Brief: - Charitable Institutions plays an important role in social welfare. These institutions are engaged in providing various services ranging from education to relief of poor across regions of the country. They operate on non-for-profit motive. The various resources mobilised by these institutions will be used for their objectives for which they are formed.
To incentivise these institutions which are addressing various social issues the Income Tax Act, 1961 (‘ITA,1961’) has provided for exemption of income earned by Charitable Institutions vide section 11.
ITA, 1961 Provisions: -
Section 11 provides that income derived from property held under trust wholly for charitable or religious purposes to the extent applied to such purposes in India is exempt from tax.
Section 2(15) of ITA, 1961 defines Charitable Purpose. It includes: -
- Relief of the Poor; o Education;
o Yoga;
o Medical Relief;
o Preservation of Environment including watershed, forest and wildlife;
o Preservation of Monuments or places or objects of artistic or historic interest; o Advancement of any other object of general public utility.
The phrase ‘advancement of any other object of general public utility’, is very wide. It should be noted that the following are not treated as advancement of any other object of general public utility 1: -
- Carrying on any activity in the nature of trade, commerce or business or o Carrying on any activity of rendering any service in relation to the trade.
'Property' is a term of the widest import, and subject to any limitation or qualification which the context might require, it signifies every possible interest which a person can acquire, hold and enjoy. Business would undoubtedly be property unless there is something to the contrary in the enactment - J.K. Trust v. CIT 32 ITR 535.It includes immovable and movable property. - CIT v State Urban Development Agency 37 taxmann.com 193
The profits of the business carried on by a non-religious trust will be exempt provided: -
o The business is incidental to the attainment of the objective of the trust; and
o Separate books of account are maintained by such trust in respect of such business.
1Where aggregate receipts from such activities exceeds 20% of total receipts of the trust or institution undertaking having object of advancement of any other object of general public utility (WEF AY 2016-17)
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This section requires Charitable Institutions to apply 85% of income for its purposes in India and the balance can be accumulated for application in future. The 15% of the income should be invested in the investments specified in section 11(5) of ITA, 1961.
2Any amount credited or paid out of income to another charitable institution registered under Section 12AA of ITA, 1961 as a corpus (capital) contribution shall not be treated as application of income for charitable or religious purposes.
Where 85% income cannot be applied during the previous year, it should be accumulated and applied for charitable purposes in future subject to a maximum period of 5 years. For this purpose, assessee has to file Form 10 before the due date for filing return of income specified under Section 139 of ITA, 1961.
The word ‘applied’ need not necessarily spent. Even if the amount is irretrievably earmarked and allocated for charitable or religious purposes it may said to have been ‘applied’ to the said purposes- CIT Vs Radhaswami Satsang Sabha 25 ITR 472.
Any amount by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as application of income, is not considered as application of income for the purpose of section 11 of ITA, 1961.
Capital Donations, which are received for a specific purpose, are not subject to tax.
Any voluntary contributions received by trust or institution created wholly for charitable or religious purpose, other than capital contributions, shall be deemed to income derived from property held under trust wholly for charitable or religious purposes.(Section 12)
The objectives of Charitable Institutions are such that public in general are beneficiaries. They should not benefit a group of individuals. Section 13 of ITA,1961 specifically provides that the benefit of exemption provided in section 11 and 12 are not available if the beneficiaries of the activities of charitable institutions are only those specified there in.
Section 12(2) of ITA, 1961 states that the value of services, being medical or educational services, made available by any charitable or religious trust running a hospital or medical institution or educational institution to any person referred to clause 3 (a)/(b)/(c)/ (cc)/(d) of section 13(3) shall be deemed to be income of the trust or institution derived from property held under trust wholly for charitable or religious purpose and shall be chargeable to tax.
However, charitable institutions running educational institution or medical institution or hospital shall not lose the benefit of exemption of any income other than the income referred to in section 12(2).
2Finance Act 2017
3Author of the trust or founder of the institution or trustee or manager or relative of such person or person
who made substantial contribution.
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Registration requirements: -
The Charitable Institution will get the benefit of exemption U/s 11 and 12 only if it is registered U/s 12AA of the ITA, 1961.
The application should be made in form 10 to the Principal Commissioner or Commissioner of Income Tax. Order granting or refusing registration shall be passed before expiry of six months from the end of the month in which the application was received.
Where registration has been granted to the trust or institution U/s 12AA then the provisions of section 11 and 12 shall apply in respect of income related to the assessment year for which assessment proceedings are pending before assessing officer as on the date of such registration.
After grant of registration Principal Commissioner or Commissioner has satisfied that the activities of the trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution he shall pass an order in writing cancelling the registration of such trust or institution.
If the objects of the charitable institution are modified after grant of registration, such change should be informed to the Principal Commissioner or Commissioner within 30 days of such modification.
