Shubhashish Shivam

Shubhashish ShivamVery often we get involve in rendering of professional services to charitable and religious organization commonly called as NGO, NPO etc. These services include Auditing, Accounting, Taxation, consultancy, foreign transaction related issues etc. In this regard as far as taxation services are concerned some common errors frequently happen and by mean of this article I have tried to demonstrate those errors and also the corrective measures thereof.

1. Treatment of net income as Gross Total income for Income Tax purposes :

let illustrate it through following example ;

Income & Expenditure A/c of XYZ Charitable Trust

To, Salary & Wages 60000.00 By, Donation & Contribution 1000000.00
     Printing & Stationery 6500.00    
     Newspaper & periodical 9000.00    
     Office Rent 36000.00    
     Cultural expenses 22000.00    
     Program Expenses 125000.00    
     Scholarship 350000.00    
     Books distribution 350000.00    
To, Excess of Income over Expenditure 41500.00    
TOTAL 1000000.00 TOTAL 1000000.00

Now the error may be here in considering excess of income over expenditure as income of trust and deciding taxation on that base, which is wrong because ;

(i) As per sec-2(24)(iia) of Income Tax act, 1961, Income includes “ Voluntary contribution received by a trust created wholly or partly for charitable or religious purposes or by an institution establishes wholly or partly for such purposes or by an association or institution referred to in clause (21) or (23), or by a fund or trust or institution referred to in sub clause (iv) or sub clause (v) or by any university or other educational institution referred to in sub clause (iiiad) or sub clause (vi) or by any hospital or other institution referred to in sub clause (iiiae) or sub clause (via) of clause (23C) of section 10 or by an electoral Trust”,

And for the purpose of this sub clause “ Trust” includes any other legal obligation.

So, entire voluntary contribution received is income itself and no allowance will be there for deduction from such income.

(ii) Another postulation in this regard can be that the income received in the form of voluntary contribution falls under the head “Other sources”, and for deduction of expenses in context of other income, provision of section 57 shall be followed, which states that “ any expense from income shall be allowed if it was laid out or expended wholly and exclusively for the purpose of making or earning such income and should not be in the nature of capital expenditure

So as the expenses appearing in the expenditure side of Income & Expenditure A/c are not incurred for the purpose of earning such donation and contribution income, hence shall not be allowed. These expenses are application of income rather and can be shown as application of income as required by section 11 & 12. Of Income Tax Act, 1961.

2. Business Income : 

It’s a common misconception that religious or charitable organization cannot transact business, since where charity is involved there is no scope of business or commercial transaction. We know this is wrong and in the context of Income tax Act 1961 following points are worth noting;

(i) As per section 11(4) of Income Tax Act, 1961 “property held under trust” includes Business Undertaking.

(ii) As per sec 11(4A) exemption under sec 11 is available to a trust or institution in respect of the profit and gains of the business if

a) The business is incidental to the attainment of objectives of the trust or institution and

b) Separate books of accounts are maintained by such trust or institution in respect of such business.

(iii) As per section 2(15) of income Tax Act,1961 , the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any 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 such activity, unless—

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

3. Rate of Income Tax :

Again it’s a normal misconception that income of charitable trust or institutions (if not exempt) are subject to 30% tax plus applicable surcharge and cess(as on the basis of companies or firm). However we all know that trust or institution or any other legal obligation are liable to assessed as “Association of Person”

Part I of First schedule to the Annual Finance Act prescribes rate of taxes at which different persons will be liable to pay taxes and clause (I) of that part prescribes AOP to be taxed as same as on the basis of individual. However it is to be noted here that sec-167B is applicable in case of AOP. So if Trust or institutions are liable to assessed as AOP then obviously section 167B does also have applicability in case of charitable trust or institutions.

But section 167B will not be applicable in case of charitable trust or institutions because of following two reasons;

(a) Sec-167B of income Tax Act, 1961 specifically excludes Companies and societies registered under societies registration Act, 1980 or any other similar legislation.

(b) The different rates as prescribed in section 167B are based upon knowledge and determination of share of individual members. But as far as charitable or religious organizations are concerned there is no scope of share of income or surplus among members concerned.

Hence it can be said now that charitable or religious trust or institutions are subject to tax (if income is not exempt) at the rate applicable to individual assessee. However there are certain exceptions in this regard also as contained in section 13(1) of Income Tax Act, 1961 in which case income is subject to maximum marginal rate;

(i) Income for private religious purpose{sec-13(1)(a)}

(ii) Income for the benefit of particular religious community{sec-13(1)(b)}

(iii) Income for the benefit of persons specified in section 13(3) {sec-13(1)(c)}

(iv) Funds not invested in accordance with provisions of sec-11(5) {sec 13(1)(d)}

(v) Anonymous donation {sec-115}

So except in the conditions mentioned above Charitable Trust or institutions are subject to income tax at the rate applicable to individual assessee provided exemption under section 11 or 12 of 10(23C) is not available

4. Educational institution and hospitals are eligible for automatic exemption in terms of section 10(23C)of income Tax Act, 1961 :

Educational institutions and hospitals are eligible for exemption from levy of income tax in terms of sections 10(23C) of income tax Act, 1961. However all such institutions are not eligible for automatic exemption and section 10(23C) categorize institution for the purpose of exemption in the following manner;

(i) University or educational institution existing solely for the educational purposes and not for the profit purpose, substantially financed by government {sub clause (iiiab) of sec-10(23C)}

(ii) Hospital or other institution for the reception and treatment of illness and mental defectiveness and not existing for the purpose of profit, substantially financed by government. {Sub clause (iiiac) of sec-10(23C)}

(iii) University or educational institutions and hospital or other similar institution not substantially financed by government but the total receipt not exceeding Rs. One Crore. {Sub clause (iiiad) and (iiiae) of sec-10(23C)}

(iv) University or educational institutions and hospital or other similar institution not substantially financed by government but the total receipt exceeding Rs. One Crore. {Sub clause (vi) and (via) of sec-10(23C)}

As far as institutions covered in clause (i), (ii), (iii) as abovementioned are concerned; such institutions are not required to obtain approval from income tax department to avail exemption. However institutions mentioned in sub clause (iv) are required to obtain approval from Income Tax department. The approval is to be obtained in Form 56D and in terms of rule 2CA of Income Tax Rules, 1962.

So next time while providing auditing services to any private educational institution or university or hospital etc, whose total receipts is more than one Crore rupees , don’t forget to check its approval granted by Income tax Department.

5.Minimum three years audited financial statements is prerequisite for obtaining approval u/s 12AA of Income Tax Act, 1961 of Income Tax Act, 1961.

Provision contained in clause (b) of rule 17A of Income Tax Rules, 1962 are worth noting in this regard which are as under ;

“Where the trust or institution has been in existence during any year or years, prior to the financial year in which the application for registration is made, two copies of the accounts of the trust or institution relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts has been made up.

Accordingly furnishing three years accounts is not the minimum criteria but if the institution is in existence for three years or more then maximum latest three years account is to be submitted. So a trust or institution which is in existence for less than 03 years can also make an application for registration under section 12A with accounts of such financial years for which it is in existence.

However when the application is made in form no 56D by an educational institution or University or hospital etc as referred in sec- 10(23C) (vi) & (via) then at least three years audited financial statements is a prerequisite.

6. Audit report in form 10B in case of unregistered institutions :

For claiming exemption under section 11 and 12 of income tax Act, 1961 charitable or religious trust or institution shall mandatory have to get their accounts audited if the total income without giving effects to provisions of section 11 and 12 exceed maximum amount not chargeable to tax and shall obtain audit report in form 10B.

So if a charitable and religious trust or institution is not registered under section 12A and hence not eligible to claim exemption under section 11 and 12 of the Act is not supposed to obtain audit report in form 10B. Even if such institution is getting its account audited from a Chartered Accountant by virtue of requirements contained in its governing statue, the audit report shall not be in form 10B. Instead the audit report issued in such circumstances shall be in format set out in SA-700 issued by ICAI. This is so because;

(i) Form no 10B is a statutory format as like form 3CB-3CD and hence should be utilized for specified purposes only. Statutory forms are for the purpose designated and should not be used universally.

(ii) Following is mentioned as heading of form 10B ;

“Audit Report under section 12A (b) of the Income Tax Act, 1961, in the case of charitable or religious trusts or institutions”

So form 10B shall be applied for tax audit purposes only. If the audit report is provided under the provisions of governing law of such trust or institution then audit report in form 10B cannot be provided.

(iii) Also form 10B contains particulars relating to compliance with provisions of various sections of Income Tax Act, 1961 and hence can’t be issued as audit report in any other case.

7. Donation received by charitable trust or institution is eligible for 100% deduction u/s 80G of Income Tax Act, 1961 in the hands of donor :

Any donation received by charitable trust or institution is eligible for deduction from gross total income of donor U/s 80G of income Tax Act, 1961 provided the charitable trust or institution is approved by CBDT for such purpose. However sometimes such trust or institution claims that the donation made to them is eligible for 100% deduction. Here it is crucially important to understand the fact that donation made to every charitable trust or institution is not eligible for 100% deduction. Section 80G categories such institutions fund etc in four categories viz;

  • Funds eligible for 100% deduction without any qualifying limit.
  • Funds eligible for 50% deduction without any qualifying limit.
  • Funds eligible for 100% deduction Subject to qualifying limit.
  • Funds eligible for 50% deduction subject to qualifying limit.

And most funds which are registered u/s 12A of Income Tax Act, 1961 falls under last category i.e. donation made to them is eligible for deduction @ 50% subject to qualifying limit. So firstly it is to be checked that the institution is covered by which category and on that basis only deduction will be allowed to donors i.e. either 50% or 100% and that too either subject to qualifying limit or not.

8. Exemption from income tax means exemption from GST too :

The imposition of indirect taxes and direct taxes are altogether two different aspects. If an assessee is allowed exemption from payment of Direct tax then it doesn’t necessarily means that it is also not required to pay indirect taxes. However the liability will be decided separately as per governing provisions of different legislations.

As far as charitable and religious trust or institutions are concerned they can’t be exposed to Central excise duty and State VAT due to their nature of operations, but they can be exposed to liability of collection and payment of GST. Accordingly it should be decided as per provisions of GST law that whether they are liable to pay the same or not. And in this regard following points are worth noting ;

  1. If the trust has partly exempted turnover and partly taxable turnover totaling to 20 lakhs, then, registration needs to be obtained.

Besides the above general rule, following are some cases wherein an NGO shall be liable to register under GST, even though its aggregate turnover in a financial year does not exceed Rs. 20 lakhs-

    • Charitable trust making inter-State taxable supply of goods (i.e. taxable supply of goods between 2 different States/Union Territories)
    • Charitable trust required to pay GST under reverse charge (e.g. availment of services from lawyer)
    • Charitable trust making occasional taxable supply in a State where it does not have a fixed place of business (e.g. an NGO participating in an exhibition outside)
    • NGO making supply of goods through an E-commerce operator (e.g. Amazon, Snapdeal, Flipkart etc.) who is required to collect tax at source

*special category States comprises of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.

  1. Service provided to charitable trust not exempt from GST. However, notification No. 12/2017 provides for exemption to educational institutions availing below mentioned services:
    • Transportation of students, faculty and Staff.
    • Catering services including mid-day meal.
    • Security and cleaning services or house-keeping services
    • Services relating to admission to, or conduct of examination by such institution., however, in the following is taxable if provided to an institution of grade beyond Higher Secondary School
    • Supply of Online education journals provided to an educational institution, further the same is taxable if provided to an institution of grade below Higher Secondary School

Hence the liability to collect and pay service tax depends upon provisions of GST law including the abovementioned provisions.

9. Application of income must be in India to claim exemption u/s 11,12,10(23C) etc. of Income Tax Act, 1961 :

The statement is partially correct since there is an exception in law itself in this regard. Sec-11 of Income Tax Act, 1961 states that “ Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, shall not be included in the total income of the previous year of the person in receipt of such income.

Although section 10(23C) doesn’t stipulates any such condition for use in India but considering the very purpose of exemption application must be in India itself.

However sec-11(1)(c) of Income Tax Act, 1961 stipulates that “Subject to provisions of sec 60 to 63 , The following income shall not be included in the total income of the previous year of the person in receipt of the income ;

Income derived from property held under trust –

(i) Created on or after 01/04/1952, for a charitable purpose which tends to promote international welfare in which India is interested to the extent to which such income is applied to such purposes outside India, and

(ii) For charitable or religious purposes, created before 01/04/1952 to the extent to which such income is applied to such purposes outside India.

Hence if the circumstances prevail, application may be outside India in compliance with provisions of section 11(1)(c) of Income Tax Act, 1961

10. Application of income means “expenditure solely attributable to charitable or religious activities :

Let’s get back to the example given in point no. 01. The expenditure side contains both the direct expenditure related to programs and other charitable activities performed and certain indirect expenses such as salaries office rent etc.

Here sometimes it is misunderstood that as application of income should be for charitable or religious activities to claim exemption u/s 11, 12, and 10(23C) etc, hence other indirect expenditure should not be treated as application of income for the concerned purpose.

The judgment given in “CIT Vs Birla Janhit Trust (1994) 208 ITR 372(Cal)” would be informative in this regard which states that “Expenditure on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust must be considered as application of Income. Accordingly while determining whether a particular expense is application of income or not due regard should be given to the nexus of expenditure with the objects of institution. Both either direct or indirect expense will be treated as application of income if it is incurred for the purpose of carrying out the object and purposes of the trust or institution i.e. Charitable or religious activities.

11. Exemption means exemption from every income :

Taxable income in the case of charitable and religious trust or institution can be assessed under all the four heads of income except salary head. Also it is normally construed that exemption u/s 11, 12, 10(23C) of Income Tax Act, 1961 is available in respect of entire income of such trust or institution. It is true also but there is an exception in section 11 itself by virtue of which certain capital gains becomes taxable in the hands of charitable trust pr institution subject to non fulfillment of certain conditions.

Accordingly whenever there is capital gain income in the hands of such trust or institution then it is appropriate to assess the exemption u/s 11 of Income tax act, 1961 after considering the provision of sec-11(1A), which provides exemption on the basis of extent of sale consideration utilized for acquisition of another capital asset to be applied for the same purposes for which former asset was being used.

Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)

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    articles are very good i wish know whether a trust can appropriate current year’s surplus from the preceding year excess expenditure [loss] for the purpose of computation of income tax

  2. HARISH MODI says:


  3. Ravikiran says:

    One of client having trust and running primary school an NGO and not registered U/s 12AA , what are the tax implications sir,
    Can he get exemption ? If yes in which sec and which ITR and which column to select that exception . If No on which amount the tax will be applied whether the gross or net Income
    At What rate of tax

    Please help

  4. Arvind Goel says:

    Whether an educational run by a Registered Society requires separate PAN & TAN, while society is already is already having PAN and TAN in its name?


    : a charitable trust regd u/s 12a ,during the ay 2019-20 recd rs 230000 as voluntary contribution and during the year amount spent for charitable purpose was rs 240000 and filed its return of income in itr 7 claiming exemption u/s 11(1)(c).while processing it return u/s 143(1a) cpc disallowed the exemtion and raised demand .how will resolve the issue”

  6. S K Roy says:

    ShivamJi, I have seen your valuable advises of tax exemption on educational institution. One of my client one school (govt adided) runs under trust and the trust has taken registration under sec 12. The return is filed using trust pan no. Now, can the school take pan separately. If pan is taken separately what are the expected problem may come after this. Pl. suggest.

  7. A.V.saiprasad says:

    Sir, Does members Contributions shown in Balancesheet be taken as Gross Receipts under I&E a/c in the case of Educational Institute U/s 10(23C)(D). What if the Contributions are raised for meeting Capital expenditure specifically.

  8. Rajendrakumar Jain says:

    dear Shivam
    your writeup is very excellent and well studies . the nuances you have explained are very crucial to understand the taxation of trusts.

  9. MANIK VOHRA says:

    a group of firemen has formed a society to help the needy & poor people by provideing them ration or providing financial assistance for marriage of poor girls and registered their pan as AOP, during the period 2012-13 & 2013-14, they collected a sum of Rs.42060 and Rs.37350 as donation from people and had expended the same on the noble cause. They had filed their return for the said period in itr -7 by showing the total receipts as donation received and amount expended as amount utilised for the purpose,they dont have any 12a registration nor they got their accounts audited. the CPC has assessed the case as AOP and applied maximum marginal rate of 30% on gross receipts and had not allowed any amount expended and resulted in demand. it is my humble request to you sir to please help me as this a genuine case.

  10. Rohan Dedhia says:

    Hi Shubham,

    There seems to be a paradox situation created by the Article.

    Well, I agree with the majority part of the article. I agree with the part which states that sec. 164(2) is applicable to Trusts (even if not registered u/s 12A) due to the usage of the words ‘in the nature of’ in the said phrase which does not appear in 139(4A) nor 2(24).

    However, I disagree with the part which says that Form 10B is not required for Trusts not registered u/s 12AA, due to the following points:
    a. All Trusts (whether registered u/s 12A or not) have to file ITR-7, since sec. 139(4A) specifically provides for it. So if income exceeds income not chargeable to tax, Form 10B is triggered, otherwise defective Notice follows. Filing ITR-5 to avoid Form 10B is wrong because it triggers the situation of transfer of surplus to members which is not allowed in the case of Trusts;

    2. Form 10B uses the words ‘Trust’ ‘charitable’ etc and not 12A / 12AA. If a Trust is created, whether registered u/s 12A or not, the essence shall remain of Trust and it shall always be assessed as ‘Trust’;

    Discussion welcome

  11. Minakshee says:

    Very informative and detailed article..Thank for sharing it.

    Is filing IT return mandatory for a public charitable trust without 12A registration and income below tax exemption limit ( Rs. 1 lac ) ?

  12. Narinder Gupta says:

    Sir, How to Compute Income of a charitable Institution registered U/s 12A. Suppose Current year income is Rs. 10 Lacs and Unutilised amount B/f from Last Year is say Rs 5 Lacs.( Deemed application under sect 11(1) was Rs. 5 lacs).In current year income applied for charitable purpose is say Rs 3 Lacs. . Current year income is 5.5 Lacs ( i.e 85% of Rs RS 10 lacs Rs. 8.5 Lacs less Rs 3 Lacs applied.) or Rs.10.5 Lacs i.e Rs. 8.5 lac- Rs 3 lacs + Rs 5 lacs B/f)

  13. Abhishek says:

    sir i have a query regarding the taxation of charitable trust…
    There is a unregistered charitable trust (registered under Bombay trust act but not under Income tax). The shares of members are not specified being a charitable trust. The said trust runs a sports & gym facility free of charge while it receives income in form of rent, a property in the name of trust is given on rent, its their only income source.
    Sir my query is whether it can avail the basic exemption limit while computing its income under IFHP?
    Or else MMR will be applicable as shares of members is not specified as per section 161(4)?


    its very well written… i have a query.
    The taxation of unregistered charitable society (registered under societies act 1860)
    it has 7 members ; 6 are retired persons having pension of more than 500000 pa
    1 having business income of 1000000
    As per Trust deed none of the 7 members can withdraw any sort of amount from it
    No surplus can be withdrawn by any one and the cannot draw salary or any thing else

    interest on FDRs RS.150000
    voluntary donations Rs 75000
    spent for free meals to poor Rs 200000
    From above article its clear that taxable income is Rs 225000
    But (1) is it mandatory to file return( income less than taxable limit)
    (2) at what rate it will be taxed…is it individual rates or MMR

    As per above article individual rates are applicable….is it your own perception or is
    it based on some legal decided case laws…plz. elaborate


    Recently CPC has sent assessment order with applying MMR on voluntary contributions and interest earned on FDRs of a unregistered charitable society. can you please quote some case law for appealing in this case as not to apply MMR on unregistered NGOs

  16. ramesh bhatia says:

    if a ngo take franchisee of food outlets , use all profit for charitable purpose , maintain separate books rcpts exceeds 25 lacs whether income will be taxable or exempt

  17. Naveen Verma says:

    Shivam ji,

    It is a very informative article. Can you please give an illustration on how to calculate income and amount incurred for charitable purpose.

  18. RAJ says:


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April 2021