By Subash Agarwal, Advocate
Recent media reports indicate that Azim Premji, India’s third richest man, has become the first Indian to sign up for the “Giving Pledge”, a campaign led by Warren Buffet and Bill Gates to encourage the wealthiest people to make a commitment to give most of their wealth to philanthropic causes. He, thus, became the third non-American after Richard Branson and David Sainsbury to join this philanthropy. “I strongly believe that those of us, who are privileged to have wealth, should contribute significantly to try and create a better world for the millions who are far less privileged” were the comments of the noble soul immediately after he made the announcement of his noble intention.
2. Can Azim Premji be harassed under the old and archaic provisions of the Income-Tax Act relating to taxation of charitable trusts?
To find an answer to this, let us first examine the entire modus operandi as explained by the following news report that has appeared in the media on 01.03.2013 about Azim Premji’s transfer of Wipro shares to a trust for the purpose of performing charitable activities-
“A couple of days after he reaffirmed his commitment to philanthropy, Wipro Chairman Azim Premji on Friday transferred shares worth about Rs 12,300 crore to his philanthropic arm, the Azim Premji Trust. This is the largest philanthropic transfer by any individual in the country. A statement issued issued on Friday by the foundation said the billionaire had transferred 295.5 million equity shares, representing 12 per cent of the shares of Wipro Ltd, to an irrevocable trust (the Azim Premji Trust) that finances the activities of the Azim Premji Foundation. These shares were held by entities controlled by Premji. With this, the trust’s shareholding in Wipro will go up to about 19.93 per cent”.
3. Observations on the basis of Media Reports
Following observations can be made on the basis of above news report -
(a) It appears from the news report that “Azim Premji Trust” and “Azim Premji Foundation” are two different entities.
(b) From the various websites, it appears that “Foundation” is a registered trust u/s 12A of the Act, which carries on various philanthropic and charitable activities.
(c) “Azim Premji Trust’s” activities and purpose are not fully known. However, the above news report declares that it is an irrevocable trust that finances the activities of the foundation. Thus, it can be said that the trust carries on activities which are at least partly charitable in nature. It is, however, not known whether the trust is registered u/s 12A of the Income tax Act. (hereinafter referred to as the Act)
(d) It appears that the income from shares, which is received in the form of dividend and therefore, exempt from tax in the hands of the trust, is transferred to the foundation to carry on “wholly” charitable activities..
4. Is there any bar for a Charitable Trust to accept donations in the form of shares?
There is no bar in the general law for a charitable trust to accept donation in the form of shares. In fact in Trustees of Mangaldas N. Verma Charitable Trust vs. CIT 207 ITR 832, a case before the Bombay High Court, where the issue was relating to the donation of shares towards the corpus of the charitable trust and the specific issue was whether shares donated towards the corpus could be considered as investment of funds in shares [in violation of section 13(1)(d)(i)]. The Bombay High court held in favour of the assessee that shares donated towards the corpus could not be considered as “investment of funds”.
5. Tax implications for a Trust receiving shares as donation?
(a) Firstly, it is imperative to examine the issue from the standpoint of the term “income” as defined in section 2(24). The relevant portion of clause (iia) of section 2(24) reads as under-
(iia) “voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes…………
From the above, it is amply clear that the voluntary contributions received by a charitable / religious trust (irrespective of the fact whether it is wholly or partly established for a charitable purpose or whether it is registered u/s 12A of the Act or not) are in the nature of “income” of the trust. Since the term “voluntary contribution” has not been qualified by the word cash or kind, it has a wider connotation and even shares will constitute income of the trust.
(b) Such trusts as mentioned above, if are registered u/s 12A of the Income-Tax Act and if their income is applied or accumulated as per the provisions of section 11 of the Act, such income is exempt from taxation. However, holding of shares by registered trusts have serious tax implication under some other provision which is discussed a little later.
(c) It is important to note here that prior to 1.4.1989, the words in section 2(24)(iia), viz., “voluntary contributions received by a trust created wholly or partly for charitable or religious purposes” were qualified by the words “not being contribution made with a specific direction that they will form part of the corpus of the trust or institution”. The effect of the entire provision taken together, as it existed prior to 01.04.1989, was that “corpus donations” were exempt – be it a religious / charitable trust registered u/s 12A or not so registered. The position was reversed post-1.04.1989.
(d) In respect of the charitable / religious trusts registered u/s 12A, a further amendment was made by the Direct Tax Law (Amendment) Act, 1989 w.e.f. 01.04.1989 in section 12(1) whereby “corpus donations” were excluded from their income. The net effect of the amendments made w.e.f. 01.04.1989 is as under-
(i) “Corpus Donation” in respect of registered trusts (u/s 12A) are exempt from tax and there is no requirement of application / accumulation of such receipts.
(ii) Unregistered charitable / religious trusts will not be able to claim any exemption in respect of “Corpus Donations” because of amendment in the definition of income in section 2(24)(iia) w.e.f. 1.4.1989. Thus, assuming that the Azim Premji trust is not regsiteerd u/s 12A of the Act, the same is liable to be taxed on receipt of Wipro shares worth Rs. 12,300 crore from the entitites belonging to Sri Azim Premji as per the definition of income u/s 2(24)(iia). But, assuming that the Trust is registered u/s 12A of the Act, the consequence of the receipt of Wipro shares is discussed hereunder.
6. Implication of a Trust registered u/s 12A receiving shares as donation.
For a charitable / religious trusts registered u/s Section 12A, it is imperative to analyse the provision of section 13(1)(d). According to this provision, such trusts will loose exemption from tax of the income earned in their hands in the following situations-
(i) any funds of the trust or institution are invested or deposited otherwise than in any one or more of the forms or modes specified in section 11(5); or
(ii) any funds of the trust or institution invested or deposited before the 1.3.1983, otherwise than in any one or more of the forms or modes specified in section 11(5) continue to remain so invested or deposited after the 30.11.1983; or
(iii) the trust holds any shares in a company, other than -
(A) shares in a public sector company;
(B) shares prescribed as a form or mode of investment under clause (xii) of section 11(5). It is pertinent to note here that the type of shares prescribed are units of Mutual Fund shares of a depository, shares held by a recognized stock exchange of specified nature of companies etc.
Thus, there is an embargo on holding of the general types of shares listed (or unlisted) in a stock exchange. Needless to say, Wipro shares cannot be held by a registered Trust.
However, proviso to section 13(1)(d) gives relaxation in the following situations-
(i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1.6.1973;
(ii) any accretion to the shares, forming part of the corpus mentioned in clause (i), by way of bonus shares allotted to the trust or institution;
(iii) any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1.4.1984 or any subsequent assessment year.
From the above discussion, it is amply clear that, though donation in the form of shares will not amount to “investment” of trust funds in violation of section 11(5), but it will certainly violate the stipulation in clause (iii) of section 13(1)(d) [it debars holding of shares (other than specified shares) after 30.11.83], thus, making the entire income of trust vulnerable to tax.
7. ConclusionIt is surprising that even in this age of the 21st Century, we have an archaic and outdated law, which debars a registered trust to hold shares received even by way of “corpus donation” and prescribes a drastic consequence of denial of exemption from tax of the total income earned by the trust. Such laws may discourage a philanthropically inclined person from making provision for charity for the general cause. In the case of Shri Azim Premji, the department may gloss-over the technical violation and take a liberal view due to the “high-profile” nature of charity but the archaic law gives an ammunition in the hands of overzealous officers to throttle genuine charities and to rob the money meant for the general benefit of the downtrodden to be put in the hands of the politicians and bureaucrats for squandering and for filling their personal coffers