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) |
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.)]
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