Know all the Restrictions on the Charitable Trust

This blog will focus on some common issues that every litigant should be responsive to draft the provisions of a Deed. At all the time, lawyers must take the vision to modify the restricted charitable Trust to fit the factual setting and needs as per the specific donor, or charitable donor as the case may be. 

What are Restricted Gifts?

• If a charitable trust accepts a gift subjected to a restricted charitable trust, in those cases, the charity gets legally bound by those limits and restrictions. Whether the Trust understands it or not, receiving these kinds of gifts, tends to establish a particular purpose for charitable Trust and trustee. It will get subjected to the legal regime governing such charitable trusts. 
• Some general types of restricted charitable trusts comprise endowments, long term funds, scholarship funds, building funds, as well as donor instructed funds that often get placed with community foundations.

What are the restrictions on charitable purposes?

Moreover, there are also some restrictions on the use of charitable trusts. Such as, these Trust must be devoted entirely and exclusively to the charitable purposes of the Trust. Likewise, if it is not seen in such a way, the trustee would have the discretion to use the funds for either charitable or non-charitable (i.e., invalid) objectives. It will lead the Trust to be Void. 

What do you mean by Restriction on Sufficient Wordings?

• There are cases where addresses, whether a trust is devoted exclusively to charitable purposes, focus on the wording of the Trust or not. It is because the courts have interpreted terms such as objects of liberality, benevolent objects, and charitable purpose as not referring exclusively to “charitable purposes”. 
• In every case, the court will search for the stated well as the expressed intention of the creator of Trust. Concerning the above, drafter of charitable purpose trusts has a responsibility to certify that the wording of the Trust is sufficient to support the verdict of a charitable purpose trust.

What do you mean by a restriction on Political Purposes?

Besides, trusts for political purposes are invalid even if it is otherwise for charitable purposes. “Political purposes” does not mean merely direct political party movements; it also takes account of the promotions of political ideas and any efforts to influence the legislative or executive procedures. 

What do you mean by Restricted Charitable Gift?

• A restricted charitable gift usually means a gift to a charitable purpose that is questionable and subjected to restrictions, limitations, conditions, and terms of reference, directions, or other restricting factors of the Trust. These limitations are compulsorily imposed by the donor and serve to constrain or limit a charity relating to how the gift can get handed off. Therefore, the unrestricted charitable gifts are constructively owned by a charitable trust for its general charitable purposes.
• By and large, restrictions normally found in deeds covering restricted charitable purpose trusts, which tend to be religious and fall into one of three classifications. Those are:- Restrictions on religious doctrine, i.e., requiring that the property be used only for individuals who subscribe to a particular religious doctrine; Restrictions of use, i.e., limiting the property to a particular use, such as use for a church, cemetery or seminary. Restrictions on limiting the use of the property will apply to those who follow specific religious practices similar to requiring that the property be utilized only by members of a church who obey to the practice of “strict union.”

What do you mean by Restrictions on Conditional Gifts?

• A conditional gift includes the charity becoming beneficial to the owner of the gift, whichever after the condition has fulfilled or until a condition subsequent fails or occurs, as the case may be. Part of the discrepancy relates ownership gift and the other part of the wording, which is corresponding to the gift.
• In a charitable trust, the charity never turns out to be the beneficial owner of the gift. In its place, the charity holds title to the gift in Trust, subject to specific terms and restrictions. It is likely for a conditional gift to be a restricted charitable trust only if the gift includes both a condition precedent and a donor obligation that the gift gets used for a purpose.

Procedural Restriction – Do you know that Corpus donations should not get reflected as an application of income in the event of Charitable Trust?

Any donations by a charitable or religious trust or any organization to any other trust registered u/s 12AA, which forms part of the corpus of recipient trust/institution, shall not be reflected as application of income u/s 11 for the donor trust/institution. It says explicitly that corpus donations shall not get measured as an application of income to be reflected.

What about the Modifications in object clause cited at the time of registration of charitable Trust?

It means that objects of a trust or an institution have granted registration. Subsequently, it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration. Those shall be required to obtain a new certification by producing an application within thirty days from the date of such adoption or modifications of the objects in the prescribed form and procedural method.

What about Amended Returns of Income as per Section 139(4A)?

Section 12A has recently got amended to provide for a further condition that the person in receipt of income chargeable to income-tax shall furnish the return of income as per the prescribed time given details under section 139(4A) of the Income Tax Act^[1].

What about getting property by any person without consideration u/s 56(2) (X)?

• Intending to avoid the practice of Charitable or Private Trusts of receiving money or property for insufficient consideration, the Finance Act 2017 introduced clause (x) under section 56(2). After the addition of this section, money or property obtained by any person for inadequate consideration exceeding Rs. Fifty thousand shall be accountable to income-tax under the beam of “Income from other sources-not for Purpose” in the hands of the beneficiary.
• Subsequently, now if any property gets acknowledged by the charitable or Private Trust for “inadequate consideration” exceeding of Rs. 50,000, then it will be chargeable to income-tax under the head “Income from other sources- not for Purpose” under section 56(2)(x) of The Finance Act 2017 in the hands of the beneficiary of the Trust.

Read our article:Guide: Registration Aspect of Educational Trust

What are the exceptions to the newly inserted clause (x) are in section 56 contrary to property received without consideration? 

• Property received without consideration from any fund, foundation, college, or other educational institution, hospital, or other medical institution or any trust mentioned to in clause (23C) of section 10 of Income Tax Act.
• Property received without consideration from or by any trust registered under section 12A or section 12AA of Income Tax Act.
• Property received without consideration by any fund or Trust or institution, any university or other educational institution, any hospital or other medical institution. It is mentioned to in sub-clause (iv), sub-clause (v), sub-clause (vi), sub-clause (via) of clause (23C) of section 10 of Income Tax Act.
• Property received without consideration from an individual by a trust created or recognized solely for the assistance of family members or relatives of the individual.

Therefore, it is essential to note that the above-discussed trusts and institutions are out of the domain of Section 56(2) (x) of Finance act 2017. The trusts registered u/s 12A and other institutions registered under section 10(23C) are barred from this clause so that Donations received by these Charitable trusts are not get taxed. 

What is the Restriction on Cash Donations u/s 80G?

The Finance Act 2017 has amended section 80G. Therefore to provide that no deduction shall be allowed under section 80G concerning the donations of any sum exceeding Rs. 2,000/-, until and unless such amount gets paid by any mode other than cash. Previously this limit was Rs. Ten Thousand, but now the Government has taken this step only to be responsible for the cashless economy and transparency of the economy of the nation.

What are the restrictions deliberated by the Supreme Court of India on the property of transfers under Trust?

• Authorities to Consider

In the case of “Venugopala Naidu & Ors v Venkatarayulu Naidu Charities & Ors,” it has been deliberated that trustees and courts are the only authorities who should reflect upon the market value of any Property of Trust.

• No Private Negotiations

Any private intimations and negotiations that are not noticeable to the public eye should not be accepted unless there are particular grounds or authoritative supports given to substantiate them.

• Limitations to Public Auction

The Supreme Court held and opined in the case of “Committee of Management of Pachaiyappa’s Trust v Official Trustee of Madras & Anor,” that any conduct relating to the lease of a trust property will get hold only by the orders of a high court judge. Moreover, it must be done by public auction altogether.

A Detailed Study on Donations for Charitable Trust and its Restrictions

What are the types of Donation? 

Opposing to an ordinary person or organization, a charitable or religious institution gets a significant source of receipts in terms of donations. These donations may be made voluntarily of as the corpus. The Income Tax Law of India delivers a blanket of exemptions to corpus contributions. On the contrary, it requires the application of voluntary donations for charitable or religious purposes generally. These donations can also get branched into ‘anonymous’ and ‘non-anonymous’ form. 

What about the Chargeability of Income under the Income Tax Act for Anonymous Donation?

The Chargeability of Income under Income Tax Act for Anonymous Donation enclosed under the provisions of section 115BBC of the Income Tax Act 1961. The situation draws its tax liability at the rate of 30% depending on the present status of Trust -charitable or religious. Therefore, if a trust is a religious trust, it should not pay tax complying with the above section 115BBC. On the contrary, if it is a charitable trust with anonymous donations are taxable at the rate of 30%, which gets subjected to specific limited exemption. 

What about the Chargeability of Income under the Income Tax Act for Non-Anonymous Donation?

• The Chargeability of Income under Income Tax Act for Non- Anonymous Donation received by a trust can be claimed exemption subjected to the provisions of sections 11 & 12 of the Income Tax Act 1961. As a result, a trust may accumulate 15% of Non- Anonymous Donation and required to apply an outstanding 85% donation for public charitable or any religious purposes. 
• Furthermore, the law also provides an exemption from taxes if the state of affairs of Trust specified for deemed application or accumulation of donations is duly satisfied. Moreover, those anonymous donations received by religious Trust not taxable as per section 115BBC get operated and distributed at the level of non-anonymous donations for taxation of religious trusts/Institutions.

Whether all the Cash donations are anonymous?

Even if the donor’s identity is available and can be disclosed, if required- such Donation can get received in cash, and it cannot get called as anonymous Donation. For that reason, considering cash donations as anonymous is not a legally correct proposition.

What about the Cash Donations after the Inclusion of section 269ST by the Finance Act 2017?

• The Finance Act 2017 has presented a new provision of section 269ST in the Income Tax Act 1961. It plays a vital role in restricting a person who is receiving Rs. 2 lakh or more in cash from a Contributor in aggregate in a day. It also applies in respect to a single transaction or which may relate to one occasion from a Contributor. The infringement of such provisions may attract penalties under the section of 271DA. The amount will be the same as the amount so received by the Beneficiary of the Trust.
• For that reason, if the donations found received in violation of section 269ST, then the charitable Trust shall be accountable and liable to attract penal consequences. For instance, if a charitable Religious Temple trust, being paid cash amount of Rs. 3,50,000 by a donor only for ‘Conduct for Pratishta’ or ‘Prasad’ or ‘Pooja-Archana’ program, it will be said as non-compliant for section 269ST. 

Conclusion

It gets examined that the intent of the Government seems to implement a conduct for an efficient governance tool in public charitable institutions, and to exercise greater scrutiny. As a result, it can avoid any misapplication of the favorable legal provisions described above laws to such institutions, which is noble by nature.

Moreover, the amendment expects tax authorities to have professional as well as expert knowledge in all the applicable laws to be in force. At this moment, we at Corpbiz have experienced legal professionals to help you with the process of Property distribution in compliance with all the recent amendments and expectations to be fulfilled. Our professional will ensure to mitigate all your ventures successfully as well as timely completion of your work.

Read our article:Guide: Analysis of Property held by Trust or by name