shall be considered for arriving at the amount spent for
charitable purposes within the meaning of sec. 11(1)(a) of the I.T. Act, 1961?
As per certain case laws, when a Charitable Trust
donates its income to another Charitable trust, the provision of Sec. 11(1)(a) relating to
the application of income to that extent can be said to have been met.
Please define the
significance of the word Corpus from the viewpoint of Income Tax provisions.
‘Corpus’ has not been defined either in the
Income Tax Act or in the Societies Registration Act, 1860. Ordinarily, ‘corpus’
means body of law or collection of writings.
The significance : Under sec. 11(1)(d) of the Income Tax
Act, the income from the voluntary contributions towards the corpus of the trust or the
institution is not to be included in the computation of income.
Therefore to the extent of the moneys received towards
corpus, the trust or the institution is not under obligation to spend at least 75% of this
moneys in the year of its receipt as provided in Sec. 11(1)(a) of the I.T. Act.
How does a trust or
institution create a Corpus?
Before the funds from any donor are received towards the
corpus, it is advised that the Trust should provide for the creation of a corpus funds in
its Memorandum. It may be noted that in case the trust wishes to create a corpus out of
the surplus funds available during the financial year, this can be achieved by applying to
the concerned Assessing officer within the time of filing of its return.
It is to be noted that the donor should specifically
mention that the funds so donated by him are towards the corpus of the funds.
What are the consequences
in case the society/ trust or the institution does not avail the registration under the
Income Tax Act?
The income so received by way of voluntary contributions
either to Corpus or otherwise shall be considered and the expenses so incurred shall be
allowed to compute the taxable income.
The income so derived shall be assessed in the status of
the Associations of persons. The taxability of this income is generally done at the
maximum rates of tax.
The following benefits are lost in case of non
registration of the society.
- Setting
apart up to 25% of the income so received during the year.
- Accumulation
of the funds even exceeding 25% of the income received for the specific purposes .
- Losing
the exemption of the voluntary contributions received towards the Corpus of the society.
What is the correct
treatment of accounting for the grants with specified end objectives received from
the donor agencies (from the Income Tax angle)?
This issue was addressed in a particular case and the
following was prescribed:
- The
tied up grants received for the end objectives shall be credited to the Donor
agency’s account
- The
Donor account shall be debited with the amount of the expenses incurred .
- Any
non refundable credit balance in the personal account of the Donor shall be treated as
income in the year in which such non refundable balance was ascertained.
The major advantage coming from this accounting
treatment is that the society /trust need not comply with any of the conditions as
prescribed in Sec. 11/12/12A etc.
An alternative treatment is the usual way of
crediting the Income side with the amount of grants received and then complying with the
condition of expending at least 75% of the amounts of these grants.
Whether the society/
Trust can adjust the deficit from the previous year against the funds received during the
year for the purpose of computing the quantum of application of funds u/s 11(1)(a) of the
I.T. Act?
Once it is proved that the deficit has arisen due to the
expending of the funds for charitable and the religious purposes, the deficit so brought
forward can be treated as the application of funds in the subsequent year. This is despite
the fact that there is no enabling provision existing in the I.T. Act.
In case the trust also takes a loan in a particular year
and spends the amount so raised, the expenses so incurred shall be taken as the
application of income in the year of repayment of the loan.
What are the powers of
the Commissioner of Income Tax relating to the registration of the trusts?
The commissioner has the power to examine the documents
of incorporation of the trusts and also the objects for which the trust is created. An
order denying registration has to be a speaking order. This view has been endorsed by the
judiciary.
What are the requirements
to claim the tax exemption in case of the income from the business run by a trust?
Sec. 11(4A) of the Act specifies that in order to claim
the tax exemption under Sec. 11 and 12 , the following conditions are required to be
satisfied.
- The business from which the income representing the profits and gains
from Business and Profession is derived, is incidental to the attainment of the objectives
of the trust.
- Separate books of accounts are maintained by the trust in respect of such
business.
What
is a religious endowment and whether it can be a private religious purposes?
Ans. Endowments are defined to be the dedication of
property by gift or devise to religious or charitable purposes. Religious endowment is one
which has for its objects the establishment, maintenance or worship of an idol or deity or
any object or purposes subservient to religion. In case, the religious endowments are
created for a particular family deity, these become Private endowments. There can be
private endowments for religious purposes but there can not be private endowments for the
charitable purposes.
What is a public temple and how it is different from the Private
temple?
Ans. A public temple is one where a considerable portion
of the public or a section thereof has a beneficial interest. The main characteristics for
a public temple is that it is intended for the use of the public at large or a specified
class who are entitled for the worshipping of the idol.
