Income tax provisions related to charitable trust in brief

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. However, if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to 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 the said activity, the same will not be regarded as advancement of any object of general public utility. However, if the total receipts from such activities do not exceed Rs. 10,00,000/-, such activities of the trust will continue to be regarded as activities for charitable purpose. Preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest would be considered as “charitable purpose” other than “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 to be made specifying purpose for accumulation of income for period of 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. Pending application of income, to be invested in manner as 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.

With effect from 1st June, 2007 any fund or institution established for charitable purposes or any trust established for public, religious and charitable purposes will be notified by Prescribed Authority which hitherto was notified by Central Government.

Registration:-Registration under section 12AA will be granted from 1st day of the financial year in which the application for registration is made. Commissioner not empowered to condone the delay in application for registration. The Commissioner has power 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. Commissioner of Income tax now also has power to cancel registration of trust granted under provisions of section 12A of the Income-tax Act, 1961.

Appeals :-Orders passed under section 12AA or under section 80G rejecting the registration of trust/ rejecting approval under section 80G are appealable. The appeal lies to the Income tax Appellate Tribunal.

Approval under section 80G:-From 1st October, 2009, approval once granted under section 80G will be valid in perpetuity unless revoked by the Commissioner of Income tax in accordance with the provisions of section 80G(5)(vi) of the Income tax Act, 1961.

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 maximum marginal rate. This restriction does not apply to:

1. Any asset held as part of the corpus as on 1-6-1973;
2. Any accretion to shares, forming part of the corpus as on 1-6-1973, by way of bonus shares;
3. Any debentures acquired before 1-3-1983. If debentures acquired after 28-2-1983 and before 25-7-1991, exemption is denied only in respect of income from such debentures, provided debentures are disinvested by 31-3-1992.

Modes of Investment specified in S. 11(5)

1. Investment in Government savings certificates/other securities/ certificates issued by Central Government under Small Savings Schemes;
2. Deposit in any account with the Post Office Savings Bank;
3. Deposit in any account with a scheduled/co-operative bank;
4. Investment in units of the Unit Trust of India;
5. Investment in any security of the Central/State Government;
6. Investment in debentures whose principal and interest are fully and unconditionally guaranteed by Central/State Government;
7. 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;
8. Deposits with or investment in any bonds issued by an approved financial corporation engaged in providing long-term finance for industrial development in India;
9. 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;
10. Investment in immovable property;
11. Deposits with the Industrial Development Bank of India;
12. Any other prescribed form or mode of investment or deposit. (for example, Units of mutual funds referred to in s. 10(23D), investment by way of acquiring equity shares of a ‘depository’ prescribed).
13. 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%. 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.
• However, in case of partly religious and partly charitable institutions where the anonymous donations are directed towards medical or educational institutions run by such entities or anonymous donations are received by wholly charitable institutions, it will be taxable to the extent such donations exceeds 5% of the total income of institution or Rs.100,000/- whichever is more.

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), could now be made on or before 30th September of the relevant assessment year.

Electoral Trust:-Electoral Trust to be approved by the Central Board of Direct Taxes. Voluntary contributions received by Electoral Trust to be treated as income with effect from 1st April, 2010. Income of Electoral Trust by way of voluntary contribution will be exempt subject to fulfillment of following conditions:

• Such Electoral trust distributes to the political parties (registered under section 29A of the Representation of the People Act, 1951) 95% of the donation received by it during the previous year along with the surplus, if any brought forward from any earlier years and;
• Electoral Trust functions in accordance with the rules made by the Central Government.

Contribution to Electoral Trust eligible for deduction while computing taxable income.