Applicability of MMR in Respect of Income Provided Special Tax Treatment Forfeiture of Exemption of Charitable Trust

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The Tax Publishers Forfeiture of Exemption of Charitable Trust--Applicability of MMR in Respect of Income Provided Special Tax Treatment Dr. CA. Nisha Bhandari In case of charitable or religious trust when exemption under Section 11 or 12 is forfeited by virtue of Section 13(1)(c)/(d), tax is charged as per Section 164(2) at the maximum marginal rate (MMR). Generally controversy arises as to whether MMR would apply only to that part of income which has forfeited exemption or to the entire income. Apart from it, confusion also arises as regards applicability of MMR in respect of income which is either taxable at a concessional rate of tax or exempt from tax. The learned author analyses the said issue with the help of various case law in this regard. 1. Scheme of taxation of charitable or religious trust The scheme of taxation of charitable trusts comprises three main aspects. The first is the computation of the income of the trust. This is to be done in the usual manner but having regard to the provisions in Section 2(24)(iia). The second aspect of taxation of charitable trusts is the allowability of exemption. While Sections 11 and 12 provide for exemption subject however to the conditions prescribed therein, the various sub-sections of Section 13 provide for forfeiture of exemption under the circumstances specified therein. The third aspect is the question of rate of tax applicable to the charitable trusts on the part of income which is not found to be exempt under Sections 11 and 12 or on the part of the income exemption in respect whereof stands forfeited by virtue of the provisions in Section 13(1)(d) consequent to failure to make compliance with the modes of investment provided in Section 11(5). 2. Rate of tax on income in respect of which exemption forfeited under Section 13(1)(c)/(d) According to the proviso to Section 164(2), in a case where the whole or any part of the relevant income is not exempt under Section 11 or Section 12 by virtue of Section 13(1)(c)/(d), tax will be charged on the relevant income or on the part of the relevant income at the maximum marginal rate. The two circumstances in the Section 13(1)(c)/(d) are : SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Forfeiture of Exemption of Charitable Trust--Applicability of MMR in Respect of Income Provided Special Tax Treatment

Dr. CA. Nisha Bhandari

In case of charitable or religious trust when exemption under Section 11 or 12 is forfeited by virtue of Section 13(1)(c)/(d), tax is charged as per Section 164(2) at the maximum marginal rate (MMR). Generally controversy arises as to whether MMR would apply only to that part of income which has forfeited exemption or to the entire income. Apart from it, confusion also arises as regards applicability of MMR in respect of income which is either taxable at a concessional rate of tax or exempt from tax. The learned author analyses the said issue with the help of various case law in this regard.

1. Scheme of taxation of charitable or religious trust

The scheme of taxation of charitable trusts comprises three main aspects. The first is the computation of the income of the trust. This is to be done in the usual manner but having regard to the provisions in Section 2(24)(iia).

The second aspect of taxation of charitable trusts is the allowability of exemption. While Sections 11 and 12 provide for exemption subject however to the conditions prescribed therein, the various sub-sections of Section 13 provide for forfeiture of exemption under the circumstances specified therein.

The third aspect is the question of rate of tax applicable to the charitable trusts on the part of income which is not found to be exempt under Sections 11 and 12 or on the part of the income exemption in respect whereof stands forfeited by virtue of the provisions in Section 13(1)(d) consequent to failure to make compliance with the modes of investment provided in Section 11(5).

2. Rate of tax on income in respect of which exemption forfeited under Section 13(1)(c)/(d)

According to the proviso to Section 164(2), in a case where the whole or any part of the relevant income is not exempt under Section 11 or Section 12 by virtue of Section 13(1)(c)/(d), tax will be charged on the relevant income or on the part of the relevant income at the maximum marginal rate. The two circumstances in the Section 13(1)(c)/(d) are :