Transcript Document

TAXATION OF PRIVATE
BENEFICIARY AND CHARITABLE
TRUST
Presented By
CA Swatantra Singh FCA, MBA
Email ID: [email protected]
New Delhi, (India)
9811322785
www..carajput.com
Nangia and Company
1
Structure of a Non Profit Organization in India
In India non profit organizations can be registered as:
Trusts
Societies
Section 25 Companies
 The Income Tax Act gives all categories equal treatment, in terms of
exempting their income and granting 80G certificates, whereby donors
to non-profit organizations may claim a rebate against donations made.
Foreign contributions to non-profits are governed by FC(R)A
regulations and the Home Ministry
2
Comparison among Trust, Society & Section 25 Company
Points of Differences
Trust
Society
Section 25 Company
Statute / Legislation
Relevant State Trust Act or
Indian Trust Act, 1882
Societies Registration Act, 1860
Indian Companies Act, 1956
Jurisdiction
Deputy Registrar/Charity
commissioner
Registrar of societies (charity
commissioner in Maharashtra).
Registrar of companies
Registration
As trust
As Society
As a company u/s 25 of the
Indian Companies Act.
In Maharashtra, both as a society
and as a trust
Registration Document
Trust deed
Memorandum of association and
rules and regulations
Memorandum and articles of
association. and regulations
Stamp Duty
Trust deed to be executed
on non-judicial stamp
paper, vary from state to
state
No stamp paper required for
memorandum of association and
rules and regulations.
No stamp paper required for
memorandum and articles of
association.
Members Required
Minimum – two trustees.
No upper limit.
Minimum – seven managing
committee members. No upper limit.
Minimum three .No upper limit.
Board of Management
Trustees / Board of
Trustees
Governing body or council/managing
or executive committee
Board of directors/ Managing
committee
Mode of Succession on Board
of management
Appointment or Election
Appointment or Election by members
of the general body
Election by members of the
general body
3
Meaning of ‘Trust’
A trust is a relationship in which :
 a person or entity (the trustee) holds legal title
 to certain property (the trust property or trust corpus), but is bound
by a fiduciary duty to exercise that legal control
 for the benefit of one or more individuals or organizations (the
beneficiary), who hold ‘beneficial’ or ‘equitable’ title.
 The trust is governed by the terms of the (usually) written trust
agreement and local law.

The entity (one or more individuals, a partnership or a corporation)
that creates the trust is called the settlor.
4
Types of Trusts

Bare Trust
A trust where the beneficiary is absolutely entitled to the assets, and the trustee is
obliged simply to pay them over to the beneficiary. ‘Resulting’ and ‘Constructive’
trusts are usually bare trusts. Bare trusts generally do not continue for any length
of time, unless they arise out of protracted litigation, or the beneficiaries are
minors (in which case the bare trust must continue till they reach majority)

Constructive Trust
It is imposed by law as an equitable remedy. It generally occurs due to some
wrong doing, where the wrong doer has acquired legal title to some property and
cannot in good conscience be allowed to benefit from it.

Resulting Trust
It is a form of implied trust which occurs where a trust fails, wholly or in part, as a
result of which the settlor becomes entitled to the assets.
5
Types of Trusts

Discretionary Trust
It is an arrangement where the trustee may choose, from time to time, who (if
anyone) among the beneficiaries is to benefit from the trust, and to what
extent, so long as the decision is made based on the beneficiaries best
interests. The purpose of such a trust is that no individual can claim to be
entitled to any specific interest in the trustee’s assets, which often has tax
advantages or asset protection advantages.

Fixed Trust
the entitlement of the beneficiaries is fixed by the settlor. The trustee has little
or no discretion. E.g.
 a trust for a minor (to X if she attains 21)
 a life interest (to pay the income to X for her lifetime)
6
Types of Trusts

Hybrid Trust
It combines elements of both fixed and discretionary trusts. The trustee must pay a
certain amount of the trust property to each beneficiary fixed by the settlor. But the
trustee has the discretion as to how any remaining trust property, once these fixed
amounts have been paid out, is to be paid to the beneficiaries.

Express Trust
It arises where a settlor deliberately and consciously decides to create a trust, over
his or her assets, either now or upon his death. In these case this will be achieved
by signing a trust instrument which will either be a will or a trust deed.

Implied Trust
It is created where some of the legal requirements for an express trust are not
met, but an intention on behalf of the parties to create a trust can be presumed to
exist.
7
Types of Trusts

Intervivos Trust
A settlor who is living at the time the trust is established creates an intervivos
trust.

Testamentary Trust
A trust created in an individual’s will.

Irrevocable Trust
It is the one that will not come to an end until the terms of the trust have been
fulfilled.

Revocable Trust
A trust of this kind can be revoked (cancelled) by its settlor at any time.
8
Public Trusts

Like private trusts, public trusts may be created inter-vivos or by will.

Public trusts are however governed by general law, though the principles
forming the basis of the Indian Trusts Act can be applied in the case. It was
held in the case of State of UP Vs. Bansi Dhar, AIR (1974) SC 1084, 1090
that “it is true that Indian Trusts Act relates only to private trusts, public
charitable trust have been expressly excluded from its ambit. But while
provisions of section 83 of the Trusts Act proprio vigore do not apply, there is
a common area of principles which covers all trusts, private and public, and
merely because they find a place in the trusts Act, they cannot become
untouchable where public trusts are involved.

It is a trust established for charitable purposes; normally must be for the
benefit of public at large or a class of beneficiaries.

These are entitled to special treatment under the law of taxation.
9
Public Trusts

These are exempt from the rule against perpetuities, which would
otherwise require a trust to come to an end after a certain period.
Charitable trusts may continue indefinitely.
 A formal deed is not necessary to constitute a public trusts, even
where immovable property is dedicated because section 5 of Indian
Trusts Act 1882 is not applicable on public Trusts.
 Public trusts are an exception to the well settled rule that there is no
valid trust unless the objects thereof are specified. The trusts is not
allowed to fail for uncertainty .
10
Public Trusts
 A charitable trust is synonymous with public trust. There is nothing
called as a private charitable trust.
 Charitable trusts come under the doctrine of cy pres, under which if
the charitable purposes of the trust cannot be fulfilled, then they can
be replaced by new and more appropriate charitable purposes.
 Management or Control
may vest in private hands.
In the case of Smt. Ganesha Devi Rami Devi Charity Trust Vs. CIT
(1969) 71 ITR 696, 704 (Cal) it was held that “the implication,
therefore, is that if the trust or fund is controlled by a body of
persons which is not a public body, but if it enures to the benefit of a
public it will still be a charitable trust or fund
11
Private Trusts
 Private trust may be created inter vivos or by will.
 Private trust are governed by the provisions of the Indian Trust
Act 1882
 It has one or more particular individuals as its beneficiary.
 Where immovable properties worth more than Rs. 100 are
transferred, trust will not be operated unless it is registered
(Gostha Behari Gose Vs. University of Calcutta, AIR 1972 Cal
61 ) .Trust created by will does not require any stamp
 Private trusts are void for perpetuity
12
Partly Private and Partly Public Trusts?
 Dedication may be absolute , or it may be partial. Where the
dedication made by a settler in favor of an idol covers the entire
beneficial interest which he had in the property, the debutter is
an absolute or complete debutter. Where, however, some
proprietary or pecuniary right or interest in the property is either
indisposed of or is reserved for the settlor’s family or relations, a
case
of
partial
dedication
may
arise.
( K.Mukherjea’s Hindu Law of Religious and Charitable
trusts, 4th edition page 174-5)
13
Partly Private and Partly Public Trusts?
 If the dedication is partial ,a trust in favor of a charity is not
created but a charge in favor of charity is attached to , and
follows, the property which retains its original private and
secular Character ( Menakuru Dasaratharami Reddi V.
Duddakuru Subba Rao, AIR 1957 SC 797)
 In cases of partial debutter endowment , it is a question of
construction whether idol is true beneficiary….. Or whether heirs
are true beneficiaries…. ( Lord Shaw in Har Narayan V. Surya
Kunwari, AIR 1921 PC 20)
14
Charitable Trusts Vs. Religious Trusts.
 Private Religious trusts Vs. Private charitable trusts?
What is to be noted is that there might be a private trust for
religious purposes, but there can be no private charitable trust.
[(CIT Vs. M. Jamal Mohamad Sahib (1941) 9 ITR 375 (Mad)]
 Partly Charitable & Partly Religious Trusts?
In Hindu system there is no line of demarcation between religion
and charity. But what a purely religious purposes and what
religious purposes will be charitable must be entirely decided
according to Hindu Law and Hindu Notions (Malayammal Vs.
A.Malayalam Pillai (1991) Supp (2) SCC 579, 584)
15
Legislations in India Governing Trusts
A BRIEF SUMMARY OF THEIR PREAMBLES
 THE INDIAN TRUSTS ACT, 1882
“An Act to define and amend the law relating to Private Trusts and
Trustees. The Indian Trusts Act was passed in 1882 to define law relating
to private trusts and trustees.”
 CHARITABLE AND RELIGIOUS TRUSTS ACT,1920
“An Act to provide more effectual control over the administration of
Charitable and Religious Trusts .
Whereas it is expedient to provide facilities for the obtaining of information
regarding trust created for public purposes of a charitable or religious
nature,….
16
Legislations in India Governing Trusts

RELIGIOUS ENDOWMENTS ACT 1863
An Act to enable the Government to divest itself of the management of
Religious Endowments”
 CHARITABLE ENDOWMENTS ACT, 1890
“An Act to provide for the Vesting and Administration of property held in
the trust for charitable purposes.
Whereas it is expedient to provide for the vesting and administration of
property held in trust for charitable purposes; It is hereby enacted as
follows:”
17
Legislations in India Governing Trusts

THE SOCIETIES REGISTRATION ACT ,1860.
“An Act for the Registration of Literary, Scientific and Charitable Societies
Whereas it is expedient the provision should be made for improving the
legal condition of societies established for the promotion of literature,
science, or the fine arts, or for the diffusion of useful knowledge, the
diffusion of political education or for charitable purposes; it is enacted as
follows:-”
18
Legislations in India Governing Trusts
 Apart from these central legislations , a number of statute have been
enacted by the state legislatures dealing with religious and charitable
trusts and endowments, For example:
 The Madras Hindu Religious & Charitable Endowments Act (19
of 51)
 The Bombay Public Trusts Act (29 of 1950)
 The Orissa Hindu Religious Endowments Act (4 of 1939)
 The Bihar Hindu Religious Trusts Act (1 of 1951)
A trust which is registered in a state having a legislation for that
purpose has to follow the provisions of the State Act . The
registration is done with the sub-registrar / civil court.
19
How to form a Trust - Law & Procedure
 Essentials of a Trust
 Who can form a trust ?
 Capacity to create a Trust.
 Who can be a trustee ?
 Who can be a beneficiary ?
 Subject matter of trust.
 Instrument of Trust
20
Essentials of a Trust
 The existence of the author/settlor of the trust or someone at whose
instance the trust comes into existence.
 Clear intention of the author/settlor to create a trust.
 Purpose of the Trust.
 The Trust property
 Beneficiaries of the Trust.
 There must be divesting of the ownership by the author / settlor of the
trust in favour of the beneficiary or the trustee.
Unless all these requisites are fulfilled a trust cannot be said to have
come into existence.
21
Who can form a Trust ?
 As per section 7 of the Indian Trusts Act, a trust can be formed –
 by every person competent to contract, and
 by or on behalf of a minor, with the permission of a principal civil court
of original jurisdiction.
 Besides individuals, a body of individuals or an artificial person such as an
association of persons, an institution, a limited company, a Hindu
undivided family through it's karta, can also form a trust.
 It may, however, be noted that the Indian Trusts Act does not apply to
public trusts which can be formed by any person under general law. Under
the Hindu Law, any Hindu can create a Hindu endowment and under the
Muslim law, any Muslim can create a public wakf. Public Trusts are
essentially of charitable or religious nature, and can be constituted by any
person.
22
Capacity to create a Trust
 As a general rule, any person, who has power of disposition over a
property, has capacity to create a trust of such property. According to
section 7 of the Transfer of Property Act, 1882, a person who is
competent to contract and entitled to transfer the property or
authorized to dispose of transferable property not his own, either
wholly or in part and either absolutely or conditionally, has 'power of
disposition of property'.
 Thus, two basic things are required for being capable of forming a trust
 power of disposition over property; and
 competence to contract.
23
Who can be a Trustee ?
 Every person capable of holding property can become a trustee.
However, where the trust involves the exercise of discretion, he can
accept or act as a trustee only if he is competent to contract.
 No one is bound to accept trusteeship. Any number of persons may be
appointed as trustees.
 However, no trust is defeated for want of a trustee. Where there is no
trustee in existence, an official trustee may be appointed by the court
and the trust can be administered. An executor of a Will may become a
trustee by his dealing with the assets under the provisions of the Will.
24
Who can be a Beneficiary ?
 In a private trust the beneficiaries are one or more ascertainable
individuals.
 In a public trust the beneficiaries are a body of uncertain or
fluctuating individuals and may consist of a class of the public or
the whole public.
25
Subject matter of Trust
 Any property capable of being transferred can be a subject matter
of a trust.
 Section 8 of the Indian Trust Act, however, provides that mere
beneficial interest under a subsisting trust cannot be made the
subject matter of another trust.
 In the case of J.K. Trust vs. CIT (1957) 32 ITR 535 (S.C.), the
Supreme Court had held that the word " property" under the
Trusts Act is of the widest import and a business undertaking will
undoubtedly be a property so that a running business can be
made a subject matter of trust. This view has been followed in the
case of in CIT vs. P. Krishna Warriar (1964) 53 ITR 176 (SC).
26
Instrument of trust

The instrument by which the trust is declared is called instrument of Trust, and
is generally known as Trust Deed.

It is well settled that no formal document is necessary to create a Trust as held
in Radha Soami Satsung vs. CIT- (1992) 193 ITR 321 (SC). But for many
practical purposes a written instrument becomes necessary under following
cases –
 When the trust is created by a will irrespective of whether the trust is
public or private or it relates to movable or immovable property. This is
because as per Indian Succession Act, a will has to be in writing
 When the trust is created in relation to an immovable property of the
value of Rs.100 and upwards, in case of a private trust. In case of public
trusts, a written trust deed is not mandatory, even in respect of
immovable property, but is optional.

Where the trust/association is being formed as a society or company, the
instrument of trust; i.e., the memorandum of association, and Rules and
Regulations has to be in writing.
27
Instrument of trust

A written trust-deed is always desirable, even if not required statutorily, due to
following benefits :
 a written trust deed is a prima facie evidence of existence of a trust ;
 it facilitates devolution of trust property to the trust;
 it clearly specifies the trust-objectives which enables one to ascertain
whether the trust is charitable or otherwise;
 it is essential for registration of conveyance of immovable property in
name of the Trust;
 it is essential for obtaining registration under the Income-tax Act and
claiming exemption from tax;
 it helps to control, regulate and manage the working and operations of
the trust;
 it lays down the procedure for appointment and removal of the trustee(s),
his/their powers, rights and duties; and
 it prescribes the course of action to be followed under any eventuality
including dissolution of the trust.
28
Types of Instrument of Trust
 Trust deed, where a trust is declared intervivos; i.e., by settling
property under Trust.
 A will, where a trust is declared under a will;
 A memorandum of association along with rules and regulations, when
the association/institution is being formed as a society under the
Societies Registration Act, 1860.
 A memorandum and articles of association where the association
/institution is desired to be formed as a Company.
29
Essentials of a valid Charitable or Religious Trust
 There are four essential elements of a valid charitable or religious trust
 Charitable or Religious Object : The object or purpose of the
trust must be a valid religious or charitable purpose according to
law ;
 Capacity to create Trust : The founder or settlor should be
capable of creating a trust and dedicating his property to that trust;
 Certainty of Object and Dedication thereto : The settlor should
indicate precisely the object of the trust and the property in
respect of which it is made. The property should be dedicated to
the trust and the owner must divest himself of the ownership of
that property.
 Concurrence with the law : The trust or its objects must not be
opposed to the provisions of any law for the time being in force.
30
Provisions in the Income Tax Act, 1961 impacting Trusts- Brief
overview

Section 2(15)
Defines a charitable objective

Section 10(23C)
Provides exemption to educational, medical, charitable and public religious
institutions, existing not for the purposes of profit

Section 11-13
Provides for tax treatment in case of charitable trusts

Section 80G
Deals with deduction in respect of donations to certain funds , charitable
institutions etc.

Section 161-164
Deals with liability in special cases i.e. of representative assessee, which
includes taxation of private discretionary trusts.
31
Method of Computation of Income

Income from the properties of the trust have been held to be
arrived at in the normal commercial manner without
classification under the various heads set out in section 14 (CIT
Vs. Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135
ITR 485 (Mad)
 Real income has to be taken into account for the purpose of
considering the exemption u/s 11 (CIT Vs. Birla Janhit Trust
(1994) 208 ITR 372, 375-76 (Cal)
32
Method of Computation of Income
 In that view of the matter, the loss incurred by the charitable
trust on sale of investment is not allowable in computing the
income of the trust because of the fact that such loss can not
formed part of the real income of the trust. (Hindustan Welfare
Trust Vs. Director of Income Tax (exemption) (1993) 201 ITR
564, 566
 It may also be noted that where provisions of section 11 are
attracted, the provisions of section 28(iii) cannot be invoked.
[CIT Vs. South Indian Film Chamber of Commerce (1981) 129
ITR 22 (Mad)]
33
Charitable Purpose as per Income Tax Act 1961
 According to Section 2(15), ‘charitable purpose’, includes relief of the
poor, education, medical relief, and the advancement of any other
object of general public utility.

Amendment made in A.Y. 2009-10
Proviso added
“Provided that the advancement of any other object of general public
utility shall not be a charitable purpose , if it involves the carrying on of
any activity in the nature of trade, commerce or business, or any
activity of rendering any service in relation to any trade, commerce or
any business, for a cess or fee or any other consideration, irrespective
of the nature of use or application, or retention, of the income from
such activity”
34
Charitable Purpose
 Action flowing from charitable thought should not be for
benefiting once own self. The action should always be for
benefit of others.
[Sole Trustee, Lok Shikshana Trust v. CIT [1975] 101 ITR
234 (SC)]
 The Court may disallow a project as being charitable even if the
trust deed declares it to be so.
[All India Spinners Association v. CIT [1944] 12 ITR 482
(PC)]
35
Charitable Purpose

Inclusive Definition
The statutory definition is not exhaustive or exclusive. Even if the object or
purpose may not be regarded as charitable in its popular signification as not
tending to give relief to the poor or for advancement of education or medical
relief, it would still be included in the expression “charitable purpose” if it
advances an object of general public utility.
[CIT v. Andhra chamber of Commerce [1965] 55 ITR 722(SC)]

Concept of charity
The very concept of ‘charity’ denotes altruistic thought and action. Its object
must necessarily be to benefit others rather than one’s self. The action which
flows from charitable thinking is always directed at benefiting others. It is this
direction of thought and effort and not the result of what is done in terms of
financially measurable gain which determines that it is charitable.
[Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)]
36
Charitable Purpose
 Relief for the poor

The relief in order to be charitable must, in every case, be to such
section of the community, which may be well defined and identified by
some common quality of public nature. If the class were vague and ill
defined, the institution would not be a valid charitable trust.

The object need not be to benefit all persons living in a particular
country or province. It is sufficient if the object is to benefit a section of
the public as distinguished from specified individuals.
[CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC)]
37
Charitable Purpose

Education

As per wider and extensive meaning, the word ‘education’ would connote
every acquisition of further knowledge. However section 10(22) of the I. T. Act,
which grants exemption to the income of a ‘university or other educational
institution, existing solely for educational purposes not for profit’ the word
‘education’ would connote the process of training and developing the
knowledge, skill, mind and character of students by normal schooling.
[CIT Vs. Oxford University Press (Bom) 221 ITR 77]

Education is the systematic instruction, schooling or training to the young in
preparation for the work of life. It also connotes the whole course of scholastic
instruction, which a persons receives in the process of training and developing
the knowledge, skill, mind and character of students by normal schooling
[Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)]
38
Charitable Purpose

The coaching of students in an institutions is not imparting education, which
can be said to be a process of training and developing of students and
character of students by normal schooling. A coaching institution cannot be
said to be an institution where normal schooling is done. Coaching institute
was held not to be entitled to exemption from Income Tax U/s 10(22) of the
Act.
[Institute of Mining and Mines surveying Vs. CIT, (1994) 208 ITR 608
(Pat)]

Education is per se regarded as an activity that is charitable in nature. The
fee structure must take into consideration the need to generate funds to be
utilized for the betterment and growth of the educational institution, the
betterment of education in that institution and to provide facilities necessary
for the benefit of the students
[T.M.A Pai & Others vs. State of Karnataka & others]
39
Charitable Purpose

Medical relief
Hospital/Other Institution for the reception and treatment of persons
suffering from illness or mental defectiveness or for reception and treatment
of persons requiring medical attention or rehabilitation, existing solely for
philanthropic purposes and not for purposes of profit.

General public utility

An object of general public utility means an object of public utility, which is
available to the general public as distinct from any section of the public. The
expression “object of general public utility” includes all objects which
promote the welfare of the general public. Therefore when the principal
object of a chamber of commerce is to promote and protect trade,
commerce and industry in India or any part of India, the said object can be
said to be general utility and therefore a charitable purpose.
[CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC)]
40
Charitable Purpose

The State Bar Council is a body constituted for general public utility since the
advancement of any object beneficial to even a section of public as
distinguished from an individual or group of individuals would be an object of
public utility and consequently a charitable purpose.
[CIT v. Bar Council of Maharashtra [1981] 130 ITR (SC)]

Society of Chartered Accountants being engaged in activities of general public
utility, is a charitable society.
[CIT v. Jodhpur Chartered Accountants Society [2002] 258 ITR 548 (Raj.)]

Delhi Stock Exchange is non charitable institution.
[Delhi Stock Exchange Association Ltd. V. CIT [1997] 224 ITR 235]

Where primary or dominant purpose of institution is charitable and other
objects which, by themselves, may not be charitable, but are merely ancillary
or incidental to primary or dominant object, same would not prevent institution
from validly being recognized as charitable trust.
[Director of Income Tax v. Bharat Diamond Bourse [2003] 259 ITR 280]
41
Religious Purpose
 It means a religious purpose within the meaning of the personal law
applicable to the assessee.
[Bai Hirbai Rahim Trust v. CIT [1968] 68 ITR 821 (Bom)]
[Saraswathi Ammal v. Rajagopal Ammal, AIR [1953] (CS) 491]
 Starting and maintaining a Sanskrit Pathshala or a Dharamshala or a
temple accessible to the public, or a Sadabrata i.e food distributed to
the public whoever may come and take it, or a piyau or kund where
water was available to everybody, hospitals or other charitable or
religious institutions are all charitable or religious purposes.
[Smt. Ganeshi Devi Rami Devi Charity trust v. CIT [1969] 71 ITR
696 (al)]
42
Religious Purpose
 Holding and maintaining of samadhs in reverence of guru where
people at large come and pay homage and worship at the samadhs,
also holding of mela at such samadhs to propagate and remind the
people of the teachings of the guru in whose memory the mela is
held.
[CIT v. Guryani Brij Balabh Kaur trust [1980] 125 ITR 381 (Punj.)]
[CIT v. Guryani Brij Balabh Kaur trust [1989] 178 ITR 615 (Punj.)]
 Provision of dinner to Brahmins on specified occasions is religious
purpose.
[CIT v. Ahmedabad Rana Caste Association [1973] 88 ITR 354
(Guj.)]
[CIT v. Ahmedabad Rana Caste Association [1983] 140 ITR 1
(SC)]
43
Religious Purpose

Public worship by itself will be a public religious object, but not if it is linked with
other objects like conduct of marriage, staging dramas.
[Ochira Temple Administration Board v. State of Kerala [1988] 171 ITR 429
(Ker.)]

Reciting prayers is a religious object but renovation of public hall for purposes of
settlor will lose benefit.
[Court Receiver v. CIT [1964] 54 ITR 189 (Bom.)]

Charities undertaken during religious occasions like Ramzan do not become
religious solely on this account.
[CGT v. Mecotronics Pvt. Ltd. [2000] 242 ITR 542 (Mad.)]
44
Religious Purpose

Ceremonies for repose of soul of founder and his wife alonwith other religious
objects cannot be treated as private because such ceremonies like ‘raogar’
and ‘muktad’ are for benefit of mankind.
[CWT v. Trustees of the J.P. Pardiwala Charity Trust [2965] 58 ITR 46
(Bom.)]

Section 13(1)(b) applied only to a charitable trust and not to a religious trust..
The test of this section will not be applicable to a religious trust who will,
therefore, be entitled to exemption under Section 11(1)(a)
[Income tax Officer v. Catholic Church [1982] 13 TTJ 200(Ahd.)]
45
Profit Motive

Justice Bhagwati, who delivered the majority judgement of the Supreme Court in
the case of Sole Trustee, Loka Shikshana Trust (1975) 101 ITR 234, 256
observed that “But where the predominant object of the activity is to carry out the
charitable purpose and not to earn profit, it would not lose its character of a
charitable purpose merely because some profit arises from the activity.”
In the same case the Ld. Judge observed that “it would indeed be difficult for
persons in charge of a trust or institutions to so carry on the activity that the
expenditure balances the income and there is no resulting profit. That would not
only be difficult of practical realisation but would also reflect unsound principal of
management”.

In CIT Vs. Thyaga Brahma Gana Sabha (Sri.) (1991) 188 ITR 160 (Mad.),
the court held that the exclusionary clause does not require that the activity must
be carried on in a such a manner that it does not result in any profit at all.
Charitable purpose would not loose its character merely because some profit had
arisen from the activity- Director of Income Tax (Exemption) vs. Shilpam
(1998) 230 ITR 126 (Cal.)
46
Care in Drafting of main objects of a Trust
 The objectives should be clearly defined.
 Where a trust is formed and the trust deed does not reveal any
specific object of a public, religious or charitable nature it shall
not be entitled to claim exemption under the Act (Additional CIT
Vs. Ganga Bai Charities (1983) 142 ITR 718 (Mad).
 Where the deed of creation of the voluntary organization was
not specific as regards the utilization of the income, the
organization was not entitled to claim any exemption under the
provisions of section 11 of the Act. (Assembly Rooms Vs. CIT
(2000) 241 ITR 76 (Mad)
47
Care in Drafting of main objects of a Trust

Objectives partly charitable

A trust created for providing benefit first for the relatives and balance
amount for charities and after death of the relatives to the applied
totally for charities was held not to have been formed for charitable
purposes as the trustees had absolutely discretion to apply the income
[Sarah Cherian Trust Vs. ITO (1987) 173 ITR 656 (Ker]

When there are several objects of a trust some of them being
charitable and some non charitable, and if the trustee could have
discretion in applying the trust income to any of the objects , whole of
the trust must be treated as non charitable and no part of the income
would be exempt from tax [South Indian Athletic Association Ltd. Vs.
CIT (1975) 107 ITR 108 (Mad)]
48
Care in Drafting of main objects of a Trust


Objectives partly charitable
Care should be taken as section 13(1) (c )(ii) also provides that any
part of the income or any part of the property of the trust or the
institution was during the previous year used or applied directly or
indirectly for the benefit of the members or their relatives or any
institution I in which the members have substantial interest, then the
exemption shall not be available .
49
Care in Drafting of main objects of a Trust

Beneficiaries should be properly defined.

It would be sufficient if the objects are for the benefit of a section
of the public as distinguished from individuals. It may be noted
that in order to become charitable, the relief should be for
section of the community which could be well defined and
identified by some common quality of public nature. If the class
is not properly defined or is ambiguous , then the object will not
be a valid charitable object. Refer decision in the case of
Sherwani Charitable Trust Vs. CIT (1968) 79 ITR 750( All)
50
Care in Drafting of main objects of a Trust

Scope and implication of general public utility
 In Bar Council of Maharastra Vs. CIT (1980) 126 ITR 27 (Bom), these
words were extensively debated. It was observed that word general
pertained to a whole class. The word public denoted the body of people
at large and the word utility meant usefulness . Therefore, advancement
of any object beneficial to the public as distinguished from an individual or
group of individual would be considered as charitable purposes.
51
Care in Drafting of main objects of a Trust

Ancillary / incidental objects being not for a charitable
purposes
 Even in such case exemption will be available so long as these
objects sub serve the main objects, which should be of religious
or charitable nature – CIT Vs. Jaipur Charitable Trust (1976)
103 ITR 777 (SC)
 Objects for carrying out business activity
The objects should be specified with the purpose of enabling the
trust to carry on business. At the same time, it should be clear
that the object of carrying out the business is only to subserve
the main objects of carrying out charitable work.
52
Income of Trust exempted under Section 11
Section
11(1)(a)
Nature of income
Income derived from property held under trust
wholly for charitable or religious purposes
Extent to which exemption allowed
To the extent income is applied to such
charitable or religious purposes in India.
Whereas such income is accumulated or set
apart for such application, to the extent of
15% of the income from such property.
11(1)(c)
11(1)(d)
Income derived from property held under trust for
a charitable purpose, which tends to promote
international welfare in which India is interested
To the extent income is applied to such
charitable or religious purposes outside India.
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.
100% exemption.
Exemption is available only if the Board has
directed such exemption.
In computing the 15% of the income which may be accumulated or set apart, any such voluntary contributions
as are referred to in Section 12 shall be deemed to be part of the income.
53
No exemption under Section 11
Section
Nature & extent of income not exempt under Section11
13(1)(a)
Income of private religious trust not used for public benefit.
13(1)(b)
Income of charitable trust created for benefit for particular religious community.
13(1)(c)
Income/ property of charitable or religious trust applied for direct or indirect benefit of person
referred in 13(3)
13(1)(d)
Any income, is taxable if
If any funds are invested other than in 11(5)
Any funds invested earlier than 1983 remain invested thereafter
Shares and company are held after 1983.
11(4A)
Income from business which is not incidental to the attainment of the objectives of the trust, or in
respect of which separate books of accounts have not been maintained.
12(2)
Value of medial/ education services provided to specified persons by trust running hospital and
educational institution shall be income of trust and will be chargeable in the year in which
services are provided and chargeable to tax, despite section 11(1).
54
Conditions subject to which income derived from property held under
trust is exempted under section11

Trust must have been created for any lawful purpose. The trust should not be
created for the benefit of any particular religious community or caste.

The trust should be registered with the Commissioner of Income Tax under
Section 12A

The property from which income is derived should be held under a trust by such
charitable or religious trust / institution. The property should be held wholly for
charitable purposes.

The exemption is confined to only such portions of the trust’s income which is
applied to charitable or religious purposes or is accumulated for applying to such
purposes in India.

85% of the income is required to be applied for the approved purposes and the
unapplied income and the money accumulated or set apart (in excess of 15% of
the income from such property) should be invested in the specified forms or
modes.

No part of the income should ensure, directly or indirectly, for the benefit of the
settler or other specified persons.
55
SECTION 10(23C) vs SECTION 11-13

Since section 10(23C)(iiiad) & (vi) provides for exemption only in case the
educational institution exists for educational purposes, will this exemption be
available to a society / trust running an educational institution as well as having
income from other charitable objects as defined u/s 2(15)

An educational institution could be regarded as an educational institution if the
society was running an educational institution. All the income of a society
running a college would not be exempt under section 10(22). Only the income
which has a direct relation or is incidental to the running of the institution, as
such, would qualify for exemption. It is not the entirety of the income of the
recipient, the trust in this case, but the income of the particular source, namely,
the educational institution, that comes within the purview of sub-section (22) of
section 10 of the Act
[Birla Vidhya Vihar Trust Vs. CIT (1981) 24 CTR (Cal) 307: (1982) 136 ITR
445 (Cal): TC32R. 734].
56
SECTION 10(23C) vs SECTION 11-13

LETTER OF MINISTRY OF LAW , JUSTICE & COMPANY AFFAIRS-DT 2211-1983
 The ministry in reference to a question as to whether the activities of an
association or institution engaged in promotion of sports & games can ,
independently of the provision of S.23, be considered as enuring for
charitable purposes within the meaning of S.2(15) of the IT Act.
 It has opined that Section 10(23) & 11 are not inconsistent with each
other and can operate simultaneously
57
Concept of ‘Corpus’

There is no judicial guidance on the subject as to what amount in the funds
of a trust will constitute its corpus.

According to Black’s Law Dictionary, it means “an aggregate or mass; physical
substance, as distinguished from intellectual conception; the principal sum or
capital, as distinguished from interest or income; the main body or
principal of a trust.”

The corpus ingredient constituted of the originally donated or settled capital
amount in the form of money, movable property or immovable property (which
might conveniently be termed as original corpus) plus any contribution
received by the trust with a specific direction that it shall form part of the
corpus of the trust.

To claim a donation to be a corpus donation it is necessary that a written
direction from donor is obtained.
58
Voluntary Contributions received by a Trust

The voluntary contributions received by a charitable or religious trust are to
treated as follows:
 Corpus Donations
Voluntary contributions made to a charitable or religious trust with a
specific direction that they shall form part of the corpus of the trust i.e
corpus donations do not form part of the total income of the trust as per
Section 11(1)(d).
 Contributions other than corpus donations
Section 12(1) states that any voluntary contributions (not being corpus
donations) received by a charitable or religious trust shall be deemed to
be the income derived from property held under trust wholly for
charitable or religious purposes. Such voluntary contributions would
therefore be eligible for exemption under Section 11(1) provided the trust
satisfies the conditions as prescribed under Section 11 and 13.

While corpus donations do not form part of total income, other voluntary
contributions are exempt from tax as per Section 11 and 13
59
Voluntary Contributions received by a Trust

Membership fees or subscriptions cannot be treated as voluntary contribution
as they are not the gratuitous payment by the member for any social purpose
or a payment without any constitution.
[Trustee of Shri Kot Hindu Stree mandal v. CIT [1994] 209 ITR (Bom.)]

Where a trust received voluntary contribution with specific direction that it
should form a part of the trust corpus, the trust will not loose exemption if the
contribution is applied for meeting running expenses.
[Dharma Pratishthanam v. ITO [1985] 11 ITD 40 (Delhi)]

Where a charitable trust received donations from different donors who had
specifically directed that the donations were to remain as corpus of the trust,
the trust will not be precluded from using those receipts for making donations
to other charitable trusts. Section 12 does not recognize such receipts as
income of the trust for the purpose of Section 11.
[ITO v. Abhilash kumari Public Charitable Trust [1987] 28 TTJ 523 (Delhi)]
60
FORMS OF REGISTRATION
In India, various options of registration of an Organization
are available. The most convenient & popular form of
registration is under “The Societies Registration Act,
1860.”
An organisation can also be registered as a Trust under the
Registration Act, 1908
OR
Section 25 company registered under the Companies Act,
1956
The above mentioned forms of registration are prevalent in
India and one has to choose keeping in view the purpose and
size of the organisation.
61
REQUISITES
1. REGISTRATION
2. DOCUMENTS TO BE FILED
3. NOTICE TO BE PUBLISHED IN NEWSPAPER
4. APPROVAL AND REGISTRATION
5. ALTERATION OF MEMORANDUM
6. ANNUAL COMPLIANCES
7. THE RIGHT AND LIABILITIES OF MEMBERS
62
Application of Income
 The exemption under Section 11 is available only if the income
derived from property held under trust is ‘applied’ to the charitable or
religious purposes.
 Income must be available for application. TDS cannot be considered
as income. CIT V.Jayshree Charity Trust 1985 Tax LR 247 (Cal)
 The application of income need not necessarily result in expenditure.
Therefore, an amount irretrievably earmarked or allocated for the
purposes of the trust or institution is also treated as applied even
though it has not been actually spent.[CIT Vs. Trustees of the HEH
Nizams Charitable Trust (1981) 131 ITR 497 (AP)]
 Application need not necessarily result in revenue expenditure. Even
capital expenditure is considered to be application of income for the
purposes of Section 11if it is incurred for charitable purposes.[CIT v.
Kannika Parameshwari Devasthanam & Charities [1982] 133 ITR
779 (Mad.)]
63
Instances of Application of Income

Administrative expenses incurred for the purpose of carrying out objects and
purposes of the trust.
[CIT v. Birla Janhit Trust [1994] 208 ITR 372 (Cal.)]

Capital expenditure on purchase of a building to be utilized as a hospital for
promotion of the charitable purpose.
[CIT v. S.Rm.M.ct.M. Tirupanni Trust Trust v. CIT [1998] 230 ITR 636 (SC)]

Deficit arising out of excess of expenditure over income during a particular year
should be set off against surplus relating to subsequent year CIT Vs. Mahrana of
Mewar Charitable Foundation (1987) 164 ITR 439 (Raj)
64
Instances of Application of Income

Depreciation on various assets of the trust is deductible even if the cost of the
assets has been fully allowed as application of income in past years. [CIT v.
Institute of banking Personnel Selection (IBPS) [2003] 131 Taxmann 396
(Bom.)]

Repayment of loans originally taken to fulfill objects of the trust. [CIT v.
Jnambhumi Press Trust [2000] 242 ITR 457 (Kant.)]. However, the loan is
returned , it should be treated as income of the organization in the previous
year in which it is received. [CIT Vs. Kuchhi Menon Union (1985) 155 ITR
51 (Kar)]

Donation to other charitable trusts out of current year’s income. However,
donation out of income accumulated or set apart is not treated as application
of income and is taxed accordingly. [CIT v. Aurobindo Memorial Fund
Society [2001] 247 ITR 93 (Mad.)]
65
Instances of Application of Income

Section 10(1) of the Act excludes agricultural income. Agricultural income will
not form part of total income for the purpose of computing the accumulation of
income in excess of 15% of the total income as laid down in sec 11- CIT V.
Nabhinandan Digamber Jain(2002) 257 ITR 91(MP)
66
Application out of composite fund

In CIT Vs. Ashoka Charity Trust (1982) 135 ITR 556 (Cal), there existed a
composite fund consisting of income from property held under trust and non
includible voluntarily contributions. Out of such fund, the expenditure /
application to charitable purposes existed the income received from property
held under trust. The entire application was allowed and the contention of the
AO to apportion such application on pro-rata basis disallowed.

Similarly, it has been held in the case of CIT Vs. Silk & Art Silk Mills
Association Ltd. (1990) 182 ITR 38 that expenditure for the objects of the
trust should be first deemed to have been made out of the assessable income
and balance, if any , should be deemed to have come out of non-assessable
income. In such circumstances pro-rata basis cannot be adopted.
67
Non Application Of Income Despite Extension Of Periodtaxability Thereof
 11(1B): Non utilization of income in case of
explanation to section 11(1A).
clause (2)(a)(i) to
 11(1B)(a): Taxable in the year immediately following the
previous year in which income was received.
 11(1B)(b): Taxable in the year immediately following the year in
which income was derived.
68
Conditions Of Accumulation
 11(2): Accumulation of unapplied income.
 11(2)(a): Application for accumulation upto 10 years.
 11(2)(b): Accumulated income to be invested as per 11(5)
 Proviso-1: Period of stay from court to be excluded in calculating
10 years.
 Proviso-2: 10 years to be substituted 5 years in case of income
accumulated after 1-4-2001.
 Explanation: Accumulation for benefit of exempted institutions
u/s 12AA and 10(23) shall not be treated as application.
69
Conditions of Accumulation
 Section 11 (2) not to restrict operation of section 11(1)
 In the case of Addl. CIT Vs. A.L.N. Rao Charitable Trust (1995)
216 ITR 697 (SC), it is been held that accumulated income which
is exempt under section 11(1)(a) need not be invested in
Government Securities.
 Belated Applications For Accumulation
 CIRCULAR NO. 273
The board has passed a general order U/S 119(2)(b) – No.180/57/80IT(AI) by which the CIT has been authorized to admit belated
applications U/S 11(2) r/w r.17 of the IT rules if certain conditions are
satisfied.
70
Taxability Of Accumulated Income – in which year?

11(3)(a): Applied for purposes other than charity or ceases to be accumulated
or set apart for charity – taxed in such year of application.

11(3)(b): Ceases to be invested in 11(5) – taxed in year of cessation.

11(3)(c): Is not utilized for the purpose for which it was accumulated, by the
expiry of the year immediately following the period of accumulation – taxed in
year immediately following expiry of period aforesaid.

11(3)(d): Is credited or paid to exempted trust – taxed in year of credit or
payment.
71
Application To Change Purpose Of Accumulation
 11(3A): In case of 11(2), if the income can not be applied for the
purpose for which it was allowed to be accumulated, then an
application can be made to change the purpose of
accumulation.
 Proviso1: The changed purpose can not be for payment to
exempted trust.
 Proviso2: Accumulated funds of dissolved trust can be credited
or paid to exempted trust in the year the accumulating trust was
dissolved.
72
Treatment of capital gains

Section 11(1A) first caters to two main situations, viz.
 where the capital asset is property held under a Trust wholly for charitable
or religious purposes;
 where the capital asset is held under a Trust in part only for such
purposes

Within these main situations, the provision also caters to the following sub
situations:
 where the whole of the net consideration is utilized in acquiring the new
capital asset;
 where only a part of the net consideration is utilized for acquiring the new
capital asset.

In respect of each of these sub-situations under the main situations, the
section spells out the quantum of income which will be deemed to have been
applied to charitable or religious purposes.
73
Treatment of capital gains
 Income’, as defined under section 2(24), includes Capital Gains,.
Therefore, for the purposes of section 11(1)(a), Capital Gains are also
considered as a part of the income. Since, Capital Gains are also
considered as a part of the income, therefore, they can be applied for
charitable or religious purposes.

Under section 11(1A), if the entire amount of net consideration is
invested in another Capital Asset then, the entire Capital Gain will be
deemed to have been applied for Charitable or Religious purposes.
 Under section 11(1A), if a part of the entire amount of net consideration is
invested in another Capital Asset then, the appropriate fraction of the
Capital Gain will be deemed to have been applied for charitable or
Religious Purposes.
74
Treatment of capital gains

The Capital Gain have to be re-invested in another Capital Asset in the same
year, unless the assessee exercises the option available under explanation to
section 11(1), to apply the income in subsequent year.

Investment in fixed deposit is considered as an investment in Capital Asset. The
CBDT instruction no. 883, dated 24.09.1975, specifies that, such fixed deposits
should be for 6 months or more. But, various High Courts have held that, such 6
months time limit is legally not valid. The nature of asset is important and not the
time frame.

No time limit has been provided under section 11(1A), for retention of the new
asset. Under the prevailing provisions each year’s income and application are
treated separately for the purposes of exemptions. Therefore, if the asset is held
till the end of the relevant previous year and is disposed of in the subsequent
year, then the exemptions cannot be denied nor can they be withdrawn in the
next year.
75
Treatment of capital gains
Illustration 1
The following illustration clarifies the treatment of capital gains under section 11(1A).
Cost of the Asset
Rs. 40,000/-
Sale Proceeds/Net consideration
Rs. 1,00,000/-
Re-investment in Capital Assets
(i) Rs. 80,000/(ii) Rs. 1,00,000/-
Solution 1
The computation of capital gain deemed to have been applied for the purposes of section
11(1)(a) is as under :
(i) Net consideration
1,00,000
1,00,000
(ii) Cost of the Asset
40,000
40,000
(iii) Capital gains
60,000
60,000
(iv) Investment in New Asset
80,000
1,00,000
(v) Shortfall in re-investment (i) - (iv)
20,000
Nil
(vi) Capital gains deemed to have been applied
for charitable purposes (iii) - (v)
40,000
60,000
76
Business Income of a Trust

Section 11(4) provides that a business undertaking held by a trust will be
treated as a property held under a trust.

Where a claim is made that the income of any business shall not be included
in the total income, the AO shall have the power to determine the income of
such undertaking in accordance with the provisions of the Act relating to the
assessment. (i.e. as per Section 28 to 44 )

Where any income so determined is in excess of the income as shown in the
accounts of the undertaking such excess shall be deemed to be applied to
purposes other than charitable or religious purposes and thus, it will be liable
to be taxed accordingly.
.
77
Business Income of a Trust
 As per Section 11(4A), the income earned by a trust from any
business activity shall be exempted from tax provided the following
conditions are satisfied:
 The business carried on is incidental to the attainment of the objects of
the trust and
 Separate books of accounts are maintained in respect of such business
 It has been held in [CIT v. Thanthi Trust [2001] 247 ITR 785 (SC)],
that a business whose income is utilized by the trust for the purpose
of achieving the objectives of the trust is, surely, a business, which is
incidental to the attainment of the objectives of the trust. In any event
if there is an ambiguity, the provision must be construed in a manner
that benefits the assessee.
78
Rental Income of a Trust
 Rent derived from additions to trusts buildings is exempt from tax
when rent was used for religious purposes.
 The words applied is wider in import than the word expenditure.
Expenditure means disbursement, paying out, distribution or
spending. The money or amount will not go out irretrievably when it is
applied to a purpose. The construction of the building was for the
purpose of getting some income by way of rent and such income
would be applied to the charitable or religious purposes. The purpose
was sufficient for satisfying Section 11(1).
[CIT v. St. George Forana Church [1988] 170 ITR 62 (Ker.)]
79
Rental Income of a Trust
 It has been held that letting of Dharamshala’s , auditoriums, running
of libraries, etc. could not be considered as business activities and
any income generated from such activities should be considered as
income from properties held under trust . In CIT Vs.Ganesh Ram
Laxminarayan Goel (1984) 147 ITR 468 (MP), it was held that letting
out of dharamshala’s was an activity towards attainment of the
objects of the organisation and profit making was not the profit motive
and therefore it could not be considered as business activity.
80
Section 13 (1)(a)
 The exemption under the head religious trusts has always been
available only in respect of religious trusts which enure for the
benefit of the public.
 Where the trust is for private religious purposes, the exclusion
did not and does not apply to that part of the income from
property held under trust which does not enure for the benefit of
the public.
[CIT v. Bengal Mills & Streamers Presbyterian Assn [1983]
140 ITR 586 (Cal.)]
81
Section 13(1)(b)
 This section enacts that income of a trust or charitable institution
created or established after 1.4.1962 for the benefit of any
particular religious community or caste is not excluded from its
total income.
In [CIT v. Shri Maheshwari Agarwal Marwari Panchayat
[1982] 136 ITR 556 (MP)] it was held that since the trust was for
a particular religious community, the provisions of section
13(1)(b) were not applicable as they apply only to charitable
trusts. As per this interpretation, 13(1)(b) will not apply in case of
religious or both Religious & charitable trusts.
82
Section 13(1)(c)
 Where a part of income of the charitable or religious trust or
institution enures or is used or applied, directly or indirectly, for
the benefit of the settlor, founder and certain other specified
persons is not eligible for exemption.
[Director of income tax v. Bharat Diamond Burse [2003] 259
ITR 280 (SC)]
83
Section 13(1)(d)
 The income of any charitable or religious trust will not be entitled to
exemption under section 11 or 12 if, for any period during the previous
year:
 Any funds of the trust are invested after 28.02.1983, otherwise
than in any one of more of the forms specified in 11(5);
 In [CIT v. ALN Rao Charitable Trust [1995] 216 ITR 697 (SC)], it was
held that accumulated income which is exempt u/s 11(1)(a) need not
be invested in the Govt. Securities; it is only in respect of any
additional accumulated income beyond 15% that, if the assessee
wants exemption of its additional accumulated income also, the
assessee is required to invest the additional accumulated income in
the manner laid down in section 11(5)
84
Anonymous Donations

Anonymous donations of the following entities shall be included in the total
income u/s 115 BBC and taxed at the rate of 30%.
(i) any trust or institution referred to in section 11;
(ii) any university or other educational institution referred to in section
10(23C)(iiiad) and (vi) i.e. its annual receipts is less than or more than Rs. 1
crore;
(iii) any hospital or other institution referred to in section 10(23C) (iii a e) and (vi
a) i.e. its annual receipts is less than or more than Rs. 1 crore;
(iv) any fund or institution referred to in section 10(23C)(iv); (established for
charitable purpose)
(v) any trust or institution referred to in section 10(23C)(v). (established for public
religious purposes or public religious & charitable purposes )
85
Anonymous Donations

Anonymous donations not covered under section 115BBC
The following anonymous donations shall, however, be not be covered
under section 115BBC:
(a) donations received by any trust or institution created or established
wholly for religious purposes.
(b) donations received by any trust or institution created or established for
both religious as well as charitable purposes (other than any
anonymous donation made with a specific direction that such donation is
for any university or other educational institution or any hospital or other
medical institution run by such trust or institution.)

The term "anonymous donation" is defined to mean any voluntary
contribution, where the person receiving such contribution does not
maintain a record consisting of the identity of the person making such
contribution indicating the name and address of the person and such other
particulars as may be prescribed. Such anonymous donations will be taxed
@ 30% (to be increased by surcharge as applicable and education cess.)
86
Birds eye view of provisions of section 11
Income from permissible
Income from property
held under trust including
voluntary contributions
Section 11(1)(a)
Income from property
partly held under trust,
Income from voluntary
for trust formed before
contributions towards
1.4.1962 Section11(1)(b)
corpus Section 11(1)(d)
business activity Section 11(4A)
Capital Gains Section 11(1A)
option to apply under section
11(1)(a) can also be exercised
< 85% applied
> 85% applied
Investment of the capital
Total amount to be
gain in new capital assets
accumulated being > 15%
Permission u/s 11(2) for
Accumulation of income upto 15%
accumulation in excess of 15%
Accumulation for indefinite period
Accumulation for a period of 5
years only
Application after 5 years for
charitable purposes
Mode of investment as specified u/s 11(5)
Mode of investment can be other than as u/s 11(5) to the extent the income remains invested in
business as per clause (iii) of the proviso to section 13(1)(d)
87
Legal Compliances
Basis of differences
Section 10(23C)
When is Application
required to be made?
Required to be made by
educational institutions where:
Gross annual receipt exceeds
Rs. 1 crore; or
Section 12 AA
Section 80G
Required to be made by all
NGOs in order to claim
exemption u/s 11
Required to be made by all
NGOs which wishes to take
the benefit under this
section
Is not substantially financed by
the Government.
Form for the above
Application
Form 56 D
Form 10 A
Form 10 G
Rules applicable
2CA
17A
11AA
Time limit for filing of
application
Before the end of the previous
year
Before the end of the previous
year
NA.
Time limit for
approval
Within 12 months from the end
of the month
in which
application is received
Within 6 months from date of
application
Within 6 months from date
of application
Time period for
exemption
Lifetime
Lifetime
Upto 5 Years
Withdrawal of
approval
By CCIT
By CIT
N.A
88
Legal Compliances
Basis of differences
Section 10(23C)
Section 12
Section 80G
Exemption w.e.f.
The year in which it is granted
and thereafter
The year in which it is
granted and thereafter
AY as specified in
order
Appeal on rejection
Not provided
Lies to Appellate Tribunal
Lies to Appellate
Tribunal
Form of Audit Report
Form 10BB (Rule 16CC)
Form 10B (Rule 17B)
Form of Application for
accumulation
Not prescribed
Form 10
Last date of filing of form
for accumulation
Before the due date of filing of
return u/s 139
Before the due date of filing
of return u/s 139
Power to condone belated
application
No
No
Form for filing of return
ITR 7
ITR 7
Note: In case of Private Trusts the Return has to be filed in ITR 5
89
Legal Compliances-Audit

Audit
 If the income of the trust before giving effect to exemption under Section
11 and 12 exceeds Rs. 50,000 then the accounts of such trust are to be
audited and the audit report is to be furnished in the prescribed form
(Form 10B)
 For the purpose of computing aforesaid limit of Rs. 50,000, corpus
donations will be included while incomes exempt under any provision
other than Section 11 and 12 (e.g. Section 10) will not be included.
 A charitable institution was registered under Section 12A(a). It was held
that the AO was not justified in refusing benefit of exemption under
Section 11 on the ground that trust had violated provisions of Section
12A(b) by not filing audit report in Form No. 10B along with its report of
income.
[Calcutta Management Association v. ITO [1992] 42 ITD 62 (Cal.)]
90
Legal Compliances-12AA

Procedure for Application [Section 12AA]
 On receipt of an application for registration of a trust made under Section
12A, the Commissioner shall:
 Call for requisite documents or information from the trust or institution in
order to satisfy himself about the genuineness of activities of trust and
may also make requisite enquiries in this behalf; and
 After satisfying himself about the objects of the trust and the genuineness
of its activities, he shall pass an order in writing registering the trust, or if
he is not so satisfied, pass an order in writing refusing to register the trust.
A copy of such order shall be sent to the applicant.
 However, an order refusing to register the trust shall only be passed after
the applicant has been given a reasonable opportunity of being heard.
91
Information to be submitted for 12AA
As per Form No. 10A, the following information needs to be
submitted.
Name & Address of founders / authors
Date of creation of trust
Name & address of trustees
Certified copy of instrument of trust
Copies of accounts for last 3 years
92
Legal Compliances-80G
 Registration [Section 80G]
 An application in triplicate in Form 10G should be filed with
the CIT or DIT (Exemption), alongwith the following
documents:
 After receiving the application the CIT or DIT(E) may call for
a report from AO and if he is satisfied that the conditions
mentioned in 80G(5) (i) – (v) he will issue a certificate for
allowing deduction u/s 80G to the donors making donations
to the applicant trust for a period upto 5 years as may be
ordered by him.
 After expiry of the time for which the deduction u/s 80G is
granted, a fresh application for renewal has to be made in
the manner mentioned above.
93
Information to be submitted for 80G
As per Form No. 10G, the following information needs to be
submitted.
 Legal status of the institution/ fund








Objects and geographical area of activities
Name & Address of trustees
Status of approval under 12A / 10(23)
Status of last approval under 80G
Change in objects if any since last approval
Details of assessments, arrear taxes, accumulations
Details of investments, business income, violations of section 13 etc.
Notes on activities for last 3 years alongwith accounts.
94
Legal Compliances
 Registration u/s 12A cannot be denied on the ground that the objects
or the activities of the trust are of public religious purposes
[New Life in Christ Evangelistic Association v. CIT [2000] 246 ITR
532 (Mad.)]
 W.e.f. AY 2000-01 a trust can be registered u/s 80G even if upto 5% of
its total income of the PY is spent for religious purposes. However,
upto AY 1999-2000, registration u/s 80G could be denied if one or
more of its objects was wholly or substantially attributable to religious
purpose.
[Upper Ganges Sugar Mills Ltd. V. CIT 227 ITR 578 (SC)]
95
Taxability of a Public Trust at a glance
Sources of Income
Under
Section
Tax
Rates
Voluntary Contributions (being corpus donations)
11(1)(d)
Exempt
Income not applied / accumulated to the extent > 15%
11(1)(a)
AOP Rate
Income received on 31st March carried forward to next year for utilization
but not utilized in that next year [Explanation 2(b) to Section 11(1)(d)]
11( 1B)
AOP Rate
11(3)
AOP Rate
11(4)
AOP Rate
Income accumulated
another trust
u/s 11(2) is not invested / utilized / donated to
Excess Business Income as assessed by the AO
Income derived u/s 13(1)(a) & 13(1)(b)
AOP Rate
Income derived u/s 13(1)(c) & 13 (1)(d)
MMR
Anonymous Donations u/s 115BBC
30%
96
Taxability of Public Trust
Taxability of Public trusts
Income is not exempt u/s 11 or 12
Exemption u/s 11 or 12 is forfeited
Section 164(2)
due to contravention u/s 13(1)(c) or
13(1)(d)
Section 164(2)
Taxable at the rates applicable in
Taxable at the Maximum Marginal rate
case of AOP
97
Tax rates applicable to Public Charitable or Religious
Trust

Where income is not exempt under section 11 or 12 [Section 164(2)]
Taxable at the rates applicable in case of an AOP

Where exemption under Section 11 or 12 is forfeited due to contravention
under Section 13(1)(c) or 13(1)(d) [Section 164(2)]
Such income is taxable at maximum marginal rate.
However, in the case where the assessee is not entitled to exemption under
Section 11 or 12, by virtue of the provisions contained in Section 13(1)(b), the
maximum marginal rate does not become applicable. The income will then be
charged on rates specified for an association of persons as provided under
Section 164(3)
[ITO v. Gurjar Pushkarna Vidyotejak Mandal [1988] 30 TTJ 610 (Ahd.)]
98
Tax rates applicable to Public Charitable or Religious
Trust

A trust will attract MMR of tax only on that part of the income which has
forfeited exemption under the above circumstances and not on the entire
income of the trust.- Director of Income tax ( Exemption) V. Sheth Mafatlal
Gagalbhai Foundation Trust (2001) 114 Taxmann 19 ( Bom)

In Gurdayal Berlia Charitable Trust V.fifth Generation Trust v. fifth ITO
(1990) 34 ITD 489, Bombay, the tribunal observed that only the income from
unapproved investment would be Taxable at MMR.
99
Taxability of Private Trust
Taxability of Private trusts
Shares of beneficiaries are determinate [Section 161]
Shares of beneficiaries are indeterminate [Section 164(1)]
Where income does not
Where income
Where income does not
Where income
include business profits
includes business profits
include business profits**
includes business profits
The trustee is assessable
The whole of the income
The income of the trust is
The whole of the income
at the rates applicable
of the trust is taxable at
Taxable in the hands of
of the trust is taxable at
to each beneficiary
Maximum Marginal Rate
trustees at the rates
Maximum Marginal Rate
Applicable to an AOP
** Note: Subject to conditions as specified in the following slides
10
Taxability of a Private trust
 Where shares of beneficiaries are determinate or known (Section
161)
 Where income does not include business profits [Section 161(1)]
The trustee is assessable at the rates applicable to each
beneficiary.
 Where income includes profits from business [Section 161(1A)]
The whole of the income of the trust is taxable at maximum
marginal rate.
However, if such profits from business are receivable under a trust
declared by any person by ‘will’ exclusively for the benefit of any
relative, dependant on him for support and maintenance and such trust
is the only trust so declared by him, then, the trustees shall be
assessable at the rates applicable to each beneficiary.
10
Taxability of a Private trust

Where shares of beneficiaries are indeterminate or unknown i.e. in case of
discretionary trust [Section 164(1)]
 Where income does not include profits from any business and if:
 None of the beneficiaries has taxable income exceeding maximum
amount not chargeable to tax or is a beneficiary in any other trust; or
 The income is receivable under a trust declared by any person by
will and such trust is the only trust so declared by him; or
 The income is receivable under a non testamentary trust created
before 1.03.1970 exclusively for the benefit of relatives of settlor, or
member of HUF, who are mainly dependant upon settlor; or
 The income is receivable by trustees on behalf of a provident fund,
superannuation fund, gratuity fund, pension fund or any other bona
fide fund created by the employer carrying on business or
profession for the benefit of his employees,
Then, income of the trust is taxable in the hands of trustees at the
rates applicable to an AOP. In any other case, income is taxable at
the maximum marginal rate.
10
Taxability of a Private trust

Where shares of beneficiaries are indeterminate or unknown i.e.
in case of discretionary trust [Section 164(1)]

Where income includes business profits:
The whole of the income of the trust is taxable at the maximum
marginal rate.
However, if such profits from business are receivable under a trust
declared by any person by ‘will’ exclusively for the benefit of any
relative, dependant on him for support and maintenance and such trust
is the only trust so declared by him, then, the trustees shall be
assessable only at the rates applicable to an AOP.
10
NGO- DEFINITION
As per World Bank-Private Organizations that pursue
activities to relieve suffering, promote the interest of
poor, project the environment , provide basic social
services or undertake community deployment
NGOs are mainly engaged in religious, education /
medical related services, community services
Also known as NPOs, NFPOs, VOs, VDOs, NGDOs,
also Government promoted GONGOS,
NGOs- Organisational Structure
PEOPLE
GOVT.
NGO
DONORS
ORGANISATION
GENERAL BODY
GOVERNING BODY
EXECUTIVE TEAM
BENEF.
NGO-NATURE

NGOs are Societies registered under Societies Registration Act
1956, Central or Respective state act or

Public Trusts registered under Indian Trust Act 1882 or

Section 25 Companies or

Mutually Aided Cooperative society Or

Self Help Groups
NGOs – Some Facts

There are around 1.2 million NGOs.

Employ nearly 20 million persons on paid or volunteer
basis

Main source of receipt are Government/ International
Grants, Donations, Self Generated funds.

Nearly 60% of NPOs are engaged in religious education
and community related services.

Estimated more than 5000 cr coming from Foreign
sources.
NGOs – Areas of work in NGOs

Statutory and Internal Auditors and Tax Auditor if doing
business like book shop or pharmacies

Auditors on behalf of Donor or other funding agencies

Advisor on Financial Management

Finance Manger / CFOs

Senior Management Team Member/ CEOs

Member of Advisory Board, Governing Body
NGOs – As Statutory/ Internal Auditor

There are separate audit procedures under Society
Registration Act , Indian Trust Act , Companies Act 1956 ,
Mutually Aided Cooperative Society, Income Tax Act and
FCRA.

Audit Under I.T.Act-If total income exceeds 50000 audit u/s
12A(b).Audit Report in Form 10B.Here CA may suggest
about application of income , accumulation of income,
investment of funds, filling application for accumulation of
funds.

Audit under FCRA-Audit by organization receiving foreign
contribution. U/r 8(2) FCRR 1976.Audit Report in Form
FC3
NGOs-AUDIT ON BEHALF OF DONOR OR OTHER
FUNDING AGENCIES

Audit as per agreement-It may contain various provisions like
purpose of grants, manner of utilization, time frame

In some case Special Purpose Audit also.
NGOs-What is income
 Section 2(24)(iia)-Income includes voluntary
contribution received by religious trusts etc.
 Main source of income are donations , voluntary
contributions, subscriptions fees, capital gains,
PGBP, income from property held under trust,
and corpus donations.
 Section 2(24)(iia) read with section 12- Corpus
donations with a specific instruction that this
donations shall form part of corpus of trust – not
to include in income.
NGOs-Accounting Aspects
 Para 13 of AS 12-Accouting for Govt Grants –
Grant should not be recognized as income until
there is a reasonable assurance that (1)
Complying of conditions (2) Grant will be received.
AS 12 not applicable on NGOs. Still same
principal should be followed.
 Grant Recognized as Income.
 Grant Recognized as Liability
 Grant Recognized as income to the extent it is
expended
NGOs – Applicability of AS
 According to the opinion given by ASB In 1995
 AS are applicable to on Commercial , Industrial
and business enterprises whether profit oriented
or for charitable purposes .
 Applicable even if small activities are commercial /
industrial/business in nature.
 Except AS-3,AS-17, AS-18, AS-23,AS-27,all other
AS are applicable.These AS are though not
mandatory though ought to be followed
NGOs- Some Issues Under I.T.Act-Depreciation-

Depreciation allowed even if whole of the amount incurred on
capital expenditure is allowed u/s 11.(DIT (Exemption) Vs
Franjee Cawasjee Institute (1993) 109 CTR (Bom) 463

Income chargeable under H/P-Deprecations Allowable(CIT Vs
Sheth Manilal Ranchhoddas Vishram Bhawan Trust (1992) 198
ITR 598 (GUJ)

FBT payable by NGOs if not having Reg U/s 12A or eligible for
exemption u/s 10(23C)
NGOs- Some issues under FCRA
 Foreign Source-Section 2(e)
 Indian Citizens Living Abroad-Donations from
them not from foreign source unless such person
has foreign citizenship. Period of stay is irrelevant.
So his contribution will be from Indian sources if
he has no foreign citizenship.
 Contributions from companies of foreign countriesForeign Sources. Contributions from Subsidiaries
of Foreign companies formed in India – Foreign
Sources.
NGOs- Some Issues under FCRA
 All NGOs receiving FC to received clearance from
Ministry Of Home Affairs.
 Permission not needed Gift not exceeding 8000 per annum.
 Salary , wages or other remuneration for business
purposes
 Payment for International trade or business
transacted outside India.
 By way of gift or presentation received as member
of any Indian Delegation
NGOs – Some Issues under FCRA-Salient features of FC(M&C)Bill 2005
 Yet to pass
 Registration valid for 5 years.
 Restriction on Administrative expenses up to 30%
of FC
 Re-Registration of already registered societies
within 2 years.
 Provisions for suspension and cancellation of
registration certificates.
 Prohibitions on transfers of FC to other persons.
NGOs-Scope of work -Registration and Re- Registraions

Application in Form FC-8 for regular registration and Form
FC-1A for prior permission along with supporting
documents. Section 6 of FCRA

Office of I.B.visit , inspect accounts, ask questions, inquire
local police station .Confidential report to FCRA deptt.

Permission or rejection within 90 days. Opportunity

Application for reregistration.Or appel in HC within 60
days.

Application for prior permission more than once allowed if
required

If Registration is allowed separate bank account as given
in application would be opened and operated
NGOs-FCRA-Returns

Annual Return with Balance Sheet etc in duplicate duly
certified by CA giving details of receipt and utilisation of
Foreign Receipt.Return with Form FC-3 upto 31st July
every year to Sec,MHA.New Delhi

In this regard CA to certify

B/F FC at the beginning of the year

FC received

Unutlised FC

Maintenace of accounts as per S-13 and Rule 8(1)

Disclamer clause-That information furnished in this
certificate and B/S and R/P is correct
NGOs- Implication of Service Tax-VAT

If service covered under S-65(105) are provided than ST is
payable . Credit is allowed as in other cases also.

Pathological Labs run by NGOs are not liable to ST under head
Testing and Analysis Services.

If doing business than VAT is payble .Can take credit is allow
Audit of
Provident Fund
Trusts
S
AUDIT OF PROVIDENT FUND
TRUSTS
• Introduction
• Formation of PF Trusts
• Audit of PF Trusts
• Recent Changes and Challenges
Introduction
What is a Provident Fund ?
It is a mandatory, tax-qualified, defined,
contribution retiral benefit plan
wherein equal contribution
at the specified rate
is made by the employer and the employee
and the same is payable in lump sum on
retirement.
Introduction
Relevant Statutes are :
 Employees
Provident
Provisions Act, 1952
 Income
Tax Act,1961
 Provident
 Indian
Fund Act, 1925
Trusts Act, 1882
Fund
&
Miscellaneous
Introduction
Following three Schemes framed under the EPF & MP Act, 1952:
 Employees’ Provident Fund Scheme, 1952
- came into force from 1st November, 1952
 Employees’ Family Pension Scheme, 1971
- came into force from 1st March 1971
Later replaced by Employees’ Pension Scheme, 1995
with effect from 16th November, 1995
 Employees’ Deposit Linked Insurance Scheme, 1976
- came into force from 1st August, 1976
Formation of PF Trusts
Options
 Total
Compliance with RPFC
 Covered Trust for All Members
 Excluded Trust for Excluded Employees
with Approval under Schedule IV part A
of the Income Tax Act, 1961
 Trusts
for Both Covered and Excluded
Employees
Formation of PF Trusts
Definition :
"Excluded Employee"
an employee of the Company
to whom both of the following two conditions apply
at the time of the coverage of the Company under the
Employees' Provident Funds & Miscellaneous Provisions Act,
1952
or at the time of his joining the services of the Company,
whichever is later.
i His pay at the relevant time is more than Rs 6500/- per
month.
ii He does not have any current PF Balance.
Formation of PF Trusts
An Excluded Employees' Trust is one,
which does not come under the purview of the PF Department,
but its policies are framed based on the PF Act.
The regulatory Statute is the Income Tax Act, 1961.
 The rate of contribution by the member can be any amount
not exceeding his basic salary including DA (if any)

The employer can decide to contribute any amount up to
12%. Employer contribution above 12% is taxable in hands of
employees

Employee Contributions eligible for Sec. 88 rebate / 80C
Deduction Interest on Employer and Employee contributions
are tax free

However, withdrawls before completion of 5 years of
membership, become taxable in year of withdrawal with
condtitions.
Formation of PF Trusts
Apart from the financial benefits, some very
important benefits become available to employees
who are members of voluntary PF Trusts in
comparison to the unexempted establishments :
• Easy Availability of advances
• No hassles of Dealing with Public Departments
• Availability of Refundable advances
• Faster transfer of accumulations for outgoing
members
• Faster settlement of final dues
Formation of PF Trusts
Coverage
 Establishments employing 20 or more persons and engaged in
any of the 177 industries / Businesses specified.
 Co-operative Societies, employing 50 or more persons &
working without the aid of power.
 Establishments not coverable statutorily can opt for coverage.
 An establishment continues to be covered under the Act,
irrespective of fall in the employment strength.
 Since the Act applies on its own force to the establishments,
the employers are required to file the particulars in the
specified format for registration and allotment of business
number.
Formation of PF Trusts
When can a company opt to set up an Exempted Trust
?

Covered under the provisions of the PF &MP Act,
1952

Profit making Company

20 employees

Pass a Board Resolution

File for exemption with the RPFC

Apply to the CIT for recognition of PF Trust

On receipt of the approval from RPFC the Trust
can
comply as “Exempt”
Cost Benefits
Particulars Un-exempted
Establisment
(%)
Exempted Employees Trust
(%)
Administration
Charges
Inspection
charges
1.10
Nil
Nil
0.18
EDLI Charges
0.50
0.50
EDLI
Administration
Charges
Total Cost
0.01
0.01
1.61
0.69
Formation of PF Trusts

EPS deduction, to be paid to the RPFC cannot be
made
from the Employee's contribution.

The EPS deduction of 8.33% can be made only
from
the employer's contribution of 12% of Basic
and DA.

This is capped at Rs.6500/-
AUDIT OF PROVIDENT FUND TRUSTS
Contributions:
 Statutory rate of contribution is 12% of emoluments
(basic wages, dearness allowance, cash value of food
concession and retaining allowances if any,) in the case of 177
establishments.
 Rate of contribution shall be 10% in case of the following:
Brick, beedi, jute, guar gum factories, coir industry other than
spinning sector.
 Establishments declared as sick undertakings by BIFR.
 Matching contribution is to be collected from the employees
 Out of 12% (or 10% as the case may be) of the employer’s
share of contribution, 8.33% is to be remitted towards pension
fund.
 Employer is also required to pay a contribution of 0.5% of the
emoluments towards EDLIS’1976.
AUDIT OF PROVIDENT FUND TRUSTS
Specifics :
•
Interest Payment
•
Investment Pattern
•
Valuation of Securities & Amortisation of Premium
•
Settlements during the year
•
Advances / Loans
•
Meetings
•
Submission of Returns
•
Health of Securities
AUDIT OF PROVIDENT FUND TRUSTS
The Rate of Interest declared by EPFO
for FY 2003-04 and FY 2004-05
on PF contributions is 9.5% p.a.
An Exempted Trust cannot credit interest
less than the statutory rate of interest stipulated
even if the Trust is not able to earn the minimum interest.
In case of a shortfall, the Company has to make good the
deficit.
However, An Excluded Employees' Trust / Private Trust
may declare interest based on the earnings of the Trust.
Investment Pattern prescribed for Provident
Fund Trusts effective
April 1, 2003
25%
30%
Central Govt
State Govt.
PSU
Flexible
15%
30%
AUDIT OF PROVIDENT FUND TRUSTS
Effective April 1, 2005, vide Circular no F.No. 5(53)/2002ECB&PR
Dated: January 24, 2005
The Trustees, subject to their assessment of the risk-return
prospects, may, if they so decide, divide the total portfolio
under Central and State Government categories into tradable
and non-tradable categories.
Upto 10% of the total portfolio at the end of the preceding
financial year can be treated as tradable and may be used for
active management.
S
AUDIT OF PROVIDENT FUND TRUSTS
Provided that the tradable portfolio of Government securities
shall be marked to market and mutual funds, which have been
set up as dedicated funds for investment in Government
securities, shall be valued at Net Asset Value at the close of the
financial year.
Flexible portion being 30% may be invested in any of the three
categories as decided by their Trustees
Investment may be made in Shares of companies that have an
investment grade debt rating from at least two credit rating
agencies 5%
AUDIT OF PROVIDENT FUND TRUSTS
Valuation of Securities & Amortisation of
Premium :
Guidelines in AS 13 cannot apply to PF Trusts
Cost
Face Value
Cost or Market Value whichever is lower
Amortise Premium but not discount
AUDIT OF PROVIDENT FUND TRUSTS
Amortise Premium but not discount
Income exempt
Hold till maturity
Trade
Valued at lower of cost or market value
AUDIT OF PROVIDENT FUND TRUSTS
Settlements during the year
A member may completely withdraw the amount that has accrued in
his account if:
 He retires at the age of 58.
 He retires – god forbid – because of permanent and total
debilitation. This could be either mental or physical, but must be
‘permanent and total’ -- the scheme distinguishes between partial
and total disabilities.
 He immigrates or takes up employment abroad.
 His services are terminated because of retrenchment in the
company.
 He chooses to terminate his service under a voluntary retirement
scheme.
 The establishment he works for shuts down.
 The organisation he works for shuts down, and he joins one that
does not participate in the EPF scheme.
He can withdraw up to 90 per cent of the amount in his credit in the
year before he retires -- that is, between the ages of 57 and 58.
AUDIT OF PROVIDENT FUND TRUSTS
If an employee brings in a transfer from another
approved Provident Fund Trust or RPFC

then the service rendered with such an exemployer is counted.
 Settlement can be done only after a waiting period of
two months from the date of resignation

For members going abroad, settlements can be
done immediately

Settlements are immediate in case of female
members who resign from the services for the
purpose of getting married.
S
AUDIT OF PROVIDENT FUND TRUSTS
TDS on settlements





Any payment received from a Statutory Provident Fund,(i.e. to
which the Provident Fund Act, 1925 applies) is exempt.
Any payment from any other provident fund notified by the Central
Govt. is also exempt.
The Public Provident Fund(PPF) established under the PPF
Scheme, 1968 has been notified for this purpose.
Besides the above, the accumulated balance due and becoming
payable to an employee participating in a Recognised Provident
Fund is also exempt to the extent provident in Rule 8 of Part A of
the Fourth Schedule of the Income Tax Act.
There is no tax deduction if the member has put in five years of
continuous service with the employer (includes period of past
membership with previous employer/s if there is a transfer
received). Otherwise, the member is liable for deduction of tax
S
AUDIT OF PROVIDENT FUND TRUSTS
Advances / Loans from provident fund corpus:
 To buy life insurance policies.
 To buy land, or to build or buy a house.
 To repay any loans that he has taken to buy or build a
house.
 To finance the treatment or hospitalisation of self or any
member of the family.
 To finance the weddings or college expenses of his
children.
 In special cases, where the establishment he works for
is temporarily shut down, or if his services have been
terminated and he has challenged that termination in
court.
Loans are to be utilized for purpose else provision to add
back to income
AUDIT OF PROVIDENT FUND TRUSTS
Meetings : to be held once in a calendar quarter
Section 17(1A)(d) of EPF&MPAct, 1952
The Board of Trustees constituted shall :
(i) maintain detailed accounts
(ii) submit returns to the RPFC
(iii) invest the provident fund monies
(iv) transfer provident fund account of any employee
(v) perform such other duties as may be specified
S
AUDIT OF PROVIDENT FUND TRUSTS
Submission of Returns
 EPF&MP
 IT
Act
Act
AUDIT OF PROVIDENT FUND TRUSTS
Health of Securities
State wise exposure
90
82.93
80
Rupees in Lacs
70
60
50
40
30
20
20.51
12.30
10
0
ja
a
R
n
ha
t
s
rn
a
K
ak
at
a
sh
e
d
An
States
ra
h
d
a
Pr
PSU exposure
160
140
100
80
60
40
20
Public Sector Units
HD
SS
IC
IF
AB
0
BM
Rupees in Lacs
120
271.50
61.37
87.86
10.25
Sector
Ho
us
in
g
ig
at
io
n
Rupees in Lacs
Ir
r
150
100
50
0
Po
w
er
300
250
200
Fi
na
nc
e
Rupees in Lacs
Sector wise exposure
Redemption of Investments at maturity
250
213.41
200
150
105.28
81.44
100
65.40
45.14
50
22.06
20.56
Period of redemption
24 YEARS
15 YEARS
11 YEARS
10 YEARS
8 YEARS
7 YEARS
3 YEARS
0
2 YEARS
0.87
1 YEAR
Rupees in Lacs
140.00
Rating Profile Analysis
300
263.18
250
Amount in Lac Rs.
190.95
200
150
87.86
83.80
100
40.86
50
20.51
7.00
0
A
A-
A+
AAA
Rating
ASO
UNRATED
SOV
Recent Changes …..
and Challenges
 Auditors
change in two years
 Investment Pattern opened up
 Rate of Interest
 Accounting Standards
 Valuation of Investments
 FBT – SAF
AUDIT OF PROVIDENT FUND TRUSTS
Anamolies :
No authentic data available,
however,
Rs 1,40,000 crore with RPFC
Rs 1,40,000 crore in private trusts
S
Presented By
CA Swatantra Singh FCA, MBA
Email ID: [email protected]
New Delhi, (India)
9811322785
www..carajput.com