PROVISIONS OF INCOME TAX ACT, 1961 APPLICABLE TO CHARITABLE TRUSTS FOR THE FINANCIAL YEAR 2022-2023

[Mr. M. GOVINDARAJAN]

Charitable trusts

A charitable trust is an irrevocable trust established for charitable purposes and, in some jurisdictions, a more specific term than ‘charitable organization’. A charitable trust enjoys a varying degree of tax benefits in most countries. It also generates good will. Some important terminology in charitable trusts is the term ‘corpus’ (Latin for ‘body’), which refers to the assets with which the trust is funded, and the term "donor", which is the person donating assets to a charity.

In India, trusts set up for the social causes and approved by the Income Tax Department get not only exemption from payment of tax but also the donors to such trusts can deduct the amount of donation to the trust from their taxable income. The legal framework in India recognizes activities including ‘relief of the poor, education, medical relief, preserving monuments and environment, and the advancement of any other object of general public utility’ as charitable purposes. Companies formed under Section 8 of the Companies Act, 2013 for promoting charity also receive benefits under law including exemption from various procedural provisions of the Companies Act, either fully or in part, and are also entitled to such other exemptions that the Central Government may accord through its orders.

Applicable provisions

The following provisions are applicable to charitable trusts registered under Section 12AA of the Income Tax Act, 1961-

• If the trust does not utilize accumulated income within the period of 5 years then such income is chargeable to tax in the 6^th year.  Now it has been amended.  The tax is leviable for the remaining income to be utilized in the fifth year itself.
• If the corpus donation is made out of the accumulated income under Explanation 2 to section 11(1) then it will not be allowed as application of income.
• The provisions require 85% of the income is to be applied.  The term ‘application’ includes expenses accrued/incurred but not paid.  An explanation is inserted to the said section so as to provide that for the purposes of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it. 
• A new proviso is inserted to provide that where during any previous year any sum has been claimed to have been applied by the trust or institution, such sum shall not be allowed as application in any subsequent previous year.
• There is no provision for maintenance of books of accounts by the trusts/institutions whose income exceeds Rs.2.50 lakhs.  Now it is required to maintain specified books of accounts for the trusts/institutions.
• Section 115BBI provides for the taxation of specified income.  The tax chargeable for specified income is 30%.  No deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the specified income.

The explanation to this section defines the term ‘specified income’ as-

• income accumulated or set apart in excess of 15% of the income where such accumulation is not allowed under any specific provision of this Act; or
• deemed income referred to in Explanation 4 to the third proviso to clause (23C) of section 10, or sub-section (1B) or sub-section (3) of section 11; or
• any income, which is not exempt under clause (23C) of section 10 on account of violation of the provisions of clause (b) of the third proviso of clause (23C) of section 10, or not to be excluded from the total income under the provisions of clause (d) of sub-section (1) of section 13; or
• any income which is deemed to be income under the twenty-first proviso to clause (23C) of section 10 or which is not excluded from the total income under clause (c) of sub-section (1) of section 13; or
• any income which is not excluded from the total income under clause (c) of sub-section (1) of section 11.

• To claim the deduction under section 80G, the trust has to file Form 10 BD in which the details of donations received and the trusts have to provide the donor with a certificate of donation in Form 10BE.
• Section 80G (5D) provides that no deduction shall be allowed under this section in respect of donation of any sum exceeding   Rs.2,000/- unless such sum is paid by any mode other than cash.
• Any receipt or payment exceeding Rs.2 lakhs in cash will attract 100% penalty.
• The expenditure exceeding Rs.10000/- is to be made by banking mode only otherwise it will not be allowed as expenditure.
• If the capital expenditure exceeding Rs.10,000/- is paid in cash,  the excess amount paid above Rs.10,000/- will not be allowed as expenditure.
• Wherever TDS is applicable and the same is not deducted then 30% of the expenditure will be disallowed and this lead to cancellation of registration.
• The corpus donation and accumulated income shall be invested or deposited in investments specified in section 11(5) to claim exemption.  Such investments are detailed as below-

• investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;
•  deposit in any account with the Post Office Savings Bank;
• deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank);
• investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963;
•  investment in any security for money created and issued by the Central Government or a State Government;
• investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government;
• investment or deposit in any public sector company;
• deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India;
• deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;
• deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India;
• investment in immovable property;
• deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964;
• any other form or mode of investment or deposit as may be prescribed.

• Any amount spent out of any loan or borrowing by the trust shall not be treated as application for charitable purposes.
• Excess application of income of previous years cannot be claimed as application of expenses in the current year.
• A new section 271AAE has been inserted in the Income Tax Act, 1961 vide Finance Act, 2022.  The said section provides that any trust or institution referred to in section 11 has violated the provisions of the twenty-first proviso to clause (23C) of section 10, or clause (c) of sub-section (1) of section 13, as the case may be, the Assessing Officer may direct that such person shall pay by way of penalty-

• a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13, where the violation is noticed for the first time during any previous year; and
• a sum equal to 200% of the aggregate amount of income of such person applied, directly or indirectly, by that person, for the benefit of any person referred to in sub-section (3) of section 13, where violation is noticed again in any subsequent previous year.

• The Trust can claim exemption either under section 10(23) or under section 11 only.  There shall not be double claim or mixed claim.
• All of the trustees and the office bearers shall have PAN and Aadhaar cards.
• Every year the income tax return is to be filed within the due date.  If the same is not paid within the due date penalty of Rs.5000/- is payable if the return is filed after due date but before 31^st December.  If the total income does not exceed Rs.5 lakhs then the penalty does not exceed Rs.1000/-.

If any information in this regard is left the same may be brought before this forum for the benefit of readers.