Taxability in case of Trust

Q1) Types of Trust in Income Tax Act 1961?

  • In Income tax act trust are classified into two categories:-
    a) Religious Trust
    b) Charitable Trust
    In Income tax act Religious trust are named as Religious and Charitable Trust.

Q2)Types of Trust in General?

  • Ans:- In general Trust are Divided into two category:-
    a) Private Trust
    b) Public Trust
    Private Trust are govern under Trust Act 1882.
    Public Trust are govern under States trust act. Ex Madhya Pradesh state trust act,Maharashtra State Trust act etc.
    Conclusion- Religious Trust and Charitable trust both are classified as Public trust.

Q3)What is the registration criteria for Trust in Income tax act?

  • Ans- All Religious and Charitable trust deed are liable to get Registered under section 12AA to get the tax exemtion benefit.

Q4) Define the objectives for which TRUST can be form?

  • Ans:- TRUST can be form for following objectives:-
    a) Relief of the poor.
    b) Education.
    c) Medical relief.
    d) Advancement of any other object of general public utility.
    The receipts from the clause (d) should not exceed 20% of the total receipt of the trust.

Q5)Define taxability criteria for trust?

  • All receipts of Trust are bifurcated into two part
    a) 15% of total Receipts.
    b) 85% of Total Receipts.
    -15% of total receipts are always being kept out of the purview of taxability means they will enjoy tax exemption irrespective of any condition.
    -Other 85% will be reduced by the amt. “expended” for the objective of trust. If any Sum of money is left then it will be taxable in Income tax act.

    However above taxability is subject to some exception, which had been covered in following three points:-
    1) If any sum of money is due to be received from person, then before filling ROI provide such declaration, Income taxauthority will provide you the opportunity to take the tax exemption benefit in the current year, however we have to give them surety that such due amount will be expended in the year of receipt or till the immediate next year.
    2) Secondly if huge sum of money is being received during the closing of year then before filling ROI specify such condition and take the benefit in current year. However such sum of money must had been expended before the end of next FY.
    3) If TRUST is accumulating sum of money for the purpose specified in section 11(5) then such accumutaion is permitted and tax b
    enefit over such accumulation is permitted. Such accumulation is not permitted beyond the period of 5 year.
    Exception:- Voluntary Donation received specifically to form the part of “corpus” of trust will enjoy 100% tax exemption irrespective of above classification and condition.

Q6) What are the condition under which tax exemption benefit of TRUST will be withdrawn?

  • Tax benefit of TRUST will withdraw under following situation
    No exemption is available to the following incomes of trust/institution:
    a) Entire income from property held under trust for private religious purpose which does not benefit the public
    b) Entire income of charitable Trust or institution established for the indirect benefit of any particular religious community or caste
    c) Entire income, If income (wholly or partly) and property of the charitable or religious trust or institution is used for the benefit of specified person**
    d) Income of charitable / religious trust is not invested as specified
    e) Value of medical or educational services made available by any charitable or religious trust running a hospital medical institution or educational institution to specified person**
    f) Any income being profits and gains of business unless business is incidental to the attainment of the objectives of the trust / institution and separate books of account are maintained in respect of such business.

Q7) Weather Trust are liable to perform Business Activity and can claim tax benefit?

  • Yes, TRUST can perform business activity, however two conditions must be complied:-
    1) Separate books of accounts of such TRUST must be prepared.
    2) Such Business activity must be incidental to the attainment of the objectives of TRUST.

Q8) Treatment of Depreciation in case of TRUST?

  • Ans)In case of TRUST expenses are not classified in revenue and capital, all expenses are classified under same roof and being allowed to deduct for the total sum received. Ex purchase of machinery is treated as normal expense and allowed to be deduct from the sum received.
    Therefore in case of TRUST deduction in the name of depreciation is not permitted as we had already taken its deduction from the profit at the time of purchase of such asset.

Q9) How to Compute capital gain in case of TRUST?

  • Ans.)Computation of Capital Gain in case of TRUST is different from normal computation Try to learn it by the help of a example
    Sr.No. Net Consideration Less Capital Gain
    1 100000 Investment:- In New Asset (80000) 20000
    Therefore we can conclude that capital gain in case of trust is excess of net consideration over the amount of new investment.
    Others imp Points to be covered in case of trust:-
    Analysis of amendments related to Charitable and religious trusts by Finance Act, 2017 Finance Act’2017 had made some major changes relating to Charitable and religious trusts. These amendments have far reaching impact on the taxation of Charitable and religious trusts. In this Article we have discussed five major amendments which are affecting Charitable and religious trusts.
    Here, we have analyzed these amendments made vide Finance Act’2017 which have impacted the Charitable Trusts and religious trusts:
    1. First Amendment
    Following Explanation 2 shall be inserted after the renumbered Explanation 1 to sub-section (1) of section 11 by the Finance Act, 2017, w.e.f. 1-4-2018:
    Explanation 2. —Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to any other trust or institution registered under section 12AA, being contribution with a specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income for charitable or religious purposes.
    Analysis:
    Any contribution by a charitable or religious trust or institution to any other trust or institution registered u/s 12AA, with a specific direction that it shall form part of corpus of recipient trust/institution shall not be treated as application of income u/s 11 for the donor trust/institution. It means that corpus donations shall not be considered as an application of income.
    2. Second Amendment:
    Following clause (ab) shall be inserted after clause (aa) of sub-section (1) of section 12A by the Finance Act, 2017, w.e.f. 1-4-2018:
    “the person in receipt of the income has made an application for registration of the trust or institution, in a case where a trust or an institution has been granted registration under section 12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)], and, subsequently, it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, in the prescribed form and manner, within a period of thirty days from the date of said adoption or modification, to the Principal Commissioner or Commissioner and such trust or institution is registered under section 12AA”
    Analysis: it means where a trust or an institution has been granted registration and subsequently it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, it shall be required to obtain fresh registration by making an application within a period of thirty days from the date of such adoption or modifications of the objects in the prescribed form and manner.
    3. Third Amendment:
    Following clause (ba) shall be inserted after clause (b) of sub-section (1) of section 12A by the Finance Act, 2017, w.e.f. 1-4-2018:
    (ba) the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section.
    Analysis: Section 12A has been amended so as to provide for further condition that the person in receipt of income chargeable to income-tax shall furnish the return of income within the time specified u/s 139(4A) of the Income Tax Act.
    4. Fourth Amendment: A new clause (x) in section 56(2) has been inserted to broaden the scope and to cover the charitable trust under its ambit
    56(2)(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,:-
    (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum.
    (b) any immovable property. (c) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property.
    (d) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration.
    Analysis:
    In order to prevent practice of the Charitable or Private Trusts of receiving money or property for inadequate consideration or without consideration, Finance Act 2017 introduced clause (x) in section 56(2). With the insertion of this section the money or the property received by any person for inadequate consideration or without consideration in excess of Rs. 50,000 shall be liable to income-tax under the head “Income from other sources” in the hands of the recipient.
    Consequently, now if any property is being received by the charitable trust or by any private trust for inadequate consideration or without consideration in excess of Rs. 50,000 then it will chargeable to income-tax under the head “Income from other sources” under section 56(2)(x) in the hands of the recipient trust. However, this newly inserted clause(x) in section 56 shall not apply to any sum of money or any property received:
    1) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10.
    2) from or by any trust or institution registered under section 12A or section 12AA.
    3) by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10.
    4) from an individual by a trust created or established solely for the benefit of relative of the individual.
    Thus, it is important to note that above mentioned trusts and institutions are out of the ambit of Section 56(2)(x). The trusts registered u/s 12A and specified institutions registered u/s 10(23C) are excluded from this clause so that Donations received by these trusts are not get taxed.
    5) Fifth Amendment: (5D) “No deduction shall be allowed under this section in respect of donation of any sum exceeding TEN TWO thousand rupees unless such sum is paid by any mode other than cash.”
    Analysis: Finance Act 2017 amended section 80G so as to provide that no deduction shall be allowed under the section 80G in respect of donation of any sum exceeding Rs. 2,000/- unless such some is paid by any mode other than cash. Earlier this limit was Rs. 10,000/-. The Government has taken this step in order to provide cash less economy and transparency.
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