Assessment of Charitable Trusts - Taxation | Income Tax for assessment (Inter Level) PDF Download

Assessment of Charitable Trusts - Taxtation

Learning Sections 

 The income of charitable trust is exempt from Income Tax as per the provisions of

Section 11 or alternatively under

Section 10(23C) of the Act and

according to it the basis of getting the exemption is that the income of the trust should be used for Charitable Purpose and the charitable purpose has been defined in section 2(15) of the Income Tax Act 1961. 

Section 2(15). Meaning of charity or charitable purpose

As per section 2(15) “Charitable purpose” includes relief of the poor, education, medical relief, preservation of environment including watersheds, forests and wildlife and preservation of monuments or places or objects of artistic or historic interest, yoga and the advancement of any other object of general public utility.

Exception 1 to advancement of any other object of general public utility.
The advancement of any other object of general public utility shall not be charitable purpose, if it involves the

-  carrying on of any activity in the nature of trade, commerce or business, or

-  any activity of rendering 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.

Exception 2

The aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.

E.g. 1 : A trust owning a public swimming pool collects membership fees as well as charges for the use of swimming pool. The collection is Rs 5,00,000. Total receipts is Rs 20,00,000. The services provided are object of general public utility. Therefore as per exception 2 since receipt from general public utility is upto 20% of Rs 20,00,000, it can avail exemption u/s 11 for previous year. This condition has to be checked in every previous year.

Analysis - Definition contains two parts Part 1 : 

In following cases any amount charged from specified activity is charitable 

1. Relief to the poor. Relief of poverty among unemployed by providing them work. Helping in marriage, rehabilitation of poor, providing safe drinking water and toilets.

2. Education. It covers formal education in schools, colleges and universities. It also covers education provided by CA, CMA and CS institutes. It do not cover private coaching centres.

3. Medical relief. It covers hospitals and nursing homes.

4. Preservation of environment and monuments.

5. Yoga

Exception do not apply in the above 5 cases. i.e. If the specified activities are carried out in relation to the relief of the poor, it would still constitute charitable purpose. E.g. if a trust assist poor women to meet and market household products and in process it renders certain services in relation to the business for a fees, the proviso would not apply. (Lijjat papad)

Part 2

1. An object of general public utility fall in exceptions. Raising of moral, intellectual, economic, social and political conditions of people in general is treated as charitable purpose. Promotion of sports and games. Sale and purchase of commodity for fees. Providing services to non-members for fees.

General public utility should not be in the nature of trade, commerce or business. However REMPY can be in the nature of trade, commerce or business even if it charges fees exceeds 20% of the total receipts shall be treated as charitable purpose.

Sources of Income of Charitable Trusts

1. Section 11(1). Income from property held under trusts. (land, building, shares, debentures, bonds, fixed deposits, intangible assets) (there is a source of income)

2. Section 12. Income by way of voluntary contributions

Any voluntary contributions received by a trust shall be deemed to be income of the trust. However contributions made with a specific direction that they shall form part of the corpus of the trust shall not be treated as income of the trusts. (corpus donation not an income) (there is no source of income)

3. Section 11(4A). Trust carrying on the business is exempt from tax.
Profits and gains of business is exempt from tax if the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained by such trust in respect of such business. E.g. Schools selling books, uniforms etc is exempt if separate books of accounts are maintained. Even if total receipts from selling of books / services from activities of REMPY exceeds 20% of the total receipt sexemption can be claimed.

However in case of “advancement of any other objects of general public utility” if total receipts from selling of goods / services exceeds 20% of the total receipt exemption shall be denied.

4. SECTION 11(1A). EXEMPTION FROM CAPITAL GAIN

FOLLOWING INCOME SHALL BE EXEMPT FROM TAX

 1. 15% of the income is exempt from tax without any conditions. It is called statutory deduction.

2. If the income is accumulated for charitable or religious purpose in India. (Section 11(2), (3) & (5))

3. Where the income is not applied on or before the due date, then the assessee should exercise its option by applying to the assessing officer in writing.

(i) for the reason that the whole or any part of the income has not been received during that year, or when can income be applied : During the previous year in which the income is received or during the previous year immediately following such PY. e.g. Income earned in the PY 2016-17 is received in the PY 2017-18. In such a case it can be applied in the PY 2017-18 or in the PY 2018-19.

(ii) for any other reason, [last moment received] when can income be applied : During the previous year immediately following the previous year in