Taxation Of Charitable/Religious Trust

Charitable/religious trusts are the trusts which are formed with an objective of providing relief to poor, education ,medical relief, preservation of environment/ monuments , advancement of objects of general public utility, religious purpose, etc. There taxation has always been a point of concern. The entire income of such trust(be it house property, capital gain or any other income) is taxed as per the provisions of section 11-13 of the Income Tax Act ,1961 rather than as per there relevant provisions . Here I have discussed the major areas related to taxation of income of such charitable/religious trusts.

Income of charitable/religious trust can be classified as follows:-

I. Voluntary Contributions(donations) Section 11(1)

Voluntary contributions are basically the donations received by the charitable/religious trust which form part of income of the trust.

They are of two types:

1)      Donations received with specific direction that they shall form part of corpus fund

Such donations are exempt

2)      Donations received without such specific instruction

Such donations shall form part of income from trust property

II. Income From Property held under trust for charitable and religious purposes

Particulars	Taxability
15% OF GROSS RECEIPTS FROM SUCH TRUST PROPERTY	EXEMPT
85% OF GROSS RECEIPT FROM SUCH TRUST PROPERTY
i. Income Applied For charitable Purposes in INDIA	EXEMPT (Sec11(1))to the extent to which applied for the following purposes: 1.     Purchase of capital asset 2.     Repayment of   loan for purchase of capital asset 3.     Revenue Expenditure 4.     Donation to trust registered u/s 12AA or u/s 10(23C)
Income DEEMED TO BE APPLIED FOR CHARITABLE                      PURPOSE IN INDIA: IN CASE WHOLE OR PART OF INCOME IS NOT RECEIVED DURING THAT YEAR IN WHICH IT IS DERIVED	-Exempt in case : a. Income is applied for charitable purpose in India in the year of receipt or in the immediate succeeding year. b. Assessee submits a declaration to the Assessing Officer on or before the due date of filling of return as per section 139(1) that such income shall be applied for such purpose in the year of receipt or succeeding year.
IN ANY OTHER CASE	-Exempt in case : a. Such income is applied in abovementioned charitable purposes in the immediately succeeding year. b. Assessee submits a declaration to the Assessing Officer on or before the due date of filling of return as per section 139(1) that such income shall be applied for such purpose in the immediate succeeding year.
II. INCOME NOT APPLIED FOR CHARITABLE/RELIGIOUS PURPOSE IN INDIA Accumulated for specific purpose in India Q) What are the modes in which income shall be accumulated for specific purpose (sec 11(5))?? A) 1. Investment in government saving certificate/UTI 2. Deposit in post office savings bank/scheduled bank. 3. Investment in immovable property. 4. Deposit with or investment in bonds of a public co. having main object of providing long term finance for urban infrastructure/industrial development/ residential house, in India	EXEMPT (sec 11(2))IN CASE ACCUMULATED FOR SPECIFIC PURPOSE IN INDIA SUBJECTED TO THE FOLLOWING CONDITIONS: A)     ASSESSEE GIVES NOTICE TO Assessing officer specifying purpose and period     (cannot exceed 5 years) of accumulation before assessment is complete. B)      Accumulated amount is deposited /invested in specified form. Withdrawal of Exemption in the following cases (sec11(3)): Particulars Year of Withdrawal Applied for purpose other than the purpose for which it is accumulated or set apart Income of previous year in which so applied Ceases to be invested in the forms specified u/s11(5) Income of previous year in which it so ceases If not utilised till 5 years or immediately succeeding year Income of previous year immediately following expiry of 5th year. Donated to trust registered u/s 12AA or 10(23C) Income of previous year in which income is so donated
Not accumulated for specific purpose in India	Taxable in case income is not applied for charitable/religious purpose in India and is also not accumulated for specific purpose in India.

III. CAPITAL GAINS (Sec 11(1A)

The capital gain arising from the transfer of a property held by religious/charitable trust shall be taxable as under:

1)      Cost of new asset ≥ net consideration from asset sold →   Entire capital gain is exempt

2)      Cost of new asset < net consideration from asset sold →   Capital Gains Exempt = Cost of new asset less     Cost of old asset

IV. Anonymous Donations (Sec 115BBC)

Q) What are anonymous donations??

A) Anonymous donations are basically the donations where the person receiving the donations doesn’t maintain any record of the person giving the donation. E.g. – Offerings given in temple in donation box.

Taxability

Step 1: Compute the total amount of anonymous donation received by the charitable/religious institution

Step 2 : Compute 5% of the total donations(corpus donations + anonymous donations + other donations not forming part of corpus)

Step 3 : Select the higher of the following two:

a)      Amount computed in step 2 or

b)      1,00,000

The amount computed in step 3 shall be exempt and the remaining amounts of anonymous donations are taxable in the hands of such charitable/religious institution @ flat 30% (115BBC)

Cases where anonymous donations shall not be taxable u/s 115BBC

1)      Where donations are received by trust established WHOLLY for RELIGIOUS purpose (no charitable purpose). E.g.-donations given by devotees to trust owning a temple.

2)      However in case such religious/charitable trust also runs a school/medical institution/educational institution ,etc and the donations are received with specific direction that they are for such school/institution then such donations shall be taxable

Anonymous donations not taxable u/s 115BBC → taxable as per section 11 & 12

Anonymous donations taxable u/s 115BBC → not exempted u/s 11 & 12

Section 13: Section 11 not to apply in certain cases:

1. Entire income from the property held under a trust for private religious purposes which does not enure for the benefit of the public.

2. Entire income of a charitable trust or institution created or established for the benefit of any particular religious community or caste.

3. Entire income of the following charitable/religious trust:-

a) where any part of the income of such trust is used for the benefit of any person specified under sec13(3)   or

b) Where any property of the trust id used for the benefit of any person specified under sec13(3)

4. Entire income of a charitable /religious trust whose funds are not invested in modes specified under section 11(5).

- See more at: http://taxguru.in/income-tax/taxation-charitablereligious-trust.html#sthash.pzFJZTQb.dpuf

Auditor Appointment and Resignation Procedure

An auditor appointed under section 130 of Companies Act 2013, can resign after his or her appointment. When an auditor ceases to hold office after resignation as company auditor, the auditor is obliged under section 140 of companies act 2013 read with rule 8 of the companies (audit and auditors) rules, 2014 to notify registrar of companies or ROC within 30 days from the date of resignation by Fling a statement in the prescribed form ADT3.

E Form ADT-3 is required to be filed pursuant to Section 140(2) of the Companies Act, 2013 and Rule 8 of the Companies (Audit and Auditors) Rules, 2014 which are reproduced for your reference.

Section 140:

(2) The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

Rule 8:

Resignation of auditor —For the purposes of sub-section (2) of section 140, when an auditor has resigned from the company, he shall file a statement in Form ADT-3.

I. RESIGNATION BY THE STATUTORY AUDITOR AND FILING OF ADT-3 FORM BY RESIGNING AUDITOR

Auditor shall give resignation letter to the company and shall file the E Form ADT-3 with the concerned Registrar of companies within 30 days from the date of his resignation. In ADT-3 Forms, following information need to be given:

(i) Name of Resigning Auditor Firm

(ii) Address of Resigning Auditor Firm

(iii) Ph. No. of Resigning Auditor Firm

(iv) PAN of Resigning Auditor Firm

(v) Registration No. of Resigning Auditor Firm

(vi) E-Mail of Resigning Auditor Firm

(vii) Reason of Resignation

(viii) To attach the scan pdf copy of Resignation Letter with ADT-3 Form

(ix) Fill the details of Member who shall sign the ADT-3 Form with his membership No. and Associate/ Fellow

(x) Digitally sign the ADT-3 Form by the member of the Resigning Auditor Firm

Penal provisions

As per Section 140(3), If the auditor does not comply with sub-section (2), he or it shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees. Therefore, if the auditor fails to inform the ROC about the resignation then there may be penalty of Rs. 50,000/- to 5 lacs.

II. PROCEEDINGS BY THE COMPANY

The New Auditor Firm shall be appointed by the company under section 139 (8)(i) of the Companies Act, 2013 which is read as follows:

(8) Any casual vacancy in the office of an auditor shall—

(i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting;

Sequence of events for Resignation of Existing Auditor and appointment of New auditor will be as follows:

For the Company

1) Receive the Resignation Letter along with Form ADT-3 from the resigning Auditor. {Format of Resignation Letter has been attached at end of this Article}

2) Call a Board Meeting for acceptance of the resignation.

3) Obtain the consent letter and certification under section 139 and 141 from the proposed New Auditor Firm.

4) Call a Board Meeting for filing the Casual Vacancy and approve the notice for EGM. {Format of Notice for holding EGM has been attached at end of this Article}

4) Hold the EGM and approve the Auditor’s Appointment.

5) Intimate the New Appointed Auditor Firm regarding his appointment till the conclusion of ensuing AGM. {Format of Intimation Letter has been attached at end of this Article}

5) Now file Form No.MGT-14 for the filing of the Resolution passed at EGM. {Format of Copy of Resolution passed at EGM has been attached at end of this Article}

6) File ADT-1 for new Auditor’s Appointment.

III. FILING OF DOCUMENTS/ E FORMS BY THE COMPANY FOR APPOINTMENT OF NEW AUDITOR FIRM

E Form MGT-14

In E Form MGT-14, copy of resolution passed at meeting of Member and Explanatory statement under section 102 needs to be attached

E-FORM ADT-1

DETAILS TO BE FILLED IN ADT-1 Form

The company shall file the E Form ADT-1 with the concerned Registrar of companies within 30 days from the date of appointment of New Auditor Firm. In ADT-1 Forms, following information need to be given:

(i) Name, Address, PAN, Registration No. and E-Mail Id of New Appointed Statutory Audit Firm of Resigning Auditor Firm

(ii) Period of accounts for which the Auditor is appointed

(iii) No. of Financial Years to which the appointment relates

(iv) No. of Financial Years if the audit of the company has been done by the Firm in Earlier Years

(v) To Tick the column No. 5 that Auditor has not been appointed in AGM.

(vi) Date of appointment shall be given as date of Board Meeting in which he was appointed.

(vii) SRN of ADT-3 need to be given

(viii) Information of the Resigned Audit Firm

(ix) Attach Intimation Letter, Consent of New Auditor Firm appointed at EGM and Copy of resolution passed at Meeting of Members of the company

(x) Digitally sign the ADT-1 Form by the Director/ Mg. Director of the company

Click here to Download Draft Format of of Resignation Letter by Auditor, Consent Letter and Certificate from Auditor

Service tax cannot be levied on indivisible works contracts entered prior to 01 June 2007

We are sharing with you an important judgement of the Hon’ble Supreme Court in the case of Commissioner of Central Excise and Customs, Kerala and Others Vs. Larsen and Toubro Ltd. and Others [2015-TIOL-187-SC-ST] on the following issue:

Issue:

Whether Service tax can be levied on indivisible Works Contracts prior to its introduction on June 1, 2007?

Facts & Background:

In the case of Larsen and Toubro Ltd, Kehems Engg Pvt Ltd Vs. CST, Delhi/ CCE & ST, Indore/ CCE/ Rajkot and CCE & ST, Indore Vs. Kehems Engineering Pvt Ltd. [2015-TIOL-527-CESTAT-DEL-LB], the Five Member Bench of the Hon’ble CESTAT, Delhi by a majority of 3 to 2 held that Service elements in a composite/Indivisible Works Contract (involving transfer of property in goods and rendition of services), where such services are classifiable under Commercial or Industrial Construction Service (“CICS”), Construction of Complex Service (“COCS”), or Erection, Commissioning or Installation Service (“ECIS”),are subject to levy of Service tax even prior to insertion of taxable service ‘Works Contract Service’ under Section 65(105) (zzzza) of the Finance Act, 1994 (“the Finance Act”) i.e. prior to June 1, 2007.

In the above stated case, the two Hon’ble Judicial Members relying upon decisions in the case of CST Vs. Turbotech Precision Engineering Pvt Ltd.[2010 (18) S.T.R 545 (Kar)] and Strategic Engineering Pvt. Ltd. Vs. CCE [2011 (24) S.T.R 387 (Mad)] held that Works Contract Service was not a taxable service prior to June 1, 2007 as CICS, COCS and ECIS covers only such contracts/ transactions which involves pure rendition of service(s), falling within the ambit of the respective definitions and do not comprehend Works ContractService within their ambit. It was further held that the decision of the Hon'ble Delhi High Court in case of G.D. Builders and Others Vs. Union of India and Another [(2013) 32 STR 673 (Del.)] (“GD Builders Case”) that a Works Contract can be vivisected and discernible taxable service elements could be subjected to Service tax prior to June 1, 2007 is erroneous on per incuriam and sub silentio grounds.

However, on the other hand three Hon’ble Technical Members relying upon the decision in GD Builders Case,C.C.E. Vs. B.S.B.K. Pvt. Ltd. [2010 (253) ELT 522] and YFC Projects (P.) Ltd. Vs. Union of India [(2014) 44 GST 334/43 taxmann.com 219 (Delhi)] (“YFC Case”), held that in GD Builders Case and YFC Case, the Hon'ble Delhi High Court has considered the very same matter and held that Works Contract can be vivisected and discernible taxable service elements could be subjected to Service tax prior to June 1, 2007. This Tribunal being sub-ordinate to both the Apex Court and the High Court would be bound by the above mentioned decisions. In other words, the ratio decidendi of the GD Builders Case stands uncontroverted as of now and therefore, the same is binding on all sub-ordinate Courts including this Tribunal.

Accordingly, the matter travelled up to the Hon’ble Supreme Court wherein group of appeals were filed both by the Revenue and the Assessees.

Held:

The Hon’ble Apex Court after elaborate discussion of the various provisions and judicial pronouncements held as under:

• A plain reading of the judgment in the case of Gannon Dunkerleyand Company and Others Vs. State of Rajasthan and Others [2002-TIOL-103-SC-CT-CB],clearly and unmistakably holds that unless the splitting of an indivisible Works Contract is done taking into account the eight heads of deduction, the charge to tax that would be made would otherwise contain, apart from other things, the entire cost of establishment, other expenses, and profit earned by the contractor and would transgress into forbidden territory namely into portion of such cost, expenses and profit as would be attributable in the Works contract to the transfer of property in goods in such contract;

• Works Contract is a separate species of contract distinct from contracts for services simpliciter recognized by the world of commerce and law as such, and has to be taxed separately as such;

• A close look at the Finance Act would show that the taxable services referred to in the charging Section 65(105) thereof would refer only to service contracts simpliciter and not to composite Works contracts. This is clear from the very language of Section 65(105) of the Finance Act which defines ‘taxable service’ as "any service provided";

• Under Section 67 of the Finance Act, the value of a taxable service is the gross amount charged by the service provider for such service rendered by him. This would unmistakably show that what is referred to in the charging provision is the taxation of service contracts simpliciter and not composite Works contracts, such as are contained on the facts of the present cases;

• While introducing the concept of Service tax on indivisible Works Contracts various exclusions are also made such as Works contracts in respect of roads, airports, airways transport, bridges, tunnels, and dams. These infrastructure projects have been excluded and continue to be excluded presumably because they are conceived in the national interest. If the contention of the Revenue is accepted, each of these excluded Works contracts could be taxed under the sub-heads of Section 65(105) of the Finance Act, which was never the intention of Parliament;

• In GD Builders case, it was held that the levy of Service tax in Section 65(105)(g), (zzd), (zzh), (zzq) and (zzzh) of the Finance Act is good enough to tax indivisible composite Works contracts, but in view of our finding that the said Finance Act lays down no charge or machinery to levy and assess Service tax on indivisible composite Works contracts, such argument must fail;

• The Delhi High Court judgment unfortunately misread the judgment of this Court in the case of Mahim Patram Private Ltd. Vs. Union of India [2007-TIOL-23-SC-CT], to arrive at the conclusion that it was an authority for the proposition that a tax is leviable even if no rules are framed for assessment of such tax, which is wholly incorrect.

Thus, the Hon’ble Apex Court in no ambiguous terms ruled that Works contracts cannot be taxed before June 1, 2007. Accordingly, the appeals filed by the Assessees were allowed and appeals filed by the Revenue were dismissed

Our Comments:

Levy of Service tax on Turnkey Contracts prior to introduction of Works Contract Services under the Finance Act w.e.f. June 1, 2007 has been a long tale of litigation since past years. With this landmark judgment of the Hon’ble Supreme Court, the haze surrounding the issue will now get clear with the Hon’ble Apex Court delivering final verdict by ruling that no Service tax can be levied on Works Contract in prior to June 1, 2007 .

On the principle of prudence, it is astonishing to see this matter travelling till the Hon’ble Supreme Court to decide whether a tax introduced on June 1, 2007 can be made applicable to certain services existing prior to that date. Nonetheless, the Hon’ble Apex Court has re-affirmed what the Hon’ble Justice Shri. Raghuram delivered in the Delhi Tribunal Verdict by stating that “Harvesting revenue, by levy and collection of taxes qua legislation by Parliament must therefore clearly avoid encroachment into the field(s) authorized to States; and vice-versa.”

Further, the Hon’ble Justice Raghuram in his speech at FAPCCI, Hyderabad on January 17, 2015 has said that something is pathologically, terminally and seriously wrong with our Departmental adjudication.

Until and unless the Department stops raising such futile issues, there cannot be an end to unproductive litigations in the Country.