1 / 35

FORMATION & REGISTRATION OF CHARITABLE INSTITUTIONS

FORMATION & REGISTRATION OF CHARITABLE INSTITUTIONS. By CA Benedin K. R., B.Com., FCA, ISA (DISA). Constitution of a Charitable Institution. What is it? Is it necessary for a religious or charitable institution? Should it be in a written format?.

olaf
Download Presentation

FORMATION & REGISTRATION OF CHARITABLE INSTITUTIONS

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. FORMATION & REGISTRATIONOFCHARITABLE INSTITUTIONS By CA Benedin K. R., B.Com., FCA, ISA (DISA)

  2. Constitution of a Charitable Institution • What is it? • Is it necessary for a religious or charitable institution? • Should it be in a written format?

  3. Categories of Charitable Institutions • Trust – the simplest form of an institution • Society – More democratic set-up • Company – Corporate aura

  4. TRUSTS • What are they? Author(s); Trust Property; Trustees; Beneficiaries • Trust Deed • Concept of membership in Trusts • First Governing Body appointed by authors • Registering authority of trusts – Sub-Registrars • Indian Trusts Act, 1882 – An Act to define and amend the law relating to private Trust and Trustees • The Charitable and Religious Trusts Act, 1920 – An Act to provide more effectual control over the adminsitration of charitable and religious Trusts • Public Trust Acts (Bombay Public Trusts Act, 1950; Madhya Pradesh Public Trusts Act, 1951)

  5. SOCIETIES • An association of persons to act jointly for the promotion of certain common purpose. • Prepare MOA and Bye-laws • Office-bearers elected by members • Registering authority – Registrar of Societies; on-line registration through egroops.kerala.gov.in; Registration Certificate issued • The Travancore-Cochin Literary, Scientific and Charitable Societies Registration Act, 1955 – Extends to the whole of Kerala State excluding the “Malabar District” • The Societies Registration Act, 1860 (Central Act) • AGM to be held and Balance Sheet and list of office-bearers to be filed with Registrar every year • State Acts adds local flavour, i.e. M. P. Societies Registration Act, 1972 (Application for permission to purchase or sell immovable property – 2% of purchase, 5% of sale).

  6. COMPANIES • Corporate image • Registeredunder section 8 of the Companies Act, 2013 (earlier u/s 25 of the 1956 Act) • Registering authority – Registrar of Companies • Management and administration to be governed by the provisons of Companies Act • Board meetings, AGM, notices to meetings, accounts and audit, filing with Registrar, etc. To be as per Companies Act.

  7. Comparison of various types of constitutions

  8. Preparatory Review of the constitution for Registration under the Income-tax Act, 1961. Provisions to be included in the Deed/Memorandum: • Investment of the funds of the institution will be in accordance with the provisions of section 11(5) r.w.s. 13(1)(d) of the IT Act, 1961. • The Trust Deed is irrevocable. • Accounts of the society shall regularly be maintained, accounts shall be closed by 31st March and the same shall be audited by a Chartered Accountant every year. • Income of the institution shall be solely utilized towards the objects and that the funds/assets will not be utilized for payment to the author/Trustee/Member by way of profit/interest/ dividend, etc. • In the event of the dissolution of the institution, the remaining assets shall be transferred to another charitable institution having similar objects or in its absence to the Government. • Amendment to the Trust Deed/Memorandum of Association will be carried out only with the prior approval of the Commissioner of Income-tax. • The benefits of the institution is open to the members of the public irrespective of caste, religion, sex, etc. • Objects/Activities of the institution shall be carried out only in India. • Any alienation of immovable property will be carried out only with the prior approval of the Commissioner of Income Tax for every occasion.

  9. Registration u/s 12AA Why Registration Required Provisions of sections 11 and 12 shall not apply unless the institution is registered u/s 12AA

  10. Registration u/s 12AAWhat income is exempted u/s 11? Income derived from property held under trust to the extent it is applied for charitable or religious purposes in India [s. 11(1)] • What is meant by income derived from property held under trust? • What is the meaning of application? • What are charitable purposes?

  11. Concept of Income and income derived Property held under Trust • “Income” includes voluntary contributions received by an institution created wholly or partly for charitable or religious purposes [s. 2(24)(iia)] • Any voluntary contributions received by an institution created wholly for charitable or religious purposes shall be deemed to be income derived from property held under trust. [s. 12(1)].

  12. Meaning of Application of Income • Utilization of income for charitable or religious purposes regardless of the fact whether revenue or capital in nature. Examples • Repayment of loan [DIT (Exemption) vs Govindu Naicker Estate (2009) 315 ITR 237 (Mad.)] • Payment of tax [ACIT vs. Janaki Ammal Ayya Nadar Trust (153 ITR 159 (Mad.)] • Donation to another Trusts • Write-off of loan given to economically weaker sections of society [CIT vs Sacred Heart Church (2005) 172 ITR 709 (Guj)] • Defending Criminal charges (Ananda Marga Pracharaka Sangha vs CIT (1994) 76 Taxman 88 (Cal.) • Capital expenditure is income applied [CIT vsKannikaParameshwari Devasthanam & Charities (1982) 133 ITR 779 (Mad.)] 

  13. Exemptions allowed from Application • Voluntary contributions made with a specific direction that they shall form part of the corpus of the institution. [(s. 11(1)(d)] • Fifteen percent of the income may be accumulated or set apart every year. [s.11(1)(a)]. • Any income derived was not received during that year or not applied for any other reasons – provided such income was applied in the succeeding year or in the year in the year of its actual receipt. This option shall be exercised in writing (in Form 10) before the expiry of the due date for filing the return of income [Explanation 2 below sec. 11(2)]. • Income accumulated or set apart under notice to the assessing officer specifying the purpose for which it is so accumulated or set apart for a period not exceeding five years [s.11(2)].

  14. Charitable purposes[s.2(15)] Charitable purpose includes • Relief of the poor • Education • Medical relief • Preservation of environment • Preservation of monuments or places or objects of artistic or historic interest • Advancement of any other object of general public utility  

  15. Business held under trust Any activity in the nature of trade, commerce or business shall not be considered “advancement of any other object of general public utility”, irrespective of the use, application or retention of income from such activity. However, exemption allowed if— • the gross value of receipts from such activity is less than Rs.25 lakhs in the previous year [(s. 2(15)] • the business is incidental to the attainment of the objectives of the trust; and • separate books of account are maintained in respect of such business [(s.11(4A)].

  16. Case Law • Business in handicrafts and transferring profits to recognized educational institutions not eligible for exemption. Hit by s.11(4A) [ Auroboutique Trust vs. CIT (2002) 178 CTR 352 (Mad.)] • The income of the newspaper business has been employed to achieve the Trust’s objectives of education and relief to the poor and that the Trust has maintained separate books of account in respect thereof hence the Trust is entitled to exemption u/s 11. [ACIT vs Thanthi Trust (2001) 247 ITR 785 (SC)] • A commercial concern is not an object of relief of the poor on the ground that it provides employment. The object should provide relief directly and not indirectly. [Yograj Charity Trust [1976] 103 ITR 777(SC)]. • An institution set up with the object of promoting trade or commerce is a charitable institution as it promotes common good through enhancement of business. [CIT vsFederation of Indian Chambers of Commerce & Industry [1981] 130 ITR 186(SC)] • Welfare activities adopted for the truck drivers, cleaners and mechanics of the truck owners are in the nature of staff welfare activities, as are common in other business organizations which cannot be termed for general public utility within the meaning of s. 2(15) [Commissioner of Income tax vs Truck Operators Association (2011) 243 CTR (P&H) 302]

  17. “Charitableor Religious” purposes • “Religious purposes” not defined • Can these two terms be distinctly differentiated? • Overlapping functions • Department view

  18. Conditions for applicability of sections 11 and 12 • The institution shall be registered u/s 12AA [s. 12A(1)(aa) Registration u/s 12AA is a condition precedent for claiming the benefits u/s 11(1)(a) [U.P. Forest Corporation vs Dy CIT (2008) 297 ITR 1.] • Registration will be effective from the financial year in which the application is made [s. 12A(2)]. • Where the total income exceeds the threshold limit, accounts shall be audited [s. 12A(b)]. • At least 85% of the income shall be applied for charitable purposes in the relevant previous year. • Funds of the trust shall be kept invested/deposited in the modes prescribed u/s 11(5) • The author, trustee, manager, etc. or their relatives shall not take any benefit from the property held under trust [s.13(2)]. • Return of income shall be filed if the total income exceeds the maximum amount which is not chargeable to tax (s. 139(4A).

  19. Registration u/s 12AADocuments to be submitted • Application in Form 10A in duplicate to the Commissioner of Income-tax • Original/certified copy of the instrument under which the institution was created • Copy of accounts for the latest 3 years (or from the inception of the institution) • Declaration u/s 13(1)(c) • Notes on activities since the inception of the institution • Copy of PAN, if available

  20. Registration u/s 12AAStandard Operating Procedure and points for consideration • Verify the previous years’ accounts to see if the income exceeds the maximum amount which is not chargeable to tax. • There will be a site inspection by an Income-tax official. • Ensure that some charitable activities are carried out. • There will be a hearing prior to the approval/rejection of the application. • The instrument by which the institution was formed shall be produced in original. • Consider carrying documentary evidence to prove the existence and functioning of the institution. • Order has to be passed on the application within six months from the end of the month in which the application is made.

  21. Case law • Non-consideration of the application within the time fixed by s. 12AA(2) will result in deemed registration [Society for the promotion of Education, Adventure Sport & Conservation of Enviornment vs CIT (2008) 216 CTR (All) 167]; [Karnataka Gold Association vs DIT (2004) 91 ITD 1 (Bang)] • For the purposes of registration under s. 12A, what the authorities have to satisfy is the genuineness of the activities of the trust or institution and how the income derived from the trust property is applied to charitable or religious purpose [Sanjeevamma Hanumanthe Gowda Charitable Trust vs DIT (Exemtion) (2006) 285 ITR 327 (Kar) • Application u/s 12A cannot be rejected for the reason that return of income has not been filed since inception [CIT vs Shri Advait Ashram Society (2012) 211 Taxman 311 (All.)] • In the case of a newly established trust, it is not within the scope of CIT to examine the question whether the trust has actually commenced its charitable activities [DCIT vs Foundation of Ophthalmic & Optometry Research Education Centre (2013) 254 CTR 133 (Del.)]

  22. Cancellation of Registration If Commissioner of Income-tax is satisfied that • The activities of the institution are not genuine, or • are not carried out in accordance with the objects of the institution, he shall pass an order cancelling the registration [sec. 12AA (3)] Finance Bill 2014 Finance Bill 2014 has proposed to empower the Commissioner to cancel the registration of an institution if provisions of sections 11 and 12 do not apply to exclude its income either wholly or partly by operation of s.13(1), namely (a) income applies for private religious purposes, (b) income of a charitable institution is applied for the benefit of any particular religious community, (c) income enures or property held under trust is applied for the benefit of persons referred to in s. 13(3) or (d) investments made otherwise than in mode prescribed u/s 11(5).

  23. Consequences of non-registration u/s 12A Assessment as AOP

  24. Taxation of Non-exempt income of Registered Institutions Non-exemption for the reason that: • Any part of income enures or • Any part of income or trust property is applied for the benefit of any author, substantial contributor, trustee, manager or their relatives or any concern in which any of these persons have substantial interest At maximum marginal rate. [DIT (Exemptions vs Sheth Mafatlal Gagalbhai Foundation Trust (2001) 249 ITR 533 (Bom)] Maximum marginal rate is applicable only on that part of income which has forfeited exemption and not on the entire income of the Trust [DIT (Exemptions) vs Sheth Mafatlal Gagalbhai Foundation Trust (2001) 249 ITR 533 (Bom)] Consider the Finance Bill 2014 proposal: The above situation may result in cancellation of registration In other cases, non-exempt income shall be taxed as income of AOP. [s. 164(2)]

  25. Anonymous Donations Anonymous donations received by charitable institutions (not religious institutions) in excess of five percent of the total donations or Rs.1 lakh whichever is higher shall be taxable at 30% (s. 115BBC). Finance Bill 2014 proposes to bring the exempted portion below Rs.1 lakh or 5% of the total donations whichever is higher into chargeable income. Anonymous donation does not apply where the assessee has maintained a record of the identity indicating the name and address of the person making the contribution (Sunder Deep Educational Society vs ACIT (ITAT Delhi); Consider • Donations received through bank accounts fromn unknown donors • School children collecting donations in tin boxes

  26. Depreciation Is depreciation an application of income? Can the income applied for the creation of fixed assets be considered for depreciation on commercial principles? It was held in Lissie Medical Institutions vs. CIT 348 ITR 344 (2008) (Ker) that Income considered for application of funds for creation of fixed assets cannot be considered for depreciation Finance Bill 2014 Finance Bill 2014 has proposed that “income shall be determined without any deduction or allowance byway of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this clause in the same or any other previous year”. The decision in Lissie Medical Institutions (supra) has now become the law.

  27. Grants received for specific purposes are not income of the institution • Tied-up grants received from a foreign donor were for specific purposes and did not belong to assessee [Nirmal Agricultural Society vs ITO (1999) 71 ITD 152 (HYD)] • Grant received through regular banking channels from foreign funding agencies do not form part of income at all [Society for Integrated Development in Urban & Rural Areas vs. DCIT (2004) 90 ITD 493 (Hyd)]

  28. Can the Excess of excess expenditure of one year be treated as application in subsequent year(s)? Divergent views exist. Consider the following Tribunal decisions: In Favour - • Adjustment of excess expenditure of earlier years in subsequent years would amount to application of income [CIT vs Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj)] • Excess expenditure in the earlier years can be adjusted against income of subsequent years and such adjustment would be application of income for subsequent years [CIT vs Institute of Banking Personnel Selection (2003) 264 ITR 110 (Bom)] • Amount of excess application of the last year can be set off against the deficiency of the subsequent assessment year [CIT vs Matriseva Trust (2000) 242 ITR 20 (Mad.)] Against – • income applied in earlier year cannot be treated as applied for the subsequent year [Pushpawati Singhania Research Institute for Liver, Renal & Digestive Diseases vs DDIT (Exemption) (2009) 29 SOT 316 (Del)]

  29. Capital Gain • If the whole of net consideration on transfer of a capital asset is utilized for acquiring another capital asset, the entire capital gain is regarded as applied for charitable purposes. • If only part of the net consideration is utilized for acquiring a new asset, so much of the capital gain by which the cost of the new asset exceeds the cost of the transferred asset [s. 11(1A)] Fixed deposit with public sector undertakings or scheduled banks is investment in capital asset for purposes of s. 11(1A) [CIT vs East India Charitable Trust (1994) 206 ITR 152 (CAL)] Assessee, a charitable trust, invested the premium received by it on leasing the plot in time deposit with the bank—Fixed term deposit is a capital asset [DIT (Exemption vs DLF Qutab Enclave Complex Medicdal Charitable Trust (2001) 248 ITR 41 (Del)]

  30. Registration u/s 80GFeatures • Applicable only to Charitable institutions, i.e. religious institutions excluded. • approval once granted shall continue to be valid in perpetuity (CBDT circular 7 dated 27/10/2010) • Institution should have received registration u/s 12A or 10(23C) • Application shall be approved/rejected within a period not exceeding 6 months.

  31. Registration u/s 80GDocuments to be submitted (Rule 11AA) • Application in Form 10Gin triplicate to the Commissioner of Income-tax • Copy of registration granted u/s 12A or u/s 10(23C) • Copy of accounts for the latest 3 years (or from the inception of the institution) • Notes on activities since the inception of the institution • May require copies of Income-tax returns filed for last three years

  32. Registration u/s 10(23C)Features • Applicable only to institutions having aggregate annual receipts in excess of Rs. 1 crore. • Approval once granted shall continue to be valid in perpetuity (CBDT circular 7 dated 27/10/2010) • Institution should have received registration u/s 12A • Application shall be approved/rejected within a period of 12 months from the end of the month in which the application was made.

  33. Registration u/s 10(23C)Documents to be submitted (Rule 2C) • Application in Form 56D in triplicate to the Chief Commissioner of Income-tax • Deed of Trust/memorandum and Articles of Association • A list of trustees including settler/members of Governing Council • Photocopy of the certificate u/s 80G • True copies of assessment orders for the last three years • Copy of registration granted u/s 12A • Copy of accounts for the latest 3 years (or from the inception of the institution) • Notes on activities since the inception of the institution When there are multiple objects, registration u/s 10(23C) (vi) cannot be rejected on the suspicion that the society may deviate from its objective of education [Digember Jain Society for Child Welfare vs DIT (Exemptions) (2010) 228 CTR (Del) 517]

  34. APPEALS • Appeals against rejection of applications u/s 12A, 80G or 10(23C) lie with Appellate Tribunal directly (s. 253(1)(c) • Consider the possibility of withdrawal of the application and re-submission, after curing the defects, instead of a rejection

  35. THANKYOU

More Related