QUESTION
A charitable trust derived its income from the business of providing mineral water to various companies situated in Software Technology Park in Hyderabad. A sum of Rs. 30 Lakhs has been derived as income from such business activity, which has been applied for the purpose of "General Public Utility". The total receipt of Charitable trust was Rs. 140 Lakhs in FY 2021-22.
Examine the taxability of application of income of the Charitable Trust in FY 2021-22. Would your answer be differ if Charitable Trust is an Educational Trust runs in a backward district of Maharashtra and runs school and applies profits from the business in school activities.
APPLICABLE PROVISIONS
AS PER S.2(15) OF THE INCOME TAX ACT, 1961, unless the context otherwise requires, the term "charitable purpose"includes;
a) relief of the poor,
b) education,
c) yoga,
d) medical relief,
e) preservation of environment (including watersheds, forests and wildlife) and
f) preservation of monuments or places or objects of artistic or historic interest, and
g) the advancement of any other object of general public utility.
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.
Rationalization of definition of Charitable Purpose in Union Budget 2015; insertion of 'yoga' and substitution of Proviso (i) and (ii) w.e.f. 1 Apr. 2016
The primary condition for grant of exemption to a trust or institution under section 11 of the Act is that the income derived from property held under trust should be applied for charitable purposes in India.
CHARITABLE TRUST ENGAGED IN BUSINESS ACTIVITIES
It means that a Charitable trust is engaged in business activity will be liable to any tax on income from the activity. However, exemption would be available to the trust in respect of income earned from such business activity if -
(a) Such business is incidental to the attainment of the objects of the trust/institution; and
(b) separate books of accounts are maintained by such trust/ institution in respect of such income.
SECTION 2(15) PROVIDES THAT
The Advancement of any other object of general public utility"would not be Charitable Purpose if it involves the carrying on of -
(a) any activity in the nature of trade, commerce or business or
(b) any activity of rendering of any service in relation to any trade, commerce or business.
For a fees or cess or any other consideration, irrespective of the nature of use or application of the income from such activity, or the retention of such income, by the concerned utility.
Unless-
(1) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(2) the aggregate receipts from such activity or activities, during the previous year, does not exceed 20% of the total receipts, of the trust or institution undertaking such activities, for the previous year.
Therefore, in effect, "advancement of any other object of general public utility"would continue to be a"Charitable Purpose", if the activity in the nature of trade, commerce or business is undertaken in the course of actual carrying out of such advancement of any other object of general public utility and the aggregate receipts from any activity in the nature of trace, commerce or business or any activity of rendering any service in relation to any trade, commerce or business does not exceed @20% of the total receipts of the trust or institution undertaking such activity or activities, for the previous year.
SECTION 11(4A) of the Income Tax Act, 1961
Substituted by the Finance (No. 2) Act, 1991, w.e.f. 1-4-1992. Prior to the substitution, sub-section (4A), as inserted by the Finance Act, 1983, w. e. f. 1- 4- 1984, read as under:" (4A) Subsection (1) or sub-section (2) or sub- section (3) or sub-section (3A) shall not apply in relation to any income, being profits and gains of business, unless- (a) the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or is of a kind notified by the Central Government in this behalf in the Official Gazette; or (b) the business 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, and separate books of account are maintained by the trust or institution in respect of such business."
NEW SECTION 11(4A) OLD ONE AS BEEN SUBSTITUTED BY FINANCE ACT, 1991
Subsection (1) or Sub Section (2) or Sub Section (3) or Subsection (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business
ANSWER
1. IN FIRST CASE- Net Income from business activity of supplying mineral water of the trust of Rs. 30 Lakhs is not eligible for exemption under provisions of Section 11. Since receipt of Rs. 30 Lakhs increased 20% of the total receipts of the trust or institution i.e. Rs. 28 Lakhs (20% of Rs. 140 Lakhs). This is because the "advancement of any object of general public utility"would not be a Charitable Purpose if it involves carrying on any activity in the nature trade, commerce or business and carrying on of any activity of rendering of any activity in relation to any trade, commerce or business. In this case supply of mineral water to the companies in Software Technology Park is an activity in the course of trade or commerce or business activity.
2. SECOND CASE- when purpose of trust is imparting education in remote areas this restriction is not applicable. The reason is that the restriction contained in Section 2(15) is applicable to only last limb of the definition i.e. of "Charitable Purpose", i.e. "advancement of the object of general public utility". It does not affect the other limbs of the definition i.e., relief of "poor", "Education", "Medical Relief", etc.
SECTION 11(4)- provides property held under trust involves includes a business undertaking held under trust.
SECTION 11(4A) - exemption can be availed in respect of profits and gains of business, if such business is incidental to the attainment of the objectives of the trust and a separate books of account are maintained in respect of such business.
PLEASE NOTE- in Second Case as given above the profit from business shall be eligible for exemption under Section 11 assuming that the business is incidental to the attainment of main activity of the trust and the books of account of business activity is maintained separately.
OVERVIEW OF CONDITIONS AND SCHEME OF TAXATION OF CHARITABLE TRUSTS
1. The exemptions available under section 11 are subject to the conditions specified in sections 11, 12, 12A, 12AB and 13 of the Act.
2. The organization must be solely existing for the public benefit, and such organization can be either religious or charitable in nature.
3. Section 11 provides that the Income from trust property (subject to provision of sections 60 to 63 of the Income-tax Act, 1961) shall be subject to exemption as provided in clauses (a), (b), (c) and (d) of sub-section (1) of section 11. Hence, initially, one needs to compute the income of an organization subject to exemption.
4. Section 11(1)(a) begins with the words 'income derived from property held under trust wholly for charitable or religious purposes...........'. The word 'wholly' refers to the object and not to the property held under trust. The trust should be wholly for charitable or religious purposes but it is not necessary that the property should be wholly with the trust.
5. It may be noted that section 11(1)(a) uses the words "income derived from property held under trust wholly for charitable or religious purposes.......". This section does not distinguish between a private and public religious trust, therefore, as far as section 11 is concerned there is no difference between a public and private religious trust.
6. Income shall be exempt to the extent applied for wholly for charitable or religious purposes in India and this exemption is also available to the income accumulated up to 15% of the income. [Section 11(1)(a)]
7. If the organization was created prior to 1-4-1962, then the exemption will be available even if it is partly for religious or charitable purposes. The income to the extent applied for religious or charitable purposes is exempt under section 11(1)(b) and the same condition of 85 per cent application would apply.
8. Under section 11(1)(c) income of charitable or religious organizations is required to be applied in India only, unless the organization is specifically permitted to work outside India or works for notified purposes which tend to promote international welfare in which India is interested.
9. Organizations created before 1-4-1952 can apply income outside India also. Organizations created on or after 1-4-1952 can apply income outside India for charitable purposes which tend to promote international welfare in which India is interested. These organizations will only get exemption under section 11 if the CBDT has permitted or notified such activity for charitable purposes outside India.
10. Under section 11(1)(d) income in the form of voluntary contribution with a specific direction that they shall form part of corpus shall be exempt. The Finance Act, 2021 provides that the corpus donation shall be exempt only if invested or deposited in one or more of the forms or modes specified in Section 11(5) maintained specifically for such corpus. Thus, the corpus donation received by an organization will not be treated as exempt income unless it is invested or deposited in one or more of the forms or modes specified in section 11(5) maintained specifically for such corpus.
11. To cover the shortfall in application of 85%, Clause (2) of Explanation to section 11(1) provides for the option to apply the shortfall in application in subsequent year or in the year of receipt (subject to condition) and section 11(2) provides for the accumulation of any part of income for specific purpose for five years, subject to certain conditions.
12. Under section 11(1B) and section 11(3), income shall be subjected to tax if the conditions for option or accumulation as mentioned in previous para are not complied with.
Explanation 2 to section 11(1) provides for disallowances of application amount regarding corpus grant to any institution approved under section 10(23C) or registered under section 12AA/12AB.
Explanation 3 to section 11(1) provides for disallowance due to violation of TDS provisions & cash payments. If tax is deductible from any payment but it is not deducted and payment is made to a resident person, 30% of such amount will be disallowed. If payment for an expense exceeding Rs. 10,000 is made in cash or any impermissible mode; that payment or expense will not be considered while computing the application of income.
Explanation 3A to Section 11(1) inserted by the Finance Act, 2022 provides that where the property held under a trust or institution includes any temple, mosque, gurdwara, church or other place notified under section 80G(2)(b), any sum received by such trust or institution as a voluntary contribution for renovation or repair of such temple, mosque, gurdwara, church or other place, may, at its option, be treated by such trust or institution as forming part of the corpus of the trust or the institution.
Explanation 4 to Section 11(1) provides that application for charitable or religious purposes from the corpus as referred to in section 11(1)(d) shall not be treated as application of income for charitable or religious purposes. However, when such corpus donations are invested or deposited back, into one or more of the forms or modes specified in section 11(5) maintained specifically for such corpus, 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.
Explanation 5 to section 11(1) provides that calculation of income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding the previous year.
13. Capital gains are also required to be applied for charitable and religious purposes and therefore, it will amount to depletion of the corpus of the organization. In order to overcome this disadvantage, the Income-tax Act has brought section 11(1A).
- Section 11(1A) provides for exemption of capital gain if these are utilized for acquiring another capital asset.
- Section 11(4) provides that "property held under trust"shall include a business undertaking so held and
- Section 11(4A) provides exemption of income from incidental business activities on specified conditions.
- Section 11(5) together with Rule 17C provides for the modes where investment by a trust can be made.
- Section 11(6) of the Income Tax Act provides that depreciation shall not be allowed while computing income subject to application against those assets which have been treated as application in earlier years.
- Section 11(7) provides that exemption under section 10 shall not be available except income referred to in section 10(23C), 10(46) and section 10(1).
The proviso to section 11(7) further provides that an organization registered under section 12AB cannot simultaneously have approval under section 10(23C) or notified u/s 10(46). By amendment in section 11, it is clarified that the registration u/s 12AA/12AB shall be inoperative from the date on which the trust or institution has been approved under clause (23C) of section 10 or is notified under clause (46) of the Income-tax Act.
The Finance Act, 2022 inserted Explanation to Section 11 to provide that any sum payable by any trust shall be considered as an 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 such trust according to the method of accounting regularly employed by it.
Section 12(1) provides that any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes shall, for the purposes of section 11, be deemed to be income derived from property held under trust wholly for charitable or religious purposes. However, contribution received with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in income for the purposes of section 11. In other words, voluntary contributions other than those towards corpus specific direction are deemed as income.
Section 12A(1) provides conditions for applicability of sections 11 and 12. This sub-section provides that sections 11 and 12 shall not be applicable unless the conditions specified in sub-section (1) of section 12A are fulfilled. Conditions include registration under section 12AA/12AB, obtaining and furnishing of Audit report, submission of return, maintenance of books of account, etc.
Proviso to sub-section (2) of section 12A provides for the benefit of registration even for earlier years once the registration is granted.
- Section 12AB provides the process of registration as well as the situation and process of cancellation of registration.
- Section 13 of the Act specifies the circumstances under which the benefits under sections 11 and 12 would not be available to an organization.
- Section 13 has been enacted as an exception to section 11, and therefore, the benefits which are otherwise available under sections 11 and 12 will not be available under the circumstances stated in section 13.
- Section 13(10) and section 13(11) inserted by the Finance Act, 2022 provides for the computation of income in the specified circumstances when the benefit of exemption is denied to the trusts or institutions under section 11 and 12.
CONDITIONS TO CLAIM EXEMPTION
The exemptions available under section 11 are subject to the conditions specified in sections 11, 12, 12A, 12AA and 13 of the Act. Therefore, exemption is not available if various conditions, as are required to be followed, are not adhered to.
This issue was pointed out in CIT v. Hyderabad Secunderabad Foodgrains Association Ltd. [1988] 41 Taxman 291/[1989] 175 ITR 574 (AP). In this case, the Court held that it was proper on the part of the revenue to ensure and verify that the provisions of sections 12, 12A, 12AA and 13 were duly complied by the assessee before availing exemption under section 11.
The following are the conditions as provided in section 12A(1) which are to be fulfilled in order to be eligible for applicability of the provisions of sections 11 and 12:
i) The organization should have been registered under section 12AA/12AB of the Income-tax Act.
ii) If the trust or institution has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, then it is required to make an application for fresh registration.
iii) Keep and maintain books of account and other documents in such form and manner and at such place, as may be prescribed.
iv) Audit report mandatorily needs to be obtained and furnished one month prior to due date of filing the return under section 139(1). (After Finance Act, 2020)
v) Income-tax return has to be furnished for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section [as per section 12A(ba).
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