Modes of investment or deposits by a Charitable or Religious Trust or Institution as per provisions of Section 11(5) of the Income Tax Act, 1961
Surplus fund of the Charitable entities should be invested as per forms and modes prescribed under section 11(5) of Income Tax Act.
As per the provisions of Section 11(5) of the Income-tax Act,1961 investments by a trust has to be made as per the prescribed mode of investments as contained therein.
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, the trust has to dispose of the same as per the provisions of Section 13(1)(d) of 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 off within one year and the proceeds has to be invested as per the mode of investment allowed as per Section 11(5) of the Income-tax Act,1961.
Bonus shares which are received are not to be counted for the purpose of calculation of limit as specified in Section 13(2)(h) – [CIT v. Narinder Mohan Foundation (2009) 311 ITR 425(Del)]
Failure to invest the income in circumstances as explained will amount to violation as per section 13(1)(d) of the act. Therefore, the exemptions that are available under section 11(1)(a) will not be available.
Section 13(1)(d) provides that exemption from tax to charitable or religious trust / institution will be forfeited if any funds of the trust / institution are invested or deposited after 28.2.1983, otherwise than in any one or more of the forms or modes specified therein.
In case of a trust which makes investment which are not as per the provisions of Section 11(5), it is only the income from such investment which are not made as per the provisions of Section 11(5) is liable for tax as per this clause and not the entire income of the Trust.
It was held that perusal of section 13(1)(d) of the Act, makes it clear that it is only the income from such investment or deposit, which has been made in violation of section 11(5) of the Act, that is liable to be taxed and violation of section 13(1)(d) does not result in denial of exemption under section 11 to the total income of the assessee trust. The aforesaid judgement of Karnataka High Court is based on the judgement of Bombay High Court, in the case of DIT(E) v. Sheth Mafatlal Gagalbhai Foundation Trust (2001) 249 ITR 533 (Bom). – [CIT v. Fr.Mullers Charitable Institutions (2014) 363 ITR 230 (Karn)]
It was held that violation of section 13(1)(d) and section 13(2)(h) deprives exemption only to the income from investments not permitted under section 11(5) and not to the entire income of the trust, if the other income of the trust, otherwise fulfils the condition for exemption. Therefore, the exemption under section 11 is available to the assessee only in respect of income, to the extent the same is derived in conformity to section 11 and applied during the year for the purposes of the trust. – [Jamsetji Tata Trust v. JDIT (E) (2014) 101 DTR 305 (ITAT Mumbai)]
Only the income from impermissible investments, could be taxed and not any other income. – [Director of Income Tax (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust (2002) 253 ITR 593 (Del)]
In the case of Gurudayal Berila Charitable Trust v. ITO, the issue on the amount of violation of investment came up whether the entire exemption has to be forfeited or to the extent of violation committed. It was held that amount to the extent violated be brought to tax. – [Gurudayal Berila Charitable Trust v. ITO (1990) 34 ITD 489 (ITAT Mumbai)]
During the course of assessment proceedings, Assessing Officer found that assessee had given loan to another educational society in the assessment year 2003-04, which continued to be lent during the year under consideration, i.e., 2006-07. He observed that though the amount given as loan was less than 15 per cent of income over expenditure, but the amount was not deposited in any of the securities mentioned in section 11(5), therefore, no allowance could be given for such amount. Accordingly, he denied the exemption under section 11 alleging the violation of provisions of section 13(1)(d) read with section 11(5). CIT(A) confirmed the order of Assessing Officer. However, Tribunal reversed the order of CIT(A) by observing that assessee while giving loan to another society did not violate provisions of section 13(1)(d) read with section 11(5) as the loan was neither an investment nor deposit. Against the order of Tribunal, revenue filed an appeal before the High Court. Held: There is clear embargo in section 11(5) that the society registered for charitable and religious purpose can invest the amount only in the specified investment and that these investments do not include loan to another society even if the objects of both the societies are same. In the present case, the, excess of income over expenditure in the relevant year was less than 15 per cent of gross receipts and the society to whom loan was given, was later on registered under section 12A w.e.f. 01.04.2004 with the same objects and purposes as that of assessee. Thus, the Tribunal had rightly held that Assessing Officer was not justified in denying the exemption under section 11 by invoking the provisions of section 13(1)(d) read with section 11(5). (Related Assessment year : 2006-07 – [CIT v. Kanpur Subhash Shiksha Samiti (2013) TaxPub (DT) 2655 : 54 (I) ITCL 178 (All)]
In the instant case the assessee had complied with the direction of the High Court on its earlier writ petition of withdrawing the amount invested in IEML and placing the amount in a scheduled bank in accordance with section 11(5) of the Income-tax Act, 1961. However the DGIT did not grant exemption to the assessee for the relevant year under consideration even after the assessee had complied with the order of the High Court. On a petition to the High Court again, the High Court while allowing the petition held that the DGIT could not have refused exemption for the relevant year, when the assessee had complied with the High Court Order. The Original order passed by the High Court had held that the second application would be moved by the assessee pursuant to the order of the High Court, would be treated as having been filed was to be an entire substitute of the original application, and therefore exemption was to given for Assessment year : 2008-09. (Related Assessment year : 2008-09) – [Export Promotion Council for Handicrafts and other v. DGIT (Exemption) (2011) 337 ITR 26 : (2010) 40 DTR 73 (Del)]
Investment of funds in contravention of modes stipulated in section 11(5) – Amount could not be recovered from the earlier investment due to the pendency of garnishee proceedings. It was held that under the circumstances, as the reasons were beyond the control of the assessee, forfeiture will not raise
Funds of assessee were originally invested in Indian Bank in 1995. Subsequently same were invested in EB Fund. At that time assessee claimed exemption under sections 10(22) and 10(22A) and prescription of section 11(5) was not applicable. On deletion of sections 10(22) and 10(22A) and introduction of section 10(23C) trust sought registration under section 12A and sought to withdraw deposit from EB Fund but deposit could not be withdrawn as the deposits with EB Fund were under attachment by TRO and consequently trust could not reinvest same as per modes prescribed under section 11(5). CIT(A) had allowed assessee’s appeal against addition made by Assessing Officer. Held: Inability to invest funds (Rs. 50 lakhs) in accordance with modes prescribed under section 11(5) was caused due to garnishee proceedings initiated by TRO. Trust did its best to take back money from EB fund but money could not be recovered because of pendency of garnishee proceedings. Case of assessee comes within ken of the maxim: Lexnoncogit ad impossibilia. Taking into consideration entire conspectus of facts CIT(A) was correct in deleting addition Rs. 50 lakhs. (Related Assessment year : 2004-05) – [ACIT v. Sri Ramchandra Educational & Health Trust (2010) 128 TTJ 408 : 34 DTR 347 (ITAT Chennai)]
Text of Section 11(5)
[(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :—
(i) investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;
(ii) deposit in any account with the Post Office Savings Bank;
(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).
Explanation.—In this clause, “scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);
(v) investment in any security for money created and issued by the Central Government or a State Government;
(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government;
(vii) investment or deposit in any [public sector company]:
[PROVIDED that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,—
(A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company;
(B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company;]
(viii) deposits with or 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 clause (viii) of sub-section (1) of section 36];
(ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;
[(ixa) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India.
Explanation.—For the purposes of this clause,—
(a) “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;
(b) “public company” shall have the meaning assigned to it in section 2(71) of the Companies Act, 2013;
(c) “urban infrastructure” means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;]
(x) investment in immovable property.
Explanation.—”Immovable property” does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;
[(xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964);]
[(xii) any other form or mode of investment or deposit as may be prescribed.
1. Inserted by the Finance Act, 1983, with effect from 01.04.1983.
2. Substituted for “Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956)” by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.04.1989.
3. Inserted by the Finance Act, 2000, with effect from 01.04.2001.
4. Substituted for “which is approved by the Central Government for the purposes of clause (viii) of sub-section (1) of section 36”. Ibid, with effect from 01.04.2000.
5. Inserted by the Finance Act, 2000, with effect from 01.04.2001.
6. Inserted by the Finance Act, 1984, with effect from 01.04.1985.
7. Inserted by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.04.1989.
Clauses (i) to (xi) of section 11(5) enlists the permissible investments and deposits. Clause (xii) is the residual clause permitting any other form or mode of investment or deposit as may be prescribed. Accordingly, Rule 17C prescribes the other permissible forms or modes of investment or deposits by a charitable or religious trust or institution.
Text of Rule 17C
[FORMS OR MODES OF INVESTMENT OR DEPOSITS BY A CHARITABLE OR RELIGIOUS TRUST OR INSTITUTION.
17C . The forms and modes of investment or deposits under clause (xii) of sub-section (5) of section 11 shall be the following, namely :—
(i) investment in the units issued under any scheme of the mutual fund referred to in clause (23D) of section 10 of the Income-tax Act, 1961;
[* * *]
(ii) any transfer of deposits to the Public Account of India;]
[(iii) deposits made with an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both;]
[(iv) investment by way of acquiring equity shares of a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996 (22 of 1996);]
[(v) investment made by a recognised stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter referred to as investor) in the equity share capital of a company (hereafter referred to as investee)—
(A) which is engaged in dealing with securities or mainly associated with the securities market;
(B) whose main object is to acquire the membership of another recognised stock exchange for the sole purpose of facilitating the members of the investor to trade on the said stock exchange through the investee in accordance with the directions or guidelines issued under the Securities and Exchange Board of India Act, 1992 (15 of 1992) by the Securities and Exchange Board of India established under section 3 of that Act; and
(C) in which at least fifty-one per cent of equity shares are held by the investor and the balance equity shares are held by members of such investor;]
[(va) investment made by a person, authorised under section 4 of the Payment and Settlement Systems Act, 2007, in the equity share capital or bonds or debentures of a company —
(A) which is engaged in operations of retail payments system or digital payments settlement or similar activities in India and abroad and is approved by the Reserve Bank of India for this purpose; and
(B) in which at least fifty-one per cent of equity shares are held by National Payments Corporation of India.]
[(vi) investment by way of acquiring equity shares of an incubatee by an incubator.
Explanation.—For the purposes of this clause,—
(a) “incubatee” shall mean such incubatee as may be notified by the Government of India in the Ministry of Science and Technology;
(b) “incubator” shall mean such Technology Business Incubator or Science and Technology Entrepreneurship Park as may be notified by the Government of India in the Ministry of Science and Techno-logy;]
[(vii) investment by way of acquiring shares of National Skill Development Corporation;]
[(viii) investment in debt instruments issued by any infrastructure Finance Company registered with the Reserve Bank of India; ]
[(ix) investment in “Stock Certificate” as defined in clause (c) of paragraph 2 of the Sovereign Gold Bonds Scheme, 2015, published in the Official Gazette vide notification number G.S.R. 827(E), dated the 30th October, 2015.]
1. Inserted by the IT (Eighth Amendment) Rules, 1990, with effect from 29.03.1990.
2. Omitted by the IT (Sixteenth Amendment) Rules, 1990, with retrospective effect from 29.03.1990. Earlier, it was inserted by the (Eighth Amendment) Rules, 1990, with effect from 29.03.1990
3. Inserted by the IT (First Amendment) Rules, 1995, with effect from 06.01.1995.
4. Inserted by the IT (Fifteenth Amendment) Rules, 1998, with effect from 17.09.1998.
5. Inserted by the IT (Tenth Amendment) Rules, 2006, with retrospective effect from 26.11.1999.
6. Inserted by the IT (Seventh Amendment) Rules, 2020, with effect from 05.03.2020.
7. Inserted by the IT (Second Amendment) Rules, 2007, with effect from 01.03.2007.
8. Inserted by the IT (Ninth Amendment) Rules, 2008, with effect from 31.08.2008.
9. Inserted by the IT (Thirteenth Amendment) Rules, 2012, with effect from 20.09.2012.
10. Inserted by the IT (Eighth Amendment) Rules, 2016, with retrospective effect from 23.03.2016.