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Query

FATEMA (CHARTERED ACCOUNTANT) (719 Points)

27 November 2009

A group of friends come together and open a bank account jointly.They accept deposits and use the deposits for charitable puposes.This activity is running into lacs.However,the deposits recieved in their bank account is not an income so they need file income tax return.Do they need get themselves registered under some act?Is the legal status required for their working?

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15 Replies

CA. RUPESH JOSHI (Chartered Accountant) (174 Points)
Replied 27 November 2009

Presuming that the Deposits received are non-refundable, then such deposits would be construed as income of the AOP (Association of Persons). To avail tax benefits of utilising deposits received for charitable purposes the group should form a charitable trust and have it registered.

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CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 27 November 2009

Completely agreed with Rupesh...

And have to get regisetered as a CHARITABLE TRUST..., its compulsion, to avail the benefits of charitable trust...

On the other hand, its suggested that it should get registered as TRUST only, coz the benefits and advantage they get as a trust, won't get anywhere else..

Thanx

FATEMA (CHARTERED ACCOUNTANT) (719 Points)
Replied 27 November 2009

But the body of individuals is just acting as an intermediatery between the actual donor and the donee.Are the non-refundable deposits still taxable in the hands of BOI?

CA. RUPESH JOSHI (Chartered Accountant) (174 Points)
Replied 27 November 2009

To avail exemption u/s. 11 of the I.Tax Act, they have to get themselves registered as a trust.

AOP/BOI are subjected to tax at the maximum marginal rate. Further exemption u/s. 11 is not available to them.

FATEMA (CHARTERED ACCOUNTANT) (719 Points)
Replied 27 November 2009

I understood the applicability of section 11 but my opinion is that hte deposits are not taxable.So the question of getting the tax benefit u/s 11 after getting registered as a trust does not arise.

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CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 27 November 2009

Hi FATEMA...

The way u said.., i think than they are needed to register themselves as AOP or BOI...

I mean, though they are just accepting the deposits and thereafer donating the same, but they are needed to disclose this as a association....

Even, a charitable trust accepts the donations and distribute the same to the needy ones (So, better u shd go with section 11 only)...

But, as they are not earning anything (not even interest on the deposits from bank, if at all).. Then they are needed to register their association, and there will be no tax liability as such, coz there's no income.... As intermediaries too get register and their commision or brokerage is taxable...

Still, i wud say, they shd get register as TRUST only, coz even trust does the same job...

Accepting donations and distributing the same, yes, the difference is, the members of trust also contirbute for donations.. While here this is missing, so better u put this Q to experts column and get best answer.....

FATEMA (CHARTERED ACCOUNTANT) (719 Points)
Replied 27 November 2009

Dhiraj,this BOI is almost like a trust bcoz the members are also contributing deposits for donation.I forgot to mention dat in the beginning.

I just want to know that is it compulsory for them to get registered or optional?

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 27 November 2009

Hahahaaa....

Fatema, as such, in INDIA, various people are running various businesses (legal and illegal).., they never get register and still earn lacs and lacs....

So, registeration is not that compulsary.. But thats not advisable too... Because :

1. The risk factor, being unregistered and carrying on such business, is highest..,... As the amount deposited in bank and the same is withdrawn too.., Moreover, the amount is in "LAKHS" (as u mentioned).....

2. The advantage, as being registered CHARITABLE TRUST, are maximum and safest....

So, its highly advisable to register and fill regular forms... Othervise, once IT authorities come to know about such act, god help them then.....

And seriously, they should get register, they are as such not going to pay any tax (in absence of any additinal income)..............

They should resgister as CHARITABLE TRUST only..

irshad Ahmad (PCC Student) (24 Points)
Replied 27 November 2009

Originally posted by :FATEMA
"	yes, they have to get themselves registered as an AOP / BOI.	"

CA. RUPESH JOSHI (Chartered Accountant) (174 Points)
Replied 27 November 2009

If an assessee is an institution whose object is charitable as defined u/s.2 (15), it would be entitled to registration under section 12A, even though, as per definition of ‘person’ u/s.2 (31), it is falling in other category like AOP/BOI. Registration u/s.12A is a condition precedent for availing benefit u/s. 11 and 12.

Non-refundable deposits received for charitable purposes per se do not qualify as exempt income. They are deemed to be income of the trust subject to exemption u/s.11.

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Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 28 November 2009

Dear All,

I think before determining the nature income/reciept and its taxability, we need to evaluate terms "diversion of Income" vis a vis "application of Income".

Regards

Juzer

FATEMA (CHARTERED ACCOUNTANT) (719 Points)
Replied 28 November 2009

Dear Rupesh,

I agree with you in totality regarding the taxablitiy of non refundable deposits in case of a trust.What about the non refundable deposits in case of BOi?Are they also taxable even if the deposits are being used for donations?

Atal Dangaich (CA Final Student) (153 Points)
Replied 28 November 2009

Dear Fatema,

I may be interfering, but the thing is that income tax has to be paid on such deposits whether or not it is refundable. This is the income, as discussed already by others. There are provisions in the I-T Act to avoid the taxes. One has to comply with the requirements of these sections specifically meant for charitable purposes. Moreover, the income is not wholly exempt there are ceiling on it. I totally depends on what part of donations is spent and that too for charitable purposes. The kind of work that is being done must fit in the definition of 'Charitable Purposes'.

Moreover, the BOI has to pay taxes on such deposits received by them. Furthermore, I'd like to suggest you that do not concieve the idea of non-taxability of such donations prima facie on the fact that no body is making income out of it and it is wholly used for charitable purposes.

FATEMA (CHARTERED ACCOUNTANT) (719 Points)
Replied 30 November 2009

Dhiraj,

What if i say that the BOI recieves voluntary contributions from the individuals.They issue receipts fro every voluntary contribution that is received and specify the use of that voluntary contribution in the reciept.The contribution is immediately used for donating it to the needy.

Will they still be taxable?