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What is the criteria for Trust Audit?

Neethi V. Kannanth 
on 06 January 2021

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Introduction

NGOs are normally either set up as a trust or a society or a company registered under section 8.

There are two types of trust:

  1. Public Charitable Trusts (section 11 to 13)
  2. Private Trusts

Private Trusts are the trusts governed by the Indian Trust Act, 1882.

Public Charitable trusts are not registered under the Indian Trust Act, 1882. There are three requirements for the creation of Public Charitable Trusts. They are-

  1. A declaration of trust which is binding on the settlor.
  2. Setting apart definite property and depriving himself of the ownership and
  3. A statement of objects for which the property is thereafter to be held.
Charitable Trusts and NGO - Income Tax Audit and Benefits Available

Taxation and Exemption of Income earned by Charitable Trusts and NGO

Nature of Income

Conditions

Taxability/Exempt

Income from property held for charitable or religious purpose in India

Income applied for charitable or religious purpose in India

Exempt

Income accumulated or set aside for the application towards charitable or religious purpose in India

Exempt to the extent of 15% of such income

Income from property held for International Purposes

a) If the object of the trust is to promote international welfare in which India is interested

Exempt

b) A direction from the CBDT by a general or special order is issued stating such income shall not be included in total income

Capital gain from the capital asset held under trust wholly for charitable or religious purposes

Whole amount of net consideration from the transfer of the capital asset is utilized for acquiring a new capital asset which is held under trust wholly for religious or charitable purposes

Exempt

Net consideration from the transfer of the capital asset is partially utilized for acquiring a new capital asset

Capital gain utilised in excess of the cost of the old asset transferred is considered to have been applied for charitable and religious purpose and is exempt

Donations/voluntary contributions

Voluntary contributions with a specific direction to form part of the corpus of trust or institution

Exempt

Voluntary contribution without any specific direction

Forms part of the income from property held under trust

Anonymous donations

Donation exceeding higher of:

Taxed at 30%

i) 5% of total donations received by trust or

ii) Rs 1,00,000

Anonymous donation received by a trust established wholly for a religious and charitable purpose

Taxable in the same manner as voluntary contributions (without specific direction) as above

Note- Only Charitable or Religious Trusts or Institution registered under section 12AA is eligible for exemption stated above.

In addition to the above, income utilized for repayment of the loan for the purchase of a capital asset, revenue expenditure, and donation to trust registered under Section 12AA and Section 10(23C) shall also be treated as applied for charitable purposes and hence exempted from tax.

Conditions for claiming exemption under section 11:

  1. Property should be held under trust
  2. Trust is required to apply at least 85% of its income to charitable or religious purpose in India

As per the definition provided under tax provisions, charitable purpose includes the following:

i. Relief of the poor

ii. Education

iii. Yoga

iv. Medical relief

v. Preservation of environment (monuments or places or objects of artistic or historic interest

vi. Advancement of any other object of general public utility. However, if any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration is not considered to be for charitable purposes, irrespective of the nature of use or application, or retention of the income from such activity unless:

• such activity of trade/commerce/business is undertaken in the course of the actual carrying out of such advancement of any other object of general public utility and

• the aggregate receipts from such activity/ activities during the financial year does not exceed 20% of the total receipts of the said trust or institution during that financial year

The expression ‘religious purpose’ has not been defined under the Act. Religious purposes are necessarily associated with religion and a matter of faith with individuals or communities.

Religious Purpose includes the advancement, support, or propagation of religion and its tenets. The income of a religious trust or institution is entitled to exemption, though it may be for the benefit of a particular religious community or caste. The exemption under Section 11 is available to public religious trusts only and not to trust for private religious purposes.

Non-application of 85% of income for charitable or religious purpose

If a trust or institution is unable to apply 85% of its income from property held under them, the income is still exempt if the following conditions are met.

  1. The income is deemed to have been applied for charitable purposes in specified scenarios.
  2. 85% of income is neither applied not deemed to have been applied, the trust is allowed to accumulate such an unapplied portion of income under specified conditions to claim the exemption

Income deemed to have been applied

• the whole or any part of the income has not been received during the previous year

• any other reason

The assessee has an option to:

• apply such income referred to in the first case for such purposes during the previous year in which it is received or during the previous year immediately following the said previous year

• apply such income referred to in the second case for such purposes during the previous year immediately following the previous year in which the income was derived

Such an option is to be exercised in Form 9A to be furnished electronically with or without digital signature by the trust within the time allowed for filing return of income u/s 139(1).

Accumulation of 85% of the income of the trust

If a minimum of 85% of the income of trust or institution has not been applied or deemed to have been applied as stated above, it is allowed to be accumulated or set aside as per section 11(5) and such income shall be exempt if following conditions are satisfied-

• Such trust or institution furnishes Form No. 10 – notice of accumulation of income by charitable trust or institution electronically on or before the due date for filing the return of income

• Mention the purpose for which income is being accumulated or set aside

• Income shall not be accumulated for more than 5 years and years in which income accumulated or set aside due to the order or injunction of any court to be excluded in computing 5 years

• Money so accumulated or set aside is invested or deposited in a specified mode.

Investment of accumulated income

As per section 11(5), the accumulated income should be invested in the following modes of investment:

• Investment in government saving certificate/UTI

• Deposit in post office savings bank/scheduled bank/co-operative bank

• Investment in immovable property

• Investment in any security for money created and issued by the Central or State Government

• Company debentures fully and unconditionally guaranteed by Central or State Government

• Investment or deposit in a public sector company

• Deposit with or investment in bonds of a financial corporation or public company (registered in India) engaged in providing long term finance for India’s industrial development

If the income is not accumulated as stated above, it shall be taxed in the following manner-

Category of violation

Year of taxation

Income is applied for purpose than religious or charitable

Year of application

Income ceases to be invested as specified

Year in which it ceases to be invested as specified

Not utilized for the purpose it was accumulated for more than 5 years

6th year

Donated to trust registered under Section 12AA or 10(23C)

Year in which income is so donated

 

Non-Availability of Exemption in certain cases

No exemption is available to the following incomes of trust/institution:

• Entire income from property held under trust for a private religious purpose which does not benefit the public

• Entire income of charitable Trust or institution established for the indirect benefit of any particular religious community or caste

• Entire income, If income (wholly or partly) and property of the charitable or religious trust or institution is used for the benefit of specified person**

• Income of charitable/religious trust is not invested as specified

• Value of medical or educational services made available by any charitable or religious trust running a hospital medical institution or educational institution to specified person**

• Any income being profits and gains of a business unless the business is incidental to the attainment of the objectives of the trust/institution and separate books of account are maintained in respect of such business

 

**Specified person for this purpose are as below:

• Author or founder of trust or institution

• Any person who has made a substantial contribution i.e., the contribution of > Rs 50,000 up to the end of the financial year

• In case the author, founder, or person is HUF, a member of such HUF

• Trustee/ manager of the trust/institution irrespective of their designation nomenclature;

• Any relative of any of such author, founder, person who has made substantial contribution, trustee or manager as specified above

• Any concern in which any of the above specified persons has substantial interest i.e., the total contribution of > 50% up to the end of the financial year


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