Taxmann's Trusts & NGOs Ready Reckoner by Taxmann

1.6

1.7

1.8

2.1

MEANING OF CHARITABLE PURPOSE

2.6

2.7

2.8

2.9 Medical relief

2.10 Preservation of environment (Including watersheds, forests and wildlife)

2.11 Preservation of monuments or places or objects of artistic or historic interest

2.12 Advancement of any other object of general public utility

2.13 Can the activities be undertaken with a pro t motive?

2.14 Pro t is permissible but pro teering is not

2.15 Management can be private

2.16 There should be intent to do business with continuity

2.17 Section 2(15) does not apply to religious institutions

2.18 Religious festivals and worship of God is charitable in nature

2.19 Promoting the business of members or providing some bene t to members

2.20 Employers’ federation

2.21 Payment clearing body under RBI is charitable organisation

2.22 Cancellation against proviso to section 2(15) is not justi ed

RELIGIOUS & PARTLY RELIGIOUS TRUST

3.1

3.8

3.9

3.10

3.11

3.12

AMENDMENT OF TRUST DEED

4.1 Chapter summary

4.2 Amendment in trust deed by trustees

4.3 No power to revoke lies with the settlor or founder

4.4 Amendment permitted if allowed in the trust deed

4.5 Settlor can clarify his charitable intentions by executing a supplementary deed

4.6 Objects modi ed by recti cation deed shall be invalid unless the original trust deed empowers alteration

4.7 Power to rectify trust deed under section 92 of CPC

4.8 Civil court has limited powers to amend trust deed

4.9 Amendment in trust deed based on the decree passed in civil court is not maintainable

4.10 Section 34 of Indian Trust Act cannot be invoked to amend trust deed

4.11 Trust deed can be amended under section 26 of Speci c Relief Act

4.12 Recti cation order of civil court is binding on income tax department

4.13 Revenue need not be a party to recti cation

4.14 Effect of recti cation is not retrospective

4.15

REGISTRATION SCHEME UNDER SECTION 12AB

5.1 Chapter summary

5.2 Registration required to claim exemption

5.3 No retrospective bene t of registration w.e.f. 1-4-2023

5.4 Text of sections 12A and 12AB

5.5 Overview of registration scheme under section 12AB

5.6 Trust registered under erstwhile section 12A or under section 12AA prior to 1-4-2021 [Section 12A(1)(ac)(i)]

5.7 Provisional registration for rst-time applicants (up to 30-92023) [Section 12A(1)(ac)(vi)] 72

5.8 Provisional and direct regular registration based on the commencement of activities (From 1-10-2023) [Section 12A(1) (ac)(vi)(A) and section 12A(1)(ac)(vi)(B)] 77

5.9 Conversion of provisional registration into regular registration [Section 12A(1)(ac)(iii)] 81

5.10 Trust whose registration has become inoperative due to the rst proviso to section 11(7) [Section 12A(1)(ac)(iv)] 82

5.11 Re-registration for con rming the modi cation of object clause [Section 12A(1)(ac)(v)] 85

5.12 Renewal of regular registration after 5 years [Section 12A(1) (ac)(ii)] 87

5.13 Implications of rejection and cancellation of registration 91

5.14 Deemed registration under section 12AB 92

5.15 Applicability of case laws pertaining to powers of PCIT/CIT 93

5.16 Incomplete or false information in the registration application can invite cancellation 93

5.17 Summary of registration scheme under section 12AB 94

5.18 Power to condone delays in ling registration applications under section 12A by trusts or institutions 96

6 REGISTRATION OF TRUST FORMED WITHOUT AN INSTRUMENT

6.1 Chapter summary 100

6.2 Introduction

6.3 Registration under section 12AB

6.4 Meaning of document evidencing creation of trust

6.5 Oral trust without evidence of creation

SHIFTING OF APPROVAL-BASED EXEMPTION UNDER SECTION 10(23C) TO SECTION 12A/12AB

7.1 Chapter summary

7.2 Background

7.3 Amendments by the Finance (No. 2) Act, 2024 105

I-17

7.4 The rationale behind the amendment

7.5 Analysis of amendments

7.6 Issues in converting provisional approval under section 10(23C) to regular registration under section 12AB 111

7.7 Additional compliances due to the transition from section 10(23C) to section 11 111

7.8 Opportunity for solely educational institutions to shift to section 11 regime 112

7.9 Investment of funds in permissible modes 113

PRACTICAL GUIDE TO REGISTRATION UNDER SECTION 12AB

8.1 Chapter summary

8.2 Introduction

8.3 Activities outside India

8.4 Private management

8.5 Application of income

8.6 Insuf ciency of funds

8.7 Seeking unnecessary details

8.8 Existence of pro t

8.9 Surplus in activities

8.10 Surplus in one year

8.11 Section 13(1)(b) cannot be applied during registration 119

8.12 Section 12AA could not be denied for bogus donations 120

8.13 Registration of assessee trust could not be denied for amended objects 120

8.14 Mutuality should be ignored if charitable activities are predominant 120

8.15 Tribunal can direct the Commissioner for registration 121

8.16 Clause of commercial activity in deed 121

8.17 Being registered as a section 25 company (Section 8 under the Companies Act, 2013) cannot be ignored 122

8.18 CIT does not have the right to give conditional registration 122

8.19 Sections 12AA and 80G permissible with foreigners as directors 123

8.20 Section 12AA registration could not be denied if the trust had charitable-cum-religious activities

8.21 Religious as well as charitable institutions under section 12A

8.22 Trust working for people from a particular region

8.23 Conducting doctors’ conferences in 5-star hotels is not a valid reason to deny registration

8.24 Activities include proposed activities

8.25 Veri cation of genuineness of activity

8.26 Reasonable pro t will not affect the charitable character

8.27 Power of CIT at the time of granting registration

8.28 Sponsorship and advertisement cannot be a reason to deny section 12AB registration

8.29 Building godowns and warehouses is a charitable

8.30 Registration cannot be denied for inability to produce old section 12A certi cate

8.31 CIT(E) should provide speci c ndings to question the genuineness

8.32 Practical guide to registration

8.33 To whom an application is to be made

8.34 Form for making application

8.35 Documents to be attached with the application in Form 10A

8.36 Documents to be attached with Form 10AB

8.37 Mode of ling

8.38 Veri cation of application

8.39 Procedure on receipt of application in Form 10A

8.40 Procedure on receipt of application in Form 10AB

8.41 Conditions to approval order issued in Form 10AC

8.42 Tutorial on e-filing of Form 10A

8.43 Tutorial for e-filing of Form 10AB

CONDITIONS FOR CLAIMING EXEMPTION UNDER SECTIONS 11 AND 12

9.1 Chapter summary

9.2 Introduction and overview of conditions under section 12A(1)

9.3 Registration under section 12AB [Section 12A(1)(ac)]

9.4 Maintenance of books of account [Section 12A(1)(b)(i)]

9.5 Audit of accounts [Section 12A(1)(b)(ii)]

9.6 Filing of return of income [Section 12A(1)(ba)] 155

9.7 Implications of not complying with conditions of section 12A(1) 156

9.8 AO cannot challenge the charitable nature 160

SCOPE OF INCOME UNDER SECTION 11

10.1 Chapter summary 161

10.2 Introduction 163

10.3 Section 11 will not apply where sections 60 to 63 are applicable 164

10.4 Real income in commercial sense or total income under section 2(45) 167

10.5 Income is computed in commercial sense and not as per the ve heads of income under section 14 169

10.6 Term wholly pertains to the objects and not to the property [Section 11(1)(a)] 171

10.7 Section 11(1)(a) does not distinguish between private and public religious trust 171

10.8 Income from capital gains 171

10.9 Voluntary contributions are part of income for the purpose of section 11(1) 172

10.10 Distinction between income from trust property and voluntary contribution 177

10.11 Membership fees/subscriptions cannot be treated as voluntary contributions

10.12 Charity shows and advertisements in souvenirs

10.13 Voluntary contributions to be considered on receipt basis only 179

10.14 Contribution may be either ‘voluntary’ or under a legal or contractual obligation 180

10.15 It is inherent right to receive ‘voluntary contributions’ 180

10.16 Treatment of exempted income 180

10.17 Whether agriculture income should be considered for accumulation of income? 181

10.18 Income/loss from agricultural properties cannot be set-off 181

10.19 Business income from business held as trust [Section 11(4)] 181

10.20 Business income from incidental business activity [Section 11(4A)] 182

10.21 Anonymous donation 182

10.22 Income from trust property vis-à-vis income from organization 184

11 CONCEPT OF INCOME, TOTAL INCOME AND OTHER RECEIPTS

11.1 Chapter summary 186

11.2 Background and context 186

11.3 Relevant sections of the Income-tax Act 187

11.4 Meaning of “total income” under section 11(1) 188

11.5 Determining income for audit requirement under section 12A(1)(b) 189

11.6 “Total income” includes income from business held as property of trust under section 11(4) 190

11.7 “Total income” includes income from incidental business under section 11(4A) 190

11.8 Computing income to select the audit report Form 10B or 10BB, i.e. below or above ve crores 190

11.9 “Aggregate receipts” and “total receipts” under clause (ii) of the proviso to section 2(15) 191

11.10 Less than Rs. 5 crores “aggregate annual receipts” under section 10(23C)(iiiac) or (iiiad) 191

12 APPLICATION OF INCOME

12.1 Chapter summary 193

12.2 Meaning of application 195

12.3 Application of income of the previous year and year of application 196

12.4 Application of income to be allowed on a payment basis 197

12.5 Term ‘applied’ be equated with the term ‘spent’ 197

12.6 Capital expenditure is also treated as an application 199

12.7 Administrative and establishment expenses 203

12.8 Repayment of debt/loan for charitable purposes 205

12.9 Payment of wealth tax and income tax are valid application 208

12.10 Transfer to earmarked funds or reserves for speci c purposes 209

12.11 Remuneration paid to trustees and functionaries 209

12.12 Rent paid to interested person against property 211

12.13 Advance to the supplier cannot be treated as application 212

12.14 Advances for property with adequate documentation 212

12.15 Legal expenses defending functionaries and members 213

12.16 Inter-charity donations 213

12.17 Disallowance under section 40(a)(ia) or 40A(3) per se does not result in tax liability 214

12.18 Ad hoc disallowance of 50% expenditure for particular year 215

12.19 Restriction on application out of corpus 215

12.20 Source of application 216

13 SCHEME OF TAXATION AND COMPUTATION OF INCOME

13.1 Chapter summary

13.2 Overview of the conditions and scheme of taxation

13.3 Conditions to claim exemption

13.4 Computation of income available for application

13.5 Flow chart on scheme of taxation

13.6 Income without the bene t of section 11 and subject to tax

14 CORPUS DONATION

14.1 Chapter summary

14.2 Meaning of corpus

14.3 Written document is necessary

14.4 Corpus donation is not a part of income even under amended section 2(24)(iia) 236

14.5 Treatment of corpus donations received by a trust registered under section 12AA/12AB (before amendment by Finance Act, 2021 i.e., upto A.Y. 2021-22) 238

14.6 Treatment of corpus donations received by section 10(23C) approved institutions (upto A.Y. 2021-22) 238

14.7 Treatment of corpus donations after the amendment by the Finance Act, 2021 (Effective from A.Y. 2022-23)

14.8 Application out of corpus fund

14.9 Treatment of corpus donations by entities registered under section 12AA/12AB or approved under section 10(23C)

14.10 Donations through charity boxes

14.11 Whether corpus donations can be applied for charitable purposes? 245

14.12 Corpus donations with speci c directions received by the unregistered trust

14.13 Interest on corpus donations will also be a part of corpus

14.14 Speci c direction can be on identical letters

14.15 Corpus can be applied for the objects of the trust

14.16 No separate letter is required if the trust deed provides to treat the donation as a corpus

14.17 Donations towards corpus

14.18 Contributions towards infrastructure fund

14.19 Voluntary contribution for renovation and repair of religious institutions

INTER-CHARITY DONATIONS

15.1 Chapter summary

15.2 Introduction

15.3 Treatment of inter-charity donations

15.4 Inter-charity donations are at par with direct implementation

15.5 Inter-charity donations by parent to subsidiary

15.6 Organisations need not be directly engaged in a particular purpose

15.7 Right to pursue incidental objects

15.8 Even donating entire income is valid application of income

15.9 Charitable trust can be created for support functions 260

15.10 Spending by donee trust in the year of receipt is not a relevant factor

15.11 Inter-charity donations to entity not having similar objectives

PROJECT GRANTS WHETHER INCOME

16.1 Chapter summary

16.2 Introduction

16.3 Whether project grant is income?

16.4 Whether project grant is voluntary contribution?

16.5 Applicability of section 2(24)(xviii) to project grants

16.6 Legal obligation is not income

16.7 Case laws treating project grants as legal obligations and not voluntary contributions

16.8 Case laws where project grants are held as voluntary contributions

16.9 Voluntary contribution with a speci c purpose is not income

16.10 Donation for project assets is not a voluntary contribution

16.11 Funds received under local act for statutory purpose is not an income

16.12 Interest income on a project grant is a part of income 272

16.13 Donations for a speci c project should be treated as corpus donation 273

16.14 Restricted grants cannot be taxed in the absence of section 12AA registration 273

16.15 Voluntary contribution with speci c direction is not income

16.16 Concluding remarks

IMPLICATIONS

OF SECTION 2(24)(xviii) ON GRANTS AND CORPUS DONATIONS

17.1 Chapter summary

17.2 Introduction

17.3 Questions arising due to the insertion of sub-clause (xviii) section 2(24)

17.4 Does the principle of ‘ejusdem generis’ apply to section 2(24) (xviii)? 278

17.5 Explanatory notes to the Finance Act, 2015 280

17.6 ICDS-VII is con ned only to government grants

17.7 Explanatory notes to the Finance Act, 2016

17.8 Section 2(24)(iia) applies only to ‘trusts’, therefore section 2(24)(xviii) was inserted to cover government grant to other recipients 283

17.9 Understanding the context of government grants and legal obligations 283

17.10 Will corpus donations be considered as part of income after 1-4-2016? 285

17.11 Subsidies are no longer capital receipts 285

IMPLICATIONS OF TDS AGAINST GRANT RECEIPT

18.1 Chapter summary

18.2 Issue and background

18.3 Legal background

18.4 New reporting mechanism applicable from Assessment Year 2023-24 289

18.5 Deduction of TDS does not change the nature of receipt 290

18.6 Concluding remarks 292 19

TREATMENT OF DONATIONS IN KIND

19.1 Chapter summary

19.2 Introduction

19.3 Whether donation in kind is treated as income under section 11? 295

19.4 Gold and jewellery received as donation is a capital receipt 296

19.5 Applicability of circular No. 580, dated 14-9-1990 296

19.6 Applicability of the above principles to trusts registered under section 12AB 297

19.7 Treatment of donations in kind of the assets in the permissible modes under section 11(5) 298

19.8 Treatment of donations in kind of assets in impermissible modes under section 11(5) 298

19.9 Interplay of section 11(1)(d) and exception to section 13(1)(d) 299

19.10 Donations in kind are not eligible for deduction under section 80G 299

20.1 Chapter

20.2 Introduction

TREATMENT OF CAPITAL GAINS

20.3 Insertion of section 11(1A)

20.4 Judicial precedence explaining the computation under section 11(1A)

20.5 Understanding computing capital gains with and without section 11(1A)

20.6 Analysis of provisions of capital gain applicable to a charitable trust 310

20.7 Quantum of gains deemed to have been applied

20.8 Whether the bene t of indexation is allowed?

20.9 Can capital gains be applied for charitable purposes under section 11(1A)?

20.10 Time limit for reinvestment

20.11 Accumulation of capital gains under section 11(2)

20.12 Investment of capital gains in xed deposits with the bank

20.13 Investment of capital gains in deposits with public sector companies

20.14 Spending capital gains in acquiring english mortgage of land

20.15 Investment should be made after receipt and not transfer

20.16 Investment in another capital assets shall be eligible to the extent of advance amount received on sale of assets

20.17 Advance received in earlier period can be invested

20.18 Time limit for holding the new capital asset

20.19 Whether section 50C applies to charitable trust?

21 TREATMENT OF DEPRECIATION

21.1 Chapter summary

21.3 Allowability of depreciation under section 11(6)

21.4 Section 11(6) cannot be applied retrospectively

21.5 Can a part of the asset be claimed as an application under section 11(6)?

21.6 Rate of depreciation and applicability of section 32 323

21.7 Depreciation beyond 85% is academic in nature 324

21.8 Depreciation on assets created out of legal obligations and restricted grants 324

21.9 Allowability of depreciation where the cost of acquisition is nil325

21.10 Judicial precedence on the allowability of double deduction before 1-4-2015 325

21.11 Claim of depreciation, even though the application is allowed on a cash basis 325

22 BUSINESS ACTIVITY UNDER SECTION 2(15)

22.1 Chapter summary 327

22.2 Proviso to section 2(15) for business income 329

22.3 Section 2(15) and the law regarding business activity for GPU as well as other charities 329

22.4 Intent and purpose of proviso to section 2(15) for the GPU category 332

22.5 Proviso to section 2(15) considering the Supreme Court ruling in the case of Ahmedabad Urban Development Authority 333

22.6 Conditions for business under section 2(15) for GPU 333

22.7 Four categories of business after the ruling of Ahmedabad Urban Development Authority 334

22.8 Implications on violation of proviso to section 2(15) 336

22.9 Is proviso to section 2(15) is violative of Article 14 338

22.10 Limit of 20% of the total receipts 339

22.11 Fundraising whether a business activity 340

22.12 Membership fees and ‘business’ 342

22.13 Development bodies and entities doing statutory functions 342

22.14 Barcoding is not business 342

INCIDENTAL BUSINESS UNDER SECTION 11(4A) AND BUSINESS HELD AS TRUST PROPERTY UNDER SECTION 11(4)

23.1 Chapter summary

23.2 Business held under trust under section 11(4)

23.3 Incidental business activities under section 11(4A)

23.4 Meaning of business incidental to the attainment of objectives 352

23.5 Charging fee signi cantly above cost will be treated as business 354

23.6 Pharmacy in a hospital is an integral and non-incidental business activity

23.7 Business activity as a part of charitable activity

23.8 Income under section 11(4A) shall be treated at par with income under section 11(1) 356

23.9 Maintaining separate books of account is mandatory 356

23.10 Rental income from information technology parks 356

23.11 Whether section 11(4A) restricts power under section 11(4)? 357

23.12 Inadvertent deduction of TDS will not change the nature of grant 358

23.13 Exhibitions participated by members of trade body is exempt 358

23.14 Commercial services to unrelated parties is not incidental business 358

Statutory accumulation upto 15%

24.4 Deemed application or option to spend in subsequent year or the year of receipt 362

24.5 Accumulation of income for ve years 365

24.6 Objects of accumulation should not be vague and need to be precise 370

24.7 Modi cations of objects speci ed in Form 10 374

24.8 Five-year accumulation shall begin from the year succeeding the previous year

24.9 Injunction by court shall be excluded while computing ve years

24.10 Accumulation under section 11(2) should not be done on regular basis

24.11 Can the arbitrary amount be accumulated under section 11(2)

24.12 Modes of investment of accumulated income

24.13 Effect of non or improper utilisation of income accumulated under section 11(2)

24.14 Treatment of deemed income under section 11(3)

24.15 Year of taxability of unutilised accumulated income

24.16 Condonation for delayed ling of Form 9A and Form 10

24.17 Option under section 11(2) and Explanation 2 to section 11(1) are not mutually exclusive

24.18 No discretionary powers to the Assessing Of cer

24.19 Practical guide to file Form 9A

24.20 Practical guide to le Form 10

SPECIFIED MODES OF INVESTMENT OR DEPOSIT UNDER SECTION 11(5)

25.1 Chapter

25.2 Requirement of investment in speci ed modes

25.3 Speci ed modes of investments

25.4 Meaning of ‘investment’ in the context of Income-tax Act

25.5 Whether speci ed modes of investment include investment in equity shares of a company?

25.6 Whether investment in shares of section 8 company constitute speci ed mode? 397

25.7 Whether bank balance constitutes speci ed mode of investment? 398

25.8 Whether immovable property should be considered as investment or claimed as application of income? 398

25.9 Investment in perpetual bonds is permissible under section 11(5)(vii)

25.10 Consequences of investing in impermissible modes 399

SET-OFF & CARRY FORWARD OF PAST DEFICIT

26.1 Chapter summary 400

26.2 Introduction 401

26.3 Controversy in set-off & carry forward of de cit 401

26.4 Set-off of de cit against income of a subsequent year (Prior to Amendment by Finance Act, 2021) 402

26.5 Set-off & carry forward of past de cit after amendment by Finance Act, 2021 405

26.6 Importance of source of de cit after the amendment by the Finance Act, 2021 406

SOURCE OF APPLICATION OF INCOME

27.1 Chapter summary 408

27.2 Introduction 409

27.3 Excess of the application over income 409

27.4 Amendment by the Finance Act, 2021 410

27.5 Importance of determining sources of de cit 411

27.6 Application out of the loans & borrowings to be allowed at time of repayment 411

27.7 Application out of the corpus donation under section 11(1)(d) to be allowed at the time of restoration of corpus 413

27.8 Application out of accumulated funds under section 11(2) 415

27.9 Application out of funds deemed to be applied in any preceding year 416

27.10 Application out of earlier years 15% accumulated or set apart funds 416

27.11 Application out of any other income 416

ANONYMOUS DONATIONS

28.1 Chapter summary 418

28.2 Introduction 420

28.3 Text of section 115BBC 420

28.4 What are anonymous donations? 421

28.5 Taxability of anonymous donations 423

28.6 Exclusion from taxability 424

28.7 CBDT’s Explanatory Circular No. 5/2010, dated 3-6-2010 on section 115BBC 425

28.8 Scheme of taxation of anonymous donations 426

28.9 Whether anonymous donations in the nature of project donations are hit by section 115BBC? 428

28.10 If section 13 is violated, whether anonymous donations will be taxed again? 429

28.11 Exploring the capacity of the donor 429

28.12 Unexplained payments out of unaccounted donations 430

28.13 Anonymous donation is different from unaccounted donations 430

28.14 Anonymous donation can attract Money Laundering Act 431

28.15 Anonymous donations and applicability of section 68 431

28.16 Can the provisions of sections 68, 69, 69A to 69C invoked? 432

28.17 Only donations included in the income & expenditure account is out of the purview of section 68 433

28.18 Assessing Of cer cannot declare a donation as anonymous by merely examining a few donors - Cross-examination is also necessary 434

28.19 Burden of proof is entirely on the assessee to establish the identity of the donors 434

28.20 Amount received from the sale of land over and above the registration value 434

28.21 Small collection through donation boxes is not covered 434

28.22 Af davit and video footage admissible as evidence for donation 435

28.23 Donation from companies struck off by ROC 435

28.24 Detailed list of donors along with their complete addresses would be suf cient 435

PENAL TAXATION OF NGOs

29.1 Chapter summary 436

29.2 Introduction 437

29.3 Implications of various non-compliances 438

29.4 Incomes subject to tax under section 115BBI [From AY 2023-24] 439

29.5 Other non-compliances are subject to tax under section 164(2) 446

29.6 Withdrawal of bene ts of sections 11 and 12 without cancellation of registration 447

29.7 Non-compliances subject to section 13(10) and 13(11) 448

29.8 Circumstances where registration status is lost and the assessee is subject to ve heads of income 451

29.9 Levy of accreted tax for not getting re-registration, renewal of registration or conversion of provisional registration to the regular registration 452

29.10 Summary of penal tax rates 453 30

CANCELLATION OF REGISTRATION

30.1 Chapter summary 455

30.2 Overview of the powers of CIT for cancellation of registration 457

30.3 Cancellation of registration before amendment by Finance Act, 2022 (Applicable upto 31-3-2022) 458

30.4 Cancellation of registration after amendment by Finance Act, 2022 (Applicable from 1-4-2022) 465

30.5 Consequences on cancellation of registration 469

30.6 Appeal against the order of cancellation 471

30.7 Whether non-renewal of registration under section 12AB shall result in cancellation? 471

30.8 Whether rejection of renewal application by CIT shall automatically result in cancellation? 471

30.9 Difference between renewal and cancellation process 472

30.10 Whether giving incomplete or false information in the registration application can invite cancellation? 473

30.11 Power of CIT for cancellation of registration under section 12AB shall be subject to the existing judicial precedents 473

30.12 Cancellation based on section 2(15) read with section 13(8) not justi ed 474

30.13 Order under section 144 and cancellation is justi ed if activity not according to objects 475

30.14 Rejection under section 10(23C)(vi) cannot be a basis for cancelling section 12AA 475

30.15 Even high court does not have the power to issue cancellation related directions under section 12AA(3) 475

30.16 Onus is on revenue to justify cancellation 476

30.17 Cancellation under section 12AA(3) if the nature is amended 476

30.18 Passing references not enough to invoke section 12AA(3) and section 13(1)(c) 477

30.19 Capitation fee cannot be reason for cancellation under section 12AA(3) 477

30.20 Cancellation under section 12AA(3) of unrecognized educational institutions 478

30.21 Development authority having a pro t motive was liable to lose registration 478

30.22 Matter restored back cannot be rejected by CIT again under section 12AA(3) 478

30.23 Trust registration cannot be cancelled for unexplained expenditure 478

30.24 Genuineness cannot be revisited for cancellation - Purchase and sale of books 479

30.25 Cancellation under section 12AA(3) only if the organisation is not found to be genuine 479

30.26 Cricket association doing commercial activities 480

30.27 Revoking section 12AA merely based on the ndings of the search is not permissible 480

30.28 Cancellation cannot be made only if some commercial activities are noticed 480

30.29 Cancellation cannot be made on general observation 481

30.30 CIT has to establish non-genuineness for cancellation 481

30.31 Cancellation can only be based on the conditions under section 12AA(3) 481

30.32 Section 12A cannot be denied merely because it is otherwise eligible under section 10(23C) 482

30.33 No cancellation if expenditure beyond objects 482

30.34 No cancellation where there was no allegation that assessee was carrying sale of milk and milk products with sole motive of earning pro t 482

30.35 Section 12AA registration could not be cancelled for bogus donation 482

30.36 Cancellation of approval is not permissible when the matter is pending before the settlement commission 483

30.37 Activities outside india cannot be a reason for cancellation 483

30.38 Cancellation on the basis of reasonable doubt not sustainable 483

30.39 Dharamshala used for commercial purposes 483

30.40 Cancellation should be based on speci c ndings 484

30.41 Condonation of delay to be provided to old institutions 484

30.42 Non-deduction of TDS will not result in refusal 484

31 MERGER OF CHARITABLE TRUSTS & INSTITUTIONS

31.1 Introduction 485

31.2 Amendments by the Finance (No. 2) Act, 2024 485

31.3 Analysis of the amendment 485

32 TAX ON ACCRETED INCOME OF NGOs

32.1

32.2

32.3

32.4

32.5

32.6 Computation of FMV of

32.7 Calculation of total liability

32.8 Speci ed date 493

32.9 Rate of accreted tax 493

32.10 Meaning of MMR 493

32.11 Payment of tax under section 115TD(5) 494

32.12 When to pay tax on accreted income? 494

32.13 Interest on late payment

32.14 Assessee in default

32.15 Corpus fund is normally not created out of income

32.16 Trust may continue to be a valid legal obligation even after cancellation 496

32.17 Circular on no cancellation under section 143(3) in the light of section 115TD 496

32.18 Any cancellation should be strictly as per section 12AA(3)/ 12AB(4) 497

32.19 Other fundamental and prima facie issues arising out of ‘accreted income’ 497

TAXATION WHEN REGISTRATION STATUS IS LOST

33.1 Chapter summary 499

33.2 Status of charitable organisations under income tax 500

33.3 Applicable tax rates in the absence of or on withdrawal of registration under section 12AB 502

33.4 Non-applicability of section 167B 502

33.5 Expenses on charitable activities are admissible under section 57(iii) even for entities not registered under section 12AB 503

34 APPROVAL UNDER SECTION 80G

34.1 Chapter summary 505

34.2 Introduction 507

34.3 Conditions to be ful lled for approval under section 80G(2)(a)(iv) 507

34.4 Statement of donations 510

34.5 Donations in kind 511

34.6 Cash donations 511

34.7 Amount of deduction under section 80G 512

34.8 Process of approval under section 80G [Effective from 01-04-2021] 514

34.9 Summary of approval scheme 521

PRACTICAL GUIDE TO APPROVAL UNDER SECTION 80G

35.1 Chapter summary 524

35.2 Power of CIT at the time of processing of application under section 80G 524

35.3 Institutions or funds approved under section 10(23C) does not automatically recognised under section 80G 525

35.4 CIT is not empowered to seek explanation regarding donations 525

35.5 Failure to spend 85% will not affect section 80G 525

35.6 Nature of activities was not required to be examined for approval under section 80G(5) 525

35.7 Section 80G approval cannot be denied on the ground of change in name of trust 526

35.8 Inter-charity donation cannot be ground to reject application for approval under section 80G 526

35.9 Trust deed having a clause violative of section 80G(5)(ii) 526

35.10 No discretionary power to reject section 80G application 526

35.11 Once registration under section 12A is granted then the section 80G approval cannot be denied 526

35.12 Registration under section 12AA does not guarantee section 80G approval as a matter of right 527

35.13 Expression ‘total income’ does not mean ‘income’ as it appears in section 11 527

35.14 CIT is not empowered to see violation of section 13 during section 80G renewal 528

35.15 Section 80G shall be available for restricted grants which are not subject to 85% application 528

35.16 Section 80G cannot be denied based on huge surplus income 529

35.17 Amending object clause to con ne activities to India only 529

35.18 Negligible activity cannot be a reason to reject section 80G application 529

35.19 Bogus donation cannot be reason for section 80G cancellation 529

35.20 Scope of enquiry during approval process is limited to eligibility only 530

35.21 Approval cannot be denied on mere technicalities 530

35.22 Ful lment of conditions post- ling of the application 530

35.23 Mere donation to another institution cannot be termed as religious activity 530

35.24 Renewal can be denied if the trust looks religious 531

35.25 It is necessary to ascertain expenditure on religious activities before rejection section 80G renewal application 531

35.26 Supreme court rules facts must be considered to invoke section 80G(5B) 531

35.27 Approval cannot be denied merely because some clauses of trust deed are religious 532

35.28 Approval cannot be granted if established for the bene t of a particular community 532

35.29 Availability of suf cient funds 532

35.30 Application of income outside India 532

35.31 Practical guide for approval under section 80G 533

35.32 To whom an application is to be made 533

35.33 Form for making application 533

35.34 Documents to be attached with Form 10A 534

35.35 Documents to be attached with Form 10AB 535

35.36 Mode of ling 536

35.37 Veri cation of form 536

35.38 Procedure on receipt of application in Form 10A 536

35.39 Procedure on receipt of application in Form 10AB 537

35.40 Conditions to approval order issued in Form 10AC 537

35.41 Tutorial for e-filing of Form 10A 538

35.42 Tutorial for e-filing of Form 10AB 543

35.43 Expenses on religious purposes 547

PRACTICAL GUIDE TO FURNISH STATEMENT OF DONATIONS IN FORM 10BD

36.1 Chapter summary 548

36.2 Introduction 549

36.3 Requirement to furnish statement of donations 549

36.4 Requirement to issue a certi cate of donations 550

36.5 Mode of donation to claim benefit under section 80G 551

36.6 Consequences of delay or non-compliance 551

36.7 Salient features of Rule 18AB 551

36.8 Frequently Asked Questions (FAQs) 552

36.9 Steps to submit Form 10BD at the e- ling portal 560

36.10 Steps to download Form 10BE from the e- ling portal 564

TAX IMPLICATIONS OF CSR EXPENDITURE

37.1 Chapter summary 566

37.2 Introduction 567

37.3 Status before Companies Act, 2013 and Finance Act, 2014 568

37.4 Status of allowability of CSR expenditures after Finance Act, 2014 568

37.5 Overview of the tax implications of CSR expenditure after Finance Act, 2014 573

37.6 Overview of various provisions under which CSR expenditure can be claimed 574

37.7 Treatment of income made from CSR activities 576

37.8 CSR expenses and MAT 576

37.9 Expenses in excess of CSR statutory limit or which do not qualify to be CSR expenses under section 135 of the Companies Act 576

37.10 Claiming expenses not covered as CSR expenses under section 37 577

37.11 CSR as business expenditure under section 37 577

37.12 Definition of CSR 581

37.13 Registration of undertaking entities 582

37.14 Filing of report on CSR 583

37.15 CSR funds can be used to ght corona virus 583

37.16 Frequently asked questions on CSR 586

38 INTERNATIONAL ACTIVITIES OF NGOs OUTSIDE INDIA

38.1 Chapter summary 604

38.2 Overview of legal issues and provisions for trusts registered under section 12AB 604

38.3 Implications of expenditure being incurred in violation of section 11(1)(c) 605

38.4 Whether activities outside India result in forfeiture of the entire income? 605

38.5 Activities outside India cannot be a reason to reject an application for registration 606

38.6 Enabling powers in the constitution document to work outside India 606

38.7 Whether having a clause of activities outside India in the trust deed invite forfeiture? 606

38.8 Income should not only be applied for charitable purposes but the application should also be in India 607

38.9 Supporting students to study outside India 608

38.10 Expenditure incurred in India for activities outside India but serving the charitable purpose in India is not covered under section 11(1)(c) 608

38.11 Situs of expenditure and not where the places where the purposes were carried out is relevant 609

38.12 Holding conferences outside India 609

38.13 Activities outside India by institutions approved under section 10(23C) 609

38.14 Implication if any activity is outside India for a section 10(23C) entity 610

39 ANALYSIS OF THE APPLICABILITY OF TAX AUDIT UNDER SECTION 44AB

39.1 Do the charitable trusts need to le an audit report in Form 3CA/3CB-3CD? 611

39.2 Controversy on the applicability of tax audit 611

39.3 Analysis of the applicability of tax audit 614

39.4 What are the implications of point 9 in the notes to Form 10B, which requires the uploading of the audit report in Form 3CA or 3CB? 623

39.5 Conclusion 623

REQUIREMENT OF AUDIT UNDER SECTION 12A AND SECTION 10(23C)

40.1 Chapter summary 625

40.2 Requirement of audit of accounts 625

40.3 Time limit to obtain and furnish the audit report 626

40.4 Applicability of audit to section 10(23C) institutions 627

40.5 Applicability of audit to non-approval category of section 10(23C) institutions 627

40.6 Monetary limit for audit 628

40.7 Objective of audit under the Income-tax Act 628

40.8 Form of audit report (upto A.Y. 2022-23) 629

40.9 Form of audit report (from A.Y. 2023-24) 629

40.10 Who is required to le an audit report in Form 10B? 629

40.11 Who is required to le an audit report in Form 10BB? 630

40.12 De nition of foreign contribution 630

MAINTENANCE OF BOOKS OF ACCOUNT

41.1 Chapter summary 632

41.2 Inherent requirement to maintain books of account 632

41.3 Insertion of explicit provision by the Finance Act, 2022 634

41.4 Condition of the requirement to maintain books of account 634

41.5 Applicable if total income exceeds Rs. 2,50,000 635

41.6 Meaning of books of account 635

41.7 List of books and documents to be maintained by trust or institution 635

41.8 Manner of keeping books of account 642

41.9 Place of keeping books of account 642

41.10 Period for which books are to be maintained 642

RAMIFICATIONS OF NOT OBTAINING AUDIT REPORT AND NON-MAINTENANCE OF BOOKS OF ACCOUNT

42.1 Chapter summary 643

42.2 Whether submission of the audit report is directory or mandatory? 643

42.3 Case laws regarding the delayed ling of audit report [Not relevant after enactment of section 13(10) and 13(11)] 644

42.4 If the conditions for availing the bene t of exemption are substantially satis ed, it could not be denied exemption merely on the bar of limitation in the furnishing audit report in Form No. 10B 645

42.5 Delay in obtaining/submission of audit report upto AY 2022-23 646

42.6 Delay in obtaining/submission of audit report w.e.f. AY 2023-24 646

42.7 Special provisions to compute income (w.e.f. AY 2023-24) 646

42.8 Reporting in clause 39 of annexure to Form 10B 647

42.9 Reporting in Form ITR-7 647

42.10 Computation of income as per section 13(10) & 13(11) 648

42.11 Condonation of delay in filing Form 10B/10BB 649

43 OVERVIEW OF FORM 10B AND FORM 10BB

43.1 Chapter summary 651

43.2 Forms to le audit report 652

43.3 Who is required to le an audit report in Form 10BB? 652

43.4 Who is required to le an audit report in Form 10B? 652

43.5 Audit report and its parts 653

43.6 Annexure to Form 10BB 655

43.7 Annexure to Form 10B 662

43.8 Additional clauses in Form 10B 662

43.9 Additional details required in Form 10B for clauses that are common to both Form 10B and Form 10BB 667

43.10 Notes to Form 10BB and Form 10B 670

44 TUTORIAL ON E-FILING OF FORM 10BB

44.1 Introduction 671

44.2 Tutorial on adding the CA to the e- ling portal (Assessee login) 672

44.3 Tutorial on assigning Form 10BB to the CA (Assessee login) 674

44.4 Tutorial on acceptance of assignment by CA (CA login) 676

44.5 Tutorial on uploading/submission of Form 10BB by CA (CA login) 678

44.6 Tutorial on acceptance of Form 10BB by auditee (assessee login) 682 45

TUTORIAL ON E-FILING OF FORM 10B

45.1 Introduction 683

45.2 Tutorial on adding the CA to the e- ling portal (Assessee login) 684

45.3 Tutorial on Assigning Form 10B to the CA (Assessee login) 686

45.4 Tutorial on Acceptance of Assignment by CA (CA login) 688

45.5 Tutorial on uploading/submission of Form 10B by CA (CA login) 690

45.6 Tutorial on acceptance of Form 10B by Auditee (Assessee login) 693

46 REQUIREMENT TO SUBMIT ITR UNDER SECTIONS 12A AND 10(23C)

46.1 Chapter summary 694

46.2 Submission of ITR is one of the conditions to claim the bene t of exemption 695

46.3 Requirement to submit ITR 696

46.4 Time limit to file ITR 696

46.5 Which ITR form is to be used? 697

46.6 E-filing of ITR 699

46.7 Consequences of delay in furnishing of ITR, i.e., submission of return after the due date but before the time allowed under section 139(4) 699

46.8 Belated return of income 701

46.9 Revised return of income 701

46.10 Can the bene t of exemption be claimed by ling an updated return? 702

46.11 Should the updated return be subject to section 13(10) and 13(11)? 703

46.12 Whether assessment made due to non-furnishing of return shall be subject to section 13(10) & 13(11)? 704

46.13 Filing of ITR under section 148 704

47 A PRACTICAL GUIDE TO FILE FORM ITR-7

47.1 Chapter summary 707

47.2 Introduction 707

47.3 Key changes introduced in Form ITR-7 applicable for AY 2024-25 708

47.4 Key changes introduced in Form ITR-7 applicable for AY 2023-24 714

47.5 Relevant schedules of Form ITR-7 718

47.6 Manner of filing ITR 720

47.7 Verification of ITR 721

47.8 Processing of ITR 721

47.9 Defective ITR 722

47.10 Common mistakes while ling of ITR-7 722

FORFEITURE OF VARIOUS EXEMPTIONS UNDER SECTION 13

48.1 Chapter summary 725

48.2 Introduction 726

48.3 Scope of section 13 727

48.4 Income applied for private religious purposes [Section 13(1)(a)] 728

48.5 Bene t of section 11 is not available against the taxable portion of anonymous donation [Section 13(7)] 730

48.6 Violation of proviso to section 2(15) [Section 13(8)] 731

48.7 Accumulation of income and non-furnishing of Form 10 and return of income by due date [Section 13(9)] 733

FORFEITURE - CHARITABLE ACTIVITY FOR A PARTICULAR RELIGIOUS COMMUNITY OR CASTE

49.1 Chapter summary 735

49.2 Income applied for a particular religious community or caste 736

49.3 Provision applies only to charitable organisations 736

49.4 Only organisations created on or after 1-4-1962 are covered 737

49.5 Organisation formed for the bene t of backward caste(s) 738

49.6 Applicability of section 13(1)(b) on charitable-cum-religious organisations 738

49.7 Charitable organisations preaching christianity do not violate section 13(1)(b) 739

49.8 Rejection of registration to religious trust pursuant to section 13(1)(b) is not tenable 740

49.9 Religious conference is not necessarily a religious activity 741

49.10 Trust created for the linguistic group will not be hit by section 13(1)(b) 741

49.11 Trust deed directing to work for speci c community 741

49.12 Minority status to an institution does not mean established for the particular religious community 742

49.13 Charitable-cum-religious organisations cannot work only for one community 742

FORFEITURE - BENEFIT TO INTERESTED PERSONS

50.1 Chapter summary 744

50.2 Bene t to interested persons under section 13(1)(c) 745

50.3 Bene t implies something which is not ‘due’ 745

50.4 Exemption to be denied to the extent of violation 745

50.5 Penalty for passing unreasonable bene t 746

50.6 Special rate for taxation of income 747

50.7 Tax rate under section 115BBI or section 164(2) 747

50.8 Cancellation on violation of section 13(1)(c) 748

50.9 Meaning of interested persons 748

50.10 When is an interested person deemed to be bene ted? 749

50.11 If two charitable organisations have common board members 749

50.12 Payment to another charitable organisation with common trustees 750

50.13 Being director is not a substantial interest 750

50.14 Being a chairman in a company does not amount to holding a ‘substantial interest’ 750

50.15 Categories of bene ts under section 13(2) are not exhaustive 751

50.16 Relief from applicability of section 13(1)(c), if investment is less than 5% 751

50.17 Corollary to section 13(1)(c) is section 12(2) 751

50.18 Onus is on the revenue to prove that bene t is provided to interested persons 752

50.19 Adverse nding under section 13 needs to be duly recorded and substantiated 752

50.20 Meaning of the term bene t for section 13(1)(c) 752

50.21 Meaning of adequate security 753

50.22 Meaning of adequate rate of interest 753

50.23 Section 13(2)(a) vis-à-vis section 13(2)(h) 753

50.24 Investment is totally prohibited 754

50.25 Judicial precedence on reasonable remuneration under section 13(1)(c) 754

50.26 Rent paid to the interested person against property 756

50.27 Telecast expenditure on the interested person is not a violation 757

50.28 Lending is not prohibited 757

50.29 Vehicle in the name of the president of the society 758

50.30 Pledge of investment and diversion of funds 758

50.31 Commercial contract to managing trustee is not a violation 759

50.32 If the founder is convicted of criminal offence 759

50.33 Expenditure on guest house allegedly used by an interested person 759

50.34 Money utilised to meet the medical emergency of a trustee 760

50.35 Expenditure on spouse of functionaries is not permissible 760

50.36 Members of the housing society cannot be treated as interested persons 760

50.37 Repair to building belonging to trustees 760

50.38 Unjusti ed advance to trustees 761

50.39 Adequacy of rent received by trust 761

50.40 Advertisement expenses paid to rms of trustees 761

50.41 Luxury cars and non-maintenance of log sheets 761

50.42 Remunerations to trustees in accordance with pay scale of professors 761

50.43 Lease rent to companies in the same group 762

50.44 Payment of salary made since inception of trust 762

50.45 Bene t is to be established before invoking section 13(1)(c) 762

50.46 Payment of remuneration to managing trustee is not at all unusual 762

50.47 Small expenses towards commemoration of deceased founder to be allowed 762

50.48 Failure to explain advance to speci ed persons 763 51

FORFEITURE – VIOLATION REGARDING THE INVESTMENT OF FUNDS UNDER SECTION 13(1)(d)

51.1 Chapter summary 764

51.2 Investments in an unspeci ed manner 766

51.3 Taxability of income earned on impermissible investment 767

51.4 Special rate for taxation of income 767

51.5 Tax rate under section 115BBI or section 164(2) 768

51.6 Cancellation on violation of section 13(1)(d) 768

51.7 Sections 13(1)(d) and 11(5) deal only with investments 768

51.8 Investment in debenture includes bonds 769

51.9 Advance is not an investment 769

51.10 Less than 5 per cent investment in concerns of interested persons 769

51.11 Section 13(1)(d) violation cannot be invoked if the trust was restrained from converting shares 769

51.12 Prior to amendment by Finance Act, 2022, even only the income violative of section 13(1)(d) could be brought to tax 770

51.13 Shares with no actual investment, section 13(1)(d)/13(1)(d)(iii) are not attracted 771

51.14 Money seized from the investment from the residence of the Chairman 771

51.15 Temporary loan to another society is not an investment or deposit 772

51.16 Year of default and other issue pertaining to section 13(1)(d) read with proviso (iia) 772

51.17 Insertion of clause (iv) in the rst proviso to section 13(1)(d) due to shifting of sections 10(23C) to 12A 776

52 INVESTMENT IN SECTION 8 COMPANY AND INCUBATEE COMPANIES

52.1 Chapter summary 779

52.2 Meaning of ‘investment’ in the context of Income-tax Act 780

52.3 Shares in section 8 company cannot be treated as investment 781

52.4 Investment by the incubator in incubatee company 782

53 OVERVIEW AND FUNDAMENTAL CONCEPTS OF EXEMPTION SCHEME UNDER SECTION 10(23C)

53.1 Introduction 784

53.2 Exempted funds and institutions under section 10(23C) 784

53.3 Scheme of exemption under section 10(23C) 785

53.4 Various terms and conditions under section 10(23C) 790

53.5 ‘Solely’ in section 10(23C)(vi) means exclusively; pro t-oriented institutions can’t claim exemption 790

53.6 Can a ‘solely’ educational institution have other ‘charitable activity’ 791

53.7 Meaning of the term ‘education’ reaf rmed 792

53.8 Can a ‘solely’ educational institution have a pro t-making activity 793

53.9 ‘Solely’ means exclusively, but registration in India is not mandatory 794

53.10 Even new organisations in the process of starting can claim an exemption 794

53.11 Religious teaching in a seminary is education under section 10(23C)(iiiad) 795

53.12 What is the meaning of ‘substantially nanced by government’? 795

53.13 Substantially nanced under section 10(23C)(iiiab) is qua total receipts and not qua total expenditure 796

53.14 Fees collected are not to be considered as government funding 797

54 GOVERNMENT-FUNDED AND UPTO RS. 5 CRORE ANNUAL RECEIPTS INSTITUTIONS

54.1 Chapter summary 799

54.2 Introduction 800

54.3 Scheme of taxation and conditions for exemptions 800

54.4 Threshold limit for educational institutions and hospitals (increased from Rs. 1 crore to 5 crore by the Finance Act, 2021) 802

54.5 Meaning of ‘aggregate annual receipts’ 802

54.6 Rs. 5 crore limits to be applied in aggregate and not per institution 803

54.7 Limit of Rs. 1 crore/5 crore shall include additions under section 10(23C)(iiiad) 804

54.8 Section 12AA can be availed even if organisation is exempt under section 10(23C)(iiiad) 805

54.9 The 50% government funding requirement is prospective in nature 805

55 EXEMPTION AND CONDITIONS FOR APPROVAL UNDER SECTION 10(23C

)

55.1 Chapter summary 806

55.2 Approval and conditions 809

55.3 Text of section 10(23C) 809

55.4 Computation of income 827

55.5 Application of income 828

55.6 Minimum application, statutory accumulation, and ve years accumulation 830

55.7 Condition to maintain prescribed books of account 833

55.8 Condition to get books of account audited 833

55.9 Condition to le return of income 834

55.10 Investment of funds in speci ed modes 836

55.11 Pro t and gains from business 837

55.12 Computation of income in certain situations 838

55.13 Restriction on simultaneous bene t under section 10(46)/10(46A) 839

56 APPROVAL AND CANCELLATION UNDER SECTION 10(23C

)

56.1 Chapter at a glance 841

56.2 Introduction 842

56.3 Institutions under the approval category 843

56.4 Relevant text of section 10(23C) dealing with approval 844

56.5 Analysis of the approval scheme w.e.f. 1-4-2021 846

56.6 Appeal against the rejection of approval application 856

56.7 Summary of new approval scheme 856

56.8 Power of CIT at the time of processing of application 858

56.9 Power of CIT to examine books of account at the time of approval 858

56.10 Whether at the time of getting registration compliance with state law is required 859

56.11 Whether a ‘solely’ educational institutions can have objects other than the objects related to education? 860

CONTENTS

56.12 Section 10(23C)(vi) could not be denied for purchasing land 860

56.13 Approval under section 10(23C)(iv) is permissible if charitable in nature 861

56.14 Section 10(23C)(vi) application cannot be rejected for pro t making or bogus expenses 861

56.15 Activities should dominantly be carried out in India 862

56.16 Investment in chit funds is a valid ground for rejection of approval 862

56.17 Abnormal uctuation in administrative expenditure 862

56.18 Application of funds 863

56.19 Hospital running a chemist shop 863

56.20 Accounts and audit report 863

56.21 Cancellation of approval upto 31-3-2021 863

56.22 Cancellation of approval during renewal process (w.e.f. 1-4-2021) 865

56.23 Cancellation of approval w.e.f. 1-4-2022 (Finance Act, 2022) 865

57 PRACTICAL GUIDE TO APPROVAL UNDER SECTION 10(23C)

57.1 Exemption is not automatic 870

57.2 To whom an application must be made? 870

57.3 Form for ling application 870

57.4 Documents to be attached with Form 10A 871

57.5 Documents to be attached with Form 10AB 872

57.6 Mode of ling 873

57.7 Veri cation of application 874

57.8 Procedure on receipt of application in Form 10A 874

57.9 Procedure on receipt of application in Form 10AB 874

57.10 Conditions to approval order issued in Form 10AC 874

57.11 Tutorial on e-filing of Form 10A 876

57.12 Tutorial on e-filing of Form 10AB 881

58 TABULAR OVERVIEW OF COMPLIANCES UNDER SECTION 10(23C)

58.1 Introduction 887

58.2 Overview of compliances under section 10(23C) 887

COMPARATIVE ANALYSIS OF EXEMPTION UNDER SECTIONS 11 AND 10(23C)

59.1 Chapter summary 893

59.2 Introduction 894

59.3 Why is it important to understand the comparative difference? 894

59.4 Advantages of approval under section 10(23C) compared to registration under section 12AB 895

59.5 Advantages of registration under section 12AB compared to approval under section 10(23C) 896

59.6 Comparative analysis between section 12AB registration & section 10(23C) approval 897

60 MUTUAL SOCIETIES

60.1 Chapter summary 903

60.2 Introduction 904

60.3 Concept of mutuality 904

60.4 Person cannot make a pro t out of himself 906

60.5 Requirement of the homogeneous identity of the contributors/ participators 907

60.6 Members may be different at different-times 908

60.7 Pro ts/surplus may be distributed in future 909

60.8 Collecting advertisement charges from some members will not amount to mutuality 910

60.9 Co-operative providing insurance to members 910

60.10 Tenant association providing services for a charge 911

60.11 Stock exchange is not a mutual society 911

60.12 Mutuality should be ignored if charitable activities are predominant 912

60.13 Chamber of commerce held to exist for charitable purposes 913

60.14 Generation of surplus under mutuality is not taxable 913

60.15 Mutuality will not be affected even if the corpus is not distributed among the members upon dissolution 914

60.16 Taxability of interest income 915

60.17 Maintenance expenses shall be permissible against interest income 918

60.18 Membership and life membership are exempt 918

60.19 Mutuality and charitable purpose 919

60.20 Borderline of mutuality and charitable purpose 920

EXEMPTION TO INSTITUTIONS

NOTIFIED UNDER SECTION 10(46) AND 10(46A)

61.1 Chapter summary 921

61.2 Introduction 922

61.3 Exemption under section 10(46) 922

61.4 Key issues and compliances under section 10(46) 923

61.5 Insertion of clause (46A) in section 10 925

61.6 Exemption under section 10(46A) 926

61.7 Process to get noti ed 926

61.8 Key differences between clauses (46) and (46A) 926

61.9 Section 10(46A) is primary provision to claim exemption 928 APPENDIX: Relevant Circulars 929

12.1 CHAPTER SUMMARY

(

a) The application of income has to be for charitable or religious purposes in the year in which the income accrues or is received. However, such application of income is allowed on a payment basis.

(

b) Application is not ‘charge’ against income and therefore, the income is computed after deducting all the chargeable expenditure i.e., the expenditure which is incurred on earning that income. For example, the fundraising expenditure should not be treated as applied towards charitable purposes rather, such expenditure should be deducted from the income while determining the income subject to 85% application.

(

c) The term ‘application’ is broad enough to include capital expenditures within its ambit.

(

d) The purchase of a capital asset, towards the advancement of objects, is an application of income, and thus, expenditure incurred on the purchase of capital asset would be deductible under section 11(1)(a).

(

e) Set-off of past deficit against current year income is not permissible for the purpose of computing 85% application. Therefore, the charitable trusts shall not be permitted to carry forward the losses or excess application of earlier years.

(

f) The Department Circular No. 5-P (LXX-6) of 1968, dated June 19, 1968, states that the income should be computed on the basis of normally accepted commercial principles. It implies that establishment expenses should be deducted in order to determine the net income available for application.

(

g) Establishment expenditure can also be treated as an application for the purpose of exemption under section 11, unless certain elements of expenditure could be directly attributed to earning of income of a charitable organisation. Such expenditure should be deducted from the gross income.

(

h) As per departmental Circular No. 100, dated 24-1-1973, payment of loan for the fulfilment of the charitable objects shall be treated as an application for the purpose of section 11(1). The application out of loans and borrowings shall not be considered an application of income for

Para 12.1

APPLICATION OF INCOME

charitable or religious purposes. However, when a loan or borrowing is repaid from the previous year’s income, such repayment shall be allowed as an application in the previous year in which it is repaid to the extent of such repayment. The Finance Act, 2023 has provided that the application out of loans or borrowings will be allowed as an application of income if the conditions set out in the newly inserted second, third and fourth proviso to Explanation 4(ii) to section 11(1) are satisfied.

(

i) Certain elements of expenditure which could be directly attributed to earning income of a charitable organisation should be deducted from the gross income to arrive at a figure of income subject to application and should not be considered as an application.

(

j) Reasonable remuneration paid to trustees, managers, functionaries, etc., towards services rendered is considered as an application for charitable or religious purposes.

(

k) Legal expenses incurred in defending criminal charges over the trustees or functionaries are a valid application.

(

l) The mandatory 85% utilisation can be done by the trust or institution itself or by donating to trusts with similar objectives. However, after the amendment by the Finance Act, 2023, only 85% of the eligible donations made by a trust or institution registered under section 12AB to another trust or institution registered under section 12AB or approved under section 10(23C) shall be treated as the application.

m) If tax is deductible from any payment but it is not deducted or after deduction, it is not paid within the specified time and payment has been made to a resident person, 30% of such payment will be disallowed. In other words, only 70% of that expense shall be deemed as the application of income, if tax is not deducted from such payment in accordance with Chapter XVII-B. The disallowance shall be made in accordance with section 40(a)(ia). However, such disallowances shall be considered as an application in the year in which TDS compliances are made on such amount. Also, the disallowance under section 40(a) (ia) per se does not result in tax liability.

(n) The provisions of sections 40A(3) and 40A(3A) are extended to charitable and religious organisations. Consequently, if payment for an expense exceeding Rs. 10,000 is made in any mode other than account payee cheque, bank draft, net banking (i.e., payment in cash or bearer cheque), that payment or expense will not be considered while computing the application of income. However, the disallowance under section 40A(3) per se does not result in tax liability.

(

MEANING OF APPLICATION

Para 12.2

o) The application out of corpus shall not be considered as an application for charitable or religious purposes. However, when it is invested or deposited back, into one or more of the forms or modes specified in section 11(5) maintained specifically for such corpus from the income of the previous year, such amount shall be allowed as an application in the previous year in which it is deposited back to the corpus to the extent of such deposit or investment. The Finance Act, 2023 has provided that the application out of corpus will be allowed as an application of income if the conditions set out in the newly inserted second, third and fourth proviso to Explanation 4(i) to section 11(1) are satisfied.

12.2 MEANING OF APPLICATION

The income of charitable trusts is computed under sections 11 to 13, therefore the other provisions of the Income-tax Act do not apply to them. It’s worth noting that under the current scheme of the Income-tax Act, the charitable trusts are not subject to assessment under the five heads of income, and section 14, which deals with computation under five heads of income does not apply to them. In the case of charitable or religious institutions, their taxable income is not computed. Instead, the income that qualifies for exemptions under section 11 or 10(23C) is computed. This is the key distinction between a normal taxpayer and an exempt institution.

Section 11(1)(a) makes it clear that the income derived from property held under trust wholly for charitable and religious purposes, to the extent to which such income is applied to such purposes in India, is excluded. According to section 11(1) of the Income-tax Act, in order to claim exemption of income derived from property held under trust or on receipts from voluntary contributions, the trust must apply the income for charitable purposes. It is important to understand the meaning and implications of the term ‘application’ under the Act.

According to Third New International Dictionary, Vol. 1, the word ‘applied’ means :

“to put to practical use; engaged in for a utilitarian or contributory purpose; employed in the decoration, design or execution of useful objects.”

In the context of charitable trusts, the term ‘application’ implies the utilisation of income on activities of the trust for the advancement of its objects. The emphasis on ‘application’ can be related to the intent of the statute, which seems to ensure that such income/funds are not needlessly accumulated and are properly utilized for their avowed purpose. For the purposes of section 11, in order to be treated as ‘application’, funds must be spent/ applied for charitable or religious purposes out of the income of the trust. It may be noted that for charitable or religious trust, the scope of ‘income’ includes capital income and the scope of ‘application’ includes applications of capital nature.

Para 12.3

APPLICATION OF INCOME 196

Additionally, it’s worth noting that corpus donations are considered part of income under section 2(24)(iia), but they are exempt under section 11(1) (d) subject to certain conditions. Notably, section 11(1)(a) doesn’t use the term “expenditure,” but instead uses the word “applied”. However, whether corpus donation could be treated as income under section 2(24)(iia) itself is under question. (Refer Chapter on corpus donations for detailed discussion)

12.3 APPLICATION OF INCOME OF THE PREVIOUS YEAR AND YEAR OF APPLICATION

In order to claim exemption, 85 per cent of the income derived from property held under trust, including the amount received as voluntary contributions (other than voluntary contributions towards the corpus of the trust) in the previous year, has to be applied for such purposes.

Section 11(1) provides that subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;

It can be noted the term ‘total income’ is succeeded with the term ‘of the previous year’ but while allowing exemption, the term ‘application’ is not linked with any year and is kept open. Therefore, it can be argued that application amount of previous year (if not claimed as an application) can be set-off and claimed as an application against the income of subsequent year.

In Siddaramanna Charities Trust v. CIT [1974] 96 ITR 275 (Mys.), it was held that expenditure incurred at the beginning of the year, out of past funds, was application of the income of the previous year. On the other hand, excess expenditure of earlier years can be adjusted against the income of the previous year without violating the requirements of section 11(1)(a). [CIT v. Maharana of Mewar Charitable Foundation [1986] 29 Taxman 476/[1987] 164 ITR 439 (Raj.)]. In these cases, the consideration of application of income was on the basis of the genuine necessity on the part of the assessee having a direct bearing on the income of the previous year.

The Finance Act, 2021 has inserted Explanation 5 to section 11(1) to provide that for the computation of income required to be applied or accumulated during the previous year, no set-off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed.

(See also, chapter on Set-off & carry forward of past deficit)

197 TERM ‘APPLIED’ BE EQUATED WITH THE TERM ‘SPENT’ Para 12.5

12.4 APPLICATION OF INCOME TO BE ALLOWED ON A PAYMENT BASIS

A trust deriving income from a property held under trust for charitable or religious purposes is not included in its total income if such income is applied for charitable purposes in India. The application of income includes all payments and expenditures for the purpose of charitable and religious purposes in India.

The Finance Act, 2022 inserted the following Explanation after section 11(7) “Explanation.—For the purposes of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it):

Provided that where during any previous year, any sum has been claimed to have been applied by the trust or institution, such sum shall not be allowed as application in any subsequent previous year.”

This Explanation explicitly provides that any sum payable by any trust shall be considered an application of income in the previous year in which such sum is actually paid. Thus, the application of income shall be allowed only on a payment basis. This is irrespective of the previous year in which the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed.

A proviso to the Explanation further provides that where any sum has been claimed to have been applied by such trust during any previous year, such sum shall not be allowed as an application in any subsequent previous year. These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-23 and subsequent assessment years.

12.5 TERM ‘APPLIED’ BE EQUATED WITH THE TERM ‘SPENT’

The Karnataka High Court in the case of CIT (Exemptions) v. Ohio University Christ College [2018] 99 taxmann.com 377 held that payments made to the professors of Ohio University, USA for which the requisite provision was made in the books of account of the previous year, the actual payment was made in the next assessment year and was permissible as application.

In CIT v. Trustees of H.E.H. the Nizam’s Charitable Trust [1981] 7 Taxman 178/131 ITR 497 (AP), it was held that it was not necessary that the money should have been actually ‘spent’ for being treated as ‘application’. It would not be correct to equate the word ‘applied’ with the word ‘spent’, and therefore, even the funds, which have been allocated for the purposes, will be deemed to have been applied. The amounts that are actually disbursed are debited

Para 12.5

APPLICATION OF INCOME

198

to the income and expenditure account but which are not actually disbursed are shown as liabilities in the balance sheet. These facts and circumstances would constitute application of the funds for charitable purposes within the meaning of section 11(1)(a) of the Act. If the Legislature intended that the amounts should actually be spent, there was nothing preventing it from using that word.

In the above case, reference was made to the case of CIT v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All.) where it was categorically held that word ‘applied’ does not necessarily mean spent. But this decision was in context of section 4(3)(i) of the Act. It may be noted that in the old Act, the income was exempted irrespective of application or accumulation. In other words, even 100 per cent accumulation was permissible and therefore, application or non-application did not have any tax implications. The implication of the term ‘application’ is different under the new Act. On the basis of recent case laws, currently the term ‘applied’ is more or less close to the term ‘spent’ unless there is no doubt about the authenticity of application. The accounting standards and the guiding principles of ‘accrual accounting’ are also relevant.

In Nachimuthu Industrial Association v. CIT [1999] 235 ITR 190, the Supreme Court upheld the decision of Madras High Court where it was held that sums transferred to a donation reserve fund could not be treated as application of funds.

The Finance Act, 2022 inserted an explanation after section 11(7) which provides that all applications shall be allowed on a payment basis only. Therefore, all the above case laws shall not be applicable from the assessment year 2022-23 and subsequent assessment years.

12.5-1 Mere earmarking of funds will not always suffice

It’s important to note that the aforementioned case should not be interpreted as allowing the claiming of applications by simply earmarking funds for various purposes. In the case of CIT v. Thanthi Trust [1982] 137 ITR 735, the Madras High Court held that the term “application” must be interpreted as “actually expended.” However, the court also noted that if there is no doubt regarding the authenticity of the application, it cannot be disallowed even if physical funds have not been disbursed.

12.5-2 Application means ‘actually expended’ even without the physical transfer

In the case of the same assessee, the Supreme Court, vide CIT v. Thanthi Trust [1999] 239 ITR 502 held that the word application has to be understood as actually expended. But at the same time, it was observed that, when there is no doubt about the authenticity of the application, then it cannot be disallowed even if physical funds have not been parted. The Apex

Court observed that the High Court was right in the conclusion which it arrived at by holding that the credit entries made in the assessee’s books of account were genuine and there was no evidence to prove that they were mere make-believe or bogus. In this case a sum of Rs. 10,41,689.47 had been credited by the assessee trust in favour of the educational institution out of which Rs. 3,04,035 had been drawn by the said institution, and for the accounting year 1967-68 corresponding to the assessment year 196970, a sum of Rs. 8,99,535 had been credited in favour of the educational institution and the educational institution had drawn Rs. 16,71,500 during that year. The revenue held that unless the educational institution expended the amount donated by the assessee trust within the assessment year, the assessee could not claim benefit of exemption under section 11. The Supreme Court did not agree to the contention of the revenue as there was no reason to treat the entries as bogus.

12.5-3 Every spent may not be treated as application In certain circumstances, even money advanced or disbursed may not be treated as application of funds. It has to be satisfied that the money was applied for charitable purposes. In other words, not only the money should be disbursed but it should have been applied for charitable purposes. In CIT v. V.G.P. Foundation [2004] 134 Taxman 663/[2003] 262 ITR 187 (Mad.) the trust disbursed funds as advance for construction of a hospital to a contractor but no construction was made. It was held that the money instead of lying with the assessee was laid with another organisation which could not be regarded as application of income for charitable purposes. In this case, the assessee-trust had advanced certain amount to its sister concern, a private limited company, of which trustees of assessee were also directors. It claimed that monies so given were meant to be used to meet cost of construction of hospital and, therefore, should be regarded as having been applied for charitable purpose. The Assessing Officer rejected claim of the assessee because the money instead of lying with assessee had been laid with sister company, therefore such amount could not be regarded as application of funds for a charitable purpose.

12.6 CAPITAL EXPENDITURE IS ALSO TREATED AS AN APPLICATION

The term ‘application’ has a relatively wider connotation for the purposes of section 11. For instance, even capital expenditure which is otherwise not

Para 12.6

APPLICATION OF INCOME

200

considered as an allowable expense is also treated as application. It may be noted that the scope of ‘income’ includes capital income and the scope of application includes applications of capital nature. Further, even corpus donations are considered as a part of income under section 2(24)(iia) and subsequently exempted under section 11(1)(d) and similarly the word ‘expenditure’ is not used under section 11(1)(a) instead, the word ‘applied’ has been used. It may also be appreciated that unlike commercial or business organisations, in case of charitable trusts, capital gains are also considered as a part of income under section 11(1) and are not computed under the head ‘Capital Gains’ under sections 45 to 55. In other words, the scheme of computing income, as well as application, is totally different as far as charitable or religious organisations are concerned.

In a ruling of the Allahabad High Court applied the legal ratio the above Supreme Court ruling in CIT v. Mool Chand Sharbati Devi Hospital Trust [2010] 190 Taxman 338 (All.) where it was held that Capital Expenditure on building and infrastructure were basic necessity and therefore should be treated as expenditure u/s 11(1). It may be mentioned here that the assessee has its prime object of running educational institutions. For running an educational institution building and physical infrastructure is a basic necessity. It has not been doubted that the construction of a suitable building and other infrastructure was necessary for the assessee-trust to be able to carry out its objects of providing education. Thus, the expenditure in question was incurred by the assessee in constructing a building and physical infrastructure for carrying out its purposes and such expenditure would necessarily be an expenditure incurred for carrying out the objects of the assessee-trust. It is settled law that even capital expenditure incurred by an assessee in acquiring assets which are necessary for carrying out its objects amounts to the application of income of the trust for charitable objects.

In Satya Vijay Patel Hindu Dharamshala Trust v. CIT [1972] 86 ITR 683 (Guj.) also it was held that expenditure incurred in acquiring a capital asset for carrying out the dominant purpose of the trust was an expenditure within the meaning of section 11(1)(a) of the Income-tax Act, 1961.

In the case of CIT v. Queens Educational Society [2009] 177 Taxman 326 (Uttaranchal) the Assessing Officer had refused exemption to the assessee u/s 10(23C)(iiiad) relying on the judgment of the Hon’ble Supreme Court in Aditanar Educational Institution v. Addl. CIT [1997] 90 Taxman 528/224 ITR 310. However, the above Queens Educational Society (supra) was in context of exemption under section 10(23C)(iiiad) and was not applicable to organisation eligible under section 10(23C)(iv) or section 11. It may be noted that the Supreme Court in Queen’s Educational Society v. CIT [2015] 55 taxmann.com 255/8 SCC 47 quashed the Uttarakhand High Court ruling in the Queens case (supra).

201 CAPITAL EXPENDITURE IS ALSO TREATED AS AN APPLICATION Para 12.6

In a case Pinegrove International Charitable Trust v. Union of India [2010] 188 Taxman 402 the Punjab & Haryana High Court has pointed out that the above Queens case (supra) was not applicable to organisation eligible under section 10(23C)(iv) or section 11 as it was in context of section 10(23C)(iiiad). The other relevant cases in this regard are ST. Lawrence Educational Society (Regd.) v. CIT [2011] 9 taxmann.com 233/197 Taxman 504 (Delhi), Vanita Vishram Trust v. Chief CIT [2010] 192 Taxman 389/327 ITR 121 (Bom.), Himachal Pradesh High Court in Maa Saraswati Educational Trust v. Union of India [2010] 194 Taxman 84, Sunbeam English School Society v. CIT, Varanasi [2011] 9 taxmann.com 228/129 ITD 299 (All. - Trib.), Kashatriya Sabha Maharana Partap Bhawan v. Union of India [2010] 194 Taxman 442 (Punj. & Har.).

In the case of Hans Raj Samarak Society v. Asstt. DIT (Exemptions), Trust Circle-II, Delhi [2011] 16 taxmann.com 103/133 ITD 530 (Delhi - Trib.) it was held that purchase of capital asset is an application of income, thus expenditure incurred on purchase of capital asset would be deductible under section 11(1)(a).

In the case of CIT v. Kannika Parameswari Devastham & Charities [1982] 133 ITR 779 (Mad.), it was held that if the expenditure is on capital account on object(s) contained in the object clause, the expenditure will amount to application of income.

In the case of CIT v. Janmabhumi Press Trust [2000] 242 ITR 457 (Kar.), the assessee constructed a building out of accumulated and borrowed funds. The building was later rented out. A part of the rent was used for repayment of loan. Such repayment of loan was treated as application of income.

12.6-1

Purchase of building

The Supreme Court in S. RM. M. CT. M. Tiruppani Trust v. CIT [1998] 96 Taxman 635/230 ITR 636, observed that the assessee was entitled to claim the benefit of section 11(1)(a). In the case, the assessee applied ` 8 lakhs for charitable purposes in India by purchasing a building which was to be utilised as a hospital. This income, therefore, was entitled to an exemption under section 11(1).

12.6-2

Construction of dharamshala, hospital etc.

Expenditure on land and building including dharamshalas, hospitals have been considered as application [Satya Vijay Patel Hindu Dharamshala Trust v. CIT [1972] 86 ITR 683 (Guj.), CIT v. St. George Forana Church [1988] 36 Taxman 42/170 ITR 62 (Ker.)]. In the aforesaid two cases, this issue was debated and held in favour of the assessee. These two cases slightly differ from each other, in Satya Vijay Patel Hindu Dharamshala Trust’s case, the Court held that capital expenditure was allowable provided it was towards the objects of the organisation. But in the St. George Forana Church’s case,

Para 12.6

APPLICATION OF INCOME

202

the Court held that the scope of the term ‘application’ was wider than the term ‘expenditure’, therefore, expenditures on properties, the income from which was applied for charitable purposes, was also a part of application for the purposes of section 11. It has to be understood that the Court held that if the construction of the building is for the purpose of getting some income by way of rent and such income would be applied to the charitable or religious purposes. The building in itself may not be for charitable purposes but since the income derived from it is used solely for charitable purposes, therefore, the construction cost of the building was also entitled to be treated as application of income for charitable purposes.

In CIT v. Divine Light Mission [2005] 146 Taxman 653 (Delhi), it was held that the amount spent on acquiring/constructing capital asset is well settled, it is no more required to be discussed as the same is covered by the decision of the Apex Court in S.RM. M. CT. M Tiruppani Trust v. CIT [1998] 96 Taxman 635/230 ITR 636.

12.6-3 Capital expenditure out of funds accumulated under section 11(2)

In the case of DIT (Exemption) v. Guru Nanak Foundation [2008] 170 Taxman 547 (Delhi), it was held that capital expenditure out of accumulated funds under section 11(2) were permissible. It was observed that the issue raised was squarely covered in favour of the assessee by the decision of the Supreme Court in S. RM. M. CT. M. Tiruppani Trust v. CIT [1998] 96 Taxman 635/230 ITR 636 and of this Court in CIT v. Divine Light Mission [2005] 146 Taxman 653 (Delhi).

12.6-4 Summing up

To sum up, it can be said that capital expenditures are not required to be distinguished from revenue expenditures as far as application of income for charitable purposes is concerned. The Supreme Court in S. RM. M. CT. M. Tiruppani Trust v. CIT [1998] 96 Taxman 635/230 ITR 636, has held that capital expenditure should be considered as application provided they are towards the objects of the organisation. The Kerala High Court, has held that if the construction of the building is for the purpose of getting some income by way of rent and such income would be applied to the charitable or religious purposes, then such application should also be considered as application though the building by itself may not be for charitable or religious purposes.

Various case laws have established that the application of income need not be limited to revenue expenditure only. The crucial factor is that the application should serve the organization’s objectives. For example, solely adding or enhancing trust corpus property may not entitle an organization to exemptions. The section requires a consideration of the trust’s objectives as well as the income derived from the property held in trust. The income from trust properties must be applied to the trust’s objectives. In terms of

ADMINISTRATIVE AND ESTABLISHMENT EXPENSES Para 12.7

the trust’s objectives, the amount can be applied for revenue or capital purposes. There is no reason why capital expenditures cannot be considered as applications if they serve the trust’s objectives.

12.7 ADMINISTRATIVE AND ESTABLISHMENT EXPENSES

Administrative and establishment expenses have always remained an issue of judicial and legislative debate. The prime issue in this regard is whether the income available for charitable or religious purposes should be considered after deducting administrative and establishment expenses or should they be considered as an application for charitable or religious purposes or to what extent establishment expenditure would be permitted because there might be a circumstance where the activities are dormant but establishment expenditure still continues.

12.7-1 View of the department on administrative and establishment expenses

The view of the department seems to be towards deducting administrative and establishment expenses from the total income to determine the income available for application. Establishment or administrative expenses are considered as a charge to the income of the organisation and, therefore, only the net income after such expenses is available for charitable purposes. Circular No. 5-P (LXX-6) of 1968, dated June 19, 1968, states that the income should be computed on the basis of normally accepted commercial principles. Therefore, it implies that establishment expenses should be deducted in order to determine the net income available for application. The relevant extracts of the said circular are as under:

“Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word ‘income’ should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).”

12.7-2 Whether such expenses amount to the application of income

There seems to be a generic treatment to the establishment expenses and they are considered as application along with other items of expenses, though in strict commercial/accounting sense, such treatment is debatable. The establishment expenses are a charge on the income and ‘application’ is

Para 12.7

APPLICATION OF INCOME

204

analogous to ‘appropriation’ of the income available for charitable purposes. Administrative and establishment expenses could be of various categories some part of which could be directly attributed to the generation of income and some part could be towards charitable or religious purposes. This issue has been debated in various cases as to whether establishment expenses can be considered as application for the objects of the organisation.

In CIT v. Birla Janahit Trust [1994] 73 Taxman 465/208 ITR 372 (Cal.), the Court opined that expenses incurred for running a trust should be considered to have been applied for the objects of the trust. In this case, reference to various other cases was also made. The following extracts are very relevant in this regard:

“It appears from the order of the Appellate Assistant Commissioner that the assessee has incurred the expenditure on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust and not only to earn the income from dividend. It is now well-settled that in determining the portion of income applied or accumulated for charitable or religious purposes, regard should be had to the trust income in a commercial sense or according to the accounts of the trust and not the total income as computed under the provisions of the Income-tax Act. Our attention has been drawn to several decisions in this connection. In Deo Radha Madhava Lalji Genda Trust v. Property Tax Officer [1980] 125 ITR 531 (MP), it has been observed that tax liability and other outgoings in respect of the trust property are all incidental expenses relating to and connected with the main objects of the trust, which are exclusively religious and charitable. If the trust property is not properly maintained and proper accounts are not kept, the very existence of the trust would be in jeopardy and its object and purpose would be lost. In this view of the matter, simply because a part of the rental income is spent in the maintenance, repairs, payment of salaries to employees, taxes and legal expenses, etc., it could not be said that the income derived from the trust property was not applied exclusively to religious or charitable purposes.” (p. 375)

In Gem & Jewellery Export Promotion Council v. ITO [1999] 68 ITD 95 (Mum. - Trib.), the Tribunal held that the entire non-code expenditure could not be said to have been incurred towards earning of the income and, therefore, only that portion of the expenditure - which could be attributed to the earning of income should be deducted from the gross income for computing the income on which application and accumulation under section 11(1)(a) was allowed. In other words, the expenditure which can be precisely or reasonably be attributed to earning an income should be deducted first to determine the income available for charitable purposes, and the remaining portion of expenditure shall be treated as applied towards charitable purposes.

12.7-3 15% of income to be computed before admin and establishment expenses

The ITAT Kolkata Bench C in the case of Kanehialall Lohia Trust v. Income-tax Officer (Exemption) [2020] 120 taxmann.com 208 (Kolkata - Trib.) held that

REPAYMENT OF DEBT/LOAN FOR CHARITABLE PURPOSES

15 per cent accumulation for application in future has to be calculated on gross receipt and not on net receipt after deduction of revenue expenditure. In this case the AO argued that the administrative and establishment expense should be deducted first to determine the income available for charitable purposes and 15% of such income to be allowed for indefinite accumulation. The ITAT held that 15% should be calculated based on the total income before administrative and establishment expense.

12.8 REPAYMENT OF DEBT/LOAN FOR CHARITABLE PURPOSES

Repayment of any debt or loan has been considered as application. [CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj.)]. The Court referred with approval to the departmental Circular No. 100, dated 24-1-1973 which has expressed the view that the repayment of the loan if taken for fulfilment of the charitable objects shall be treated as application for the purpose of section 11(1).

The Finance Act, 2021 has inserted Explanation 4(ii) to section 11(1) to provide that the application out of loans and borrowings shall not be considered an application of income for charitable or religious purposes. However, when a loan or borrowing is repaid from the previous year’s income, such repayment shall be allowed as an application in the previous year in which it is repaid to the extent of such repayment.

The Finance Act, 2023 has further inserted an amendment to provide that the application out of loans or borrowings will be allowed as an application of income if the conditions set out in the newly inserted second, third and fourth proviso to Explanation 4(ii) to section 11(1) are satisfied.

12.8-1 Text of department circular

Circular No. 100, dated 24-1-1973, is reproduced as under:

“Repayment of a debt incurred for charitable purposes by a charitable trust and loans advanced by educational trusts - Application of income.

(1) Section 11 of the Income-tax Act requires 100 per cent of the income of a charitable and religious trust to be applied for religious and charitable purposes to be entitled to the exemption under the said section. Two questions have been considered regarding the application of income:

(i) Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust; and

(ii) Whether loans advanced by an educational trust to students for higher studies would be treated as application of income for charitable purposes.

(2) Board has decided that repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of the trust is to give interest bearing loans for higher studies, it will amount to carrying on of money lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting of loans, even interest-bearing, will amount to the application of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year.”

12.8-2 Application out of loans & borrowings

As per section 11(1), the exemption is available for the income derived from property held under trust or for the voluntary contributions, provided the organisation applies the income for charitable purposes. As long as the expenditure is incurred out of the income of the trust on the objects of the trust, it would be considered as a valid application of income, even if such expenditure is for capital purposes. Thus, all expenditures, whether revenue or capital, for charitable purposes shall be considered as an application of income.

12.8-3 Application to be considered in the year of repayment of loans

The Finance Act, 2021 inserted Explanation 4(ii) to section 11(1) with effect from the assessment year 2022-23 to provide that application from loans and borrowings shall not be considered as an application for charitable or religious purposes for the purposes of section 11(1)(a).

When the borrowing is repaid by utilising the income of the previous year, then the amount repaid out of income shall be allowed as an application in the previous year in which it is repaid [Proviso to Explanation 4(i) to section 11(1)]

“Text of Amendment by Finance Act, 2021 (ii) application for charitable or religious purposes, from any loan or borrowing, shall not be treated as application of income for charitable or religious purposes:

Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the loan or borrowing, or part thereof, is repaid from the income of that year and to the extent of such repayment.”

Therefore, the application out of loans and borrowings shall not be considered an application of income for charitable or religious purposes. However, when a loan or borrowing is repaid from the previous year’s income, such repayment shall be allowed as an application in the previous year in which it is repaid to the extent of such repayment.

12.8-4 Restriction on application out of loans or borrowings

The Finance Act, 2023 inserted the second, third and fourth proviso to Explanation 4(ii) to section 11(1) with effect from 1-4-2023 and will accordingly apply to the assessment year 2023-24 and subsequent assessment years.

(

i) Conditions to be satisfied while making an application out of loans or borrowings

The second proviso provides that the first proviso (i.e. application of income out of repayment of loan or borrowings ) shall apply subject to the following specified conditions.

(a) Such application should not be in the form of a corpus donation to another trust [Explanation 2 to section 11(1)];

(

b) TDS, if applicable, should be deducted on such application [Explanation 3 to section 11(1)];

(

c) Where payment or aggregate of payments made to a person in a day exceeds Rs. 10,000 in other than specified modes (such as cash) is not allowed [Explanation 3 to section 11(1)];

(d) Carry forward and set off of excess application is not allowed [Explanation 5 to section 11(1)];

(

e) Application is allowed in the year in which it is actually paid [Explanation to section 11];

(

f) The application should not directly or indirectly benefit any person referred to in section 13(1) and the income of the trust or institution should not enure any benefit to such person [Section 13(1)(c)]; and

(

g) The application should be in India except with the approval of the Board in accordance with the provisions of section 11(1) (c).

(ii) Cap of 5 years to repay the loan or borrowings

The third proviso provides that any application out of a loan can be set off against future years’ income for a period of five years from the end of the year in which such a loan was applied for charitable purposes.

(iii) Application out of loans before 1-4-2021 should not be allowed as an application

The fourth proviso states that in cases where application from any loan or borrowing is made on or before 31-3-2021, the repayment of such a loan shall not be allowed as an application of income.