Section 11 – Made Easy – Never Before Ever After

Section 11 of Income Tax Act, 1961- Income from property held for charitable or religious purposes

Sub Section (1) of Section 11

Subject to the provisions of  sections 60 to  63, the following income shall not be included in the total income (i.e. Exempt) of the previous year of the person in receipt of the income

(a) (b) (c) (d)
  • 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; AND
  • where any such income is accumulated or set apart for application to such purposes in India,
  •  to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;
  • income derived from property held under trust in part only for such purposes,
  • the trust having been created before the commencement of this Act,
  • to the extent to which such income is applied to such purposes in India; AND
  • where any such income is finally set apart for application to such purposes in India,
  • to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property;
income derived from property held under trust –

(i) created on or after the 1st day of April, 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 the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India:

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;

Income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

For the purposes of clauses of (a) and (b) –

Explanation – 1

  • in computing the fifteen per cent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income; (Clause-1)
Situation (Clause-2) Reason Year of application Notes Sec.11(1B) {Where clause 2 not satisfied}
if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the *income derived* during that year from property held under trust, or, as the case may be, held under trust in part, by any amount— (i)       for the reason that the whole or any part of the income has not been received during that year, OR (a)     so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, AND 1.       Exemption is allowed only at the option of the person in receipt of the income.

2.       Option shall be exercised before the expiry of the time allowed u/s 139(1).

(a)     In the previous year immediately following the previous year in which the income was received; such income shall be deemed to be the income of the person in receipt
(ii)     for any other reason, (b)     so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, (b)     In the previous year immediately following the previous year in which the income was derived.

Rule 17(1): To exercise aforesaid option Form No. 9A shall be furnished electronically either under digital signature or electronic verification code, on or after 1st day of April of relevant AY and before the expiry of time allowed u/s 139(1).

Explanation – 2

Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to any other trust or institution registered under section 12AA, being contribution with a specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income for charitable or religious purposes.

From the above it can construed that Payment of any amount to any other charitable or religious trust with a specific direction shall not be considered as application of income. Hence any contribution to any other religious or charitable trust in general (i.e. without any specific direction) can be considered as application of income.

Explanation – 3

The provisions of sub-clause (ia) of clause (a) of  section 40 and sub-sections (3) and (3A) of  section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”

S.No. Section Description
1 40(a)(ia) 30% of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sec.139(1), is not deductible in computing the income chargeable under the head of PGBP.
2 40A(3) Where the assesse incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise by an account payee cheque drawn on a bank or account payee bank draft or use of electronic paying system through a bank, exceeds Ten thousand rupees, no deduction shall be allowed in respect of such expenditure.
3 40A(3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year  the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds ten thousand rupees.

(1A)      for the purposes of sub section (1)

(a) (b)
  • where a capital asset, being property held under trust wholly for charitable or religious purposes,
  •  is transferred and
  •  the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held,
  •  then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely;
(i) (ii)
>where the whole of the net consideration is utilized in acquiring the new capital asset,

> the whole of such capital gain;

> where only a part of the net consideration is utilized for acquiring the new capital asset,

> so much of such capital gain as is equal to the amount, if any, by which the amount so utilized exceeds the cost of the transferred asset;

  • where a capital asset, being property held under trust in part only for such purposes,
  • is transferred and
  •  the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held,
  • then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—
(i) (ii)
> where the whole of the net consideration is utilized in acquiring the new capital asset,

> the whole of the appropriate fraction of such capital gain

> in any other case,

> So much of the appropriate fraction of the capital gain as is equal to the amount, if any,

>By which the appropriate fraction of the amount utilized for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset.

Note: “appropriate fraction” means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes.

Sub-section (2) of Section 11

Situation – Further exemption for accumulating more than 15% Conditions
  • Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section
  • is not applied, or is not deemed to have been applied,
  • to charitable or religious purposes in India during the previous year
  • but is accumulated or set apart, either in whole or in part,
  • for application to such purposes in India,
  • such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income
(a) Assessee shall furnishes a statement in the *prescribed form* and in the prescribed manner to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years;

(b) The money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5);

(c) The statement referred to in clause (a) is furnished on or before the due date specified under sub- section (1) of section 139 for furnishing the return of income for the previous year.

Note: If the income so set apart or accumulated not able to apply in the period of five years due to court order, intervening period shall be excluded.

*Rule 17(2): The statement shall be furnished in Form-10 before the expiry of the time allowed u/s 139(1).*

Explanation:

  • Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub- section (1), read with the Explanation to that sub-section,
  •  which is not applied, but is accumulated or set apart,
  • to any registered
Trust or Institution Sec.12AA
fund or institution or trust or any university or other educational institution or any hospital or other medical institution Sec.(23C)(iv) / (v) / (vi)
  • Shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.

Sub-section (3) of Section 11

Exemption withdrawn conditions – Only for amount the amount over & above 15% [Sec.11(2)] Effect
Any income referred to in sub-section (2) which –

(a)  is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or

(b)   ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or

(c)  is not utilized for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof,

(d) is credited or paid to any trust or institution registered under  section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in Sec.(23C)(iv) / (v) / (vi).

Shall be deemed to be the income of such person

> The previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be,

>The previous year immediately following the expiry of the period aforesaid.

Sub-section (3A) of Section 11

  • Notwithstanding anything contained in sub-section (3), where due to circumstances beyond the control of the person in receipt of the income,
  • any income invested or deposited in accordance with the provisions of clause (b) of sub-section (2)
  • cannot be applied for the purpose for which it was accumulated or set apart
  • the Assessing Officer may, on an application made to him in this behalf, allow such person to apply such income for such other charitable or religious purpose in India as is specified in the application by such person and as is in conformity with the objects of the trust;
  • And thereupon the provisions of sub-section (3) shall apply as if the purpose specified by such person in the application under this sub-section were a purpose specified in the notice given to the Assessing Officer under clause (a) of sub-section (2).
 

(Exception) Provided that the Assessing Officer shall not allow application of such income by way of payment or credit made for the purposes referred to in clause (d) of sub-section (3) of section 11

i.e. Sec.12AA OR Sec.10(23C)(iv)/(v)/(vi)
Provided  further  that

  • in case the trust or institution, which has invested or deposited its income in accordance with the provisions of clause (b) of sub-section (2),
  • is dissolved,
  • The Assessing Officer may allow application of such income
  • For the purposes referred to in clause (d) of sub-section (3)
  • In the year in which such trust or institution was dissolved.

Sub-section (4) of Section 11

  • For the purposes of this section “property held under trust” includes a business undertaking so held,
  • and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof,
  • the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment;
  • and where any income so determined is in excess of the income as shown in the accounts of the undertaking,
  • Such excess shall be deemed to be applied to purposes other than charitable or religious purposes.
> Income from a business undertaking shall be included in the income of the trust if, assesse made claim to AO to not to include.

> AO has the power to determine the income of the business undertaking in accordance with provisions of the act.

>If AO found excess income over the income shown in the BOA shall be deemed to be applied to the purposes other than charitable or religious purposes.

Sub-section (4A) of Section 11

Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.

Sub-section (5) of Section 11

The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following
(i) investment in savings certificates as defined in sec.2(c) 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)
(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 u/s 36(1)(viii)
(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 u/s 36(1)(viii)
(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.
(x) investment in immovable property
(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

Rule 17C: For the purposes of Sec.11(5)(xii) (Other form of prescribed investments)
(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 recognized 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 recognized 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;

(vi) investment by way of acquiring equity shares of an incubatee by an incubator.
(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.

Sub-section (6) of Section 11

Object Effect Cause
In this section where any income is required to be applied or accumulated or set apart for application then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, Acquisition of which has been claimed as an application of income under this section in the same or any other previous year.

Sub-section (7) of Section 11

Where a trust or an institution has been granted registration u/s 12AA(1)(b) or has obtained registration at any time under  section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and the said registration is in force for any previous year, Then, nothing contained in  sec.10 [other than clause (1) and clause (23C) thereof] shall operate to exclude any income derived from the property held under trust from the total income of the person in receipt thereof for that previous year.
Summary:

If the trust is registered u/s 12AA or 12A, then any exemption u/s 10 shall not apply

Exception: Sec.10(23C)

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