Trust issues

Trusts covered under Section 10 of ITA

This is the concluding part of the serial on this subject and covers trusts under the umbrella of Section 10 of the ITA in place of the normal Section 11.

Forfeiture of exemption
If any part of income of a trust created after April 1, 1962 results in benefit to any interested person the entire income will be liable to tax.

However, though this provision is also applicable in the case of a trust created before April 1, 1962 exemption is not forfeited if such use of the income or property is in compliance with the mandatory provisions in the terms of the trust deed.

If any funds of the trust are invested or deposited otherwise than in any one or more of the modes specified in Section 11(5), the exemption from tax will be forfeited. Funds not conforming to this requirement were required to be converted into permissible investments before April 1, 1993.

Donations in kind or acquisition of any asset not conforming to the approved assets are required to be converted into permissible investment within one year from the end of the financial year in which such assets are acquired.

Investment avenues
The following is the list of avenues prescribed u/s 11(5):

• NSC VIII.
• Post Office Savings Bank and Time Deposit.
• Kisan Vikas Patra
• Scheduled or Co-operative Banks.
• Co-operative Society carrying on Banking business.
• Co-operative land mortgage bank.
• Co-operative land development bank.
• Schemes of MFs.
• Securities of Central or State government.
• Securities of corporate bodies guaranteed by state or central government.
• Deposits or investment in a public sector company.
• Deposits or investment in a financial corporation engaged in providing long-term finance for industrial development in India approved u/s 36(1)(viii)..
• Deposits or investment in a public company in India approved u/s 36(iii) for providing long-term finance for construction or purchase of residential houses in India.
• Deposits or investment with an authority for providing long-term finance for urban infrastructure in India.
• Deposits with IDBI.
• Equity shares of a Depository.
• Immovable property.
• Any other mode as may be prescribed. All the prescribed modes so far have been listed above.

Audit
All the trusts are required to get their accounts audited. An omission to file an audit report may be rectified by filing the report at a later stage before the assessment is completed [CIT v Hardeodas Agarwalla Trust 198ITR511 (Cal) 1992].

If the audit report is not furnished with the return, the ITO must bring this defect to notice of the assessee giving him a chance to rectify this defect within the time allowed by ITO.

However notwithstanding continued existence of such defect, the Commissioner (Appeals) would not be justified in granting registration to assessee-trust [Director of Income-tax (Exemptions) v. SPIC Educational Foundation (2002) 257ITR46 (Mad.).

Trusts covered by Section 10
The income of most of the trusts is exempt u/s 11 which imposes several straight-jacket limitations for earning the exemption.

These limitations are unviable for some trusts such as Prime Minister's National Relief Fund, universities and other educational institutions financed wholly or substantially by the government, hospitals existing solely for philanthropic purposes, etc.

The entire income of such trusts is exempt directly u/s 10. As a matter of fact, some of these trusts need not file any returns.

Moreover, the accounts of all trusts covered by Section 11 are required to be audited for the years during which the income exceeds Rs 50,000 but only a few covered by Section 10 need audit.

Any asset not conforming with the prescribed assets u/s 11(5) were required to be disposed of before March 31, 1992. There is no restriction on investments for trusts in item-1 whereas trusts covered by item-2 and item-3 are not required to make any changes in their existing pattern of investment.

Trusts under items 4 and 5 require grant of exemption or continuance thereof from a prescribed authority. The notification or approval is valid for 3 years each time.

These trusts are required to apply 85 per cent of their income for their objectives or accumulate the funds for stated objectives within five years.

Income of such trusts is exempt u/s 10 but these are required to invest their funds in avenues as specified by Section 11(5). In other words, there is hardly any difference between these trusts and those u/s 11.

Circular 395 dt September 24 1984 stipulates that an association engaged in the promotion of sports and games can claim exemption u/s 11, even if it is not approved u/s 10(23).

Table-2 gives the list of various Forms related with charitable and religious trusts.

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