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Charitable Trust, Association & Societies – Analysis of Income-tax and GST Provisions |
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Charitable Trust, Association & Societies – Analysis of Income-tax and GST Provisions |
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Charitable Trust
11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property; (b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property; (c) income derived from property held under trust- (i) created on or after the 1st day of April 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and (ii) for charitable or religious purposes, created before the 1st day of April 1952, to the extent to which such income is applied to such purposes outside India: Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income; (d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. 12. (1) Any voluntary contributions received by a trust created wholly for chari- table or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly. (2) The value of any services, being medical or educational services, made available by any charitable or religious trust running a hospital or medical institution or an educational institution, to any person referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13, shall be deemed to be income of such trust or institution derived from property held under trust wholly for charitable or religious purposes during the previous year in which such services are so provided and shall be chargeable to income-tax notwithstanding the provisions of sub-section (1) of section 11. Explanation.-For the purposes of this sub-section, the expression "value" shall be the value of any benefit or facility granted or provided free of cost or at concessional rate to any person referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13. (3) Notwithstanding anything contained in section 11, any amount of donation received by the trust or institution in terms of clause (d) of sub-section (2) of section 80G in respect of which accounts of income and expenditure have not been rendered to the authority prescribed under clause (v) of sub-section (5C) of that section, in the manner specified in that clause, or which has been utilised for purposes other than providing relief to the victims of earthquake in Gujarat or which remains unutilised in terms of sub-section (5C) of section 80G and not transferred to the Prime Minister's National Relief Fund on or before the 31st day of March, 2004 shall be deemed to be the income of the previous year and shall accordingly be charged to tax. 12A. (1) The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely:- (a) the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Principal Commissioner or Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later and such trust or institution is registered under section 12AA : Provided that where an application for registration of the trust or institution is made after the expiry of the period aforesaid, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution,- (i) from the date of the creation of the trust or the establishment of the institution if the Principal Commissioner or Commissioner is, for reasons to be recorded in writing, satisfied that the person in receipt of the income was prevented from making the application before the expiry of the period aforesaid for sufficient reasons; (ii) from the 1st day of the financial year in which the application is made, if the Principal Commissioner or Commissioner is not so satisfied: Provided further that the provisions of this clause shall not apply in relation to any application made on or after the 1st day of June 2007; (aa) the person in receipt of the income has made an application for registration of the trust or institution on or after the 1st day of June, 2007 in the prescribed form and manner to the Principal Commissioner or Commissioner and such trust or institution is registered under section 12AA;
[(2) Where an application has been made on or after the 1st day of June, 2007, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately following the financial year in which such application is made:] [Provided that where registration has been granted to the trust or institution under section 12AA, then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending before the Assessing Officer as on the date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year: Provided further that no action under section 147 shall be taken by the Assessing Officer in case of such trust or institution for any assessment year preceding the aforesaid assessment year only for non-registration of such trust or institution for the said assessment year: Provided also that provisions contained in the first and second proviso shall not apply in case of any trust or institution which was refused registration or the registration granted to it was cancelled at any time under section 12AA.]
12AA. (1) The Principal Commissioner or Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) 27[or clause (ab)] of sub-section (1) of section 12A, shall- (a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and (b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he- (i) shall pass an order in writing registering the trust or institution; (ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant : Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard. (1A) All applications, pending before the Principal Chief Commissioner or Chief Commissioner on which no order has been passed under clause (b) of sub-section (1) before the 1st day of June, 1999, shall stand transferred on that day to the Principal Commissioner or Commissioner and the Principal Commissioner or Commissioner may proceed with such applications under that sub-section from the stage at which they were on that day. (2) Every order granting or refusing registration under clause (b) of sub-section (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) or clause (aa) 28[or clause (ab)] of sub-section (1) of section 12A. (3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996) and subsequently the Principal Commissioner or Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution: Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard. (4) Without prejudice to the provisions of sub-section (3), where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and subsequently it is noticed that the activities of the trust or the institution are being carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to operation of sub-section (1) of section 13, then, the Principal Commissioner or the Commissioner may by an order in writing cancel the registration of such trust or institution: Provided that the registration shall not be cancelled under this sub-section, if the trust or institution proves that there was a reasonable cause for the activities to be carried out in the said manner. 13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof- (a) any part of the income from the property held under a trust for private religious purposes which does not enure for the benefit of the public; (b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste; (bb) [***] (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) : Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3) in so far as such use or application relates to any period before the 1st day of June, 1970; (d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year- (i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; or (ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983; or (iii) any shares in a company, other than- (A) shares in a public sector company ; (B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11, are held by the trust or institution after the 30th day of November 1983: Provided that nothing in this clause shall apply in relation to- (i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June 1973; (ia) any accretion to the shares, forming part of the corpus mentioned in clause (i), by way of bonus shares allotted to the trust or institution; (ii) any assets (being debentures issued by, or on behalf of, any company or corporation) acquired by the trust or institution before the 1st day of March 1983; (iia) any asset, not being an investment or deposit in any of the forms or modes specified in sub-section (5) of section 11, where such asset is not held by the trust or institution, otherwise than in any of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1993, whichever is later; (iii) any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent assessment year. Explanation.-Where the trust or institution has any other income in addition to profits and gains of business, the provisions of clause (iii) of this proviso shall not apply unless the trust or institution maintains separate books of account in respect of such business. Explanation.-For the purposes of sub-clause (ii) of clause (c), in determining whether any part of the income or any property of any trust or institution is during the previous year used or applied, directly or indirectly, for the benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period before the 1st day of July, 1972, no regard shall be had to the amendments made to this section by section 7 [other than sub-clause (ii) of clause (a) thereof] of the Finance Act, 1972. (2) Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3),- (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3) for any period during the previous year without either adequate security or adequate interest or both; (b) if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3), for any period during the previous year without charging adequate rent or other compensation; (c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services; (d) if the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation; (e) if any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in sub-section (3) during the previous year for consideration which is more than adequate; (f) if any share, security or other property is sold by or on behalf of the trust or institution to any person referred to in sub-section (3) during the previous year for consideration which is less than adequate; (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3): Provided that this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the income and the value of the property, so diverted does not exceed one thousand rupees; (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971), in any concern in which any person referred to in sub-section (3) has a substantial interest. (3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :- (a) the author of the trust or the founder of the institution; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees; (c) where such author, founder or person is a Hindu undivided family, a member of the family; (cc) any trustee of the trust or manager (by whatever name called) of the institution; (d) any relative of any such author, founder, person, member, trustee or manager as aforesaid; (e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest. (4) Notwithstanding anything contained in clause (c) of sub-section (1) but without prejudice to the provisions contained in clause (d) of that sub-section, in a case where the aggregate of the funds of the trust or institution invested in a concern in which any person referred to in sub-section (3) has a substantial interest, does not exceed five per cent of the capital of that concern, the exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment, by reason only that the funds of the trust or the institution have been invested in a concern in which such person has a substantial interest. (5) Notwithstanding anything contained in clause (d) of sub-section (1), where any assets (being debentures issued by, or on behalf of, any company or corporation) are acquired by the trust or institution after the 28th day of February, 1983 but before the 25th day of July, 1991, the exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such assets, by reason only that the funds of the trust or the institution have been invested in such assets if such funds do not continue to remain so invested in such assets after the 31st day of March, 1992. (6) Notwithstanding anything contained in sub-section (1) or sub-section (2), but without prejudice to the provisions contained in sub-section (2) of section 12, in the case of a charitable or religious trust running an educational institution or a medical institution or a hospital, the exemption under section 11 or section 12 shall not be denied in relation to any income, other than the income referred to in sub-section (2) of section 12, by reason only that such trust has provided educational or medical facilities to persons referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3). (7) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof, any anonymous donation referred to in section 115 BBC on which tax is payable in accordance with the provisions of that section. (8) Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in the said previous year. (9) Nothing contained in sub-section (2) of section 11 shall operate so as to exclude any income from the total income of the previous year of a person in receipt thereof, if- (i) the statement referred to in clause (a) of the said sub-section in respect of such income is not furnished on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year; or (ii) the return of income for the previous year is not furnished by such person on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the said previous year.
[Anonymous donations to be taxed in certain cases. 115BBC. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be the aggregate of-
(2) The provisions of sub-section (1) shall not apply to any anonymous donation received by-
(3) For the purposes of this section, "anonymous donation" means any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.]
[Charge of tax where share of beneficiaries unknown. 164(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, [or which is of the nature referred to in sub-clause (iia) of clause (24) of section 2,] [or which is of the nature referred to in sub-section (4A) of section 11,] tax shall be charged on so much of the relevant income as is not exempt under section 11[or section 12], as if the relevant income not so exempt were the income of an association of persons : [Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]]
CHARITABLE OR RELIGIOUS TRUST - REGISTRATION OF - CONDONATION OF DELAY IN FILING OF FORM NO. 10B FOR YEARS PRIOR TO ASSESSMENT YEAR 2018-19 CIRCULAR NO. 10 [F.NO.197/55/2018-ITA-I], DATED 22-5-2019 Under the provisions of section 12A of Income-tax Act, 1961 (hereafter 'Act') where the total income of a trust or institution as computed under the Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to Income-tax in any previous year, the accounts of the trust or institution for that year have to be audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the person in receipt of the income is required to furnish along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed. 2. As per Rule 17B of the Income-tax Rules, 1962 (hereafter 'Rules') the audit report of the accounts of such a trust or institution is to be furnished in Form No. 10B. As per Rule 12(2) of the Rules, such audit report is to be furnished electronically. The failure to furnish such report in the prescribed form along with the return of income results in disentitlement of the trust from claiming exemption under sections 11 and 12 of the Act. 3. Representations have been received by the Board/field authorities stating that Form No. 10B could not be filed along with the return of income for AY 2016 17 and AY 2017-18. It has been requested that the delay in filing of Form No. 10B may be condoned. Previously, vide instruction in F.No. 267/482/77-IT(part), dated 9-2-1978, the CBDT had authorized the ITO to accept a belated audit report after recording reasons in cases where some delay has occurred for reasons beyond the control of the assessee. 4. Accordingly, in supersession of earlier Circular/Instruction issued in this regard, and with a view to expedite the disposal of applications filed by such trusts or institutions for condoning the delay in filing Form No. 10B and in exercise of the powers conferred under section 119(2) of the Act, the Central Board of Direct Taxes hereby directs that;
The first and the foremost question which arises is as to which entity to be formed when one is trying to deal with a Charitable entity. A comparison chart of the various entities is given herein below:- COMPARISON- TRUST, SOCIETY AND SECTION 8 COMPANY
The decision as to which entity is to be followed is to be done on the basis of above parameters. Thereafter the question of Registration under the Income-tax Act,1961 has to be done by filing Application before the DIT(Exemptions) in Form No 10A. Practical issues relating to Public Charitable Trust 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,1961 and 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-
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. 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: -
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. 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) 264 ITR 110(Bom) ]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 (1993) 109 CTR 463(Bombay) 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 decided the claim under the Act. CIT(Exemptions) Vs Bhatia General Hospital (2018) 405 ITR 24(Bom). Also CIT Vs Sheth Manilal Ranchhoddas Vishram Bhavan Trust(1992) 192 ITR 598(Guj) and CIT Vs Ganga Charity Trust (1986) 162 ITR 612(Guj). Similar view has been taken in the case of CIT Vs Market Committee, Pipli (2011) 330 ITR 16(P&H), CIT Vs Raipur Pallottine Society(1989) 180 ITR 579(MP),CIT Vs Sheth Manilal Ranchooddas Vishram Bhavan Trust(1992) 198 ITR 598(Guj), CIT Vs Society of the Sisters’ of St Anne(1984) 146 ITR 28(kar). 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) 348 ITR 344(Ker) -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) 394 ITR 712(All) 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(2018) 402 ITR 441(SC) and it was noted that the amendment is prospective in nature 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) 264 ITR 110(Bom) ] 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(1995) 211 ITR 293(Guj) 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 (1987) 164 ITR 439(Raj) CIT Vs Kristi Upaj Mandi Samiti(2017) 390 ITR 59(Raj).[SLP granted against this decision reported in (2017) 245 Taxman 270(SC)] The decision of Rajasthan High Court in the case of Shri Akhey Ram Ishwari Prasad Trust Vs CIT (2004) 266 ITR 281 (Raj) 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. Whether a Charitable trust can switch from one method of accounting to another ? In the case of CIT Vs Ganga Charity Trust Fund(1986) 162 ITR 612(Guj) 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:-
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(1986) 162 ITR 612(Guj),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(1981) 127 ITR 378(AP) 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 (1985) 153 ITR 159(Mad) 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 19th June,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. 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 (1982) 135 ITR 485(Mad), 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 (1982) 136 ITR 12(Mad). 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) (2014) 365 ITR 160(Bom) 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) 365 ITR 181(Bom). Whether Corpus donation can be spent for the objects of the trust? ften 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. Anonymous Donation Difference between anonymous and unaccounted donation. Provisions of Section 115BBC. See Vidyavardhini Vs Asstt CIT, Central Circle-2, Thane(2012) 20 taxmann.com 81(Mum). CBDT Circular No 5/2010 dated 3-6-2010 Delay in filing Form No 10 Where eighty five percent income of the trust is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year then the trust has an option to accumulate the said income for the purpose of application in the next five years. The said option has to be exercised by filing a statement in form 10 in the prescribed manner to the assessing officer stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years. Prior to the coming into the force of Finance Act, 2015 The Finance Act, 2015 amended section 11 and section 13 of the Act with effect from 01.04.2016(A.Y.2016-17).Consequently, Income-tax Rules, 1962 (hereafter ‘Rules’) were also amended vide the Income-tax (1st Amendment) Rules, 2016. As per the amended provisions of the Act read with rule 17 of the Rules, while 15% of the income can be accumulated indefinitely by the trust or institution, 85% of income can only be accumulated for a period not exceeding 5 years subject to the conditions, inter alia, that such person submits the prescribed Form No. 10 electronically to the Assessing Officer within the due date specified under section 139(1) of the Act. Therefore from the assessment year 2016-17 and onwards Form 10 has to be filed within the time allowed u/s 139(1). Here it may be noted that prior to the finance act, 2015 requirement of filing the form 10 within the time allowed u/s 139(1) was prescribed in the Rules only however after the amendment carried out by Finance Act, 2015 the requirement of filing the form 10 within the time allowed u/s 139(1) has also been incorporated in section 11(2) of the Act. There are number of case laws on this issue that Belated form 10 can also be filed is there are bonafide reasons or reasons which are beyond the controls of the assessee. The Hon’ble Bombay High Court in case of CIT Vs Sakal Relief Fund reported under 2017 (4) TMI 772 held that Tribunal justified in holding that Form 10 prescribed in terms of Rule 17 of Income Tax Rules for the purpose of Section 11 of the Act would be valid even if filed during the Assessment Proceedings, consequent to a reopening notice under Section 148 of the Act, even if not filed with the return of income”. The Hon’ble Gujrat High Court in case of CIT Vs Mayur Foundation reported under 274 ITR 562 (2005) also held that belated form 10 can be filed. Recently the Hon’ble Chennai ITAT in case of DDIC vs The Madras Seva Sadan in ITA No 974/Mds/2015 dated 27.04.2016 held that “We are of the opinion, considering the activities of the trust and genuineness of the objects and supporting affidavit in explaining the delay, the assessee should file before Assessing Officer revised form No.10B and form No. 10 further considering the principles of natural justice and provisions of Rule 46A, we set aside the entire disputed issue to the file of the Assessing Officer for limited purpose to verify the genuineness of evidence and pass the order afresh after providing adequate opportunity of being heard to the assessee”. Further the CBDT vide circular no 273 (F.No 180/57/80-IT(A-I)}, dated 03.06.1980 authorised the Commissioner for condoning the delay in filing of Form10 and directed him to admit belated application u/s 11(2) read with rule 17 and to dispose of the same after satisfying itself. Delay in filing of Audit Report in Form No 10B Further in the similar manner there are number of judgments in which Hon’ble Court held that exemption u/s 11 cannot be denied merely for delay in filing the Audit Report in Form 10B which is procedural in nature The Hon’ble Calcutta High Court had occasion to deal with the similar issues in case of Commissioner of Income Tax vs Rai Bahadur Bissesswarlal Motilal Malwasie. Trust reported under 195 ITR 825 (Calcutta). In this case assessee had not filed the audit report in Form 10B along with its return of income but filed the same before the completion of assessment. The Hon’ble Calcutta High Court in the above case held that where the assessee has complied with the provisions of the Act in the course of the assessment proceedings by curing the defect in the return by filing an audit report, the ITO cannot ignore such audit report or the return in completing the assessment and decided the issue in favour of the assessee. The said decision also followed by the Hon’ble Calcutta High Court in case of Commissioner of Income Tax vs Hardeodas Agarwalla Trust reported under 198 ITR 511 (Calcutta) and held that “ In our view, having regard to the object of section 12A, it cannot be said that the Legislature intended that, even where the trust has got its accounts audited and the certificate obtained in Form No. 10B before the completion, merely because such report could not be filed in the course of the assessment proceedings, it would deprive a trust of getting the exemption if it is otherwise entitled to it in law.” Moreover Hon’ble Andhra Pradesh High Court in case of CIT vs Andhra Pradesh State Road Transport Corporation reported under 285 ITR 147 confirmed the view of the ITAT that the provisions contained in section 12A(b) are only directory in nature and not mandatory” Six years for carry over -change in the use –application It is often seen that after filing form. No 10 for a specified purpose, due to some reason that purpose is not capable of being fulfilled and needs to be changed. In this regard, the AO is permitted to entertain an Application for change of the use as per Section 11(3A) and thereafter it can be spent for the purposes as specified in the change which is done. 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 documentfor 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] decided on 14thSeptember,2018 Delhi ITAT. 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 ITA No 3585/Del/2006 dated 30th September 2009 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 (1988) 169 ITR 298(Bom) 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) © of the Income-tax Act. Also, in the case of CIT Vs Trustees of Nizam’s religious endowment trust (1977) 108 ITR 229(SC) 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. Capital gains in case of Charitable Trust The manner in which capital gains are to be dealt with in Section 11(1A) as reproduced hereinabove. In this regard, CBDT’s Instruction No 883 [XXI/1/74] dated 24.09.1975 is to be noted. Thus, if a charitable trust simply puts funds in fixed deposit exceeding six months, no capital gains tax is payable. The following judgements in this regard are worth discussion:- Whether a charitable trust can accept donation in Cash? There is no bar on a charitable trust accepting donation in cash directly. However in this regard, provisions of Section 269ST has to kept in mind. Also as far as donor is concerned, Section 80G (5D) provides that no deduction shall be allowed under this Section in respect of donation of any sum exceeding ₹ 2000/- unless such sum is paid by any mode other than cash. Whether a Charitable Trust can make expenditure in cash? An explanation 3 was inserted in Section 11 by Finance Act 2018 to provide that for the purpose of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of Section 40 and sub-section (3) and (3A) of Section 40A, shall mutatis mutandis apply as they apply in computing the income chargeable under the head “profits and gains of business or profession”. The expression “mutatis mutandis” has its usual meaning, that is , that only such verbal changes are to be made in the rules mentioned (in the rules where to be applied) as would make the principles embodied in these rules applicable to applications under (rules from where it is to be applied). In this regard, the memorandum explaining provisions are as follows:- At present, there are no restrictions on payments made in cash by charitable or religious trusts or institutions. There are also no checks on whether such trusts or institutions follow the provisions of deduction of tax at source under Chapter XVII-B of the Act. This has led to lack of an audit trail for verification of application of income. In order to encourage a less cash economy and to reduce the generation and circulation of black money, it is proposed to insert a new Explanation to the section 11 to provide that for the purposes of determining the application of income under the provisions of sub-section (1) of the said section, the provisions of sub-clause (ia) of clause (a) of section 40, and of sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”. When violation of Section 11(5) is made as per Section 13(1)(d) –which part of income is to be taxed at maximum marginal rate. In the case of CIT Vs Fr Mullers Charitable Institution(2014) 363 ITR 230(Kar) it was held that in a case where an amount of ₹ 80 lacs was given as advance in violation of Section 11(5) read with Section 13(1)(d) , following clear provisions as laid down in Section 164(2) of the Act it was only that portion which was liable to be taxed at the maximum margin rate and not the entire amount of income. DIT(Exemptions) Vs Sheth Mafatlal Gagalbhai Foundation Trust( 2001) 249 ITR 533(Bom) and DIT(Exemption) Vs Agrim Charan Foundation (2002) 253 ITR 593(Del) Followed Charitable Purpose The Apex Court in the case of Indian Chamber of Commerce Vs CIT(1975) 101 ITR 796(SC) quoted the following passage from the judgement of the Andhra Pradesh High Court in the case of A P State Road Transport corporation Vs CIT(1975) 100 ITR 392,397(AP) while considering the import of Section 2(15) of the Income-tax Act,1961 It is one of the fundamental principles in legislation and the drafting of statutes that the provisions contained therein should be clear and cogent and, more so, with regard to the fiscal statutes which impose a burden on the public. But, in this case, we find is that the amendment, instead of being clear and cogent is complicated and courts have taken different views in interpreting the same. The Court also noted that “We dare say that achieving greater simplicity and clarity in statute law will be taken up by the draftsmen of the legislative bills to avoid playing linguistic games in the Court and the promotion of interpretative litigation. Lawyers and legislators must stop confusing each other and start talking to their read audience-the people-so that communication problems may not lead to prolific forensic battles.We must confess to having been hard put to it to get at The controlling distinction between activities which fall on one side or the other of “Charitable purpose”. The Court noted the history which compelled the definitional modification was the abuse to which the charitable disposition of the statute to charitable purposes was subjected by exploiting businessmen. You create a charity, earn exemption from the taxing provision and run big industries virtually enjoying the profits with a seeming veneer of charity, a situation which exsuscitated Parliament and constrained it to engraft a clause deprivatory of the exemption if the institution fulfilling charitable purposes undertook activities for profit and thus sought to hoodwink the statute. The Finance Minister’s speech in the House explicates the reason for the restrictive condition. He stated in the house: The definition of charitable purpose in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefit provided by them, namely, the newspaper industry which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such case, the Select committee felt that the words “ Not involving the carrying on of any activity for profit” should be added to the definition. (Refer Lok Sabha debates Volume LVI, page 3073(August 18,1961) The evil sought to be abolished is thus clear. The interpretation of the provision must naturally fall in line with the advancement of the object. Of course there are borderline cases where it becomes difficult to decide at first sight whether the undertaking which yields profit is a deceptive device or a bonafide adventure which results in nominal surplus although substantially intended only to advance the charitable object. The Apex Court also noted Chambers of commerce dot this country and by and large, they have the same complex of objects. They exist to promote the trading interests of the commercial community and after the Andhra Chamber of Commerce case (1965) 55 ITR 722(SC) have been regarded as pursuing charitable purposes. This expression, defined in Section 2(15) is a term of art and embraces objects of general public utility. But , under cover of charitable purposes, a crop of camouflaged organisations sprung up. The mask was charitable, but the heart was hunger for tax free profit. When Parliament found this dubious growth of charitable chameleons, the definition in Section 2(15) was altered to suppress the mischief by qualifying the broad object of “general public utility” with the additive “not involving the carrying on of any activity for profit”. The Court noted as follows at Page 804 In our view, the ingredients essential to earn freedom from tax are discernible from the definition, if insightfully, actually read against the brooding presence of the evil to be suppressed and the beneficial object to be served. The policy of the statute is to give tax relief for charitable purpose, but what falls outside the pale of charitable purpose? The institution must confine itself to the carrying on of activities which are not for profit. It is not enough if the object be one of general public utility. The attainment of that object shall not involve activities for profit. What then is an activity for profit? An undertaking by a business organisation is ordinarily assumed to be for profit unless expressly or by necessary implication or by eloquent surrounding circumstances the making of profit stands loudly negatived. We will illustrate to illumine. If there is a restrictive provision in the bye-laws of the charitable organisation which insists that the charges levied for services of public utility rendered are to be on a "no profit" basis, it clearly earns the benefit of section 2(15). For instance, a funeral home, an S.P.C.A. or a co-operative may render services to the public but write a condition into its constitution that it shall not charge more than is actually needed for the rendering of the services,-may be it may not be an exact equivalent, such mathematical precision being impossible in the case of variables,-may be a little surplus is left over at the end of the year-the broad inhibition against making profit is a good guarantee that the carrying on of the activity is not for profit. As an antithesis, take a funeral home or an animal welfare organisation or a super-bazaar run for general public utility by an institution which charges large sums and makes huge profits. Indubitably they render services of general public utility. Their objects are charitable but their activities are for profit. Take the case of a blood bank which collects blood on payment and supplies blood for a higher price thereby making profit. Undoubtedly, the blood bank may be said to be a general public utility but if it advances its public utility by sale of blood as an activity for (making) profit, it is difficult to call its purpose charitable. It is just blood business: The Court also noted the decision of Lok Shikshana Trust (1975) 101 ITR 234(SC) where Khanna J observed as follows:- "As a result of the addition of the words 'not involving the carrying on of any activity for profit' at the end of the definition in section 2(15) of the Act, even if the purpose of the trust is 'advancement of any other object of general public utility', it would not be considered to be 'charitable purpose' unless it is shown that the above purpose does not involve the carrying on of any activity for profit. The result thus of the change in the definition is that in order to bring a case within the fourth category of charitable purpose, it would be necessary to show that: (1) the purpose of the trust is the advancement of any other object of general public utility, and (2) the above purpose does not involve the carrying on of any activity for profit. Both the above conditions must be fulfilled before the purpose of the trust can be held to be charitable purpose...................... It is true that there are some business activities like mutual insurance and co-operative stores of which profit making is not an essential ingredient, but that is so because of a self-imposed and innate restriction on making profit in the carrying on of that particular type of business. Ordinarily, profit motive is a normal incident of business activity and if the activity of a trust consists of carrying on of a business and there are no restrictions on its making profit, the court would be well justified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit.................(emphasis * ours). By the use of the expression 'profit motive' it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity.................... We are not impressed by the submission of the learned counsel for the appellant that profit under section 2(15) of the Act means private profit. The word used in the definition given in the above provision is profit and not private profit and it would not be permissible to read in the above definition the word 'private' as qualifying profit even though such word is not there." The true test is to ask for answers to the following questions: (a ) Is the object of the assessee one of general public utility? (b) Does the advancement of the object involve activities bringing in moneys? (c) If so, are such activities undertaken, (i) for profit, or (ii) without profit? Even if (a) and (b ) are answered affirmatively, if clause (i) is answered affirmatively, the claim for exemption collapses. The solution to the problem of an activity being one for or irrespective of profit is gathered on a footing of facts. What is the real nature of the activity? One which is ordinarily carried on by ordinary people for gain? Is there a built-in prescription in the constitution against making a profit? Has there been in practice, profit from this venture?, although this last is a weak test. The mere fact that a service is rendered is no answer to chargeability because all income is often derived by rendering some service or other. Further, what is an activity for profit depends on the correct connotation of the preposition. "For" used with the active participle of a verb means "for the purpose of" (See judgment of Westbury C, 1127). "For" has many shades of meaning. It connotes the end with reference to which anything is done It also bears the sense of "appropriate" or "adapted to": "suitable to purpose"-vide Black's Legal Dictionary. An activity which yields a profit or gain in the ordinary course must be presumed to have been done for profit or gain. Of course, an extreme case could be imagined where without intent or purpose an activity may yield profit. Even so, it may legitimately be said that the activity is "appropriate or adapted to such profit". Ultimately the Court noted in Page No 809 as follows:-
On these facts it was held that the activities did not amount to charitable purposes. Relief to the Poor In the case of Thiagarajar Charities Vs Addl CIT (1997) 225 ITR 1010(SC), the Apex Court held that Rural reconstruction necessarily involves uplift of the rural masses and is directed for the welfare of such people.Majority of such persons belong to poor(or poorer) segments of the society. Similarly cottage industry is also associated with the idea of small, simple enterprise or industry in which employees, work in their own houses or in a small place gathered together for the purpose using their own equipment and is usually found in rural areas/places or so carried on, by the poor( or poorer) section of the society. In substance the above acitivity, specified in clause 1(g) is to afford “relief to the poor”. Clause 1(g) in the trust deed in the said case was worded as follows:- To engage in , carry on, help, aid and assist and promote rural reconstruction work, cottage industry and all other matters incidental thereto in India. Other issues The following issues are worth noting:-
Charity & Mutuality
In considering the case for exemption of the subscriptions collected from the members of the application on the principle of mutuality it is necessary to bear in mind two concepts. The first concept is that the principle of mutuality is based on the doctrine that no person can make a profit out of himself. To take a common instance, supposing a dozen persons’ gather together and agree to purchase certain commodities in bulk and distribute them among themselves in accordance with their individual requirements, they may collect a certain amount provisionally based on the anticipated price of the commodities to be purchased. If it ultimately happens that the commodities are available at a cheaper price so that at the end of the distribution of the commodities among themselves, a part of the original amount provisionally collected is repaid, then what is repaid cannot by any test be classified as income. This would represent savings and not income. The Income-tax Act seeks to tax income and not savings. If this principle is borne in mind, then it would be easier to understand the decisions rendered on this point. It may be seen that in the above instance there is no trading as such. The same legal position would apply even where the parties join together and meet their commercial requirements in a manner mutually beneficial to them. In such a case there may be a trade inter se ; but the trade is not one intended to bring in any profits. It is this aspect which is referred to by Lord Normand in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax [1948] 16 ITR 270, 279 (PC): "the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves." On the same issue the following decisions are important:-
In case of a charitable organization, the primary condition is that the organization cannot distribute surplus amongst the members and the surplus is always for the benefit of public at large. In such a situation, it is always believed that charity and mutuality cannot go together. It is pertinent to refer to the decision of Australian Court decision in the case of Coleambally Irrigation Mutual Co-operative Ltd Vs FCT(2004) FCAFC 250 which ruled that the principle of mutuality did not apply because the organization’s constitution prohibited the distribution of surplus fund to the members. However, even though charitable organization exists for the benefit of public at large, even if they are rendering services to the members, the principle of mutuality has been applied in several cases as would appear from discussion later on. It has been time and again discussed in professional circles that charity and mutuality are contradictory and cannot go together. However, in a number of decisions where the organization has been enjoying the provisions of charity, Income has been exempted applying principles of mutuality . Infact the Central Board of Direct Taxes(CBDT) in its Circular NO 11/2008 dated 19-12-2008 has clarified as follows in Para 3.1 of the Circular:- 3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility'. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organisations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organisations have dealings with non-members, their claim to be charitable organisations would now be governed by the additional conditions stipulated in the proviso to section 2(15). In the case of CIT Vs Indian paper mills association (1994) 209 ITR 28(Cal) it was held that the right of members of the club regarding the disposal of the surplus at the time of dissolution of the club cannot nullify the principle of mutuality in as much as the participants themselves should decide how the surplus fund should be utilized. Moreover the court also noted that if at all this question can arise in the actual year of dissolution to see whether the surplus has been distributed in accordance with the objects or not. Thus in such a situation even in case of a charitable organizations ,the principle of mutuality becomes applicable.
The mutuality principle is dependent upon the existence of an identity between contributors to the fund and those who are entitled to participate in it. The identity required is not an identity between individuals, but an identity between classes , and all that is required is reasonable relationship between what a member contributes and the member’s expected participation in the common fund. Sydney Water Board Employees Credit Union Vs Federal commissioner of taxation(1973) 129 CLR 446
Typically the following are the characteristics of a Mutuality organization:- They are carried on the for the benefit of members’ collectively. They have members that share a common purpose. Those members are all entitled to participate in that common purpose. The main purpose for which the organization is established and is operated is the common purpose of the members and all the members contribute to a common fund that gives effect to the common purpose and all contributions are applied for the collective benefit of the members. The members contribute not with an idea to trade, but with an idea of rendering mutual help. The receipt in their hands is not really the profit, as no man can make a profit out of himself, just as he cannot enter into a trade or business with himself. In this regard, the Apex court in the case of Commissioner of Income-tax Vs Royal Western India Turf Club(1953) 24 ITR 551(SC) held that The cardinal requirement is that all contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial". Styles' case has recently been examined and explained by the Judicial Committee in English & Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax, Assam' [1948] AC 405; 16 ITR 270 After referring to various passages from the speeches of the different Law Lords in Styles' case Lord Normand, who delivered the judgment of the Board, summarized the grounds of the decision in Styles' case as follows:- "From these quotations it appears that the exemption was based on (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves"
The practical effect of the principle is that receipts derived from mutual dealings with an organization’s members(mutual receipts) are excluded from the assessable income of the organization; expenses incurred to get mutual receipts are not deductible; receipts derived from trading with non-members and income from sources outside of the organization are treated as assessable income and the expenses directly related to the assessable income can be claimed as expenses.
The participation envisaged in the principle of mutuality is not that the members should take the surplus to themselves. It is enough if they have the right of disposal over the same. (See CIT Vs West Godavari District Rice Millers Association 150 ITR 394(AP) . In the said decision, the Hon’ble Court relied upon the decision of the Madras High Court in the case of CIT Vs Madras Race Club(1976) 105 ITR 433(Mad) wherein it was held as follows:- "The memorandum and articles of association of a company represent the contract between the company and the members. It is only by virtue of their ownership of the surplus assets, if any, that the members had agreed to the clause that they would not take back the surplus, but allow it to be transferred to any similar entity. As they themselves are to deal with the surplus, if any, at the time of winding up, it cannot be said that they are not participators in the surplus. This clause is only a fetter in the manner of disposal. The participation envisaged in the principle of mutuality is not that the members should willy-nilly take the surplus to themselves. It is enough if they had a right of disposal over the surplus to show that they were the participators." (p. 434). Moreover, the Madras High court quoted the English case of IRC Vs Eccentric Club Ltd (1925) 12 TC 657(HL) wherein it was provided clause 6 of the Memorandum that no member of the club in his character as such member was entitled to receive, directly or indirectly, any dividend, bonus or other profit out of such income or property of the club. On the winding up of the Club, the surplus if any was not to be distributed to the members but was to be given or transferred as the committee of management may determine. With all these features, it was held that the doctrine of mutuality would apply and the amount was not liable to be taxed. Also in the aforesaid decisions it was held that it is well settled that the identity need not be necessarily of individuals because it is the identity of status or capacity which matters more.
One extreme contention advanced on behalf of the revenue was that where a club had taxable income from trading or business activities, then there was no scope for the application of any principle of mutuality, even assuming that the subscriptions could be brought within the ambit of this principle. In Carlisle and Silloth Golf Club v. Smith [1912] 6 TC 48, 54, 55 (KB). there was a club, which was a bona fide members' club, for the purpose of recreation and other purposes incidental thereto. It took on lease from a railway company an open land which was utilized as a golf club at a nominal rent on condition that the golf club was to be run there and that non-members would be allowed on payment of certain fixed amounts for the use of the golf course. There were enough visitors to avail themselves of this privilege. The revenue authorities sought to assess the entire profits or gains of the golf club consisting of receipts from members and non-members. The court held that in so far as the club engaged itself in granting facilities of playing golf to non-members, it was carrying on a trade or business, and the profit was liable to be assessed. As regards contributions from the members, the principle of mutuality was applied. With reference to the facilities afforded on receipt of "green fees" from non-members, Hamilton J. held as follows1: "Now it seems to me that that constitutes engaging in the carrying on of an enterprise which is in itself outside the scope of the club and is distinct from the ordinary objects and activities of the club;............. I think, therefore, that at the outset the club has, for considerations sufficient in its own view, annexed to its ordinary enterprise of a golf club the rendering of services systematically to strangers for the purpose of obtaining, among other advantages to itself the revenue that those strangers provide..........; it is a case it seems to me at the outset in which this aggregate of gentlemen, who may for practical purpose be treated as one person, annexed to their club for the purposes of recreation an enterprise which is separate from it and which results in pecuniary receipts to themselves." This case, in our opinion, shows that the application of the principle of mutuality is not destroyed by the presence of transactions with, or profits derived from non-members. The said principle could apply to transactions with members. The maintenance of a combined account for all the transactions does not also affect the claim, as the way in which the accounts are kept is not conclusive in matters of taxation. The two activities can in appropriate cases be separated and the profits, if any, from the members, can be taken on the basis of the actuals from the accounts or, at any rate, by an estimate if it should become necessary. We are, therefore, unable to accept this part of the contention of the revenue. We are not shut out from considering the question of mutuality by virtue of (a) transactions with non-members or (b) maintenance of common accounts.
In the case of CIT Vs Kumbakonam Mutual Benefit Fund Ltd (1964) 53 ITR 241(SC), the Hon’ble Apex Court held that essence of mutuality lies in the return of what one has contributed to a common fund, and if profits are distributed as shareholders, the principle of mutuality is not satisfied. All the participators must be contributors to the common fund, mere entitlement to contribute will not suffice.
Receipts for the various facilities extended by the clubs to its members, as part of usual privileges , advantages and conveniences, attached to the membership of the club, could not be said to be from “ a trading activity” and the surplus-excess of receipts over expenditure- as a result of mutual arrangement could not be said to be “income” for the purposes of the Act. CIT Vs Bankipur Club Ltd 226 ITR 97(SC)
In the case of Chelmsford Club Ltd Vs CIT 243 ITR 89(SC), it was held that in addition to the surplus arising from the activities of the business of the club that was excluded from the levy of income-tax , even the annual value of the club house, as computed in Section 22 of the income-tax Act would be outside the purview of the levy of income-tax on principles of mutuality.
Principle of mutuality applies to all non-commercial activities. As regards income from commercial ventures, the club or society would not be entitled to claim principles of mutuality in respect of adventures of commercial nature.
Receipts from interest on bank deposit can be treated as exempt on principles of mutuality
Transfer fee realized from a newly inducted member in a co-operative housing society was eligible to be exempt on principles of mutuality. Transfer Charges, non-occupancy charges were held to be exempt on principles of mutuality in the case of 402 ITR 670(SC). In the case of CIT Vs Apsara Co-operative Housing Society Ltd (1993) 204 ITR 662(Cal) it was held that the transfer fees charged by a cooperative housing society was exempt on account of mutuality and the principles which governed clubs as far as mutuality are concerned will equally govern co-operative housing society as well. See also ITO Vs Venkatesh Premises Co-operative society ltd (2018) 402 ITR 670(SC). The apex court case dealt with non-occupancy charges, transfer charges and common amenity fund charges.
Before we evaluate the rival stands, it would be necessary to appreciate the general understanding of doctrine of mutuality. The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax; only the income which comes within the definition of Section 2(24) of the Act is subject to tax (income from business involving the doctrine of mutuality is denied exemption only in special cases covered under clause (vii) of Section 2(24) of the Act). The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable. Over time, groups which have been considered to have mutual income have included corporate bodies, clubs, friendly societies, credit unions, automobile associations, insurance companies and finance organizations. Mutuality is not a form of organization, even if the participants are often called members. Any organization can have mutual activities. A common feature of mutual organizations in general and of licensed clubs in particular, is that participants usually do not have property rights to their share in the common fund, nor can they sell their share. And when they cease to be members, they lose their right to participate without receiving a financial benefit from the surrender of their membership. A further feature of licensed clubs is that there are both membership fees and, where prices charged for club services are greater than their cost, additional contributions. It is these kinds of prices and/or additional contributions which constitute mutual income. The Apex Court in a detailed case held that the income was not exempt on the principles of mutuality. In the case of CIT Vs Common Effluent Treatment Plant(2010) 328 ITR 362(Bom), the issue of taxability or otherwise of interest on fixed deposit with banks was discussed threadbare and the court was not inclined to follow the decisions of Karnataka High Court in the case of Canara Bank Golden Jubilee Staff Welfare Fund Vs Dy CIT(2009) 308 ITR 202(SC).Later on the decision in the case of Common Effluent has been approved by the Apex Court in ITO Vs Venkatesh Premises Co-operative society ltd (2018) 402 ITR 670(SC). Interest on fixed deposit with bank was exible to tax and could not be made exempt on the principles of mutuality – Sports Club of Gujarat ltd vs CIT(1988) 171 ITR 504(Guj). See also (1995) 211 ITR 379(Gujarat)
In the said case it was held that notwithstanding the fact that the facilities of the club were being provided to members including general public, the activities were covered as advancement of object of general public utility and hence the income was exempt u/s 2(15) of the Act.
Where all the activities of the assessee club towards its objects of promotion of game and other ancillary activities carried were only incidental to said game only, registration already granted u/s 12AA cannot be cancelled. Even otherwise, principle of mutuality is applicable. CBDT Circular No 11/2008 followed. Also ITO€-1, Kolkata Vs Indian leather Products Association (2015) 64 taxmann.com 406(Kolkata-Tribunal)
In this case the apex court held that the entrance fee received from trading members was not exempt on account of principle of mutuality as the body of trading members who had paid the entrance fees and the shareholders among whom the profits of the company were distributed were not identical and the element of mutuality was lacking.
No matter who the purchasers may be , if the society sells the tea grown and manufactured by it at a price which exceeds the cost of producing it and rendering it fit for sale, it has earned profits which are , subject to the provisions of taxing act, taxable profits. The reason for taking such a stand that the society was formed under the Industrial and Provident Societies Act, 1893 which contemplated that the society registered under the said act will be a profit-making concern. The Court noted that when the constitution, rules and business practices of the appellant society so closely conform to the pattern of an ordinary profit-making concern, how can it plausibly be maintained that no profits can result? Thus, a commercial venture in order to make profits cannot be treated as exempt on account of principles of mutuality.
Clubs/Association
Housing Society
A question arises as to if in the case of an organization the provisions of charity and mutuality both are applicable, then which provisions should be applied. It is always advisable to apply mutuality provisions since the income is totally exempt in such cases without any fetters whereas in case of charitable organizations, there are conditions regarding utilization of funds and other statutory obligations.
The provisions of Income-tax Act,1961 do not deal with Mutuality directly and it is only to be inferred that since there is no income in case of mutuality , there is no need for any application of the provisions of income-tax Act,1961. The principles relating to mutuality have evolved in view of the decisions of the various Courts. It is only regarding mutual insurance that specific provision has been made in Section 2(24) to treat the same as income. Also Section 28(iii) deals with specific services performed by association for its members which are brought within the tax net .
The hon’ble Madras High court held that where chits are run as a business by a third party and assessee subscribes to that merely as a subscriber, the dividend income received over and above what has been subscribed by the assessee, has to be assessed as income and cannot be claimed as exempt on principles of mutuality.
In the said case , the court observed that the dominant motive which prompts most people to join chit fund schemes is to avail themselves of the facility of bidding for the chits when they are in urgent need of finance so that they may receive the chit amount in a lump sum as a loan with the facility of repaying it in monthly installments. A chit fund does, no doubt incidentally partake of the nature of saving scheme also. But unless the amounts are advanced to the prizing subscribers through a scheme of competitive bidding or by drawing lots, there will no income derived either by way of interest or by way of amounts forgone by the bidders at the auction. Thus, the chit fund is primarily intended to operate as a scheme for advancing loans from the common fund to the subscribers, their turns for getting such loans being determined either by auction or by drawing lots. It was held that the contributions made to chit fund cannot be treated as revenue expenditure nor the receipt of any amount therefrom can be treated as a business receipt.
Though a member was of necessity also a depositor he was not required to be a borrower. Thar was wholly optional. The income of the fund was by way of interest and such interest was received only from those who borrowed from it. The fact that the money that was lent came out of deposits made by the members who had borrowed as also the deposits made by the members who had not chosen to raise any loan would not make any difference so far as the need for establishing identity between the contributor and the participator vis-à-vis interest income. It is enough to show that a person had a right to be the contributor even though he did not contribute. Conclusion There are many more cases where mutuality can be claimed. However, an important point to be noted is that commercial motive must not be there in order to claim mutuality. The present note deals with the direct tax aspect of mutuality, though in indirect tax also the concept of mutuality is there. Analysis of GST provisions
Relevant Notifications and Circulars:
Relevant entries from Notification No. 12/2017-Central Tax (Rate)
Relevant entries from Notification No. 14/2018-Central Tax (Rate)
Relevant entries from Notification No. 28/2018-Central Tax (Rate)
Relevant entries from Notification No. 09/2017-Integrated Tax (Rate) (Besides the entries contained in Notification No. 12/2017 above [with respect to CGST], as amended from time to time, the following entry seek relevance with respect to IGST)
Circular No. 66/40/2018-GST, dated 26.09.2018 GST on Residential programmes or camps meant for advancement of religion, spirituality or yoga by religious and charitable trusts “The services provided by entity registered under Section 12AA of the Income Tax Act, 1961 by way of advancement of religion, spirituality or yoga are exempt. Fee or consideration charged in any other form from the participants for participating in a religious, Yoga or meditation programme or camp meant for advancement of religion, spirituality or yoga shall be exempt. Residential programmes or camps where the fee charged includes cost of lodging and boarding shall also be exempt as long as the primary and predominant activity, objective and purpose of such residential programmes or camps is advancement of religion, spirituality or yoga. However, if charitable or religious trusts merely or primarily provide accommodation or serve food and drinks against consideration in any form including donation, such activities will be taxable. Similarly, activities such as holding of fitness camps or classes such as those in aerobics, dance, music etc. will be taxable”.
THANK YOU -By CA Ramesh Kumar Patodia [Disclaimer: The analysis in this booklet is solely for information purposes. We are not offering it as a legal, accounting or other professional service advice. While best efforts have been made in this preparation, we assume no liabilities of any kind with respect to the accuracy or completeness of the contents, and specifically disclaim from any loss caused, is alleged to have been caused directly or indirectly by the information contained herein. Readers are advised to take expert opinion.
By: RameshKumar Patodia - June 10, 2019
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