CBDT clarifies provisions under Finance Act 2023 relating to donations made by a trust / institution to another trust / institution for purposes of application of income

[Vivek Jalan]

Income of any fund or institution or Trust or any university or other educational institution or any hospital or other medical institution referred to in certain clauses of section 10(23C) of the Income-tax Act, 1961 (ITA) or any Trust or institution registered under section 12AA or 12AB of the ITA is exempt, subject to the fulfilment www.vilgst.com Page - 5 - of 7 of certain conditions that at least 85% of income of the Trust/institution should be applied during the year for charitable or religious purposes; Trusts or institutions are allowed to apply mandatory 85% of their income either themselves or by making donations to the Trusts with similar objectives; and If donated to other Trust/institution, the donation should not be towards corpus. In order to ensure intended application towards charitable or religious purposes, Finance Act, 2023 (FA 2023) provided that eligible donations made by a Trust/institution shall be treated as application for charitable or religious purposes, only to the extent of 85% of such donations and accordingly, the FA 2023 made the amendments by inserting clause (iii) in Explanation 4 to section 11(1) of the ITA that “any amount credited or paid, other than the amount referred to in Explanation 2, to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, or other trust or institution registered under section 12AB, as the case may be, shall be treated as application for charitable or religious purposes only to the extent of eighty-five per cent of such amount credited or paid”. A similar amendment was made by inserting clause (iii) in Explanation 2 to third proviso of section 10(23C) of the ITA. The CBDT, vide Circular No. 3/2024 dated 6 March 2024, has clarified the manner of computation of exemption for donations made by an eligible Trust/institution to another eligible Trust/institution considering the amendment introduced vide Finance Act, 2023. It has been reiterated that eligible donations made by a Trust/institution to another Trust/institution under any of the two regimes shall be treated as application for charitable or religious purposes only to the extent of 85% of such donations. Hence, when a Trust/institution donates INR 100 to another trust/institution, it will be considered to have applied 85% (INR 85) for the purpose of charitable or religious activity. www.vilgst.com Page - 6 - of 7 Further, it clarifies that 15% (INR 15) of such donations by the donor Trust/institution shall not be required to be invested in specified modes under section 11(5) of the ITA [relating to accumulated/set apart income to be invested or deposited in specific forms or modes] as the entire amount of INR 100 has been donated to the other Trust / institution and is accordingly, eligible for exemption under the first or second regime.