Taxpublishers.in - Monday Corner Answer to the Quiz for the week (30 Dec 2024)

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Quiz for the week (30 Dec 2024): Do Good Charitable Trust was formed on 10th April, 2023. The trust received voluntary contributions and corpus donations of Rs. 40 lakhs and Rs.25 lakhs respectively during the financial year 2023-24. The trust omitted to apply for registration to avail the benefit of tax exemption under the Income-tax Act,1961. The trust spent Rs.5 lakhs towards administrative expenses and Rs.30 lakhs towards its objects during the financial year 2023-24. The objects of the trust consisted of medical assistance and educational scholarship. It has not filed its ITR for the assessment year 2024-25 and seeks your advice. Best Answer : A charitable trust which has got registration under section12AB is governed by section 11 and section 13 of the Income-tax Act, 1961. A registered charitable trust can exclude voluntary contributions made with a specific direction that they shall form part of corpus of the trust or institution from its total income. However, the identity of the corpus so received has to be maintained. The income of a charitable trust or institution is determined on commercial principles and not under any of the heads of income contained in section 14 of the Act. In this case, the trust has not obtained registration and has received corpus donation besides voluntary contributions. The corpus donation is akin to earmarked funds to be kept and spent as per the direction of the donor. Section 11(1)(d) provides for exclusion in the case of a registered charitable trust. Section 2(24) defining the term 'income' is inclusive and there is no legal provision for excluding the corpus donations. In a way, for registered charitable trusts and institutions a special privilege is given to keep corpus donations outside the tax net. Since the trust in the above case is not a registered trust it cannot avail the benefits of section 11. The gross receipt less administrative expenses would be eligible for deduction to arrive at the total income of the trust. Since the trust is not registered, its application of income in regular parlance of section 11 cannot be imported since it is unregistered. One may refer to the decision in the case of Veeravel Trust v. ITO (2021) 129 taxmann.com 358 (Chennai-Trib) where it was held that even the corpus donation is to be included in the total income of the trust. Further reference could be made to decision in the case of Annadhaneshwara Charitable Trust v. ITO (2023) 156 taxmann.com 270 (Bang-Trib). There are many decisions where it has been held that corpus fund received by a trust not registered under section 12AA (then) it could not be taxed being a capital receipt (ITO v. Gaudiya Granth Anuved Trust (2013) 28 ITR (Trib) 161 (Agra-Trib); Sri Guru Singh Sabha v. Dy.CIT (2018) 68 ITR (Trib) 394 (Del). Therefore, corpus donation plus voluntary contributions less administrative expenses would be the total income of the trust. Since the trust is not a registered trust and a non-discretionary trust it would be subjected to tax at the maximum marginal rate.

Quiz for the week (30 Dec 2024):

Do Good Charitable Trust was formed on 10th April, 2023. The trust received voluntary contributions and corpus donations of Rs. 40 lakhs and Rs.25 lakhs respectively during the financial year 2023-24. The trust omitted to apply for registration to avail the benefit of tax exemption under the Income-tax Act,1961. The trust spent Rs.5 lakhs towards administrative expenses and Rs.30 lakhs towards its objects during the financial year 2023-24. The objects of the trust consisted of medical assistance and educational scholarship. It has not filed its ITR for the assessment year 2024-25 and seeks your advice.

Best Answer :

A charitable trust which has got registration under section12AB is governed by section 11 and section 13 of the Income-tax Act, 1961. A registered charitable trust can exclude voluntary contributions made with a specific direction that they shall form part of corpus of the trust or institution from its total income. However, the identity of the corpus so received has to be maintained. The income of a charitable trust or institution is determined on commercial principles and not under any of the heads of income contained in section 14 of the Act.

In this case, the trust has not obtained registration and has received corpus donation besides voluntary contributions. The corpus donation is akin to earmarked funds to be kept and spent as per the direction of the donor. Section 11(1)(d) provides for exclusion in the case of a registered charitable trust. Section 2(24) defining the term 'income' is inclusive and there is no legal provision for excluding the corpus donations. In a way, for registered charitable trusts and institutions a special privilege is given to keep corpus donations outside the tax net.

Since the trust in the above case is not a registered trust it cannot avail the benefits of section 11. The gross receipt less administrative expenses would be eligible for deduction to arrive at the total income of the trust. Since the trust is not registered, its application of income in regular parlance of section 11 cannot be imported since it is unregistered. One may refer to the decision in the case of Veeravel Trust v. ITO (2021) 129 taxmann.com 358 (Chennai-Trib) where it was held that even the corpus donation is to be included in the total income of the trust. Further reference could be made to decision in the case of Annadhaneshwara Charitable Trust v. ITO (2023) 156 taxmann.com 270 (Bang-Trib).

There are many decisions where it has been held that corpus fund received by a trust not registered under section 12AA (then) it could not be taxed being a capital receipt (ITO v. Gaudiya Granth Anuved Trust (2013) 28 ITR (Trib) 161 (Agra-Trib); Sri Guru Singh Sabha v. Dy.CIT (2018) 68 ITR (Trib) 394 (Del).

Therefore, corpus donation plus voluntary contributions less administrative expenses would be the total income of the trust. Since the trust is not a registered trust and a non-discretionary trust it would be subjected to tax at the maximum marginal rate.