Taxation of Charitable
Trust/Institution
Introduction
The Income-tax Act grants exemption to the
income from property held under trust or any
other legal obligation for religious or charitable
purposes, subject to the fulfillment of certain
conditions laid down under the Act. The object is
to encourage the role of philanthropy in relieving
distress and in helping to meet the economic,
social, cultural and religious needs of the
society.
Section 11 to 13 of the Income-tax Act, 1961
deals with taxation of Charitable Trust/Institution.
Introduction (Contd…)
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Section 11 provides the manner in which income
is exempt from income-tax.
Section 12 provides the income of trust or
institutions from contributions.
Section 12A provides the conditions as to
registration of trusts, etc.
Section 12AA provides the procedure for
registration.
Section 13 provides section 11 not to apply in
certain cases.
The basic condition for claiming
exemption of income by the
trust/institution is that income
should be derived from the
property held under a trust and
the said income should be applied
to charitable or religious purpose
in India.
Meaning of ‘Property Held under
Trust’ :
The expression ‘property’ used in Section
11 has the widest amplitude. It includes a
business undertaking. It certainly takes in
movable or immovable property like
money, shares, securities, lands, buildings
and houses. It may comprise of an interest
in a partnership firm.
Charitable purpose :
The term “Charitable Purpose” has been defined
in section 2(15) of the Income-tax Act to include
relief of the poor, education, medical relief and
the advancement of any other object of general
public utility.
 w.e.f.
01.04.2009
PROVIDED
THAT
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 services in relation to
any trade, commerce or business, for a cess or
fee or any other consideration, irrespective of
the use or application or retention, of the income
from such activity.
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Charitable Purpose : (Contd…)

The definition of charitable purpose is inclusive and not
exhaustive or exclusive. The expression “object of
general public utility” was not restricted to objects
beneficial to whole of mankind. An object beneficial to a
section of the public was an object of general public
utility. [CIT v Andhra Chamber of Commerce 55 ITR
722 (SC)]

A trust is not charitable, unless it benefits the community
or a section of the community. A trust would not be
charitable, if it only conferred private benefits.The onus
is on the assessee to show that his object are of general
public utility and that in the advancement of the objects
there is no involvement in activities for profit.[Indian
Chamber of Commerce v CIT 101 ITR 796 (SC)]
Religious Purpose :

The term religious purpose has not been defined
in the Income-tax Act. ‘Religious Purposes’ are
necessarily associated with religion. ‘Religious
Purpose’ includes the advancement, support or
propagation of religion or its tenets.
 A charitable trust created after 01.04.1962 would
lose exemption if it is for the benefit of any
particular religious community or caste. [Sec.
13(1)(a)]
Registration of trust/institution before the
Commissioner of Income-tax :
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Registration before the Commissioner is precondition for
exemption.
Registration u/s. 12AA does not mean that the trust is
automatically entitled to the exemption u/s. 11 each year,
as the issue of whether there is any application of
income for charitable or religious purposes or
accumulation of income during the previous year or
whether any of the provisions of section 13 are attracted
for the year, can be examined by the Assessing Officer
each year, before granting the exemption.
However, An Assessing Officer cannot deny exemption
under section 11 to a trust registered under section
12AA, on the ground that its objects are not charitable or
religious in nature. This view is supported by the
decision of the Ahmedabad Tribunal in the case of Stock
Exchange of Ahmedabad vs. ACIT 74 ITD 1 (Ahd.)
Section 12A
Condition as to Registration
1.
2.
There are two conditions for registration of trust have
been provided, namely :
An application to be made for registration in the
prescribed form (Form 10A) and in the prescribed
manner to the Commissioner of Income tax either before
1st July 1973 or within one year from the date on which
the trust is created whichever is later
Where the total income of the trust or institution without
giving effect to the provisions of section 11 & 12 exceeds
50,000/- in any previous year, the accounts of the trust
or institution for that year has to be audited by a
chartered accountant or any other accountant entitled to
be appointed as an auditor of companies. The report of
audit should be in Form No. 10B prescribed in the
Income-tax Rules, 1962 and said audit report has to be
furnished along with the return of income.
Condition as to Registration : (Contd…)
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The Audit Report has to accompany the Return of Income,
otherwise the return may be treated as incomplete. However, the
report may accompany a revised or subsequent return. As held by
the Allahabad High Court in the case of CIT vs. Shri Baldeoji
Maharaj Trust (1983) 142 ITR 584, not enclosing the report
alongwith the return filed under section 139(4A) is an omission,
which entitles an assessee to file a revised return under section
139(5).
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In case the report has remained to be filed along with the return
through oversight, it can be submitted at any time before the
completion of assessment. In the case of CIT vs. Rai Bahadur
Bissesswarlal Motilal Malwasie Trust (1992) 195 ITR 825, the
Calcutta High Court has affirmed this view, holding that the
requirement of filing the audit report with the return is merely a
procedural requirement, and that exemption cannot be denied so
long as the report is available to the assessing officer before the
completion of assessment.
Condonation of delay for filling of
application for registration
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Before 01.06.2007, Commissioner has power to
condone the delay in filing of application for
registration.
 However, an application for registration made
after 01.06.2007, the provisions of section11
and 12 shall apply in relation to income of such
trust or institute from the assessment year
immediately following the financial year in which
such application is made. [Sec. 12A(2)]
Section 12AA
Procedure for registration of Trust
1.
2.
3.
On receipt of application for registration, Commissioner shall call for
such documents or information from the trust/institution as he thinks
necessary and may also make such inquires as he may deem
necessary.
On being satisfied about the genuineness of the activities of the
trust/institution, he shall grant the registration. In case, he is not
satisfied, he may refuse to grant such registration after giving a
reasonable opportunity of being heard.
Every order granting or refusing registration shall be passed within
6 months from the end of the month in which application is made.
At the stage of granting registration, the Commissioner is not to
examine the application of income. All that he may examine is
whether the application is made in accordance with the requirement
of Section 12A read with rule 17A and whether Form No. 10A has
been properly filled up. He may also see whether the objects of the
trust are charitable or not. At this stage, it is not proper to examine
the application of income. [Fifth Generation Education Society v
CIT 185 ITR 634 (All.)]
Incomes entitiled for
Exemption u/s. 11 & 12
1. Income in the form of voluntary contributions towards the corpus of the
trust.
2. Income derived from property held under trust (including voluntary
contributions other than those made towards the corpus received by a
wholly charitable or religious trust ) is exempt to the extent it is applied
to charitable or religious purposes or is accumulated or set apart for
application to such purposes, subject to certain conditions & limits.
3. Income being profits and gains of an eligible business, that is, business
which is incidental to the attainment of the objects of the trust and
separate books of account are maintained in respect thereof and
income of the said business is applied to charitable or religious
purposes or is accumulated or set apart for application to such
purposes, subject to certain conditions & limits.
4. Income being capital gains arising on transfer of a capital asset, where
the sale consideration is utilized in acquisition of another capital asset.
The Supreme Court in the case of Gangabai Charities v. CIT (1992)
197 ITR 416 held that the crux of the statutory exemption under section
11(1)(a) of the Act is not the income earned from property held under
trust but the actual application of the said income for religious and
charitable purposes.
Application of Income :
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Under the provisions of section 11(1)(a), income from
property held under trust for religious or charitable purposes
is exempt to the extent to which the income so accumulated
or set apart is not exceeding 15% of the income from
property held under trust and it is applied for such
purposes in India.
 It is not correct to equate the word “applied” as used in
section 11 with the word “spent”. For instance, if the
charitable trust debits its accounts as soon as it passes
resolutions sanctioning donations to various donees and
such amounts, as are outstanding, are shown as liabilities in
the balance sheet (this will happen when in certain cases the
amounts, though sanctioned and debited as expenditure in
one accounting year, are actually disbursed in the next year)
the amounts which are sanctioned but not actually spent in
the relevant accounting year will constitute application of
funds for charitable purpose with the meaning of section
11(1)(a). [CIT vs. Trustees of H. E. H. the Nizam’s
Charitable Trust [1981] 131 ITR 497 (AP)]
Expenditure considered as
application of income :
Administrative Expenses : It is not only the direct expenditure
on objects like scholarships or medical relief which is to be
considered, but all other expenses incurred in fulfilling the
objects of the trust viz. rent, rates and taxes, establishment
expenses, interest etc., as without incurring such expenses, it
may not be possible for the trust to function.
2. Capital Expenditure : All capital expenditure laid out in
furtherance of the objects and purposes of the Trust will be
treated as application of income. The application of the
income of a trust can be for a revenue or capital purpose as
long as the expenditure is incurred on the objects of the trust.
However, capital expenditure incurred for acquiring assets,
not in furtherance of the objects, but for enhancing the
income, it is in reality an investment, and acquisition of such
an asset cannot be regarded as an application of income for
charitable or religious purposes.
1.
Expenditure considered as Application of Income :
(Contd..)
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Repayment of loans : Repayment of loans taken to fulfil
one of the object of trust is treated as an application of
income for charitable purpose.
Payment of taxes : The expenditure incurred by way of
payment of tax out of the current year’s income has to
be considered as application for charitable purposes.
Donation to other trusts : When a donor trust which is
itself a charitable and religious trust donates its income
to another trust, the donor trust can be said to have
applied its income for religious and charitable purposes.
Utilisation by the donee trust in any year would not be
relevant for the purpose of deciding whether the donor
trust can exemption u/s. 11 or not – CIT v. Sarladevi
Sarabhai Trust (No. 2) [1988] 172 ITR 698 (Guj.), CIT
v. Thanthi Trust [1999] 239 ITR 502 (SC).
Expenditure considered as Application of Income :
(Contd..)
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Depreciation : Depreciation on assets of a trust is to be
deducted for the purpose of calculating income of a
trust. This is because of the fact that the concept of
commercial income necessarily envisages deduction of
depreciation on assets of the trust.
CIT v. Framjee Cawasjee Institute (1993)109CTR 463,
CIT v. Seth Manilal Ranchhoddas Vishram Bhavan
Trust [1992] 105 CTR (Guj.) 303.
Bombay High Court in the case of CIT v. Institute of
Banking Personnel Selection (2003) 185 CTR 492
held that depreciation is allowable on the assets, even
though, the cost of which has been fully allowed as
application of income u/s. 11 in past years.
Deedmed Application of Income
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As per Clause (2) of Explanation to Section 11(1), where the
income applied to charitable or religious purposes falls short of
85% of the income derived during the previous year because –
I. the whole or any part of the income has not been received
during the previous year; or
II. for any other reason
the assessee has an option to :
(a) apply such income [referred in clause(i)] for such purposes
during the previous year in which it is received or during the
previous year next following the said previous year; and
(b) apply such income [referred in clause(ii)] for such purposes
during the previous year next following the previous year in
which the income was derived.
The option is to be exercised in writing within the time
allowed for filing return of income u/s. 139(1).
Deemed Application of Income : (Contd…)
If the option is exercised by the assessee/trust, the
income is regulated in the following manner :
1. such income shall be deemed to have been applied to
charitable or religious purposes in the previous year in
which it is derived;
2. such income shall not be taken into account for
computing the income applied to such purposes in the
year it is actually applied;
3. if such income, or any part thereof, is not applied to
such purposes within the prescribed period aforesaid,
such income, or such part, shall be deemed to be
income for the previous year immediately following the
previous year in which the income was received or
derived, as the case may be.
Accumulation of Income
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1.
2.
3.
If a trust/institution for any reason cannot utilize its income wholly
or partially, or wants to accumulate its income for some project or
scheme, it can obtain exemption under section 11(2) by
accumulating the income subject to the following conditions :
The trustee must apply in Form No. 10 as per Rule 17 to the
Income-tax Officer for permission to accumulate the income,
stating the purpose and period of accumulation, which shall, in no
case, exceed 5 years. The notice once given need not be given
every year during the period of accumulation. A separate notice
may also be given for the surplus of each year, though the
purpose may be same.
Section 11(2)(b) provides that the money so accumulated should
be invested or deposited in any mode or form prescribed under
section 11(5), as in the case of investments of other funds.
The time limit for filing Form No. 10 is the same time limit as for
filing return under section 139(1). This time limit is prescribed in
Rule 17. The time limit for making investments is not laid down
either in the Act or the rules, but Form No. 10 contains a
declaration that the amount accumulated has been or will be
invested within six months of the end of the previous year.
Accumulation of Income : (Contd…)
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Though Rule 17 states that Form No. 10
should be filed before the expiry of the time
limit u/s. 139(1), the Bombay High Court in
the case of CIT vs. Nagpur Hotel Owners
Association (1994) 209 ITR 441 had held
that this rule is beyond the scope of the
section and that the application for
accumulation can be made even after
completion of assessment, at the stage when
the matter is pending before the Tribunal. The
matter went up to the Supreme Court and it
was held at 247 ITR 201 and 165 CTR 1 that
Form No. 10 must be filed with the assessing
officer before completion of the assessment
proceedings.
Section 12 : Income from contributions
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Any voluntary contributions received by a trust created
wholly for charitable or religious purposes or by an
institution established wholly for such purposes (not
being contributions made with a specific direction that
they shall form part of the corpus of the trust or
institution) shall for the purposes of section 11 be
deemed to be income derived from property held
under trust wholly for charitable or religious purposes
and the provisions of that section and section 13 shall
apply accordingly.
The term “voluntary contributions” has been defined in
section 2(24)(iia) of the Income-tax Act.
However, any contributions received with a specific
direction that they shall form part of the corpus of the
trust or institution shall not be income of the trust or
institution. The term corpus has not been defined in
the Income-tax Act. Various dictionary meaning says
that it is capital.
Income from Contribution : (Contd…)
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Section 11(1)(d) grants exemption to donations made
with a specific direction that they shall form part of the
corpus, but the benefit of this section is available only
to trusts enjoying the benefit of exemption under
section 11. If a trust loses exemption under section
11, corpus donations would be taxable as income.
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In order to prove that a donation is towards the
corpus of a trust, it would be advisable to obtain a
specific letter from the donor mentioning clearly
that the donation is given towards the corpus of
the trust and that only the interest arising on the
investment of the corpus donation is to be utilized
for the objects of the trust.
Income in commercial sense :
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For the purpose of determining the income of the trust eligible for
exemption u/s. 11, the income arising from property held under trust
constitutes the income of the trust. It will mean income from property,
business, dividends, interest on securities or other interest. It will also
include donations received by the trust, by virtue of the provisions of
section 12. In other words, the income for the purpose of section 11 is
the income as per the accounts of the trust. It means the income in the
commercial sense, without reference to the heads of income specified in
section 14, i.e., the book income and not total income as defined in
section 2(45), ‘being the total amount of the income ………… computed
in the manner laid down in the Act’.
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The total income as per section 2(45), being artificially computed
income, will normally differ from the actual income of the trust, but so
long as the trust has utilized its actual income, it will not be liable to tax,
irrespective of the position of the total income. If it has not utilized part of
the actual income, the balance, after accumulation of 15 per cent under
section 11(1)(a) and any additional amount under section 11(2), will be
liable to tax.
Capital Gain :
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Income by way of capital gain is also to be computed as per
commercial principles in case of a charitable trust. Section
11(1A) deals with the computation of capital gains and provides
that if the entire sale proceeds are utilized for acquisition of
another capital asset, then the capital gains shall be deemed to
have been applied for the objects of the trust. In case only part of
the sale proceeds are reinvested, the excess of the investment
over the cost of the transferred asset is deemed to be applied for
charitable purposes and qualifies for exemption.

Though the time limit for re-investement is not mention in Section
11(1A), it should be within the same year or the next year, as per
the Explanation to section 11(1). The Calcutta High Court, in the
case of CIT vs. East India Charitable Trust (1996) 206 ITR 152
has confirmed this view, on the ground that the term “income”
includes capital gains, and therefore it is possible to exercise the
option of spending income in subsequent year for investment of
the capital gains as well.
Business Income :
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There is no prohibition on a charitable trust carrying on a
business. A charitable trust can be settled in relation to any
property including a business undertaking. The income from such
business shall also qualify for exemption provided the other
conditions of section 11 and 12 are fulfilled.
The income of such business shall be determined in accordance
with provisions of the Act. Where the income from such business
as determined by the Assessing Officer is found to be in excess
of the income shown in the accounts, then such excess shall be
deemed to have been applied to non-charitable or non-religious
purposes and such excess income shall not qualify for exemption
u/s. 11. [Section 11(4)]
Section 11(4A) provides that the business income of any
Trust/Institution will not qualify for exemption unless the business
it carries on is incidental to the attainment of the objectives of the
Trust/Institution and separate books of accounts are maintain
with respect to such business.
Forfeiture of Exemption
(Section 13)
1.
2.
3.
The exemption will not be available u/s. 11 & 12 in the following
circumstances:
If the trust is a private religious trust which does not enure for the
benefit of the public.
In the case of a Charitable Trust created after 01.04.1962, it
should not be for the benefit of any particular religious community
or caste, unless it is a trust for the benefit of scheduled castes,
backward classes, scheduled tribes or women and children, as
provided by Explanation 2 to section 13.
In the case of a Trust or Institution set up for Charitable or
Religious purposes after 31st March, 1962 if :
(i) under the terms of the Trust or rules of the Institution any part
of its income enures directly or indirectly for the benefit of
certain ‘excluded’ persons specified in section 13(3)
(ii)in fact, any part of the income or property is used or applied
directly or indirectly for the benefit of any such excluded
person.
Forfeiture of Exemption : (Contd…)
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a)
b.
c.
d.
Section 13(2) specifies the following categories of
transactions which would be deemed to be the use
or application of the income or property of the Trust
for the benefit of the excluded persons :
Lending any part of the income or property of the
Trust to ‘excluded’ persons without adequate
security or adequate interest or both. It may be noted
that both rate of interest and security must be
adequate.
Making available any land, building or other property
of the Trust for the use of ‘excluded’ persons without
adequate rent or compensation.
Payment of excessive remuneration to the ‘excluded’
persons for service rendered to the Trust.
Making available services of the Trust to such
persons without adequate remuneration or
compensation.
Forfeiture of Exemption : (Contd…)
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Purchasing any shares, securities or other properties
for the Trust from such persons for more than
adequate consideration.
Selling any shares, securities or other properties of
the Trust to such persons for less than adequate
consideration.
Diverting any income or property of the Trust in
excess of Rs. 1,000/- to such persons.
Investing any funds of the Trust in any concern in
which such person has a substantial interest,
provided such investment is made or continues to
remain so invested on or after 1st January, 1971.
Forfeiture of Exemption : (Contd…)
a)
b)
c)
d)
e)
f)
Section 13(3) specifies the following categories of
“excluded “persons :
the author of the trust or founder of the Institution,
the person who has made substantial contribution to
the trust,
where the author, founder or substantial contributor
is a HUF, a member of the family,
any trustee of the trust or manager of the institution,
any relative of the persons mentioned in (a) to (d)
above,
any concern in which any of the aforesaid persons
has substantial interest.
Assessable Status
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A Charitable trust would become liable to tax if it has
not utilized 85% of its income on its objects nor
applied for accumulation. Similarly the trust would be
liable to tax if it has forfeited exemption on account
of violation of the conditions laid down in section 13.
Explanation to section 2(31) w.e.f 01.04.2002
relevant to A. Y. 2002-03 and subsequent year
provides that an association of persons or a body of
individuals or a local authority or an artificial juridical
person shall be deemed to be a person, whether or
not such person or body or authority or juridical
person was formed or established or incorporated
with the object of deriving income, profit or gains.
After the amendment made by the Finance Act,
2002, effective from 2002-2003, the status will be
that of AOP.
Levy of tax at maximum marginal rate in case of
public charitable and religious trusts
1.
2.
3.
Charitable or religious trusts, which may otherwise
be eligible for tax exemption, are liable to forfeit this
exemption in the following circumstances, namely:
Where the trust is created after 31.03.1962, any part
of the income of the trust enures, under the terms of
the trust deed, directly or indirectly, for the benefit of
specified categories of persons.
Any part of the income or any property of the trust
(whenever created) is used or applied during the
relevant year, directly or indirectly, for the benefit of
specified categories of persons.
The trust funds (with certain exceptions) are invested
in contravention of the investment pattern of such
funds.
Levy of tax at maximum marginal rate in case of
public charitable and religious trusts

Where a charitable or religious trust forfeits tax
exemption in the circumstances mentioned above,
the trust shall be charged to tax at the maximum
marginal rate.
However, a trust will attract the maximum marginal
rate of tax only on that part of income which has
forfeited exemption under the above circumstances
and not on the entire income of the trust. - DIT
(Exemption) vs. Sheth Mafatlal Gagalbhai
Foundation Trust [2001] 114 Taxman 19 (Bom.)
Broad Outline of the Scheme of Taxation
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The method of computing the income of a charitable trust is
quite different from that followed in case of other assesses, in
that, it is the commercial concept of income which is to be
considered and not the income as computed under the various
heads of income as specified in section 14. In other words, the
income for the purpose of section 11 is the income as per the
accounts of the trust. It means the income in the commercial
sense, without reference to the heads of income specified in
section 14, i.e., the book income and not total income as
defined in section 2(45).
In computing the income of the trust, the income arising from
property held under trust for public charitable or religious
purposes is to be first computed and thereafter, the amount
applied for charitable purpose is determined.
Under certain circumstances the income of the trust can be
applied for charitable purposes in the subsequent year. The
trust is also permitted to accumulate its income for a longer
period under section 11(2) by filing a prescribed form (Form No.
10) with the assessing officer. The form must mention the
purpose and the period of accumulation, which shall, in no
case, exceed five years.
Carry Forward of Deficit
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There are no specific provisions for carry forward of deficit.
The Court have also held that if a trust has incurred a deficit
during a particular year, then the surplus made by it in a
subsequent year to make up for the past deficit should be
allowed to be set off against such deficit. CIT vs Maharana of
Mewar Charitable Foundation 164 ITR 439 (Raj.), CIT vs. Shri
Plot Swetambar Murti Pujak Jain Mandal, 211 ITR 293 (Guj.),
CIT vs. Matriseava Trust 242 ITR 20 (Mad.), Govindu Naicker
Estate vs. ADIT 248 ITR 368 (Mad) and CIT vs. Institute of
Banking 264 ITR 114 (Bom.).
The Court have taken the view that there are no words of
limitation in section 11 of the Income-tax Act requiring that the
income should have been applied for charitable or religious
purposes only in the year in which the income has arisen. It
has also been held that income derived from trust property is
to be determined on commercial principles and the application
of such commercial principles also warrants the conclusion that
the expenditure incurred in an earlier year can be set off
against the income of the subsequent year.
Debateable issue :

Income-tax Refund :
Whether income-tax refund should be taken as part of the
income of the trust based on the principles of commercial
income or can it be argued that refund of tax can never be
considered in computation of income?

Dividend & Income from Mutual Funds :
Dividend & income from mutual funds are exempt from tax u/s.
10. The question that needs to be debated is whether, in the
context of charitable trust, the same is to be excluded in
computing the income of the trust or is the same required to be
included by following the concept of real income.

Depreciation :
Whether Depreciation is allowable in light of the decision of the
Supreme Court in the case of Escorts Ltd. vs. Union of India
199 ITR 43, wherein it was held that double deduction cannot
be presumed, unless specifically provided for by the law.
Debateable Issue : (Contd…)

Carry forward of deficit :
How many years the trust can carry forward deficit ?
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Order granting or refusing for registration of the trust :
Order granting or refusing for registration of the trust is not passed by
the Commissioner within 6 months then what course of action is
available? Or can it be presumed to have been granted?

Capital Gain :
Whether the requirement of computing the income on the principles of
commercial income will preclude the trust from the benefit of
indexation contained in section 48 of the Income-tax Act.
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Head of Income :
Under which head of income , income of charitable trust is charged to
tax?