Restrictions on Charitable Trusts in respect of various transaction under Income Tax
A charitable trust is an irrevocable trust established for charitable purposes and, in some jurisdictions, a more specific term than “charitable organization”. A charitable trust enjoys a varying degree of tax benefits in most countries. Under the Indian Income Taxation Laws, a trust is considered as charitable, if its objects are directed to the benefit of the society at large and not for an individual or group of individuals. A charitable or religious institution has substantial source of receipts in form of donations. Such donations may be corpus or voluntary. The Income Tax Law provides blanket exemption to corpus contributions (received for a particular purpose such as for construction of a building) whereas it requires application of voluntary contributions in general for charitable or religious purposes. In this article we will discuss the restrictions on Charitable Trusts in respect of various transaction under Income Tax.
Below are the various transactions under Income Tax that a Charitable Trusts is being restricted:
a. Restrictions on the Donation by Donor under Section 80G of the Income Tax Act, 1961
Any person or ‘assessee’ who makes an eligible donation is entitled to get tax deduction under section 80G subject to conditions. Section 80G does not restrict the deduction to individuals, companies or any specific category of taxpayer. As per section 80G, only donations in cash/cheque are eligible for the tax deduction under section 80G, no deduction is allowable in case of amount of donation if exceeds Rs 2,000/- unless the amount is paid by any mode other than cash.
b. Taxation of Anonymous Donation
Section 115BC covers the provision of taxability of anonymous donation which attracts tax liability at the rate of 30%. if a trust is a religious trust it need not pay tax as per section 115BBC whereas if it is a charitable trust the anonymous donations are taxable @30% (if anonymous donation exceeds- Rs. 1,00,000 or 5% of total donations whichever is higher)
“Anonymous donations” are not taxable under section 115BBC if
(i) Such donations are received by any trust/ institution established wholly for religious purposes. Therefore, in case of a trust owning a temple, the offerings / donations made by the devotees etc. shall not be taxable under this section even if the names and addresses of donors are not available. Such donations shall be covered under section 11 and 12.
(ii) Such donations are received by any trust / institution established wholly for religious and charitable purposes. However such donations shall be taxable under section 115BBC if the anonymous donation is made specifically for any university / school / educational institution OR hospital / medical institution run by such trust or institution.
Where the total income of an assessee, being the person in receipt of income on behalf of any university or other educational institution or any hospital or other institution referred to in Section 10(23C) or any trust or institution u/s 11 includes any income by way of any anonymous donation, the income tax payable shall be aggregate of:
– The amount of income-tax calculated at the rate of 30% on the aggregate of Anonymous Donations received in excess of higher of below:
-5% of the total donations received by the assessee; OR
-Rs. 1, 00, 000, and
The amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of the anonymous donations which is in excess of the 5% of the total donations received by the assessee or Rs. 1,00,000, as the case may be.
c. Restriction on Cash Expenditure by Trust:
The Finance Act, 2018 has inserted Explanation 3 under Section 11(1). The said Explanation 3 provides as under:
“For the purposes of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of Expenses or payments not deductible in certain circumstances section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.
Section 40A(3) provides that no deduction is allowable in computation of profits and gains in respect of cash payments exceeding Rs. 10,000. Section 40A(3A) provides that if a deduction is allowed in year 1 on mercantile basis and subsequently in year 2 the assessee makes cash payment, the payment so made shall be deemed to be profits and gains of business of year 2, if the payment exceeds Rs.10,000.
d. Restrictions on Payment of Expenditure by Trust:
The Finance Act, 2018 has inserted Explanation 3 under Section 11(1). The said Explanation 3 provides as under
“For the purposes of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of Expenses or payments not deductible in certain circumstances section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.
Section 40(a) (ia) provides that in computation of profits and gains of business, 30% of any sum payable to a resident on which tax is not deducted/paid in accordance with the said section is not allowable as a deduction.
e. Restriction on repayment of loan in cash:
Section 269ST is considered as one of the important section which was introduced by our respected Government with the intension of restricting the Cash Transactions to curb Black Money and Tax Theft in the industry.
As per section 269ST Any person should not receive an amount of Rs. 2,00,000 or more except by account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account or any other electronic mode as may be prescribed,
a. in aggregate from a person in a day, or
b. in respect of a single transaction, or
c. in respect of transactions relating to one event or occasion from a person
The CBDT had clarified that in respect of receipt in the nature of repayment of loan by Non-Banking Finance corporation or Housing Finance companies the receipt of one instalment of loan repayment in respect of a loan shall constitute a single transaction as specified clause (b) of section 269ST and all the instalments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions section 269ST.
The above section is not applicable in the below cases:
1. Any receipt by government, any banking company post office savings bank or cooperative bank
2. Transactions of the nature referred to in section 269SS
3. Such other persons or class of persons or receipts, notified by the central government
The Central Government has specified that the provision of section 269ST shall not apply to the following, namely:
a. Cash withdrawal by any person from a bank, cooperative bank or a post office savings bank.
b. Receipt by a business correspondent on behalf of a banking company or co operative bank, in accordance with the guidelines issued by the Reserve Bank of India.
c. Receipt by a white label automated teller machine operator from retail outlet sources on behalf of a banking company or cooperative bank
d. Receipt from an agent by an issuer of prepaid payment instruments
e. Receipt by a company or institution issuing credit cards against bils raised in respect of one or more credit cards
f. Receipt which is not includible in the total income under section 10(17A)
If Trust fails to follow section 269ST than penalty shall be levied at 100% of receipt. The penalty shall be imposed by the Joint Commissioner. However no penalty shall be levied if Trust proves that there were good and sufficient reasons for the contravention
