INCOME TAX PROVISIONS FOR CHARITABLE TRUSTS

Exemption

Income derived from property held under trust or of an institution (‘trust’) wholly for charitable/religious purpose is exempt, if 85% of the income is spent on the objects of the trust, during the year. If the amount spent is less than 85% of the income, the shortfall is taxable, unless the trust has complied with the conditions mentioned in the table below.

‘Charitable purpose’ includes relief of the poor, education, medical relief, and the advancement of any object of general public utility.

Circumstances for not spending 85% of income Written appln. to be made Conditions

Consequences if conditions not satisfied:
Application in F. No. 10 made specifying purpose for accumulation of income for period up to 5 years. Period for which unable to apply income for that purpose due to court order/injunction to be excluded Before the expiry of time allowed u/s. 139(1) for furnishing the return To be spent within period of accumulation or immediately following year. To be spent for the purpose of accumulation. Pending application of income to be invested in manner specified in S. 11(5). Cannot be spent by way of donation to another charitable trust or institution except if the Assessing Officer permits the same in the year in which the trust or institution is dissolved. Such income deemed to be income of the previous year in which any of the conditions not satisfied.

If income not spent within stipulated time, for the purpose of accumulation, deemed to be income of the previous year immediately following period of accumulation, unless assessing officer’s permission obtained to spend it on other objects of the trust.

Whole/part of the income not received during previous year As above To be spent in the year of receipt, or in the next year. Such income deemed to be income of previous year immediately following year of receipt.
Any other reason As above To be spent in the year of receipt, or in the next year. Such income deemed to be income of previous year

Voluntary Contribution received by any university or educational institution referred to in section 10(23C)(vi) or hospital or other institutions referred to in section 10(23C)(via) shall be deemed to be income (with retrospective effect from assessment year 1999-2000). Similarly, voluntary contributions received by any university or other educational institution or any hospital or other institution referred to in sections 10(23C)(iiiad) and 10(23C)(iiiae) respectively will be deemed as income received by them.

Registration

Trust’s application for registration is to be made to the Commissioner (Comm.) within 1 year of creation. In case of delay, it is entitled to exemption only from 1st day of financial year in which application is made. Exemption is available from inception, if the Comm. is satisfied that the delay is for valid reasons.

The Finance (No. 2) Act, 2004 has given power to the Comm. to cancel the registration of the trust by an order in writing if he is satisfied that the activities of trust are not genuine or are not being carried out in accordance with the objects of the trust.

Audit

To qualify for exemption u/ss. 11 and 12, a trust having total income (before exemption u/ss. 11 and 12) exceeding the maximum amount not chargeable to tax must have its accounts audited by a C.A.

Investments

All investments of the trust must be in modes provided in s. 11(5). If not, they must be brought in conformity within 1 year from the end of the previous year in which such investments are acquired, or 31-3-1993, whichever is later. Contravention results in income and wealth of the trust being taxed at max. marginal rate. This restriction does not apply to:

Any asset held as part of the corpus as on 1-6-1973;

Any accretion to shares, forming part of the corpus as on 1-6-1973, by way of bonus shares;

Any debentures acquired before 1-3-1983. If deb. acquired after 28-2-1983 and before 25-7-1991, exemption is denied only in respect of income from such deb., provided deb. are disinvested by 31-3-1992.

Modes of Investment specified in S. 11(5)

Investment in Government savings certificates/other securities/ certificates issued by Central Government under Small Savings Schemes;

Deposit in any account with the Post Office Savings Bank;

Deposit in any account with a scheduled/co-operative bank;

Investment in units of the Unit Trust of India;

Investment in any security of the Central/State Government;

Investment in debentures whose principal and interest are fully and unconditionally guaranteed by Central/State Government;

Investment or deposit in any public sector company (PSC); Shares of PSC may be retained for three years and other investments or deposits till its maturity once PSC ceases to be a PSC;

Deposits with or investment in any bonds issued by an approved financial corporation engaged in providing long-term finance for industrial development in India;

Deposits with or investment in any bonds issued by an approved public company with main object of carrying on business of providing long-term finance for construction / purchase of houses in India for residential purposes or for urban infrastructure;

Investment in immovable property;

Deposits with the Industrial Development Bank of India;

Any other prescribed form or mode of investment or deposit. (Units of mutual funds referred to in s. 10(23D), investment by way of acquiring equity shares of a ‘depository’ prescribed).

Investment in "Indira Vikas Patra" and "Kisan Vikas Patra" are in accordance with the norms and modes specified in sec. 11(5) – Circular No. 566, dt. 17-7-1990.

Corpus donations

U/s. 11(1)(d), voluntary contributions with specific direction that they shall form part of the corpus of the trust are not includible in the total income of the trust. However, u/s 12 other voluntary contributions would be deemed to be income of the trust.

Business income

Exemption is not available in relation to any profit and gains of business of a trust, unless the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained in respect of such business.

Capital gains

The gains arising from transfer of a capital asset, is deemed to have been applied to charitable/religious purposes, if the whole net consideration is used to acquire new capital assets. If only part of the net consideration is so utilised, such gains, as equals the excess of the amount so utilised over the cost of the transferred asset is deemed to have been applied for charitable/religious purposes.

Anonymous Donations

The term "anonymous donation" is defined to mean any voluntary contribution, where the person receiving such contribution does not maintain a record consisting of the identity of the person making such contribution indicating the name and address of the person and such other particulars as may be prescribed. Such anonymous donations will be taxed @ 30% (to be increased by surcharge as applicable and education cess.)

Anonymous donations received by trusts/ institutions specified are taxable as aforesaid. However, the following anonymous donations are not covered:–

donations received by a trust or institution which is created or established wholly for religious purposes;

donations received by any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.

Time limit for application for claiming exemption

Application by funds, trusts, institutions, universities, other educational institutions, hospitals or medical institutions seeking exemption under section 10(23C), to be made at any time during the financial year preceding the assessment year from which such exemption is sought.