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Trust taxation

GEORGE JOSEPH ( Practising CA) (100 Points)

21 November 2013

A trust with mixed objects;80 % charitable and 20 % religious,No business activities.Yearly income around Rs.60000/= only being interest on Fixed deposit. No other income anticipated.For last several years this is the case. Not registered under sec12/12AA.The Bank deducts income tax on interest.My queries are as follows:

1.In which entity capacity the trust will be assessed?

2.Can basic slab exemption be availed?

3.Is there any tax liability for AY 2014-15?

4.If no tax liability, to get refund, what is the procedure?

5.Any obligation to file return

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16 Replies

Shreyas (***) (53 Points)
Replied 21 November 2013

Exemption u/s 11 is not available to trusts not registered u/s 12AA

1) Capacity: Artificial Jurisdictional Person

2) Yes slab exemption is available

3) Tax liability of an assessee would depend on its income. However, as per information provided by you Rs. 60,000/- interest is received and there is no other income then there is no tax liability.

4) Well being a practicing CA its a weired question to ask . However, you can contact me via email for the same.

5) No, there is no obligation to file the return.

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Rachit (Analyst) (913 Points)
Replied 21 November 2013

Hi Shreyas

Could you pl. provide your views on the following issue:

As per section 11 of the I. Tax Act, a charitable trust must apply at least 85% of the income on the trusts objects to be eligible for the exemption. The balance 15% is deemed to be accumulated for the purpose of charity and is exempt from tax.

Income derived by a trust wholly for charitable or religious purposes, to the extent it is not exempt under Sections 11 and 12 is liable to tax at normal rates applicable to an Association of Persons (AOP) i.e. at slab rates

Therefore if due to any reason, the amount spent on the objects of the trust is less than 85% of its total income; and the deficiency is not carried forward to the subsequent year, then the same is considered as taxable income and taxed at slab rates.

In view of the above if in case a charitable trust is unable to spend 85% on its objects and this 85% is below the basic exemption limit of Rs. 2.00 lacs thereby resulting in NIL tax liability.

Can there be any adverse repercussions in this respect if every subsequent years it does not spend 85% on its objects and as the said amount being below taxable limit no tax is paid.

Further, whether the said post tax income can be taken to the corpus of the trust or has to be reflected separately in the Trust Balance Sheet.

CA. Amit G. Chandani (Entrepreneur/Consultant) (1312 Points)
Replied 21 November 2013

Dear Rachit,

If, in any year, income applied falls short of 85%, still you can take section 11 benefit under Explanation 2 of Section 11(1).

Your trust is violating Section 11, it is only due to the fact that your income is below exemtion limit, you are not being audited. Once it comes in audit, no CA will sign Form No.10B if the conditions of exemption are not satisfied.

Said income can be added to corpus of trust.

Regards,

Shreyas (***) (53 Points)
Replied 21 November 2013

Rachit,

No there are no adverse repercussions if income is below the slab rate and no amount is accumulated or set apart of application in future years.

Surplus has to be carried forward and disclosed seperately in the Balance Sheet under Income and Expenditure Account.

Corpus Funds consists of only those contributions received by the trust with specific direction that they shall form part of the corpus of the trust.

Hence, for the purpose of true and fair view of the balance sheet of the trust it would be advisable to disclose Surplus or Deficit seperately in the Balance Sheet.

CA. Amit G. Chandani (Entrepreneur/Consultant) (1312 Points)
Replied 21 November 2013

Dear Shreyas,

It will be a great favor if u can provide the provision/relevant case law mentioning Section 11 need not to be followed for trust whose income is below the minimum exemption limit.

Thanks in anticipation.

If it would be the intention of law, it would have been mentioned as it is mentioned in Section 44AA/44AD for non-maintenance of books for assesee u/s 44AD.

Views solicited.

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Rachit (Analyst) (913 Points)
Replied 22 November 2013

Thanks Shreyas & Amit for your replies. Shreyas, I too agree with your view.

Dear Amit,

Trusts are assessed as AOP and taxed at slab rates. In my view, Sec. 11(1) grants exemption from tax in the event the income is utilized as prescribed thereunder.

If the trust is unable to apply the income or part of the income to the trusts object the said exemption is denied to the extent of the amount of deficiency and the income (deficiency) becomes taxable and taxed at slab rates. To illustrate:

( Amount in lacs)

Total Income 10.00

(-) Basic exemption 15% u/s. 11(1) 1.50

Balance 85% to be applied 8.50

Amount applied / spent (say) 7.00

Amount not applied / Deficiency - TAXABLE INCOME 1.50

TAX PAYABLE NIL as income is below basic exemption limit

GEORGE JOSEPH ( Practising CA) (100 Points)
Replied 22 November 2013

Friends, Shreyas, Rachit, Amit, I thank you all for ur replies.

Rachit (Analyst) (913 Points)
Replied 26 November 2013

Whether a charitable trust can spend a substantial portion of the corpus of the trust in a single financial year? Does it require to take a prior permission of the Charity Commissioner in this respect before application of the said funds,

Eg. Total Corpus of the Trust 50.00 lacs

(-) Amount applied towards the objects during F.Y. 2012-13 (45.00) lacs

Balance corpus as on 31.03.2013 5.00 lacs

Shreyas (***) (53 Points)
Replied 26 November 2013

If say a trust wants to spend Rs. 45 lacs then it should be disclosed in income and expenditure account instead of reducing it from Corpus of the Trust

Income (say) Rs. 5,00,000/-

Less: Amounts applied for objects of the Tust Rs. (45,00,000)/-

Surplus/(Deficit) [to be c/f to balance sheet] Rs. (40,00,000)/-

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GEORGE JOSEPH ( Practising CA) (100 Points)
Replied 26 November 2013

I agree with What Mr.Shreyas says.Dont adjust against corpus.I do not think any approval from charity commissioner is required.trust shall spend maximum funds as per the constitution and trust deed so that the accumulation is within 15 % limits of the income earned during a year.

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GEORGE JOSEPH ( Practising CA) (100 Points)
Replied 26 November 2013

Rachit (Analyst) (913 Points)
Replied 27 November 2013

Thanks Shreyas & George.

One more issue for discussion.

Corpus Donations received by a trust is exempt u/s. 11 (1) (d) of the I. Tax Act.

Whether, donation given / paid out of the income for the year, by a trust registered u/s. 12AA as / towards corpus donation to/of another trust shall be treated as an application of its income as presribed u/s. 11(1) of the Act.

Explanation to sec.11(2) is applicable only to accumulated income.