What everyone should know while claiming exemptions for registered charitable and religious Trust under the Income Tax Act, 1961
The Finance Act, 2022, and the Finance Act, 2021 have made a series of significant and dynamic amendments to the conditions to be followed by registered charitable & religious trusts to avail of the exemption under section 11 of the Income Tax Act, 1961. In this background, this article attempts to highlight the changes and challenges for Exemption to registered charitable & religious Trust under section 11 of the Income Tax Act, 1961 is given hereunder:
|Particulars||Conditions for Exemption|
|1||Corpus donation would not form part of income
Section 11(1)(d) has been amended which read as under;
Income in the form of voluntary contribution made with the specific direction that they shall form part of the corpus of the trust or institution subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or mode specified in sub-section (5) maintained specifically for such corpus. w.e.f. 01st April 2022
|Previously income in the form of voluntary contributions made with the specific directions, that they shall form part of the corpus of trust or institution is exempt.
The Finance Act, 2021 amended section 11(1)(d) whereby income in the form of voluntary contributions made with specific direction that they shall form part of the corpus of the trust or institution is exempt if such corpus donations are invested or deposited in the forms or modes specified under section 11(5) maintained specifically for such corpus. Thus, the corpus donations when received the purpose of the same has to be identified and must be kept in section 11(5) investment/deposit.
In case, a charitable trust could not maintain the amount so received in such a manner then it would be forming part of the voluntary contributions and the resultant requirement of applying 85% or opting for accumulation under section 11(2) of the Act would apply to them as well.
There is no requirement for restoring the corpus at a later date since it is treated as a voluntary contribution at the first instance.
|2||Explanation 4 to section 11(1) has been inserted which reads as under:
Explanation 4 -For the purpose of determining the amount of application under clause (a) and clause (b) – i. Application for charitable or religious purposes from the corpus as referred to in clause (d) of this sub-section, shall not be treated as application of income for charitable or religious purposes: Provided that amount not so treated as application, or part thereof, shall be treated as application of income for charitable or religious purposes in the previous year in which the amount, or part thereof is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus, from the income of that year and to the extent of investment.
ii. Application for charitable religious purpose, from any loans or borrowings, shall not be treated as application of income for charitable or religious purposes
Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the loan or borrowing, or part thereof, is repaid from the income of that year and to the extent of such repayment.
|In view of the explanation 4 has been inserted which provides that the application for the charitable or religious purposes from the corpus as referred to clause (d) of this sub section, shall not be treated as application of income for the charitable or religious purposes provided that if the amount is deposited or invested back in to one or more forms specified in sub-section (5) maintained specifically for such corpus shall be treated as application for charitable or religious purposes in the previous year and to the extent the amount is deposited or invested.
Corpus donations when applied for objects of the trust it would not be treated as an application of income. However, when the corpus amount is replenished /restored in a subsequent year out of voluntary contributions, it would be treated as an application of income.
It further provides that application from loans or borrowings shall not be treated as an application of income for charitable purposes provided if the loan is repaid in the previous year then it shall be treated as an application of income from the previous year from the income of such previous year to extent it is repaid.
|3||Explanation 4 to section 11(1) has been inserted which reads as under: –
For the purpose of this sub-section, it is hereby clarified that the calculations of income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding the previous year.
|In view of this, it has been provided that the Charitable trust or the institution shall not be permitted to claim any carry forward of losses, deduction and allowance of any excess application of any preceding year while computing the income required to be applied or accumulated during the previous year.|
|4||Amendment in Section 10(23C) clause (iiiad) and (iiiae) which reads as under: –
Any university or other educational institution existing solely for educational purposes and not for the purpose of profit if the aggregate annual receipts of such university or educational institution do not exceeds amount of receipts as may be prescribed.
Any hospital or other institution for the reception and treatment of person suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for profit, if the aggregate annual receipts of such hospital or institution do not exceed the amount of annual receipts as may be prescribed.
Explanation: – For the purpose of clause (iiiad) and (iiiae), it has been clarified that if the person has receipts from university or educational institution as referred in clause (iiiad), as well as the hospital or institution as referred to in clause (iiiae), the exemption under these clauses shall not apply if the aggregate of the annual receipts of the person from such university or educational institution, hospitals or institution exceeds rupees five crores
|In view of this it has been provided that Educational or Medical Institution are entitled to threshold exemption under section 10(23C) (iiiad) and 10(23C)(iiiae) respectively if the annual receipts do not exceed Rs 5 crores ( Previously it was Rs 1 crores)|
|5.||Computation of income in the case of any other object of general public utility||The Finance Act, 2022 brought much clarity when a trust or institution is covered by the proviso to section 2(15). Where the objects of a trust are advancement of any other object of general public utility and the said activity brought more than 20% of the aggregate receipts, section 13(8) says that the provisions of sections 11 and 12 shall not operate to exclude any income from the total income of such trust/ institution.
The Finance Act, 2022 has also inserted section 13(10) which says that where a trust /institution is covered by proviso to section 2(15) its income shall be computed as under:
i) Deduction of expenditures other than those which are from corpus as on 31st March of the preceding previous year; (ii) Any expenditure which is not from any loan or borrowing; (iii) Depreciation in respect of assets except those which have been claimed as application; and (iv) Any expenditure other than contribution or donation to any person. The provisions of section 40A(3), section 40A(3A) and section 40(a)(ia) are also applicable.
|6||Depreciation u/s Sec 11(6) of the Act||Not allowable as application, if the cost of the capital asset is fully claimed as the application of Income.|
|7||Application/Expenses out of a loans Sec 11(1) Explanation (ii) (Finance Act, 2021).||Revenue and Capital Expenses during the year out of the loans are not allowed as an application of such year but allowed as an application in the year in which the principal of the loan is repaid.|
|8||Expense out of corpus Sec 11(1) Explanation 4(i) Expenditure out of corpus not allowed as application. (Finance Act, 2021).||But when this amount is invested back in the specified modes as prescribed in U/s 11(5) of the Act, it will be allowed as an application of funds in the year in which it is invested back.|
|9||Set off of carried forwarded Deficit. Sec 11(1) Explanation- 5 (Finance Act, 2021).||The set-off of past deficit against the current year’s income is not allowed and it will not be considered in calculating 85% expenditure. This is called an only paper deficit.|
|10||Application of expenses is allowed only on a Payment Basis and not on an accrual basis. Sec 11(7) Explanation. (Finance Act, 2022).
|The expenses will be allowed only when in the year of its actual payment, irrespective of the method of accounting regularly employed by the Trust.
|11||Expenses paid without TDS. Sec 11(1) Explanation-3.||There is no general exemption that Trust, Society or Non-Profit Organizations are exempt from deducting and paying. If No Tax is deducted at source, then 30% of such expenditure will be considered as NON-APPLICATION OF FUNDS.|
|12||Inter charity Donation (Sec 11(1) Explanation-2 (Finance Act, 2020)||Donation made to another registered trust out of the Corpus is not allowed as an application.|
|13||Accumulation of 15% Permitted u/s 11(1)(a) of the Act.||without any restriction on the period during which it has to be used|
|14||Payment exceeding Rs. 10000/- made in cash.||As per Explanation 3 of Sec 11(1), it would not be considered an Application of Funds.|
|15||Capital gain from an asset held under trust in U/S Sec 11(1A)||Net consideration is utilised fully for acquiring another capital asset;
Entire capital gain is deemed to have been applied for charitable and religious purposes and hence is exempt*
Net consideration is utilised partially for acquiring another capital asset;
Where net consideration is utilised for acquiring new capital assets. So much of such capital gain as is equal to the amount, if any by which the amount so utilised exceeds the cost of transferred assets is considered to have been applied for charitable and religious purposes and is exempt*
|16||When accrued income is not received in the same year i.e. funds are not received||Sec11(1) Explanation-2 (a) If the funds are not received at all during the same year then the exemption will be granted if the same is spent in the year in which it is received or in the following year. (b) If the funds could not be spent in the same year for any other reason, then the exemption will be granted if spent during the following year and it this situation form 9A needs to file for permission to apply in the subsequent year.|
|17||Audit report not filed before up to 30th September of every year||As per Sec 12A (b)(ii) Exemption u/s 11 will be fully disallowed.|
|18||Books of account to be maintained by the trusts or institutions. (Notification No. 94/2022, dated 10-08-2022)||The Central Board of Direct Taxes (CBDT) has notified a Rule 17AA prescribing books and other documents to be kept and maintained by a trust or institution registered under section 12A/10(23C).
The key extracts of the newly notified Rule 17AA are given in the below paragraphs.
1) Every fund or institution or trust or any university or other educational institution or any hospital or other medical institution is required to keep and maintain the following books of account and other documents:
a. Books of account, including the following:
Cash Book, Ledger Journal, Copies of bills, original bills, and any other book that may be required to be maintained to give a true and fair view.
b. Books of accounts for a business undertaking and business carried on by assessee other than the business undertaking referred to in section 11(4).
c. other documents for maintaining:
i) Record of all projects and institutions run by the person containing details of their name, address, and objectives;
ii) Record of income in respect of voluntary contribution containing details of donor, income from property held under trust along with list of such property, and other income of fund or institution or trust, etc.;
iii) Record in respect of the application of income in India & outside India, deemed application of income, income accumulated or set apart, money invested in the specified mode, etc.;
iv) Record of voluntary contribution received & its application;
v) Records of loans and borrowings;
vi) Record of properties held by trust;
vii) Record of the specified person.
|19||Investment in public sector companies are eligible modes of investment as per Section 1(5)(vii) by a charitable Trust.||in this regard, the shares of public sector companies are eligible mode of investment as per section 11(5)(vii) of the Income-tax Act, 1961 and also those shares which prescribed as a mode of investment under section 11(5)(xii) of the Income-tax Act, 1961.
With reference to the investment in other shares,( Private Equity) the trust has to dispose of the same as per the provisions of Section 13(1)(d) of the Income-tax Act,1961. The trust though is not permitted to acquire these other shares but can receive any shares by way of donation from any person and in such a situation, the law allows the trust to receive the shares by way of donation but the same has to be disposed of within one year and the proceeds have to be invested as per the mode of investment allowed as per Section 11(5) of the Income-tax Act,1961.
(a) In the case of charitable trusts and institutions all corpus donations and borrowings are not to be considered in the aggregate receipt for the purpose of application towards the objects of the trust.
(b) Where the corpus and borrowings have been used for the objects of the trust then only when the corpus amount is restored or the borrowing is repaid, it must be treated as an application of income by the trust.