Taxation Of Charitable And Religious Trusts: A Comprehensive Analysis of the Exemption Framework under Sections 11 to 13 of the Income-tax Act, 1961
(Including a Comprehensive Master Illustration Demonstrating the Computation of Exempt and Taxable Income by Applying the Relevant Provisions of Sections 11 to 13. From Page 10 to 33)
Overall Scheme of Exemption under Sections 11 to 13
The exemption provisions contained in Sections 11 to 13 operate as a single integrated code. The scheme begins with registration under Section 12AB and then examines whether the income of the trust qualifies for exemption under Sections 11 and 12. The law thereafter verifies whether the statutory conditions relating to application of income, accumulation, investments, business activities, audit and return filing have been satisfied. Finally, the an-ti-abuse provisions of Section 13 are applied to determine whether any part of the exemp-tion should be denied because of private benefit or violation of statutory safeguards. Thus, exemption is not determined by any single provision but by the combined operation of the entire code.
Also Read: Taxation of Charitable & Religious Trusts: A Guide to Sections 11–13 – Part-II
Central Principle of the Entire Code
The entire scheme contained in Sections 11 to 13 is founded upon a single principle: in-come that enjoys exemption must remain dedicated to charitable or religious purposes, must be applied or accumulated in accordance with the Act, must be managed through transparent and accountable mechanisms and must never be diverted for private benefit. Every provision in the exemption code ultimately serves this objective.
Section 11(1)(a) – Application of Income
Section 11(1)(a) forms the foundation of the exemption scheme for charitable and religious trusts. It grants exemption in respect of income applied in India for charitable or religious purposes and ordinarily requires a trust to apply at least 85% of its income during the year, while the remaining 15% may be retained without conditions. Since exemption is linked with actual application of income, the law also recognises that a trust may not always be able to spend the required amount during the same year due to non-receipt of income or other valid reasons. Accordingly, Explanation 1 permits the trust to exercise the prescribed option and apply the amount within the permitted subsequent period while continuing to claim exemption for the earlier year. However, this relaxation is conditional and, under Sec-tion 11(1B), where the trust ultimately fails to utilise the amount within the prescribed peri-od, the exemption earlier granted is withdrawn and the amount becomes taxable. Thus, the scheme is based on actual application of income, permits temporary postponement in genuine cases and ensures that the income is ultimately applied for charitable purposes within the time allowed by law.
Section 11(1)(d) – Corpus Donations
The Act distinguishes between ordinary donations and corpus donations. Ordinary dona-tions form part of the income of the trust and are subject to the application requirements of Section 11, whereas corpus donations received with a specific direction from the donor to form part of the corpus are treated as capital receipts and are exempt without being sub-jected to the 85% application requirement. Corpus donations made by one exempt trust to another exempt trust are not treated as application of income and therefore cannot be used to satisfy the donor trust’s application requirement. Further, expenditure incurred out of corpus funds is not treated as application of income since the corpus has already enjoyed exemption at the time of receipt. However, where the corpus is subsequently replenished out of the income of the trust in accordance with the prescribed conditions, such replen-ishment is recognised as application of income in the year of restoration. This ensures that the same corpus amount does not generate exemption benefits twice while permitting recognition when the corpus is rebuilt from current income.
TDS and Cash Payment Compliance
The modern exemption scheme requires not only charitable expenditure but also compli-ance with statutory tax obligations. Expenditure may qualify as application of income only if the requirements relating to deduction and payment of tax at source are satisfied. Similarly, expenditure incurred through prohibited cash payment modes may not be recognised as valid application. Thus, the concept of application now incorporates both charitable utilisa-tion and compliance with prescribed tax and payment disciplines.
Expenditure Out of Borrowed Funds
A similar principle applies to expenditure incurred from loans and borrowings. Since bor-rowed funds do not represent income of the trust, their utilisation is not treated as applica-tion of income at the time of spending. The expenditure becomes relevant for exemption purposes only when the borrowing is subsequently repaid out of the income of the trust. The provision ensures that exemption remains linked with actual application of income ra-ther than utilisation of borrowed money.
Inter-Trust Donations
Where one exempt trust makes a donation to another exempt trust, only 85% of such dona-tion is treated as application of income in the hands of the donor trust. The restriction re-flects the legislative approach that transfers between exempt institutions should not auto-matically generate full application benefits. The provision seeks to ensure that exemption remains connected with ultimate charitable utilisation rather than repeated circulation of funds within the charitable sector.
Section 11(1A) – Capital Gains
Section 11(1A) provides relief where a charitable trust transfers a capital asset and rein-vests the consideration in another capital asset intended for charitable purposes. The pro-vision recognises that charitable institutions may need to replace, modernize or reorganise their assets without losing exemption. Accordingly, where the prescribed reinvestment conditions are satisfied, the capital gain arising on transfer is treated as application of in-come. Full reinvestment generally results in full exemption of the capital gain, whereas par-tial reinvestment results in proportionate relief. The provision therefore preserves exemp-tion where charitable funds continue to remain invested in charitable assets despite the transfer of an existing asset.
Section 11(2) – Accumulation of Income
Section 11(2) permits a trust to accumulate income beyond the normal 15% retention al-lowed under Section 11(1)(a) where immediate application is not possible and funds are required for a specific future charitable purpose. The benefit is available only if the trust specifies the purpose of accumulation, furnishes the prescribed statement, invests the ac-cumulated funds in the modes specified under Section 11(5) and utilises the funds within the permitted period. Accumulation cannot be general or indefinite and must be linked to a defined charitable objective. Since the accumulated income continues to enjoy exemption despite not being immediately spent, it must remain invested in approved modes through-out the accumulation period. Thus, Section 11(2) allows postponement of application for planned charitable projects while ensuring that the accumulated funds remain earmarked, protected and ultimately utilised for the specified charitable purpose.
Section 11(3) – Taxability of Accumulated Income
Section 11(3) is the enforcement provision for Section 11(2). While Section 11(2) permits accumulation of income without loss of exemption, Section 11(3) provides that the accu-mulated income becomes taxable if the conditions attached to such accumulation are vio-lated. Taxability may arise where the accumulated income is applied for a purpose different from the purpose specified at the time of accumulation, ceases to remain invested in the approved modes prescribed under Section 11(5), is not utilised within the permitted period or is transferred in a manner prohibited by the Act. Thus, the exemption granted under Sec-tion 11(2) continues only so long as the accumulated funds remain linked to the specified purpose, are properly invested and are utilised within the prescribed timeframe. Sections 11(2) and 11(3) therefore operate together, with the former allowing postponement of char-itable expenditure and the latter ensuring that the accumulated income is ultimately applied in accordance with the conditions governing exemption.
Section 11(3A) – Change of Accumulation Purpose
Section 11(3A) provides relief where a trust has validly accumulated income under Section 11(2) but is subsequently unable to utilise the funds for the original purpose because that purpose has become impossible or impracticable to implement. In such cases, the accu-mulated income may be permitted to be applied for another charitable purpose instead of becoming taxable under Section 11(3). However, the change cannot be made merely at the discretion of the trustees and is permissible only where the original purpose can no longer reasonably be carried out and the alternative purpose continues to be charitable in nature. The accumulated funds are generally required to be utilised by the same trust, though transfer to another eligible charitable institution may be permitted in accordance with the statutory provisions where the trust itself ceases to exist. Thus, Sections 11(2), 11(3) and 11(3A) together form a complete code governing accumulation, with Section 11(2) permit-ting accumulation, Section 11(3) taxing accumulated income where conditions are violated and Section 11(3A) providing relief where the original accumulation purpose becomes in-capable of implementation for genuine reasons.
Section 11(4) – Business Undertaking Held Under Trust
The Act does not treat every business activity of a charitable trust as incompatible with ex-emption. Section 11(4) recognises that a business undertaking may itself constitute prop-erty held under trust and, therefore, the mere existence of a business undertaking does not deprive the trust of exemption. However, the Assessing Officer is empowered to determine the true income of such undertaking and, where the actual income exceeds the income disclosed by the trust, the excess may not qualify for exemption. Thus, while business in-come can enjoy exemption where the business undertaking forms part of the trust property, the benefit is available only in respect of correctly disclosed and properly determined in-come. This position is distinct from Section 11(4A), which applies where the trust itself car-ries on a business activity in the course of pursuing its charitable objects.
Section 11(4A) – Business Incidental to Charitable Objects
Section 11(4A) provides that business income may qualify for exemption where the busi-ness is incidental to the attainment of the charitable objects of the trust and not an inde-pendent profit-making activity. The dominant purpose must continue to be charitable and the business activity should merely support or facilitate the achievement of the trust’s ob-jects. A further mandatory condition is that separate books of account must be maintained for such business activity so that its receipts, expenditure and profits can be independently verified. Thus, Section 11(4A) permits business activities that are genuinely connected with the charitable purposes of the trust while ensuring transparency and preventing charitable status from being used to shelter unrelated commercial ventures. Read together, Sections 11(4) and 11(4A) establish that business income is not automatically excluded from ex-emption; its eligibility depends upon the nature of the business, its relationship with the charitable objects, maintenance of proper records and correct disclosure of income.
Section 11(5) and Section 13(1)(d) – Approved Investments of Trust Funds
Section 11(5) prescribes the modes in which trust funds and accumulated income may be invested or deposited. Since charitable institutions enjoy tax exemption and may retain or accumulate substantial funds, the law requires such funds to remain invested in safe, transparent and approved modes so that they remain available for charitable purposes and are not exposed to speculative or impermissible investments. This requirement assumes particular importance in the case of income accumulated under Section 11(2), which must continue to remain invested in the approved modes throughout the accumulation period in order to retain its exemption. Section 13(1)(d) provides the consequences where trust funds are invested or deposited otherwise than in the modes specified under Section 11(5) and operates as the enforcement provision for the investment discipline imposed by that section. Thus, even where a trust is otherwise entitled to exemption, non-compliance with the prescribed investment conditions may result in denial or restriction of exemption. Read together, Sections 11(5) and 13(1)(d) ensure that exempt charitable funds remain protect-ed, properly invested and available for the charitable purposes for which exemption is granted.
Section 12A – Registration, Return Filing and Audit
Section 12A lays down the basic conditions that must be satisfied for claiming exemption under Sections 11 and 12. Registration under Section 12AB is the starting point of the ex-emption scheme, but registration alone does not guarantee exemption. The trust must con-tinue to comply with the statutory requirements prescribed by the Act, including timely filing of the return of income and furnishing of the prescribed audit report wherever applicable. Where the income of the trust before claiming exemption exceeds the prescribed limit, its accounts are required to be audited and the audit report furnished within the stipulated time. The audit serves as an independent verification of compliance with the provisions re-lating to application of income, accumulation, investments and other statutory conditions governing exemption. Thus, Section 12A makes registration, return filing and audit an inte-gral part of the exemption framework and ensures transparency, accountability and con-tinued compliance by charitable institutions.
Section 11(6) – Depreciation on Assets
Section 11(6) prevents double deduction in respect of capital assets acquired by a charita-ble trust. Where the cost of acquisition of an asset has already been treated as application of income for purposes of exemption under Section 11, depreciation on the same cost can-not again be claimed while computing income eligible for exemption. The provision en-sures that the same expenditure does not generate repeated exemption benefits and that charitable expenditure receives deduction only once. Accordingly, trusts owning substan-tial fixed assets must compute their exempt income after giving effect to this restriction on depreciation.
Section 11(7) – Actual Application of Income
Section 11(7) emphasises that exemption is linked with actual application of income and not merely with accounting recognition of expenditure. For expenditure to qualify as appli-cation, there must generally be actual utilisation of funds for charitable purposes and not merely the creation of provisions, liabilities or book entries. The requirement applies irre-spective of the method of accounting followed by the trust, as the decisive factor is the ac-tual outflow of funds rather than the accounting treatment given to the expenditure. The provision also prevents the same expenditure from being recognised more than once by en-suring that an amount already considered for exemption is not again treated as application when actual payment subsequently takes place. Read together, Sections 11(5), 12A, 11(6) and 11(7) form the compliance framework of the exemption scheme by regulating invest-ments, registration and reporting requirements, preventing double deduction and linking exemption with actual charitable application of funds.
Section 13(1)(c) and Section 13(3) – Benefit to Specified Persons
Section 13 contains the anti-abuse provisions of the exemption scheme and identifies sit-uations in which exemption otherwise available under Sections 11 and 12 may be denied or restricted. A key provision is Section 13(1)(c), which provides that exemption may be denied where any part of the income or property of the trust is used or applied, directly or indirectly, for the benefit of specified persons. The provision is intended to ensure that charitable re-sources remain dedicated to charitable purposes and are not diverted for private advantage by persons connected with the trust. Section 13(3) identifies the specified persons for this purpose and includes the author or founder of the trust, substantial contributors, trustees, managers, their relatives and concerns in which such persons have substantial interest. Since these persons are capable of influencing the affairs of the institution, transactions involving them are subjected to special scrutiny to determine whether charitable income or property has been used for private benefit. Thus, Sections 13(1)(c) and 13(3) together oper-ate as safeguards against private enrichment through charitable institutions and preserve the public character of charitable assets.
Section 13(2), 13(4) and 13(6) – Transactions with Specified Persons
Section 13(2) supplements Section 13(1)(c) by identifying situations which may be regard-ed as conferring a benefit upon specified persons and thereby attracting denial of exemp-tion. These include loans or advances granted on non-commercial terms, use of trust property without adequate compensation, excessive or unreasonable remuneration, pur-chase or sale transactions carried out at unfair values and investments of trust funds in concerns in which specified persons have substantial interest. The provision does not pro-hibit genuine transactions with specified persons, but requires that such dealings be fair, reasonable and free from any element of private benefit. The emphasis is on the substance of the transaction and whether charitable resources have been directly or indirectly diverted for the advantage of connected persons.
Section 13(4) provides limited relief where violations relating to investments in concerns connected with specified persons are confined to the extent prescribed by law, thereby en-suring that minor violations do not automatically result in complete denial of exemption. Section 13(6) similarly provides that the mere receipt of educational or medical facilities by specified persons from a charitable institution does not by itself attract disqualification, provided such facilities are available in the ordinary course and without any special or pref-erential treatment. Together, these provisions seek to prevent diversion of charitable assets for private benefit while recognising that bona fide and arm’s-length dealings with specified persons may legitimately occur in the course of administering a charitable institution.
Section 13(7) – Anonymous Donations
Section 13(7) links the exemption provisions with the taxation of anonymous donations under Section 115BBC. Donations received without maintaining the prescribed identity particulars of the donor are treated separately under the Act and do not enjoy the normal exemption available under Sections 11 and 12. The provision reinforces the importance of transparency and accountability in the receipt of charitable funds.
Overall Role and Principle of Section 13
Section 13 constitutes the anti-abuse framework of the exemption scheme governing chari-table and religious trusts. While Sections 11 and 12 prescribe the conditions for earning exemption through application of income, accumulation and compliance with statutory requirements, Section 13 identifies the circumstances in which such exemption may be denied or restricted. Its underlying principle is that the income and property of a charitable institution must remain dedicated to charitable purposes and should not be used, directly or indirectly, for the private benefit of founders, trustees, contributors or other connected persons. The section therefore safeguards the public character of charitable assets, pre-vents private enrichment through charitable institutions and preserves the integrity of the exemption granted under Sections 11 and 12.
The Entire Exemption Code In One Sentence
Parliament grants exemption to income of registered charitable and religious institutions that genuinely apply their income for approved charitable purposes, properly accumulate unspent income, maintain approved investments, comply with statutory procedures, avoid private benefit and avoid all disqualifications contained in Section 13; any failure at any stage results in partial or complete withdrawal of the exemption.
The Master Flow Chart Of Trust Assessment
1. Registration under Section 12A/12AB.
2. Determine income under Sections 11 and 12.
3. Separate corpus donations from ordinary income.
4. Compute income available for application.
5. Test 85% application requirement.
6. Examine Explanation 1 option.
7. Examine Section 11(2) accumulation.
8. Verify Section 11(3) compliance.
9. Verify corpus and borrowing adjustments.
10. Verify TDS and payment compliance.
11. Verify business income conditions.
12. Verify Section 11(5) investments.
13. Apply Section 13 anti-abuse provisions.
14. Apply Section 2(15) commerciality restrictions.
15. Identify anonymous donations.
16. Compute exempt income.
17. Compute taxable income.
MASTER EXAMPLE ON TAXATION OF CHARITABLE TRUSTS
Background
Shree Public Welfare Trust (“SPWT”) is a public charitable trust registered under section 12AB. The objects of the trust are:
1. Education.
2. Medical relief.
3. Relief to poor.
4. Advancement of an object of General Public Utility (GPU).
The trust maintains regular books of account and is otherwise eligible for exemption under sections 11 and 12 subject to fulfilment of statutory conditions. The following information relates to Previous Year 2025-26.
PART A : INCOME OF THE TRUST
A1. Voluntary Contributions
| Sl. No. | Particulars | Rs. Lakhs |
| 1 | General donations received | 500.00 |
| 2 | Corpus donations received with specific written direction | 120.00 |
| 3 | Anonymous donations received | 40.00 |
A2. Income from Property Held Under Trust
| Sl. No. | Particulars | Rs. Lakhs |
| 4 | Rent from trust property | 20.00 |
| 5 | Bank interest credited | 30.00 |
| 6 | Interest accrued but not received till 31-03-2026 | 30.00 |
Trust exercised option under Explanation 1 to section 11(1) in respect of such unrealised income.
A3. Business Activities
| Sl. No. | Particulars | Rs. Lakhs |
| 7 | Pharmacy operated within charitable hospital | 50.00 |
| 8 | Printing press constitutes a business undertaking held under trust. AO determines income at ₹100.00 Lakhs . Income disclosed by trust = ₹80.00 Lakhs | 100.00 |
A4. General Public Utility Activity
| Sl. No. | Particulars | Rs. Lakhs |
| 9 | GPU receipts | 200.00 |
| 10 | Commercial receipts from trade-related activities | 75.00 |
| 11 | Revenue expenditure relating to GPU activities | 110.00 |
| 12 | Depreciation claimed in GPU segment | 10.00 |
Assume commercial receipts exceed statutory limit prescribed under proviso to section 2(15).
PART B : APPLICATION OF INCOME
B1. Revenue Expenditure
| Sl. No. | Particulars | Rs. Lakhs |
| 13 | Educational expenditure actually paid through banking channels | 220.00 |
| 14 | Medical expenditure actually paid through banking channels | 100.00 |
| 15 | Professional fees paid to consultants = ₹20.00 Lakhs (Tax deductible at source was not deducted.) | 20.00 |
| 16 | Construction expenditure paid in cash to contractor | 30.00 |
| 17 | Scholarship provision created. (No payment made till year-end.) | 25.00 |
B2. Capital Expenditure
| Sl. No. | Particulars | Rs. Lakhs |
| 18 | School building purchased | 100.00 |
| 19 | Depreciation claimed thereon | 10.00 |
B3. Corpus Transactions
| 20 | Expenditure incurred out of corpus funds | 40.00 |
| 21 | Corpus replenished out of current year’s income | 15.00 |
B4. Borrowings
| 22 | Charitable expenditure incurred from bank loan | 50.00 |
| 23 | Loan repaid during year from current income | 20.00 |
B5. Inter-Trust Donations
| 24 | Donation to another registered trust | 60.00 |
| 25 | Corpus donation to another registered trust | 20.00 |
PART C : ACCUMULATION
| 26 | Form 10 filed before due date. | YES |
| 27 | Amount accumulated u/s 11(2) | 80.00 |
| 28 | Purpose specified (Construction of Cancer Hospital). | YES |
| 29 | Period specified ( 5 Years) | YES |
| 30 | Out of accumulated funds ₹15.00 Lakhs invested in equity shares of a private company not covered by section 11(5). | 15.00 |
PART D : SPECIFIED PERSON TRANSACTIONS
| 31 | Trustee’s son studied in trust school. (Normal fees charged.) | |
| 32 | Interest-free loan given to trustee | 80.00 |
| 33 | Excess remuneration paid to Managing Trustee | YES |
| 34 | Trust invested ₹18,00,000 in a private company in which trustee has substantial interest | YES |
| 35 | Income earned from such investment | 15.00 |
| 36 | Total trust funds | 1000.00 |
PART E : OLD ACCUMULATIONS
| 37 | Earlier deemed application exercised under Explanation 1 to section 11(1) | 30.00 |
| 38 | Actual utilisation in succeeding year | 20.00 |
| 39 | Balance not utilised | 10.00 |
| 40 | Earlier accumulation used for purchase of luxury vehicles for trus-tees | 12.00 |
| 41 | Earlier accumulation ceased to remain invested in specified modes | 8.00 |
| 42 | Earlier accumulation transferred to corpus fund | 5.00 |
| 43 | Earlier accumulation originally earmarked for school building. AO permit-ted change of purpose to cancer hospital under section 11(3A). | 50.00 |
PART F : COMPLIANCE FACTS
44. Return filed within due date prescribed u/s 139(4A).
45. Audit report furnished within prescribed time.
REQUIRED
Computation of :
1. Income derived during the year.
2. Adjusted income for section 11 purposes.
3. Amount eligible for 15% accumulation.
4. Amount requiring application.
5. Amount treated as application.
6. Exemption available.
7. Taxable income under each provision.
8. Working notes with statutory references.
Computation of Income of Shree Public Welfare Trust
Step 1 : Income Derived During the Year
| Particulars | Rs. (Lakhs) |
| General donations | 500.00 |
| Corpus donations | Nil |
| Anonymous donations | 40.00 |
| Rent from trust property | 20.00 |
| Bank interest received | 30.00 |
| Interest accrued but not received | 30.00 |
| Printing press income determined by AO | 100.00 |
| Pharmacy income | 50.00 |
| GPU receipts | 200.00 |
| Total Income Derived | 970.00 |
Step 2 : Computation of Adjusted Income
| Particulars | Rs. (Lakhs) |
| Income derived | 970.00 |
| Less: Donation to another registered trust | (60.00) |
| Adjusted Income | 910.00 |
Step 3 : Statutory Accumulation under Section 11(1)(a)
| Particulars | Rs. (Lakhs) |
| Adjusted income | 910.00 |
| 15% accumulation | 136.50 |
| Automatic exemption | 136.50 |
Step 4 : Income Requiring Application
| Particulars | Rs. (Lakhs) |
| Adjusted income | 910.00 |
| Less: 15% accumulation | 136.50 |
| Income requiring application | 773.50 |
Step 5 : Eligible Application of Income
| Particulars | Rs. (Lakhs) |
| Educational expenditure | 220.00 |
| Medical expenditure | 100.00 |
| Professional fees allowable (70%) | 14.00 |
| School building acquisition | 100.00 |
| Corpus replenishment | 15.00 |
| Loan repayment from current income | 20.00 |
| Donation to another trust (85%) | 51.00 |
| Total Eligible Application | 520.00 |
Step 6 : Application Shortfall
| Particulars | Rs. (Lakhs) |
| Income requiring application | 773.50 |
| Less: Eligible application | (520.00) |
| Shortfall | 253.50 |
Step 7 : Deemed Application
| Particulars | Rs. (Lakhs) |
| Actual application | 520.00 |
| Deemed application | 30.00 |
| Total application | 550.00 |
Step 8 : Revised Shortfall
| Particulars | Rs. (Lakhs) |
| Income requiring application | 773.50 |
| Less: Application including deemed application | (550.00) |
| Balance shortfall | 223.50 |
Step 9 : Accumulation under Section 11(2)
| Particulars | Rs. (Lakhs) |
| Balance shortfall | 223.50 |
| Less: Accumulation under section 11(2) | (80.00) |
| Unapplied income taxable | 143.50 |
Step 10 : Additional Taxability under Section 11
| Particulars | Rs. (Lakhs) |
| Taxable under section 11(1B) | 10.00 |
| Taxable under section 11(3)(a) | 12.00 |
| Taxable under section 11(3)(b) | 15.00 |
| Taxable under section 11(3)(c) | 8.00 |
| Taxable under section 11(3)(d) | 5.00 |
| Total additional taxability | 50.00 |
Step 11 : Total Taxable Income under Section 11 Framework
| Particulars | Rs. (Lakhs) |
| Unapplied income | 143.50 |
| Additional taxability under section 11 | 50.00 |
| Total taxable under section 11 | 193.50 |
Step 12 : Taxability under Section 13
| Particulars | Rs. (Lakhs) |
| Interest-free loan to trustee | 25.00 |
| Excess remuneration to Managing Trustee | 12.00 |
| Income from specified concern | 2.00 |
| GPU income taxable under section 13(10) | 90.00 |
| Total taxable under section 13 | 129.00 |
Step 13 : Taxability under Section 115BBC
| Particulars | Rs. (Lakhs) |
| Anonymous donations | 40.00 |
| Taxable under section 115BBC | 40.00 |
Step 14 : Independent Taxability under Section 11(4)
| Particulars | Rs. (Lakhs) |
| Income disclosed by trust | 80.00 |
| Income determined by AO | 100.00 |
| Excess taxable under section 11(4) | 20.00 |
Step 15 : Consolidated Taxable Income
| Particulars | Rs. (Lakhs) |
| Taxable under section 11 | 193.50 |
| Taxable under section 13 | 129.00 |
| Taxable under section 115BBC | 40.00 |
| Taxable under section 11(4) | 20.00 |
| Total Taxable Income | 382.50 |
Step 16 : Income Eligible for Exemption
| Particulars | Rs. (Lakhs) |
| Total income derived | 970.00 |
| Less: Total taxable income | (382.50) |
| Income eligible for exemption | 587.50 |
Final Answer
| Particulars | Rs. (Lakhs) |
| Income eligible for exemption | 587.50 |
| Income taxable | 382.50 |
WORKING NOTES
Working Note 1 – Corpus Donation – Section 11(1)(d)
Section 11(1)(d) provides that voluntary contributions received with a specific direction from the donor that they shall form part of the corpus of the trust shall not be included in the income eligible for application under section 11. The object of this provision is to pre-serve the permanent capital structure of the trust. In the present case, corpus donations of 120.00 lakhs were received together with specific written directions from the donors. Ac-cordingly, the amount is excluded from the computation of income derived and no part thereof is required to be applied for charitable purposes.
Working Note 2 – Printing Press Business Undertaking – Section 11(4)
Section 11(4) deals with a business undertaking held under trust. The provision authorises the Assessing Officer to determine the income of such business independently. Where the income determined by the Assessing Officer exceeds the income disclosed by the trust, the excess is deemed to be income not entitled to exemption. In the present case, the trust dis-closed income of 80.00 lakhs whereas the Assessing Officer determined income at 100.00 lakhs. Accordingly, the excess of 20.00 lakhs becomes independently taxable. However, for computing income derived from property held under trust, the figure of 100.00 lakhs is adopted.
Working Note 3 – Pharmacy Activity – Section 11(4A)
Section 11(4A) permits exemption in respect of business income where the business is in-cidental to the attainment of the objectives of the trust and separate books of account are maintained. The pharmacy is operated within the charitable hospital and is directly con-nected with the object of medical relief. Separate books are maintained. Therefore, the conditions of section 11(4A) are satisfied and the income of 50.00 lakhs remains eligible for exemption subject to fulfilment of other provisions.
Working Note 4 – Unrealised Interest – Explanation 1 to Section 11(1)
Explanation 1 to section 11(1) recognises that a trust cannot apply income which has not actually been received. Therefore, where income has accrued but has not been received during the year, the trust may exercise an option to apply such income in a subsequent year. Such income is deemed to have been applied during the current year. Since interest of 30.00 lakhs accrued but remained unrealised and the option was exercised, the amount qualifies for deemed application.
Working Note 5 – Donation to Another Registered Trust – Explanation 4(iii) to Sec-tion 11(1)
Explanation 4(iii) to section 11(1) restricts application benefit in respect of donations made to another registered trust. Only 85% of such donation is treated as application. The legisla-tive intention is to prevent indefinite circulation of funds between charitable institutions. Accordingly, out of the donation of 60.00 lakhs, only 51.00 lakhs qualifies as application and the balance 9.00 lakhs does not qualify.
Working Note 6 – TDS Default – Explanation 3 to Section 11(1)
Explanation 3 to section 11(1) incorporates principles similar to section 40(a)(ia). Where tax is deductible at source but has not been deducted, the expenditure is not fully recog-nised as application. Instead, 30% of the expenditure is denied. Professional fees of 20.00 lakhs were paid without deduction of tax at source. Therefore, 6.00 lakhs is disallowed and only 14.00 lakhs is treated as application.
Working Note 7 – Cash Payment – Explanation 3 to Section 11(1)
Explanation 3 to section 11(1) also disallows expenditure incurred otherwise than through prescribed banking channels where the payment exceeds the specified limits. The purpose is to discourage cash transactions and ensure transparency. Construction expenditure of 30.00 lakhs was paid in cash. Consequently, the entire amount is ignored for application purposes.
Working Note 8 – Scholarship Provision – Actual Application Principle
Sections 11 and 12 recognise actual application and not merely book entries. A provision created in the accounts without actual payment does not amount to application of income. Since scholarship provision of 25.00 lakhs remained unpaid, it does not qualify as applica-tion.
Working Note 9 – School Building Acquisition – Section 11(1)(a)
Capital expenditure incurred for achieving charitable objects is treated as application of in-come. Purchase of a school building directly advances the educational objects of the trust. Therefore, the entire cost of 100.00 lakhs qualifies as application in the year of acquisition.
Working Note 10 – Depreciation – Section 11(6)
Section 11(6) prevents double deduction. Where the acquisition cost of an asset has al-ready been treated as application, depreciation on the same asset cannot again be treated as application. Since the school building cost of 100.00 lakhs has already been recognised as application, depreciation of 10.00 lakhs is not allowable.
Working Note 11 – Corpus Utilisation – Explanation 4(i) to Section 11(1)
Explanation 4(i) provides that expenditure incurred out of corpus funds is not treated as ap-plication of income. The legislature amended the law to ensure that corpus funds are not repeatedly used to claim exemption. Accordingly, expenditure of 40.00 lakhs from corpus does not qualify as application.
Working Note 12 – Corpus Replenishment – Explanation 4(i) to Section 11(1)
The same provision permits recognition of application when the corpus is replenished out of current income. Since 15.00 lakhs was restored to the corpus from current year’s in-come, the amount qualifies as application.
Working Note 13 – Borrowings and Loan Repayment – Explanation 4(ii) to Section 11(1)
Explanation 4(ii) provides that expenditure incurred out of borrowed funds is not applica-tion. The benefit is deferred until repayment of the borrowing out of income. Therefore, ex-penditure of 50.00 lakhs from bank loan is ignored, whereas repayment of 20.00 lakhs out of current income qualifies as application.
Working Note 14 – Corpus Donation to Another Trust – Explanation 2 to Section 11(1)
Explanation 2 provides that corpus donation made by one trust to another trust is not appli-cation of income. The objective is to prevent multiple exemptions through corpus transfers. Therefore, corpus donation of 20.00 lakhs does not qualify as application.
Working Note 15 – Deemed Application – Explanation 1 to Section 11(1)
The provision allows postponement of actual utilisation where income has not been re-ceived or could not be applied. Since unrealised interest of 30.00 lakhs could not be spent, it is treated as deemed application and reduces the application shortfall.
Working Note 16 – Accumulation – Section 11(2)
Section 11(2) permits accumulation beyond the statutory 15% provided Form 10 is filed, the purpose is specified and the period is specified. The trust accumulated 80.00 lakhs for construction of a Cancer Hospital for a period of 5 years and complied with all statutory requirements. Accordingly, exemption is available in respect of the accumulated amount.
Working Note 17 – Interaction of Sections 11(1) and 11(2)
The scheme of the Act requires sequential computation. First, 15% accumulation under section 11(1)(a) is allowed. Thereafter actual application is considered. Then deemed ap-plication is allowed. Finally, section 11(2) accumulation is granted. Only the residual bal-ance remains taxable.
Working Note 18 – Investment in Non-Specified Mode – Section 11(3)(b) read with Section 11(5)
Section 11(5) prescribes approved modes of investment. Section 11(3)(b) withdraws ex-emption if accumulated funds are invested otherwise than in such modes. Investment of 15.00 lakhs in a private company violates section 11(5). Therefore, exemption is withdrawn and 15.00 lakhs becomes taxable.
Working Note 19 – Non-Charitable Utilisation – Section 11(3)(a)
Section 11(3)(a) provides that accumulated income applied for purposes other than chari-table purposes becomes taxable. Funds accumulated for a Cancer Hospital were diverted towards purchase of luxury vehicles for trustees. Since the utilisation is non-charitable, 12.00 lakhs becomes taxable.
Working Note 20 – Ceasing to Remain Invested – Section 11(3)(c)
The requirement of investment in approved modes is a continuing condition. Where accu-mulated funds cease to remain invested in approved modes, exemption is withdrawn. Since 8.00 lakhs ceased to remain invested in approved modes, the amount becomes tax-able.
Working Note 21 – Transfer to Corpus – Section 11(3)(d)
Accumulated income must be utilised for the specific purpose for which accumulation was permitted. Conversion into corpus defeats that objective. Accordingly, transfer of 5.00 lakhs to corpus attracts section 11(3)(d) and becomes taxable.
Working Note 22 – Change of Purpose – Section 11(3A)
Section 11(3A) empowers the Assessing Officer to permit change of purpose where the original purpose becomes impossible or impracticable. Since approval was granted for change from School Building to Cancer Hospital, exemption continues and no taxation arises.
Working Note 23 – Failure to Utilise Deemed Application – Section 11(1B)
Section 11(1B) operates when income earlier treated as deemed application is not actually utilised within the prescribed period. Out of 30.00 lakhs earlier deemed applied, only 20.00 lakhs was actually spent. Consequently, the balance of 10.00 lakhs becomes taxable.
Working Note 24 – Specified Persons – Section 13(3)
Section 13(3) identifies the persons whose receipt of direct or indirect benefits from the trust may attract denial of exemption under section 13. The specified persons include the author of the trust, founder, trustee, manager, relatives of such persons and any concern in which such persons possess substantial interest. In the present case, the Managing Trus-tee is covered as a trustee, the Trustee’s Son is covered as a relative of a trustee and the pri-vate company is covered as a concern in which the trustee has substantial interest. Accord-ingly, all transactions involving these persons require examination under section 13.
Working Note 25 – Educational Facility to Trustee’s Son – Section 13(6)
Section 13(6) provides a statutory safe harbour in respect of educational and medical facil-ities provided by a trust to specified persons. Where such facilities are provided on the same terms and at the same rates as applicable to the general public, section 13(1)(c) does not apply. In the present case, the Trustee’s Son was charged normal fees without any con-cession, rebate or preferential treatment. Therefore, no benefit is deemed to have been con-ferred and no exemption is denied.
Working Note 26 – Interest-Free Loan to Trustee – Sections 13(2)(a), 13(1)(c) and 13(3)
Section 13(2)(a) provides that lending of the income or property of the trust to a specified person without adequate security or adequate interest shall be deemed to be use of trust property for the benefit of such person. Such deemed benefit attracts section 13(1)(c). The trust granted an interest-free loan to the trustee. Since the trustee is a specified person un-der section 13(3), the transaction constitutes a prohibited benefit. For examination pur-poses, the value of the benefit is taken at 25.00 lakhs and the same becomes taxable.
Working Note 27 – Excess Remuneration – Sections 13(2)(c), 13(1)(c) and 13(3)
Section 13(2)(c) applies where salary, allowance or remuneration paid to a specified per-son exceeds what may reasonably be paid for the services rendered. The excess portion is deemed to be a benefit provided out of the income or property of the trust. The Managing Trustee received remuneration in excess of reasonable limits and the excess component has been determined at 12.00 lakhs. Only the excessive portion is hit by the provision. The reasonable remuneration continues to remain valid application of income.
Working Note 28 – Investment in Concern of Specified Person – Sections 13(2)(h) and 13(4)
Section 13(2)(h) treats investment of trust funds in a concern in which a specified person has substantial interest as a benefit to such specified person. However, section 13(4) pro-vides partial relief where the investment does not exceed 5% of the capital or funds pre-scribed under the provision. In the present case, investment of 18.00 lakhs constitutes only 1.80% of total trust funds of 1,000.00 lakhs. Since the investment is below the statutory threshold, the entire exemption is not lost. Only the income arising from such investment, namely 2.00 lakhs, becomes taxable.
Working Note 29 – General Public Utility Activity – Proviso to Section 2(15) and Sec-tion 13(8)
The fourth limb of charitable purpose under section 2(15) relates to advancement of any other object of general public utility. The proviso to section 2(15) withdraws charitable character where commercial activities exceed the prescribed statutory threshold. In the present case, commercial receipts amount to 75.00 lakhs against GPU receipts of 200.00 lakhs, resulting in a ratio of 37.50%. On the given assumption that the statutory threshold stands exceeded, the proviso becomes applicable. Consequently, section 13(8) operates and exemption under sections 11 and 12 becomes unavailable in relation to the GPU activi-ty.
Working Note 30 – Computation of GPU Income – Section 13(8)
Once section 13(8) becomes operative, the GPU segment is segregated and its income is computed separately. Revenue expenditure incurred wholly and exclusively for earning such income is allowable. GPU receipts amount to 200.00 lakhs, revenue expenditure amounts to 110.00 lakhs and depreciation amounts to 10.00 lakhs. Under normal commercial prin-ciples, the resulting surplus would be 80.00 lakhs.
Working Note 31 – Special Computation under Sections 13(10) and 13(11)
Section 13(10) prescribes a special method of computation where section 13(8) applies. Section 13(11) further provides that the benefits available under section 11 shall not be considered while computing such income. Consequently, the concepts of 15% accumula-tion, application of income, corpus application and accumulation under section 11(2) are ignored. Gross receipts of 200.00 lakhs are reduced only by admissible expenditure of 110.00 lakhs. Therefore, taxable GPU income is computed at 90.00 lakhs and no further reduction is available.
Working Note 32 – Anonymous Donations – Section 115BBC
Section 115BBC imposes special taxation on anonymous donations received by specified charitable entities. An anonymous donation means a voluntary contribution in respect of which the trust does not maintain prescribed records regarding the identity and address of the donor. The trust received anonymous donations of 40.00 lakhs. Assuming the entire amount qualifies as anonymous donation within the meaning of section 115BBC, the amount becomes taxable under the special provisions of that section.
Working Note 33 – Excess Income Determined by AO – Section 11(4)
Section 11(4) contains an independent charging mechanism in relation to business under-takings held under trust. Where the Assessing Officer determines income at a figure higher than that disclosed by the trust, the excess is deemed to be income not eligible for exemp-tion. The trust disclosed income of 80.00 lakhs whereas the Assessing Officer determined income at 100.00 lakhs. Accordingly, the excess of 20.00 lakhs becomes taxable irrespec-tive of satisfaction of application or accumulation requirements.
Working Note 34 – Return Filed Late – Section 12A(1)(ba)
Section 12A(1)(ba) mandates filing of the return of income within the due date prescribed under section 139(4A) as a condition for claiming exemption under sections 11 and 12. If the return is filed beyond the prescribed due date, the condition stands violated. Conse-quently, exemption under sections 11 and 12 becomes unavailable for the relevant as-sessment year. In such a situation, the trust is generally required to compute its income under the normal provisions of the Act and the exemption framework ceases to operate.
Working Note 35 – Audit Report Filed Late – Section 12A(1)(b)
Section 12A(1)(b) requires furnishing of the prescribed audit report within the prescribed time where the income of the trust exceeds the statutory threshold. The audit requirement is intended to ensure verification of the accounts and compliance with the exemption pro-visions. Failure to furnish the audit report within the stipulated time constitutes violation of a mandatory condition for exemption. Consequently, the trust becomes ineligible to claim exemption under sections 11 and 12 for the relevant assessment year, subject to any statu-tory relaxation or judicial relief available on the facts of the case.
Working Note 36 – Section 11(1)(a) – Statutory Accumulation of 15%
Section 11(1)(a) grants an automatic accumulation of 15% of the income derived from property held under trust. This benefit is available without any requirement of application of income, filing of Form 10 or specification of purpose. The legislative intent is to permit a reasonable reserve for future charitable activities. Accordingly, 15% of the adjusted in-come, amounting to 136.50 lakhs, qualifies for automatic exemption.
Working Note 37 – Concept of Income Requiring Application
The scheme of section 11 does not require application of the entire income derived by the trust. After allowing the statutory accumulation under section 11(1)(a), only the balance income is required to be applied for charitable or religious purposes. This balance consti-tutes the benchmark against which actual application, deemed application and accumula-tion under section 11(2) are measured.
Working Note 38 – Revenue Application versus Capital Application
The expression “application of income” is wider than revenue expenditure. Both revenue expenditure incurred for carrying out charitable objects and capital expenditure incurred for acquisition of assets used for charitable purposes qualify as application. Accordingly, edu-cational expenditure, medical expenditure and acquisition of a school building all qualify as application, subject to compliance with the statutory restrictions introduced by the Ex-planations to section 11(1).
Working Note 39 – Principle Behind Explanation 2, 3 and 4 to Section 11(1)
The Explanations inserted in section 11(1) seek to prevent multiple or artificial claims of application. Explanation 2 restricts corpus-to-corpus transfers. Explanation 3 restricts ap-plication in cases involving TDS defaults and impermissible cash payments. Explanation 4 postpones recognition of application in respect of corpus utilisation and borrowed funds until replenishment or repayment takes place. Collectively, these provisions ensure that application is recognised only where there is genuine deployment of current income for charitable purposes.
Working Note 40 – Architecture of Taxability under Sections 11 and 13
The provisions of section 11 primarily deal with exemption through application and accu-mulation of income. Section 13, on the other hand, acts as an anti-abuse mechanism. Even where a trust satisfies the application requirements of section 11, exemption may still be denied wholly or partly if benefits are provided to specified persons, if impermissible in-vestments are made, or if the GPU activity loses charitable character under the proviso to section 2(15). Thus, section 13 operates as a restriction upon the exemption otherwise available under section 11.
Working Note 41 – Distinction between Loss of Exemption and Independent Taxa-bility
Certain provisions merely withdraw exemption in respect of a specific amount, while others create independent taxable income. For example, section 11(1B) taxes unutilised deemed application, section 11(3) taxes violation of accumulation conditions, section 115BBC tax-es anonymous donations and section 11(4) taxes excess business income determined by the Assessing Officer. These provisions operate independently and therefore require sepa-rate computation before arriving at the final taxable income.
Concluding Principle
The computational architecture of charitable trust taxation proceeds in the following se-quence: determination of income under sections 11 and 12, computation of application and accumulation, examination of forfeiture provisions under sections 11(1B), 11(3) and 11(4), verification of specified-person transactions under section 13, computation of GPU taxation under sections 13(8), 13(10) and 13(11), taxation of anonymous donations under section 115BBC and finally verification of compliance conditions under section 12A. Only after passing through each of these statutory filters can the final exempt income and taxa-ble income of the trust be determined.
Important Provisions of the Act relating to exemption of Income of Trust Section 11 to 13
1. Section 11(1)(a): Income from property held under trust wholly for charitable or religious purposes is exempt to the extent applied in India, with accumulation up to 15% of such income also remaining exempt.
2. Section 11(1)(d): Corpus donations received with a specific direction to form part of the corpus are exempt, provided they are invested or deposited in the modes specified under Section 11(5) and maintained specifically as corpus funds.
3. Explanation 1 to Section 11(1): Voluntary contributions under Section 12 are included in income for computing the 15% accumulation limit, and where 85% ap-plication is not achieved due to non-receipt of income or any other reason, the shortfall may be deemed as applied in the relevant year if exercised within the prescribed time and actu-ally applied in the subsequent permitted year(s).
4. Section 11(4): A business undertaking held under trust is treated as property held under trust, and if the Assessing Officer determines its income at a figure higher than that shown in the accounts, the excess is deemed to have been applied for non-charitable purposes and loses exemption.
5. Section 11(4A): Exemption under Section 11 is not available for busi-ness income unless the business is incidental to the trust’s or institution’s objects and separate books of account are maintained for such business activity.
6. Section 12(1): Voluntary contributions (other than corpus donations) received by a charitable or religious trust or institution are deemed to be income derived from property held under trust and are eligible for exemption subject to Sections 11 and 13.
7. Section 12(2): The value of free or concessional medical or educa-tional services provided by a trust to specified persons under Section 13(3) is deemed to be taxable income of the trust in the year of such benefit, notwithstanding Section 11.
8. Section 12(3): Specified donations received for Gujarat earthquake relief become taxable if accounts are not furnished as prescribed, the funds are used for other purposes, or unutilised amounts are not transferred to the Prime Minister’s National Relief Fund within the prescribed time.
9. Section 11(6): For determining income required to be applied or ac-cumulated, no depreciation or similar deduction is allowed on an asset whose acquisition has already been claimed as application of income in the same or any earlier year.
10. Section 11(7): Where a trust or institution is registered under Section 12A/12AB, it cannot simultaneously claim exemption under any other provision specified in this sub-section, and the benefits of Section 11 are governed by the registration provisions.
11. Explanation 2 to Section 11(1): Corpus donations made by one char-itable entity to another trust, institution, university, educational institution, hospital, medi-cal institution, or a trust registered under Section 12AA/12AB, with a specific direction to form part of the recipient’s corpus, shall not be treated as application of income for chari-table or religious purposes.
12. Explanation 3 to Section 11(1): While computing application of in-come for charitable or religious purposes, the disallowance provisions of Section 40(a)(ia) and Sections 40A(3) and 40A(3A) apply mutatis mutandis, thereby denying application benefit for specified TDS defaults and payments made otherwise than through prescribed banking modes.
13. Explanation 4(i) to Section 11(1): Application of corpus funds is not treated as application of income; however, such amount is deemed as application in the year it is replenished from current income by reinvesting it into the corpus in prescribed modes within 5 years, subject to compliance with specified conditions and excluding cor-pus applications made on or before 31-03-2021.
14. Explanation 4(ii) to Section 11(1): Application made out of loans or borrowings is not treated as application of income; however, the amount is deemed as ap-plication in the year the loan is repaid from current income, provided repayment is made within 5 years, prescribed conditions are satisfied, and the provision does not apply to loan-funded applications made on or before 31-03-2021.
15. Explanation 4(iii) to Section 11(1): Donations (other than corpus do-nations) made by one exempt trust or institution to another eligible trust, institution, uni-versity, educational institution, hospital, medical institution, or Section 12AB-registered entity are treated as application of income only to the extent of 85% of the amount so paid or credited.
16. Section 11(1B): Where income covered by the deemed application option under Explanation 1 is not actually applied within the prescribed subsequent period, such income becomes taxable in the immediately succeeding year specified under the pro-vision.
17. Section 11(2): Income not applied or deemed applied up to 85% dur-ing the year may remain exempt if it is accumulated for specified charitable or religious pur-poses for a period not exceeding 5 years, the prescribed statement is filed within the pre-scribed time, and the funds are invested in the modes specified under Section 11(5).
18. Explanation to Section 11(2): Amounts accumulated under Section 11(2) and paid or credited to another trust, institution, university, educational institution, hospital, medical institution, or Section 12AA/12AB registered entity are not treated as ap-plication of income either during or after the accumulation period.
19. Section 11(3)(a): Accumulated income becomes taxable in the year in which it is applied for non-charitable or non-religious purposes, or ceases to be accumu-lated or set apart for the specified charitable or religious purpose.
20. Section 11(3)(b): Accumulated income becomes taxable in the year in which it ceases to remain invested or deposited in the forms or modes specified under Section 11(5).
21. Section 11(3)(c): Accumulated income becomes taxable in the last year of the permitted accumulation period if it is not utilised for the purpose for which it was accumulated or set apart.
22. Section 11(3)(d): Accumulated income becomes taxable in the year in which it is paid or credited to another trust, institution, university, educational institu-tion, hospital, medical institution, or other eligible entity referred to in the provision.
23. Section 11(3)(i): Taxability arises in the year of misapplication or cessation of accumulation under clause (a).
24. Section 11(3)(ii): Taxability arises in the year in which the funds cease to be invested or deposited in prescribed modes under clause (b).
25. Section 11(3)(iii): Taxability arises in the last previous year of the ac-cumulation period where the accumulated income remains unutilised under clause (c).
26. Section 11(3)(iv): Taxability arises in the year in which the accumu-lated income is paid or credited to another eligible entity under clause (d).
27. Section 11(3A): Where accumulated income cannot be applied for its original purpose due to circumstances beyond the trust’s control, the Assessing Officer may permit its application to another object of the trust in India; however, such diversion cannot ordinarily be made by payment to another eligible entity, except on dissolution of the trust where the Assessing Officer may permit such transfer.
28. Section 13(1)(a) Exemption under Sections 11 and 12 is denied to income from a trust created for private religious purposes that does not benefit the public.
29. Section 13(1)(b) Exemption is denied to a charitable trust or institu-tion created after commencement of the Act if it is established for the benefit of any particu-lar religious community or caste.
30. Section 13(1)(c)(i) Exemption is denied to the extent income of a trust created after commencement of the Act is intended to benefit specified persons under Section 13(3).
31. Section 13(1)(c)(ii) Exemption is denied to the extent trust income or property is actually used or applied, directly or indirectly, for the benefit of specified persons under Section 13(3).
32. Section 13(1)(d)(i) Exemption is denied where trust funds are invest-ed or deposited after 28-02-1983 otherwise than in modes specified under Section 11(5).
33. Section 13(1)(d)(ii) Exemption is denied where pre-01-03-1983 in-vestments continue in non-specified modes after 30-11-1983.
34. Section 13(1)(d)(iii) Exemption is denied where the trust holds im-permissible company shares after 30-11-1983, to the extent of such investments.
35. Proviso to Section 13(1)(d) Specified grandfathered corpus assets, bonus shares, old debentures and certain transitional assets are protected from denial of exemption.
36. Section 13(2)(a) Trust property is deemed to benefit specified per-sons if loans are given without adequate security or adequate interest.
37. Section 13(2)(b) Trust property is deemed to benefit specified per-sons if trust assets are made available without adequate rent or compensation.
38. Section 13(2)(c) Trust property is deemed to benefit specified per-sons if excessive salary, allowance or remuneration is paid to them.
39. Section 13(2)(d) Trust property is deemed to benefit specified per-sons if trust services are provided without adequate remuneration.
40. Section 13(2)(e) Trust property is deemed to benefit specified per-sons if assets are purchased from them for excessive consideration.
41. Section 13(2)(f) Trust property is deemed to benefit specified per-sons if assets are sold to them for inadequate consideration.
42. Section 13(2)(g)Trust property is deemed to benefit specified per-sons if trust income or property is diverted in their favour.
43. Section 13(2)(h) Trust property is deemed to benefit specified per-sons if trust funds are invested in concerns in which such persons have substantial inter-est.
44. Section 13(3)(a) Specified person includes the author of the trust or founder of the institution.
45. Section 13(3)(b) Specified person includes a substantial donor whose contribution exceeds the prescribed monetary limits.
46. Section 13(3)(c) Specified person includes a member of the HUF where the author, founder or donor is an HUF.
47. Section 13(3)(cc) Specified person includes any trustee or manager of the institution.
48. Section 13(3)(d) Specified person includes relatives of the author, founder, donor, trustee, manager or HUF member.
49. Section 13(3)(e) Specified person includes any concern in which the above persons have substantial interest.
50. Section 13(4) Where investment in a specified person’s concern does not exceed 5% of its capital, exemption is denied only for income arising from such investment and not for other trust income.
51. Section 13(5) Certain debentures acquired between 01-03-1983 and 24-07-1991 enjoy limited protection, and exemption is denied only on income arising from such investments.
52. Section 13(6) Educational and medical facilities provided by a trust to specified persons do not by themselves result in denial of exemption, except to the extent taxable under Section 12(2).
53. Section 13(7) Anonymous donations taxable under Section 115BBC are not exempt under Sections 11 or 12.
54. Section 13(8) Exemption under Sections 11 and 12 is denied where the proviso to Section 2(15) becomes applicable to the trust or institution.
55. Section 13(9)(i) Accumulation benefit under Section 11(2) is denied if the prescribed accumulation statement is not filed within the due date under Section 139(1).
56. Section 13(9)(ii) Accumulation benefit under Section 11(2) is denied if the return of income is not filed within the due date under Section 139(1).
57. Section 13(10) Where Section 13(8) applies or registration condi-tions are violated, taxable income is computed after allowing only eligible revenue expendi-ture incurred in India, subject to prescribed restrictions.
58. Section 13(11) While computing income under Section 13(10), no further deduction, allowance or loss set-off is permitted under any other provision of the Act.
59. Explanation 1 For Sections 11 to 13, “trust” includes any other legal obligation, and “relative” has the prescribed extended meaning.
60. Explanation 2 A trust benefiting Scheduled Castes, Scheduled Tribes, backward classes, women or children is not regarded as benefiting a particular reli-gious community or caste.
61. Explanation to Section 13(1)(c) Specified-person benefit before 01-07-1972 is determined without considering certain later amendments to Section 13.
62. Explanation 3 A person has substantial interest in a company if he and related specified persons hold at least 20% voting power, and in any other concern if entitled to at least 20% of its profits.
Cross Mapping Of Serial Number In Question With Working Note In Solution
| S. No. | Working Note | Subject | (₹ Lakhs) |
| 1 | — | General Donations | 500.00 |
| 2 | WN-1 | Corpus Donation | 120.00 |
| 3 | WN-32 | Anonymous Donations | 40.00 |
| 4 | — | Rent from Trust Property | 20.00 |
| 5 | — | Bank Interest Credited | 30.00 |
| 6 | WN-4, WN-15 | Unrealized Interest / Deemed Application | 30.00 |
| 7 | WN-3 | Pharmacy Activity | 50.00 |
| 8 | WN-2, WN-33 | Printing Press Business Undertaking / Excess Income Determined by AO | 100.00 / 20.00 |
| 9 | WN-29, WN-30, WN-31 | GPU Receipts | 200.00 |
| 10 | WN-29 | Commercial Receipts from GPU Activity | 75.00 |
| 11 | WN-30, WN-31 | Revenue Expenditure relating to GPU | 110.00 |
| 12 | WN-30, WN-31 | Depreciation in GPU Segment | 10.00 |
| 13 | WN-38 | Educational Expenditure | 220.00 |
| 14 | WN-38 | Medical Expenditure | 100.00 |
| 15 | WN-6, WN-39 | Professional Fees without TDS | 20.00 |
| 16 | WN-7, WN-39 | Construction Expenditure Paid in Cash | 30.00 |
| 17 | WN-8 | Scholarship Provision Unpaid | 25.00 |
| 18 | WN-9, WN-38 | School Building Acquisition | 100.00 |
| 19 | WN-10 | Depreciation on School Building | 10.00 |
| 20 | WN-11, WN-39 | Expenditure Out of Corpus Funds | 40.00 |
| 21 | WN-12, WN-39 | Corpus Replenishment | 15.00 |
| 22 | WN-13, WN-39 | Charitable Expenditure from Bank Loan | 50.00 |
| 23 | WN-13, WN-39 | Loan Repaid from Current Income | 20.00 |
| 24 | WN-5, WN-39 | Donation to Another Registered Trust | 60.00 |
| 25 | WN-14, WN-39 | Corpus Donation to Another Trust | 20.00 |
| 26 | WN-16 | Form 10 Filed Before Due Date | — |
| 27 | WN-16 | Amount Accumulated u/s 11(2) | 80.00 |
| 28 | WN-16 | Purpose Specified | — |
| 29 | WN-16 | Period Specified | — |
| 30 | WN-18 | Investment in Non-Specified Mode | 15.00 |
| 31 | WN-24, WN-25 | Trustee’s Son Studied in School | — |
| 32 | WN-24, WN-26 | Interest-Free Loan to Trustee | 80.00 |
| 33 | WN-24, WN-27 | Excess Remuneration to Managing Trustee | 12.00 |
| 34 | WN-24, WN-28 | Investment in Specified Concern | 18.00 |
| 35 | WN-28 | Income from Specified Concern | 15.00 |
| 36 | WN-28 | Total Trust Funds | 1000.00 |
| 37 | WN-23 | Earlier Deemed Application Exercised | 30.00 |
| 38 | WN-23 | Actual Utilisation in Succeeding Year | 20.00 |
| 39 | WN-23 | Balance Not Utilised | 10.00 |
| 40 | WN-19 | Luxury Vehicles Purchased from Old Accumulation | 12.00 |
| 41 | WN-20 | Accumulation Ceased to Remain Invested in Approved Modes | 8.00 |
| 42 | WN-21 | Earlier Accumulation Transferred to Corpus | 5.00 |
| 43 | WN-22 | Change of Purpose Approved u/s 11(3A) | 50.00 |
| 44 | WN-34 | Return Filed Within Due Date | — |
| 45 | WN-35 | Audit Report Filed Within Time | — |
Cross Mapping Of Working Notes In Solution With Serial Number In Question.
| Working Note | S. No. | Subject | (₹ Lakhs) |
| WN-1 | 2 | Corpus Donation | 120.00 |
| WN-2 | 8 | Printing Press Business Undertaking | 100.00 |
| WN-3 | 7 | Pharmacy Activity | 50.00 |
| WN-4 | 6 | Unrealised Interest | 30.00 |
| WN-5 | 24 | Donation to Another Registered Trust | 60.00 |
| WN-6 | 15 | Professional Fees without TDS | 20.00 |
| WN-7 | 16 | Construction Expenditure Paid in Cash | 30.00 |
| WN-8 | 17 | Scholarship Provision Unpaid | 25.00 |
| WN-9 | 18 | School Building Acquisition | 100.00 |
| WN-10 | 19 | Depreciation on School Building | 10.00 |
| WN-11 | 20 | Expenditure Out of Corpus Funds | 40.00 |
| WN-12 | 21 | Corpus Replenishment | 15.00 |
| WN-13 | 22, 23 | Charitable Expenditure from Bank Loan / Loan Repaid from Current Income | 50.00, 20.00 |
| WN-14 | 25 | Corpus Donation to Another Trust | 20.00 |
| WN-15 | 6 | Deemed Application of Unrealised Interest | 30.00 |
| WN-16 | 26, 27, 28, 29 | Form 10, Accumulation u/s 11(2), Purpose & Period Specified | 80.00 |
| WN-17 | — | Application Shortfall Mechanism | 253.50 / 223.50 / 143.50 |
| WN-18 | 30 | Investment in Non-Specified Mode | 15.00 |
| WN-19 | 40 | Luxury Vehicles Purchased from Old Accumulation | 12.00 |
| WN-20 | 41 | Accumulation Ceased to Remain Invested in Approved Modes | 8.00 |
| WN-21 | 42 | Earlier Accumulation Transferred to Corpus | 5.00 |
| WN-22 | 43 | Change of Purpose Approved u/s 11(3A) | 50.00 |
| WN-23 | 37, 38, 39 | Earlier Deemed Application Exercised / Utilised / Not Utilised | 30.00, 20.00, 10.00 |
| WN-24 | 31, 32, 33, 34 | Specified Persons under Section 13(3) | NIL, 80.00, 12.00, 18.00 |
| WN-25 | 31 | Trustee’s Son Studied in School | NIL |
| WN-26 | 32 | Interest-Free Loan to Trustee | 80.00 |
| WN-27 | 33 | Excess Remuneration to Managing Trustee | 12.00 |
| WN-28 | 34, 35, 36 | Investment in Specified Concern / Income Therefrom / Total Trust Funds | 18.00, 15.00, 1000.00 |
| WN-29 | 9, 10 | GPU Activity and Section 2(15) Violation | 200.00, 75.00 |
| WN-30 | 9, 11, 12 | Computation of GPU Income | 200.00, 110.00, 10.00 |
| WN-31 | 9, 11, 12 | Special Computation u/s 13(10) & 13(11) | 200.00, 110.00, 10.00 |
| WN-32 | 3 | Anonymous Donations | 40.00 |
| WN-33 | 8 | Excess Income Determined by AO | 20.00 |
| WN-34 | 44 | Return Filed Within Due Date | NIL |
| WN-35 | 45 | Audit Report Filed Within Time | NIL |
| WN-36 | — | 15% Statutory Accumulation | 136.50 |
| WN-37 | — | Income Requiring Application | 773.50 |
| WN-38 | 13, 14, 18 | Educational Expenditure, Medical Expenditure and School Building Acquisition | 220.00, 100.00, 100.00 |
| WN-39 | 15, 16, 20, 21, 22, 23, 24, 25 | Principles of Explanations 2, 3 & 4 to Section 11(1) | 20.00, 30.00, 40.00, 15.00, 50.00, 20.00, 60.00, 20.00 |
| WN-40 | — | Architecture of Taxability under Sections 11 & 13 | 193.50, 129.00 |
| WN-41 | — | Distinction between Loss of Exemption and Independent Taxability | 382.50 |
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1. This material has been prepared solely for personal academic study, learning, research and reference purposes. It is intended to provide a simplified understanding of the statutory framework relating to exemption of charitable and religious trusts and institutions and should not be regarded as professional, legal, tax, accounting or advisory guidance.
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Author Bio
Very lucidly explained. Kudos!