Incomes which are exempted under Section 11 of Income Tax Act, 1961

Similar to Section 10, incomes mentioned in Section 11 also does not form part of the total income. There are various conditions to be fulfilled for claiming exemption under this Section. However in this article, an attempt is made to understand basically what types of incomes are exempt under this Section. So for understanding purpose Section 11(1)(a) is analyzed.

The first limb of 11(1) is reproduced hereunder:

“Section 11:

(1) Subject to the provisions of Sections 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—

(a) 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…….”

Incomes specified in this section are exempted incomes similar to that of incomes specified in Section 10. That means the incomes specified in this Section shall not form part of the total income of the person similar to that of agriculture income. However one major difference is that to get exemption under section 11, that income should be applied for charitable/religious purposes.

Now let us understand it in detail:

Words in the Section 11(1)(a)	Meaning / Explanation
Income	Income is defined in Section 2(24) which includes profits & gains. So here income means balance of income after meeting the expenditure. Income = Total income(Revenue) – expenditure
Derived from	Got from or obtained from some thing
Property	Property is not defined in the Income Tax Act. However as per The General Clauses Act, 1897 property is of 2 types one being Immovable Property and other being Moveable Property. 2(36) “movable property” shall mean property of every description, except immovable property. 2(26) “immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. So property means all types of assets whether it is immovable or moveable or tangible or intangible, fixed assets or current assets.
Held under trust	Trust is not defined in the Income Tax Act. As per Section 3 of The Indian Trusts Act, 1882 A “trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner: Here “trust” means an obligation annexed to the ownership and it does not refer to the type of organization.
Property held under trust	It means any type of property which is held under an obligation. It means the holder of the property cannot use the property in whichever way he wants, but he has to use the property as per the directions of the person who gave the property. Example 1: Mr. A entrusted a building to Mr. B with a direction to use the property for the specified purpose. So in this case Mr.B is the owner of the property and he is holding the property in his name also. But he holds that property not for his own benefits but it should be used as per the directions of Mr. A. So Mr. B holds the property in trust. Here no separate legal entity is created. Example 2: Mr. A creates a Trust by name “A’s Charitable Trust” by executing a Trust Deed making Mr.B as Trustee and transfers the building to the Trust. Here a separate legal entity is created which is “A’s Charitable Trust” and now the property is held under trust by that legal entity. Q. What type of an organization can hold property in trust as per the Income Tax Act? A. It appears that there is no bar in the income tax act. Section 11(1) uses the word “person”. As per Section 2(31) person includes: (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. Section 12A mandates registration of trust or institution for claiming exemption. Though Sec 11 uses the word “Person” , Section 12A contemplates a trust or institution as an eligible entity for registration. Trust means trust created under a Trust Deed. Institution is not defined under the Act. But generally such institutions are formed as separate legal entity and the objective of which should not profit motive. They may be formed as: 1) Trust by creation of Trust Deed 2) Society Registered under Societies Act 3) Company incorporated under section 8 of the Companies Act Note: Partnership is not possible as partnership is formed for earning profit. Q. Whether property should be located in India? A. No such condition prescribed in the Act.
Wholly for Charitable or Religious purposes	Charitable Purpose: Sec 2(15) of the Income Tax Act defines Charitable Purpose: “charitable purpose” includes 1) relief of the poor, 2) education, 3) yoga, 4) medical relief, 5) preservation of environment (including watersheds, forests and wildlife) and 6) preservation of monuments or places or objects of artistic or historic interest, and 7) the advancement of any other object of general public utility: Religious Purpose: Not defined under the Income Tax Act. Generally it is understood that practicing, advancement or support of any religion. Wholly: Means the property should be held 100% for charitable or religious purposes.
to the extent to which such income is applied	Here the phrase answers the question “How much income is exempted?” The answer is income is exempted to the extent it is applied. Concept wise this is similar to 80C deduction. In other words amount spent on charitable/religious activities will be allowed as deduction from the income. The term “applied” is wider than spent or incurred. Even if the amounts are spent towards capital expenditure, it will be treated as “income applied” and eligible for deduction.
to such purposes in India	Such purposes mean charitable or religious purposes for which property is held. In India means, the amount should be spent in India and not outside India.

Question 1: Which income is exempted from tax under Section 11?

Answer: The following income is exempted if:

1. Income is derived from property which is held under trust for charitable or religious purposes

and/or

2. Such income is applied for charitable or religious purposes in India.

Example 1:

Particulars	Income derived from
	Property held under trust	Property not held under trust
Income(Revenue)	Rs.10.00 Lacs	Rs.10.00 Lacs
Income applied for charitable purposes	Rs.5.00 Lacs	Rs.5.00 Lacs
Taxable Income	Rs.5.00 Lacs	Rs.10.00 Lacs (As the property is not held under trust, no deduction is allowed)

Question 2: Whether voluntary donations received can be treated as income from property held under trust?

Answer: Voluntary donations are received from outsiders and there is no connection between the property held under trust and voluntary donations received. So they cannot be treated as income from property held under trust. However a deeming fiction is introduced in Section 12(1) by which voluntary contributions are deemed to be income derived from the property held under trust. The answer is “Yes”.

Question 3: What are the different types of voluntary donations? What is its tax treatment?

Answer: Under the Income Tax Act, voluntary donations received can be divided into two types. They are:-

a. Received with a direction to form part of the corpus fund (capital fund is called as corpus fund in case of charitable organizations) or specific fund (building fund etc) of the charitable organization. These donations are generally referred to as corpus fund donations. These donations are not treated as income as per provisions of Sec 11(1)(d). So these donations are automatically exempted even if the amount is not spent.

b. Received without any direction. These are generally called voluntary donations. These will form part of the income of the organization and these are exempt only if the amount is spent on charitable / religious activities.

This is one of the most benevolent clauses of Section 11. Capital Receipt (i.e., corpus fund donations) is not treated as income whereas even capital expenditure (construction of building etc) is allowed as deduction from income.

Type of Income / Expenditure	Taxability
Corpus fund donations received	Exempted Income
Voluntary donations received	Taxable Income
Capital Expenditure	Allowed as deduction
Revenue Expenditure	Allowed as deduction

Situations where Section 11 is advantageous:

Situation 1:

Mr.Ram is a businessman and also a philanthropist. He gets rental income from the shopping complex and he wants to use that rental income forever even after his demise, for charitable activities. Assume that he gets Rs.20.00 Lacs per annum as rental income. The expenditure he incurs towards that property is only payment of property tax of Rs.2.00 Lacs. He spent balance Rs.18.00 Lacs on charitable activities such as scholarships to poor students, pension to old age people.

Situation 2:

Mr. Ram transfers the shopping complex property under trust to a separate legal entity. That legal entity is created by him as a charitable trust by executing a trust deed and makes himself, his wife and son as Trustees. Now that trust becomes of the owner of the property and it gets same rental income of Rs. 20.00 Lacs and pays Rs. 2.00 Lacs as property tax and spent Rs. 18.00 Lacs towards same charitable activities.

What is the tax payable under the 2 situations and which is advantageous situation?

Answer:

Calculation of tax payable:

Particulars	Situation 1	Situation 2
Name of the Assessee	Mr. Ram	Ram Charitable Trust
Income received from shopping complex	20,00,000.00	20,00,000.00
Less: Property Tax	2,00,000.00	2,00,000.00
Net Annual Value / Income	18,00,000.00	18,00,000.00
Less: Standard Deduction 30%	6,00,000.00	–
Less: Amount spent on charitable activities	18,00,000.00	18,00,000.00
Taxable Income	12,00,000.00	–
Income Tax Liability (taken as 30%)	3,60,000.00	–

Notes:

a. In Situation 1, no deduction is allowable under the Income Tax Act for the amounts spent (Rs.18.00 Lacs) towards charitable activities by himself. Hence Rs.12.00 Lacs is taxable.

b. In Situation 2, standard deduction of 30% is not allowed because income of charitable organization will be calculated on general accounting principles and not based on the scheme of taxation in the Income Tax Act.

c. In Situation 2, Rs. 18.00 Lacs is deductible from income as amount is spent on charitable activities.

d. In Situation 1, the tax liability is Rs. 3.60 Lacs whereas in situation 2, the tax liability is Rs. NIL.

Which is advantageous Situation?

On taxability angle, definitely Situation 2 is advantageous as tax outgo is NIL. However Mr. Ram loses the ownership of the property.

Situation 3:

Mr. Ram does not want to lose the ownership rights of the property. So he has not transferred the shopping complex building to the trust but he donates every year the balance amount of Rs.18.00 Lacs to the Trust. Charitable activities are carried out under the trust. Is this advantageous?

Donations made are allowable as deduction under section 80G of the income tax act in the hands of the donor. However the recipient organization should have registered under section 80G and only 50% donations gets deduction subject to 10% of total income.

Conclusion under Situation 3:

a) When charitable trust is registered under section 80G also, then it is partially advantageous when compared with Situation 1 since tax out go will be lesser than Rs.3.60 Lacs.

b) When charitable trust is not registered under section 80G then there is no advantage as tax out go is Rs.3.60 Lacs.

Situation 4:

Mr. Krishna is a philanthropist but he is not having any source of income. During nationwide lockdown in 2020 he collected Rs.1.00 crore from friends & relatives. The amounts so collected were spent towards providing food to migrant workers who were going to their native places. Let us assume that Rs.50.00 laces received in the form of cash and balance Rs.50.00 Lacs received in his individual bank account. Mr. Krishna deposited cash donations in his individual bank account and from that account he spent entire Rs.1.00 crore towards providing food to migrant workers.

Solution:

Analysis from the perspective of Section 11: The activity for which Mr. Krishna spent is a charitable activity under Section 11. So total amount spent will be allowable expenditure. However he has not registered himself under the Income Tax Act as Charitable Organization/ Institution u/s 12A. Hence for him Section 11 is not applicable. So he has to offer the income under normal tax provisions by treating his activity as a business. He should be able to prove that amounts received are not his personal income but exclusively received for food distribution activity only.

Note: This article is written for basic understanding about the income which is exempted under Section 11. There are many procedural conditions prescribed in the Act such as registration of organization with Income Tax Department etc.