Charitable Trusts – Exemption under Section 11 of Income Tax Act, 1961

CA VISHAL SACHDEVA

EXEMPTION UNDER SECTION 11 OF INCOME TAX ACT, 1961

Section 11 of Income Tax Act,1961 provides exemptions for Income earned from property held under charitable trusts / societies for the activities carried out for charitable or religious purposes subject to certain terms and conditions. The term charitable and religious purpose has been defined under section 2(15) of the Income Tax Act, 1961 to include relief to the poor, education, preservation of monuments, preservation of environment, preservation of places of historical and artistic interests, medical relief, yoga, promotion of sports and games and advancement of any other object of general public utility. The income of trust involved in all activities as defined under Section 2(15) of the act, other than ‘advancement of any other object of general public utility” are exempt from tax subject to Sections 11, 12 and 13 of the Income Tax Act, 1961 read together with the Rules

Advancement of any other object of general public utility

The term “charitable purpose” as defined under section 2(15) of the Income Tax Act, 1961 includes all the above-mentioned objects which construe the meaning charitable purpose, except the last limb which includes the advancement of any other object of general public utility

From the assessment year 2009 – 2010 the term any other object of general public utility is not included in the definition of the term ‘charitable purpose’. The term any other object of general public utility is defined to include any activity of trade, commerce or business or any other activity in the nature of trade, commerce or business carried on for a cess, fee or other consideration. Thus, income derived from a source ancillary to the main objects of ‘charitable purpose’ as defined in the Section 2(15) of the Income Tax Act shall be exempt to the extent of the following:

From the assessment year 2016 – 2017 a trust carrying on such business activities or rendering such service would have its income from such business exempt to the extent of 20% of the total receipts of the trust during the relevant previous year

Who can claim the exemption?

Any trust or institution which was registered under section 12AA of Income Tax Act, 1961 could claim exemption of income earlier. However, since October 1, 2020 every trust, registered under section 12AA would have to reapply under section 12AB of the Income Tax Act in Form 10A online to gain exemption of income and can then claim exemption under this section. This registration would be applicable for 5 years after which a renewal would have to be taken. Those trusts which were not erstwhile registered under Section 12AA and have undergone the process of new registration would be initially given a provisional registration for 3 years.

Incomes that can be claimed as exemption:

• Income received or derived from property held by charitable trust or societies utilized by them for charitable purposes is exempt from taxation under certain conditions which are dealt with later with in this note.
• Voluntary contributions received by a trust with a specific direction that they shall form part of corpus of the trust or institution shall be exempt from tax. However, it cannot be considered as income of the trust. It shall form a part of the corpus of the trust and treated as a capital receipt.

Conditions for claiming exemption:

• Income should be received from property held under trust wholly or in part, (for the properties held in part, exemption can be claimed only if trust has been created before commencement of this act), for charitable or religious purposes in India.
• The aforesaid income should either be applied or accumulated for charitable purposes in India.
• The income accumulated or set apart for charitable or religious purposes should not exceed 15% of the total income received during the previous year. In other words, a minimum of 85% of the income derived from the trust property should be applied for charitable purposes in India
• In computing income under this section, any contributions referred to in Section 12 of Income Tax act shall be deemed to be part of the income. Section 12 deals with voluntary contributions received other than with a specific direction that they shall form part of corpus trust or institution.
• The income applied for charitable purposes which tends to promote international welfare can also be claimed as exemption subject to the following:
• The income of trusts created on or after 1-04-1952 are also exempt from tax to the extent such income is applied to promote international welfare in the domiciles where India is interested.
• In case of trust created before 1-04-1952 income applied for charitable or religious purposes outside India through payment to another trust registered under Section 12AA being contribution in the with a specific direction that such contribution shall form a part of the corpus of the trust shall not be treated as application of income of the trust.

For determining the amount of application under this section, the provisions of Section 40(a), 40(ia), 40A(3) & 40A(3A) shall apply mutatis mutandis as they apply in computing the income chargeable under the head profits or gains of business or profession.

For Example, if a trust named “A” registered u/s 12AA received an income of Rs.1,20,000 and utilized Rs.80,000 and created a reserve of Rs.40,000.

Can the trust claim exemption under section 11?

No, because 85% of the income should be utilized for the religious or charitable purposes and 15% can be created as reserve, but here only Rs.80,000 has been utilized i.e., 66.67% which is less than the prescribed limits.

Income applied is less than Income Derived

If in the previous year, the income applied to religious or charitable purposes in India falls short of 85% of income derived during that year, by any amount:

• for any reason that, whole or part of the income has not been received during the year

OR

• For any other reason

Then at the option of the trust, the income so derived i.e., including income not utilized for religious or charitable purposes (be deemed to be income applied to religious or charitable purposes) and can be claimed as exempt from tax. But the exemption cannot be claimed on the same amount on its receipt or utilization in the subsequent years.

If the income so deemed to be utilized for charitable or religious purpose is not utilized for such purpose on its receipt, then such income shall be added back as income of the trust in the year in which it is received or derived.

Such option can be exercised before the expiry of time allowed under section 139 for filing of return of income.

To claim exemption, the assessee should furnish an application in Form 9A read with Rule 17 of the Income Tax Rules justifying the reason for such shortfall and the amount on which such option is exercised.

Example:

For example, a trust named “A” has derived an amount of Rs.1,20,000 but has received only Rs.80,000 in that previous year and utilized the total amount of Rs.80,000 in that year. Can the trust claim an exemption under section 11?

Usually, the answer would be NO. Because, since the trust failed to utilize 85% of the amount derived i.e., Rs.1,02,000 due to non-receipt of income. But by submitting Form 9A trust can claim exemption on confirmation from the assessing officer.

If Income utilized is less than 85% of income received / derived

It may so happen that the trust may receive more income than it needs to utilize in that year i.e., the application of income for charitable purpose may fall short of 85% of the income derived during the year.

In such circumstances, the trust can set apart more than 15% of income derived or received subject to the following conditions:

It must invest the funds exceeding 15% in the modes specified under Section 11(5) read with Rule 17C and the period of such accumulation of funds in the specified mode should not exceed 5 years from the date of making such accumulation or as specified under Rule 17C for different modes of investments.

Modes of Investment under Section 11(5)

• Investment in savings certificates as defined under Section 2 of Government Savings
  Certificates Act, 1959, and any other securities or certificates issued by Central Government.
• Deposit in any account with Post Office Savings Bank Account.
• Deposit in any account with a scheduled bank, or a co-operative society engaged in carrying on the business of banking.
• Investment in units of UTI.
• Investment in any security for money created and issued by the Central Government or a State Government.
• Investment in Debentures issued by or on behalf of company or corporation where
  principal and interest are fully and unconditionally guaranteed by central or state government.
• Investment in any shares of a public sector company. However, if the company ceases to be a public company within 5 years from the date of investment, then the investment shall be construed to mean as eligible investment for a period of 3 years from the date the company ceases to be a public sector company. In the case of any other investment or deposit, the investment shall be treated as eligible investment until it is repayable by such company.
• 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 sub-section (viii)(1) of Section 36;
• Investments in any bond issued by public company formed and registered in India with an objective of providing long term finance for urban infrastructure or purchase of house for residential purposes and is eligible for deduction under Section 36(1)(viii).
• Investment in Immovable Property (immovable property does not include Plant and Machinery)
• Deposits with IDBI.
• Investments in any other mode or form as prescribed in Rule 17C like investment in mutual funds, acquiring shares of incubatee by an incubator, acquiring shares of National Skill Development Centre etc.

The assessee shall make an application for investment of excess funds in any of the modes specified under Section 11(5) in Form 10 to the assessing officer who may then grant approval of the investment depending upon the facts and circumstances and the justifications of the case. The application should be furnished on or before the due date specified in section 139 for furnishing the return of income for the previous year.

Any income as referred above if not applied for the purposes mentioned in Form 10, before the expiry of 5 years, or ceases to remain invested or deposited in any mode fore-mentioned the same investment shall be deemed to be the income of the trust in the previous year in which there is a breach of such condition. If the circumstances for non-utilization of funds for specified purpose within the said period are beyond the control of the trustees, then the income could be utilized as per the recommendations of the assessing officer for such other purpose as may be falling within the scope of the objects of the trust.

Depreciation under Section 11

There is no bar on claiming any expense including depreciation under this section. But, if an acquisition of an asset has been treated as application of income in that previous year, then depreciation is not allowed under this section. This needs to be discussed in greater detail together with case laws. There are various case laws like CIT vs Ramananda Adigalar (Madras High Court), CIT vs Institute of Banking Personnel Selection (Bombay High Court), Director of Income Tax vs Framjee Cawasjee Institute, and finally the caselaw of CIT vs Rajasthan and Gujarati Charitable Foundation Trust (Supreme Court). This case law held in the Supreme Court took the reference of CIT vs Munisuvrat Jain 1994. The facts of the case are as follows:

CIT vs Rajasthan and Gujarati Charitable Foundation Trust (Supreme Court)

It was held in this case that the decision taken by the Bombay High Court in the case law CIT vs Munisuvrat Jain (Bombay High Court) would be applicable in the present circumstances

The assessee was registered as a Public Charitable Trust with the CIT Pune. The assessee had a temple which was a trust property. The trust acquired a building and furniture and fixture which was allowed as a application of income in the previous years. The assessee claimed depreciation and the same was disallowed by the CIT. It was stated by the CIT that depreciation is allowable as a deduction under Section 32 of the Act and allowable in computing income under Section 29 under the head profits and gains of business and profession. “In that matter it was stated that depreciation is allowable as a deduction only from the profits and gains of business and profession under Section 32 and not under general principles. The court rejected this argument. It was held that normal depreciation could be a legitimate deduction in computing the real income of an assessee under Section 11(1)(a) of the Income Tax Act, 1961 or general principles. Thus depreciation is chargeable for computation of income for charitable and religious purposes and for application and accumulation of income under general principles of commerce.”

However, there is an exception to the various case laws cited above namely Lissie Medical Institutions vs CIT (Kerala High Court).

Now comes the question of claiming the deductibility of depreciation on assets in the computation of income of charitable trusts in the previous year in which the actual application is made for the acquisition of assets by the trust.

Exemption under section 10:

Any trust or institution being registered under section 12AB, 12AA or 12A then no other provisions of section 10 (except clause 1 and clause 23C) shall be applicable for claiming exemption.

Voluntary Contribution by one trust to another trust

Donation of funds by a trust to another trust would be regarded as application of income under Section 11(1)(a) in the hands of the donor trust.

This would be irrespective of the fact whether the donee trust applies the funds in the same previous year or otherwise. But obviously if the donee trust does not meet the 85% minimum application of income in the previous year criterion, the contribution would be regarded as income in the hands of the donee trust.

However, the donation of funds by a trust with a specific direction that the funds would form a part of the corpus of the donee trust would render the donation taxable in the hands of the donor trust. The point is very logical and simple the funds if allowed as a deduction in the hands of the donor trust would render the income non-taxable in its hands and the specific direction that it should form a part of the corpus of the done trust would make it a capital receipt in the hands of the donee trust and this donation would then escape assessment in the hands of both the donor and the donee which is against the principle of quid pro quo.

Non compliance with Section 13

The exemption of income generated from a property held under a trust will be taxable if it does not comply with the provisions of Section 13 of the said Act.

• Where the income generated from a property held under a trust does not enure for the benefit of the general public at large then the trust is ineligible for exemption under Section 11 and 12 of the Act.
• Where the income generated from a property held under a trust is for the advancement or benefit of a particular community or caste or religious section of the society then the trust becomes ineligible for exemption under Section 11 and 12 of the Act. However, if the income generated is meant for the benefit of Schedule Caste, Schedule Tribe, Other Backward Classes or tribals or women and children then the said income would qualify for exemption under Section 11 and 12 of the Act.
• If a trust is created for the benefit of a private person or an individual or if the income generated from the trust is used for the benefit of an interested person as defined in Section 13(3) of the Act then the entire income is ineligible for exemption under Section 11 and 12.

In accordance with Section 13(3) the author, trustee, a relative of such an individual, a person who has made a cumulative contribution to the trust of an amount exceeding Rs.50,000 till the end of the relevant previous year, a person having substantial interest in the trust (i.e., more than 20%) or a relative of such individual etc. shall be included in the definition of an ‘interested person’.

The term relative would be as defined by Section 2(41) of the Income Tax Act, 1961 and would be defined to include ‘any husband, wife, brothers and sisters of the individual and his parents and their spouses and any other lineal ascendant and descendant of the individual.’

Anonymous Donation

Where a trust receives a voluntary contribution from an individual without any name, address, PAN No., etc., of the individual it shall be treated as Anonymous Donation. The anonymous donation would be treated as any other income in the hands of the trust and would not be eligible for exemption under Section 11 and 12 of the Act.

The taxable figure shall be the amount in excess of Rs.100,000 or 5% of the receipts of the trust, whichever is higher. The rate of taxation in case of excess anonymous donation shall be 30%. However, from FY 2021 – 2022, due to the amendment made by the Finance Act, 2021, no anonymous voluntary contributions can be received any further.

Amendment as per the Finance Act, 2021

According to the amendment as per the Finance Act, 2021 every trust which qualifies for exemption under Section 80G(5)(viii) and Section 35(1)(a) of the Act, shall from 1.04.2021 submit the details of each voluntary contribution / donation received under Section 80G including the name, address, PAN No. specifications of the grant, URN No., etc., in Form 10BD to the Income Tax Department. The trust shall then download a certificate in Form 10BE and give to each donor. The Form 10BD shall be submitted to the department on or before May 31 of the following year starting from FY 2021 – 2022.