TRUSTS -TYPES & TAXABILITY Presentation By CA Sanjeev Verma ForBareilly Branch of CIRC of ICAI 22nd January2011
TRUSTS -TYPES & TAXABILITYMeaning of Trust A trust is a relationship in which : A person/s or entity (the trustee) holds legal title. to certain property (the trust property or trust corpus), but is bound by a fiduciary duty to exercise that legal control. for the benefit of one or more individuals or organizations (the beneficiary), who hold ‘beneficial’ or ‘equitable’ title. The trust is governed by the terms of the (generally) written trust agreement and local law. The entity (one or more individuals, a partnership or a legal entity) that creates the trust, is called the settlor.
TRUSTS -TYPES & TAXABILIYType of Trusts:- TYPES OF TRUSTS:- • BARE TRUST • CONSTRUCTIVE TRUST • RESULTING TRUST • DISCRETIONERY TRUST • FIXED TRUST • HYBRID TRUST • EXPRESS TRUST • IMPLIED TRUST • INTERVIVOS TRUST • TESTAMENTARY TRUST • REVOCABLE TRUST • IRREVOCABLE TRUST
TRUSTS -TYPES & TAXABILITY Bare Trust A trust where the beneficiaries are entitled to the assets absolutely, and the trustee is simply obliged to pay them over to the beneficiaries. ‘Resulting’ and ‘Constructive’ trusts are usually Bare trusts. Bare trusts generally do not continue for any length of time, unless they arise out of protracted litigation, or the beneficiaries are minors (in which case the bare trust must continue till they reach majority)
TRUSTS -TYPES & TAXABILITY Constructive Trust It is imposed by law as an equitable remedy due to some wrong doing, where the wrong doer acquired legal title to some property and cannot in good conscience be allowed to benefit from it. Resulting Trust It is a form of implied trust which occurs wherea trust fails, wholly or in part, as a result of which the settlor becomes entitled to the assets.
TRUSTS -TYPES & TAXABILITY Discretionary Trust An arrangement where thetrustee may choose,from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent, so long as the decision is made based on the beneficiaries best interests. The purpose is that no individual can claim to be entitled to any specific interest in the trustee’s assets,which often has tax advantages or asset protectionadvantages. Fixed Trust Entitlement of the beneficiaries is fixed by thesettlor.The trustee has little or no discretion. E.g. a trust for a minor (up to if he/she attains 21) a life interest (to pay the income to X for his/her lifetime)
TRUSTS -TYPES & TAXABILITY Hybrid Trust A combination of elements of both fixed and discretionary trusts. The trustee must pay a certain amount of the trust property to each beneficiary fixed by the settlor. But the trustee has the discretion as to how any remaining trust property, once these fixed amounts have been paid out, is to be paid to the beneficiaries.
TRUSTS -TYPES & TAXABILIY Express Trust It arises where a settlor deliberately and consciously decides to create a trust, over his or her assets, either now or upon his death. In these case this will be achieved by signing a trust instrument which will either be a will or a trust deed. Implied Trust It is created where some of the legal requirements for an express trust are not met, but an intention on behalf of the parties to create a trust can be presumed to exist.
TRUSTS -TYPES & TAXABILITY Intervivos Trust A settlor who is living at the time the trust is established, creates an intervivos trust. Testamentary Trust A trust created in an individual’s will. Irrevocable Trust It is the one that will not come to an end until the terms of the trusthave been fulfilled. Revocable Trust A trust of this kind can be revoked (cancelled) by its settlor at any time.
TRUSTS -TYPES & TAXABILITY PUBLIC TRUSTS PRIVATE TRUSTS PARTLY PRIVATE & PARTY PUBLIC TRUSTS
TRUSTS -TYPES & TAXABILITY PUBLIC TRUSTS Like private trusts, public trusts may be created inter-vivos or by will. Public trusts are however governed by general law, though the principles forming the basis of the Indian Trusts Act be applied in these trusts. It is a trust established for charitable purposes, normally, must be for the benefit of public at large or a class of beneficiaries. These are entitled to special treatment under the law of taxation. These are exempt from the rule against perpetuities, which would otherwise require a trust to come to an end after a certain period. Charitable trusts may continue indefinitely A formal deed is not necessary to constitute a public trusts, even where immovable property is dedicated because section 5 of Indian Trusts Act 1882 is not applicable on public Trusts
TRUSTS -TYPES & TAXABILITY Public trusts are an exception to the well settled rule that there is no valid trust unless the objects thereof are specified. The trust is not allowed to fail for uncertainty A charitable trust is synonymous with public trust. There is nothing as a private charitable trust. Charitable trusts come under doctrine of cy pres in which if charitable purpose of trust can not be fulfilled then these can be replaced by new & more appropriate charitable objects. Management or Control may vest in private hands. In the case of Smt. Ganesha Devi Rami Devi Charity Trust Vs. CIT (1969) 71 ITR 696, 704 (Cal) it was held that “the implication, therefore, is that if the trust or fund is controlled by a body of persons which is not a public body, but if it ensures to the benefit of a public it will still be a charitable trust or fund
TRUSTS -TYPES & TAXABILITY PRIVATE TRUSTS Private trust may be created inter vivos or by will. Private trust are governed by the provisions of the Indian Trust Act 1882 It may have one or more particular individuals, as its beneficiary. Where immovable properties worth more than Rs. 100/- are transferred, trust will not be operated unless it is registered (GosthaBehariGose Vs. University of Calcutta, AIR 1972 Cal 61 ) .Trust created by will does not require any stamp
TRUSTS -TYPES & TAXABILITY PARTLY PRIVATE & PARTLY PUBLIC TRUSTS Dedication of property may be partial or absolute. If dedication is not absolute, a trust in favour of charity is not created but a charge in favour of charity is attached to and follows, the property retains its original private character. In cases of partial debutter endowment , it is a question of construction whether idol is true beneficiary….. Or whether heirs are true beneficiaries….
TRUSTS -TYPES & TAXABILITY PARTLY PRIVATE & PARTLY PUBLIC TRUSTS Further broadly classified into:- i) Private specific trust-with beneficiaries and shares determinate in respect of both. ii) Private discretionary trust- beneficiaries or their share or either is indeterminate Liability is fixed u/sec 161 and not sec 164- Case of CIT v. KamaliniKhatau[1994}209 ITR101(SC) Representative Assessee is duty bound to file return - G.K. Ravi v CIT144 CTR(Mad) 645 Provision of Sec 164 will not apply where beneficiary is just one person – Kum. Pallavi S. Mayor v. CIT127ITR701(Guj)
TRUSTS -TYPES & TAXABILITY Overview of impacting Sections of Income Tax Act,1961 Section 2(15)Defines a charitable objective Section 10(23C)Provides exemption to educational, medical, charitable and public religious institutions, existing not for the purposes of profit - Rule 2BC- Educational Institutions- Annual receipts less than Rs. 1 crore Section 11-13Provides for tax treatment in case of charitable trusts Section 80GDeals with deduction in respect of donations to certain funds , charitable institutions etc. Section 115BBC- Anonymous donations to be taxed in certain cases Section 161-164Deals with liability in special cases i.e. of representative assessee, which includes taxation of private discretionary trusts.
TRUSTS -TYPES & TAXABILITY Section 2(15) Charitable objects According to Section 2(15), ‘charitable purpose’, includes relief of the poor, education, medical relief, preservation of environment(including watersheds, forests, wildlife)and preservation of monuments or places or objects of artistic or historical interest and the advancement of any other object of general public utility. Recent Amendment A.Y. 2009-10 Following Proviso added:- “Provided that the advancement of any other object of general public utility shall not be a charitable purpose , if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or any business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity” Amendment Finance Act 2010 w.r.e.f. 1-4-09 Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakhrupees or less in previous year
TRUSTS -TYPES & TAXABILITY Recent Amendment A.Y. 2011-12 Sec 115BBC In relation to sub-clauses of 10(23C)-iiiad), iiiae),vi), via)or iv) or v) 1(i) the amount of income tax calculated at the rate of 30% on the aggregate on anonymous donations received in excess of the higher of the following, namely:- 5% of the total donations received or Rs. One Lacs and (ii) The amount of income tax with which the Assessee would have been chargeable had his total income been reduced by the aggregate of anonymous donations received.
TRUSTS -TYPES & TAXABILITY Profit Motive vs Charitable Activity Case Laws:- Sole Trustee, LokaShikshana Trust (1975) 101 ITR 234, 256 It was observed that “But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity.” further “it would indeed be difficult for persons in charge of a trust or institutions to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principal of management”. Other similar Judgments CIT v. Thyaga Brahma GanaSabha (Sri.) (1991) 188 ITR 160 (Mad.), Director of I. Tax (Exemption) v. Shilpam (1998) 230 ITR 126 (Cal.) Director of I. Tax v. Bharat Diamond Bourse(2003)126 Taxman 365(SC)
TRUSTS -TYPES & TAXABILITY Scope and implication of general public utility Bar Council of Maharastra Vs. CIT (1980) 126 ITR 27 (Bom) , these words were extensively debated. It was observed that word general pertained to a whole class. The word public denoted the body of people at large and the word utility meant usefulness . Therefore, advancement of any object beneficial to the public as distinguished from an individual or group of individual would be considered as charitable purposes. Similar judgments CIT v.Gujrat Maritime Board(2008) 166 Taxman 56 (SC) CIT v. Jodhpur Chartered Accountants Society(2002)258 ITR 548(Raj)
TRUSTS -TYPES & TAXABILITYExemption u/sec 11 Section 11
TRUSTS -TYPES & TAXABILITY Section 10(23C) v. Section 11 to13 Since section 10(23C)(iiiad) & (vi) provides for exemption only in case the educational institutionexisting for educational purposes, whether exemption be available to a society / trust running an educational institution as well as having income from other charitable objects as defined u/s 2(15)? Case law:- [Birla VidhyaVihar Trust Vs. CIT (1981) 24 CTR (Cal) 307: (1982) 136 ITR 445 (Cal): TC32R. 734]. An educational institution could be regarded as an educational institution, if the society was running an educational institution. All the income of a society running a college would not be exempt under section 10 Only the income which has a direct relation or is incidental to the running of the institution, as such, would qualify for exemption u/sec 10. It is not the entirety of the income of the recipient, the trust in this case, but the income of the particular source, namely, the educational institution, thatcomes within the purview of section 10 of the Act
TRUSTS -TYPES & TAXABILITY Ministry of Law in November1983 opined that Section 10(23) & 11 are not inconsistent with each other and can operate simultaneously The ministry in reference to a question as to whether the activities of an association or institution engaged in promotion of sports & games can , independently of the provision of S.23, be considered as enduring for charitable purposes within the meaning of S.2(15) of the Act. It has opined that Section 10(23) & 11 are not inconsistent with each other and can operate simultaneously
TRUSTS -TYPES & TAXABILITY CONDITIONS FOR EXEMPTION U/Sec 11 • Trust must have been created for any lawful purpose &should not be created for the benefit of any particular religious community or caste. • The trust should beregistered with the CIT under Section 12A • The property from which income is derived should be held under a trust by such charitable or religious trust / institution. The property should be held wholly for charitable purposes. • The exemption is confined to only such portionsof the trust’s income which is applied to charitable or religious purposes or is accumulated for applying to such purposes in India. • 85% of the income is required to be appliedfor the approved purposes and the unapplied income and the money accumulated or set apart (in excess of 15% of the income from such property) should be invested in the specified forms or modes. • No part of the income should ensure, directly or indirectly, for the benefit of the settler or other specified persons
TRUSTS -TYPES & TAXABILITY VOLUNTARY CONTRIBUTIONS • The voluntary contributions received by a charitable or religious trust are to treated as follows: • Corpus Donations Voluntary contributions made to a charitable or religious trust with a specific direction that they shall form part of the corpus of the trust i.e. corpus donations do not form part of the total income of the trust as per Section 11(1)(d). Case law: • Contributions other than corpus donations Section 12(1) states that any voluntary contributions (not being corpus donations) received by a charitable or religious trust shall be deemed to be the income derived from property held under trustwholly for charitable or religious purposes. Such voluntary contributions would therefore be eligible for exemption under Section 11(1) provided the trust satisfies the conditions as prescribed under Section 11 and 13. • While corpus donations do not form part of total income, other voluntary contributions are exempt from tax as per Section 11 and 13
TRUSTS -TYPES & TAXABILITY Section 12 • Contribution need not be in any particular manner -Sec 12 does not insist any manner in which Voluntary Contribution be made.-A deed to making single contribution or a contribution recurring from year to year would be sufficient- CIT v. Chhadami Lal Jain Trust 106 ITR 179(All) • Specific directive necessary for application on charitable/ religious purposes -R.B ShreeRam Religious & Charitable Trust v. CIT 172 ITR 373(Bom) Where a trust received voluntary contribution with specific direction to form a part of the trust corpus, it will not loose exemption if applied for meeting running expenses- Dharma Pratishthanam v. ITO  11 ITD 40 (Delhi) • Membership Fee/ Subscriptions not to be treated as voluntary contribution as same can never be considered as payments without consideration - Trustees of Shri Kot Hindu Stree Mandal v.CIT 209 ITR396(Bom) • Exemption is lost when even small portion is used for non-charitable purposes -Chairman, Andhra Pradesh Welfare Fund v. CIT 143 ITR 82(AP)
TRUSTS -TYPES & TAXABILITY ………..Sec 12 contd. • Where donors had specifically directed that the donations were to remain as corpus of the trust, the trust will not be precluded from using those receipts for making donations to other charitable trusts. Section 12 does not recognize such receipts as income of the trust for the purpose of Section 11. [ITO v. Abhilash kumari Public Charitable Trust  28 TTJ 523 (Delhi)] • Charitable trust- voluntary contributions- donation towards building construction –As per sec 12(1), any contribution made with a specific direction that they shall form part of the corpus of the trust- not to be treated as income for the purpose of sec 11. Manner not defined in Act/ Rule- same to be deduced from facts and circumstances of each case. [Shree Mahadev Tirath Shards Ma Seva Sangh vs. ITO.ITAT Chandigarh B Bench AY 2006-07-(2010) 133TTJ(Chd)(UO)57]
TRUSTS -TYPES & TAXABILITY APPLICATION OF INCOME • Exemption under Section 11 is available only if the income derived from property held under trust is ‘applied’ to the charitable or religious purposes. • Income must be available for application. TDS cannot be considered as income. CIT V.Jayshree Charity Trust 1985 Tax LR 247 (Cal) • Application need not necessarily result in revenue expenditure. Even capital expenditure is considered to be application of income for the purposes of Section 11,if it is incurred for charitable purposes.[ CIT v. Kannika Parameshwari Devasthanam & Charities  133 ITR 779 (Mad.)] • The application of income need not necessarily result in expenditure. Therefore, an amount irretrievably earmarked or allocated for the purposes of the trust or institution is also treated as applied even though it has not been actually spent. [CIT Vs. Trustees of the HEH Nizams Charitable Trust (1981) 131 ITR 497 (AP)] • Deficit arising out of excess of expenditure over income during a particular year should be set off against surplus relating to subsequent year –treated as application CIT Vs. Mahrana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj)
TRUSTS -TYPES & TAXABILITY APPLICATION OF INCOME-Instances • Deficit arising out of excess of expenditure over income during a particular year should be set off against surplus relating to subsequent year –treated as application CIT Vs. Mahrana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj) • Depreciation on various assets of the trust is deductible even if the cost of the assets has been fully allowed as application of income in past years. [CIT v. Institute of banking Personnel Selection (IBPS)  131 Taxmann 396 (Bom.)] • Repayment of loans originally taken to fulfill objects of the trust. [CIT v. Janambhumi Press Trust  242 ITR 457 (Kant.)]. However, the loan is returned , it should be treated as income of the organization in the previous year in which it is received. [CIT Vs. Kuchhi Menon Union (1985) 155 ITR 51 (Kar)] • Donation to other charitable trusts out of current year’s income-application. However, donation out of income accumulated or set apart is not treated as application of income and is taxed accordingly. [CIT v. Aurobindo Memorial Fund Society  247 ITR 93 (Mad.)]
TRUSTS -TYPES & TAXABILITY • Agricultural income will not form part of total income for the purpose of computing the accumulation of income in excess of 15% of the total income as laid down in sec 11- CIT V. Nabhinandan Digamber Jain(2002) 257 ITR 91(MP) • If sec 11(1)(a) has been full exploited & there is still accumulated income left to be dealt with, sub sec (2) of 11 can be pressed in service and if complied with, such accumulated income beyond prescribed percentage can also earn exemption u/sec 11(2)-Addl CIT v. A.L.N. Rao Charitable Trust 216 ITR 697(SC) • Monies given to sister concern for hospital construction but lying unspent by latter could not be regarded as applied for charitable purpose.-CIT v. V.G.P. Foundation 262 ITR 187 • Amount given by making credit entries in books & withdrawn by later-entitled to exemption-CIT v. Thanthi Trust 239 ITR 502(SC)
TRUSTS -TYPES & TAXABILITY CONDITIONS FOR ACCUMULATION • 11(2): Accumulation of unapplied income. • 11(2)(a): Application for accumulation upto 10 years. • 11(2)(b): Accumulated income to be invested as per 11(5) • Proviso-1: Period of stay from court to be excluded in calculating 10 years. • Proviso-2: 10 years to be substituted 5 years in case of income accumulated after 1-4-2001. • Explanation: Accumulation for benefit of exempted institutions u /s 12AA and 10(23) shall not be treated as application.
TRUSTS -TYPES & TAXABILITY ACCUMULATION OF INCOME • Must be conscious Act & not just a mass of unspent / unapplied profits- CIT v. SBI  169 ITR 298(Bom) • Time limit for filing of Form 10 before completion of assessment is mandatory & without particulars of this income, assessing authority can not entertain claim u/sec 11-CIT v. Nagpur Hotel Owners Association  247 ITR 201(SC) • Option can be exercised alongwith return filed u/sec 139(4), if exercised in writing-requirement satisfied -Tulsidas Gopalji Charitable & Chaleshwar Temple Trust v. CIT 207 ITR368(Bom) • If after filing Form 10, Assessee without investing applied the same to charitable purposes, exemption could not be denied on ground that sec 11(2)(b) not complied- SRMMCTM Tiruppani Trust v. CIT 96 Taxman 635(SC) • Plurality of purposes for accumulation in not precluded- Director of I.Tax v. Mitsui & co. Environmental Trust 211 CTR(Del)352 • Option available for capital gain also -CIT v.East India Charitable Trust206 ITR 152(Cal)
TRUSTS -TYPES & TAXABILITY BUSINESS INCOME OF A TRUST • Section 11(4) provides that a business undertaking held by a trust will be treated as a property held under a trust. • Where a claim is made that the income of any business shall not be included in the total income, the AO shall have the power to determine the income of such undertaking in accordance with the provisions of the Act relating to the assessment. (i.e. as per Section 28 to 44 ) • Where any income so determined is in excess of the income as shown in the accounts of the undertaking such excess shall be deemed to be applied to purposes other than charitable or religious purposes and thus, it will be liable to be taxed accordingly.
TRUSTS -TYPES & TAXABILITY BUSINESS INCOME OF A TRUST • As per Section 11(4A), the income earned by a trust from any business activity shall be exempted from tax provided the following conditions are satisfied: • The business carried on is incidental to the attainment of the objects of the trust and • Separate books of accounts are maintained in respect of such business • It has been held in that a business whose income is utilized by the trust for the purpose of achieving the objectives of the trust is, surely, a business, which is incidental to the attainment of the objectives of the trust. In any event if there is an ambiguity, the provision must be construed in a manner that benefits the assessee. [CIT v. Thanthi Trust  247 ITR 785 (SC)]
TRUSTS -TYPES & TAXABILITY TAXABILITY OF PRIVATE TRUST • Where shares of beneficiaries are determinate or known (Section 161) • Where income does not include business profits [Section 161(1)] The trustee is assessable at the rates applicable to each beneficiary. • Where income includes profits from business [Section 161(1A)] The whole of the income of the trust is taxable at maximum marginal rate. However, if such profits from business are receivable under a trust declared by any person by ‘will’ exclusively for the benefit of any relative, dependant on him for support and maintenance and such trust is the only trust so declared by him, then, the trustees shall be assessable at the rates applicable to each beneficiary.
TRUSTS -TYPES & TAXABILITY TAXABILITY OF PRIVATE TRUST Where shares of beneficiaries are indeterminate or unknown i.e. in case of discretionary trust [Section 164(1) Where income does not include profits from any business and if: • None of the beneficiaries has taxable income exceeding maximum amount not chargeable to tax or is a beneficiary in any other trust; or • The income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; or • The income is receivable under a non testamentary trust created before 1.03.1970 exclusively for the benefit of relatives of settlor, or member of HUF, who are mainly dependant upon settlor; or • The income is receivable by trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other bona fide fund created by the employer carrying on business or profession for the benefit of his employees, Then, income of the trust is taxable in the hands of trustees at the rates applicable to an AOP. In any other case, income is taxable at the maximum marginal rate.
TRUSTS -TYPES & TAXABILITY TAXABILITY OF PRIVATE TRUST • Where shares of beneficiaries are indeterminate or unknown i.e. in case of discretionary trust [Section 164(1)] • Where income includes business profits: The whole of the income of the trust is taxable at the maximum marginal rate. However, if such profits from business are receivable under a trust declared by any person by ‘will’ exclusively for the benefit of any relative, dependant on him for support and maintenance and such trust is the only trust so declared by him, then, the trustees shall be assessable only at the rates applicable to an AOP.
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