Practical issues relating to Public and Private Trust

[Ramesh Patodia]

PRACTICAL ISSUES RELATING TO PRIVATE TRUST

Definition and meaning of Trust

1. As per Section 3 of the Indian Trust Act, 1882 a trust is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner; the person who reposes or declares the confidence is called the “author of the trust”; the person who accepts the confidence is called the “trustee”; the person for whose benefit the confidence is accepted is called the “beneficiary”; the subject matter of the trust is called “trust-property” or “trust-money”; the “beneficial interest” or “interest” of the beneficiary is his right against the trustee as owner of the trust-property; and the instrument, if any, by which the trust is declared is called the “instrument of trust”.

2. The property may belong to the beneficiary, but for obligation and use of it, the property vests in trustee. The trustee’s ownership is qualified by the annexed obligation and is not absolute ownership as known to law. The trustee is placed under an obligation to use the ownership rights for the benefit of those to whom the ownership rights really belong. 

3. Types of Trust:-

1. Fixed Trust-A fixed trust is a trust in which the beneficiaries have a current fixed entitlement to such income as remained after proper exercise of trustee’s powers. They have an interest in possession under the trust.
2. Discretionary Trust- A discretionary trust is a trust in which the beneficiaries have no such current fixed entitlement but only hope that the trustees, in carrying out their duty to consider how much income might be paid to which beneficiary, will in their discretion pay income to a particular beneficiary or beneficiaries. No interest in possession subsists.

4. Registration of a Trust- The law of registration of documents is contained in Registration Act, 1908. Under Section 17 of the Registration Act, a non-testamentary instrument declaring any right, title or interest in an immovable property valuing Rs 100 or more is required to be registered. 

As per Section 5 of the Indian Trust Act, 1882 no trust in relation to immovable property is valid unless declared by a non-testamentary instrument in writing signed by the author of the trust or the trustee and registered, or by the will of the author of the trust or of the trustee.

Non testamentary disposition of property is where property is given otherwise than by the instrument of will and can take effect during the life time of the person making the instrument.

5. Who may create a Trust - a trust may be created as per Section 7 by 

(a) every person competent to contract

(b) With the permission of a principal civil court of original jurisdiction, by or on behalf of a minor.

6. Discretionary Trust- Defined

This extract is taken from CWT v. Estate of Late Vikramsinhji of Gondal, ( 2014 (5) TMI 286 - SUPREME COURT )

A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour. [Snell's Principles of Equity, 28th Edn., 138]

The Income-tax Act, 1961 however doesn’t define Discretionary Trust. Section 164(1) refers to discretionary trust as follows:-

Any income in respect of which the persons who are liable as representative assessee or any part thereof is not specifically receivable on behalf or for benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or part thereof is receivable are indeterminate or unknown

1. Generally speaking a discretionary trust is a trust in which the individual shares in income or corpus of the beneficiaries are indeterminate or unknown.

2. The trust law recognises the creation of the trust by wills, no formal deed is necessary for the purpose of recognition of a trust created by a Will.

3. A trust has to be certain as to its beneficiary. Where it is for the benefit of an individual, it is expected that an alternative beneficiary should be provided in case of pre-decease of such individual before maturity of the trust. Where a trust is created for the two minors provided for the contingency of pre-decease of either of them, but not for the contingency of both, the AO held the trust to be invalid on grounds of uncertainty as regards the beneficiaries. The High Court in Mehra Trust 2005 (3) TMI 49 - ALLAHABAD HIGH COURT found that in such a case, Section 77 of the Trust Act would provide for extinguishment of the trust, so that it will revert back to the settlor. There is therefore no uncertainty as presumed by-the AO. The trust was held to be valid. It is pertinent to note the provisions of Section 77 of the Indian Trust Act, 1882 which reads as follows:-

Section 77- Trust how extinguished

A trust is extinguished-

1. When its purpose is completely fulfilled; or
2. When its purpose becomes unlawful; or
3. When the fulfilment of its purpose becomes impossible by destruction of the trust-property or otherwise ;or
4. When the trust being revocable, is expressly revoked. 

4. Revocation of trust- Section 78 of the Indian Trust Act, 1882

A trust created by will may be revoked at the pleasure of the testator. 

A trust otherwise created can be revoked only-

1. Where all the beneficiaries are competent to contract – by their consent
2. Where the trust has been declared by a non-testamentary instrument or by words of mouth- in exercise of a power of revocation expressly reserved to the author of the trust; or 
3. Where the trust is for the payment of debts of the author of the trust and has not been communicated to the creditors –at the pleasure of the author of the trust. 

5. Nature of interest of a beneficiary under a discretionary trust

Gartside Vs Inland Revenue Commissioners 1967 (12) TMI 59 - HOUSE OF LORDS

No doubt in a certain sense the beneficiary under a discretionary trust has an interest, the nature of it may sufficiently for the purpose be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by Court of equity. Certainly that is so and when it is said that he has a right to have the trustees exercise their discretion fairly and reasonably or properly that indicates that some objective consideration must be applied.

7. Amendment of the trust deed

- CIT Vs Kamla Town Trust Vs CIT 1995 (11) TMI 1 - SUPREME COURT

It is not open to the AO to disregard the rectification of a trust deed, when it is done by order of a City Civil court though such order would operate only prospectively.

It is important to note the following passage from the above judgement. 

So far as jurisdiction of the civil court to grant rectification of the trust deed is concerned the relevant provision is found in Section 26 of the Specific Relief Act, 1963 which had succeeded the prior Specific Relief Act of 1877. Under the earlier Act an analogous provision was found in Section 31 of the Act. As per these provisions a suit could be filed before the competent civil court for rectification of an instrument when through fraud or a mutual mistake of the parties a contract or other instrument in writing does not express their real intention. It is obvious that a trust deed is not a contract in the strict sense of the term but it would certainly be covered by the expression “other instrument in writing”. It could therefore, not be urged with any emphasis that the competent civil court which was approached by the Settlor Company for rectification of the instrument of trust, was not having requisite jurisdiction to entertain such proceedings

8.  Status of a Private Trust

There is a lot of ambiguity in this regard. In respect of the specific and Discretionary trust, there can be several permutations and combinations whereby individual and non individuals can be beneficiary of the trust and a question arises whether trust derives its status from that of its Beneficiaries or that of its Trustees?

A trustee appointed under a trust, declared by a duly executed instrument in writing (oral trust included), testamentary or otherwise, is a representative assessee as per section 160 of the Act provided he receives or is entitled to receive any income on behalf of or for the benefit of any person. Such a trustee is deemed to be an assessee for the purpose of the Act. The computation of income and also the taxation thereof must be in like manner and to the same extent as it would be in respect of the person beneficially entitled to the income. This position in law is by virtue of express provisions of sec 161(1).

Thus, Trustee is only a representative of the beneficiaries. He represents the beneficiaries who are the real owners and the income is also be liable to taxed in the like manner and to the same extent as it would have been in respect of beneficiaries. 

The Apex Court in the case of CWT v/s Nizam’s Family (Reminder Wealth) Trust (Trustees of HEH) 1977 (5) TMI 1 - SUPREME COURT   held that the words 'in like manner and to the same extent ' have to be construed that there would have to be as many assessments on the trustees as there are beneficiaries with determinate and known shares. In a number of cases it has been held that if the beneficiary is an individual then the status of the trustee would also be that of an individual. This would be so even if there is more than one beneficiary provided all of them are individuals. The assessment will be taxed at individual rates of taxes applicable to total income of each beneficiary.

Delhi High Court in the case of CIT Vs Food Corporation of India, Contributory Provident Fund Trust 2008 (7) TMI 398 - DELHI HIGH COURT has held that in order to determine whether an assessee is responsible for deduction of tax at source, the status of the assessee is required to be determined and in case of a trust where individuals are beneficiaries, the trust has to be treated as individual and hence no deduction of tax at source is required to be done u/s 194A. The High Court upheld the ITAT order which had relied on the following decisions:-

CIT Vs SAE Head office Monthly paid Employees Welfare trust 2004 (9) TMI 92 - DELHI HIGH COURT

CIT Vs Shri Krishna Bhandari Trust 1992 (3) TMI 23 - CALCUTTA HIGH COURT

CIT Vs Deepak Family Trust (No 1) 1993 (12) TMI 20 - GUJARAT HIGH COURT

M L Family trust Vs State of Gujrat 1993 (12) TMI 9 - GUJARAT HIGH COURT

ITO Vs Arihant Trust 1994 (8) TMI 11 - MADRAS HIGH COURT

CIT Vs T S K Enterprises 2004 (7) TMI 53 - MADRAS HIGH COURT

I.Specific Trust

I)  In accordance with the interpretation hereinabove as well as the Apex Court case of N.V. Shanmugham & Co. v/s CIT 1970 (4) TMI 27 - SUPREME COURT . it is clear that:

1. There would have to be as many assessments on Trustees with determinate or known shares.
2. Assessment of the trustee would have to be made in the same status as that of the beneficiary whose income is sought to be taxed
3. The amount of tax payable by trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were to be assessed directly.

If there are two beneficiaries say one being an individual and the other being a Hindu Undivided Family, the trustee would be liable to tax with respect to the share of the individual beneficiary in the status of “individual” and with respect to the share of “HUF”.

FILING OF RETURN/PAN

There is no provision for mentioning multiple statuses in one Return of Income or a single PAN application.

The return of income as well as the software is not designed in accordance with this law. CBDT issued a Circular No. 6/2012 [F.No.133/44/2012-SO (TPL)] facilitating manual filing of Return of Income of Private Trusts since the exiting e-filing software did not accept Return of income of a Private Discretionary Trust in the status of an individual. 

II. Discretionary Trust

 To begin with, when the shares of the beneficiaries are indeterminate, the income cannot be assessed in the hands of the beneficiaries. Tax shall be charged on relevant income at maximum marginal rate in the hands of Trustees. If the case falls into exceptions provided in proviso 164(1) then tax shall be charged on relevant income as if it were the total income of an AOP. It is only that the tax shall be charged as if it were an AOP, not necessarily that the status shall be determined on that basis. 

 A.  If there are two or more beneficiaries who are individuals?

 In a case where all the beneficiaries are individuals status of such a private discretionary trust would be that of an Individual:

• CIT v/s Deepak Family Trusts 1993 (12) TMI 20 - GUJARAT HIGH COURT
• CIT v/s Shri Krishna Bandar Trust 1992 (3) TMI 23 - CALCUTTA HIGH COURT

B. If there are two or more beneficiaries some of whom are individual, and the others are non-individuals.

In the case of CIT v. Indira Balkrishna  1960 (4) TMI 7 - SUPREME COURT the Hon’ble SC while considering what constitutes an association of persons, held that the word “association” means “to join in any purpose” or “to join in an action”. Therefore, “association of persons” as used in section 2(31) (v) of the Income-tax Act, 1961, means an association in which two or more persons join in a common purpose or common action. In the present case, neither the trustees nor the beneficiaries can be considered as having come together with the common purpose of earning income. The beneficiaries have not set up the trust. The trustees derived their authorities under the terms of the deed of trust. Neither the trust nor the beneficiaries have come together for a common purpose. They are merely in receipt of income. The mere fact that the beneficiaries or the trustees being representative assessees are more than one, cannot lead to the conclusion that they constitute "an association of persons”.

Thus, here also the status cannot be AOP.The question of status of these types of Private Discretionary Trusts seems to be wide open.

C. If there are only non-individual beneficiaries

Where there are only one type of beneficiaries, say only Corporates the status of the discretionary private Trust may be considered as “Company”.

Taxation of Private Discretionary trust

Chapter XV of the Income-tax Act 1961 deals with the liability of the Representative Assessees –general provisions.

Section 160

1. Section 160(1)(iv)- representative assessee means in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise receives or is entitled to receive on behalf of or for the benefit of any person such trustee or trustees.
2. Section 160(1)(v)- in respect of income which a trustee appointed under an oral trust receives or is entitled to receive on behalf of or for the benefit of any person, such trustee or trustees.
3. Explanation 1 contains a deeming fiction whereby in certain cases- a trust even though not declared by a duly executed instrument is writing is deemed to be a trust declared by a instrument in writing.
4. Explanation 2 –definition of oral trust- which has not been declared by a duly executed instrument in writing and which has not been deemed to be a trust duly declared by an instrument in writing as per Explanation 1

Section 161

1. Section 161(1)-every assessee to be assessed in the same manner in which it is assessable upon the beneficiary.
2. Section 161(1A)-business income-taxable as MMR. The rationale behind this is explained in the CBDT Circular No 387 dated 6^thJuly,1984 that Trustees of a trust are ordinarily not expected to carry on any business, because implicit in the nature of business is the possibility of incurring loss and no prudent trustee would like to risk the trust’s property in business venture. However, increasingly it has been seen that taxpayers are conducting business through the medium of trusts and the arrangements are mainly entered for the purpose of tax avoidance, the main object being to avoid payment of the tax firm tax which would become payable if the business is carried on in partnership.

However, MMR is not applicable where profit and gains are receivable by trust declared by a person by will exclusively for the benefit of any relative dependent upon him for support and maintenance, and such trust is the only trust so declared by him.(Relative –Section 2(41).

3. Section 161(2)-where an income already assessed in the hands of the representative assessee –cannot again be taxed under any other provisions of the Act. 

Section 162-Right of representative assessee to recover tax paid

Section 164-Charge of tax where share of beneficiaries unknown

-164(1)-any income which is not specifically receivable on behalf of or for the benefit of any person or where the individual shares of the person on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown the tax shall be charged at MMR.

Exceptions

1. None of the beneficiaries have any other income chargeable under the Act exceeding the maximum amount not chargeable to tax in the case of an AOP or is a beneficiary under any other trust, or
2. Where the trust is declared by a will and the trust is the only trust so declared or
3. The relevant income is receivable by trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bonafide by a person carrying on a business or profession exclusively for the benefit of the persons employed in such business or profession. 

In such cases the tax shall be charged as if the same were total income of an AOP.

Again in case of income from business or profession, the tax shall be chargeable at AOP rate only if the trust is declared by will exclusively for the benefit of any relative dependent on him for support and maintenance and such trust is the only trust so declared by him.

Explanation 1 of Section 164- deals with 

1. Deeming fiction as to when any income shall be deemed as being not specifically receivable on behalf or for the benefit of any one person
2. Deeming fiction as to when the individual shares of the person on whose behalf or for whose benefit such income or part thereof is receivable shall be deemed to indeterminate or unknown Section 164A-Oral trust- MMR Rate. 

The provisions were introduced by the Finance Act, 1981 w.e.f. 1/4/1981 and the provisions as introduced has been explained in CBDT Circular No. 308 dated 29/6/1981.The effect of the provisions are

1. An oral trust, the terms of which are not subsequently recorded in writing and intimated to the AO in the specified manner, will be chargeable to tax at the MMR rate in all cases; and
2. An oral trust, the terms whereof are subsequently recorded in writing and intimated to the AO in the specified manner, will be chargeable to income-tax at the MMR rate in cases where the shares of the beneficiaries are indeterminate or unknown. Where however the shares are determined the tax would be recovered in the same manner as the beneficiaries.

Section 166- direct assessment or recovery not barred

1. As a general rule such trusts are taxed at a maximum marginal rate.

Trust created for benefit of minor 

2. Where a trust is created for the deferred benefit of a minor child by accumulated the income of the trust until such time the minor attains majority, the provision relating to clubbing u/s 64(1A) are not applicable.

CIT Vs M R Doshi 1994 (9) TMI 3 - SUPREME COURT . See also Kapoor Chand (Dead) 2015 (11) TMI 398 - SUPREME COURT

However, this doesn’t mean that even the trust cannot be taxed-See Ganesh Chhababhai Valabhai Patel Vs CIT 2002 (5) TMI 20 - GUJARAT HIGH COURT

Trust for unborn child 

3. A trust for an unborn child is a valid trust- 

CWT Vs Rakesh Mohan 2005 (1) TMI 88 - ALLAHABAD HIGH COURT

Specific trust becoming discretionary and vice versa

4. In case of a discretionary trust, if the shares are specified later on the trust becomes a specific trust from the date of the specification- CIT Vs Devshi Trust 2005 (7) TMI 88 - BOMBAY HIGH COURT . Similarly there may be a specific trust and may be made discretionary later on. Until it is discretionary the same has to be treated as specific trust. CIT Vs Mani Enterprises 2004 (1) TMI 49 - GUJARAT HIGH COURT .

5. In the case of H H Maharaja Sri Jyotindrasinghji Vs Asst CIT  2008 (9) TMI 512 - GUJARAT HIGH COURT based on the decision of CIT Vs Kamalini Khatau 1994 (5) TMI 1 - SUPREME COURT , it was held that where a resident assessee was a beneficiary of a discretionary trust executed in UK, but there was no income during the year as none was distributed, the issue was, whether such income could be assessed on accrual basis in the hands of the beneficiary.
6. In case of a sole beneficiary, the share stands specified so that the maximum marginal rate provided for the trusts ,where shares are not specified, would have even otherwise no application as held in CIT Vs Poonam Trust 2005 (3) TMI 42 - PUNJAB AND HARYANA HIGH COURT .
7. Liability of representative assessee- Only the beneficial interest could be assessed and not the entire trust fund as held in the case of A V Reddy Trust Vs CWT 1999 (10) TMI 3 - SUPREME COURT .

8. Beneficial interest- how assessed- under the same head in which the trust would have been assessed- CIT Vs Pooja Investments Private Ltd 2004 (7) TMI 36 - PUNJAB AND HARYANA HIGH COURT .

9. Maximum rate of tax is prescribed by law in certain cases as in case of a discretionary trust, where the shares of the beneficiaries are not specified. Should such assessees be deprived of a minimum exemption limit, so as to apply maximum rate for the entire wealth? The issue was decided by the Supreme Court in favour the tax payer in the case of DIT Vs Gopal Srinivasan Trust 2001 (10) TMI 88 - SUPREME COURT . It was found that the maximum rate would have no application in respect of wealth for which no tax was payable. The objective of maximum rate was that the revenue should not lose, where the wealth was taxable but not to bring to tax, what would not have been taxable.

10. Section 161(1A) prescribed liability at MMR for a trust which carries on a business. Where there is a business loss, but all the same, it has other taxable income, the issue whether MMR rate would apply to the income even in such a case, is debatable. See Ganga Medical Trust Vs CIT 2002 (9) TMI 35 - MADRAS HIGH COURT .

11. Trust income not to be included for rate purposed- CIT Vs P N Bajaj 2002 (11) TMI 54 - MADRAS HIGH COURT – since the trustees are assessed in the same status as that of beneficiary –there cannot be any reason for inclusion of the income from trust for rate purposes u/s 86.

12. Where the beneficiaries itself are trust- if they are so specified- MMR May not be applicable- CIT Vs Srinivali Trust 2004 (2) TMI 46 - GUJARAT HIGH COURT .

13. Whether the trustees can form AOP- What is relevant is not the number of the trustees but the status of the beneficiaries as decided in the case of CIT Vs TSK Enterprises 2004 (7) TMI 53 - MADRAS HIGH COURT   following 1990 (7) TMI 37 - BOMBAY HIGH COURT .

14. Non resident trust-with resident beneficiaries-

• Som Datt Vs ACIT Kolkata benches- 2015 (6) TMI 604 - ITAT KOLKATA
• Shantaben Patel Mumbai ITAT- ITA 5000/Mum/2001

15. Receipt of income or distribution-Arvind Singh Chauhan –Agra bench of ITAT.

16. Whether the amount received by a beneficiary from the trust can be said to be received without consideration and hence taxable u/s 56 –ITAT Mumbai Benches –Ashok C Pratap.

17. Residence of a trust-how to be determined- Tax shall be charged as that of an AOP – See Gopal Srinivasan Trust Vs ADIT 1993 (4) TMI 121 - ITAT MADRAS-D

18.  42 ITR 1- Adequate consideration –Meaning Transfer also defined- upon creation of a Trust; there is a transfer even if Settler and Trustee are same.
19. Family Settlement has been held not to be a transfer. It has been held by Apex Court that there can be no capital gains in case of family settlements and this situation can be said to still prevail. 2007 (7) TMI 171 - MADRAS HIGH COURT .

20. A trust created by will- a person has a right to create a trust inter vivos, to be operative within his lifetime or by will to be operative after his death.

A will can be written and rewritten so as to vary or revoke the will made earlier. A fortiori, therefore, a trust proposed to be created by will may be revoked at the pleasure of the testator. Obviously, it can neither be varied nor revoked after the death of the testator. 

A will can be revoked in three ways:

1. By another will executed in same manner as the original will.
2. By destroying it
3. By the disposition of the property by the testator in his lifetime.

If the testator, after executing a will containing declaration of a trust, chooses to transfer the property, the property , meant to be trust property, inter vivos to be held upon the same trust as that declared in the will, the legal position of the trust becomes quite different from that of a trust simply described in a will by the testator without any transfer of the property inter vivos. In such a case , the will may be revoked by the testator, but the trust created by the conveyance of the property survives unless the testator reserves a power of revocation 

Amendments made by Finance Bill 2017

1. Section 115BBDA has been amended to provide that this provision shall be applicable to all the assessees except domestic companies or funds or institutions or trust or any university or other educational institutions referred to in Section 10(23) or a trust or institutions registered u/s 12A. This provision deals with levy of tax on dividend referred to in Section 2(22) except clause (e). The following points may be noted:-

a)   It is being discussed that the trusts would now be hit. However, as of now also where the status of trust is treated as individual, this provision can be said to have been applicable.

b)   Dividend received from Mutual funds is still out of this levy.

c)   A situation will arise where the dividend received by trust in excess of ₹ 10 lacs will be chargeable to tax u/s 115BBDA and thereafter when the said amount is distributed as income to the beneficiary in later years, the same may be again brought to tax in the hands of beneficiaries, though the law is clear that there cannot be double taxation of same income (Nagappa Vs CIT 1968 (9) TMI 12 - SUPREME COURT ).

2. Insertion of Section 56(2)(x) and deletion of Section 56(2)(viia)

Section 56(2) (x) is being sought to be inserted to provide that any amount received by any person without consideration shall be chargeable to tax u/s 56(2) (x). In this regard, the following questions arise:-

a)   When a person settles a trust for the beneficiary, it is really for the benefit of the beneficiary and as such the provisions of Section 56(2) (x) has to be seen as if the settler is settling for the benefit of the beneficiary and as such the exclusionary clauses re relative has to be applied with relation to beneficiaries. Though this is doubtful.

b)   Section 56(2) (X) uses the term “consideration” as against “adequate consideration” used in Section 60-64. The Apex Court in the case of Sonia Bhatia Vs State of UP & Ors 1981 (3) TMI 250 - SUPREME COURT has threadbare discussed the meaning of “Consideration”, “adequate consideration” and “gift”. It has been held that when the word “consideration” is qualified by the word “ adequate” it makes consideration stronger so as to make it sufficient and valuable having regard to the facts, circumstances and necessities of the case. The words “adequate consideration” clearly postulates that consideration must be capable of being measured in terms of money having regard to the market price of the property. When the term used is consideration, it postulates transfer by way of gift also. Similarly, in the case of Tulsidas Kilachand Vs CIT 1961 (1) TMI 5 - SUPREME COURT it was held that the words “adequate consideration” denote consideration other than mere love and affection. When the law insists that there should be adequate consideration and not good consideration, it excludes mere love and affection. 

c)   Moreover, Section 56(2) (x) talks about receipt and not transfer. Though, it has been held in the case of 1961 (1) TMI 5 - SUPREME COURT as above, there may be transfer by a person to himself or himself and another person or persons, in the context of trust, however it has to be seen that the trust is an obligation annexed to the ownership of the property and the facts of the case has to be seen.

d)   Distribution of Income by trust to the beneficiaries –whether hit by Section 56(2)(x)- Decision of Mumbai ITAT in the case of Ashok C Pratap  VERSUS ADDITIONAL COMMISSIONER OF INCOME-TAX, RANGE-11(2), MUMBAI  2012 (7) TMI 701 - ITAT MUMBAI and Mrs. Sharon Nayak, Bangalore vs Assessee on 27 May 2016 Bangalore ITAT decision in 2016 (6) TMI 294 - ITAT BANGALORE In the later case, it was held that what was received by the beneficiary from the trust was his own income collected on his behalf by the beneficiary. 

PRACTICAL ISSUES RELATING TO PUBLIC CHARITABLE TRUST

1. Investment in shares -Whether can be done by a charitable Trust?

As per the provisions of Section 11(5) of the Income-tax Act,1961 investments by a trust has to be made as per the prescribed mode of investments as contained therein. A question arises whether a trust can purchase equity shares of any company or can invest in Stock market?

In this regard, the shares of public sector companies are eligible mode of investment as per Section 11(5)(vii) of the Income-tax Act,1961and also those shares which prescribed as a mode of investment u/s 11(5)(xii) of the Income-tax Act,1961.

With reference to the investment in other shares, the trust has to dispose of the same as per the provisions of Section 13(1)(d) of Income-tax Act,1961.

The following issues are relevant here-

1. Bonus shares which are received are not to be counted for the purpose of calculation of limit as specified in Section 13(2)(h)- CIT Vs Narinder Mohan Foundation 2007 (10) TMI 288 - DELHI HIGH COURT.

2. Innocent deviation need not loose exemption- 2001 (8) TMI 78 - DELHI HIGH COURT . Also see Export Promotion council for handicrafts Vs DGIT (Exemptions) 2010 (5) TMI 38 - DELHI HIGH COURT

In this regard, another pertinent question which arises is whether in case of a trust which makes investment which are not as per the provisions of Section 11(5), what happens to the taxation of such a trust whether the entire income becomes taxable or only the income. It is only the income from such investment which are not made as per the provisions of Section 11(5) is liable for tax as per this clause and not the entire income of the Trust. See Seth Walchand Hirachand Memorial Vs ITO(E) 2017 (4) TMI 67 - ITAT MUMBAI .

2. Sale of Capital assets by a Charitable trust- Applicability of Section 50C 

Section 50C of the Income-tax Act,1961 deals with Special provision for full value of consideration in certain cases and as per this section, where the consideration received or accruing as a result of the transfer by assessee of a capital asset, being land & building or both is less than the value adopted or assessed or assessable by any authority or a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall for the purpose of Section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer. 

A question arises whether in a case of a charitable trust which has sold any property during the year -whether the provisions of Section 50C are applicable. In this regard, it may be noted that Section 11(1A) of the Act specifically deals with the capital asset held by a charitable trust and thus the calculation has to be done as per the provisions of Section 11(1A) and Section 50C cannot be invoked. The following cases in this regard can be relied upon: -

1. DCIT Vs Saife Jubilee High School (Ahmedabad ITAT ITA No 2301/Ahd/2014)  2018 (11) TMI 540 - ITAT AHMEDABAD
2. ACIT-1 Kanpur Vs Upper India Chamber of Commerce  2014 (11) TMI 395 - ITAT LUCKNOW
3. CIT Vs Thiruvendgadam Investments Pvt ltd  2009 (12) TMI 48 - MADRAS HIGH COURT

It is also to be noted that Section 50C doesn’t start with a non-obstante clause and therefore these provisions are not applicable in case there are specific provisions dealing with the computation as in case of charitable trust.

3. Claim of depreciation on asset already claimed as application of income

Income of a Charitable trust has to be computed on Commercial basis and Claim of Additional depreciation by a Charitable Trust has to be allowed notwithstanding that the entire amount of the capital asset may have been claimed as an application of Income.

It has time and again been held that the income of a Charitable trust has to be computed on commercial principles [ CIT Vs Institute of Banking 2003 (7) TMI 52 - BOMBAY HIGH COURT ] and therefore even if the entire cost of the asset has been allowed to be treated as an application of income, depreciation on such asset in subsequent years has to be allowed on commercial principles. See also DIT(Exemptions) Vs Framjee Cawasjee Institute 1992 (7) TMI 331 - BOMBAY HIGH COURT and CIT Vs Munisuvrat Jain (1994) Tax LR 1084(Bom). Moreover, if an asset is not capable of being used and has to be discarded and the entire WDV is written off in the books of account, then the same has to be allowed as an additional depreciation notwithstanding that the nomenclature in the accounts may not have been used as Additional depreciation because nomenclature cannot decide the claim under the Act. CIT(Exemptions) Vs Bhatia General Hospital 2018 (3) TMI 587 - BOMBAY HIGH COURT . Also CIT Vs Sheth Manilal Ranchhoddas Vishram Bhavan Trust 1992 (2) TMI 51 - GUJARAT HIGH COURT  and CIT Vs Ganga Charity Trust 1985 (10) TMI 67 - GUJARAT HIGH COURT . Similar view has been taken in the case of CIT Vs Market Committee, Pipli 2010 (7) TMI 374 - PUNJAB AND HARYANA HIGH COURT , CIT Vs Raipur Pallottine Society 1989 (9) TMI 93 - MADHYA PRADESH HIGH COURT ,CIT Vs Sheth Manilal Ranchooddas Vishram Bhavan Trust 1992 (2) TMI 51 - GUJARAT HIGH COURT , CIT Vs Society of the Sisters’ of St Anne 1983 (8) TMI 44 - KARNATAKA HIGH COURT . In the case of 146 ITR, the Court dealt with the argument of the Revenue that Depreciation allowance being a notional expenditure cannot be allowed to be debited to the expenditure account of the trust. The depreciation is nothing but decrease in the value of the property through wear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy etc. The balance sheet will not present a true and fair view unless depreciation was provided for.

Decision against- Kerala High Court Lissie Medical Institutions 2012 (4) TMI 115 - KERALA HIGH COURT -this decisions brings views of CBDT also as well as the CBDT Circular No 5-P is reported in End notes. 

Allahabad High Court in the case of CIT(Exemptions) Vs Seth Anandram Jaipuria education society Cantonment 2017 (3) TMI 896 - ALLAHABAD HIGH COURT has not accepted the Kerala High Court view. 

Amendment made by Finance (No 2) Act 2014 in Section 11(6).

Amendment considered in the case of CIT-III,Pune Vs Rajasthan & Gujrati Charitable Foundation Poona 2017 (12) TMI 1067 - SUPREME COURT and it was noted that the amendment is prospective in nature 

4. Whether carry forward of excess expenditure can be claimed as application of income in subsequent years by a Charitable Trust?

In the case of [ CIT Vs Institute of Banking 2003 (7) TMI 52 - BOMBAY HIGH COURT ] it was held that Income derived from trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in subsequent year in which adjustment has been made having regard to the benevolent provisions contained in Section 11 of the Act. See also CIT Vs Shri Plot Swetamber Murti Pujak Jain Mandal 1993 (11) TMI 17 - GUJARAT HIGH COURT and Circular No 100 dated January 24,1973, F No 195/1/72-I.T.(A.I) [(1973) 88 ITR (St) 66] 

Also CIT Vs Maharana of Mewar Charitable Foundation 1986 (7) TMI 56 - RAJASTHAN HIGH COURT, CIT Vs Kristi Upaj Mandi Samiti 2016 (7) TMI 707 - RAJASTHAN HIGH COURT .[SLP granted against this decision reported in 2017 (1) TMI 1625 - SUPREME COURT OF INDIA ] The decision of Rajasthan High Court in the case of Shri Akhey Ram Ishwari Prasad Trust Vs CIT 2003 (1) TMI 20 - RAJASTHAN HIGH COURT was considered here as having not laying down any law that in all cases where the expenditure are incurred by the assessee in excess of income earned during the previous year relevant to the assessment year, such income though applied for charitable purposes, shall not be entitled for exemption under Section 11(1)(a) of the Act. 

5. Whether a Charitable trust can switch from one method of accounting to another?

In the case of CIT Vs Ganga Charity Trust Fund 1985 (10) TMI 67 - GUJARAT HIGH COURT it was held that there is nothing in the Act which precludes the assessee, who bona fide desires to switch over to another system of accounting, from doing so. A bona fide assessee cannot be precluded from switching over to another system of accounting which he finds convenient and which would reflect his real income. Reliance was placed on the following decisions: -

1. CIT Vs Rajasthan Investment Co (P) Ltd 1978 (1) TMI 62 - CALCUTTA HIGH COURT
2. Reform Flour Mills Pvt ltd Vs CIT 1978 (3) TMI 80 - CALCUTTA HIGH COURT
3. Snow White Food Products Co Ltd Vs CIT 1981 (11) TMI 27 - CALCUTTA HIGH COURT

 

6. Whether payment of income-tax and wealth-tax has to be deducted from income for the purpose of arriving at income which is available for application?

In the case of CIT Vs Ganga Charity trust fund ( 1985 (10) TMI 67 - GUJARAT HIGH COURT , it was held that for the purpose of actual application or accumulation or setting apart of income from trust property for the purposes of the trust, the trustees must have on hand income which could be so utilised and what are outgoings towards payment of income-tax must be deducted for working out such surplus income. Similar view was taken in the case of CIT Vs Trustees of HEH, the Nizam’s Supplemental Religious Endowment Trust 1978 (2) TMI 7 - ANDHRA PRADESH HIGH COURT   by holding that the payment of income-tax and wealth-tax made during the relevant year relating to the previous assessment years were incidental to the carrying out of the charitable purposes of the trust. Such payments were outgoings in that particular year and were, therefore, incidental to the carrying out of the objects of the trust and had, therefore to be excluded from the income of the trust. See Also CIT Vs Janaki Amal Ayya Nadar Trust 1982 (8) TMI 4 - MADRAS HIGH COURT in which it was held that payment of tax is necessary to preserve the property of the trust when a demand is lawfully made. Even though the trust may not accept the demand and challenges the same on appeal, that is not relevant for considering the question whether payment has to be made to preserve the trust property. The expenditure incurred by way of payment of tax out of current year’s income has to be considered as application for charitable purposes. This is because payment is made to preserve the corpus, the existence of which is absolutely necessary for the trust. The Court also relied on the CBDT Circular No 5 dated 19^thJune,1968 (to check whether Circular No 5-P (LXX-6) of 1968 dated July, 19 1968) wherein the application of income is to be considered and Income means income after considering all outgoings. 

7. Income for the purpose of Section 11 need not be computed in accordance with the provisions of Section 14 applicable for computation of total income

In the case of CIT Vs Calavala Cunnan Chetty Charities 1979 (8) TMI 17 - MADRAS HIGH COURT , a question came up before the Hon’ble Court that whether for the purpose of computing the accumulation in excess of 25 percent, as laid down in Section 11(1)(a) of the Income-Tax Act, 1961 income has to be computed under various heads as enumerated under the Income-tax Act? The Court considered that the provisions of Section 11 are contained in the Chapter III dealing “Income which do not form part of total income”. Thus, Section 11 forms Part of receipts or income which would be excluded from computation of total income. The Court also considered that in the case of Lord Chetwode Vs IRC (1977) 1 All ER 638 it was observed that “ it is notorious that there is not and never has been any definition of income in the UK Tax Code. The same position holds good in India also because what is chargeable to income-tax is left to be determined according to the statutory provisions of the Act in the light of the elastic concept of income. That is why Section 2(24) defines “income” as including particular category of receipts. The idea is more to bring in all the categories of income which are brought to tax by applying a legal fiction so that by their non-inclusion in the definition, such categories did not escape taxation. In the absence of any definition of income, the same has to be proceeded on the basis of income as understood in general parlance. Income would ordinarily exclude a receipt by way of capital. Mere gross receipt cannot also be taxed as income. It may be broadly stated that what is taxed is not also any gross receipt. The receipt must be revenue in nature and is to be taxed after excluding the necessary outgoings. The court also noted that where Parliament considered that the computation should be done in accordance with the provisions of the Act, it introduced the concept by using appropriate language “as computed in accordance with the other provisions of this Act”. The computation under different categories of income arises only for the purposes of charge. Those provisions cannot be introduced to find out what the income derived from the property held under trust to be excluded from the total income is, for the purpose of exemption under Chapter III. Finally it was held that income from properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by Section 14. This decision was followed in the case of CIT Vs Estate of V L Ethiraj 1979 (12) TMI 14 - MADRAS HIGH COURT .

8. Whether Provisions for doubtful debts can be considered to be an application of income?

The Bombay High court in the case of Bombay Stock Exchange Vs DDIT(Exemption) and others (No 1) 2012 (4) TMI 487 - BOMBAY HIGH COURT quashed the reopening of the assessment by holding that full details of the provision for doubtful debts was given at the time of assessment and as such it could not have been said that there was an omission or failure to disclose fully and truly all material facts relating to the assessment. Similar view was taken in the case of Bombay Stock Exchange Ltd Vs DDIT(No 2) 2014 (6) TMI 444 - BOMBAY HIGH COURT .

9. Whether Corpus donation can be spent for the objects of the trust?

Often it is seen that the Assessing officers dispute the application of income on the pretext that the application has been made out of the corpus fund. In this regard, it is to be noted that there is no bar on spending any amount received for the purpose of Corpus of the trust and it can be spent for the specific purpose for which it is received or there is no specific purpose then towards the objects of the trust.  

Thermax Social Initiative Foundation Vs ITO(E)  2017 (1) TMI 555 - ITAT PUNE

10. Anonymous Donation

Section 115BBC deals with anonymous donation.

Anonymous donation received by wholly religious institutions totally exempt. Even partly religious and partly charitable trust also exempt except where such donation is for the educational or medical institution run by such entity. Anonymous donation received by a wholly charitable entity is taxable, however only to the extent of amount in excess of ₹ 100000/- or 5% of total donation received by such trust. 

Difference between anonymous and unaccounted donation . Anonymous donation means that the donations are on record, but the trace of the donor is not available. However, unaccounted donation is not accounted for. 

Section 68 cannot be applied to an income which is other exempt- Kerala High Court- CIT Vs Muslim Educational Society ITA No 1711 of 2009.

Judicial decisions/Circulars

1.  Vidyavardhini Vs Asstt CIT, Central Circle-2, Thane 2012 (4) TMI 306 - ITAT MUMBAI . 
2. Dy CIT Vs All India Pingalwara Charitable Society 2016 (4) TMI 160 - ITAT AMRITSAR
3. Madhavi Raksha Sankalp Nirman Niketan Vs DCIT 2017 (4) TMI 1147 - ITAT MUMBAI Onus as well as burden of proof on assessee that the donation was not anonymous donation. Production of certain percentage of donors was also held to be a good way. 
4. Bhagwan Shree Laxmi Narayan Vs ITO(E) 2014 (9) TMI 81 - ITAT DELHI - Activity of giving spiritual lectures not liable for anonymous donation taxation. 
5. ITO{E} Vs Charanjiv Charitable Trust ITA No 1963/Del/2011- 2015 (8) TMI 881 - ITAT DELHI After enactment of Section 115BBC, Section 68 cannot be applied. 
6. Gurudev Siddha Peeth Vs ITO 2015 (7) TMI 989 - ITAT MUMBAI
7. DIT{E} Vs Bombay Pinjrapore Trust 2015 (3) TMI 718 - BOMBAY HIGH COURT - maintaining gaushala not liable for anonymous donation. 
8. CBDT Circular No 5/2010 dated 3-6-2010 

11. Delay in filing Form No 10/Form no 9A

It often happens that the above forms are not filed within the time of filing the return. In this regard, there are number of judgements which have dealt with the issue. In the case of CIT Vs Sakal Relief Fund 2017 (4) TMI 772 - BOMBAY HIGH COURT it was held that for excluding an income of a charitable trust from the net of taxation u/s 11, the intimation in form no 10 was to be filed with the AO before the completion of the assessment proceedings. Even if form no 10 is filed during the reassessment by the assessee trust, benefit of accumulation u/s 11(2) was available because such filing would be considered within time allowed for furnishing return u/s 139(4). In the case of Cotton Textiles Export Promotion Council Vs ITO 2007 (10) TMI 450 - ITAT MUMBAI   it was held that an assessee can give notice in writing in form no 10 for more than one year in order to claim accumulation of income and claim of assessee cannot be denied merely on ground that in subsequent year no notice was given. In this regard the Circular No 273 dated 3-6-1980 issued by CBDT can also be resorted to.

12. Six years for carry over -change in the use -application

As per the provisions of Section 11(2) an application in form no 10 for accumulation of income in next five years for the purposes as specified in the said form. However, even after the expiry of five years, the amount can be spent in the sixth year to avoid Application can be made for change of the use and thereafter it can be spent for the objects as specified. 

13. Can a foreigner be a trustee of a trust?

In this regard, it may be noted that the Income-tax Act,1961 doesn’t say anything regarding this and resort has to be made to other Acts. The Indian Trust Act,1882 can be roped in even though it has been stated in the Act itself that this Act is not applicable to charitable or religious trust. In this regard as per the provisions of Section 73 of the Indian Trust Act where a person appointed as a trustee is absent for a continuous period of six months, leaves India for a continuous period of six months, or leaves India for the purpose of residing abroad, a new trustee may be appointed in his place by a person nominated in the trust document for that purpose, if an and in absence of such person, by settlor of the trust, if alive and competent to contract or the surviving/continuing trustee, if any or the retiring trustee himself with the consent of the court. See Global Academy of Emergency Vs CIT[E]  2018 (10) TMI 787 - ITAT DELHI decided on 14^thSeptember,2018 Delhi ITAT.

14. Whether Section 8 Company liable for MAT?

There are specific provisions in Section 115JB dealing with exemption related to income of an entity registered u/s 11 of the Income-tax Act,1961. Resort can also be had to the decision of Delhi Gymkhana Club Ltd Vs DCIT in 2009 (9) TMI 682 - ITAT DELHI dated 30^thSeptember,2009

15. Can a trust do charitable activities outside India?

In this regard, it is to be noted that as per the provisions of Section 11 the application of the Income has to be made for objects in India. It is clear that if the application is made as such, then the exemption u/s 11 cannot be availed. However, in the case of CIT Vs State Bank of India 1987 (4) TMI 41 - BOMBAY HIGH COURT it was held that simply a clause in the trust deed which permitted application outside India without there being actual spending outside India would not violate Section 11(1) (c) of the Income-tax Act. Also, in the case of CIT Vs Trustees of Nizam’s religious endowment trust 1975 (4) TMI 11 - ANDHRA PRADESH HIGH COURT it was held that in case of a trust having activities outside India, the exemption will be denied to the extent of income applied outside India. The said reasoning was on the basis of the Similar provision in the Wealth-tax Act where area of purpose of the trust was the decisive factor for claiming exemption whereas it was the actual application under the Income-tax Act which was the decisive factor. Similar view has been taken in the case of Digambar Jain Society for Child Welfare Vs DGIT(Exemptions) (2010) 228 CTR (Del) 517 and Ewing Christian College Society Vs Chief CIT 2009 (5) TMI 103 - ALLAHABAD HIGH COURT .

16. Distinction between a charitable and religious trust - the line of distinction between religious purposes and charitable purposes is very thin and no water tight compartment between the two activities can be established.

Umaid Charitable Trust Vs Union of India & Ors 2008 (5) TMI 232 - RAJASTHAN HIGH COURT

CIT Vs Dawoodi Bohra Jamat  2014 (3) TMI 652 - SUPREME COURT

Also se Pt Ram Chandra Shukla Vs Shree Mahadeoji Mahabirji and Hazrat Ali Kanpur and others ( 1969 (10) TMI 76 - SUPREME COURT .

17. Issues arising out of accredited Income-Chapter XII-EB-Section 115TD

There are lot of issues arising out of taxation of accredited income as follows:-

1. The provision applicable only for 12AA registered trust and not others.
2. Even those donations received prior to 01-04-1973 even though they were non taxable at that time.
3. Where the tax has been paid like income in case of 115BBC not considered.             

Note:the above are some of the issues in relation to the Private and Public Trust, though there are lot more which are not discussed herein. 

THANK YOU

By CA Ramesh Kumar Patodia

([email protected])