Assessment of Trusts and Institution – Important Points to be Consider

Following are the certain important Points for Consideration for Assessment of Trusts and Institutions.

1.   Voluntary Contribution Received by Trusts:

Voluntary contribution can be of two types:

(1) Voluntary contribution with a specific 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.

Restriction on exemption in case of corpus donation by exempt entities to other exempt entities registered under section 12AA [Explanation 2 to section 11]

Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to any other trust or institution registered under section I2AA, being contribution with a specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income for charitable or religious purposes.

(2) 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.  [Section 115BBC]:   Taxation of certain Anonymous Donations Received by Trusts

(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 @ 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)(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) Trust or Institution not liable to pay tax on Anonymous Donations received by them [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 Donations 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.   [Section 12(2)]:  Exemption under Section 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)

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.

Explanation.—The expression ‘value’ shall be the value of any benefit or facility granted or provided free of cost or at concessional rate to any person mentioned in section 13(3), clauses (a) to (d).

4.  Treatment of Capital Gain 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).

5.   [Section 11(1A)]:  Cases where income from Capital Gain shall be Deemed to have been applied for Charitable Purposes

Section 11(1A) deals with two situations, namely:—

(A) Transfer of capital asset held under trust wholly for charitable or religious purposes.

(B) Transfer of capital asset held under trust in part only for charitable or religious purposes.

(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, and

(i) the whole of the net consideration is utilised for acquiring another capital asset; or

(ii) part of the net consideration is utilised for acquiring another capital asset,

then, the capital gain arising from such transfer shall be deemed to have been applied to charitable purposes to the extent specified hereunder:

(B)  [Section 11(1A)(b)]:  Transfer of Capital Asset held under Trust in Part only for Charitable or Religious Purposes

As already discussed, such trusts are eligible for exemption under section 11 only when they have been created before the commencement of the Income-tax Act, 1961.

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:

Appropriate Fraction means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes;

Cost of the Transferred Asset means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in section 55(1)(b);

Net Consideration means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

6. Treatment of Donation in Kind:

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 one year from the end of the previous year in which asset is acquired.