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
₹25,00,000/- up to A.Y. 2015-16)

Circumstances for not spending 85% of income	Form/Statement to be submitted	Conditions	Consequences, if conditions not satisfied
Application in Form 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 under section 139(1) for furnishing the return of income	To be spent within period of accumulation or immediately following year. Pending application of income, to be invested in manner as specified in section 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 under section 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 section 10(23C)(iiiad) and section 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 A.Y. 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 A.Y. shall be eligible to claim benefit under section 11 in respect of income of any A.Y. preceding the aforesaid A.Y. 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 A.Y. in which registration is granted to such trust/ institution merely on the ground that such trust/ institution has not obtained registration for such preceding A.Y. Benefits as above shall not be available if the registration was refused or cancelled at any time.

Filing of tax return (w.e.f. AY 2018-19)

The provisions of section 11 and section 12 shall not be applicable in relation to the income of any trust or institution unless they file their tax return for the previous year any time before the end of the relevant assessment year or before completion of assessment, whichever is earlier [section 12A(ba) read with section 139(4)].

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 under section 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 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 section 10(23C) and section 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 under section 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).

Where a trust (already registered under section 12AA or section 12A) proposes to adopt or undertake modifications of the objects of the trust which do not confirm to the conditions of the registration, the trust is required to obtain fresh registration by making an application (in a prescribed form and manner) within 30 days from the date of such adoption or modifications (w.e.f 1st April 2018)

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 under Section 11 and Section 12, a trust having total income (before exemption under Section 11 and Section 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 Section 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 March 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 June 1973;
Any accretion to shares, forming part of the corpus as on 1 June 1973, by way of bonus shares;
Any debentures acquired before 1 March 1983. If debentures acquired after 28 February 1983 and before 25 July 1991, exemption is denied only in respect of income from such debentures, provided debentures are disinvested by 31 March 1992.

Modes of investment specified in Section 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 section 11(5) – Circular No. 566, dated 17th July 1990.

Corpus donations

Under section 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.

W.e.f. 1st April 2018 - Any contribution by a donor trust (by way of credit / payment) to any other trust or institution (registered under section 12AA) with a specific direction that such contribution should form part of the corpus of the other trust or institution, shall not be treated as application of income for charitable or religious purposes for the donor trust [under section 11(1)(a)/ 11(1)(b)]. Similar amendment is also made under section 10(23C) in respect of corpus donations given by any fund or trust or institution or any university or other educational institution or any hospital or medical institution.

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, under Section 12 other voluntary contributions would be deemed to be income of the trust.

Subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government as the case may be, shall not form part of income of such trust or institution.

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.

The capital gain on transfer of asset held by a trust or an institution in respect of which accreted income has been computed and tax paid (under Chapter XII-EB), the cost of acquisition of such asset is deemed to be the FMV of the asset considered for computation of accreted income as on the specified date referred in section 115TD(2) [section 49(8) w.e.f 1st April 2016].

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 Rs 100,000/- whichever is more.
W.e.f 1st April 2018 no deduction under Section 80G shall be available to a payer if the donation is in cash and exceeds ₹2,000 (₹10,000 up to AY 2017-18)

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 aggregate 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 under section 80GGB for Indian Companies or under section 80GGC for any assessee except local authority and every artificial juridical person wholly or partly funded by the Government.

Conversion/ Merger of charitable institution into/ with a non-charitable institution

Where a trust or institution registered under section 12AA has

Converted into any form which is not eligible for grant of registration under section 12AA; or
Merged with any entity other than an entity which is a trust or institution having similar objects and registered under Section 12AA; or
Dissolved and assets of such trust/ institution is not transferred to any charitable institution registered under section 12AA or approved under section 10(23C) within a period of 12 months from the end of the month in which the dissolution, takes place then in addition to income chargeable in respect of the total income of such trust or institution, the accreted income of trust or institution as on specified date to be charged to tax at the maximum marginal rate. Accreted income means excess of
aggregate fair market value of total assets over total aggregate liabilities of such trust or institution as on specified date.

The value of the following assets (and liability, if any related to such assets) shall not be taken into consideration while computing the “accreted income”;

any asset directly acquired by a trust or institution out of its agricultural income;
any asset acquired by the trust or institution during the period from the date of its creation or establishment and ending on the date from which the registration under section 12AA became effective provided that the trust or institution has not been granted any benefit of section 11 and section 12 during the said period.

However, in case the benefit of section 11 and section 12 has been allowed to the trust or institution in any previous year or years beginning prior to the date from which the registration under section 12AA is effective, then for the purposes of excluding the assets as aforesaid, the date of registration shall be said to be effective from the first day of the earliest previous year.

The assets and liabilities of the charitable institution which have been transferred to another charitable institution within a specified time limit will be excluded while calculating accreted income.

A trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA in previous year if:

the registration granted under section 12AA has been cancelled
it has adopted or undertaken modification of its objects which do not conform to the conditions of registration and
- has not applied for fresh registration under Section 12AA in the said previous year; or
- has filed application for fresh registration under section 12AA but the said application has been rejected.

Even if no tax is payable by a trust or institution on its total income in accordance with the provisions of the Act, tax on accreted income shall be payable by such trust or institution.

Tax on accreted income to be paid to the credit of Central Government within 14 days from

the date on which the period for filing appeal before Income Tax Appellate Tribunal against the order cancelling the registration / order rejecting the application expires, and if no appeal has been filed by the trust or the institution; or
the date on which the order in any appeal confirming the cancellation of the registration / application, is received by the trust or institution.
from the end of the previous year in which required fresh application is not made
from the date of receiving of order cancelling the application for fresh registration
from the date of merger of trust with an entity other than an entity which is a trust or institution having similar objects and registered under section 12AA
from the date on which the period of 12 months expire from the end of the month in which the dissolution takes place and there is failure to transfer assets to a charitable institution as aforesaid.

Tax on accreted income (“additional tax”) is final tax and no credit is available for such tax paid. In case of failure of payment additional tax within prescribed time, simple interest @1% per month or part thereof leviable. In case of default in payment of additional tax and interest thereon, trust or institution to be regarded as assessee in default. Recipient of the assets of the trust also to be held liable in such cases (to the extent of the assets received).

For the above purposes, registration under section 12AA shall include any registration obtained under section 12A at the relevant time.