Chapter 10: Assessment of Trusts & Non-Profit Organisations
1. Charitable Purpose & 20% Commercial Ceiling (Sec 2(15))
Charitable purpose includes: (1) Relief of poor, (2) Education, (3) Yoga, (4) Medical relief, (5) Preservation of environment, (6) Preservation of monuments, and (7) Advancement of any other object of general public utility (GPU).
Proviso for GPU Trusts:
Carrying on any activity in the nature of trade, commerce, or business is permitted ONLY IF:
(a) The activity is undertaken in the course of actual carrying out of such GPU purpose, AND
(b) The aggregate receipts from such commercial activity do NOT EXCEED 20% of the total receipts of the trust in that previous year!
Carrying on any activity in the nature of trade, commerce, or business is permitted ONLY IF:
(a) The activity is undertaken in the course of actual carrying out of such GPU purpose, AND
(b) The aggregate receipts from such commercial activity do NOT EXCEED 20% of the total receipts of the trust in that previous year!
2. 15% Accumulation & 85% Application Mechanics
| Component | Statutory Mechanism | Procedural Compliance / Form |
|---|---|---|
| Unconditional Accumulation | Up to 15% of gross income can be accumulated indefinitely without any condition or investment restriction. | No form required. |
| Mandatory Application | At least 85% of gross income must be applied for charitable or religious purposes in India during the year. | Reflected in audited accounts. |
| Deemed Application (Form 9A) | Where 85% cannot be applied due to: (a) income not received during the year, or (b) any other reason. Income must be applied in year of receipt or immediately following year. | File Form 9A electronically before the due date u/s 139(1). |
| Specified Accumulation (Form 10) | Trust can accumulate unapplied income up to a maximum period of 5 years for specified purpose, provided funds are invested in Section 11(5) modes. | File Form 10 electronically before the due date u/s 139(1). |
3. Specified Violations Taxed u/s 115BBI
Specified incomes of trusts are chargeable to tax at a flat rate of 30% (plus 25% surcharge + 4% HEC = 39%) without any deduction or basic exemption:
- Income applied directly or indirectly for the benefit of interested persons u/s 13(1)(c) (Author, founder, trustee, substantial contributor).
- Income invested in prohibited modes u/s 13(1)(d) (Shares of private companies, non-scheduled banks).
- Income accumulated under Form 10 not utilized for the specified purpose within 5 years.
- Anonymous donations taxable u/s 115BBC (exceeding higher of ₹ 1 Lakh or 5% of total donations).
4. Exit Tax on Accreted Income (Section 115TD)
Levied at Maximum Marginal Rate (34.944%) on the Accreted Income of the trust upon trigger of any of the following events:
- Conversion into any form which is not eligible for registration u/s 12AB.
- Merger with an entity which is not a charitable trust with similar objects.
- Non-distribution of assets on dissolution within 12 months from end of month of dissolution.
$ ext{Accreted Income} = ext{Aggregate FMV of Total Assets} - ext{Total Liabilities computed under Rule 17CB}$.
• Tax must be paid within 14 days from the date of the trigger event.
• If tax is not paid within 14 days, interest u/s 115TE @ 1% per month is charged.
• Tax must be paid within 14 days from the date of the trigger event.
• If tax is not paid within 14 days, interest u/s 115TE @ 1% per month is charged.
5. High-Frequency Exam Traps
Trap 1: Corpus Donations to Other Trusts!
Donation to another trust with specific direction that it shall form part of the corpus of recipient trust is NOT TREATED AS APPLICATION OF INCOME u/s 11(5) explanation!
Donation to another trust with specific direction that it shall form part of the corpus of recipient trust is NOT TREATED AS APPLICATION OF INCOME u/s 11(5) explanation!
Trap 2: Delayed filing of Form 9A or Form 10!
Forms 9A and 10 must be filed at least two months prior to the due date of filing return of income u/s 139(1). Late filing leads to complete forfeiture of exemption!
Forms 9A and 10 must be filed at least two months prior to the due date of filing return of income u/s 139(1). Late filing leads to complete forfeiture of exemption!