CHAPTER- 4 EXEMPTIONS AVAILABLE TO PUBLIC CHARITABLE...
Transcript of CHAPTER- 4 EXEMPTIONS AVAILABLE TO PUBLIC CHARITABLE...
CHAPTER- 4
EXEMPTIONS AVAILABLE TO PUBLIC
CHARITABLE TRUSTS UNDER THE
INCOME TAX ACT,1961
CHAPTER 4
EXEMPTIONS AVAILABLE TO PUBLIC CHARITABLE TRUSTS UNDER THE INCOME TAX ACT,1961
CATEGORIES OF EXEMPTIONS
4.1 The basic principle of taxation is that any person
earning income should pay some portion of the same to the
exchequer by way of taxes, popularly known as Income Tax or
Corporate Tax. However, the Income Tax Act has specifically
provided certain incomes to be exempt from the purview of
taxation. The income of charitable trusts is made exempt, the
rationale behind which has already been discussed in the preceding
chapters.
4.2 The exemptions granted to charitable trusts and other
similar institutions, under the Income Tax Act, can be broadly
classified in three categories . The categories are:-
Category 1-Blanket Exemptions
D Un-monitored and blanket tax exemption for -
* Educational institutions/ hospitals wholly or substantially
financed by Government [10(23C)(iiiab), (iiiac)]
* Educational institutions/ hospitals with aggregate annual receipts
below Rs.l crore. [10(23C)(iiiad) and (iiiae)]
Category 2-Exemptions with some restrictions
D Charitable Fund or institution with importance throughout India
/States [10(23C)(iv)]
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D Public religious or public religious and charitable trust or
institution [10(23C)(v)]
n Educational institutions/hospitals with aggregate annual
receipts above Rs.l crore [10(23C)(vi),(via)]
Category 3- Exemptions with full restrictions
n Public religious charitable trusts or legal obligations [Sections
11 to 13]
The detailed scheme of exemptions under the various sections is
mow proposed to be discussed with a view to understand the
legislative intent and the actual operation of these sections.
4.3 The two main sections that grant exemption to the
income of trusts are Section 11 and Section 12 of the Income Tax
ACT, 1961. In addition to these two sections, Section 10(23C ) also
exempts the income of institutions working in the field of
education or medical relief existing solely for charitable or
philanthropic purposes and not for the purpose of profit and also
income of institutions like universities, colleges etc. which have
been substantially funded by the government. As majority of the
charitable trusts run educational institutes and/or hospitals, this is a
relevant section from their point of view. In addition to these two
sections, a very important section is Section 80G of the Act which
grants tax exemption to the donor in respect of the donation given
by him to a trust recognized under this section . It is easier for a
trust to get donation when it is recognized under Section 80G.
In addition to these sections, Section 35(1 )(ii) allows
deduction of expenditure on scientific research while section
35AC allows expenditure on eligible projects or schemes. These
two sections are also sometimes used by charitable trusts.
However, as the scheme of these two sections is totally different
from that of exemption to charitable trust, these two sections are
not considered in this treatise.
4.4 As mentioned earlier, section 11, 12 , 10(23C) &
section 80G form the back bone of the exemptions given to a
charitable trust. The exact sections as appearing in the Income
Tax Act, 1961, alongwith the necessary rules and forms are
enclosed as Annexure -A to the thesis. From the researcher's
point of view it is however necessary to understand the scheme of
these sections and various issues emerging out of these sections by
way of assessments as well as judicial pronouncements. As
mentioned earlier, there has been a plurality of opinions and
interpretations about the correct meaning of these sections.
Fortunately, now over the years, the meanings have become clear
due to judicial pronouncements of the various high courts as well
as the Hon Supreme court . The few of the issues that have been
debated can be briefly summarised as under :
1. What is income? Does it refer to the gross income ,total income
or net income ?
2. How is it to be computed for the purpose of section 11 ?
3. What is property held under a trust referred to in sec. 11(1 )(a)?
4. What is application of income ?
5. What is accumulated or set apart for application ?
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6. What treatment is to be provided to the business carried out by
the trust ?
The various issues are discussed below. At this point, it
is necessary to mention that it is neither possible to cover all the
judicial discussions on this issue nor is the intention of the study.
Effort has been made to largely cover the salient features emerging
from the plethora of judicial pronouncements available.
SECTION 11 OF THE INCOME TAX ACT, 1961
4.5 Section 11 lays down in detail the statutory provisions
for exempting income from property held for charitable or
religious purposes. The scheme of this section is as under :
Section 11(1) describes the types of income that shall
not be included in the total income of the person for the previous
year. This income includes income derived from property held
under trust wholly for charitable or religious purposes to the extent
such income is applied for such purposes in India. If the income is
not applied but accumulated or set apart for application the extent
to which such income is not in excess of 15% of the income from
such property is also held as exempt. This section also holds
income in the form of voluntary contributions forming corpus of
the trust or institution to be exempt.
Section 11(1 A) describes the treatment to be given to
the capital gains arising out of the transfer of capital assets being
property held under trust wholly for religious or charitable
purposes.
• Section 11(1B) is a deeming provision in respect of the
income covered under clause 2 of sub section 1.
••• Section 11(2) describes the m o d e of accumulat ion or
sett ing apart of income in case 8 5 % of the income is not utilized
for charitable purposes .
<• Section 11(3) is another deeming provision. It
specifies that
(a) income referred to in sub section (2) applied for
another than charitable purposes,
(b) income that ceases to be accumulated or set apart for
application,
(c) income which ceases to remain invested or deposited in
the forms or modes specified in section 11(5),
(d) income which is paid or credited to any other trust or
institution
shall be deemed to be income of the person for the previous year.
Section 11 (3A) authorizes the assessing officer to condone the
default of the assessee as mentioned above, due to circumstances
beyond the control of the person in receipt of the income.
••* Section 11(4) specifies that property held under trust
includes a business undertaking so held. It also empowers the AO
to determine the income of such business undertaking as per the
provisions of the Act. If the income determined by the AO is in
excess of the income as shown by the trust, the excess shall be
deemed to be applied to purposes other than charitable or religious
purposes.
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•
• >
Section 11(5) lays down the forms and modes in detail
for investing or depositing the accumulated income. Section
ll(5)(xii) refers to any other form or mode of investment or
deposit as may be prescribed thus leaving a route open for the
government to include any further modes of investment as deemed
fit.
SECTION 12
4.6 Section 12 describes the treatment to be given to
income of trusts or institutions from contributions. The scheme of
the section is as under :
'I* Section 12(1) describes the treatment to be given to
voluntary contributions received by trusts or institutions created
wholly for charitable or religious purposes. This section deems
such contributions to be income derived from property held under
trust. It also specifies that the provisions of section 13 regarding
forfeiture of exemptions will apply to such income.
Section 12(2) specifies that value of any medical or
educational services, made available by any charitable or religious
trust, running a medical or educational institution, to any person
referred to in section 13, shall be deemed to be income of such
trust and shall be chargeable to income tax, notwithstanding the
provisions of section 11(1).
THE CONCEPT OF INCOME
4.7 Section 11(1) provides that subject to the provisions of
Section 60 to 63, "the following income shall not be included in
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the total income of the previous year".... The reference in sub
section (a) is invariably to "income" and not to "total income".
The expression "total income" has been specifically defined in
Section 2(45) of the Act as "the total amount of income computed
in the manner laid down in this Act." It would, accordingly, be
incorrect to assign to the word "income" used in Section 11(1) (a),
the same meaning as has been specifically assigned to the
expression "total income" vide Section 2(45) of the Act. This is
the view taken by the Central Board of Direct Taxes in its Circular
No. 5 LXX-6 of 1968 dated 19th June 1968. The Board further
explained in the said Circular that 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. In C.I.T. v. Rao Bahadur Calavala Cunnan
Chetty Charifies [1982]135ITR485(MAD) their Lordships of the
Madras High Court held that taking into account 1 the purposes for
which the condifions of Sec. 11(1) (a) are imposed, it would be
clear that one has to consider the income as arrived at in the
context of what is available in the hands of the assessee, subject of
course to any adjustment for expenses extraneous to the trust. The
expression "income" has to be understood in the popular or
general sense and not in the sense in which the income is arrived at
for purposes of assessment to tax by the applications of some
artificial provisions either giving or denying deductions. If the
expression "income" is so understood, then the Court held that the
assessing authorities have to take the accounts of a charitable
institution with reference to the receipts and deduct there form the
expenses necessary for earning or looking after that income. The
net amount that remains would be available for distribution or
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application for charitable purposes. In applying the income for
charitable purposes, even capital expenditure may be incurred.
Therefore, the nature of the expenditure in the hands of the entity,
which receives the money, is not the criterion. The Court further
held that there is no need or scope to arrive at the income of a
charitable trust in the manner contemplated by the Income Tax
Act, i.e. Sec. 14.
Since income has to be understood in commercial
sense, it is only the net income after meeting the expenses that can
be treated as income. It is only out of such income that an amount
to the extent of 85% is required to be spent on the objectives of the
trust. It was held by the Hon Kerala High Court in the case of
CIT V. Program for Community Organisations [1997] 228 ITR 620
(KER ) and later confirmed by the Hon Supreme Court [248] ITR
1 (SC) that the assessee was entitled to have the net income
reckoned as income. In its decision the Hon Supreme Court has
held as under :-
"The question that really requires consideration is whether, for
the purposes of section 11(1) (a) of the Income-tax Act, 1961, the
amount for the grant of exemption of twenty-five per cent, should
be the income of the trust or it should be its total income as
determined for the purposes of assessment to income-tax. This
question has to be answered in the light of these facts: The
assessee-trust received donations in the aggregate sum of Rs. 2,
57,376. It applied thereout for its charitable purposes the
aggregate sum of Rs. 1,70,369 leaving a balance of Rs. 87,010.
The question is whether the assessee is entitled to accumulate
twenty-five per cent, of Rs. 2,57,376 as it contends, or twenty-five
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per cent, of Rs. 87,010, as the Revenue appeared to
contend
In our view, therefore it is the real income which is to be
taken into amount account. The question of deduction which is
otherwise allowable in computing the income in a case not
covered by section 11 cannot arise while deciding the percentage
of application or accumulation. The question of deduction comes
only when the income is otherwise chargeable to tax under the
provisions of the Income-tax Act, 1961. It cannot be disputed that
section 11 has given benefit to an assessee-trust, which applies its
income for charitable or religious purpose. If the entire income is
applied for charitable purpose, the question on payment of any tax
would not arise. If a trust desires to accumulate income in excess
of the limits laid down in section 11(1), the conditions specified in
section 11(2) of the Act have to be fulfilled in respect of the entire
accumulation and not merely in respect of the accumulation in
excess of 25 per cent, of the income. Further, if the trust does not
comply with the conditions laid down in section 11(3) is the entire
income accumulated and not merely the income accumulated in
excess of the limits specified in section 11(1) of the Income-tax
Act, 1961. In other words such an assessee loses the benefit of the
accumulation permitted under section 11(1). The question of
chargeability of a part of income to tax which is not exempt arises
only when the accumulation is more than the permissible limit.
While making assessment of that part of the income which is in
excess of the specified percentage, such taxable income of a trust
cannot be classified under different heads. It is only when any
income is assessed under a particular head that the question of
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allowing deduction under that head arises for consideration. In a
case where an assessee-trust has income comes within the ambit of
taxation, it will not be possible for earmarking any part of such an
income to a particular head. The head of income is irrelevant
unless the entire income comes from one specific head. Since the
income from property held under trust has to be arrived at in
normal commercial manner and when the income from property
held under trust as such is excluded, there is no scope of
computing the income from property by applying the provision of
section 14 of the Act. The provision of section 14 cannot be
pressed into service in such a case.
Therefore, the question on allowing any statutory deductions as
contemplated by the different provisions of the act dealing with
different heads of income in computing the income' accumulated
does not arise when the trust loses the benefit of accumulation. "
The next question is about depreciation. Should depreciation be
considered in computing the income of a charitable trust or not ?
The income of a charitable trust as contemplated by s.l l(l)(a) is
required to be computed in accordance with the normal rules of
accountancy. The amount of depreciation debited has to deducted
to arrive at the income available for application to the objects of
the trust. In the case of CIT v. Bhoruka Public Welfare
Trust[1999] 240 ITR 513 (CAL), it has been held that :-
In this connection, we may usefully refer to the following
observations of the Karnataka High Court in CIT v. Society of the
Sisters of St. Anne [1984] 146 ITR 28, 31 :
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"The depreciation is nothing but decrease in value of property
through wear, deterioration or obsolescence
At the end of its effective life, the asset ceases to
earn revenue, i.e., the capital value has expired and the asset will
have to be replaced or a substitute found. Provision for
depreciation is the setting aside, out of the revenue of an
accounting period, of the estimated amount by which the capital
invested in the asset has expired during that period. It is the
provision made for the loss or expense incurred through using the
asset for earning profits, and should, therefore, be charged against
those profits as they are earned.
If depreciation is not provided for, the books will not contain a
true record of revenue or capital. If the asset were hired instead of
purchased, the hiring fee would be charged against the profits;
having been purchased, the asset is, in effect, then hired by capital
to revenue, and the true profit cannot be ascertained until a
suitable charge for the use of the asset has been made. Moreover,
unless provision is made for depreciation, the balance-sheet will
not present a true and fair view of the state of affairs; assets
should be shown at a figure which represent that part of their
value on acquisition which has not yet expired'. "
This has been clarified in CBDT circular no 5P of 1968,
dt. 19 June 1968. The circular states that :-
1. In Board's Circular No. 2-P(LXX-5), dated 15-5-1963, it was
explained that a religious or charitable trust, claiming exemption
under section 11(1), must spend at least 75 per cent of its total
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income for religious or charitable purposes. In other words, it was
not permitted to accumulate more than 25 per cent of its total
income. The question has been reconsidered by the Board and the
correct legal position is explained below.
2. Section 11 (I) 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. . . . " The reference in clause (a) is
invariably to "Income " and not to "total income ". The expression
"total income" has been specifically defined in section 2(45) as
"the total amount of income computed in the manner laid down in
this Act". It would, accordingly, be incorrect to assign to the word
"income", used in section 1 l(l)(a), the same meaning as has been
specifically assigned to the expression "total income" vide section
2(45).
3. In the case of a business undertaking, held under trust, its
"income" will be the income as shown in the accounts of the
undertaking. Under section 11(4), any income of the business
undertaking determined by the ITO, in accordance with the
provisions of the Act, which is in excess of the income as shown in
its accounts, is to be deemed to have been applied to purposes
other than charitable or religious, and hence it will be charged to
tax under sub-section (3). As only the income disclosed in the
account will be eligible for exemption under section 11(1), the
permitted accumulation of 25 per cent will also be calculated with
reference to this income.
4. 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).
5. To sum up the business income of the trust, as disclosed by the
accounts plus its other income computed as above, will be the
"income" of the trust for the purposes of section 11(1). Further,
the trust must spend at least 75 per cent of this income and not
accumulate more than 25 per cent thereof. The excess
accumulation, if any, will become taxable under section 11(1). "
It has been also held that agricultural income of a trust also has to
satisfy the conditions as regards application and accumulation of
income . the Hon Madras High Court has held as under in the case
of Rev Fr Superior v. State of Tamilnadu [2000]242 ITR 148
(MAD) that :-
Section 4(b) of the Tamil Nadu Agricultural Income-tax Act reads
as under:
"any agricultural income derived from property held under trust,
wholly or partly for charitable or religious purposes, to the same
extent to which income derived from property held under trust
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wholly or partly for charitable or religious purposes, is not
included in the total income for purposes of the Income-tax Act,
1961 (Central Act XLIII of 1961);"
It was therefore necessary for the assessee to show that during the
relevant year of assessment, the assessee had been recognised as a
charitable and religious trust under the Income-tax Act and the
income derived from the property held by it under trust for
charitable and religious purpose had not been included in the total
income for the purposes of the Central Act, for the relevant
assessment year. "
This follows that even a charitable institute having only
agricultural income is required to register the institution u/s 12A
and follow all the conditions imposed on such institutions under
section 11 to 13.
4.8 Another important issue is regarding voluntary
contributions . " Voluntary contributions'" means donations proper.
It means and includes money gifted, or given gratuitously and
without consideration. But entrance fees and subscriptions paid by
entrants to a society or an institution as a condition precedent to
their membership and as the price of admission to the privileges
and benefits of the society or institution, are given under a contract
and are not part of voluntary contributions. From the very
beginning i.e. even under the 1922 Act, the voluntary contributions
received by a charitable or religious institution and applicable
solely to charitable or religious purposes were not to be included
in the total income of the trust or the institution, as the case may
be. This exemption was granted by Section 4(3) (ii) of the I.T. Act,
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1922. Section 12(1) of the Income-tax Act, 1961 also granted
similar exemption. But in the 1961 Act, a new sub-section (2) was
inserted in Section 12 of the Act to provide that where a voluntary
contribution was made to a trust or a charitable or religious
institution by another charitable or religious institution to which
the provisions of Section 11 were applicable, such voluntary
contributions were deemed as income derived from property in the
hands of the recipient trust. However, the Finance Act, 1972 made
drastic change; inter alia, in regard to the provisions relating to
voluntary contributions. As regards the objects of these changes, it
was stated in Circular No. 108 dated 20th March, 1973 issued by
the Central Board of Direct Taxes, New Delhi that these changes
were made with a view to ensuring that the tax exempt funds of
charitable and religious trusts or institutions are applied to the
purposes of such trusts and institutions, and are not diverted for the
benefit of the author of the trust, founder of the institution, persons
who have made substantial contributions or who manage the
affairs of the trust or institution. 11.13 By the Finance Act, 1972,
the definition of the word '"income" in Section 2(24) of the
Income-tax Act, 1961 was amended to specifically provide that
voluntary contributions received by a charitable or religious trust
or institution, regardless of whether such trust or institution had
been created or established wholly or partly for charitable or
religious purposes, will be regarded as ''income'''' for the purposes
of the Income-tax Act, 1961. Similarly, Section 12 of the Act was
recast to provide specifically that voluntary contributions received
by a trust or institution created or established wholly for
charitable or religious purposes shall for the purposes of Section
11 and 13 of the Act, be regarded as "income" derived from
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property held under trust wholly for charitable or religious
purpose. However, in Section 1 l(l)(d) as well as in Section 12 of
the Act, it is abundantly made clear that the voluntary
contributions, which are made by the donor with a specific
direction that they shall form part of the corpus of the trust or
institution, shall not be regarded as income in the hands of the
recipient trust. Thus, if a donor, while making the donation, makes
it clear that the donation so made shall form part of the corpus of
the trust or institution, it would be a capital receipt and shall not be
chargeable to tax. It must, however, be mentioned here that even
the earlier provisions contained in Section 4(3) (ii) of the I.T. Act,
1922 as well as section 12 of the I.T. Act, 1961 applied only where
the contribution constituted income of the receiving trust; they had
no application where what was received by the trust formed part of
its capital.
APPLICATION OF INCOME
4.9 When income is earned, it should be spent or saved. In
respect of trusts, however, spending for the purposes of the trust is
known as "application " and saving for the spending in future is
known as "accumulation " .Section 11 lays down how much
should be 'applied' or 'accumulated' and if required to be
'accumulated' under what conditions. In a decision pertaining to
the 1922 Act, the Hon Supreme Court has laid down the basic
principles which are still relevant . In the case of HEH
Nizam's v CIT [ 1966] 59 ITR 582 (SC), it was held that :-
"Under the said clause, trust income, irrespective of the fact
whether the said purposes were within or without the taxable
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territories, was exempt from tax in so far as the said income was
applied or finally set apart for the said purposes. Presumably, as
the State did not like to forgo the revenue in favour of a charity
outside the country, the amended clause described with precision
the class or kind of income that is exempt thereunder so as to
exclude therefrom income applied or accumulated for religious or
charitable purposes without the taxable territories. The
substantive part of clause (i) is in two parts : the first part relates
to the income derived from property held under trust wholly for
religious or charitable purposes and the second part, to income
derived from property so held in part only for such purposes. But
the necessary condition for attracting the first part of the clause is
that the said income is applied or accumulated for application to
such religious or charitable purposes within the taxable
territories; and to attract the second part, the income from the
property so held in part shall have been applied or finally set
apart for application to the said purposes. A comparative study of
the two parts clarifies the scope of the provision. The expression
used in the first part is "applied or accumulated for application"
and the expression used in the second part "applied or finally set
apart for application". The words "applied or finally set apart for
application" in the second part indicate that unless the income
from the said property is applied or finally set apart for the
purposes within the taxable territories, the said income does not
earn the exemption. There cannot be any reason why a different
meaning should be given to the expression "applied or
accumulated for application" in the first part of the clause, for, on
principle, there cannot be any possible distinction between such
income from the property wholly held under trust or a part of the
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property held in trust. The words "applied" and "accumulated",
therefore, must mean "applied or finally set apart". "Applied"
means that the income is actually applied for the said purposes in
the taxable territories; and "accumulated" means that the income
is set apart during the year for future spending on the said
purposes. The expression "accumulated for a purpose" involves a
conscious act in praesenti and posits a clear indication on the part
of the trustee to set apart the income for that purpose. It is,
therefore, manifest that under clause (i), only income from the
property wholly or in part held in trust actually applied or set
apart for application for future spending on religious or charitable
purposes within the taxable territories is exempted from inclusion
in the total income. "
4.10 Decisions of the various courts have indicated
different situations which are categorized as apphcation of income
. Some of the important ones are :
1. estabHshment expenses to be treated as application of
income- CIT v.Birla Janahit Trust [1994] 208 ITR 372(CAL)
2. Payment of tax out of the current year's income has to be
considered as application for charitable purposes .-CIT V Ganga
Charity Trust [1986] 162 ITR 612 (GUJ).
3. Application need not precede receipt of income/voluntary
contributions.-Siddrammana Charities Trust v CIT [1974] 96 ITR
275(MAD)
4. Repayment of loan as well as advancement of loan for the
purpose of the trust would amount to application of income -
Circular No 100 of CBDT dt 24 January 1973.
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5. Expenditure for capital outlay is allocation as this word has a
wider meaning than 'expenditure'
6. Donation to another charitable or religious trust counts as
application of income -CBDT Instruction NO 1132 dt January
5,1978.
7. Reinvestment of sale proceeds of a capital asset in another
capital asset should be treated as application - Circular No 52 of
CBDT dt 30 December 1970.
8. Discharge of past liability amounts to application -
R.BShreram Trust v. CIT [1998] 233 ITR 53 (SC)
These are only a few illustrative cases which bring about the
principle of application of income. There can be and will be
several unique situations resulting in the interpretation of this term.
ACCUMLATION OF INCOME
4.11 The trusts are allowed to accumulate or set apart
income derived by them from property held under the trust
,provided they fulfill the conditions laid out in section 11(2) read
with rule 17 and application in form no 10. The most primary
condition is that the purpose of accumulation should be specified
in Form NO 10. It has been held in the case of DIT(Exem) v
Trustees of Singhania Charitable trust [1993] 199 ITR 819(CAL)
that :-
"Section 11(1) itself provides for marginal setting apart and
accumulation not in excess of 25 per cent, of the income of the
trust. It is only such accumulation which can he taken for the
broad purposes of the trust as a whole that the statute does not
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require specification of the purpose. Such setting apart for any of
the purposes of the trust is, however, a short-term accumulation,
accumulation not beyond the year next succeeding. It is sub
section (2) which provides for the long-term accumulation of the
income. Obviously, such long-term accumulation should be for a
definite and concrete purpose or purposes. What the assessee has
sought to be permitted to do here is to accumulate not for any
determinate purpose or purposes but for the objects as enshrined
in the trust deed in a blanket manner. Accumulation in such a
global manner is definitely not in the contemplation of section
11(2) when it is construed in its setting. The assessee's contention
that saving and accumulation of income for future application of
the same is for the purposes of the trust in the widest terms so as to
embrace the entirety of the objects clause of the trust deed would
render the requirement of specification of the purpose for
accumulation in that sub-section redundant. The purposes to be
specified cannot, under any circumstances, tread beyond the
objects clause of the trust. The Legislature could not have thought
of the need of specification of the purpose if it did not have in mind
the particularity of the purpose of purposes falling within the
ambit of the objects clause of the trust deed. When sub-section (2)
of section 11 requires specijication of the purpose, it does so
having in mind a statement of some specijic purpose or purposes
out of the multiple purposes for which the trust stands. Were it not
so, there would have been no mandate for such specification. For,
a charitable trust, in no circumstances, can apply its income,
whether current or accumulated, for any purposes other than the
objects for which it stands. The very fact that the statute requires
the purpose jbr accumulation to be specified implies such a
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purpose to be a concrete one, an itemized purpose or a purpose
instrumental or ancillary to the implementation of its object or
objects. The very requirement of specification of purpose
predicates that the purpose must have an individuality. In our
view, the provision of sub-section (2) is a concession provision to
enable a charitable trust to meet the contingency where the
fulfillment of any project within its object or objects needs heavy
outlay to call for accumulation to amass sufficient money to
implement it. Therefore, specification of purpose as required by
section 11 (2) admits of no amount of vagueness about such
The assessing officer has every right to scrutinize Form No 10 and
the application of the assessee regarding accumulation of income.
However , there is a major controversy regarding when the
investments covered by form no 10 are required to be made.
Paragraph 2 of Form 10 requires that the investment has to be
made before the expiry of six months commencing from the end of
the relevant previous year. The Hon. Madras High Court has held
in the case of ITO V. MCT trust [1976] 102 ITR 138 (MAD) that
"In the Income-tax Act itself generally time limits are provided by
the statutory provisions. See sections 139, 249, 253, and 256.
Section 200 provides for the rule-making authority prescribing the
time within which any person deducting tax had to pay it to the
credit of the Central Government. Therefore, it is not as if the
legislature has left the entire question of prescriptions of time to
subordinate legislation. If the legislature was so minded as to
think it necessary to leave the question of providing any time limit
100
in regard to section 11 of the Act to the rule-making authority then
it would have said so as in section 200. Else it would have itself
fixed the time limit as done in the other provisions mentioned
above. The forgoing discussions would clearly show that the
legislature does not part with the power to prescribe limitations,
which it jealously retains to itself unless it intends to do so in clear
and unambiguous terms or by necessary intendment. The
introduction of the time element in paragraph 2 of Form No. 10
prescribed by the Rules cannot, therefore, be sustained.
In the result, we agree with the learned judge in
holding that paragraph 2 of Form No. 10 was not validly
prescribed. Paragraph 4 of Form No. 10 would also have to be
struck down as ultra vires, as the prayer contained therein is made
conditional on the assessee complying with the time limit
prescribed in paragraph. "
The same view has been upheld by various other high courts also.
The rule has been subsequently modified prescribing the time limit
as the due date for filing of return u/s 139(1) of the Income Tax
Act, 1961 However the Hon. Supreme Court has held in the case
of CIT V. Nagpur Hptel Owner's ASSOCIATION [2001] 241 ITR
201(SC) that intimation under section 11 has to be furnished
before the assessing authority before the completion of the
relevant assessment.
4.12 The CBDT has also granted powers to the
jurisdictional CITs under section 119(2)(b) to condone the delay in
filing Form No. 10 if the following conditions are satisfied :
(i) The genuineness of the trust is not in doubt;
101
(ii) The delay is only due to oversight;
(iii) There has been no benefit to settler or trustee due to
delay;
(iv) The investment is made prior to condonation;
(v) The accumulation is necessary for the purposes of the
trust;
UTILISATION OF ACCUMULATED INCOME
4.13 The accumulated income has to be utilized for the
purposes of the trust within the specified time limits. Under the
following circumstances, the accumulated income becomes
chargeable to tax :
(i) Where the accumulated income is applied for other than
charitable or religious purposes, such income is liable to be taxed
in the year of such application [Sec 13 (3)(a)]
(ii) Where the accumulated income seizes to be accumulated
or set apart for application to religious or charitable purposes, such
income is liable to be taxed in the year of cessation [Sec 13 (3)(a)]
(iii) Where the accumulated income seizes to remain invested
or deposited in any of the forms or modes specified in Section
11(5), , such income is liable to be taxed in the year of cessation
[Secl3(3)(b)]
(iv) Where the accumulated income is not utilized for
specified purposes during the period of accumulation or in the year
immediately following the expiry of period of accumulation, such
income is liable to be taxed in the year immediately following the
expiry of the period of accumulation [Sec 13 (3)(c)]
102
Substantial changes have been made to this section by Finance Act
2001 and Finance Act 2002. By Finance Act 2001, the
maximum period of accumulation has been curtailed from 10
years to 5 years by inserting a proviso in section 11(2). It was
noticed that the period of 10 years available for accumulation of
unapplied income was too long a period and was needed to be
curtailed. This was because any income of a charitable trust is
required to be spent on charitable purposes and not just to be
accumulated ad infinitum. The period of 10 years was also
perceived to be creating an impediment for proper monitoring of
the trust by the Assessing Officer because of its sheer duration.
This period has now been curtailed to 5 years which is reasonable
period of time.
SCOPE OF EXEMPTION FOR BUSINESS CARRIED OUT BY
TRUST
4.14 Section ll(l)(a) grants exemption to the income
derived by trust from property held under the trust only for
charitable or religious purposes. Secfion 11(4) of the Act provides
that for purpose of Section 11, 'property held under trust' includes
business undertaking so held. Secfion 11 (4A), which came into
effect from April 1, 1984 and was later substituted w.e.f April 1,
1992 clarifies that any income of a trust, being profits and gains of
business will be exempt only if the business is incidental to the
attainment of the objectives of the trust and separate books of
accounts are maintained by such trust in respect of such business.
Section 11(4) of the Income-tax Act, 1961 lays down that
"property held under trust" for the purposes of Section 11 may
include a business undertaking held by the trust. It further states
103
that if a claim is made that the income of any such undertaking
should not be included in the total income of the trust, the Income-
tax Officer shall have power to determine the income of such
undertaking in accordance with the provisions of this Act relating
to assessment and determination of income under the head "Profit
and gains of Business or Profession." It, however, provides that if
the income so determined by the Income tax Officer is in excess of
the accounting profits of the undertaking held by the trust, such
excess shall be deemed to be applied to purposes other than
charitable or religious purposes. The result would be that the
provisions of Section 11(1) shall not apply to such excess and the
same will be charged to tax. It is now well-established that
""property is a term of widest import and business would
undoubtedly be property unless there was something to the
contrary in the enactment.
The issue as to whether a trust could be exempt even if
it carries on business if such business itself held as property
continues to be a matter of controversy. However, a decision of
the three member bench of the Hon'ble Supreme Court in the case
of ACIT Vs. Thanti Trust [2001] 247 ITR 785 (SC) over rides all
earlier decisions. The law as laid down in this case states that :-
"A public charitable trust may hold a business as part of its
corpus. It may carry on a business which it does not hold as a part
of its corpus. But it seems to us that the distinction has no
consequence insofar as s. 13(l)(bb) is concerned. Sec. 13(l)(bb)
provides, so far as is relevant to this case, that the provisions ofs^
11 shall not operate so as to include in the total income of the
previous year of a public charitable trust for the relief of the poor,
104
education or medical relief which carries on any business, any
income derived from such business unless the business is carried
on in the course of the actual carrying out of a primary purpose of
the trust. Sec. 13(l)(bb), therefore, will apply to a public
charitable trust for the relief of the poor, education or medical
relief that carries on a business, regardless of whether or not that
business is held by the trust in trust, that is, as a part of its corpus.
Even a business that is held by such a trust as a part of its corpus
is carried on by the trust and, therefore, s. 13(l)(bb) will apply to
such trust.
The requirement of s. 13(l)fbb) is that the exemption under
s. 11 will not be available to such a trust that carries on any
business unless the business is carried on "in the course of the
actual carrying out of the primary purpose of the trust", that is to
say, unless the business is carried on in the course of actually
accomplishing a primary purpose of the trust; the business must,
therefore, be carried on in the course of the actual
accomplishment of relief of the poor, education or medical relief.
As an example, a public charitable trust for the relief of the poor,
education and medical relief that carries on the business of
weaving cloth and stitching clothing by employing indigent women
carries on the business in the course of actually accomplishing its
primary object of affording relief to the poor and it would qualify
for the exemption under s. 11.
Sub-s. (4) of s. 11 remains on the statute book, and it defines
property held under trust for the purposes of that section to
include a business so held. It then states how such income is to be
determined. In other words, if such income is not to be included in
105
the income of the trust, its quantum is to be determined in the
manner set out in sub-s. (4)
Sub-s. (l)(a) of s. 11 says that income derived
from property held under trust only for charitable or religious
purposes, to the extent it is used in the manner indicated therein,
shall not be included in the total income of the previous year of the
trust. Sub-s. (4) defines the words "property held under trust" for
the purposes ofs. 11 to include a business held under trust. Sub-s.
(4A) restricts the benefit under s. 11 so that it is not available for
income derived from business unless (a) the business is carried on
by a trust only for public religious purposes and it is of printing
and publishing books or any other notified kind, or (b) it is carried
on by an institution wholly for charitable purposes and the work in
connection with the business is mainly carried on by the
beneficiaries of the institution, provided, in both cases, that
separate books of account are maintained by the trust or the
institution in respect of such business trusts and institutions are
separately dealt with in the Act (s. 11 itself and ss. 12, 12A and H,
for example).
4.15 Various developments in this regard would indicate
that wherever there is business income accruing to a trust , the
rigid requirement of law as to the condition for exemption for such
business income would require to be given due attention. Such
business income would not be automatically exempt merely
because the trust has charitable objects. In order to find out the
profit earned by an organistation with charitable objects, the test to
be applied is whether the predominant object of the business
activity is to subserve the charitable purpose or to earn profit.
106
Where profit making has been found to be the predominant object
of the activity the purpose would seize to be a charitable purpose
and the income would lose exemption u/s. 11. However, where the
predominant object of the activity is to carry out the charitable
purpose and not to earn profit, it would not lose its character of a
charitable purpose merely because some profit arises from the
activity.
Section 11 (4) can be applied to the income, by way of
profits and gains of business, carried on by trust, where the
business undertaking is a property held under trust. The
provisions of section 11(4A) cannot be applied in such a case. The
provisions of section 11 (4A) are applicable to a case where the
business undertaking is not held under trust provided the business
is incidental to the attainment of objectives of the trust and
separate books of accounts are maintained by the trust in respect of
such business.
4.16 Any income of a trust by way of capital gains will be
treated as applied for charitable purpose only to the extent to
which sale proceeds are utilized for acquiring a new capital asset.
If the capital gains are not utilised for acquiring a new capital
asset, the trust will lose exemption. Section 11(1 A) imposes a
specific condition for exemption of capital gains in respect of
charitable trusts. Unlike other income the capital gains have to be
invested in another capital asset and cannot be kept in permitted
securities as mentioned in section 11(5). The section also provides
that it is not necessary to reinvest the entire sale proceeds. Only if
a part of the sale proceeds, the exemption will be limited to a
proportionate part of the capital gains. The proportion of exempt
107
capital gains will be in the ratio of amount reinvested in another
capital asset to the net sale consideration.
Exemption granted under section 10(230 ;
4.17 Section 10 of the Income Tax Act lists out various
types of income which are not to be included in total income and
are totally exempt. Section 10 serves as a residuary section
serving as a basket where incomes, irrespective of its nature are
considered as exempt. It also acts as an accommodating section
for incomes which the government wants to be exempted. The
types of income included in section 10 therefore are of assorted
types and have no common characteristics except that they are
exempt from income tax.
On perusal of the provisions of section 10, it is seen
that this section deals with single purpose institution, income of
which are treated as exempt. However, there are certain sub
sections of section 10 which seem to over lap with section 11 also.
In respect of charitable trust, the overlapping provisions are
section 10(23C). This section 10(23C) treats income of certain
institutions as exempt. It is however noted in practice that most of
the institutions are either in the form of charitable trust or run by
charitable trust. They can therefore enjoy exemption u/s.ll also.
In other words, a charitable trust, running educational institution or
hospitals can enjoy exemption both under section 11 as well as
section 10(23C) of the Act. The provisions of section 11 have
already been discussed in detail. The provisions of section
10(23C) are now discussed.
108
Exemption for education or medical institution was
available u/s. 10(22) or section 10(22A) till A.Y.I998-99. From
A.Y.I999-2000 these sections were deleted. The exemption
provision were however clubbed in a new section - Section
10(23C) in the form of sub sections (iiiab) to (via) and introduced
by the Finance Act 1998, w.e.f. 1/4/1999.
A close study of this section shows that it can be broken up in
three parts.
(i) Section 10(23C)(i) / (ii) /(iii)/ (iiia) are regarding exemption
of income received by any person on behalf of the PM National
Relief Fund, PM Fund for promotion of Folk Art and PM Aid to
Students Fund and National Foundation for Communal Harmony.
(ii) Section 10(23C)(iiiab) and (iiiac) are in respect of
exemption of incomes of University or any other educational
institutes or medical institution, existing solely for educational /
philanthropic purposes and not for the purpose of profit, and which
are wholly or substantially financed by the government.
(iii) Section 10(23C)(iiiad) to section 10(23C)(via) are in respect
of exemption of incomes of University or any other educational
institutes or medical institution, existing solely for educational /
philanthropic purposes and not for the purpose of profit.
The first two sub sections i.e. Section 10(23C) (iiiab)
and (iiiac) talk of exemption for income of government aided
education and medical institutions. The only conditions are that
the institute should exist for education / philanthropic purposes
and not for the purpose of profit and it should be wholly or
109
substantially financed by the government. There are no other
conditions that are required to be complied with. Also, no
approval is required from any authorities.
The next two sub sections i.e Section 10(23C) (iiiad) and
(iiiae) grant exemption in respect of any educational / medical
institution, existing solely for education / philanthropic purposes
and not for the purpose of profit and where the aggregate annual
receipts of the institution do not exceed Rs. One crore ( as
prescribed vide Rule 2 BC ). The conditions required for
exemption are similar to those mentioned earlier. No approval is
required from any authorities in case of such institutions. There is
no stipulation on investment of excess fund as mentioned in
section 11(5).
However, when the aggregate annual receipts of the
educational or medical institute exceed Rs. One crore, specific
provisions are incorporated in section 10(23C)(vi) & (via).
Law prior to 1/4/1999 had three separate sections for
three separate categories of exemptions. Section 10(22) was
applicable to educational institutes , Section 10(22A) was
applicable for medical institutes and section 10(23C) was for other
approved institutions. Finance Act 1998 deleted section 10(22)
and 10(22A) and merged these sections with section 10(23C). The
rational behind this change is explained in CBDT Circular No.772
dt.23/12/1998 which reads as under :-
8. Provisions relating to exempting the income of educational
institutions, universities, hospitals and other medical institutions
8.1. Under the provisions of clauses (22) and (22A) of section 10
of the Income-tax Act, before amendment, educational and medical
institutions enjoyed a blanket exemption from income-tax if they
existed solely for educational purposes and not for the purposes of
profit. In the absence of any monitoring mechanism for checking
the genuineness of their activities, these provisions have been
misused.
8.2. The Act omits the aforesaid clauses (22) and (22A) from the
statute. The exemption would, however, continue in respect of any
university or other educational institution, hospital or other
medical institution which is wholly or substantially financed by
Government, under the new sub-clause (iiiab) and (iiiac) inserted
in section 10(23C) of the Income-tax Act, by the Finance (No. 2)
Act, 1998.
8.3. Further, under sub-clause (iiiad) and (iiiae) in section
10(23C), the income of other educational and medical institutions
would also be exempt if their annual receipts are below a limit to
be prescribed. The limit has since been prescribed at Rs. one crore
vide Notification No. S.O. 897(E) dated 12th October, 1998.
8.4. The income of the remaining educational and medical
institutions would be exempt if they are approved by the
prescribed authority on application made by them under sub
clauses (vi) and (via) of section 10(23C). This approval would be
subject to their adherence of conditions similar to those specified
for sub-sections (iv) and (v) of section 10(23C) regarding
maintenance of accounts, expenditure and accumulation of funds
and investment of funds in specified assets. The accumulated
11
income is required to be invested in the modes specified in section
11(5). These institutions are given time upto 30th March, 2001 to
transfer their investments to specified securities. The Rules and
Forms in this regard have since been notified vide Notification No.
S.O. 897(E) dated 12th October, 1998. By this notification the
Central Board of Direct Taxes have been designated as the
Prescribed Authority for the purpose of approval under sub
clauses (vi) and (via) of section 10(23C).
8.5. These amendments will take effect from 1st April, 1999 and
will, accordingly, apply in relation to assessment year 1999-2000
and subsequent years.
COMPARISON OF SECTION 11 AND SECTION 10(230
4.18 A chart comparing the provisions of section 11 and
section 10(23C) has been prepared . This will give an idea of the
actual operations similarities and differences in these two sections.
Issue
Compulsory spending of 85% of income.
Section 10(23C)(iiia iac)/ iiiad)/( No compulsion exists.
b)/(ii iiiae) such
Section 10(23C)(vi)/(v)/ (vi)/(via) 85% of the income received is to be spent in the same year. 15% of income can be accumulated indefinitely. [Third proviso, clause (a) of sec. 10(23C)].
Sections 11 to 13
85% of the income received is to be spent in the same year. 15% of income can be accumulated indefinitely. [Sec. 11(1)1 Relaxation where income not spent because not received during
12
Accumulati on of income.
Purpose of accumulation
Time period for spending of income.
Restriction on trusts not to benefit particular
No restriction on accumulation.
No provisions exist on purpose of accumulation.
No time period.
No such restriction
Income beyond 15% can be accumulated for five years. Accumulation has to be in one of the modes specified in 11(5) subject to exceptions. [Third proviso, clause (a) of sec. 10(23C)]
Accumulation of funds need not be for specific purposes but application has to be wholly and exclusively to its objects. [Third Proviso, clause (a) of section 10(23C)]
85% of the income to be spent in the same year [clause (a) of third proviso tosec. 10(23C)
No such restriction
the year or for any other reason. [Explanatio n (2) to section 11(1)]
Income beyond 15% can be accumulated for five years. Accumulation has to be in one of the modes specified in 11(5) subject to exceptions. [Sec. 11(2)]
Accumulation has to be for specific purpose and the purpose and period of accumulation has to be intimated to the AO in writing. [Sec. 11 (2)]
Under Explanation 2 of Sec. 11(1), unspent income can be spent in the subsequent year at the option of the assessee.
13
religious community or caste.
Self-dealing restrictions.
Treatment of voluntary contribution in the form of jewellery, furniture, etc.
Pre 1998 equity shares of public companies
Treatment of non-corpus
Not applicable.
No conditions exist.
No restrictions on investments
Exempt if applied to
No provision restricting self-dealing by the trustees, managers, founders, etc. (specified persons).
Voluntary contributions received and maintained in the form of jewellery, furniture, etc. need not be invested in the modes of seel 1(5). [Third proviso, clause (b), item (iv) of sec. 10(23C)]
Only University or other educational institution, hospital or other medical institution(clause (vi) and (via) of secretary 10(23C)) can hold such equity shares where such shares form part of corpus [Third proviso, clause (b), item (ia) of secretary. 10(23C).
Treated like any other income i.e.
114
donations.
Treatment of donations to corpus.
Value of medical or educational services provided to interested persons Filing of returns.
Auditing of accounts.
Approval
educational/med ical purposes
Exempt if applied to educational/med ical purposes
No restrictions
No obligation. (Now made mandatory vide TLAA 2006)
Not applicable.
No approval
exempt if applied to educational/medica 1 purposes or accumulated. [section 2(24)(iia)l No special treatment to corpus donation. In other words, corpus donations have to comply with conditions of spending and accumulation.
No restrictions
Required to file returns annually. [Sec. 139(4C)]
No explicit provision for audit. However, three years audited accounts are required to be enclosed while applying for approval [Form 56D](Now made mandatory that audited accounts be filed with return vide TLAA 2006)
Approval by the Registration once
115
and Renewal
Time limit for approval
Retrospectiv e approvals
Taxation of anonymous donations
necessary.
Not applicable
Not applicable
Taxable at 30%
CCIT/DGIT and renewal after every 3 years. Eighth proviso to section 10(23C) and Rule 2CA](Now one time approval vide TLAA 2006)
No time limit. (Now one year time limit in TLAA 2006)
Approvals could be given for any earlier years (Now asses see can only apply for the current and future financial years vide Finance Act, 2006. No power to condone delay)
Taxable @30% in case of all charitable entities. In case of wholly religious entities not taxable. In case of mixed purpose entities taxable if the anonymous donation is for an educational or medical institution
by CIT/DIT and no renewal [Sec.l2AA]
Six months from the end of the month in which the application was received. Section 12AA(2)
Assessee has to apply within one year from creation of trust or establishment of institution with provision for condonation of delay by CIT [Section 12A]
Taxable @30% in case of all charitable entities. In case of wholly religious entities not taxable. In case of mixed purpose entities taxable if the anonymous donation is for an educational or
run by the entity [Section 115BBC]
medical institution run by the entity [Section 115BBC]
4.19 What can be seen from the purview of these sections
is that the institute should exist solely for educational or
philanthropic purposes and not for purposes of profit. It is not
clear from the definition whether the expression solely qualifies
the phrase educational purposes or not for purposes of profit. A
reasonable approach would be to assume that it applies to both.
The exact meaning of this phrase has been brought out by the
decision of the Hon'ble Supreme Court in the landmark case of
ACIT Vs Aditanar Educational Institute [1997] 224 ITR 310 (SC).
In the said decision, the Hon'ble Supreme Court has commented as
under :-
"All that the High Court has stated in the penultimate
paragraph of the judgment is that counsel for the assessee gave a
right answer to a hypothetical question put forward by the Court
to the effect that the applicability ofs. 10(22) should be evaluated
or investigated every year and only if it is found that the
'institution' exists for educational purposes in the relevant year
and even if any profit results, which is only incidental to the
purpose of education, the income would be exempt. The High
Court has made an observation that any income which has a direct
relation or incidental to the running of the institution as such
would qualify for exemption. We may state that the language ofs^
10(22) of the Act is plain and clear and the availability of the
exemption should be evaluated each year to find out whether the
17
institution existed during the relevant year solely for
educational purposes and not for the purposes of profit. After
meeting the expenditure, if any surplus results incidentally from
the activity lawfully carried on by the educational institution, it
will not cease to be one existing solely for educational purposes
since the object is not one to make profit. The decisive or acid test
is whether on an overall view of the matter, the object is to make
profit. In evaluating or appraising the above, one should also bear
in mind the distinction/difference between the corpus, the objects
and the powers of the concerned entity. The following decisions
are relevant in this context : Governing Body of Rangaraya
Medical College vs. ITO (1979) 117 ITR 284 (AP) and Secondary
Board of Education vs. ITO (1972) 86 ITR 408 (Oh). We make this
position clear in order to allay the apprehensions expressed by
counsel. "
4.20 The main principle that emerges from the above
decision is that if any surplus results incidentally from the activity
carried on by the educational institutes, it will not seize to be one
existing solely for educational purposes, since the object is not one
to make profit . In other words, generation of profit will not take
an institution out of the purview of exemption if profit generation
is not an object. Similar view was expressed by the Hon'ble Kerala
High Court in the case of CIT Vs PuUikal Medical Foundation Pvt.
Ltd. [1994] 210 ITR 299 (KER). In the said decision, the Hon'ble
court has observed as under :-
"We respectfully adopt this dictum and hold that
merely because the assessee is running the hospital on commercial
lines, it will not be disentitled to the exemption under section 10
118
(22A) of the Act. As long as the dominant purpose is a
philanthropic one, the mere circumstance that the managing
director or director gets some advantages or exercises some
patronage while running the institution, that will not be a ground
to hold that the main purpose of the institution is not
philanthropic. These benefits would be merely incidental to the
carrying out of the main or primary purpose and so, such benefits
would not militate against the philanthropic character of the
institution. As long as the purpose of earning profit is to expend
such profit for the achievement of the main philanthropic purpose,
the assessee may carry on any activity for profit. The profit should
be re-deployed in the same institution or in another similar
institution
Another aspect to be considered is whether philanthropic purpose
will require a scheme for extending free consultation facility to the
poor patients. The Income-tax Officer after verifying the records
found out that it is the practice of the assessee to allow some
discount from certain bills and such discounts are accounted as
free treatment. It was also observed that such discounts need not
be to poor and indigent patients. The Officer also fairly stated that
there may be some cases where the assessee has rendered free
treatment to some patients. However, a substantial portion of the
expenditure debited as free treatment represents discounts allowed
by the management. According to the Income-tax Officer, there is
no element of "philanthropy" in granting such discounts. We
appreciate the care with which the Income-tax Officer has gone
into the accounts and fairly conceded the points in favour of the
assessee. However, free treatment to the poor and needy cannot be
19
the sole philanthropic activity of a hospital. However, we hasten to
add that it is one of the clear and apparent forms of philanthropic
activity which a hospital can perform and that it should be the aim
of a any hospital claiming to be a philanthropic institution to
render free treatment to the needy and the poor, for which it may
set out some specific principles. The assessee has not so far
formulated or practised any such principles or procedure. The
assessee should make proper remedial measures in this regard,
especially because in clause IIIA of the memorandum, one of the
object is to render free medical aid to poor patients. However, the
meaning of the words "philanthropic purposes" includes activities
promoting goodwill to mankind or activities beneficial to humanity
at large as opposed to activities solely for the benefit of a few
individuals. Eleemosynary is not one of the essential ingredients of
philanthropy. Acquiring costly machines for investigation and
examination of patients, providing the services of highly qualified
doctors for consultation, expansion of the hospital by including
rare super specialities, will all be philanthropic activities. We do
not agree with the opinion of the Officer that the employees of the
institution should also be guided by philanthropic motives in order
that the institution can claim to be a philanthropic institution.
Highly specialised doctors and technicians can be employed by the
institution only if salary commensurate with their qualifications is
paid to them. It has to be kept in mind that the present enquiry is
only whether the assessee is a philanthropic institution or
not
In case a hospital exists solely for philanthropic purposes, even if
incidentally profits is earned, the hospital is entitled to the benefit
120
under section 10 (22A) of the Act. In order to achieve the main
philanthropic objects, the hospital may do some profit earning
business provided such profit is appropriated towards the
expansion and development of the hospital or to start another
institution with the same philanthropic objectives. The real test to
be applied is what is the dominant or primary purpose of the
institution. If the Primary purpose is philanthropic, the inclusion
of some objects for earning profits for the implementation of the
primary object would not alter the character of that primary
object. In other words, this will not be a ground for holding that
the hospital is not existing solely for philanthropic purpose. All
cumulative factors will have to be taken into consideration in
order to decide whether the institution exists for philanthropic
purpose and not for purposes of profit. Neither the fortuitous
factor of having a large surplus in any particular year, nor the fact
of diverting some income to objects which are not philanthropic in
itself would be decisive of the matter. "
It can be seen from the above two decisions that the
scope of exemption u/s.lO(23C) is wider than the scope under
section 11. The plurality of exemption provisions available to
certain assessees u/s.ll as well as section 10(23C) is discussed
separately later.
There have been certain modifications regarding the
institutions covered u/s.lO(23C). Certain more requirements have
been introduced for more effective monitoring of such institutions.
The modifications are :-
121
•
(i) The institutions covered u/s.lO(23C) should file return of
income as per section 139(4C), if their income exceeds minimum
exemption Hmit.
(ii) With effect from 14/7/2006, compulsory audit has been
made mandatory for institutions covered by clauses (iv), (v), (vi)
& (via) of section 10(23C) if the income exceeds minimum
exemption limit.
(iii) The exempt income of the institutions covered u/s.l0(23C)
will not include income by way of anonymous donation as
mentioned in section 115BBC. This amendment is w.e.f
A.Y.2007-08.
DEDUCTION TO DONORS U/S 80G
4.21 Though the provisions of Section 80G do not grant
any direct exemption to a charitable trust , it is one of most
important sections from the trust's point of view. This is because ,
a donation given to a charitable trust u/s 80G entails the donor to
get a deduction, equal to prescribed percentage of the donation
given , from his income. Naturally given a choice any donor would
like to give a donation to a trust recognized u/s BOG as it results in
a direct monetary benefit to him .
The scheme of section BOG is as under :
Section 80G(1) states the deductions that will be allowed
while computing the total income of an assessee, in respect of
donations made by an assessee to specified persons.
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•
•
•
• >
Section 80G(2) gives the list of eligible persons to whom
the donations can be made for the purpose of claiming exemption
under section 80G.
Section 80G(4) specifies the limit for the donations. The
donations should not exceed 10% of the gross total income.
••• Section 80G(5) lays down the conditions for an
institution, referred to in section 80G(2)(a)(iv), in order to be held
eligible under the section.
Section 80G(5A) clarifies that where deduction in respect
of a sum is claimed under this section, such sum shall not qualify
for any other deduction under the Act.
^ Section 80G(5B) specifies that any institution or fund
incurring not being in excess of 5% of the total income, for
religious purposes, shall be deemed to be an institution to which
the provisions of this section apply.
Perusal of this section shows that this section has provided for two
types of deductions as under:-
1. 100% deduction is available without any precondition for
donations to specified funds;
2. 50% of the donation is allowable for donation to other
institutions which satisfy the requirements of Section
11,12,10(23AA) or 10(23C)
The main conditions for eligibility u/s 80G are
mentioned in S.80G (5). The donation to a trust would be held as
deductible in the hands of the donor only if the trust is registered
with the Commissioner of Income Tax and its income is exempt
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u/s 10 or 11. In the event the registration of the trust is cancelled
by the Commissioner of Income Tax, approval u/s 80G gets
automatically cancelled from the date on which registration itself
is cancelled.
4.22 Section 80G(5) lays down the conditions under which
the donations covered under section 80G(2)(a)(iv) shall be eligible
for the benefit of that section. The institution or trust to whom
such donation can be given should be
(i) established in India ;
(ii) for a charitable purpose ;
(iii) fulfills conditions laid down in section
80G(5)(i) to 80(5)(vi)
Certain important points that have emerged over the years in
respect of section 80G are as under :-
(i) For availing deduction u/s.80G, it is obligatory
on the part of the assessee to produce necessary proof of payment.
In the absence of such proof, the Assessing Officer can reject the
assessee's claim.
(ii) The assessee is entitled to deduction u/s.80G
only when he has a positive income. If the gross total income of
the assessee is negative, he is not entitled to the deduction u/s.80G
(iii) The deduction u/s.80G becomes eligible if
donations are actually made to the eligible trust during the
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previous year. The subsequent utilization or non utilization of
sucli donation by the trust or institution is of no consequence.
(iv) Another interesting issue is whether donation in
kind can also be claimed as deduction for the purpose of section
80G. The Hon'ble Supreme Court has ruled that section 80(2)(a)
contemplates only cash donations and not donations made in kind.
INFERENCES AND RECOMMENDATIONS
4.23 Section 11 & 12, Section 10(23C) and section 80G are
the main sections that provide exemptions to income of charitable
trusts. The provisions and the judicial pronouncements thereon
have been discussed in the preceding paragraphs. Section 11
mainly lays down the types of charitable organizations that will be
exempt and treatment to be given for capital gains arising out of
transfer of asset by a trust, method of application and
accumulation of income, modes of accumulation and treatment for
the income generated through business carried out by trusts.
Section 12 talks of the treatment to be given to the voluntary
contributions received by a trust. Section 10(23C) exempts the
income of institutions in the field of education and medical
services existing for philanthropic or charitable purposes and not
for the purpose of profit. Section 80G provides income to donors
giving donations to charitable trusts. Personal experience as well
as discussions and interviews with senior officers of the
department invariably lead to the conclusion that the provisions of
section 11 & 12 as well as section 80G have been drafted very
meticulously and cover all the plausible situations. There are very
few escape routes which can be resorted to by ill intended people.
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These provisions have evolved over the years and, in my opinion,
have now really matured.
4.24 The first finding that the researcher has to give is in
respect of modes of investment as laid down in section 1 l(5)(xii).
This section says "any other form or mode of investment or
deposit as may be prescribed." The other forms or mode of
investment are specified in Rule 17C. Rule 17C(1) permits
investment in units issued under any scheme of mutual fund
referred to in section 10(23D). The basic preamble specifying the
modes of investment is that trust money is public money and if at
all required to be invested, should be invested in safe modes,
devoid of any speculation which might result in erosion of its
value. Because of this reason, the trust funds are not allowed to be
invested in equity shares. However, it is surprising that investment
in units of mutual funds is a specified investment u/s.l l(5)(xii).
The mutual funds are also subject to market variation as the NAV
is linked with the investment made in mutual fund in the primary
and secondary market. The investment in units of mutual fund
cannot be equated on the same terms as the other investments like
fixed deposits with nationalized banks or bonds issued by the
central or state government.
4.25 The second observation is regarding the applicability
of 40(a)(i) and (ia) regarding non deduction / non deposit of
deducted TDS. As per the provisions of section 40(a)(i) and (ia),
any interest, royalty , commission or brokerage or fees for
professional or technical services or amounts payable to contractor
or sub-contractors shall not be allowed as a deduction in
computing the income chargeable under the head 'Profits & gains
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of business or profession' , if in respect of such sum, tax has not
been deducted or after deduction has not been deposited in the
Central Government Account within the prescribed time limit.
The purpose enacting this provision is to strengthen the TDS
provisions so that collection of tax should be prempted.
A charitable trust also makes lot of payments on
which tax is deductible. However, if the trust fails to deduct tax or
after deducting fails to deposit the same in government account, it
escapes the net cast by section 40(a)(i) and (ia). This is because
(a) The income of the trust cannot be computed
under the head 'Profits & gains of business or profession' ;
(b) Even if the said deduction is disallowed and
added back to the total income, the entire income of a charitable
trust is exempt under section 11 and hence the disallowance of
deduction has no effect as such.
To tide over this lacunae, it is recommended that if tax
is not deducted or if deducted and not deposited within the
prescribed time limit, wherever deductible a provision should be
enacted such that such amounts will not be included in the income
of the charitable trust treated as exempt under section 11 (or under
section 10(23C) as the case may be).
4.26 Though section 11, 12 & 80G have been immaculately
drafted, the same cannot be said about section 10(23C). As
discussed earlier, section 10(23C) exempts the income of
educational or medical institutes, wholly or substantially financed
by the government or private, existing solely for philanthropic or
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educational purposes and not for the purposes of profit. Section
10(23C)(iiiab) to 10(23C)(iiiae) exempts the income of
educational or medical institutes which are substantially granted
by the government or whose annual receipts are below Rs.one
crore. Earlier there was no check on such institutions. Now,
however, this lacuna has been removed by making it mandatory
for such concerns to get their accounts audited and also to file
returns of income. Section 10(23C)(vi) and (via) exempts income
of educational or medical institutes existing solely for educational
or philanthropic purposes and not for the purpose of profit and
where the receipts exceed Rs. One crore. There are two major
shortcomings in this section.
The first shortcoming is that the provisions of section
13 which has been so elaborately drafted to ensure the prevention
of misuse of trust property for the personal use of the trustees or
their relatives are not incorporated in section 10(23C). In other
words, a trust claiming exemption under this section is not subject
to forfeiture of exemption even in case the properties used for the
personal gain of the trustee or relatives. This is a major lacuna and
is required to be addressed by making the provisions of section 13
applicable in case of trusts or institutes claiming exemption
u/s.lO(23C).
The second lacuna, a more important one is the
structural fault. By virtue of this section, there exist two sections
whereby education or medical institutes can claim exemption of
income ie. Section 10(23C) and section 11. Such multiplicity of
exemptions is highly undesirable and does not serve any purpose.
The Public Accounts Committee 2006-07 had the following
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comments to offer in its 36 Report tabled before the Hon'ble
Parliament. :-
"15. While observing that separate yet overlapping
clauses in the Income Tax Act providing exemption under section
10(23C) and Sections 11 and 12 of the Act are being misused by
private educational institutions, the Committee in their earlier
Report, had recommended that the existing tax laws should be
made simpler and clearer in consultation with the Ministry of Law
and the lacunae in the law, if any, should be plugged suitably. In
this regard, the Ministry vide their Action Taken Note have
informed that necessary enabling changes have been brought in
the statute through the Taxation Laws Amendment Act, 2005. With
regard to the simplification of the existing tax laws, the Ministry
have stated that the exercise to simplify the Income Tax Act is
currently underway and the suggestions of the Committee to merge
the provisions [Sections 11, 12 and 10 (23C) (vi)J governing tax
exemptions for educational institutions have been forwarded for
consideration to the Expert Group constituted for this purpose.
The Committee desire that the Expert Group should be impressed
upon to consider the matter expeditiously and submit its findings
at the earliest. They would also like to be apprised about the
findings of the Expert Group and the consequential action taken by
the Government thereon
The Kelkar Committee, constituted for evaluation of
Direct Tax Act had also made the following categorical
recommendation.
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It is obvious that the think tank at the highest level in
the government have also visualized the ill effects of existence of
such multiplicity of exemptions. As recommended by the Kelkar
Committee, these provisions need to be immediately merged
together.
"7.18 The income of the Charitable Trust from property held under
trust is exempt to the extent it is applied for charitable purposes.
The surplus if any is allowed to be accumulated for future
application, subject to certain specified conditions. The benefit of
the exemptions is either enjoyed under various clauses of Section
10 or under Section 11 to 13. The compliance burden under the
two schemes is different. Infact, the Task Force received large
number of grievances particularly relating to delay in the issue of
exemption notification under Section 10 by the Central Board of
Direct Taxes. Such delays are inherent in the very procedure for
issuing any statutory notification. Therefore, the Task Force
recommends that the exemptions under Section 10(21), 10(23B)
and 10(23C)(iiiab) to (via), 10(29A) should be merged with Section
11 to ISA of the Income Tax Act. "
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