Exemptions to Charitable Trusts are now under close scrutiny of the Government. Amendments in recent years are testimony to this vital fact. Therefore, trusts are now under obligations to conduct all of the transactions at `Arms Length’, especially with the trustees or related persons. Following is a case study, where the trustees were the President/Secretary of the newly formed credit co-operative society, and the trust made deposits with such a society.
1.1 Section 13(3) specifies the persons which are covered by the restrictions of Section
13(1)(c) and Section 13(2). These `Specified persons’ are the following:
(a) the author of the trust or the founder of the institution
(b) any person who has made a substantial contribution to the trust or institution, [that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees];
(c) where such author, founder or person is a Hindu undivided family, a member of the family;
(cc) any trustee of the trust or manager (by whatever name called) of the institution;]
(d) any relative of any such author, founder, person, member, trustee or manager as aforesaid;
(e) any concern in which any of the persons referred to in clauses (a), (b), (c) , (cc) and (d) has a substantial interest.
1.2 Trustees of Charitable Trust are also President and Secretary of the Credit Co-operative Society Ltd. and trust has disclosed the same in their replies, ITR and Audit Report etc. Therefore, Credit Co-operative Society Ltd. can be treated as `Specified person’ for section 13(3).
1.3 Income Tax Law does not prohibit the transactions per se between the specified persons and the Charitable Trusts. Transactions are allowed, provided that the payment of the goods and services are equivalent to their market values and not excessive, so as not to pass any undue benefit to specified persons.
1.4 Section 13(2) prescribes following class of transactions with specified persons are allowed:
(a) Where any part of the income or property of the trust or institution is lent to any ‘specified person’ during the previous year with either adequate security or adequate interest or both;
(b) Any land, building or other property of the trust or institution is made available to the ‘specified persons’ after charging adequate rent or other compensation
(c) Any amount paid by way of salary or allowance or otherwise to the ‘specified persons’ which may be reasonably paid for such services;
(d) If the services of the trust or institution are made available to such ‘specified persons’ on adequate remuneration or other compensation;
(e) If any share, security or other property was purchased from such ‘specified persons’ for consideration which is adequate;
(f) If any share, security or other property was sold to such ‘specified persons’ for consideration which is adequate;
(g) If any income or property is diverted during the previous year in favour of such ‘specified persons’ provided the amount does not exceed Rs. 1,000; and
(h) If any funds of the trust or institution are not invested in any concern in which the ‘ specified persons’ has substantial interest.
1.5 Admittedly, Credit Co-operative Society Ltd., which is engaged in business of banking, is a specified person. Therefore, the transactions of deposits with the society has to be tested on the following benchmarks for similar transactions with uncontrolled entities:
i) Whether funds were lent with adequate security ?
ii) Whether funds were lent on adequate interest ?
1.6 Trust has Rs. 2,36,21,470/- as Investment/deposit as on 31/03/2021 with following break-up:
| 1) | Mutual Funds | 7700000.00 |
| 2) | Term Deposits | |
| a) | Co-operative Credit Society Ltd. | 5918069.00 |
| b) | Small Finance Bank Ltd. | 6858286.00 |
| c) | Urban Co-operative Bank Ltd. | 3144905.00 |
| 3) | Membership Share | |
| Urban Co-Operative Bank Ltd. Share Amount | 100.00 | |
| Credit Co-Operative Society Ltd. Share Amount | 110.00 | |
| TOTAL | 23621470.00 |
It is well known fact that Mutual Funds are unsecured and linked to Security Market risks. Similarly banks deposits are unsecured and would not have recourse to any security, in case of default. Thus, all asset class including Term deposits of Charitable Trust were unsecured and investments were made after considering the track record, financial soundness and reputation of the borrowing entity.
1.7 Now the next question is to decide whether the funds lent/deposited with Co-operative Credit Society Ltd. offered adequate interest. Trust had following transactions of the Term/Fixed Deposits during the AY 2021-22:
| NAME OF INVESTEE / BORROWER | AMOUNT | DATE OF CREATION | PREMATURE PENALTY | RATE OF INTEREST | TERM OF DEPOSIT |
| Small Finance Bank Ltd. | 3000000/- | 25/03/19 | NIL | 9% p.a. | 36 Months |
| -do- | 2500000/- | 13/01/20 | Applicable | 9% p.a | 36 Months |
| -do- | 10000000/- | 19/07/19 | Applicable | 9% p.a | 36 Months |
| Credit Co-operative Society Ltd. | 4000000/- | 20/05/2019 | NIL | 9% p.a | 12 Months |
| -do- | 1500000/- | 21/06/2019 | NIL | 9% p.a | 12 Months |
| Urban Co-operative Bank Ltd. | 2500000/- | 10/08/2017 | NIL | 8.25% p.a | 40 Months |
Thus the transaction of lending/depositing money of Trust with Credit Co-operative Society Ltd., a specified person, were for both adequate interest and/or adequate security and complies the Section 13(2)(a).
In view of the above facts, no violation of Section 13(3) has taken place and the investment (deposit) with Credit Co-operative Society Ltd. is in accordance with the prescribed modes u/s 11(5).