As per Section 2(15) of Income Tax Act, Charitable Purpose includes relief of the poor, education, medical relief and advancement of any object of general utility. As per the updated law preservation of environment (including watersheds, forest and wildlife) and preservation of monuments or places or objects of artistic or historic interest also comes under charitable purpose. As per the amendment made in the Finance Act 2010 with retrospective effect, if the aggregate value of the receipts from such activities is more than Rs. 10,00,000 during the year, such purpose would still be charitable. The monitory limit now raised to Rs. 25,00,000 w.e.f 1st April 2011.
Income of a Charitable Trust, Society or Section 25 Company
If the income derived from the property applied wholly for the charitable or religious purpose, exemption is allowed to that extent. A Charitable organisation 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.
As per Section 11(2), if the amount applied by a charitable organisation is less than 85%, the shortfall in application is not taxable in the following cases:
If the assessee file for No. 10 with the Assessing officer by mentioning the purpose of accumulation upto 5 year. If the amount could not be utilised due to injunction or order of the court, such period will be excluded. Time limit for filing form No. 10 with assessing officer is same as time limit to file Income tax Return under section 139(1) Rule 17.
A Charitable organisation must utilise the accumulated income within the period mentioned in the Form No.10. If the amount is not applied it must be invested as specified under section 11(5) of the Income Tax Act. Section 11(5) is applicable also to those trusts who are claiming exemption under clauses (iv), (v), (vi) and (via) of Section 10(23C).
If the charitable organisation is being dissolved, the Assessing Officer 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 Under Section. 12 AA or institution referred to in Section 10(23C).
In case of 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. However, with the permission of the Assessing Officer under section 11(3A) accumulated amount, if could not be applied for the purpose during the specified period, can be applied on other objects of the trust as permitted by the Assessing Officer.
If any part of the income has not been received during the year due to any justifiable reason, the amount can be applied in the year of receipt or in the following year. However, intimation in writing must be sent to Assessing Officer before the expiry of time allowed Under Section 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.
If due to any other reason income is not applied during the previous year, such income can be applied in the following previous year. However intimation in writing must be sent to Assessing Officer before the expiry of time allowed under Section 139(1) for furnishing the return. If such income is not applied, it shall be deemed to be the income of previous year immediately following the year in which such income was derived
Income can be applied by a trust outside of India with a specific permission from CBDT as follows:
Charities established on or before 1-4-1952 for charitable purpose outside India
Charities established after 1-4-1952 for international welfare in which India is interested.
Registration under Section 12A for Income Tax Exemption
The Charitable Trust, Society or Section 25 Company shall make an application to the Commissioner for registration Under Section 12A in Form 10A within one year of formation in such cases registration can be granted from the date of formation of trust. In case of delay, the registration could be granted from inception if Commissioner was satisfied with the reasons of delay. Otherwise, the registration would be granted from 1st day of financial year in which application is made. W.e.f. 1-6-2007 Commissioner's power of condonation has now been withdrawn. Every order granting or rejecting registration has to be passed within 6 months from the end of the month in which application is made. The Commissioner can revoke the registration granted to the trust after giving an opportunity of being heard. The appeal against the order Under Section 12AA can be made to Appellate Tribunal.
The income of the following Institutions are exempt Under Section 10.
Trust or Institution -Section 10(23C)(i)
The Prime Minister's National Relief Fund -Section 10(23C)(ii)
The Prime Minister's Fund (Promotion of Folk Art)- Section 10(23C)(iii)
The Prime Minister's Aid to Students Fund- Section 10(23C)(iiia)
The National Foundation for Communal Harmony- Section 10(23C)(iiiab)
Educational Institution wholly or substantially financed by the Government- Section 10(23C)(iiiac)
Medical Institution wholly or substantially financed by the Government- Section 10(23C)(iiiad)
Educational Institution — Annual receipts do not exceed 1 crore rupees- Section 10(23C)(iiiae)
Medical Institution — Annual receipts do not exceed 1 crore rupees Section 10(23C)(iv)**
Institution of National importance notified by the Government- section 10(23C)(v)**
Trust or Institution notified by the Central Government as for charitable purposes -Section 10(23C)(vi)**
Educational Institution other than those mentioned in sub-clauses (iiiab) & (iiiad) and approved by prescribed Authority- Section 10(23C)(via)**
Medical Institution other than those mentioned in sub-clauses (iiiac) & (iiiae) and approved by prescribed Authority.
** Subject to the condition of application of income to the extent of 85% of the income. Further, Investment of the Accumulation has also to be in accordance with provisions of Section 11(5) of the Act. In respect of other institutions listed above, these conditions do not apply.
Registration for recognition under section 80G(5) of Income Tax Act
Charities registered for Charitable purpose under Section 12A or under section 10(23C) may apply for recognition Under Section 80G(5). Charities shall be existing for charitable purpose and not for religious purpose. The charity shall be registered under general law governing charities such as Bombay Public Trust Act, 1950 or Society Registration Act, 1860 or Company's Act, 1956 under section 25. Upon getting this recognition any donation paid to such charities will be eligible for deduction in the hands of the donor. Recognition Under Section 80G(5) is governed by rule 11AA and such recognition could be granted upto a period of five years. This position of law has undergone change w.e.f. 1.10.2009. The registration valid and subsisting as on 1.10.2009 will continue to be so recognized in perpetuity. Commissioner of Income Tax has power to recall this recognition after giving opportunity of being heard to charity whose recognition is proposed to be withdrawn.
Cancellation of Income tax Exemption Registration
As per Section 12AA(3) registration of a charitable trust can be cancelled, where the Commissioner is satisfied that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust.
Audit of a Charitable Trust, Society or Section 25 Company
Where total income before the exemptions Under Sections. 11 and 12 of the trust exceeds the maximum amount not chargeable to tax; i.e., Rs. 2,00,000 (A.Y. 2013-14) (w.e.f. 1/4/2012), in order to get exemption Under Sections. 11 and 12, the accounts have to be audited by an accountant as defined in explanation below sub-section 2 of Section 288, who will give his report in Form 10B.
If the income of the trust/institution referred to in clause (iv), (v), (vi) or (via) of Sec.10(23C) without giving effect to the provisions of these clauses exceeds the maximum amount not chargeable to tax, such trusts will have to get their accounts audited by the accountant as defined in Explanation below sub-section (2) of Section 288. (As provided in the Taxation (Amendment) Act, 2006) in form 10BB.
Mode of Investment by Charitable Organisations – Section 11(5) of Income Tax Act
All investments of the trust must be in forms and modes provided in Section 11(5), which are as under —
Investment in Government savings certificates/other securities/certificates issued by the Central Government under Small Savings Scheme;
Deposit in any account with the Post Office Saving Bank;
Deposit in any account with a scheduled/co-operative society engaged in carrying on the business of banking (including co-operative land mortgage bank or a co-operative land development 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 or PSC ceases to be a PSC;
Deposits with or investment in any bonds issued by an approved financial corporation which is engaged in providing, long-term finance for industrial development in India;
a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes,
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;
Investment in immovable property;
Deposit with the Industrial Development Bank of India;
Any other prescribed form or mode of investment or deposit (Please refer Rule 17C).
Units issued under any scheme of the mutual fund referred to in clause (23D) of Section 10 of the Income-tax Act, 1961;
Any transfer of deposits to the Public Account of India;
Deposits made with an authority constituted in India by 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;
Equity shares of a depository as defined in clause (e) of sub-section (1) of Section 2 of the Depositories Act, 1996 (22 of 1996).
However, this provision will not apply to:
Any asset held as part of the corpus as on 1-6-1973 and any accretion thereto by way of bonus shares.
Any debentures acquired before 1-3-1983. If debentures acquired between 28-2-1983 and 25-7-1991, exemption is denied only in respect of income from such debentures, provided debentures are disinvested by 31-3-1992.
If investment is in contravention of the above provisions, it can be brought in its conformity within a period of 1 (one) year from the end of the previous year.
Corpus Donation received by charitable entity
Where a trust receives voluntary contributions (Act 2(24 (iia)) made with a specific direction that they will form part of the corpus, such donation will not be included in the total income of the trust. [Section 11(1)(d) r.w.s. 12].
Business Income of a Charitable Trust
Section 11(4A) provides that tax exemption will not apply in relation to any income of a trust being profits and gains of the business unless the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained by such trust in respect of such business. ICAI has expressed the view that running of hospital by a trust is a business activity. Therefore, if gross receipts from business exceeds tax audit limit, the accounts should be audited Under Section 44AB.
Capital Gains of a Charitable Trust
Where a capital asset is transferred and entire net consideration is utilised to acquire a new capital asset, the whole of capital gains is deemed to have been applied for charitable/religious purposes. If part of the net consideration is used to acquire a new capital asset, then the capital gains equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset, will be deemed to have been applied for charitable/religious purposes [Section 11(1A)]. Also refer Instruction 883 dt. 24.9.1975.
Responsibility of Charitable Trust to Deduct Tax- Tax Deducted at Source
The trust is required to deduct tax at source under Chapter XVIIB as per the provisions of the Act. The trust is may obtain certificate from the AO Under Section 197 so that it can receive income without deduction of tax at source.
Non applicability of Exemption Under Section 11 in Certain Cases-Section 13
Section 13(1)(a) — Trust for private religious purposes.
Section 13(1)(b) — Trust established for the benefit of any particular religious community or caste.
Section 13(1)(c) — Income of the trust is applied directly or indirectly for the benefit of persons referred to in sub-section (3).
Section 13(1)(d) — Funds are invested otherwise than in any form or modes specified in 11(5).
Other Points Related to Taxation of Charitable Trust, Society and Section 25 Company
If whole or part of the relevant income is not exempt Under Section 11 or 12 by virtue of provisions contained in clauses 13(1)(c) and (d), the tax will be charged at maximum marginal rate. [Proviso to Section 164].
New Section 115BBC — The anonymous donations as aforesaid will be taxed @ 30% (plus Surcharge and Education Cess), except in the following two situations:
The trust or institution is established wholly for religious purposes; and
If it is for both religious and charitable purposes, unless the donation is specifically for the educational or medical institution run by such trust.
Anonymous donation means any voluntary contribution where a person receiving such donation does not maintain record of identity indicating the name and address of person making such contribution.
Filing of Income Tax return under Section 139(4A) on or before due date i.e. 30th September.
Filing of return by the institutions referred to in clauses 21, 22B, 23A, 23B, sub-clauses a and b of clause 24 of Section 10 and sub-clauses (iv), (v), (vi), (via) of clause 23C [Section 139(4C)].
Application for grant of approval or continuance thereof, wherever required in Section 10(23C), shall be filed by 30th September of the relevant assessment year for the assessment year from which exemption is sought . The Taxation (Amendment) Act, 2006, has replaced the present system of obtaining approval periodically in case the annual receipts are more than Rs. 1 crore by a one-time approval Under Section 10(23C). This approval shall be granted or rejected within a period of 12 months from the end of the month in which such application is received.
Penalty of Rs. 100/- per day for failure to furnish return under sub-sections 4A and 4C of Section 139 [Section 272A(2)]. Similarly penalty of Rs 100 per day can be levied for delay in submitting Audit Report in Form 10B/10BB (272A)(2)(g)
13B [Electoral Trust]: The Finance Act (No. 2) of 2009 has recognized the concept of electoral trust for tax purposes. The salient features are approved by CBDT as per scheme notified by Central Government
Donations received are exempt from tax if:
95% of donations received plus surplus brought forward earlier years is distributed to registered political parties.
Charitable Trust functions as per rules framed by Central Government.
Any charitable trust, desirous of receiving any foreign contribution from a foreign source, is required to obtain registration Under Section. 6(1) of Foreign Contribution (Regulation) Act, 1976 (FCRA). Any such association which is not registered or which has been denied registration, can receive foreign contribution only after obtaining prior permission from Home Ministry of the Central Government under Section 6(1A) of (FCRA) Act.