Income Tax

All about Section 12 of Income Tax Act, 1961

This article will focus on the meaning, benefits of Section 12 of income Tax Act.

What is Section 12 of Income Tax Act?

Section 12 of Income tax act^[1] talks about voluntary donation received by a trust for charitable or religious purposes will be income derived from the property held under the trust wholly for the purposes mentioned and can claim exemption following the conditions mentioned in section 11 of the Act.

What is the need to register a trust under Section 12 of Income Tax Act?

The following are the reasons for the registration of trusts under section 12 of income tax act:

• The registered Trust Deed is an official document, enforceable by law.
• Registered Trust Deed makes the transfer of possession effective.
• Conveyance of trust property to the trustee under a registered deed is not open to contest, generally.
• The registered deed is an essential document for claiming exemption under section 11.
• The registered deed is an essential document for claiming exemption under section 80G of the Act for donors.

Types of registration of a trust made under Section 12 of Income Tax Act

The following are the types of registration of a trust made under Section 12 of Income Tax regulations:

• Registration under State Act;
• Registration under Income Tax Act;
• Registration under the Indian Registration Act;
• Registration under Public Trusts Act;
• Registration under Income Tax Act; and
• Registration under the Foreign Contribution (Regulation) Act.

How to register a trust under section 12A (1) in relation to Section 12 of Income Tax Act?

Section 12AA talks about registration of a trust made under Section 12 of Income Tax Regulation.

The Principal Commissioner has to take the following steps to register a trust created under Section 12 of Income Tax Act:

• To call for the documents and information to satisfy himself regarding the purpose of the trust and to make inquiries, he thinks necessary;
• After the satisfaction and genuineness of the purposes of the trust, he may:
  • pass an order to register the said trust, in writing;
  • pass an order to refuse to register the said trust, in writing;

A copy of such an order must be given to the applicant, and a reasonable opportunity must be given to the applicant in case of refusal of registration.

How an income from Section 12 of Income Tax Act be exempted?

The following conditions are to be satisfied to claim an exemption under section 11:

• The trust must be formed for lawful & charitable, or religious purposes.
• The property from which the income is obtained must be held under a trust or other legal obligation.
• The property must be held for charitable or religious purposes. Where a charitable trust is created on or after April 1, 1962, the further conditions must be satisfied to claim exemption:
  • The trust should not be created for the benefit of any particular religious community or caste;
  • The income either directly or indirectly benefiting any specified persons; and
  • The property should be held wholly for charitable purposes.
• The exemption can be given to such income that is applied for charitable or religious purposes in India.

Application of income by trusts made under Section 12 of Income Tax Guidelines

Application of income means spending of income by the assesse and such amount must be included in the total income. The applied income is taxable in possession of assesse.

Application of Income is mentioned under Section 11 (1), and it includes:

• Repayment of loans taken for the purposes specified for the trust is treated as an application of income.
• Consumption of the income to meet the previous year’s expense is an application of income.
• Application of income is also the capital gain derived by a trust.
• Donation given to one charitable or religious trust to another is an application of income for donor trust.
• And many more can be treated as an application of income under the section.

Accumulation of income by trusts made under Section 12 of Income Tax Regulations

Accumulated income is the net income retained by the corporation or the company over the times and not distributed as dividends to the shareholders. The accumulated income in respect of trusts established under section 12 of the income tax act is the income accumulated for charitable or religious purposes.

Section 11(2) of income tax act states that:

• Accumulation of 85% of the income
  • When under section 11(2) the 85% of the income is not applied for the trust’s purposes, then the trusts may accumulate the income wholly or partly for the future application.
  • The trust must inform the Assessing officer to accumulate the income electronically in Form 10.
  • The income accumulated by the trust must be used for the purposes specified; otherwise, it will become chargeable to tax.
• Accumulation of income above 15% of the income
  • The assessee can accumulate 15% of the income if the conditions are satisfied. If the assessee wants to accumulate more than 15% of the income, then it must be used for the purposes specified for the trusts established under section 12 of income tax act, during the previous year itself.
  • The exemption under section 11(2) is allowed if the following conditions are satisfied:
    • Furnishing the statement in Form no. 10 electronically either through digital signature or electronic verification code to the AO.
    • The accumulated income must be invested or deposited in the form prescribed under Section 11(5).
    • The statement stating the object under Form 10 must be submitted before the due date under section 139 (1) of the Act.

Section 11(3) of income tax act states that:

If the accumulated income above 15% of the net income is not deposited or invested in the manner prescribed under section 11(5), the income ceases to accumulate income.

Forfeiture of exemptions of the trusts made under Section 12 of Income Tax Act

Section 13 of the income tax act talks regarding the forfeiture of exemption of incomes of the trusts established under section 12 of income tax act.

The following incomes by the trusts established under section 12 of income tax act are not applicable for exemption under section 13 is:

• Section 13 (1) (a) is not applicable for the incomes made by the private trusts that satisfied the element of public benefit. Whereas, if the public at large is not benefited by such trust, then no exemption under section 11 or section 12 of income tax guideline will be given.
• If a charitable or religious trust established after 01-04-1962 for the benefit of a specific community or caste, then the exemption under section 11 or section 12 of income tax regulations is not available. However, the exemption is available for such trusts if established before 01-04-1962.
• If a charitable or religious trust established after 01-04-1962 benefiting a person specified under section 13 (3), then the exemption under section 11 or section 12 of income tax regulations is not available. However, the exemption is not forfeited for such trusts if established before 01-04-1962, if it is in compliance with the mandatory provisions with the rules governing the institution.
• In case the funds are not invested in the manner prescribed in Section 11 (5), it is not applicable for exemption under section 11 or section 12 of the income tax act.

Conclusion

Section 12 talks about a donation received by a trust for charitable or religious purposes will be income derived from the property held under the trust wholly for the purposes mentioned. They can claim exemption following the conditions mentioned in section 11 of the Act.

Read our article:Read Details About Section 13 of the Income Tax Act, 1961