Taxpublishers.in - Monday Corner Answer to the Quiz for the week (27 Jan 2025)

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Quiz for the week (27 Jan 2025): Ram a non-resident owned a commercial complex at Chennai fetching a monthly rent of Rs.3 lakhs. He created a charitable trust by executing a 'will' and his legal heirs all residing outside India are managing the affairs of the trust. The objective of the trust was to give medical assistance and educational scholarship. The trust is registered and eligible for tax benefits under the Income-tax Act, 1961. The trustees being non-residents want to give the trust to another charitable trust in accordance with law. Suggest the ways and means to achieve the intended purpose. Best Answer : The query posed above seeks following assumptions to be made: (i) The trust was created by Ram and it is being managed after the 'will' came into force; and (ii) All the trustees though residing presently outside India were residents when they were appointed as trustees of the trust. There is no transfer of money outside India belonging to the trust. It is stated in the query that the trust is registered under section 12AB of the Income-tax Act, 1961. The Finance (No.2) Act, 2024 permits merger of charitable trusts and institutions. It reads as under: Where any trust or institution registered under section 12AB or approved under section 10(23C) in terms of sub-clause (iv) or (v) or (vi) or (via), as the case may be, merges with another trust or institution, the provisions of Chapter XII-EB dealing with tax on accreted income will not apply. The conditions to be satisfied in this regard are (a) the other trust or institution has same or similar objects; (b) the other trust or institution is registered under section 12AA or section 12AB or approved under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, and (c) the said merger fulfils such conditions as may be prescribed. Therefore, the trustees of the trust if could identify a similar trust can transfer the assets of the trust by means of merger by satisfying the conditions of section 12AC. Besides the above, it is possible to donate the assets to another trust by way of voluntary contribution provided the recipient trust is also a registered trust under section 12AB and in such case the said transfer would not attract capital gains tax. Also, the trustees with the prior approval of jurisdictional CIT (Exemptions) may dissolve the trust by executing the dissolution deed and all the assets of the trust could be transferred to a similar trust with similar objectives. If the trust came into existence because of a 'will' executed previously, the legal heirs must complete the probate process before transfer of assets to similar trust. If the 'will' explicitly permits transfers of assets to another trust it would be still better. A deed of amalgamation or merger of trust to transfer the assets of the trust may also be explored. Since the trustees are non-residents any compliance requirement under FEMA regulations and any prior permission of RBI required in this regard must also be obtained. The overall exercise of either dissolving the trust or amalgamating /merging the trust to transfer the assets to another similar trust is basically intended to avoid tax under section 115TD of the Act.

Quiz for the week (27 Jan 2025):

Ram a non-resident owned a commercial complex at Chennai fetching a monthly rent of Rs.3 lakhs. He created a charitable trust by executing a 'will' and his legal heirs all residing outside India are managing the affairs of the trust. The objective of the trust was to give medical assistance and educational scholarship. The trust is registered and eligible for tax benefits under the Income-tax Act, 1961. The trustees being non-residents want to give the trust to another charitable trust in accordance with law. Suggest the ways and means to achieve the intended purpose.

Best Answer :

The query posed above seeks following assumptions to be made: (i) The trust was created by Ram and it is being managed after the 'will' came into force; and (ii) All the trustees though residing presently outside India were residents when they were appointed as trustees of the trust. There is no transfer of money outside India belonging to the trust. It is stated in the query that the trust is registered under section 12AB of the Income-tax Act, 1961.

The Finance (No.2) Act, 2024 permits merger of charitable trusts and institutions. It reads as under:

Where any trust or institution registered under section 12AB or approved under section 10(23C) in terms of sub-clause (iv) or (v) or (vi) or (via), as the case may be, merges with another trust or institution, the provisions of Chapter XII-EB dealing with tax on accreted income will not apply. The conditions to be satisfied in this regard are

(a) the other trust or institution has same or similar objects;

(b) the other trust or institution is registered under section 12AA or section 12AB or approved under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, and

Therefore, the trustees of the trust if could identify a similar trust can transfer the assets of the trust by means of merger by satisfying the conditions of section 12AC.

Besides the above, it is possible to donate the assets to another trust by way of voluntary contribution provided the recipient trust is also a registered trust under section 12AB and in such case the said transfer would not attract capital gains tax.

Also, the trustees with the prior approval of jurisdictional CIT (Exemptions) may dissolve the trust by executing the dissolution deed and all the assets of the trust could be transferred to a similar trust with similar objectives.

If the trust came into existence because of a 'will' executed previously, the legal heirs must complete the probate process before transfer of assets to similar trust. If the 'will' explicitly permits transfers of assets to another trust it would be still better.

A deed of amalgamation or merger of trust to transfer the assets of the trust may also be explored. Since the trustees are non-residents any compliance requirement under FEMA regulations and any prior permission of RBI required in this regard must also be obtained.

The overall exercise of either dissolving the trust or amalgamating /merging the trust to transfer the assets to another similar trust is basically intended to avoid tax under section 115TD of the Act.