CBDT clarifies on income tax implications of inter-trust donations by one registered charitable entity to another

 This Tax Alert summarizes a recent Circular^[1] issued by the Central Board of Direct Taxes (CBDT) wherein the CBDT clarifies the tax treatment of non-corpus donations made by one registered charitable entity to another in the wake of amendment by Finance Act (FA) 2023, which restricted the eligible application of such donated amount to 85% leaving 15% as ineligible application in computing the income of the trust under the Income Tax Laws (ITL) (15% amount is hereinafter referred as Ineligible Application).

The CBDT clarifies that Ineligible Application will not trigger any adverse consequences in the hands of donor charitable entity since such income is spent by way of inter-trust donation and has relaxed the requirement of making investment in prescribed modes with respect to such Ineligible Application in absence of any funds. By way of the illustration given in the Circular, the CBDT further clarifies that the charitable entity can avail full exemption under the ITL if 85% of the balance income (i.e., gross income as reduced by inter-trust donation) is applied for charitable purposes in accordance with the provisions of the ITL