Audit and exemption of Trust

First of all we should understand what is charity?

‘Charitable Purpose’ includes relief of the poor, education, medical relief and the advancement of any object of general public utility. [Section 2(15)].

The Finance Act (No. 2), 2009 has added two more limbs to the definition with retrospective effect from Assessment Year 2009-10 i.e. "preservation of environment (including watersheds, forest and wildlife) and preservation of monuments or places or objects of artistic or historic interest", thus taking such activities outside the term "advancement of any other object of general public utility". 

What is not a Charity?

The Finance Act 2009, has amended the definition of ‘charitable purpose’ to provide that ‘advancement of any other object of general public utility’ will not be considered as ‘charitable purpose’ if it involves 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 business for any fee, cess or other consideration irrespective of nature of use or application or retention of the income from such activity.

If the aggregate value of the receipts from such activities is not more than Rs. 25 lac (A.Y. 2012-13 i.e. w.e.f. 1st April, 2011). The effect of this amendment would therefore be that in a particular year, an object of the trust may be regarded as a charitable purpose, but in a subsequent year or an earlier year, it may not be so regarded depending upon the amount of receipts from such activity.

What is not included in income at all?

CORPUS DONATION

Where a trust receives voluntary contributions (Act 2(24 (iia)) made with a specific direction that they will form part of the corpus, such donation will not be included in the total income of the trust. [Section 11(1)(d)

What is exempt?

Income derived from property under trust subject to sections 60 to 63 wholly for charitable or religious purposes is exempt to the extent such income is applied on the objects of the trust in India, during the previous year. The trust must apply at least 85% of such income on the objects in such cases balance 15% will deemed to be accumulated for the purpose of charity and exempt.
[Section 11(2)]. If the amount applied by the trust is less than 85%, the shortfall in application is not taxable in the following cases —

1.    Income is accumulated up to 5 years and the purpose of accumulation is specified to the AO in Form No. 10. If accumulated amount could not be applied due to order/ injunction of the court, such period will be excluded.

The income accumulated must be applied for the specified purpose within the period of accumulation as per application in Form 10. Till the accumulated amount is applied, it must be invested as specified in Section 11(5). This requirement of Section 11(5) is applicable also to those trusts who are claiming exemption under clauses (iv), (v), (vi) and (via) of Section 10(23C).

If due to any other reason, income is not applied during the previous year, such income can be applied in the following previous year. However intimation in writing must be sent to AO before the expiry of time allowed  u/s. 139(1) for furnishing the return. If such income is not applied, it shall be deemed to be the income of previous year immediately following the year in which such income was derived [Explanation 2 to Section 11(1)].

Adjustment of expenses incurred by the trust for charitable purpose in the earlier years against the income earned by the trust in the subsequent year will have to regard as application of income of the trust in the subsequent year. Also depreciation debited in the books should be treated as expenditure for this purpose.

The repayment of loans originally taken to fulfil any of the objects of the trust is also considered as an application. The loan given by an educational trust is also an application for charitable purpose.

What is not exempt?

Business Income

Section 11(4A) provides that tax exemption will not apply in relation to any income of a trust being profits and gains of the business unless the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained by such trust in respect of such business. ICAI has expressed the view that running of hospital by a trust is a business activity. Therefore, if gross receipts from business exceed Rs. 1 cr, the accounts should be audited u/s 44AB.

If accumulated income is credited/ paid to any other trust registered u/s 12AA or referred to in sub-clause (iv), (v), (vi) or (via) of 10(23C), it shall not be treated as application of income. However if the contribution is made in that year itself (i.e not out of the accumulated income) then the same would be exempt.

EXEMPTION U/S 11 NOT TO APPLY IN CERTAIN CASES (SECTION 13)

Section 13(1)(a) — Trust for private religious purposes.

Section 13(1)(b) — Trust established for the benefit of any particular religious community or caste.

Section 13(1)(c) — Income of the trust is applied directly or indirectly for the benefit of persons referred to in sub-section (3).

Section 13(1)(d) — Funds are invested otherwise than in any form or modes specified in 11(5).

1.    If whole or part of the relevant income is not exempt u/s 11 or 12 by virtue of provisions contained in clauses 13(1)(c) and (d), the tax will be charged at maximum marginal rate. [Proviso to Section 164].

2.    New Section 115BBC — The anonymous donations as aforesaid will be taxed @ 30% (plus Surcharge and Education Cess), except in the following two situations:

a.    The trust or institution is established wholly for religious purposes; and

b.    If it is for both religious and charitable purposes, unless the donation is specifically for the educational or medical institution run by such trust.

Anonymous donation means any voluntary contribution where a person receiving such donation does not maintain record of identity indicating the name and address of person making such contribution.

Requirement of Audit

Where total income before the exemptions u/ss. 11 and 12 of the trust exceeds the maximum amount not chargeable to tax; i.e., Rs. 1,80,000 (A.Y. 2012-13) (w.e.f. 1/4/2011), in order to get exemption u/ss. 11 and 12, the accounts have to be audited by an accountant as defined in explanation below sub-section 2 of Section 288, who will give his report in Form 10B.

If the income of the trust/institution referred to in clause (iv), (v), (vi) or (via) of Sec.10(23C) without giving effect to the provisions of these clauses exceeds the maximum amount not chargeable to tax, such trusts will have to get their accounts audited by the accountant as defined in Explanation below sub-section (2) of Section 288. (As provided in the Taxation (Amendment) Act, 2006) in form 10BB.

Time limit to file a return?

As per sec 139(4A) if total income exceeds maximum amount not chargeable to tax return should be filled as if it was return u/s 139(1)

Penalty for non-filling

Penalty of Rs. 100/- per day for failure to furnish return under sub-sections 4A and 4C of Section 139 [Section 272A(2)]. Similarly penalty of Rs 100 per day can be levied for delay in submitting Audit Report in Form 10B/10BB (272A)(2)(g).