'Charitable Purpose' includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forest and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any object of general public utility. [Section 2(15)]. The Finance Act 2009, has amended the definition of 'charitable purpose' to provide that 'advancement of any other object of general public utility' will not be considered as 'charitable purpose' 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 any trade, commerce or business for any fee, cess or other consideration.
The aggregate value of the receipts from such activities is not more than Rs .25,00,000 during the year, such purpose would still be a charitable.
INCOME OF THE TRUST
Income derived from property under trust subject to sections 60 to 63 wholly for charitable or religious purposes is exempt to the extent such income is applied on the objects of the trust in India, during the previous year. The trust must apply at least 85% of such income on the objects in such cases balance 15% will deemed to be accumulated for the purpose of charity and exempt.
[Section 11(2)]. If the amount applied by the trust is less than 85%, the shortfall in application is not taxable in the following cases —
1. Income is accumulated up to 5 years and the purpose of accumulation is specified to the AO in Form No. 10 :The time limit for filing Form No. 10 is the same as time limit for filing return u/s 139(1) (Rule 17). If accumulated amount could not be applied due to order/ injunction of the court, such period will be excluded. However in the case of CIT vs. Nagpur Hotel Owners Association [247 ITR 201 SC] the Hon'ble Supreme Court has held that in the absence of reference to time limit in the section itself, such form can be submitted any time before the completion of assessment.
- a. The income accumulated must be applied for the specified purpose within the period of accumulation as per application in Form 10. Till the accumulated amount is applied, it must be invested as specified in Section 11(5).
- b. From A.Y. 2003-04, if the accumulated income is credited/paid to any trust registered u/s 12AA or referred to in subclause (iv), (v), (vi) or (via) of 10(23C), it shall not be treated as application of income
- c. [2nd proviso to Section 11(3A)] In the case of dissolution of the trust, the AO may allow the application of income in the year in which it is dissolved by way of transfer of the accumulation to other trust registered u/s. 12 AA or institution referred to in Section 10(23C).
- d. If there is violation of any of the conditions relating to accumulation of income, such income will be deemed to be income of the previous year in which the conditions are violated or the previous year immediately following the expiry of the period of accumulation.
2. Income Not Received during the previous year [Explanation 2 to Section 11(1)]:-Where due to reason that whole or any part of the income has not been received during the year, the amount can be applied in the year of receipt or in the following year. However, intimation in writing must be sent to AO before the expiry of time allowed u/s. 139(1) for furnishing the return. In case the amount is not applied, it will be deemed to be the income of previous year immediately following year of receipt.
3. Income in commercial sense:- In the case of CIT vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom), the Bombay High Court held that income derived from the trust property is to be computed on commercial principles. the income should be applied 85% of the total receipt in that financial year.
4. Meaning of application of fund :-
i) Capital expenditure on purchase of fixed assets as per the sc CIT vs Moolchand sharvati devi hospital trust that capital expenditure on building and infrastructure were basic necessary and therefore should be treated as expenditure under section 11(1).
ii) Payment of wealth tax and income tax also an application of fund as per CIT vs Ganga charity trust fund.
iii) Repayment of the any debt or has been considered as application as per CIT vs. Maharana of Mewar Charitable Foundation and circular no 100.
iv) Loan given to another charitable organization can be treated as application of fund.
v) Advance for property with adequate documentation will be treated as application of fund as per DIT vs Maharaja agresen Technical Society.
vi) Donation by one charitable trust to another trust will be treated as application of fund.
5. Depreciation :as per the recent observation of the CAG that many NGO has claimed double depreciation even if the entire of the asset was treated as application in the year of purchase. Depreciation can be claimed if the fixed asset purchased in the following situations.
i) Fixed asset purchased out of the accumulation of funds.
ii) At the time of the purchase of fixed asset the entire cost of the asset was not considered as application of fund during the year.
6. Business Income :-as per section 11(4A) whereas institution is carrying on any business activity as incidental to attainment of objective of institution a separate books of account are to be maintain. If the profit out of that business income has been utilized for the fulfillment of the objective of such institution then it will be treated as application of fund.
7. Exemption U/S 11 Not To Apply In Certain Cases (Section 13)
- A. Section 13(1)(a) — Trust for private religious purposes.
- B. Section 13(1)(b) — Trust established for the benefit of any particular religious community or caste.
- C. Section 13(1)(c) — Income of the trust is applied directly or indirectly for the benefit of persons referred to in sub-section (3).
- D. Section 13(1)(d) — Funds are invested otherwise than in any form or modes specified in 11(5).
8. Following will be considered as Benefit to a person section 13(3)
a. Interest free loan or loan without security
b. Use of properties without charging adequate rent.
c. Excessive payment for services.
d. Services of trust without adequate remuneration.
e. Purchase of property for trust for excessive consideration.
f. Sale of trust property for inadequate consideration.
g. Diversion of income or property exceeding Rs 1000.
h. Investment in substantial interest concerns.
9. Corpus Donation:-following are the provision relates to corpus donation.
a) According to section 11(1)(d) any voluntary contribution received by a trust created wholly for charitable or religious purpose with a specific direction that they shall form part of the corpus of the trust, shall not be included in the total income u/s 11.
b) A charitable organization lose exemption by virtue of violation u/s 13 (1) then corpus income will also be included in the total income.
c) To claim a donation as a corpus donation, a written document with a specific direction from the donor should be obtain. The recipient organization has no right to treat a donation as a corpus donation.
d) Donation by one charitable organization to another charitable organization is treated as a valid application of fund.
e) A corpus donation is not required to be spent in a same year it can be accumulated and form no. 10 is not required to be submitted in the Income Tax department.
f) Corpus Donation to an inter charity organization to be given out of income during the year not as a part of corpus donation received by the Trust.
g) As per circular no 108 dated 20.03.1973 by CBDT it cover u/s 12(1) which indicated that such corpus donation is not the part of income u/s 2(24).
10. Anonymous Donation:-in order to tax unaccounted money being contributed to charitable institutions by way of anonymous donations a new section 115BBC has been inserted so as to provide that any income by way of anonymous donation of following entities shall be included in the total income and taxed at the rate of 30%.
11. Privileges to Donor u/s 80G:-following are the privileges that has been enjoyed by the donor under income tax.
a. Section 80G(1) specifies two categories of donations, one for 100% deduction and other for 50% deduction.
b. The maximum limit of qualifying amount u/s 80G is 10% of the total income before allowing the deduction.
c. Section 80G is not applicable to donations in kind. Donations in the form of money only are eligible.
d. Deduction u/s 80G is available only against positive income.
It can neither be claimed against losses nor can it be carried forward.
e. Deduction is available against taxable income only. If some part of the income is not taxable then it should be excluded for the purposes of sec 80G.
f. Donations need not necessarily be made out of current year's income. Donations out of the reserve fund or the previous year's income are eligible for deduction.
g. It is not necessary that the donation should have a nexus with the prospects of business.
h. To claim deduction u/s 80G, it is necessary to produce adequate proof of payment.
i. For registration u/s 80G, the organisation has to apply in Form 10G to the Commissioner of income tax Exemption.
12. Persons referred to in section 13(3) :following are the persons which are covered under this section.
a. The author of the trust or the founder of the institution.
b. Any person who has made a substantial contribution to the trust or institution that is to say any person whose total contribution at the end of the relevant previous year exceeds fifty thousand rupees.
c. Where such author founder or person is a Hindu undivided family a member of the family.
d. Any trustee of the trust or manager ( by whatever name called ) of the institution.
e. Any relative of any such author, founder , person, member, trustee or manager as aforesaid.
f. Any concern in which any of the persons referred to in all above clauses has a substantial interest.
13. Rate of Taxes :-the rate of tax applicable to a public trust / institutions for the purpose of assessment under income tax act is that applicable to an association of person. The AOP is taxable as the same rate as applicable to individual, the basic exemption limit of Rs 200000 will also be available.
However if any part of the income is not exempt under section 11 or 12 due to the following situations shall be charged at maximum marginal rate.
a. Any directly or indirectly benefit to the person referred under section 13(3).
b. Any part of the income applied for any person referred to section 13(3).
c. The fund of the trust are not invested as per section 11(5).
14. Loss/ Deficit of the Earlier Year:-If the excess spending either out of corpus or out of revenue income is there then it can be carried forward and available as utilization in next financial year. In other words earlier year loss will be available as set off against the surplus of succeeding year ( CIT vs Trustee of Seth Merwarjee Framji Pandey Charitable Trust).