Assessment of Charitable or Religious Trust under Income Tax Act, 1961

Assessment of Charitable or Religious Trust

Income from “Trust” is Exempt if such income is applied for Charitable Purpose. Section 2(15) defines Charitable purpose which includes:

Relief of the Poor
Education
Yoga
Medical Relief
Preservation of Environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historical interest, and
The advancement of any other object of general public utility.

The advancement of any other object of general public utility” would 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 of any service in relation to any trade, commerce or business,

For cess, or fee, or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-

Such activity 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 such activities, during the P.Y, does not exceed 20% of the total receipts, of the trust, institution undertaking such activity or activities, for the Previous Year.

Kind of Income/receipt of Trust

Income from property held for charitable or religious purposes.
Voluntary contribution received by a trust with a specific direction that they shall form part of the corpus of the trust or institution.
Voluntary contribution received by a trust without a specific direction[ section-12]
Receipt from “ Advantage of any other object of general public utility”
Income from business undertaking
Capital gain on sale of Fixed Assets
Anonymous donation u/s 115BBC

Key Points:

Income derived from property held under trust wholly for charitable or religious purposes, shall not be included in the total income of the previous year if it is applied to such purposes in India. [section -11) However, minimum of 85% of the income derive to be applied for the charitable or religious purposes in India.
Voluntary contributions (other than the Corpus Donation) shall be deemed to be the income derive from the property held under trust. (Section -12)
Voluntary contribution received by a trust with a specific direction that they shall form part of the corpus of the trust or institution will not be taxable subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus.[Section-11(d)]
Receipt from “Advantage of any other object of general public utility” – Exempt only if it is up to 20% of the total receipt. If it exceeds, then trust/institution will lose its charitable status for that P.Y.
Section 11(4) clarifies that “property held under trust” includes a business undertaking so held. As per section 11(4), 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 separate books of account are maintained in respect of such business. Point: it will not be applicable in case of “Advancement of any other object of general public utility.
As per Explanation 5: 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.

what if 85% of income is not applied for charitable or religious purposes :

(a) due to the reason income is not received

If, in the previous year, the income applied to charitable or religious purposes in India falls short of 85% of the income derived during that year-

(i) for the reason that the whole or any part of the income has not been received during that year, or

(ii) for any other reason,

then—

in the case (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and
in the case referred to in (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount,

may, at the option of the person in receipt of income be deemed to be income applied to such purposes during the previous year in which the income was derived

the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived. such option to be exercised at least two months prior to the due date specified under section 139(1) for furnishing the return of income, in such form and manner as may be prescribed.

(b) other Reason

Where 85% of the income is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:—

(a) such person furnishes a statement in the prescribed form and in the prescribed manner to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years;

(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5);

(c) the statement referred to in clause (a) is furnished at least two months prior to the due date specified under section 139(1) for furnishing the return of income for the previous year:

Provided that in computing the period of five years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.

Corpus Donations:

income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in section 11(5) maintained specifically for such corpus.
Amount Received by temple, mosque, gurdwara, church or other place notified under clause of section 80G(2)(b) as voluntary contribution for the purpose of 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, subject to the condition that the trust or the institution:

applies such corpus only for the purpose for which the voluntary contribution was made;

(b) does not apply such corpus for making contribution or donation to any person;

(d) invests or deposits such corpus in the forms and modes specified under section 11(5);

If violation is made, such sum shall be deemed to be the income of such trust or institution of the previous year during which the violation takes place.

application for charitable or religious purposes from the corpus as referred to in (d) above, of shall not be treated as application of income for charitable or religious purposes:

Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or deposited back, into one or more of the forms or modes specified in section 11(5) maintained specifically for such corpus (within a period of five years from the end of the previous year in which such application was made from the corpus) from the income of that year and to the extent of such investment or deposit

For the purposes of determining the amount of application, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.

Application from Loan or Borrowings

Application for charitable or religious purposes, from any loan or borrowing, shall not be treated as application of income for charitable or religious purposes:

Provided also that the amount repaid shall not be treated as application for charitable or religious purposes under unless such repayment is made within a period of five years from the end of the previous year in which such application was made from loan or borrowing:

Provided also that nothing contained in the first proviso shall apply where application from any loan or borrowing is made on or before the 31st day of March, 2021;

Capital gain on sale of Assets:

where there is a capital gain arising from the sale of capital assets held under trust wholly for charitable or religious purpose, then excess of net consideration utilised for purchasing New Capital asset over actual cost of acquisition shall be treated as application of income[ section-11(1A)]. If partly held/utilised then, proportionate will be treated as application of income. Net consideration= Full value of consideration less expenses on transfer.

Hint: actually, we only take capital gain as income hence we can’t allow all receipt from capital Asset as application. Only portion of the capital gain used in purchase of new assets will be allowed.

Note: Capital gain will be calculated as per normal provision. Indexation is allowed on Long term capital Assets.

Example:

Original cost of capital assets transferred= Rs. 1, 00,000

Consideration for which it is transferred= Rs. 1, 50,000

Cost of new capital assets acquired= Rs. 1, 30,000

Calculate amount that will be deemed to have been applied for charitable purposes in following cases:

Capital asset wholly held charitable or religious purposes
2/3 is held for charitable or religious purposes

Answer:

Capital gain= Rs, 50, 000, Amount deemed to be applied = Rs, 30,000(1,30,000-1,00,000)
Capital gain= Rs, 50, 000, Amount deemed to be applied = Rs, 20,000(1,30,000-1,00,000)*2/3

Also Read: Trust and other NGO Accounting

Anonymous Donation u/s 115BBC

Anonymous donation means any voluntary contribution received by trust or institution, where the person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.

Section-115BBC provides for taxation of anonymous donation @ 30 %( maximum exemption limit not applicable) if it exceeds a certain limit. The limit is higher of the following:

(a) 5% of total donation received by the Trust/institution

(b) Rs. 1,00,000

The total tax payable by such institution would be:

(i) @30% on anonymous donation exceeding limits

(ii) Tax on balance income[ total income less (1)]

Other Point:

1. However, the above provision does not apply to a trust or institution created or established wholly for religious purpose.

2. If for both purpose then, amount will be taxable u/s 115BBC only if such donation is made with specific direction that such donation is for any university, or other educational institute or any hospital or other medical institution.

Note: A registered Trust is to file ITR 7 to the https://eportal.incometax.gov.in/

File ITR 7 click here

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Assessment of Charitable or Religious Trust

Key Points:

what if 85% of income is not applied for charitable or religious purposes :

Application from Loan or Borrowings