1. S. 2(24)(ii)(a) provides that voluntary contribution received by a trust created wholly or partly for charitable purposes shall be deemed to be income at the hands of the trust.2. The trust may have been created to pursue advancement of object of general public utility like urban decongestion. This activity may per se be considered to be a charitable purpose. However, if this activity constitutes of recycling of urban waste, it may involve commercial activity so that the first proviso may apply. Throughout this article, such a trust is taken up for case study.
3. Let us assume that in the first year, the aggre-gate value of receipts from commercial activities does not exceed Rs.10 lakh. The first proviso therefore is not applicable. The trust, therefore, remains charitable in nature. The donations received in the first year will be regarded as income u/s.2(24)(ii)(a) which will be exempt from tax as per S. 11 read with S. 12.
4. In the second year, the aggregate value of the aforesaid receipt may exceed Rs.10 lakh. Therefore, in the second year, the activity pursued by the trust ceases to be charitable in nature. The trust will be hit by the first pro-viso and therefore will not get the exemption u/s. 11. However, it may continue to receive donations in the second year. An interesting question arises is whether such donations would be covered by S. 2(24)(ii)(a) or not. For the purpose of second previous year, can it be said that trust is not created for charitable purpose?? If the answer to this question is in the affirmative, the provisions of S. 2(24)(ii)
(a) would not be applicable.
5. Can it be argued that although by virtue of the first proviso, object pursued by the trust ceases to be charitable in the second previ-ous year, in the first previous year (year of creation), the object was very much charitable due to non-application of the first proviso??
Thus, one may contend that the trust was created for charitable purpose, although sub-sequent to such creation, the object which was charitable in the beginning ceased to be as such in the second year. One may further argue that in any subsequent year by reason of aggregate value of receipts from commercial activities not exceeding Rs.10 lakh, the trust may revive its charitable character. One may also contend that the nature of the purpose at the time of creation is important and not thereafter by relying on the decision of the Supreme Court in the case of Bajaj Tempo Ltd. v. CIT, (1992) 196 ITR 188 (SC), where the Supreme Court dealt with the meaning of the term ‘formed’.
6. The aforesaid argument may be met by con-tending that the fiction of the first proviso should be taken to its logical end, meaning thereby that in whichever previous year the trust ceases to pursue the charitable part, proviso to S. 2(24)(ii)(a) are not applicable by relying on the decision in the case of East End Dwellings Co. Ltd. v. Finsburry Borough Council,
(1951) 2 All ER 587 followed by the SupremeCourt in Ashok Leyland Ltd. v. State of Tamil Nadu (SC), (2004) 134 STC 473 (SC).
7. Even though arguments of the trust that in the second year, provisions of S. 2(24)(ii)
(a) are not applicable may be successful, it may be argued that the donations received shall be deemed to be income by applying the provision of S. 56(2)(vii)(a). S. 56(2)
(vii)(a) was inserted by Finance Act, 2009 with effect from 1-10-2009. The clause (a) of the said Section provides that where an individual or HUF receives any sum of money, without consideration, the aggregate value of which exceeds Rs. fifty thousand, the whole of the aggregate value of such sum shall be charged to income-tax under the head ‘Income from
Other Sources’. The necessary enabling provision in this regard has been made u/s.2(24) (xv). It may be argued that the charitable trust is after all created for the benefit of various individuals at large and therefore, the status of the trust should be taken as that of an individual making S. 56(2)(vii)(a) applicable to charitable trust also. Such argument may use certain decisions like CIT v. Shri Krishna Bandar Trust, (1993) 201 ITR 989 (Cal.), CIT v. Sodra Devi, (1957) 32 ITR 615 (SC), etc. However, this argument may be countered on the basis that the beneficiaries of a public charitable trust are not specified individuals but public at large. The cases referred to above dealt with private trusts created for a group of definite individuals. In a public trust, the beneficiaries at times may not be even human beings, for example, a trust for animal welfare.
(b) Cancellation of registration:
S. 12AA(3) provides that in the case of a trust registered, if subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, he shall pass an order in writing cancelling the registration of such trust or institution after giving such trust or institution a reasonable opportunity of being heard.
The question is, can the Commissioner invoke powers u/s.12AA(3) cancelling the registration in the previous year when the first proviso applies and revive the registration in the previous year in which second proviso applies?
The powers u/s.12AA(3) can be exercised only when the Commissioner is satisfied that
- the activities of the trust are not genuine, or
- the activities are not being carried out in accordance with the objects of the trust.
Therefore, the Commissioner cannot cancel the registration merely on the basis that in any one previous year the trust ceases to be charitable by application of the first proviso. This view is strengthened by the fact that in the year of applicability of the second proviso, as the trust revives its charitable nature, cancellation of the registration would adversely affect the trust as re-grant of the registration cannot be done with a retrospective effect. The Chandigarh Tribunal in Himachal Pradesh Environment Protection & Pollution Control Board (2009) 125 TTJ 98 (Chd.) has clearly held that cancellation of the registration is not permissible by invoking the first proviso to S. 2(15).
Interestingly, as long as the registration remains in force, the Assessing Officer may be precluded from examining the charitable nature of the trust and he may not have any option but to grant exemption u/s.11. In the case of ACIT v. Surat City Gymkhana, 300 ITR 214, the Supreme Court was considering the question as to whether the Income-tax Appellate Tribunal was justified in law in holding that registration u/s.12A was a fait accompli to hold the Assessing Officer back from further probe into the objects of the trust. The Gujarat High Court ruled against the Department, relying on its earlier decision in the case of Hiralal Bhagwati v. CIT, (2000) 246 ITR 188. The Supreme Court declined to interfere as the Revenue had not challenged the earlier ruling in Hiralal’s case. Although the above decisions were
rendered in the context of unamended S. 2(15), on an aggressive note, it may be said that the Assessing Officer is helpless but to allow the exemption. No doubt, there is another view suggesting that as the registration remains intact, the Assessing Officer may still deny exemption on the basis that S. 11 is not satisfied.
(c) Status of 80G approval:
The time limit specified in the approval granted by the Commissioner to any institution or fund has been done away with. This was effected by omitting the proviso to S. 80G(5)(vi) w.e.f. 1-10-2009.
It was also provided that the approval already granted is not affected by the amendment of definition of ‘charitable purpose’. The new clause (viii) to S. 80G(5) provides that where any institution or fund has been approved for the previous year 2007-08, such institution or fund shall, notwithstanding anything contained in the proviso to clause (15) of S. 2 be deemed to have been established for charitable purpose and approved for the previous year 2008-09.
Consequent to omission of the proviso to S. 80G (5)(vi) by the Finance Act, 2009 effective from 1st September 2009, and simultaneous insertion of S. 293C, the approval u/s.80G(5)(vi) has now become open-ended and perpetual.
Unless the approval is withdrawn by invoking the powers u/s.293C, approval granted u/s.80G(5)(vi) remains in force. The question that arises is can the Commissioner invoke the powers u/s.293C to withdraw the approval on the basis that the case of the trust is covered by the first proviso to S. 2(15) and not by the second proviso thereto?? S. 293C does not as such provide for circumstances for withdrawal of approval, unlike S. 12AA (3). It only requires the authority to give a reasonable opportunity of showing cause against withdrawal. Therefore, it is natural to infer that the power to withdraw can be invoked when the circumstances necessary for grant of approval no longer exist. For this purpose, we may refer to Rule 11AA (4 & 5). The said Rule reads as follows?:
“(4) Where the Commissioner is satisfied that all the conditions laid down in clauses (i) to (v) of Ss.(5) of S. 80G are fulfilled by the institution or fund, he shall record such satisfaction in writing and grant approval to the institution or fund specifying the assessment year or years for which the approval is valid.”
(5) Where the Commissioner is satisfied that one or more of the conditions laid down in clauses (i) to (v) of Ss.(5) of S. 80G are not fulfilled, he shall reject the application for approval after recording the reasons for such rejection in writing?:
Provided that no order of rejection of an application shall be passed without giving the institution or fund an opportunity of being heard.”
S. 80G(5)(vi) provides for a condition that income of the trust is not liable to inclusion in its total income u/s.11. The Commissioner while approving the trust for the purpose of S. 80G(5)(vi) is required to look at compliance of conditions included in S. 80G(5) (vi) mentioned above. In any previous year where the case of the trust is covered by first proviso to S. 2(15) but not by the second proviso, the condition of the S. 80G(5)(vi) remains not satisfied. This can be a ground for the Commissioner either to reject the application for approval u/s.80G(5)(vi) or cancel the approval u/s.293C. In that case, the trust may take a defence that as its position of exemption u/s.11 could oscillate like pendulum year after year, thanks to interplay between the first proviso to S. 2(15) and the second proviso, the approval u/s.80G should not be cancelled, and the eligibility of claim of deduction by the donor may be independently examined u/s.80G(5)(i) without affecting the approval granted to the trust.
The donor who has donated to the trust prior to cancellation of the approval u/s.293C may still get the benefit of deduction u/s.80G, although the cancellation u/s.293C may be made on retrospective basis as held by the Calcutta High Court in the case of CIT v. Borbehta Estate (P.) Ltd., (2001) 252 ITR 379.
It may not be out of place to note that Explanation 2 to S. 80G provides that a deduction shall not be denied merely on the ground that subsequent to the donation, any part of the income of the institution or fund has become chargeable to tax due to non-compliance with any of the provisions of S. 11, S. 12, S. 12A or on the ground that u/s.13(1)(c), the exemption u/s.11/12 is denied to the institution or fund in relation to any income arising to it from any investment referred to in S. 13(2)(h) where the aggregate of the funds invested by it in a concern referred to in the said clause does not exceed five percent of the capital of that concern.
(d) Status of trust:
As the trust’s position as a charitable trust could vary from year to year, its tax position also will correspondingly vary. In one year it may have to pay tax and in another year it may not have to pay tax. Secondly, its status as well as the form in which return has to be filed may also change. Needless to say, the jurisdiction of the Assessing Officer may also change. This could result in the trust having to submit to multiple jurisdictions when there are many pending proceedings for several years.
(e) Postponement/accumulation:
As per Explanation 2 to S. 11(1), a trust may postpone application of its income for charitable purposes to the previous year next following previous year in which the income was received where the trust is following accrual system and in any other case, to the previous year next following previous year in which income was derived.
Let us assume that in the first year, the trust is a charitable trust by virtue of second proviso. The trust may have exercised its option under the aforesaid Explanation. However, in the previous year to which such application was postponed, the trust may be hit by the first proviso. One may contend that actual application made by the trust in such previous year would not be for charitable purpose and accordingly, S. 11(1B) may be invoked to tax the trust in respect of such application.
S. 11(2) provides for accumulation of not more than 85% of income for specific purposes for a period not exceeding five years, subject to satisfying the conditions laid down u/s.11(2).
If in the first year, a trust is covered by the second proviso, such trust being a charitable trust may accumulate up to 85% for future application. However, if in the year of application, the trust ceases to be charitable by virtue of the second proviso not being applicable, there is likelihood of the Department holding that the application is not for a charitable purpose. Accordingly, the Department may invoke S. 11(3)(a) which provides for taxing accumulated amount if the same is applied for a purpose other than charitable.
Interplay of the first proviso and the second proviso could have implication on carry forward also. The problem in this case is identification of head of income in the year in which past loss is sought to be set off. This may be illustrated with an example (Refer table below).
In the 3rd year, Rs.30 is charged to tax on the basis that the application is for non-charitable purpose. However, the question is what is the right head of income for taxing the same. This is for the reason that unless this Rs.30 is traced to business income, a set-off may not be permissible. This Rs.30 is traced to the first year’s accumulation which has come from Rs.100 comprising of different sources. In the absence of any mechanism available for identification of head and in the absence of proof thereof, one may explore the option of allocating Rs.30 on the basis of composition of Rs.100.
E. Concluding comments:
Looking at the above sample of issues it appears certain that the purportedly beneficial provision like the second proviso creates several problems leaving the assessee-trust in a state of confusion. There is no doubt that the second proviso has been inserted in good faith but without adequate home work. On a pessimistic note one wonders if life without the second proviso could be a better option.
