Exemption

Income derived from property held under trust or of an institution (‘trust’) wholly for charitable/religious purpose is exempt, if 85% of the income is spent on the objects of the trust, during the year. If the amount spent is less than 85% of the income, the shortfall is taxable, unless the trust has complied with the conditions mentioned in the table below.

‘Charitable purpose’ includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any object of general public utility. However, if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to trade, commerce or business for a cess or fee or any other consideration, irrespective of the nature of use or application or retention, of the income from the said activity, the same will not be regarded as advancement of any object of general public utility. However, if the total receipts from such activities do not exceed ` 25,00,000/-, such activities of the trust will continue to be regarded as activities for charitable purpose.

A Charitable trust is entitled to accumulate its unspent balance for multiple purposes. It is not necessary to intimate the details and the plan of attaining the future projects to assessing officer. In Director of Income – tax (Exemption) vs. Daulat Ram Education Society (2005) 278 ITR 260 (Del) it was held that merely because more then one purpose has been specified and the details about plans which the assessee has for spending on such purposes are not given, the assessing officer cannot deny the claim of exemption u/s. 11(2).

In the case of CIT vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom), the Bombay High Court held that income derived from the trust property is to be computed on commercial principles. Accordingly, adjustment of expenses incurred by the trust for charitable purpose in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust in the subsequent year. The High Court has also held that the depreciation debited in the books should be treated as expenditure for this purpose. The concept of commercial income necessarily envisages deduction of depreciation on assets of the Trust. Section 11 provides that the income of the trust is to be computed on commercial basis i.e. as per normal accounting principles. Normal Accounting principles clearly provide for deducting depreciation to arrive at income. Also Hon’ble P & H Court in case of CIT vs. Market Committee, Pipli (2011) held that deduction of depreciation in the case of a charitable/religious trust does not amount to double deduction. Further the Hon’ble P & H Court in case of CIT vs. Tiny Tots Education Society (2011) 330 ITR 21 has distinguished the decision in Escorts vs. Union of India (1993) 199 ITR 43 (SC) that in present case the income of the assessee being exempt, the assessee is only claiming that the depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purposes of trust and hence it cannot be held that double deduction is given in allowing the claim for depreciation for computing income for the purposes of section 11.

Voluntary Contribution received by any university or educational institution referred to in section 10(23C)(vi) or hospital or other institutions referred to in section 10(23C)(via) shall be deemed to be income (with retrospective effect from assessment year 1999-2000). Similarly, voluntary contributions received by any university or other educational institution or any hospital or other institution referred to in section 10(23C)(iiiad) and 10(23C)(iiiae) respectively will be deemed as income received by them.

With effect from 1st June, 2007 any fund or institution established for charitable purposes or any trust established for public, religious and charitable purposes will be notified by Prescribed Authority which hitherto was notified by Central Government.

Section 11 provides exclusion of income of a trust subject to the provision of section 60 to 63. Therefore before excluding any portion of income, first of all it is necessary, to find that income in question is includible in the total income of trust or not. For, if any income received by trust, is includible in the total income of another person by virtue of Section 60 to 63, then the question of exemption doesn’t arises.

If a trust or institution expends or applies more than its income, it can only mean that such excess amount is from corpus or future income. If such deficit is debited to corpus in accounts, it means that the corpus is used to apply for the of the trust. However, if the deficit is merely carried forward, such deficit is to absorb against future income. Hence the excess application in an earlier year may be set off against next year’s income.

Registration

Registration under section 12AA will be granted from 1st day of the financial year in which the application for registration is made. On being satisfied, an order shall be passed in writing registering the trust or institution. If not satisfied, an order shall be passed in writing, refusing to register. The time limit for passing the order u/s 12AA is six months from the end of the month in which the application is received. Copy of the Order must be sent to the applicant. Commissioner is not empowered to condone the delay in application for registration. The Commissioner has power to cancel the registration of the trust by an order in writing if he is satisfied that the activities of trust are not genuine or are not being carried out in accordance with the objects of the trust. Commissioner of Income Tax now also has power to cancel registration of trust granted under provisions of section 12A of the Income-tax Act, 1961.

The Finance Act, 2012 has amended sections 10(23C) and 13 of the Act retrospectively from 1 April, 2009 to ensure that if the purpose of a trust or institution does not remain charitable due to the application of the amended definition of the term "charitable purpose" on account of commercial receipt in a previous year, then such organisation should not get benefit of tax exemption u/s. 10(23) irrespective of whether or not the registration or approval granted or notification issued is cancelled, withdrawn or rescinded. Further the memorandum also explains that, this temporary excess in one year may not be treated as altering the very nature of the trust or institution so as to lead to cancellation of registration or withdrawal of approval or rescinding of notification issued in respect of trust or institution.

Appeals

Orders passed under section 12AA or under section 80G rejecting the registration of trust/rejecting approval granted under section 80G are appealable. The appeal lies to the Income Tax Appellate Tribunal.

Approval under section 80G

From 1st October, 2009, approval once granted under section 80G will be valid in perpetuity unless revoked by the Commissioner of Income Tax in accordance with the provisions of section 80G(5)(vi) of the Income-tax Act, 1961.

Audit

To qualify for exemption u/ss. 11 and 12, a trust having total income (before exemption u/ss. 11 and 12) exceeding the maximum amount not chargeable to tax must have its accounts audited by a C.A.

Investments

All investments of the trust must be in modes provided in s. 11(5). If not, they must be brought in conformity within 1 year from the end of the previous year in which such investments are acquired, or 31-3-1993, whichever is later. Contravention results in income and wealth of the trust being taxed at maximum marginal rate. This restriction does not apply to:

• Any asset held as part of the corpus as on 1-6-1973;

• Any accretion to shares, forming part of the corpus as on 1-6-1973, by way of bonus shares;

• Any debentures acquired before 1-3-1983. If debentures acquired after 28-2-1983 and before 25-7-1991, exemption is denied only in respect of income from such debentures, provided debentures are disinvested by 31-3-1992.

Modes of Investment specified in S. 11(5)

1. Investment in Government savings certificates/other securities/certificates issued by Central Government under Small Savings Schemes;

2. Deposit in any account with the Post Office Savings Bank;

3. Deposit in any account with a scheduled/co-operative bank;

4. Investment in units of the Unit Trust of India;

5. Investment in any security of the Central/State Government;

6. Investment in debentures whose principal and interest are fully and unconditionally guaranteed by Central/State Government;

7. Investment or deposit in any public sector company (PSC); Shares of PSC may be retained for three years and other investments or deposits till its maturity once PSC ceases to be a PSC;

8. Deposits with or investment in any bonds issued by an approved financial corporation engaged in providing long-term finance for industrial development in India;

9. Deposits with or investment in any bonds issued by an approved public company with main object of carrying on business of providing long-term finance for construction/purchase of houses in India for residential purposes or for urban infrastructure;

10. Investment in immovable property;

11. Deposits with the Industrial Development Bank of India;

12. Under Rule 17C the following forms and modes of investment or deposits have been prescribed:

1. investment in the mutual fund units referred to in Section 10(23D) of the Income-tax Act, 1961;

2. any transfer of deposits to the Public Account of India;

3. (deposits made with an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both;

4. (iv) investment by way of acquiring equity shares of a depository as defined in section 230(1)(e) of the Depositories Act, 1996.

5. (v) investment made by a recognised stock exchange referred to in section 2(f) of the Securities Contracts (Regulation) Act, 1956 (hereafter referred to as investor) in the equity share capital of a company (hereafter referred to as investee)

6. (vi) investment by way of equity share capital of a specified company

7. (vii) investment by way of acquiring equity shares of an incubate by an incubate

8. (viii) investment by way of acquiring equity shares of National Skill Development Corporation.

9. (ix) investment in debt instruments issued by any infrastructure finance company registered with RBI

13. Investment in "Indira Vikas Patra" and "Kisan Vikas Patra" are in accordance with the norms and modes specified in sec. 11(5) – Circular No. 566, dt. 17-7-1990.

Corpus donations

U/s. 11(1)(d), voluntary contributions with specific direction that they shall form part of the corpus of the trust are not includible in the total income of the trust. Although corpus donation are fully exempt but these are to be considered for the limit of maximum amount, which is not chargeable to income tax i.e. ` 200000/- prescribed for audit of accounts. However, u/s 12 other voluntary contributions would be deemed to be income of the trust.

Business Income

Exemption is not available in relation to any profit and gains of business of a trust, unless the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained in respect of such business.

The benefit of exemption to a trust, having the object of advancement of general public utility, would be lost if any business is carried on with gross receipt in excess of ` 25lakhs by virtue of proviso to section 2(15). This restriction of ` 25lakhs does not apply to a trust having object other than the object of advancement of general public utility.

Capital gains

The gains arising from transfer of a capital asset, is deemed to have been applied to charitable/religious purposes, if the whole net consideration is used to acquire new capital assets. If only part of the net consideration is so utilised, such gains, as equals the excess of the amount so utilised over the cost of the transferred asset is deemed to have been applied for charitable/religious purposes. There is no period of holding of the asset for availing such exemption by re-investment

Anonymous donations

The term "anonymous donation" is defined to mean any voluntary contribution, where the person receiving such contribution does not maintain a record consisting of the identity of the person making such contribution indicating the name and address of the person and such other particulars as may be prescribed. Such anonymous donations will be taxed
@ 30%. However, the following anonymous donations are not covered:–

• donations received by a trust or institution which is created or established wholly for religious purposes;

• donations received by any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.

• However, in case of partly religious and partly charitable institutions where the anonymous donations are directed towards medical or educational institutions run by such entities or anonymous donations are received by wholly charitable institutions, it will be taxable to the extent such donations exceeds 5% of the donations received or `100,000/- whichever is more.

Time limit for application for claiming exemption

Application by funds, trusts, institutions, universities, other educational institutions, hospitals or medical institutions seeking exemption under section 10(23C), could be made on or before 30th September of the relevant assessment year.

Electoral Trust

Electoral Trust to be approved by the Central Board of Direct Taxes. Voluntary contributions received by Electoral Trust to be treated as income with effect from 1st April, 2010. Income of Electoral Trust by way of voluntary contribution will be exempt subject to fulfillment of following conditions:

• Such Electoral Trust distributes to the political parties (registered under section 29A of the Representation of the People Act, 1951) 95% of the donation received by it during the previous year along with the surplus, if any brought forward from any earlier years and;

• Electoral Trust functions in accordance with the rules made by the Central Government.

Contribution to Electoral Trust eligible for deduction while computing taxable income. u/s 80GGB for Indian Companies or u/s 80GGC for any assessee except local authority and every artificial juridical person wholly or partly funded by the government.

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