Income Tax Assessment of Charitable Trust or Religious Institution; Concept of Income, Application, Setting Apart

Concept of Income of a religious or charitable institution
Assessment of income of a religious or charitable trust is different from assessment of other entities. This is due to the provisions of Section 2(24)(ii) under which the voluntary contributions are also taken as income. The trust and religious institution may wholly or partially religious or charitable in nature.

As per section 12 incomes excludes corpus donations from the ambit of income. Any voluntary contribution received with specific direction that they shall form part of the corpus are to be excluded from the definition of the term Income.

The value of any medical or educational service by a trust running an educational institution or a hospital to a person referred to in section 13(3) of the Act shall be deemed to be the income of the trust or institution. Any payment made by the beneficiary shall be deducted from the value of the service arriving at the income.

Application of Income
Expenditure incurred by the Trust or institution by way of application of income in India towards charitable or religious purposes, as per its memorandum or object clause of trust deed is deductible from Income.

Setting apart income
The assessee may set apart and accumulate 15% of income for such application and such amount will also be taken as expenditure of the year. These provisions are also applicable to mutatis-mutandis to a partly religious or charitable trust. Expenditure incurred outside India to promote international welfare in which India is interested is also allowed to be deducted under this section. The word "applied" used in section 11 should be construed widely and not in narrow sense.

Capital Gains of Charitable or Religious organization
Capital gains arising or accruing to a charitable trust or institution is dealt with in Section 11(1A) of the Act. If the whole of the net consideration i.e. consideration minus expenditure incurred in connection with the transfer is applied towards acquiring new capital asset, then the capital gains is taken to have been applied for charitable or religious purposes. If only part of the net consideration is applied for acquiring new asset, then the capital gains to the extent of differences between amount so applied and original cost of the asset taken to be applied for religious or charitable purpose.

Accumulation of Income by Charitable or Religious Institution
A trust or institution is permitted to accumulate or set apart income for specific purpose (s) apart from 15% of income permitted under section 11(1) of the Act.

Business income of a religious or charitable institution
As per section 11(4) of the Income Tax Act 1961 a business as a going concern can be held as property under the Trust. Therefore, a legitimate claim can be made that the income of such business may not be included in the total income of the person receiving such income. In such a case, the assessing officer is required to assess the income of such business under the provisions of the Act. The difference between income so determined and the income shown in accounts shall not be deemed to have been applied towards religious or charitable purpose, but applied to other purposes. The point to be noted is that the income of the business has to be calculated under usual provisions contained in Chapter IV-D and not as per Chapter III of the Act, applicable to income of charitable trusts and institutions.

Incidental Business of Charitable or religious institution
Incidental income which is incidental to attainment of its objects deals in Section 11(4A) of the income Tax Act 1961. The income of such a business will be entitled to exemption u/s 11 if separate books of account are maintained, otherwise, the income will not be entitled to benefit of exemption under section 11 and section 12.