Taxability of Income from property held for charitable or religious purposes

  • by
  • by August 20, 2020

Lets reproduce the section first. 

11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property

So basically, what it is saying that, whatever is the receipts (income) of the trust during the financial year, the trust has to apply a minimum of 85% for charitable purposes as mentioned during the application for registration u/s 12AA and for the activities mentioned in object clause of the trust deed.

So, from the above, there may a arise two different situations:

  • What if the trust is able to apply the stipulated 85% of the receipts (income)?

  • What if the trust is not able to apply the stipulated 85% of the receipts (income)?

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Let analyze both of the above situations.

  • Where the trust is able to apply 85% of the income?

    In this scenario, the trust after applying the income for the charitable purpose, can accumulate income upto 15% of the total receipts of the previous year to be spent the future years. This can be without taking the permission of the assessing officer and the same will be considered as an income for the purpose of filing of Income Tax Return.

  •  Where the trust is not able to apply 85% of the income?

    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 for the reason

    i.) that whole or any part of the income has not been recieved during that year 
    ii) for any other reason

Let’s take an example to get more clarity on both of the above situations and remedy availableto the trust under both situation:

Situation: “A XYZ trust receives a donation of ₹ 500000/- on 25th March, 2020 in theprevious year. Now as the income was received in financial year ending thetrust was not able to fully utilize the amount for the charitable purpose (thiscover situation i above)”.

Remedy: The trust can file form 9A electronically before the due date of filing of IncomeTax Return, stating the reason for the shortfall in application of the income upto85% and take accumulation of income only to be applied before the end of thenext financial year.

Summarizing the above, XYZ trust can file Form 9A before the due dateof filing of return and apply the income on or before 31st March, 2021failing which the whole of the Income will be chargeable to tax and slabapplicable to trust.

Situation: “A XYZ trust receives a donation of ₹ 500000/- on 25th March, 2020 with aspecific instruction by the donor that it is to be used in construction of Shedmeant for the Cow (Specific Donation) in the previous year. Now as the incomewas received in financial year ending the trust was not able to fully utilize theamount for the charitable purpose (this cover situation ii above)”.

Remedy: The trust can file form 10 electronically before the due date of filing of IncomeTax Return, stating the reason for accumulation of the Income for the next 5financial years. The Income so accumulated needs to be invested in modesprescribed u/s 11(5). If income is not invested in mode prescribed theaccumulation will be considered as income and will be taxable as per normalprovisions.

Summarizing the above, XYZ trust can file Form 10 before the due date offiling of return and apply the income for construction of shed meant for Cow on or before 31st March, 2025 failing which the whole of the Incomewill be chargeable to tax and slab applicable to trust.

The only major difference between form 9A and 10 is that form 9A is exercised when incomeis received for the later part of the financial year and with no specific instruction for itsapplication and form 10 exercised when income is received with specific instruction and it’sapplication in ordinary course cannot be done in the financial year itself. The other differencebeing about the modes prescribed of investment I.e form 9A is silent and 10 has prescribed specific modes of investment.

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Disclaimer- Views expressed here are personal views of author. It does not form any professional opinion. For more information we request you to seek advice from Professional. 

(Author is Surendranagar based Chartered Accountant presently holding full time certificate of Practice and assisting clients in the field of Auditing & Assurance, Direct Taxes, Indirect Taxes and liasioning work. His clientele includes various government departments, NGP sponsored schools and manufacturing industries. You can reach out to him on [email protected] )