Understanding Trust with latest case laws : Part – II.

The concept of trust is still a mystery to the taxpayer due to its complexities. The concept had been explained in the part-1. (link provided at end) where the taxpayer can get the knowledge on trust. However, for practical purpose, it is also important to know the latest judgements which has been announced by various High courts and ITAT of India  in respect of public trust.

·          Commencement of Activity: Commissioner cannot refuse to register trust on the ground that trust has not commenced its activities. Refer, CIT v. KutchiDasaOswal Moto PariwarAmbamaTrust, 362 ITR 194.  Similar decision provided in the case of   DIT(E) .v. SeerviSamajTambaram Trust, 362 ITR 199.

 

·          Denial of exemption:    on denial of exemption only net income to be taxed. Refer, DDIT(E) .v. Petroleum Sports Promotion Board, 362 ITR 235.

·         Commercial activity : Activity not in accordance with objects –Major portion of income was spent towards construction of commercial  complex-Not entitled to exemption. Refer, KammaSangham .v. DIT,. 362 ITR 30.

In the case of CIT v. Working Womens Forum, 365 ITR 353, it was held that when Trust making investment in shares of company then denial of exemption only to extent provision violated and not total denial of exemption.

Property held for charitable or religious purposes- Provide medical relief through yoga, ayurved, acupressure and naturopathy and to impart education in field of yoga for purpose of alleviating all kinds of disease- Business held in trust-charitable trust can carry on business and utilize its profits there from for charitable purposes but it cannot have its purpose, an activity that involves buying and selling of goods and making profits-Entitled exemption. Refer, Divya Yog Mandir Trust .v. Jt.CIT, 60 SOT 154.

The assessee subsidised rates of blood components in favour of corporate entity which was its associate company. The associate company was distributing it to patients at much higher rates. Held, assessee was not entitled to exemption as this was not a charitable activity. Refer, Advance Transfusion Medicine Research Foundation .v. ADIT, 28 ITR 566. 

In the case of Deputy Director of Income-tax (Exemptions) v. Petroleum Sports Promotion Board, 362 ITR 235, it was held that Expenditure incurred for purpose of promoting sports events and activities is allowable.

Conducting coaching classes and campus placements for a fee by the Institute of Chartered Accountants of India cannot be held as business. Refer, Institute Of Chartered Accountants Of India v. DGIT, 217 Taxman 152/260 CTR 1 (Delhi.)(HC).

Receipts derived by a Chamber of Commerce and industry for performing specific services to its members, though treated as business income, would still be entitled to exemption under section 11, provided there is no profit motive. Issue is decided in favour of assesse. Refer, PHD Chamber of Commerce & Industry v. DIT, 212 Taxman 194.

·         Cancellation of registration: Only on Commissioners satisfaction that activities of trust not genuine or not carried out in accordance with objects of trust. Refer, Parkar Medical Foundation v. Deputy CIT (Pune), VOL 34 PG 286.   

In the case of Cancer Aid and Research Foundation v. DIT, VOL 34 PG 56, it was held that Scholarships to students routed through another trust was no violation of objects of trust and hence not sufficient ground for cancellation of registration

In the case of ITO v. Science Olympiad Foundation, VOL 33 PG 451, it was held that charging of service fees from students  does not amount for dis-qualification.    Similar decision was also given in the case of GS 1 India .v. DIT(E), 94 DTR 105 (Delhi)(HC).

In the case of CIT v. MBA Nahata Charitable Trust, 364  ITR 693 all the donation had been received in cheque but  failed to produce the donors. In this case also trust entitled for exemption.

Exemption cannot be denied on the ground that trust is not registered under a state act or sums received are used for a different scheme as far as prior approval is received from donors. Refer, DDIT(E) .v. Society for Integrated Development in Urban and Rural Areas, 29 ITR 506.

Object of society is construction of public lavatories. Maintenance of public lavatories being incidental to object of society ,amounts spent on such maintenance is entitled to exemption. As there was no evidence of diversion of funds to founder of society, section 13 is not applicable, hence the Society is entitled for registration. Refer, Dy. CIT v. Sulabh International Social Service Organisation, 350 ITR 189.

           

·         Application of Income: Expenditure incurred in the earlier year, repaid out of income of the current year amounts to application of income. Refer, CIT .v. Punjab Mandi Board, 98 DTR 267.

A request by letter complying with the requirement and furnishing all the information as required in Form 10 was made and there was sufficient proof before the AO that the amount was not only kept  apart but was also spent in the next year, the adherence to the form and not substance, was not valid .The AO should allow exemption.  Refer, CIT .v. Moti Ram Gopi Chand Charitable Trust, 98 DTR 68.

Requirement of section 11(1)(a) is that income of trust should be applied for charitable purposes, and it should be applied in India. Amounts spent by assessee-trust outside India for participating in a fair held in Germany could not be treated as application of income of trust for purpose of section 11(1)(a) and were rightly disallowed . Refer, India Brand Equity Foundation v. ACIT, 53 SOT 506 (Delhi) (Trib.).

·         Others : Once registration under section 12A has been granted by Commissioner, Assessing Officer cannot question charitable character of institution during course of assessment proceedings. Refer, Divya Yog Mandir Trust .v. Jt.CIT, 60 SOT 154.

Both section 10(23C) and section 11 are independent sections and as assessee was registered under section 12A, as such, it was entitled to benefit under section 11. Refer, CIT .v. Indian Institute of Engineering Society, 218 Taxman 151.

In order to claim benefit of s. 11, it is mandatory to give intimation to assessing authority in Form 10 at any time before finalisation of assessment proceedings. Since the assessee failed to furnish Form No. 10 before completion of assessment, benefit under provisions of s. 11 for accumulation of profits was rightly denied by authorities below. Refer, Haryana Labour Welfare Board .v. CIT, 219 Taxman 158. 

The assessee trust exercised option for allowing accumulation of income under Explanation to section 11(1) on 22-9-2009.Subsequently, it revised its claim on ground that bona fidely wrong claim was made. However, the assessing authority held that the assessee had not exercised option within time as prescribed by law and, therefore, was not entitled for exemption. Held, since the requirement of  exercising option is directory in nature, a liberal approach ought to have been adopted and the claim of the assessee ought to have been allowed, particularly when mistake in exercising option was committed by assessee bona fidely.. Refer, ACIT .v. Industrial Extension Bureau, 59 SOT 189 (Ahd.)(Trib.). 

The assessee-society filed a letter conveying its intention of exercising option of carrying forward of  unspent funds in next year and claimed exemption under section 11 which was disallowed on the ground of technical default of delay in filing the prescribed form. Where an amount of investment exceeded unspent amount within prescribed period in next year, irregularity and delay in filing prescribed form could be condoned and exemption could be allowed under section 11.Where the fact of assessee having spent significant amount in next year was not examined by Assessing Officer, matter was to be remitted back. Refer, Moti Ram Gopi Chand Charitable Trust .v. ACIT, 59 SOT 197.

Even if business of insurance was carried out by assessee-society for carrying on primary purpose of charitable activities in accordance with aims and objects of trust, assessee would still be entitled to exemption. Refer, CIT v. Modi Charitable Fund Society, 216 Taxman 140.

·         Corpus donation: Corpus donation was in the nature of a capital receipt and not taxable, irrespective of whether trust was registered under section 12AA or not.  Refer, ITO .v. Gaudiya Granth Anuved Trust, 28 ITR 161.

Received shares as corpus and subsequent sale there is no violation the assessee is eligible for exemption. [S. 11(1)(d) (S.13(d)]. Refer, Sera Foundation v. ITO, 79 DTR 210.

·         Computation : Since income for purposes of section 11(1) has to be computed in normal commercial manner, amount of depreciation debited in books is deductible while computing such income. Refer, DCIT .v. Cutchi Memon Union, 60 SOT 260. Similar judgment came in the  case of A. P. Olympic Association v. Asst. Director of Income-tax, VOL 30 PG 314.

Where a charitable or religious trust has income from different sources and a part of such income comes within ambit of taxation, it will not be possible to earmark any part of such income to a particular head and such income has to be computed in a normal commercial manner; therefore, question of allowing any statutory deductions as contemplated by different provisions of Act dealing with different heads of income cannot arise while deciding percentage of application or accumulation under section 11.While computing income of a trust, deduction under section 24 from income from property held for charitable or religious purposes cannot be allowed. Refer, DCIT .v. Cutchi Memon Union, 60 SOT 260.

Deduction of depreciation on fixed assets of whose cost has already been claimed as application of income is permissible. Refer, CIT .v. Devi SakuntalaTharal Charitable Foundation, 358 ITR 452.

Depreciation is treated as application of income. Receipt of loan does not invite denial of exemption & Repayment of loan will amount application of income.

1. Claim for depreciation on fixed assets is treated as application of income;

2. Receipt of loan in violation of the Bombay Public Trust Act does not invite denial of exemption u/s. 11;

3. Repayment of loan originally taken for the objects of the trust will amount to an application of income

Refer, Dy.DIT v. G.K.R. Charities, Mumbai ITAT, ITA No.8210/Mum/2010, Dr. 10-08-2012 A.Y. 2007 – 2008., (2012) BCAJ Pg. 26, Vol. 44-B Part 3, December, 2012. Mumbai ITAT.

·         Anonymous donation : Voluntary donations as “anonymous donations”–Cash credits-Does not apply as the assessee has maintained a record of the identity indicating the name and address of the person making the contribution. Refer, Sunder Deep Educational Society .v. ACIT, Delhi ITAT.

·         Public Utility : Advancement of animal welfare directed towards prevention and suppression of cruelty to animals or prevention or relief of suffering by animal is nothing but charity and society engaged in such activity  falls within definition of general public utility as stated in section 2(15). Refer, Retired Race Horse Welfare Society .v. DIT, 59 SOT 209 (Hyd.)(Trib.).

Assessee an educational institution conducting various courses categorized as continuing education diploma and certificate programmes, management development programmes, seminars and workshops and conferences. 80 % receipts were from continuing education programme. The A.O. was of the opinion that on going through the nature of courses and duration, the resultant surplus for each activity, the activity of the assessee is not educational and it was held by the A.O. that the assessee's activities are not educational and since the provisions of Section 2(15) are applicable and therefore the assessee is not entitled for exemption. In appeal CIT (A) also confirmed the view of A.O. On appeal the Tribunal held that the assessee is conducting various diploma courses, certificate progarmmes seminars, workshops etc all these programmes fulfilled systematic instruction and training test hence covered under section 2 (15) as education hence eligible for exemption under section 11. Refer, Ahmedabad Management Association v. JDIT, 143 ITD 476 .

Income from management development program, hiring premises is eligible for exemption.

1. Income from management development program earned by educational institute considered as eligible for exemption;

2. Income from hiring premises and advertisement rights since applied for educational activities eligible for exemption;

3. Claim for depreciation on fixed assets, the cost of which was allowed as application of income, allowed. The tribunal observed that the assessee was not claiming double deduction on account of depreciation as has been held by the AO. According to it, the income of the assessee being exempt, the assessee was only claiming that depreciation should be recued from the income for determining the percentage of funds which have to be applied for the purpose of Trust. Thus, there was no double deduction claimed by the assessee.

Refer, ADIT v. Shri Vile Parle Kelvani Mandal, Mumbai ITAT, ITA No. 7106/Mum/2011, Dt. 05-10-2012, BCAJ Pg. 26, Vol. 44-B Part 2, November, 2012, Mumbai ITAT.

An assessee that engages itself only or predominantly in activities relating to its ancillary or incidental objects which are not related to any charitable purpose and does not carry on any activity relating to its main object of charitable nature is not entitled to exemption u/s. 11 ; assessee institution having never carried out any scientific research, and applied a very insignificant portion of its income towards research and development activities, it is not entitled to exemption u/s. 11; claim for exemption u/s. 11 is also not sustainable in view of cl. (b) of sub s(4A) thereof as the leasing business carried on by the assessee was not wholly for the charitable purposes. Refer, M. Visvesvaraya Inds. Research and Development Centre vs. CIT, 79 DTR 387.

·         Capital Gain: If capital gain is applied for charitable purpose of assessee not by acquiring a new asset but for other charitable purpose, then there is no reason why it should not be considered as application of income for charitable purpose enabling assessee to claim exemption under section 11(1). Refer, Al Ameen Education Society v. DIT, 139 ITD 245.

·         Accumulated Profit : Assessee-society was running educational institute. It was held that where assessee-society had accumulated income for specific purpose as per objects of trust and accumulated funds had been used accordingly in subsequent years, disallowance of accumulation was not justified. Refer, ACIT v. Jamia Urdu, 139 ITD 590 (Agra)(Trib.).

Link of Part –I: http://taxbymanish.blogspot.in/2012/02/understanding-taxation-of-trust-in.html

In case you have any further clarification, feel free to contact me at taxbymanish@yahoo.com or else you can view more articles & news related to Indian tax & finance at http://taxbymanish.blogspot.in/

Thank you.