Denial of Exemption [Section 13] under Charitable or Religious Trusts and Institutions [Sections 11 to 13] :
(i) The following incomes of charitable or religious trusts and institutions would not be eligible for exemption under sections 11 and 12:
(a) Where the property is held under a trust for private religious purposes, no part of the income will be exempt if it does not ensure for the benefit of the public [Section 13(1)(a)].
(b) Where a trust has been established for the benefit of any particular religious community or caste, the income thereof will not be eligible for exemption. However, a trust or institution created or established for the benefit of scheduled caste, backward classes, scheduled tribes or women and children shall not be treated as a trust or institution created or established for the benefit of a religious community or caste within the meaning of section 13(1)(b).
(c) Where the trust or the institution has been created or established after 31. 3.1962, if any part of its income enures directly or indirectly for the benefit of any person referred to in section 13(3) [Section 13(1)(c)].
(d) Irrespective of the date of the creation of the trust or the establishment of the institution, if any part of its income or any property belonging to it during the relevant previous year is used or applied directly or indirectly for the benefit of any person referred to in section 13(3) [Section 13(1)(c)].
(e) Any income of a trust or institution, if –
(i) its funds are invested or deposited otherwise than in the forms or modes specified in section 11(5);
(ii) it holds shares in a company other than –
(1) a public sector company; or
(2) shares prescribed as a form or mode of investment under section 11(5)(xii).
However, these restrictions do not apply in respect of :
(i) any assets forming part of the trust as on 1-6-1973.
(ii) Any accretion to the corpus shares by way of bonus shares allotted to the trust.
(iii) debentures issued by or on behalf of any company or corporation and acquired by the trust before March 1, 1983.
(iv) any asset not covered under section 11(5), where such asset is held for not more than one year from the end of the previous year in which such asset is acquired.
(v) any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year 1984-85 or any subsequent assessment year. However, such relaxation of the restriction will be denied unless the trust keeps separate accounts for the business. As already noted, subject to certain exceptions, such business profits are no longer eligible for exemption under section 11.
(ii) Prohibited use or application – We have noted above that when any part of the income or any property of the trust whenever created, is, during the previous year, used or applied directly, for the benefit of any person referred to in section 13(3), the denial of exemption operates. Section 13(2) specifies a few particular instances where the income or the property is to be deemed to have been used for the benefit of a person referred to in section 13(3). It should be noted that those particular instances do not in any way restrict the general meaning of the expression ―used or applied for the benefit of a person‖. The provisions of section 13(2) are as follows:
The income or the property of the trust or institution or any part of such income or property is to be deemed to have been used or applied for the benefit of a person referred to in section 13(3) in the following cases:
(a) Loan without adequate interest or adequate security – If any part of the income or the property of the trust or institution is or continues to be lent to any person referred to in section 13(3) for any period during the previous year without either adequate security or adequate interest or both.
(b) Allowing use of property without adequate rent – If any land, building or other property of the trust or institution is or continues to be, made available, for the use of any person referred to in section 13(3) for any period during the previous year without charging adequate rent or other compensation.
(c) Excess payment for services – If any amount is paid out of the resources of the trust or institution to any of the persons referred to in section 13(3) for services rendered to the trust or institution but such amount is in excess of a reasonable sum payable for such services.
(d) Inadequate remuneration for services rendered – If the services of the trust or institution are made available to any person referred to section 13(3) without adequate remuneration or other compensation.
(e) Excess payment for purchase of property – If any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in section 13(3) during the previous year for a consideration which is more than adequate.
(f) Inadequate consideration for property sold – If any share, security or other property is sold by or on behalf of the trust or institution to any person referred to in section 13(3) during the previous year for a consideration which is less than adequate.
(g) Diversion of income or property exceeding ` 1,000 – If any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in section 13(3) provided the aggregate value of such income and property diverted exceeds Rs 1,000.
(h) Investment in substantial interest concerns – If any funds of the trust or institution are, or continue to remain, invested for any period during the previous year in any concern in which any person referred to in section 13(3) has a substantial interest. Section 13(4) provides some respite where the aggregate of the funds invested in the said concern does not exceed five per cent of the capital of that concern. In such a case, the exemption under section 11 will be denied only in relation to such income as arises out of the said investment.
(iii) Exemption not to be denied to charitable trusts providing educational or medical facilities to specified persons [Section 13(6)]: A charitable or religious trust running an educational institution or a medical institution or a hospital shall not be denied the benefit of exemption under section 11 merely due to the reason that the benefit of educational or medical facilities have been provided to the specified persons referred to in section 13(3). However, the value of such facilities provided to such specified persons either free of cost or at a concessional rate would be deemed to be the income of the trust. Such income would not be eligible for exemption under section 11.
(iv) Anonymous donations [Section 13(7)] – The exemption provisions contained in section 11 or section 12 shall not be applicable in respect of any anonymous donat ion referred to in section 115BBC on which tax is payable in accordance with the provisions of that section. For example, section 11(1)(d) provides that any 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 shall not be included in the total income of such trust/institution for the relevant previous year.
However, if a trust or institution established wholly for charitable purposes receives an anonymous donation with a specific direction that the donation shall form part of the corpus of the trust or institution, such anonymous donation would not be exempt by virtue of section 11(1)(d). It would be taxable at 30% as provided in section 115BBC.
(v) Exemption to be denied to a charitable trust having its main object as “advancement of any other object of general public utility” if its trading receipts exceed
the specified threshold irrespective of withdrawal of approval or cancellation of registration or rescindment of notification [Section 13(8)]
(a) Under sections 11 and 12, income of any charitable trust or institution is exempt if such income is applied for charitable purposes in India and such institution is registered under section 12AA.
(b) The definition of “charitable purpose” under section 2(15) provides that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless,-
(1) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(2) the aggregate receipts from such activity or activities, during the previous year, does not exceed 20% of the total receipts, of the trust or institution undertaking
such activity or activities, for the previous year .
(c) Thus, a charitable trust or institution pursuing “advancement of object of general public utility” may be a charitable trust in one year and not a charitable trust in another year depending on the percentage of receipts from commercial activities vis-à-vis its total receipts.
(d) Therefore, no exemption would be available to a trust or institution for the previous year in which the receipts from commercial activities exceed 20% of the total receipts of that year. However, this temporary excess in one year may not be treated as altering the very nature of the trust or institution so as to lead to cancellation of registration or withdrawal of approval or rescinding of notification issued in respect of trust or institution.
(e) Therefore, there is need to ensure that if the purpose of a trust or institution does not remain charitable in a previous year on account of the commercial receipts exceeding the specified percentage of total receipts, then, such trust or institution would not be entitled to get benefit of exemption in respect of its income for that previous year in which the commercial receipts exceed the specified percentage of total receipts. The denial of exemption would be compulsory by operation of law and would not be dependent on any approval being withdrawn or registration being cancelled or a notification being rescinded.
(f) Accordingly, section 13(8) ensures that such trust and institution does not get benefit of tax exemption under section 11 or 12 in the year in which its receipts from commercial activities exceed the specified percentage of total receipts, whether or not the registration or approval granted or notification issued is cancelled, withdrawn or rescinded in respect of such trust or institution.
(vi) Non-submission of statement in prescribed form on or before the due date of filing return of income under section 139(1) [Section 13(9)] – In case the statement in Form 10 is not submitted on or before the due date of filing return of income under section 139(1), then, the benefit of accumulation would not be available and such income would be taxable at the applicable rate. Further, the benefit of accumulation would also not be available if return of income is not furnished on or before the due date of filing return of income specified in section 139(1).
(vii) Prohibited category of persons – Section 13(3) gives the list of persons, use or application of the income or property of a trust for whose direct or indirect benefit results in a denial of the exemption contemplated in section 11 for a charitable or religious trust or institution. The said persons are:
(1) The author of the trust or the founder of the institution.
(2) Any person who has made a substantial contribution to the trust or institution, that is, any person whose total contribution up to the end of the relevant previous year exceeds Rs 50,000.
(3) Where the author, founder or the person making a substantial contribution is a HUF, any member of the family.
(4) Any trustee of the trust or manager (by whatever name called) of the institution.
(5) Any relative of any such author, founder, person, member, trustee or manager as referred to above.
(6) Any concern in which any of the persons referred to in clauses (1) to (5) above has a substantial interest.
Relative – The expression ―relative‖, in relation to an individual, means –
(a) spouse of the individual;
(b) brother or sister of the individual;
(c) brother or sister of the spouse of the individual;
(d) any lineal ascendant or descendant of the individual;
(e) any lineal ascendant or descendant of the spouse of the individual;
(f) spouse of a person referred to in (b), (c), (d) or (e) above;
(g) any lineal descendant of a brother or sister of either the individual or the spouse of the individual;
Substantial interest in a concern – Section 13(2)(h), section 13(3) and section 13(4) refers to cases where a person has a substantial interest in a concern. These references occur where the ―Prohibited use or application‖ and ―Prohibited category of persons‖ have been described. The circumstances in which a person shall be deemed to have a substantial interest in a concern, have been laid down in Explanation 3 to section 13. Accordingly, a person shall be deemed to have a substantial interest in a concern –
(i) Where the concern is a company, if its shares, other than preference shares, carrying not less than 20 per cent of the voting power are, at any time during the previous year, owned beneficially by him alone or partly by him and partly by one or more of the other persons referred to in section 13(3).
(ii) When the concern is not a company, if he is entitled or he and one or more of the other persons referred to in section 13(3) are entitled in the aggregate, at any time during the previous year, to not less than 20 per cent of the profits of such concern.