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Taxation of Trusts:
Taxation of Public Trusts
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  • To find out the taxable income of a charitable or religious trust:-

    • Compute the income of a trust. Here,"income" includes voluntary contributions received by a trust/institution created wholly or partially for charitable or religious purposes. The income of a trust/institution is required to be computed as per the provisions of the Income Tax Act.

    • Find out the part of income exempt under section 11 or section 12 of the Act. Trusts/Institutions are required to register themselves under Section 12AA in order to avail the exemptions. This can be done by writing an application in Form 10A within a year from the date of setting of trust/institution. Broadly, the scheme of the provisions regarding the exemptions may be summarized as follows:-

      • The creation of trust must be wholly for charitable purposes and the objectives of the trust should be for charitable purposes, as defined under the Act.

      • The trust should not be created for the benefit of any particular religious community or caste.

      • The trust should not be created for carrying on business for profit.

      • The properties settle upon the trust must be held in trust. It would not suffice if only the income is held in trust.

      • The trust deed must contain a provision that the income of the trust or the property held in trust would be utilized, for charitable purposes in India.

      • It should be ensured that income or property of the trust does not ensure for the benefit of the settlor/ author of the trust or his relatives.

  • Charitable or religious trusts, which may otherwise be eligible for tax exemption, are liable to forfeit this exemption under Section 13 of the Act. It is applicable in the following circumstances:-

    • Where the trust is created after March 31, 1962, any part of the income of the trust ensures, under the terms of the trust deed, directly or indirectly, for the benefit of specified categories of persons such as, the author of the trust, trustee or manager of the trust, substantial contributor to the trust and any relative of such author, trustee, etc.

    • Any part of the income or any property of the trust is used or applied during the relevant year, directly or indirectly, for the benefit of specified categories of persons.

    • The trust funds(with certain exceptions) are invested in contravention of the investment pattern of such funds.

    Where a charitable or religious trust forfeits tax exemption in the circumstances mentioned at (a) to (c) above, the trust shall be charged to tax at the maximum marginal rate. A trust will attract the maximum marginal rate of tax only on that part of income which has forfeited exemption under the above circumstances and not on the entire income of the trust.

  • Besides there are other provisions of the Act, which are relevant to the taxability of the income of charitable or religious trusts. These provisions are summarized as follows:-

    • Filing of return of income [Under section 139(4A)] by trustees of charitable or religious trusts if the total income of trust exceeds the minimum amount which is chargeable to income-tax without giving effect to provisions of Section 11 and 12. Also, trusts/institutions whose income is exempted under Section 11 and Section 12 are also required to file a return as assessee's claim for exemption would be decided by the Income Tax Department only after it has received the relevant material from the assessee.
      The return of income has to be filed along with the audit report submitted by chartered accountants in Form 10B after auditing accounts of various trusts/institutions.

    • Liability of trustees as 'representative assessees' [Under section 161] wherein they are liable to tax in their representative capacity in respect of income of trust.

    • Under section 80G, deduction (special exemptions) in respect of donations to certain funds, charitable institutions, etc is granted. In order to be eligible under this section, the charitable trusts/institutions need to obtain a valid certificate by making an application to them in Form 10G . The form should be accompanied by following documents:-

      • Copy of registration granted under Section 12A

      • Notes on activities of institutions/fund/trusts since the time of its inception or during last three years, whichever is less and

      • Copies of accounts of trust/institution since the time of its inception or during last three years, whichever is less.

    • Wealth tax is also not charged on properties held under trust, or other legal obligation, for public purposes of a religious or charitable nature under Section 5(i) of Wealth Tax Act. In certain cases, however, Section 21A of the Wealth Tax Act lays down that wealth of trust is chargeable to tax as if the property is held by an individual who is a citizen of India and resident in India for the purpose of Act.

    • Donors are given relief from income tax in respect of donations made to institutions established in India for charitable purpose.

    • There are specific provisions relating to public charitable/religious trusts under section 10 of the act. The incomes of these trusts do not form part of total income or the income of such trusts is exempt from income tax.

    • The trustees of a charitable or religious trust are required to make an application to the prescribed authority for allotment of a Permanent Account Number (PAN) under the provisions of Section 139A of the Income Tax Act.

  • In certain cases, income of a charitable/religious trust, which is not subject to exemption under section 11 or section 12, may be chargeable to tax as if it is the income of an association of persons(AOP):-

    • Income from property held under trust wholly for charitable or religious purposes

    • Voluntary contributions without any direction that they shall form part of corpus of trust or

    • Income of trust or institution being profits and gains of business which is incidental to the attainment of the objectives of trust and separate books of account are maintained.

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