Charitable Trusts

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, yoga, 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 unless

Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility and
The aggregate receipts from such activity/activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities of that previous year (as against the existing flat ceiling of a sum of ₹ 2,500,000/- up to assessment year 2015-16)

Circumstances for not spending 85% of income	Form/Statement to be submitted	Conditions	Consequences, if conditions not satisfied
Application in F. No. 10 along with copy of resolution passed, to be made specifying purpose for accumulation of income for period of 5 years. Period for which unable to apply income for that purpose due to court order/injunction to be excluded	Before the expiry of time allowed u/s. 139(1) for furnishing the return	To be spent within period of accumulation or immediately following year. Pending application of income, to be invested in manner as specified in S. 11(5). Cannot be spent by way of donation to another charitable trust or institution except if the Assessing Officer permits the same in the year in which the trust or institution is dissolved	Failure to submit the form on or before the due date of filing return of income, benefit of accumulation will not be available. (Assessment Year 2016-17 onwards) Such income deemed to be income of the previous year in which any of the conditions not satisfied No Benefit of accumulation, if the return of income filed after the due date of filing of return of income. (Assessment Year 2016-17 onwards) If income not spent within stipulated time, for the purpose of accumulation, deemed to be income of the previous year immediately following period of accumulation, unless Assessing Officer’s permission obtained to spend it on other objects of the trust
Whole/part of the income not received during previous year	As above	To be spent in the year of receipt, or in the next year	Such income deemed to be income of previous year immediately following year of receipt
Any other reason	As above	To be spent in the year of receipt, or in the next year	Such income deemed to be income of previous year

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 than 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).

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 sections 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.

Pursuant to an insertion of Explanation to clause (iiiac) of section 10(23C), from 1st April, 2014, any university or other educational institution, hospital or other institution referred to in sub-sections (iiiab) and (iiiac) of section 10(23C) shall be considered as substantially financed by the Government for any previous year, if the Government grant to such institution exceeds prescribed percentage for total receipts (including voluntary contributions) of such institution during the relevant previous year. From assessment year 2016-17 onwards such institutions are mandatorily required to file their return of income.

Where a trust/institution has been granted registration for the purpose of availing exemption under section 11 it will not be entitled to claim exemption under section 10 [other than agricultural income and income exempt under section 10(23C).]

Similarly entities which have been approved/notified for claim of exemption under section 10(23C) are not to be entitled to exemption under any other provisions of section 10 (other than agricultural income).

In determining income for the purpose of application under section 11 and under section 10(23C), deduction or allowance by way of depreciation will not be available on any asset, which has been claimed as application of income.

A trust/institution to which registration has been granted under section 12AA in an assessment year shall be eligible to claim benefit under section 11 in respect of income of any assessment year preceding the aforesaid assessment year for which assessment is pending before an Assessing Officer provided the objects and activities of the trust were same for such preceding assessment year.

Assessing Officer is debarred from reopening of assessment of the year preceding the assessment year in which registration is granted to such trust/institution merely on the ground that such trust/institution has not obtained registration for such preceding assessment year. Benefits as above shall not be available if the registration was refused or cancelled at any time.

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 1st 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.

Pursuant to an amendment under section 12AA, the Principal Commissioner or Commissioner as the case may be, is empowered to cancel the registration granted to a trust/institution if it is noticed that the activities of such a trust/institution are carried out in such a manner that it is denied the exemption under section 11 and section 12 due to operation/attraction of section 13(1).

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)

Investment in Government savings certificates/other securities/certificates issued by Central Government under Small Savings Schemes;
Deposit in any account with the Post Office Savings Bank;
Deposit in any account with a scheduled/co-operative bank;
Investment in units of the Unit Trust of India;
Investment in any security of the Central/State Government;
Investment in debentures whose principal and interest are fully and unconditionally guaranteed by Central/State Government;
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;
Deposits with or investment in any bonds issued by an approved financial corporation engaged in providing long-term finance for industrial development in India;
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;
Investment in immovable property;
Deposits with the Industrial Development Bank of India;
Any other prescribed form or mode of investment or deposit (for example, Units of mutual funds referred to in section 10(23D), investment by way of acquiring equity shares of a ‘depository’ prescribed).
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. ₹ 2,50,000/- 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 ₹ 25 lakhs by virtue of proviso to section 2(15). From assessment year 2016-17 onwards, benefit of exemption will be lost if aggregate receipt from such activity/activities exceeds 20% of the total receipts. This restriction 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 fulfilment 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.