Recent judgments relating to Trusts

Under general law, a ‘trust’ is defined as an obligation attached to the ownership of property, and arising out of the confidence reposed by the author of the trust in the trustees. In the Income Tax Act (hereafter referred to as the Act), however, the word has been used in a wider sense to include any other legal obligation, even where the legal requirements for creation of a trust are not strictly met.

Section 11 of the Act excludes income of a charitable or religious trust from the total income of the person in receipt of such income. Section 12 of the Act exempts the income of a charitable or religious trust derived from voluntary contributions and applicable solely to charitable or religious purposes. Section 2(15) defines that “charitable purposes” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and advancement of any other object of general public utility.

This article attempts to discuss few latest decisions of the judiciary on various aspects pertaining to charitable or religious trust :

Registration of Trust :

For availing of exemption under section 11 & 12 of the Act, registration of the trust or institution is a must. In the case of CIT v. U.P. Forest Corpn. [1998] 230 ITR 945/97 Taxman 259 (SC), it was observed that in order to take advantage of the provisions of section 11, a trust or institution has to get itself registered.

Cancellation of registration :

According to section 12AA(3) of the Act, if the CIT is satisfied that the activities of the trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, he shall, after giving reasonable opportunity of being heard to the concerned trust or institution, pass an order in writing cancelling the registration granted under the said section.

In the latest judgment of a High Court, the Bombay High Court in the case of DIT (Exemption) v. North Indian Association [2017] 79 taxmann.com 410 in its decision dated 14-02-2017 expressed the view that jurisdiction to issue a notice under section 12AA(3) would only arise if one of the two conditions for its exercise is satisfied, i.e., either the trust should not be genuine or the activities of the trust are not carried out in accordance with its objects.

In one of the latest decision on the issue from the ITAT, the ITAT, Mumbai Bench-B  in its decisions dated 08-02-2017 in the case of Bhakti Kala Kshetra v. DIT (Exemptions) [2017] 163 ITD 440/79 taxmann.com 66 (Mum.-Trib.), held that even if trust or institution was hit by monetary limits mentioned under section 2(15) w.e.f. 1-04-2009, the same would adversely affect entitlement of assessee towards claim for exemption under section 11 of the Act, but, the same cannot lead to cancellation/withdrawal of registration granted under section 12A/12AA of the Act. 

In the case of Vignana Jyothi v. Dy. CIT [2017] 81 tamann.com 204 (Hyderabad – Trib.), the ITAT, Hyderabad Bench held that trust registration could not be cancelled for receiving of voluntary donation (capitation fee) from students while seeking admission.

Filing of Form 10 during re-assessment :

In the case of CIT v. Sakal Relief Fund [2017] 81 taxmann.com 396 (Bombay), the Bombay High Court held that filing of Form 10 during re-assessment proceedings was same as it was filed within the time allowed for furnishing the return of income under section 139(4); intimation in Form 10 had to be filed before completion of assessment, and therefore, the benefit of accumulation under section 11(2) could not be denied if Form 10 was filed during the re-assessment proceedings. In the instant case, the assessee-trust filed its return of income consequent to notice issued under section 148 and Form 10 for the purpose of availing accumulation of income under section 11(2) was filed later during the course of assessment. Assessing Officer (AO) rejected Form 10 on the ground that the same was not filed with the return. Accordingly, the accumulation of income wasn’t allowed and the income was brought to taxation.

Non-filing of return and denial of trust’s registration :

In the case of CIT (Exemptions) v. Shri Shirdi Sai Darbar Charitable Trust (Dharamshala) [2017] 81 taxmann.com 49 (Punjab & Haryana), the Punjab & Haryana High Court held that denial of trust’s registration merely on the ground of non-filing of return in the earlier years was unjustified. In the instant case, CIT (Exemptions) denied registration to the trust on the ground that it had not filed any return of income for the earlier assessment years. The High Court held that the CIT (Exemptions) had to satisfy two conditions while granting registration under section 12AA, firstly, whether the objects of the assessee were charitable in nature and, thus, the activities were genuine.

Miscellaneous :

In the case of DIT (Exemptions) v. Shree Nashik Panchvati Panjrapole [2017] 81 taxmann.com 375 (Bombay), it was held that where the dormant activity carried out by the trust was to take care of old, sick and disable cows, any incidental activity of selling milk which might have resulted in receipt of money, by itself would not make it trade, commerce or business nor an activity in the nature of trade, commerce or business to be hit by the proviso to section 2(15).

In the case of CIT v. Seth Anandram Jaipuria Edu. Society Cantonment [2017] 80 taxmann.com 96 (Allahabad), the Allahabad High Court has held that grant of scholarship to deserving students to pursue higher studies was charitable in nature.