Tax audit of Trust under Income Tax Act:
Section 12A(1)(b) of the Income tax act deals with the provisions of Audit of trust as per Income Tax Act. Relevant extract of the provisions of Income Tax Act is as under:
“(b) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year,—
(i) the books of account and other documents have been kept and maintained in such form and manner and at such place, as may be prescribed; and
(ii) the accounts of the trust or institution for that year have been audited by an accountant defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB and the person in receipt of the income furnishes by that date the report of such audit in the prescribed form60 duly signed and verified by such accountant and setting forth such particulars, as may be prescribed;”
As per the above provision a trust needs to get it’s accounts audited u/s 12A(1)(b) where total income without giving effect of Section 11 and 12 i.e. section for application of income exceeds maximum amount not chargeable to tax.
Till now the maximum amount not chargeable to tax was Rs. 2.5 lakh as the tax on trust was applicable based on slab rate of AOP and hence no tax was chargeable if total receipt of Trust was below Rs. 2.5 lakh.
However, Income tax department has introduced section 115BBI wherein 30% tax will be charged on income of such trust which is over and above the 15% as set apart u/s 11 of the Income Tax Act. Relevant extract of Section 115BBI of the Act is as under:
“115BBI. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any specified income, notwithstanding anything contained in any other provision of this Act, the income-tax payable shall be the aggregate of,—
(i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of such specified income; and
(ii) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of specified income referred to in clause (i).
Explanation.—For the purposes of this section, “specified income” means,—
(a) income accumulated or set apart in excess of fifteen per cent of the income where such accumulation is not allowed under any specific provision of this Act; or
(b) deemed income referred to in Explanation 4 to the third proviso to clause (23C) of section 10, or sub-section (1B) or sub-section (3) of section 11; or
(c) any income, which is not exempt under clause (23C) of section 10 on account of violation of the provisions of clause (b) of the third proviso of clause (23C) of section 10, or not to be excluded from the total income under the provisions of clause (d) of sub-section (1) of section 13; or
(d) any income which is deemed to be income under the twenty-first proviso to clause (23C) of section 10 or which is not excluded from the total income under clause (c) of sub-section (1) of section 13; or
(e) any income which is not excluded from the total income under clause (c) of sub-section (1) of section 11.]
Thus, on combined reading of both the provisions it can be said that, if trust does not apply full 85% of the receipt of trust then tax at 30% shall be applicable on entire amount and no slab rate benefit shall be provided. Accordingly, the maximum amount not chargeable to tax for the purpose of Section 12A(1)(b) would now be Rs. 1 as compared to earlier limit of Rs. 2.5 lakh. Hence, now if any trust earns Rs. 1 then as per Section 12A(1)(b) without giving the effect of section 11 and 12, that would be considered as amount exceeding the maximum amount not chargeable to tax as now the exemption limit would be Rs. 0 as per Section 115BBI of the Act and hence such trust would be required to get it’s accounts audited.
Hence, this is a confusion where on one hand income needs to be seen for 115BBI after exemption u/s 11 and if 85% is not applied or accumulated whereas the applicability of section 12A(1)(b) needs to be seen before exemption under section 11 and 12 and considering that tax will be calculated u/s 115BBI.
Many people whose total receipts were below 2.5 lakh have already filed income tax return before 31.07.2023 without getting the accounts audited. Therefore, Income tax department should issue a clarification as to whether audit is required in such cases and how such return shall be processed.
Please provide your comments below on the above matter as to whether Tax audit would be required by trust or not?
Guidance on above article for Indian Income Tax by:
Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments before Income Tax authority, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: firstname.lastname@example.org | LinkedIn: Naman Maloo
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