Amendment in provisions relating to taxability of income of trust by Finance Act, 2021

Recently, CBDT has been making various changes relating to registrations of trust wherein new Form 10A has been made available for re-registration of trust and other Forms have also been rolled out for trust.

With Finance Act, 2021 CBDT has tried to document all the trust and reduce the various controversial issues in taxability of trust and make it more strict.

Now let’s have a look at amendment’s to section 11 made by Finance Act, 2021 which deals with Income from property held for charitable or religious purposes.

Corpus donation no more exempt unless invested:

Before this amendment any donation received by a public trust was exempt if the same was received by a specific direction and there was no other condition attached to it.

However, now amendment has been made to section 11(1)(d) wherein now any amount received with a specific direction to form a part of corpus will be exempt only if it is invested in funds or modes mentioned in section 11(5) which has been specifically set up for such corpus.

Amended provision read as under:

“(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution, subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus”

The following things will not be considered as Application of income:

As we know a trust would be able to take benefit of paying 0 tax if it has applied atleast 85% of it’s income for objects of trust. However by Finance Act, 2021 CBDT has mentioned a few transactions or events which will not be considered as application of income.

Insertion of explanation 4, which says that any amount spend out of corpus fund won’t be considered as corpus fund. The provision read as under:

“(i) application for charitable or religious purposes from the corpus as referred to in clause (d) of this sub-section, shall not be treated as application of income for charitable or religious purposes

Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus, from the income of that year and to the extent of such investment or deposit; and”

Application made by borrowed funds won’t be considered as application but when that loan is repaid same will be considered as application of fund.

Let’s understand this with an example:

A trust takes Rs. 100 loan and pays salary to it’s employees then payment of such salary cannot be considered as application of fund but repaying that Rs. 100 loan will be considered as application of fund.

The provision read as under:

“(ii) application for charitable or religious purposes, from any loan or borrowing, shall not be treated as application of income for charitable or religious purposes:

Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the loan or borrowing, or part thereof, is repaid from the income of that year and to the extent of such repayment.”

Explanation 5 has been inserted as a clarification that any excess application made by a trust will not be considered or set off against income of next year.

There were various judgement which were allowing such set off of last years excess application with income of next year now this clarification will put an end to such practice. Some of the judgements which were in favor of assessee are as under:

• CIT V Gujarati Samaj (R).2012 349 ITR 559 M.P.
• CIT V Maharana of Mewar Charitable Foundation 1987 164 ITR 439 (Raj).
• CIT V Sisters of ST Anne, (1984) 146 ITR 28. High Court of Karnataka.
• CIT V Shri PLOT Svetambara Murti Pujak Jain Man, 1995,211 ITR GUJ.
• CIT v. Institute of Banking Personnel (264 ITR 110) (Hon.).
• DIT (Exemptions) v. Aditya Birla Vikram Memorial trust (ITA No. 1087 of 2014) (Bom.).
• DIT(E) v. M/s. Aditya Birla Foundation (ITA No. 1497 of 2014) (Bom.).
• Income-tax Officer vs. Trustees of Sri Sathya Sai Trust (33 ITO 320).
• DDIT (E) V Ohio University, T. A. Nos.1075 & 1076/Bang/2014.
• Institute of Banking Personnel 264 ITR 110 (Bom.)

Hence, after looking at the above amendments it can be said that CBDT is being very strict with regard to taxability of trust and it is advisable to conduct your trust keeping in mind all the relevant provisions and this provisions are being made to tackle those trust which are not genuinely conducting their objects for people at large.