STRUCTURE OF THE AUTHORITIES
1.1. The provisions regarding exempted institutions etc. are administered mainly by Director General of Income Tax (E) and Directorates of Exemption working under him in seven cities, namely, Delhi, Kolkata, Ahmedabad, Mumbai, Chennai, Hyderabad and Bangalore. However, in areas not covered under the jurisdiction of aforesaid seven Directorates, these provisions are administered by the territorial Commissioners of Income Tax. The hierarchical structure for administration of these provisions is described in the succeeding sub-paragraph.
1.2. The structure is as under:-
(i) The Central Government;
(ii) The Central Board of Direct Taxes;
(iii) The Director General of Income Tax;
(iv) The Director/Commissioner of Income Tax;
(v) The Additional/Joint Director/Commissioner of Income Tax;
(vi) The Deputy/Assistant Director/Commissioner of Income Tax;
(vii) Income Tax Officer; and
(viii) The Inspector of Income Tax.
1.3. From the aforesaid structure, it is clear that Commissioner of Income Tax (CIT) and other authorities, not working in directorates, also perform respective functions regarding exempted institutions in respect of their jurisdiction outside seven cities. In fact, the Act makes mention only of CIT. In order to fill this lacuna, the Board has authorized Director of Income Tax (Exemptions) [DIT(E)] to discharge all the functions of CIT in the aforesaid cities [Notification S.No. 880(E) dated 14.09.01]
CHARITABLE PURPOSE [Section 2(15)]
2.1Section 2(15) defines the expression “charitable purpose” in an inclusive manner to include, – (i) relief of the poor, (ii) education, (iii) medical relief, and (iv) any other object of general public utility. The aforesaid definition is not exhaustive and, therefore, purposes similar to the purposes mentioned in the aforesaid definition will also constitute charitable purposes. Further, the words “any other object of general public utility” are of wide import. However, the object should not be of utility for only a few persons. Some decided cases, discussed in subsequent sub-paragraph, will help to clarify the meaning of the definition and put it in a proper perspective.
CHARITY
2.2 (1965) 55 ITR 722 (SC)
Andhra Chamber of Commerce
The word ‘charity’ connotes altruism in thought and action. It involves an idea of benefiting others rather than oneself.
2.3 (1976) 103 ITR 777(SC)
Yograj Charity Trust
A commercial concern is not an object of relief of poor on the ground that it provides employment. The object should provide relief directly and not indirectly.
EDUCATION
2.4 (1975) 101 ITR 234 (SC);
Sole Trustee, Lok Shikshana Trust
The word ‘Education’ means training and development of mind, skill and knowledge and it has character of schooling etc. of children. Travelling also enhances knowledge but that would nto amount to ‘education’ in the context of section 2(15).
ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY
2.5 (1971) 82 ITR 704 (SC);
Ahmedabad Rana Caste Association
The words are quite wide in their ambit. However, the beneficiaries should be well defined and identifiable by some common quality of public or impersonal nature.
2.6 An institution set up with the object of promoting trade or commerce is a charitable institution as it promotes common good through enhancement of business. We may refer to the following decisions :
(i) (1981) 130 ITR 186(SC);
Federation of Indian Chambers of Commerce & Industry
(ii) (1981) 130 ITR 28 (SC);
Bar Council of Maharashtra
2.7 However, an institution, which merely regulates or enhances business of its members is not a charitable institution. We may refer to the following decision : –
(1978) 111 ITR 241 (Mad);
Madras Hotels Association
In this case, proprietors of hotels formed an association for obtaining articles on permit for supplying them to members and protecting their business interest. The association was held not to be charitable in nature.
2.8 Section 11 (4A) enacts that the business income of a charitable institution will also be exempt from tax provided that, – (i) business is incidental to the main object, and (ii) separate accounts are maintained for the business. We may consider the following cases:
(i) (1991) 34 ITD 476 (Mad);
SOS Children’s Village of India
Printing and selling greeting cards for raising funds, in case of a trust whose main object is welfare of poor and destitute children, is a business incidental to attainment of the objects.
(ii) 247 ITR 785 (SC);
ACIT Vs Thanti Trust
The settlement of a printing business for charitable objects constitutes corpus, which feeds the charitable purpose, and, therefore, the conduct of the business is incidental to attainment of charitable objects.
REGISTRATION OF TRUSTS & INSTITUTIONS
3.1 The legal frame work, granting exemption to a public charitable Trust, a company registered under section 25 of the Companies Act, or a society registered under the Societies Registration Act, 1860, or any other institution is contained in one or more of the following sections of Act:-
(i) Section 2(15);
(ii) Section 2(24) (iia);
(iii) Section 10
(iv) Sections 11,12, 12A, 12AA and 13; and
(v) Sections 35(1)(ii) and 35(i)(iii).
3.2 Section 1 2A enacts that provisions of section 11 and section 12, regarding exemption of income, will not be applicable to an institution etc., unless an application for its registration is made to the CIT/DIT(E) within a period of one year from the date of its creation. The CIT/DIT(E) may condone the delay for good and sufficient reason.
3.3 The application for registration has to be made in Form no. 1 0A . The application has to be accompanied by the following documents;-
(i) Copy of the instrument by way of which the trust or institution etc. is created; and
(ii) If it existed in years prior to the year in which application is made, accounts of the prior years (not exceeding three years)
[Rule 17A]
3.4 On receipt of the application, the CIT/DIT (E) has to pass an order either registering the trust etc. or rejecting the application. The registration may be rejected on the ground that the trust or its activities are not genuine. Such an order has to be passed within a period of six months from the end of the month in which the application is made.
[Section 1 2AA (2)]
3.5 The law regarding conditions precedent for registration, so far as merits are concerned, is written briefly and in simple language, namely, that the CIT/DIT(E) should satisfy himself about:-
(i) objects of the trust etc; and
(ii) genuineness of its activities.
Obviously, the object(s) of the trust etc. should constitute religious or charitable purpose(s) u/s 2(15) and this aspect will be enquired into. The ‘genuineness of activities’ can be inferred only if the trust/institution etc. has started to carry out the purpose(s), mentioned in the object clauses of instrument of its creation, at the time when application is made.
3.6 Section 12A(b) also requires that if income of a trust etc. in any previous year exceeds rupees fifty thousand before giving effect to provisions of section 11 and section 12, then its accounts are required to be audited by an accountant and his report in Form no. 10B (Annexe-2) has to be filed along with the return of income.
3.7 The following points should normally be kept in mind at he time of making an application for registration:-
(i) there should be a legally existent entity, which can be registered;
(ii) it should have a written instrument of its creation or written document evidencing its creation;
(iii) all its objects should be charitable or religious in nature;
(iv) its income and assets should be made applicable towards objects only, mentioned in the object clauses, and Rules and Regulations;
(v) no part of its income should be distributable or distributed, directly or indirectly, to its members, directors or founders, related persons or relatives etc. claiming through them; and
(vi) in case of dissolution, its net assets after meeting all its liabilities, should not be revertible or reverted to its founder, members, directors or donors etc., but used for the objects.
ASSESSMENT OF A CHARITABLE TRUST OR INSTITUTION
INCOME
4.1 The concept of income, for assessment of religious or charitable trusts, etc., is somewhat different from assessment of other entities. This is because of provisions of section 2(24)(ii), under which voluntary contributions are also taken as income. It also becomes clear from reading of this section that a trust or institution may be wholly or partly religious or charitable in nature. Various provisions will, therefore, be applicable to the activities or purposes which are charitable or religious in nature.
4.2 Section 12 makes some changes in the aforesaid “income”. Firstly, it excludes corpus donations from the ambit of income. Thus, voluntary contributions received with a specific direction that they shall form part of the corpus are to be excluded from the definition of the term income. It may be noted here that these contributions have to be used in accordance with the directions of the donor. And secondly, the value of any medical or educational service, by a trust etc. running an educational institution or a hospital, to a person referred to in section 13(3) of the Act will be deemed to be the income of the trust or institution. If the beneficiary has made any payment for such service, then such payment shall be deducted from the value of the service in arriving at the income.
APPLICATION OF INCOME
4.3 Section 11 permits deduction of expenditure from income. The expenditure incurred by a trust or institution by way of application of income in India towards religious or charitable pruposes, as per its Memorandum, is deductible from the income. The assessee may also set apart and accumulate 15% of income for such application and such amount will also be taken as expenditure of the year. These provisions are applicable mutatis-mutandis to a partly religious or charitable trust. This section also permits deduction of expenditure incurred outside India provided that such application of income promotes international welfare in which India is interested. However, for deduction of such expenditure, prior approval of the Board is required. In conformity with section 12, corpus donations constitute deductible expenditure under section 11 (1)(d). The word ‘applied’ used in section 11 should be construed widely and not in a narrow sense. We may have regard to some of the decided cases in the matter:-
(i) 133 ITR 779 (Mad.)
Kannika Parameswari Devastham & Charities.
If the expenditure is on capital account on object(s) contained in the object clause, the expenditure will amount to application of income.
(ii) 242 ITR 457 (Kar)
Janmabhumi Press Trust
The assessee constructed a building out of accumulated and borrowed funds. The building was later rented out. A part of the rent was used for repayment of loan. Such repayment of loan was treated as application of income.
CAPITAL GAINS
4.4 Section 11 (1A) of the Act deals with Capital Gains arising or accruing to a charitable trust or institution. The position of law is that if the whole of the net consideration (Consideration minus the expenditure incurred in connection with transfer) is applied towards acquiring a new capital asset, then, the capital gains is taken to have been applied for charitable or religious purpose. However, if only a part of the net consideration is applied for acquiring a new capital asset, then, the capital gains to the extent of differences between amount so applied and original cost of the asset is taken to be applied for religious or charitable purpose. The provision applies mutatis-mutandis where the capital asset is held partly for religious or charitable purpose.
ACCUMULATION OF INCOME
4.5 Apart from accumulation of 15% of income permitted u/s 11(1) of the Act, a trust or institution is permitted to accumulate or set apart income for specific purpose(s) (emphasis supplied) u/s 11(2). The accumulation and setting apart of income has to be for specific purpose as distinguished from general purpose(s) mentioned in the Memorandum. We may refer to the following case in this behalf:-
(1993) 199 ITR 819 (Cal);
SINGHANIA CHARITABLE TRUST
Such an amount shall also be excluded from the income provided that the following conditions are satisfied:-
(i) A notice is given in Form no. 10 (Annexe.3) to the assessing officer setting out the amount and purpose for which is accumulated, and
(ii) The money so accumulated or set apart is invested in the forms or modes mentioned in section 11(5).
As per Rule 17, the notice has to be given on or before the due date of filing the return u/s 139(1). However, subject to some conditions, the Board ahs authorized the CIT/DIT(E) to extend the aforesaid time limit if good and sufficient reason is shown for inability to give the notice in time (Circular No. 273 dated 03.06.1980). The circular stipulates satisfaction of five conditions before the time limit is extended. These are as under:-
A. The genuineness of the trust is not in doubt;
B. The failure to give notice to the Assesssing Officer and invest the surplus in time was only due to over-sight;
C. The trustees or settler have not benefited by such failure directly or indirectly;
D. The trust agrees to invest the surplus before the extenstion of time is granted; and
E. The accumulation was necessary for carrying out the object of the trust.
The issue of time limit for giving notice was also considered by Hon’ble Supreme Court in the case of CIT Vs Nagpur Hotel Owners’ Association, (2001) 247 ITR 201 (SC). It was held that such a notice can be given at any time before the assessment is made. Thus, the time limit under Rule 17 is directory and not mandatory in nature. However, a notice given after completion of assessment will not satisfy the requirement of section 11(2) as in such a case all particulars relevant for computation of income will not be available before the Assessing Officer for making the assessment.
4.6 Income accumulated or set apart u/s 11(2) for attainment of specific pruposes has to be used for the specified purposes within the period of accumulation etc. The infringement of the conditions of accumulation can occur on any or all of the following grounds:-
(i) it is applied to purposes other than charitable or religious purposes,
(ii) It is ceases to remain invested in the manner specified u/s 11(5),
(iii) It is not applied for the purposes for which it was accumulated, or
(iv) It is credited or paid to any religious or charitable. In the occurrence of any of the aforesaid infringement, the amount will be taken as the income of the previous year in which the infringement has taken place. It may happen that any assessee is unable to apply accumulated income for the purposes for which it was accumulated because of reasons beyond his control. In such a situation, section 11 (3A) allows the assessee to make an application to the assessing officer requesting for change of purpose(s) for application of income. Upon such application, the A.O. may allow the change if the substituted purposes are in conformity with the objects of the charitable trust or institution. However, transfer of income to another charitable trust will not be allowed under this provision.
BUSINESS INCOME
4.7 Section 11(4) states that a business as a going concern can be held as property under trust. Therefore, a legitimate claim can be made that the income of such business may not be included in the total income of the person receiving such income. In such a case, the assessing officer is required to assess the income of such business under the provisions of the Act. The difference between income so determined and the income shown in accounts shall not be deemed to have ben applied towards religious or charitable purpose, but applied to other purposes. The point to be noted is that the income of the business has to be calculated under usual provisions contained in Chapter IV-D and not as per Chapter III of the Act, applicable to income of charitable trusts and institutions.
INCIDENTAL BUSINESS
4.8 Section 11 (4A) deals with income of a trust or institution by way of a business, which is incidental to attainment of its objects. The income of such a business will be entitled to exemption u/s 11 if separate books of account are maintained, otherwise, the income will not be entitled to benefit of exemption under section 11 and section 12. The cases on this issue have already been discussed in paragraph 3.8 (supra).
MODES OF INVESTMENT
4.9 Section 11(5) mentions a number of modes of investment in respect of income accumulated and set apart u/s 11(2) (Schedule-1).
FORFEITURE OF EXEMPTION
5. Section 13 mentions the contains circumstances in which benefit of provisions of section 11 and section 12 shall not be available in respect of application of income or part thereof. These circumstances are listed as under:-
(i) the income is for private religious purpose and not for the benefit of public.
(ii) The income is for the benefit of any particular religious community or caste. However, income for benefit of persons belonging to Scheduled castes, Scheduled tribes, women and children will not be denied exemption u/s 11 & 12.
(iii) The income is for the benefit of any interested person mentioned in section 13(3) or Explanation I to Section 13(6) respectively. (Schedule -2 and Schedule-3)
(iv) The income is invested or continues to be invested in forms other than the forms specified in section 11(5).
APPROVAL U/S 80G(5)
6.1 Apart from exemption of income of the trust or institution etc. as provided
in section 11 and section 12 of the Act, a donor to such a trust or institution is also entitled to benefit of deduction from his income on account of the donation made by him. The amount of deduction is prescribed in section 80G(2)(iv). Section 80G(5) contains preconditions, which must be satisfied cumulatively, before the donation to the trust or institution becomes tax deductible in the hands of a donor. These conditions are summarized as under :-
(i) the income of the trust etc. would not be includible in total income by virtue of provisions contained in sections 11 and 12, section 10(23), section 10(23AA) or section 10(23C);
(ii) the income of the trust etc., as per rules governing the trust etc., is applicable wholly for charitable purpose (emphasis supplied). The charitable purpose does not include religious purpose [Explanation 3 below section 80G]. However, section 80G(5B) permits application upto 5% of the income of a year towards religious purposes.
(iii) The trust etc. is not expressed for the benefit of any particular religious community or caste;
(iv) It maintains regular books of account regarding its receipts and expenditure; and
(v) The trust etc. is approved by the CIT/DIT(E) in this behalf.
Thus, the approval to a charitable trust etc. is granted in pursuance of condition No. (v), mentioned above.
6.2 Rule 11 AA prescribes that an application for approval u/s 80G shall be made in triplicate in Form No. 10G (Annexe 4). It shall be accompanied by copies of following documents : –
(i) order of registration u/s 1 2A, notification u/s 10(23) or notification u/s 10 (23C);
(ii) note on activities conducted since inception or in last three years, whichever is less; and
(iii) accounts of the institution since inception or last three years, whichever is less.
The rule also provides that the application in form No. 10G shall be disposed of within six months of the date of its receipt by the CIT/DIT(E). However, the time taken by the assessee in complying with any requirement shall be excluded while calculating the aforesaid limitation period. Thus, limitation is involved in disposal of such an application.
6.3 No formal procedure has been laid down either in the Act or the Rule for disposal of the applications. However, if it is intended to reject an application, the trust etc., has a right to an opportunity of being heard. The time taken by the trust etc. in complying with the directions of the CIT/DIT(E) regarding filing of evidence or information shall be excluded in computation of aforesaid time limit of six months. The CIT/DIT(E) may grant approval for a period upto five years. While doing so, he has to specify the assessment years for which approval is valid. Thus, it is clear that a trust etc. may need repeated approvals. It may be stated here that the Act or the Rules do not distinguish between an initial or subsequent approval.
6.4 Two decisions regarding approval of a trust etc. under this section are summarized below:-
(1967) 65 ITR 611 (SC)
East India Industries (Madras) Pvt. Ltd.
The question whether donation to an institution are deductible u/s 80G has to be decided with reference to all the object of the institution. If some objects are non charitable, the institution is not eligible for approval.
227 ITR 578 (SC)
Upper Ganges Sugar Mills Ltd.
Even if one object is wholly or substantially wholly religious in nature, the institution is not eligible for approval u/s 80G.
No appeal is provided against an order under this section. Thus, an assessee can only challenge the order by way of Writ Petition.
APPROVAL U/S 10(17A)
7.1 This section inter-alia exempts from tax any award made in cash or kind, instituted by the Central Government, the State Government or any institution, and approved by the Central Government to have been instituted in the public interest. Thus, the only condition mentioned in the statute regarding approval is that the award should be approved by the Central Government in public interest. In order to get approval for the exemption of awards from tax in the hands of the recipients, the institutions is required to furnish information on the following points:-
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1 |
Name, address & P.A. No. of the institution |
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2 |
Assessment Year for which approval is sought |
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3 |
Instrument of creation of the institution containing interalia MOA and rules & regulations |
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4 |
Whether the institution is registered u/s 12A, or notified or approved u/s 10(23), 1 0(23C), 35(1 )(ii) or 35(1 )(iii) |
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5 |
Purpose of award |
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6 |
Copy of the scheme of the award, and rules and regulations for grant of award |
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7 |
Amount and periodicity of the award. |
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8 |
Method of selection of the person(s) to be awarded. |
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9 |
Constitution of the Jury/Selection committee includinginteralia name, |
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10 |
Name, address and qualification of the persons given awards in the last five years. |
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11 |
Copies of audited accounts since inception or last three years whichever is less; |
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12 |
Any other information in support of approval of the award. |
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7.2 While instituting awards, the institution must keep following points in mind for the purpose of notification:-
(i) Whether the award is in public interest;
(ii) Whether the object clauses, and rules and regulations of the institution permit grant of the award;
(iii) Whether the grant of award is in furtherance of aims and objects of the institution;
(iv) Whether the objects of the institution are charitable in nature;
(v) Whether selection criteria are fair and reasonable; and
(vi) Whether permission of the Board has been obtained under proviso to section 11(1 )(c) in case the expenditure on award is to be incurred outside India.
NOTIFICATION UNDER SECTION 10(23)
8.1 This section exempts from tax any income of an association or institution established in India, which any be notified by the Central Government, having regard to the fact that the association or institution is formed with the object of control, supervision, regulation or encouragement of the game of cricket, hockey, football, tennis in India, or any other game or sports as the Central Government may notify in this behalf. While four games have been specified in this section itself, the Central Government has further notified 32 games and sports indicated below:-
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S.No. |
Games |
Notification |
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No. |
Date |
||
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1 |
Golf |
So 2688 |
6.10.1961 |
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2 |
Rifle Shooting |
SO 1101 |
1.03.1967 |
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3 |
Table Tennis |
SO 1102 |
08.03.1967 |
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4 |
Polo |
SO 1562 |
22.04.1967 |
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5 |
Badminton |
SO 4091 |
29.10.1968 |
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6 |
Swimming |
241 |
14.12.1972 |
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7 |
Athletics |
241 |
14.12.1972 |
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8 |
Volley-ball |
241 |
14.12.1972 |
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9 |
Badminton |
241 |
14.12.1972 |
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10 |
Wrestling |
241 |
14.12.1972 |
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11 |
Basket-ball |
241 |
14.12.1972 |
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12 |
Kabaddi |
241 |
14.12.1972 |
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13 |
Weight-lifting |
241 |
14.12.1972 |
|
14 |
Gymnastics |
241 |
14.12.1972 |
|
15 |
Boxing |
241 |
14.12.1972 |
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16 |
Squash |
241 |
14.12.1972 |
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17 |
Chess |
241 |
14.12.1972 |
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18 |
Bridge |
241 |
14.12.1972 |
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19 |
Billards |
241 |
14.12.1972 |
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20 |
Cycling |
241 |
14.12.1972 |
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21 |
Yachting |
241 |
14.12.1972 |
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22 |
Flying |
241 |
14.12.1972 |
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23 |
Judo |
241 |
14.12.1972 |
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24 |
Kho-Kho |
241 |
14.12.1972 |
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25 |
Horse-riding |
241 |
14.12.1972 |
|
26 |
Motor racing including Motor cycle racing |
320 |
28.05.1974 |
|
27 |
Mountaineering |
GSR 99 |
30.09.1975 |
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28 |
Body building |
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|
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29 |
Soft Ball |
GSR 100 |
04.10.1975 |
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30 |
Carrom |
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31 |
Rowing |
SO 1241 |
21.04.1995 |
|
32 |
Archery |
SO 1720 |
14.06.1995 |
8.2 The provisions regarding definition of income contained in section 2(24)(ii) in respect of voluntary contributions is applicable such associations or institutions. Provisions of sections 11(2), 11(3) and 11(5), applicable to charitable and religious trusts or institutions regarding accumulation of income etc. and investment of surplus funds, are also applicable, mutatis –mutandis, to the association or institutions notified by the Central Government under this section. The Board has framed Rule no. 2C under this section, and form no. 55 (Annexe 5) under this rule for making application for the notification.
8.3 The form should be properly filled up, especially keeping the following points in mind:-
(i) Whether the objects of the association or institution, as reflected in Memorandum, are to control, supervise, regulate or encourage any game or sports;
(ii) Whether the game or sports are mentioned in section 10(23) or notified by the Central Government under this section;
(iii) Whether the documents and accounts show that the activities were actually carried on and income utilized by way of expenditure on these activities;
(iv) Whether provisions of sections 11(2) & 11(3) regarding accumulation and application of such income are followed and amount thereof;
(v) Whether surplus funds are invested in accordance with provisions of section 11(5) and details of such investments;
(vi) Whether the affairs of the association or institution are properly managed by constitution of managing committee etc.;
(vii) Whether the transactions with persons mentioned in section 13(3) are at an arm’s length and they do not derive any benefit from the association or institution;
(viii) Whether the affairs of the association or institution are administered and supervised in a manner, which ensures application of income to the objects only.
8.4 A notification under this section can be made for three years at any one time. Thus, on expiry of the period of notification, a fresh application will have to be made.
8.5 The section has been omitted by the Finance Act, 2002 w.e.f. 01.04.2003. Thus, the income of the association or institution will not be exempt for A.Y. 2003-04 and onwards under this section.
NOTIFICATION/APPROVAL UNDER SECTION 10(23C)
9.1 Sub-clauses (i), (ii), (iii) & (iiia) of clause 23C of section 10 exempt from tax the income of Prime Minister’s National Relief Fund, Prime Minister’s Fund for promotion of Folk Art, Prime Minister’s Aid to Students’ Fund and National Foundation for Communal Harmony respectively. Sub-clause (iii ab) takes out from preview of taxation the income of any university or other educational institution existing solely for educational purposes and not for profit, which is wholly or substantially financed by the government. Similarly, sub-clause (iii ac) of this clause takes away from the ambit of taxation the income of any hospital or other institution dealing with reception and treatment of persons suffering from illness or mental defectiveness or for reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation provided that the hospital or the institution exists solely for philanthropic purposes are not for profit and it is wholly or substantially wholly financed by the government. Sub-clauses (iii ad) and (iii ae) also exempt the income of the university or educational institution, hospital or other institution not financed wholly or substantially wholly by the Government provided that it satisfies other conditions mentioned in clause (iii ab) or (iii ac), as the case may be, and its annual receipts do not exceed rupees one crore.
9.2 Sub-clauses (iv), (v), (vi) &(via) of section 1 0(23C) deal with exemption of income of various kinds of religious or charitable institutions which are either notified by the Central Government or approved by the prescribed authority. Clause (iv) deals with exemption of income of any fund or institution established for charitable purposes which may be notified by the Central Government taking into account the objects of the fund etc. or its importance throughout India or throughout any State or States. Sub-clause (v) deals with exemption of income of any trust or institution set up wholly for public religious purposes or public religious or charitable purposes, which may be notified by the Central Government taking into account the manner in which its affairs are administered and supervised so as to ensure that the income is applied for its objects. Sub clause (vi) deals with exemption of income of any university or educational institution, which may be approved by the Board, provided that it is existing solely for educational purposes and not for purposes of profit, and if its annual receipts exceed Rs. 1 crore. And finally, sub clause (via) deals with exemption of income of any hospital or institution, which may be approved by the Board, and which engages itself in reception and treatment of persons suffering from illness or mental defectiveness or during convalescence or requiring medical attention or rehabilitation, provided that it exists solely for philanthropic purposes and not for profit and provided further that its annual receipts exceed Rs. 1 crore.
9.3 Provisions of section 11(1), section 11(2) and section 11(3) regarding application of income, accumulation of income and its use, and provisions of section 11(5) regarding investment of surplus funds are applicable to such a trust, institution etc. Application for notification by the Central Government under sub-clause (iv) or (v) of section 10(23C) has to be made in Form no. 56 (Annexe 6), while application for approval by the prescribed authority under sub clause (vi) or (via) has to be made in form No. 56-D (Annexe 7). Central Government is the authority which notifies institutions etc. mentioned in sub clauses (iv) & (v), while Central Board of Direct Taxes is the prescribed authority for granting approvals under sub clauses (vi) & (via) of the aforesaid section.
9.4 Points of consideration for notification or approval under different sub-clauses are different. However, the form to be filled up for notification under clauses (iv) and (v) is the same, namely, Form no. 56. Similarly, form to be filled up for approval under clauses (vi) and (via) is same, namely, Form no. 56D. Therefore, the prescribed form should be carefully filled up having regard to provision contained in the relevant sub-clause.
For sub-clause (iv), consideration has to be given to the charitable objects of the fund or institution and its territorial importance. Sub-clause (v) lays greater emphasis on the manner in which the affairs are administered so as to ensure that the income is applied properly for the objects of the trust. Sub-Clause (vi) lays emphasis on the factual position, namely, that the university or institution should be existing solely for educational purposes and not for profit. Therefore, if the aims and objects of the institution include objects other than educational, then such an institution will not be eligible for approval. This sub clause also lays stress on the position that the institution should exist for educational purposes only and not for the purposes of profit. Therefore, the issue as to how the income of the institution is applied assumes greater significance. Sub clause (via) lays emphasis on existence solely for philanthropic purposes and not purposes of profit.
NOTIFICATION UNDER SECTION 35(1)(ii)/(iii)
10.1 Donors to a scientific research association, a university, college or other institutions are entitled to weighted deduction of one and one fourth times of the donations paid by them, provided that, – (i) the association, university, college or the institution, as the case may be, is notified by the Central Government for the purpose of clause (ii) or (iii) of sub-section (1) of section 35, and (ii) the institution etc. uses the donations for the research purposes. Sub-clause (ii) deals with scientific research, while sub-clause (iii) deals with research in social science or statistical research. In order to get the aforesaid benefit, the institution etc. has to made an application in Form no. 3CF (Annexe-8) to the Central Government for its notification in official gazette. The income of an institution notified under section 35(1)(ii) is also exempt from tax u/s 10(21) subject to fulfillment of conditions regarding application of its income for scientific research purposes; its accumulation and use u/s 11(2) and 11(3); and its investment as per modes prescribed u/s 11(5). If exemption is sought u/s 10(21) also, then, annexe to Form 3CF has also to be filled up by the assessee.
10.2 The Form no. 3CF may be filled up carefully, having regard to the provisions contained in section 35(1)(ii)/(iii), 11(2), 11(3) and 11(5). As the benefit is sought to be given in respect of scientific research, research in social science or statistical research activities, it has to be ascertained whether research is the sole object or only one of the objects of the university, association or institution. In case, research is only one of the objects of the institution, then, it is incumbent on the institution to maintain separate books of account and furnish Income and Expenditure and Balance Sheet (Statement of Affairs) in respect of research activities. Such accounts have to be audited by an auditor, who should certify that expenditure incurred was for research work. Following points should be kept in mind while filling up the form:-
(i) Whether research is sole object or only one of the object of the association, institution etc. If research is the only object, then the entity is classified as ‘Association’ for notification purposes; and if it is one of the objects, then it is classified as ‘Institution’;
(ii) Whether Income & Expenditure Account and Statement of Affairs are separately maintained for research activity and audited by the auditor;
(iii) Whether income has been applied or accumulated, as the case may be, for research purposes only;
(iv) Whether surplus funds are invested in the modes prescribed in section 11(5);
(v) Details of research projects completed and research projects intended to be taken up in the ensuring years; and
(vi) Any benefit granted to the interested persons or major donors.
MISCELLANEOUS
11.1 A charitable trust etc. is required to file suo-moto returns under section 139(4A) provided its income, representing aggregate of voluntary contributions, defined u/s 2(24)(iia), exceeds the maximum amount not chargeable to income-tax. Form No. 3A has been prescribed as the return of income. The trust etc. has to get its accounts audited and a report of the auditor in Form 1 0B has to be filed alongwith the return.
RATES OF TAX
11.2 The charitable trusts etc. are liable to tax at the normal rate applicable to A.O.P.s However, in case of default u/s 11(5) or 13, the income is liable to tax at maximum marginal rate under section 164(3).
WITHDRAWAL OF NOTIFICATION
11.3 The Central Government or the Prescribed authority u/s 1 0(23C) or u/s 35(1 )(ii)/(iii) was not specifically empowered to withdraw the notification or approval. It appears that such a power was inherent under the general law to the effect that an authority which has power to grant exemption has also power to withdraw such exemption. However, Finance Act, 2002, has now bestowed such power specifically in case any or all conditions of notification or approval have been violated. Procedure of assessment has also been modified in such a case and the time taken from the date when the A.O. reports the default to the authority to the time of receipt of authority’s order by him is excluded from the limitation period.
PERIOD OF NOTIFICATION
Notifications u/s 12(23), 10(23C) or 35(i)/(ii)/(iii) are made for a period not exceeding three years. Thus, notification under these sections are valid for a period of three years or less. The assessee is entitled to make a fresh and also repeated applications. The procedure for disposal of such applications is same as for the first application.
Schedule-1
THE FORMS & MODES OF INVESTMENT ETC. PRESCRIBED U/S 11(5)
1. Investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government.
2. Deposit in any account with the Post Office Savings Bank.
3. Deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank.)
Explanation – In this clause, scheduled bank means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934)
4. Investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963).
5. Investment in any security for money created and issued by the Central Government or a State Government.
6. Investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government.
7. Investment or deposit in any public sector company Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,-
(A) Such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company;
(B) Such other investment or deposit shall be deemed to be an investment made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company;
8. Deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long term finance for industrial development in India and which is eligible for deduction under clause (viii) of sub-section (1) of section 36.
9. Deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36.
9A Deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India.
Explanation – For the purposes of this clause-
a. “long term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;
b. “public company” shall have the meaning assigned to it in section 3 of the Companies Act., 1956 (1 of 1956);
c. “urban infrastructure” means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport.
10. Investment in immovable property.
Explanation-“Immovable property” does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth.
11. Deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act., 1964 (18 of 1964)
12. Any other form or mode of investment or deposit as may be prescribed.
THE FORMS AND MODES OF INVESTMENT ETC. PRESCRIBED UNDER CLAUSE 12 OF SECTION 11(5)
1. Investment in the units issued under any scheme of the mutual fund referred to in clause (23D) of section 10 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. Investment by way of acquiring equity shares of a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositiories Act, 1996 (22 of 1996).
Schedule -2
INTERESTED PERSON
1. The author of the trust or the founder of the institution.
2. 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.
3. Where such author, founder or person is a Hindu undivided family, a member of the family.
4. Any trustee of the trust or manager, (by whatever name called) of the institution.
5. Any relative of any such author, founder, person, member, trustee or manager as aforesaid.
6. Any concern in which any of the persons referred to in clauses 1,2,3,4 and 5 (above) has a substantial interest.
Schedule-3
RELATIVE
1. Spouse of the individual.
2. Brother or sister of the individual.
3. Brother or sister of the spouse of the individual.
4. Any lineal ascendant or descendant of the individual.
5. Any lineal ascendant or descendant of the spouse of the individual.
6. Spouse of a person referred to in 2,3,4 or 5 above.
7. Any lineal descendant of a brother or sister of either the individual or of the spouse of the individual.
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Name, address &P.A. No. of the |
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Assessment Year for which approval is sought |
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Instrument of creation of the institution containing interalia MOA and rules & regulations |
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Whether the institution is registered u/s 12A, or notified or approved u/s 10(23), 1 0(23C), 35(1 )(ii) or 35(1 )(iii) |
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Purpose of award |
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Copy of the scheme of the award, and rules and regulations for grant of award |
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Amount and periodicity of the award. |
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Method of selection of the person(s) to be awarded. |
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Constitution of the Jury/Selection committee including interalianame, |
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Name, address and qualification of the persons given awards in the last five years. |
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Copies of audited accounts since inception or last three years whichever is less; |
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Any other information |
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Thank you very much for such a good article which gives total idea about registration of trusts and associated compliances as per Act. Very well written
G S Rao,