Treatment of Unregistered Trust under the Income Tax Act, 1961

Section 12A is applicable only on public charitable trusts, while issue of share of members being determinate or indeterminate comes forth for private trusts. Section 67A/ section 164 is to be applied only on private trusts where shares of beneficiaries, or for that matter beneficiaries itself are indeterminate or unknown because in case a trust/ society/ section 8 company, whose objects are charitable, the members thereof does not have any interest in the assets or income of the trust.

 

Audit report in form 10B not required in case of unregistered institutions 
For claiming exemption under section 11 and 12 of income tax Act, 1961 charitable or religious trust or institution shall mandatory have to get their accounts audited if the total income without giving effects to provisions of section 11 and 12 exceed maximum amount not chargeable to tax and shall obtain audit report in form 10B. Form no 10B is a statutory format as like form 3CB-3CD and hence it is utilized for specified purposes only. Statutory forms are for the purpose designated and should not be used universally.

So if a charitable and religious trust or institution is not registered under section 12A and hence not eligible to claim exemption under section 11 and 12 of the Act is not supposed to obtain audit report in form 10B. Even if such institution is getting its account audited from a Chartered Accountant by virtue of requirements contained in its governing statue, the audit report shall not be in form 10B. Instead the audit report issued in such circumstances shall be in format set out in SA-700 issued by ICAI.

 

Unregistered Trust - Taxed as AOP on the slab rates applicable to individuals/ AOPs etc.

A public Charitable Trust not registered would be chargeable to tax as an AOP (association of persons). The tax is chargeable on the total income of an AOP/BOI at the same rate as is applicable in the case of an individual.

 

The basic difference and that is the major one, in case a trust /society /section 8 company, whose objects are charitable, the members thereof does not have any interest in the assets or income of the trust. Therefore, in these cases where no registration under section 12A is available, the income of such trust shall be taxed as AOP not on MMR but on the slab rates applicable to individuals/ AOPs etc.

 

Money transferred to unregistered trust cannot be treated as applied for charitable purposes -  Where the assessee transferred accumulated funds to unregistered trust then it was clear violation of Explanation to section 11(2) and clause (d) in sub-section (3) of section 11 and therefore same cannot be treated as applied for charitable purpose.

Amount so transferred was thus liable to addition in the hands of the assessee-trust. Assessee was a society working under the Government of Punjab, was running Museum by the name of Maharaja Ranjit Singh War Museum and was registered under section 12AA. Object of society was to create sense of patriotism and nationality among citizens; to preserve and display war history of Punjab. During the relevant year, rupees one crore was given to Punjab State War Heroes Memorial & Museum Society, Amritsar |PSWHMMS on directions of Government of Punjab. Donee-society was not registered under section 12AA at the relevant time though subsequently registered. Assessing Officer treated amount transferred to PSWHMMS as income of assessee holding that there was violation of sections 11(2) and 11(3)(d). Assessee contended that from Explanation of section 11(2) and clause (d) in sub-section (3) of section 11, it was evident that assessee was entitled to pay or credit accumulated amount to any, unregistered trust or institution not specified in the said provisions. Further, aims and objects of the donee-society and assessee were similar, hence, there was no violation of conditions prescribed under section 11 and amount could not be treated as income of assessee society during the relevant year, as same was applied through donee.

 

Held: On account of insertion of Explanation to section 11(2) and clause (d) in sub-section (3) of section 11 by Finance Act, 2002, accumulated amount cannot be transferred to a registered trust or institution or to the trust or institution or funds as specified in subclauses (iv) (v) (vi) and (via) to section 10(23C). In case of such credit payment, same would not be treated as application for charitable and religious purpose and further, it would be treated as income of such person, i.e., the person who had made the payment. From sub-section (2) and sub-section (3), it is clear that accumulation has to be for a specified purpose and the same is to be utilized within the time frame. Aims and objects of trust cannot be reproduced as a specific purpose. The purpose must have some individuality, it is so because only from the purpose, Assessing Officer would be able to monitor the amount so accumulated. In the instant case, it was not the claim of assessee that amount was being accumulated for payment to PSWHMMS. In such circumstances, there was clear violation of conditions referred in sub-section (2) and sub-section (3) of section 11. Amount spent for purpose other than for what it was accumulated, came within the mischief of section 11(3)(c). From changes made by Finance Act, 2002 in section 11, it is clear that restrictions have been imposed on transfer of accumulated or set apart amount but utilization of income received during the year has not been touched. It is settled that income received during the year can be transferred to other Trust or institution for charitable or religious purpose and same would be held to be application for such purpose. The argument raised that since there was a restriction only for payment or credit of accumulated amount to a registered trust or institution recognized under the Act and it would mean that payment can be made to unregistered trust, institution or to institutions or trusts not even recognized by the Act as charitable was far-fetched. This would lead to adding words to provisions of statute which is not permissible. Circular No. 8 of 2002 [(2002) 178 CTR (St) 9] nowhere supports argument raised by that aims and objects of donor and donee were similar. Rather, clause 21.1 clarifies that payment to other trust or institution out of the receipt of year would continue to be treated as application, however, no payment can be made from accumulated income and same would be taxed; clause 21.2 reproduces section 11(3)(d) stating that transfer would be deemed to be income of person making such payment or credit. In view of all this, addition of amount transferred to PSWHMMS was upheld.

It may be noted that mere filing of the audit report under section 12A(1)(b) may not fulfill the requirement of filing tax audit report in appropriate cases. For example, where an institution is carrying on a business whose objects are incidental to the attainment of the objectives of the institution and separate books are maintained in respect of such business, audit under section 44AB of the Act may become necessary if the sales, turnover or gross receipts from such business exceed Rs. 40 lakhs. In that case the institution has to get its accounts audited under section 44AB and furnish the audit report along with return of income before the specified date. (Related Assessment year : 2014-15) – [Maharaja Ranjit Singh War Museum Society v. CIT – Date of Judgement : 20.03.2020 (P&H)]

 

Gross receipts cannot be taxed as Income even if trust is unregistered

Where the exemption claimed under section 11 and 12 has been denied by the Assessing officer, what can be brought to tax is the net income in the hands of the assessee trust and not the gross receipts. In all these years, we find that while denying the exemption under section 11 and 12 for want of registration under section 12AA, the Assessing officer has brought gross receipts to tax which is against the basic tenets of law where only the real income which is determined after deducting expenses from gross receipts can be brought to tax. We therefore agree with the alternate contention so advanced by the ld AR and without going into merit of the other contention which is left open, the matter is set-aside to the file of the Assessing officer to examine the claim of the expenditure so claimed by the assessee trust against the gross receipts for each of the relevant years and where the Assessing officer determines the net receipts as not exceeding the maximum amount not chargeable to tax, allow the necessary relief to the assessee trust. (Related Assessment Years : 2013-14, 2014-15, 2015-16 & 2016-17) – [Kund Kund Kahan Digamber Jain Versus Mumokshu Ashram Bajaj Palace v. ITO - Date of Judgement : 29.05.2019 (ITAT Jaipur)]

 

Exemption under section 11 can be denied for advances given to unregistered trusts in violation of section 13

In the instant case, Mr. Manas Dasgupta is a trustee of the trust. He is also President of other two independent trusts. From the bare reading of provisions of section 13(3) of the Act, we find that the term ‘concern’ used in clause (e) of section 13(3) of the Act would cover ‘trust’ also. But the crucial question is whether Mr. Manas Dasgupta would be entitled for 20% of profits of the said concern as per Explanation 3 to section 13 of the Act so as to state that he is holding substantial interest in the said trust. In the instant case, the two trusts i.e. PCSD and Lok Kendra Trust are admittedly not registered under section 12AA of the Act and hence they would be assessed to income tax only in the capacity of ‘Association of Persons’ (AOPs) and income would be assessed by applying the regular commercial business principles. Once it is determined, Mr. Manas Dasgupta, being the President of those two trusts, would be entitled to share of profits of the said AOP and if the said share is more than 20%, then he would be deemed to be holding substantial interest in that AOPs as per Explanation 3. We find that the details of beneficiaries together with their respective holdings of other two trusts i.e. PCSD and Lok Kendra Trust are not available on record. Hence we deem it fit and appropriate, in the interest of justice and fair play, to remand this limited aspect of the issue to the file of Ld. Assessing Officer for factual verification, so as to find out the fact whether Mr. Manas Dasgupta together with his relatives either individually or collectively is entitled to 20% of profits of the two trusts. If that is found to be correct, then the interest-free advance payments made by the assessee-trust to those two trusts would be falling squarely under the ambit of payments made to persons specified in section 13(3) of the Act which would in turn lead to violation of provisions of section 13(1)(c) read with section 13(2)(a) of the Act. It is not in dispute that the advances paid to those two trusts did not carry any interest. We hold that if it is found by the Ld. Assessing Officer that Mr. Manas Dasgupta either individually or collectively through his relatives hold substantial interest in those two trusts, then the granting of advances without interest or any element of security itself, would result in benefit derived by the concern mentioned in clause (e) of section 13(3) of the Act, which in turn would lead to violation of provisions of section 13(2) of the Act. Subject to these directions, we remand this issue to the file of Ld. Assessing Officer. Accordingly, the grounds raised in this regard by the revenue are allowed for statistical purposes. (Related Assessment Year : 2010-11) [ACIT v. Hooghly Engineering & Technology College Society – Date of Judgement : 04.07.2018 – (ITAT Kolkata)]

No exemption under section 11 to charitable trust in case it was not registered under section 12AA

Assessee, a society with charitable and religious objects, was in receipt of voluntary contributions as well as interest income during the year, both ‘income’ by definition. The issue arising in the instant appeal was the determination of the correct income for the current year chargeable to tax under the Act. While assessee claimed the same to be nil, Revenue had assessed its income at Rs. 3,84,731/- the ‘surplus’, i.e., the excess of receipt over payment as per the assessee’s accounts, with the assessee. Revenue also contended that assessee was admittedly not registered even subsequent to the completion of assessment, so that the benefit of exemption under section 11 on the ‘surplus’ reflected by its accounts was accordingly denied by the Revenue. It was held there was no basis for allowing exemption to assessee on its income under section 11 to whatever extent. There were two aspects of the impugned assessment for consideration/adjudication. The voluntar y contributions to the assessee-society qualify as income under section 2(24)(iia) and was therefore, subject to the provisions of the Act, eligible for exemption under section 11 on application.

Two, the assessee was not entitled to exemption under section 11 inasmuch as it was admittedly not registered under section 12AA which issue stood settled by the decision in U.P. Forest Corporation v. DCIT (2008) 297 ITR 1 (SC). Thus, the matter accordingly should travel back to the file of the Assessing Officer for adjudication afresh in accordance with law to allow deduction qua any expenditure incurred, if any, including administrative expenditure, for the purposes of the running the institution or organizing its activities. The burden of proof or the onus to prove the said expenditure was on assessee, whose accounts were presumably audited, i.e., under the provisions of Societies Registration Act, 1860. (Related Assessment Year : 2014-15) - [Langar Committee Hanuman Mandir v. ITO - Date of Judgement : 15.03.2018 (ITAT Amritsar)]