CLARIFICATION 1
1. Attention is invited to the Board’s Circular Nos. 5-P(LXX-6) of 1968 and 12-P(LXX-7) of 1968 [Clarification 2] which had been duly endorsed to all Chambers of Commerce. References are still being received from the public seeking clarifications regarding the taxability of income under the provisions of sections 11(1) and 11(2).
2. The legal position is clarified as under :
u Under section 11(1)( a), a trust claiming exemption is allowed to accumulate 25 per cent of its income or Rs. 10,000, whichever is higher. Thus, if a trust accumulates a larger income than the limits prescribed for exemption, what would be chargeable to tax is the excess over the exempted limit, and not the entire accumulation including the exempted portion.
u Section 11(2), however, provides that if the conditions laid down in the sub-section are satisfied, restrictions as regards accumulation or setting apart of income shall not apply for the period during which the conditions prescribed therein remain satisfied. To avoid taxation under section 11(1)(a), investment in Government securities as prescribed in section 11(2), has to be made, not only in respect of excess amount which is chargeable under section 11(1)(a) but of the entire unspent balance including the exempted portion.
u Subsequently, if it is found that the provisions of section 11(2) have been violated and the income has been applied to purposes other than charitable or religious, or the amounts cease to be accumulated or set apart, the entire accumulation covered by section 11(2) will be subjected to tax under section 11(3).
3. Thus, while under section 11(1)(a), the tax will be levied in the year to which the income relates, under section 11(3) the income would be chargeable in the year in which the amounts cease to be accumulated for the specific purpose mentioned. Thus, when the amounts are taxed under section 11(3), the benefit which would have been available to a trust in respect of 25 per cent of its income or Rs. 10,000 under section 11(1)(a ) would also be lost.
Circular : No. 29 [F. No. 20/22/69-IT(A-I)], dated 23-8-1968.
CLARIFICATION 2
Attention is invited to the Board’s Circular No. 5-P(LXX-6), dated 19-6-1968 (Clarification 3), on the above mentioned subject.
It has been brought to the Board’s notice that para 5 of the above circular creates the impression that where a trust accumulates more than 25 per cent of its income, only the excess over 25 per cent will be taxable under section 11(1). It is hereby clarified that the correct position in this regard is that if a trust desires to accumulate income in excess of the limits laid down in section 11(1), the conditions specified in section 11(2) have to be fulfilled in respect of the entire accumulation and not merely in respect of the accumulation in excess of 25 per cent of the income. Further, if the trust does not comply with the conditions laid down in section 12(2), the amount which becomes liable to assessment under section 11(3) is the entire income accumulated and not merely the income accumulated in excess of the limits specified in section 11(1). In other words, such an assessee loses benefit of the accumulation permitted under section 11(1).
Circular : No. 12-P [LXX-7 of 1968], dated 26-11-1968.
JUDICIAL ANALYSIS
The above circular was quoted and relied on, in M.CT.M. Chidambaram Chettiar Foundation v. ITO [1991] 39 TTJ (Mad.) 82, 87.
Note : The above view cannot be construed as correct, in view of the preponderant judicial view expressed in the cases of CIT v. C.M. Kothari Charitable Trust [1984] 149 ITR 573 (Mad.); CIT v. H.H. Marthanda Varma Elayaraja of Travancore Trust [1981] 129 ITR 191 (Ker.); Mohanlal Hargovinddas Public Charitable Trust v. CIT [1980] 122 ITR 130 (MP); CIT v. Shri Krishen Chand Charitable Trust [1975] 98 ITR 387 (J & K) and CIT v. Trustees of Bhat Family Research Foundation [1990] 185 ITR 532 (Bom.) and Addl. CIT v. A.L.N. Rao Charitable Trust [1976] 103 ITR 44 (Kar.), which has since been approved by the Supreme Court in the case of Addl. CIT v. A.L.N. Rao Charitable Trust [1995] 216 ITR 697 (SC).
CLARIFICATION 3
1. In Board’s Circular No. 2-P(LXX-5), dated 15-5-1963, it was explained that a religious or charitable trust, claiming exemption under section 11(1), must spend at least 75 per cent of its total income for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question has been reconsidered by the Board and the correct legal position is explained below.
2. Section 11(1) provides that subject to the provisions of sections 60 to 63, “the following income shall not be included in the total income of the previous year. . . .” The reference in clause (a ) is invariably to “Income” and not to “total income”. The expression “total income” has been specifically defined in section 2(45) as “the total amount of income computed in the manner laid down in this Act”. It would, accordingly, be incorrect to assign to the word “income”, used in section 11(1)(a), the same meaning as has been specifically assigned to the expression “total income” vide section 2(45).
3. In the case of a business undertaking, held under trust, its “income” will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the ITO, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed in the account will be eligible for exemption under section 11(1), the permitted accumulation of 25 per cent will also be calculated with reference to this income.
4. Where the trust derives income from house property interest on securities, capital gains, or other sources, the word “income” should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).
5. To sum up the business income of the trust, as disclosed by the accounts plus its other income computed as above, will be the “income” of the trust for the purposes of section 11(1). Further, the trust must spend at least 75 per cent of this income and not accumulate more than 25 per cent thereof. The excess accumulation, if any, will become taxable under section 11(1).
Circular : No. 5-P(LXX-6) of 1968, dated 19-6-1968.
JUDICIAL ANALYSIS
EXPLAINED IN – The above circular was explained in CIT v. Programme for Community Organi-sation [1997] 228 ITR 620 (Ker.), with the following observations :
“Reading of the circular dated June 19, 1968, it would be a condition by way of a clarification. The circular relates to the subject in the context.
It contains instructions regarding ‘income’ required to be applied for charitable purposes. Even the Board of Revenue has understood that it would be incorrect to assign to the word ‘income’ used in section 11(1)( a) of the Act, the same situation of understanding as is available from the expression ‘total income’ which is used in section 2(45) of the Act. It is specified that in the case of a business undertaking held under a trust, its income disclosed by the account will be eligible for exemption under section 11(1) and the permitted accumulation of 25 per cent will also be calculated with reference to this income.
Learned senior tax counsel submitted that the last paragraph of the circular makes out a different situation and, therefore, the circular as a whole will have to be read and taken into consideration in the context….” (pp. 623-624)
“The above paragraph, if fully read, does not alter the situation in any way. As seen from the above, when the trust derives income, it says that the word “income” should be understood in its commercial sense, i.e., book income. In other words, the Department requires its officer to understand the income of the trust with reference to the book income, after adding back the items stated therein. It is thereafter that we see that whatever may be the position, the amount spent or applied for the purposes, it is clarified, should not be less than 75 per cent of the latter if the trust is to get the full benefit of the exemption under section 11(1). In our judgment, the statutory provision makes it abundantly clear that in regard to a trust which is entitled to get the full benefit of exemption of section 11(1) of the Act, its income with reference to the head under consideration would have to be understood only at 75 per cent thereof, leaving 25 per cent altogether at that stage itself. In this sense of the situation, the Central Board of Revenue also has understood the situation in the context of the statutory language of section 11(1)(a) of the Act and not otherwise. This means that when the situation is established that the trust is entitled to the full benefit of exemption under section 11(1), the said trust is to get the benefit of 25 per cent and this 25 per cent has to be understood as that of the income of the trust under the relevant head of section 11(1)(a) of the Act.” (pp. 624-625)
EXPLAINED IN – In CIT v. Jayashree Charity Trust [1986] 159 ITR 280 (Cal.), it was observed that this circular makes it clear that the word ‘income’ in section 11(1)(a) must be understood in a commercial sense. The entire income of the trust, in the commercial sense, has been spent for the purpose of charity. There is no reason to deny the benefit of exemption granted by section 11 to that portion of the income which has been taken away by deduction at source on the ground that the amount has not been spent or accumulated for the purpose of charity.
CLARIFICATION 4
It was clarified that section 11(1)(a) required that where income derived from property held under trust was accumulated for future application to charitable purposes in India, the extent of such accumulation should not exceed 25 per cent of the income from the property or Rs. 10,000, whichever is higher. Thus, where a charitable trust donated, for charitable purposes, not out of its income but out of its corpus, movable or immovable property, equivalent to, or more in value than 75 per cent of the trust income for the year, the trust could not be regarded to have satisfied the requirement of section 11(1)(a).
Source : Relevant extracts from official minutes of twelfth meeting of Direct Taxes Advisory Committee (Central) held in New Delhi on 17-8-1968.
CLARIFICATION 5
1. There appears to be certain amount of misconception in the minds of some Income-tax Officers regarding the provisions against the accumulation of income in excess of 25 per cent, contained in section 11(1). It may be clarified that the provisions in section 11(1), prohibiting accumulation of income in excess of 25 per cent, apply only to the income derived from property held under trust, but such restrictions are not applicable to capital receipts. The donations received by a charitable trust from the members of the public, being capital receipts, cannot be regarded as income of the trust. Accordingly, the donations received by the trust should be excluded from the income of the trust for the purpose of calculating the accumulation limit of 25 per cent except in cases covered by section 12(2).
2. The above position will also be clear from section 12(2), which specifically provides that contributions made to a charitable trust by another trust, to which the provisions of section 11 apply, should, in the hands of the trustee, be deemed to be income derived from property for the purposes of section 11. Such contributions should, of course, be included in the total income of the receiving trust for the purpose of applying the limit of 25 per cent under section 11(1).
Letter : F. No. 20/10/67-IT(A-I), dated 1-5-1967.
JUDICIAL ANALYSIS
EXPLAINED IN – R.B. Shreeram Religious & Charitable Trust v. CIT [1998] 99 Taxman 318 (SC) with the observation that the CBDT Circular No. 20/10/67-IT(A-I), dated 1-5-1967 deals with the application of section 11(1). It does not deal with section 12. The Board Circular, therefore, must be read only as interpreting section 11(1) and not as interpreting section 12(1) which was not the subject-matter of the Board Circular.
CLARIFICATION 6
1. Under section 11(2), if a trust wants to accumulate income beyond the limit specified in clause (a) or clause (b) of section 11(1), it has to give a notice to the Income-tax Officer concerned in Form No. 10 prescribed under rule 17 of the Rules.
2. According to para 2 of the said Form, the accumulated money has to be invested in specified securities before the expiry of one month commencing from the end of the relevant previous year and according to para 3 thereof, copies of the annual accounts of the trust along with details of investment and utilisation, if any, of the money so accumulated, have to be furnished to the Income-tax Officer before April 30, every year.
3. It is hereby clarified that as far as proceedings for the assessment year 1962-63 are concerned, the first requirement referred to in the previous paragraph will be regarded as having been fulfilled if the accumulated money is invested in the specified securities before September 30, 1962. Similarly,the second requirement referred to in the previous paragraph shall be regarded as having been fulfilled if copies of the relevant accounts along with details of investment and utilisation of the accumulated money are furnished to the Income-tax Officer concerned before September 30, 1962.
Circular : No. 17(LXX-4), dated 2-6-1962.
