Tax Exemption [Section 11] under Charitable or Religious Trusts and Institutions [Sections 11 to 13] :
(i) Subject to the provisions of sections 60 to 63, the income of a religious or charitable trust or institution, to the extent specified in the Act, is exempt from tax when certain prescribed conditions are fulfilled. The relevant income does not even form part of the total income of the trust or institution.
(ii) Section 11 deals with the exemption of income from property held in trust or other legal obligation for religious or charitable purposes wholly or in part. Section 12 deals with exemption of income derived by such a trust from voluntary contributions. Section 12A prescribes the conditions as to registration of trust etc. Section 13 enumerates the circumstances under which the exemption available under sections 11 to 12 will be denied.
(iii) Income from property held for charitable or religious purposes – The following income shall not be included in the total income of the previous year of the person in receipt of the income:
(a) Income derived from property held under trust wholly for charitable and religious purposes to the extent such income is applied in India for such purpose.
(b) Income derived from property held under trust in part only for such purpose, to the extent such income is applied in India for such purposes. However, the trust in question must have been created before 1.4.1962.
(c) Income derived from property held under trust, created on after 1.4.1952 for charitable purpose which tends to promote international welfare in which India is interested to the extent to which such income is applied to such purpose outside India. This does not cover religious trusts.
(d) Income derived from property held under a trust for charitable or religious purposes, created before 1.4.1952, to the extent to which such income is applied for such purposes outside India.
(e) 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. Thus, it may be noted that only such income derived from property held under trust wholly for charitable or religious purposes is exempt. If the property is held in part only for such purposes, it is necessary that such a trust must have been created before the commencement of the Act. In both the cases, the exemption is limited to the extent such income is applied in India for such specified purposes.
(iv) Types of trusts – To get exemption in respect of income applied outside India, the trusts are divided into two types:
(a) If the object of the trust is to promote international welfare in which India is interested, such trust may have been created on or after 1.4.1952.
(b) If the trust is for any other charitable purpose it must have been created before 1.4.1952. Here also, the exemption is limited to the extent to which such income is applied outside India for such specified purposes. It is to be noted however that a direction from CBDT by a general or special order is necessary before such exemption can be claimed.
(v) Conditions for claiming exemption
(a) Property should be held under trust – The exemptions explained in the preceding paragraphs are available if and only if there is a valid trust or there is a legal obligation, under which the income derived from the property held under such trust or legal obligation is to be applied for charitable or religious purposes. If there is no trust nor any legal obligation, the income will not be exempt even if the whole of such income is applied to charitable or religious purposes. A mere creation of a trust for the income is not sufficient, there must be a trust of the property out of which the income is derived before one can consider any exemption under section 11.
(b) Income should be applied for charitable purposes – Section 2(15) states that ‘charitable purpose‘ includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility.
The definition of “charitable purpose” includes “any other object of general public utility” The question arises as to what is an object of “general public utility”. This expression has not been defined anywhere in the Act.
In CIT v. Gujarat Maritime Board (2007) 295 ITR 561, the Supreme Court observed that the Gujarat Maritime Board was established for the predominant purpose of development of minor ports within the State of Gujarat, the management and control of the Board was essentially with the State Government and there was no profit motive. The assessee, Gujarat Maritime Board, was under a legal obligation to apply its income which was directly and substantially from the business held under trust for the development of minor ports in Gujarat. Therefore, the Supreme Court held that the assessee was entitled to be registered as “charitable trust” under section 12A.
A number of entities functioning on commercial basis claim exemption of their income either under section 10(23C) or section 11 on the foundation that they are charitable institutions. This is based on the contention that they are engaged in the ―advancement of an object of general public utility‖ as is included in the fourth part of the present definition of “charitable purpose”. There were many decisions rendered in the past supporting the view that if unconnected business is held under a trust for promoting the object of general public utility and if profits are used for promoting such objects, income thereof shall be exempt, for example, the decision of the Supreme Court in CIT v. Madras Stock Exchange Ltd. (1981) 130 ITR 184. However, such a claim in respect of an activity carried out on commercial basis, goes against the basic intention of the provision.
Therefore, in order to limit the ambit of the phrase “advancement of any other object of general public utility”, section 2(15) now provides that “the advancement of any other object of general public utility” would not be a charitable purpose if it involves the carrying on of –
(a) any activity in the nature of trade, commerce or business or,
(b) any activity of rendering of any service in relation to any trade, commerce or business, for a fee or cess or any other consideration, irrespective of the nature of use or application of the income from such activity, or the retention of such income, by the concerned entity.
Thus, 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 .
Therefore, in effect, “advancement of any other object of general public utility” would continue to be a “charitable purpose”, if the activity in the nature of trade, commerce or business is undertaken in the course of actual carrying out of such advancement of any other object of general public utlity and the aggregate receipts from 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 does not exceed 20% of the total receipts of the trust or institution undertaking such activity or activities, for the previous year.
Illustration
| An institution having its main object as “advancement of general public utility” received Rs 30 lakhs in aggregate during the P.Y.2015-16 from an activity in the nature of trade. The total receipts of the institution, including donations, was Rs 140 lakhs. It applied 85% of its total receipts from such activity during the same year for its main object i.e. advancement of general public utility.
(i) What would be the tax consequence of such receipt and application thereof by the institution? (ii) Would your answer be different if the institution’s total receipts had been Rs 150 lakhs (instead of Rs 140 lakhs) in aggregate during the P.Y.2015-16? (iii) What would be your answer if the main object of the institution is “relief of the poor” and the institution receives Rs 30 lakhs from a trading activity, when its total receipts are Rs 140 lakhs and applies 85% of the said receipts for its main object? Solution (ii) If the total receipts of the institution is Rs 150 lakhs, and the institution receives Rs 30 lakhs in aggregate from an activity in the nature of trade during the P.Y.2015-16, then it will not (iii) The restriction regarding carrying on of a trading activity for a cess, fee or other consideration will not apply if the main object of the institution is “relief of the poor”. Therefore, receipt of Rs 30 lakhs from a trading activity by such an institution will not affect its “charitable” status, even if it exceeds 20% of the total receipts of the institution. The institution can claim exemption subject to fulfillment of other conditions under sections 11 to 13. |
Circular No.11/2008 dated 19.12.2008
Exemption under section 11 in case of an assessee claiming both to be a charitable institution as well as a mutual organisation
The proviso to section 2(15) will apply only to entities whose purpose is advancement of any other object of general public utility i.e. the last limb of the definition of charitable purpose contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.
There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants.
Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(15).
In the final analysis, however, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. If such assessee is engaged i n any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility wil l be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible.
Circular No. 395, dated 24.9.1984 –
Promotion of sports and games is considered to be charitable purposes within the meaning of section 2(15). Therefore, an association or institution engaged in the promotion of games and sports can claim exemption under section 11 even if it is not approved under section 10(23).
A trust will be treated as a charitable trust under section 2(15) even if its object involves the carrying on of an activity for profit. Such a trust will not be denied exemption under section 11 on the ground that its objects are non-charitable.
(vi) Application and accumulation – We have seen that the exemption is limited to the extent to which such income is applied in India or outside India as the case may be. Is it necessary that the entire income should be so applied? The Act gives a concession here. It is possible to claim the exemption even if the trust or institution applies only 85% of the income derived from the trust property for the purpose of the trust, during the relevant previo us year. An accumulation not exceeding 15% of the income from such property is permissible. For computing this 15%, voluntary contributions referred to in section 12 shall be deemed to be part of the income. It must be clearly noted that accumulation must be with the object of application of the accumulated amount to charitable or religious purpose in India at a later date. Such a facility for accumulation is not available for those trusts whose income is to be applied outside India.
(vii) Inability to apply in full 85% of the income – It is clear from the above discussion that free accumulation not exceeding 15% of income from property is permissible. Hence, the balance 85% must be applied during the previous year for the purposes for which the trust has been created. However, it is possible that the trust is unable to apply the minimum of 85% of its income during the previous year due to either of the following reasons.
(1) The whole or any part of the income has not been received during that year.
(2) Any other reason.
In the first class of cases, the period of application is extended to cover the previous year in which the income is actually received and the previous year immediately following the year. But the amount which may be so claimed to have been so applied during the subsequent previous year cannot exceed the amount of the income which had not been received earlier but received during a subsequent previous year.
Example 1 – During the previous year ending 31st March, 2016, a charitable trust earned an income of Rs 1,00,000 but it received only Rs 60,000 in that year. The balance of Rs 40,000 is received in the year ending 31-3-2017.
| Rs | |
| Total income earned during the P.Y.2015-16 | 1,00,000 |
| Actual receipt in P.Y.2015-16 | 60,000 |
| Permissible accumulation @15% of Rs 1,00,000 | 15,000 |
| Balance to be applied during P.Y.2015-16 | 45,000 |
| Amount received in P.Y.2016-17 to be applied in P.Y.2016-17 or P.Y.2017-18 | 40,000 |
Since this amount of ` 40,000 is received during the P.Y. 2016-17, this can be applied in the P.Y.2016-17 or in the P.Y.2017-18. If the entire amount of ` 40,000 is duly spent for charitable purposes in these two years, the exemption is fully available but if only part of the amount is so spent within the period, the exemption is restricted to that part only.
There may be a case where the inability springs from some other reason e.g. late receipt of the income making it impossible to spend it before the end of the year.
Example 2 – A trust receives a sum of ` 50,000 on 30th March, 2016. Its previous year ends on 31-3-2016.
It is obvious that it is impossible to apply the requisite sum within one day. Therefore, it has been provided that such sum can be applied at any time during the immediately following previous year i.e., up to 31-3-2017.
(viii) Formalities: Exercise of option – To avail the facility of the extended period of application of income, the trust has to exercise an option in writing that the income applied later as prescribed may be deemed to be income applied to the relevant charitable purposes during the previous year in which the income was derived. Such option has to be exercised before the expiry of the time allowed statutorily under section 139(1).
The income so deemed to have been applied shall not, however, be taken into account in calculating the amount of income applied to such purposes, during the previous year in which the income is actually received or during the immediately following previous year as the case may be. Thus, in the Example 1 given above, the amount of Rs 40,000, received subsequently in the year 2016-17 and applied to charitable purposes in the year 2016-17, will by virtue of the option exercised by the trust, be deemed to be applied for charitable purposes in the year 2015-16 itself. Therefore, such an amount will not be taken into consideration in determining
the amount of income applied for charitable purposes in the year 2016-17.
Sub-section (1B) of section 11 provides that where the income for which an option has been exercised as discussed above, is not actually applied, it is to be treated as the income of the previous year immediately following the year of receipt or the previous year in which it was derived as the case may be.
(ix) Conditional accumulation – As per section 11, application of income derived from property held under trust for charitable purposes in India is the main condition for grant of exemption to trust or institution in respect of income derived from property held under such trust. In case such income cannot be applied during the previous year, the same can be accumulated and applied for such purposes, subject to satisfaction of the conditions provided therein.
Section 11 permits accumulation of 15% of the income indefinitely by the trust or institution. However, 85% of income can only be accumulated for a period not exceeding 5 years subject to the conditions that such person submits the prescribed form i.e., Form 10 to the Assessing Officer and the money so accumulated or set apart is invested or deposited in the specified forms or modes.
If the accumulated income is not applied for charitable purposes or ceases to be accumulated or set apart for accumulation or ceases to remain invested or deposited in specified modes, then, such income is deemed to be taxable income of the trust or institution.
For the purpose of clarifying the period within which the assessee is required to file Form 10, and to ensure due compliance of the above conditions within time, section 11(2) has been amended to provide that –
(1) such person should furnish 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 being accumulated or set apart, which shall, in no case, exceed five years.
In computing the period of five years, the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.
(2) the money so accumulated or set apart should be invested or deposited in the modes specified in section 11(5).
(3) the statement in Form 10 should be filed on or before the due date of fil ing return of income specified under section 139(1).
In case the statement in Form 10 is not submitted on or before this date, 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) [Section 13(9)].
(b) The modes specified in section 11(5) are as follows:
(1) Investment in Government Saving Certificates.
(2) Deposits with Post Office Savings Banks.
(3) Deposit with Scheduled banks or Co-operative Banks.
(4) Investment in units of the Unit Trust of India.
(5) Investment in Central or State Government Securities.
(6) Investments in debentures issued by or on behalf of any company or corporation.
However, both the principal and interest thereon must have been guaranteed by the Central or the State Government.
(7) Investment or deposits in any public sector company.
Where an investment is made in the shares of any public sector company and such public sector company ceases to be a public sector company, the investment so made shall be deemed to be an investment made for a period of three years from the date of such cessation and in the case of any other investment or deposit, till the date of its maturity.
(8) Investment in bonds of approved financial corporation providing long term finance for industrial development in India and eligible for deduction under section
36(1)(viii).
(9) Investment in bonds of approved public companies whose principal object is to provide long-term finance for construction or purchase of houses in India for
residential purposes and eligible for deduction under section 36(1)(viii).
(10) 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.
“Long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years.
“Urban infrastructure” means a project for providing potable water supply, sanitation
and sewerage, drainage, solid waste management, road, bridges and flyovers or
urban transport.
(11) Investment in immovable property excluding plant and machinery, not being plant and machinery installed in a building for the convenient occupation thereof.
(12) Deposits with Industrial Development Bank of India.
(13) Any other mode of investment or deposit as may be prescribed. Rule 17C specifies the following other modes:
(1) Investments in units issued under any scheme of mutual fund referred to in section 10(23D);
(2) Any transfer of deposits to Public Account of India;
(3) Deposits made with an authority constituted in India 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;
(4) investment by way of acquiring equity shares of a ‘depository‘;
(5)investment by a recognized Stock Exchange, in the equity shares of a company promoted by it to acquire the membership rights of other stock exchanges, where at least 51% of the paid-up share capital is held by the Stock Exchange and the balance is held by its members;
(6) investment by way of acquiring equity shares of an incubatee by an incubator;
(7) investment in debt instruments issued by any infrastructure finance company registered with RBI. Where the income of the trust –
(a) is applied for purposes other than charitable or religious purposes; or
(b) ceases to be accumulated or set apart for application thereto; or
(c) ceases to remain invested or deposited in any modes mentioned under section 11(5) above; or
(d) is not utilised for the purpose for which it is so accumulated or set apart during the period specified (not exceeding 5 years) or in the year immediately following thereof.
However, in computing the aforesaid period of 5 years, the period during which the income could not be applied for the purposes for which it is so accumulated or set apart due to an order or injunction of any Court shall be excluded.
(e) accumulated or set apart for application to charitable and religious purposes in India, 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 sub-clause (iv) or (v) or (vi) or (via) of clause (23C) of section 10,
such income shall be deemed to be the income of the previous year –
(a) in which it is so applied; or
(b) in which it ceases to be accumulated or set apart; or
(c) in which it ceases to remain so invested or deposited; or
(d) immediately following the expiry of the period aforesaid; or
(e) in which it is paid or credited.
It is possible that due to circumstances beyond the control of the person in receipt of the income, any income invested or deposited in approved modes cannot be applied for the purpose for which it was accumulated or set apart. In such a case, an application may be made to the Assessing Officer specifying such other purposes as are in conformity with the objects of the trust. The Assessing Officer may allow the application of income to such other purposes. If such a permission is granted by the Assessing Officer, the new purposes will be deemed to be purposes specified in the written notice given to the Assessing Officer.
It is to be noted that the Assessing Officer cannot allow transfer of any such accumulated income to other charitable trusts/institutions as application of income towards charitable purposes. This has created genuine problems for those trusts and institutions which are wound up. However, in case of a trust or institution which has invested or deposited its income in any of the forms mentioned in section 11(5), the Assessing Officer can allow application of such income for crediting or payment to any trust or institution registered under section 12AA or any fund or institution or trust or university or education institution or hospital
or medical institution covered by section 10(23C). Such application can be allowed only in the year in which such trust or institution is dissolved.
(x) Income for the purposes of application under section 11 shall be determined without allowing any deduction or allowance for depreciation or otherwise, in respect of any asset, the cost of acquisition of which has been claimed as an application of income under this section in the same or any other previous year [Section 11(6)].
(xi) Where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than exemption of agricultural income under section 10(1) and exemption available under section 10(23C)][Section 11(7)].
(xii) Cases where trust property consists of a business undertaking – Section 11(4) clarifies that for the purposes of section 11, property held under trust may consist of a business undertaking so held. If that be so, the trustees may claim that the income of such undertaking enjoys exemption under section 11. Section 11(4) provides for two things –
(1) The Assessing Officer shall have the power to determine the income of the undertaking in accordance with the provisions of the Act relating to assessment, and
(2) Where the income determined by the Assessing Officer is in excess of that shown in the books of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes and accordingly be deemed to be the income of the previous year in which it has been deemed to have been so applied.
(xiii) Charitable trust engaged in business activity [Section 11(4A)] – Consequently, a charitable trust engaged in business activity will be liable to any tax on income from the activity. However, exemption would be available to the trust in respect of income earned from such business activity if –
(i) such business is incidental to the attainment of the objects of the trust/institution; and
(ii) separate books of account are maintained by such trust/institution in respect of such business.
Note – Profits derived by a trust/institution referred to in clauses (21), (23A), (23B), (23BB) and (23C) of section 10 will continue to be exempt from income-tax, since section 11(4A) does not override the provisions of section 10.
(xiv) Instances where capital gains would be deemed to have been applied for charitable purposes [Section 11(1A)]
(a) Transfer of a capital asset held under trust wholly for charitable or religious purposes [Section 11(1A)(a)] – Where the whole of the net consideration from the transfer of the capital asset is utilised for acquiring a new capital asset which is held under trust wholly for charitable or religious purposes, the entire amount of capital gains arising from the transfer would be deemed to have been applied for charitable or religious purposes. If, however, only a part of the net consideration is utilised in acquiring the new capital asset, the amount of capital gains deemed to have been utilised for charitable or religious purposes shall be equal to the excess of the proceeds utilised over the cost of the asset transferred.
Example
| Original cost of capital asset transferred | Rs 1,00,000 |
| Consideration for which it is transferred | Rs 1,50,000 |
| Situation 1 Cost of new capital asset acquired | Rs 1,50,000 |
| Situation 2 Cost of new capital asset acquired | Rs 1,20,000 |
Amount that will be deemed to have been applied for charitable purposes.
| Situation 1 | Rs 50,000 |
| Situation 2 | Rs 20,000 |
(b) Transfer of a capital asset held under trust in part only for charitable and religious purposes [Section 11(1A)(b)] – Where only a part of a capital asset has been transferred, only the “appropriate fraction” of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes. Where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain will be deemed to have been so applied. In any other case, the exemption will be limited to so much of the appropriate fraction of the amount utilised for acquiring the new asset as exceeds the appropriate fraction of the cost of the transferred asset.
“Appropriate fraction” means the fraction which represents the extent to which the income derived from the capital asset transferred was applicable to charitable or religious purposes before such transfer.
Example: A capital asset is being held under trust. Two-thirds of the income derived from such capital asset are being utilised for the charitable purposes of the trust. The asset is being transferred.
| Cost of transferred asset | Rs 1,20,000 |
| Net consideration | Rs 1,80,000 |
| Cost of new asset acquired | Rs 1,50,000 |
| Capital gains | Rs 60,000 [Rs 1,80,000 – Rs 1,20,000] |
| Appropriate fraction | 2/3rd |
Income represented by ‘appropriate fraction‘ = 2/3rds of Rs 60,000 = Rs 40,000
Since the entire net consideration has not been utilised in acquiring the new asset, the amount deemed to have been utilised for charitable purpose will be (2/3rds of
Rs 1,50,000) – (2/3rds of Rs 1,20,000) = Rs 1,00,000 – Rs 80,000 = Rs 20,000.
(xv) Voluntary Contributions [Section 12] – Any voluntary contribution received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes shall for the purposes of section 11, be deemed to be income derived from property held under trust wholly for charitable or religious purposes. However, corpus donations (i.e. contributions made with a specific direction that they shall from part of the corpus of the trust or institution) shall not be treated as income. Such corpus donations are treated as capital receipts not chargeable to tax. Other voluntary contributions would be treated as income. However, exemption can be claimed in respect of such income subject to fulfillment of the conditions mentioned below –
(i) The trust should be registered under section 12AA with the Principal Commissioner or Commissioner of Income-tax;
(ii) If the total income of the trust exceeds the basic exemption limit, the accounts of the trust should be audited.
(iii) The trust should apply at least 85% of its income for the approved purposes.
(iv) The balance should be invested or deposited in specified forms or modes.
Note – It may be noted that the corpus donations are to be considered for the purpose of determining whether the accounts of the trust are to be audited. Further, corpus donations have to be invested only in the investments approved under section 11(5). If invested elsewhere, the income from unapproved investment would be chargeable to tax.