Dissolution of Trust or Society or Section 8 company

A trust may be extinguished or terminated if “its purpose becomes unlawful” (vide section 77 of the Indian Trusts Act, 1882). However, when a public charitable trust is properly and completely constituted, it becomes irrevocable, even though it is voluntary. Accordingly, there is no provision under the various Public Trusts Acts (including the Bombay Public Trusts Act, 1950) to legally terminate or dissolve a valid public charitable trust. However, the assets and liabilities of the trust can be transferred to another charitable trust having similar objects thereby the former trust can be dissolved. But a revocable trust can be dissolved as per the terms and conditions of the trust deed.

In the event of dissolution of the Trust, the entire funds of the Trust shall be realized and first be used for payments of liabilities of the Trust. The assets left if any, shall be disbursed, after obtaining prior approval of the Commissioner of Income Tax (Exemptions) to the other Trust/Society having similar objectives and who have been given registration under section 12AA or section 12AB or approved under section 10(23C) of the Income Tax Act 1961. In no circumstances it shall be distributed in any manner, to the Trustee/Member of the Governing Body or their relatives or related concern.

Dissolution clause in the trust deed

Para 2.7(viii) of Manual of Office Procedure (Vol. II) of ITD provides that in case of dissolution of a trust, its net assets, after meeting all its liabilities, should not revert to its founder, members, directors, donors, etc., but used for its objects. In the absence of dissolution clause, the corpus of trust is susceptible to misuse at the time of dissolution.

Ministry reply – in Mumbai & Gujarat, Bombay Public Trusts Act, 1950 ensures that no amount can go back to any founder, etc., because properties are transferred with the permission of the Charity Commissioner only to other Trusts having similar objects. Thus, inclusion of dissolution clause in the deed is neither necessary nor legal in States where specific legislation bars such reversion.

Audit is of the view that clauses in local legislation applicable to particular States do not cover across the country. Further, procedures prescribed under other Acts cannot be enforced under Income Tax Act, which does not specify the fate of assets and properties generated out of public monies by Trusts exempted from tax. The Ministry has not highlighted the number of cases where the Charity Commissioner has taken action to revert the assets to other Trusts having similar objects. Therefore, the Ministry should insist upon inclusion of dissolution clause in the trust deed in all States, whether local legislation exists or not.

 

Registration under section 12AA – Winding-up clause

UPON A DISSOLUTION NO MEMBER TO RECEIVE PROFIT (Section 14 of Societies Registration Act, 1860)

If upon the dissolution of any society registered under Societies Registration Act, 1860, there shall remain after the satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed amongst the members of the society or any of them, but shall be given to some other society, to be determined by the votes of not less than three-fifths of the members present personally or by proxy at the time of dissolution, or, in default thereof, by such court as aforesaid. 

RULE 6 – COMPANIES REGULATIONS, 1956 READ WITH CLAUSE 10 OF ANNEXURE I – COMPULSORY CLAUSE

If upon a winding-up or dissolution of the company, there remains, after the satisfaction of all the debts and liabilities, any property whatsoever, the same shall not be distributed amongst the members of the company but shall be given or transferred to such other company

On dissolution of the Trust

On dissolution of the Trust, the net assets of the Trust shall be transferred to an association of persons or trust or society having similar objects of this Trust.

IN WITNESS WHEREOF THE AUTHOIR OF THE TRUST HAS SET HIS HAND AND SIGNATURE ON THE DAY, MONTH AND YEAR FIRST ABOVE WRITTEN IN THE PRESENCE OF

WITNESSES:                                       SETTLOR/AUTHOR OF THE TRUST

WITNESS                    1. TRUSTEE____________ 1.

2. TRUSTEE____________ 2.

3. TRUSTEE____________ ____________

Dissolution of Society

Unlike trust, societies may be dissolved. Dissolution must be approved by at least three-fifths of the society’s members. In the event of dissolution or winding-up of the society and after settlement of all debts and liabilities, the assets (funds and property of the society) remaining as on the date of dissolution shall under no circumstances be distributed among the members of the society but the same shall be transferred to another Charitable Society/ Association, whose objects are similar to those of this society and which enjoys recognisation under section 80G of the Act as amended from time-to-time.

A society can be dissolved by -

(i) its members

(ii) the Registrar of Societies

(iii) the Court or

(iv) by the Government

Dissolution of section 8 company

Like a society (but unlike a trust), a section 8 company may be dissolved. Upon dissolution and after settlement of all debts and liabilities, the funds and property of the company may not be distributed among the members of the company. Rather, the remaining funds property must be given or transferred to some other section 8 company, preferably one having similar objects as the dissolved entity.

NOTE:

A company registered under this section shall amalgamate only with another company registered under this section and having similar objects.

Tax on Accreted Income - Accreted income is subjected to tax @ Maximum Marginal Rate - If on dissolution a Charitable Trust or institution does not transfer all its assets to another Charitable Organization [Section 115TD]

If on dissolution a Charitable Trust or institution failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or 12AB or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via), within a period of 12 months from the end of the month in which the dissolution takes place,

then, in addition to the income-tax chargeable in respect of the total income of such trust or institution, the accreted income of the trust or the institution as on the specified date shall be charged to tax and such trust or institution, as the case may be, shall be liable to pay additional income-tax (herein referred to as tax on accreted income) at the maximum marginal rate on the accreted income.

 

115TD(1)	Transfer of all assets in case of dissolution of a charitable trust to another charitable trust to avoid tax on accreted income	Within 12 months from the end of the month in which dissolution takes place (applicable from 01.06.2016)
115TD(5)	Payment of tax on accreted income	Within 14 days from the date of merger or the date on which the order cancelling the registration is received or the date on which the order rejecting application for fresh registration is received, etc. (applicable from 01.06.2016)

 Inter-charity donation out of accumulated funds will be permissible in case of dissolution of charitable organization [Second Proviso to Section 11(3A)]

The Finance Act, 2003, with effect from 01.04.2003 had inserted proviso to section 11(3A) which provides that inter-charity donation out of accumulated funds will be permissible in case of dissolution of a Charitable Organization. This amendment has been made to reduce the hardship of Charitable Organizations on the brink of dissolution.

However, with effect from assessment year 2003-04, any donation made out of income accumulated or set apart either during the period of accumulation or thereafter to any trust or institution registered under section 12AA or to any fund, institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via) shall not be treated as application of income for charitable or religious purposes.

Text of Second Proviso to Section 11(3A)

PROVIDED FURTHER that in case the trust or institution, which has invested or deposited its income in accordance with the provisions of clause (b) of sub-section (2), is dissolved, the Assessing Officer may allow application of such income for the purposes referred to in clause (d) of sub-section (3) in the year in which such trust or institution was dissolved.

Registration cannot be refused on the ground that the Trust deed is not having any provision in relation to disbursement of balance funds in the eventuality of the dissolution of Trust

Dismissing the appeal of the revenue the Court held that, the certificate of registration is only an enabling provision to claim exemption. Even if the registration is granted, the exemptions from the provisions of the IT Act in particular Sections 11 and 12 is not automatic. It is only when the assessee satisfies the requirement of Section 13, he would be eligible for exemption. Accordingly, the registration cannot be refused on the ground that the Trust deed is not having any provision in relation to disbursement of balance funds in the eventuality of the dissolution of Trust. – [CIT (E) v. Shri Narsinghji Ka Mandir (2020) 312 CTR 307 : 185 DTR 30 (Raj.)]