New Dictate by Income-tax Department re: Public Trusts
- From: Noshir - CAP
New Dictate by Income-tax Department
Public Charitable Trust Without Dissolution Clause Not A Valid Trust!
Noshir H. Dadrawala
Nobel Laureate, Albert Einstein had once quipped, “the hardest thing to understand in the world is the income tax”. However, in our view, harder than income tax, is trying to understand the mind of the income tax officer!
Recently the Director of Income–tax (exemptions), Mumbai, reportedly rejected about 60 out of around 70 applications for Registration u/s 12AA which exempts the income of NPOs established for ‘charitable purposes’ from liability of tax.
The reason for rejection in most cases was absence of a “dissolution clause” in the trust deeds of these newly created trusts. The Director of Income-tax (exemption) has taken a view that in the absence of such a “dissolution clause” a trust cannot be said to have “been constituted as a valid charitable trust".
This is absolutely absurd!
Every few months we observe that the Income-tax department thinks of new ways finds new excuses to harass charitable organizations trying to do genuine good work.
Over the years, literally thousands of public charitable trusts have been granted 12A / 12AA registration certificates despite having no such dissolution clause; and this is clearly because there is no specific section under the Bombay Public Trusts Act 1950, or under the Rules of 1951 for dissolving a trust.
Will the Director of Income–tax (exemptions), Mumbai, now insist that every trust to which over the years 12A or 12AA certificate has been granted despite absence of dissolution clause "have not been constituted as a valid charitable trust" and thus their 12A certificates should now stand suspended or cancelled?
It would be a fit case under the Right to Information (RTI) Act to ask the Director of Income-tax to furnish to us the number of trusts they have issued 12A / 12AA certificates over the last 5 to 10 years despite such trusts not having a dissolution clause!
Over the years we have observed scores of small, semi-defunct and defunct trusts approach the charity commissioner to dissolve such trusts, but, only to be shooed away by the charity commissioner stating that such trusts cannot be dissolved. And this is because this quasi judicial authority (the charity commissioner) has no powers under the Bombay Public Trust Act or the Rules to dissolve a trust. Such an order / decree can only be given by a court.
Is it easy to wind up a trust?
To reiterate, the charity commissioner has no powers to windup or dissolves a trust. Such an order / decree can only be given by a court.
What view would the court take?
Well, sometimes, a trust created for certain specific objects fails due to change of circumstances. It becomes absolutely impossible for the trustees to give effect to the original wishes of the settlor. In such cases, the court is likely to suggest application of the doctrine of cy pres.
The doctrine of cy pres
The phrase, “cy pres”, is Norman-French meaning, “as near as possible”. While applying the doctrine, the first thing the court sees to is that the income of the endowment is applied to a cause as near to the original as possible. The Tendulkar Committee has explained the term “cy pres” to mean “as nearly as possible to that which has failed”.
When the particular purpose for which a charitable trust is created fails or, by reason of certain circumstances, the trust cannot be carried into effect, either in whole or in part, or where there is a surplus left after exhausting the purposes specified by the settlor, the court would not, when there is a general charitable intention expressed by the settlor, allow the trust to fail but would execute it cy pres, that is to say, in some way as near as possible to that which the author of the trust intended. In such cases, it cannot be disputed that the court can frame a scheme and give suitable directions regarding the objects upon which the trust money can be spent.
It is well established, however, that where the donor’s intention can be given effect to, the court has no authority to sanction any deviation from the intention expressed by the settlor on the grounds of expediency, and the court cannot exercise the power of applying the trust property, or its income, to other purposes simply because it considers them to be more expedient, or more beneficial, than what the settlor had directed.
Remedy or Malady
Some of the trusts which were denied 12AA registration by the Income Tax department instead of contesting the order before Income Tax Tribunal went back to the charity commissioner seeking amendment to the deed of trust.
Why did the trusts not contest before the tribunal? They were told the matter could take a year or two to come up for redress. Besides it would involve legal costs. Therefore amendment to the deed seemed easier. But, the charity commissioner put his hands up and said he had no powers to accept a Deed of Amendment. What was suggested was application u/s 50A(1) of the Bombay Public Trusts Act 10950 for framing a scheme of management or administration. But, once again, this would be a long process that could take several months and of course cost money.
Some finally decided to make a fresh application for creating a brand new trust. It seemed a practical solution.
But, the question remains … how will the trust which has already been reregistered by the charity commissioner and not granted 12AA registration by the Income tax department will get itself dissolved?
Apparently, in the wonderland of Indian NPO laws, with dichotomies in state and federal laws, few can live happily ever after!!!--
Mr. Noshir H. Dadrawala
CEO - Centre for Advancement of Philanthropy