CHAPTER- 4

EXEMPTIONS AVAILABLE TO PUBLIC

CHARITABLE TRUSTS UNDER THE

INCOME TAX ACT,1961

CHAPTER 4

EXEMPTIONS AVAILABLE TO PUBLIC CHARITABLE TRUSTS UNDER THE INCOME TAX ACT,1961

CATEGORIES OF EXEMPTIONS

4.1 The basic principle of taxation is that any person

earning income should pay some portion of the same to the

exchequer by way of taxes, popularly known as Income Tax or

Corporate Tax. However, the Income Tax Act has specifically

provided certain incomes to be exempt from the purview of

taxation. The income of charitable trusts is made exempt, the

rationale behind which has already been discussed in the preceding

chapters.

4.2 The exemptions granted to charitable trusts and other

similar institutions, under the Income Tax Act, can be broadly

classified in three categories . The categories are:-

Category 1-Blanket Exemptions

D Un-monitored and blanket tax exemption for -

* Educational institutions/ hospitals wholly or substantially

financed by Government [10(23C)(iiiab), (iiiac)]

* Educational institutions/ hospitals with aggregate annual receipts

below Rs.l crore. [10(23C)(iiiad) and (iiiae)]

Category 2-Exemptions with some restrictions

D Charitable Fund or institution with importance throughout India

/States [10(23C)(iv)]

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D Public religious or public religious and charitable trust or

institution [10(23C)(v)]

n Educational institutions/hospitals with aggregate annual

receipts above Rs.l crore [10(23C)(vi),(via)]

Category 3- Exemptions with full restrictions

n Public religious charitable trusts or legal obligations [Sections

11 to 13]

The detailed scheme of exemptions under the various sections is

mow proposed to be discussed with a view to understand the

legislative intent and the actual operation of these sections.

4.3 The two main sections that grant exemption to the

income of trusts are Section 11 and Section 12 of the Income Tax

ACT, 1961. In addition to these two sections, Section 10(23C ) also

exempts the income of institutions working in the field of

education or medical relief existing solely for charitable or

philanthropic purposes and not for the purpose of profit and also

income of institutions like universities, colleges etc. which have

been substantially funded by the government. As majority of the

charitable trusts run educational institutes and/or hospitals, this is a

relevant section from their point of view. In addition to these two

sections, a very important section is Section 80G of the Act which

grants tax exemption to the donor in respect of the donation given

by him to a trust recognized under this section . It is easier for a

trust to get donation when it is recognized under Section 80G.

In addition to these sections, Section 35(1 )(ii) allows

deduction of expenditure on scientific research while section

35AC allows expenditure on eligible projects or schemes. These

two sections are also sometimes used by charitable trusts.

However, as the scheme of these two sections is totally different

from that of exemption to charitable trust, these two sections are

not considered in this treatise.

4.4 As mentioned earlier, section 11, 12 , 10(23C) &

section 80G form the back bone of the exemptions given to a

charitable trust. The exact sections as appearing in the Income

Tax Act, 1961, alongwith the necessary rules and forms are

enclosed as Annexure -A to the thesis. From the researcher's

point of view it is however necessary to understand the scheme of

these sections and various issues emerging out of these sections by

way of assessments as well as judicial pronouncements. As

mentioned earlier, there has been a plurality of opinions and

interpretations about the correct meaning of these sections.

Fortunately, now over the years, the meanings have become clear

due to judicial pronouncements of the various high courts as well

as the Hon Supreme court . The few of the issues that have been

debated can be briefly summarised as under :

1. What is income? Does it refer to the gross income ,total income

or net income ?

2. How is it to be computed for the purpose of section 11 ?

3. What is property held under a trust referred to in sec. 11(1 )(a)?

4. What is application of income ?

5. What is accumulated or set apart for application ?

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6. What treatment is to be provided to the business carried out by

the trust ?

The various issues are discussed below. At this point, it

is necessary to mention that it is neither possible to cover all the

judicial discussions on this issue nor is the intention of the study.

Effort has been made to largely cover the salient features emerging

from the plethora of judicial pronouncements available.

SECTION 11 OF THE INCOME TAX ACT, 1961

4.5 Section 11 lays down in detail the statutory provisions

for exempting income from property held for charitable or

religious purposes. The scheme of this section is as under :

Section 11(1) describes the types of income that shall

not be included in the total income of the person for the previous

year. This income includes income derived from property held

under trust wholly for charitable or religious purposes to the extent

such income is applied for such purposes in India. If the income is

not applied but accumulated or set apart for application the extent

to which such income is not in excess of 15% of the income from

such property is also held as exempt. This section also holds

income in the form of voluntary contributions forming corpus of

the trust or institution to be exempt.

Section 11(1 A) describes the treatment to be given to

the capital gains arising out of the transfer of capital assets being

property held under trust wholly for religious or charitable

purposes.

• Section 11(1B) is a deeming provision in respect of the

income covered under clause 2 of sub section 1.

••• Section 11(2) describes the m o d e of accumulat ion or

sett ing apart of income in case 8 5 % of the income is not utilized

for charitable purposes .

<• Section 11(3) is another deeming provision. It

specifies that

(a) income referred to in sub section (2) applied for

another than charitable purposes,

(b) income that ceases to be accumulated or set apart for

application,

(c) income which ceases to remain invested or deposited in

the forms or modes specified in section 11(5),

(d) income which is paid or credited to any other trust or

institution

shall be deemed to be income of the person for the previous year.

Section 11 (3A) authorizes the assessing officer to condone the

default of the assessee as mentioned above, due to circumstances

beyond the control of the person in receipt of the income.

••* Section 11(4) specifies that property held under trust

includes a business undertaking so held. It also empowers the AO

to determine the income of such business undertaking as per the

provisions of the Act. If the income determined by the AO is in

excess of the income as shown by the trust, the excess shall be

deemed to be applied to purposes other than charitable or religious

purposes.

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•

• >

Section 11(5) lays down the forms and modes in detail

for investing or depositing the accumulated income. Section

ll(5)(xii) refers to any other form or mode of investment or

deposit as may be prescribed thus leaving a route open for the

government to include any further modes of investment as deemed

fit.

SECTION 12

4.6 Section 12 describes the treatment to be given to

income of trusts or institutions from contributions. The scheme of

the section is as under :

'I* Section 12(1) describes the treatment to be given to

voluntary contributions received by trusts or institutions created

wholly for charitable or religious purposes. This section deems

such contributions to be income derived from property held under

trust. It also specifies that the provisions of section 13 regarding

forfeiture of exemptions will apply to such income.

Section 12(2) specifies that value of any medical or

educational services, made available by any charitable or religious

trust, running a medical or educational institution, to any person

referred to in section 13, shall be deemed to be income of such

trust and shall be chargeable to income tax, notwithstanding the

provisions of section 11(1).

THE CONCEPT OF INCOME

4.7 Section 11(1) provides that subject to the provisions of

Section 60 to 63, "the following income shall not be included in

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the total income of the previous year".... The reference in sub­

section (a) is invariably to "income" and not to "total income".

The expression "total income" has been specifically defined in

Section 2(45) of the Act as "the total amount of income computed

in the manner laid down in this Act." It would, accordingly, be

incorrect to assign to the word "income" used in Section 11(1) (a),

the same meaning as has been specifically assigned to the

expression "total income" vide Section 2(45) of the Act. This is

the view taken by the Central Board of Direct Taxes in its Circular

No. 5 LXX-6 of 1968 dated 19th June 1968. The Board further

explained in the said Circular that where the trust derives income

from house property, interest on securities, capital gains or other

sources, the word "income" should be understood in its

commercial sense. In C.I.T. v. Rao Bahadur Calavala Cunnan

Chetty Charifies [1982]135ITR485(MAD) their Lordships of the

Madras High Court held that taking into account 1 the purposes for

which the condifions of Sec. 11(1) (a) are imposed, it would be

clear that one has to consider the income as arrived at in the

context of what is available in the hands of the assessee, subject of

course to any adjustment for expenses extraneous to the trust. The

expression "income" has to be understood in the popular or

general sense and not in the sense in which the income is arrived at

for purposes of assessment to tax by the applications of some

artificial provisions either giving or denying deductions. If the

expression "income" is so understood, then the Court held that the

assessing authorities have to take the accounts of a charitable

institution with reference to the receipts and deduct there form the

expenses necessary for earning or looking after that income. The

net amount that remains would be available for distribution or

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application for charitable purposes. In applying the income for

charitable purposes, even capital expenditure may be incurred.

Therefore, the nature of the expenditure in the hands of the entity,

which receives the money, is not the criterion. The Court further

held that there is no need or scope to arrive at the income of a

charitable trust in the manner contemplated by the Income Tax

Act, i.e. Sec. 14.

Since income has to be understood in commercial

sense, it is only the net income after meeting the expenses that can

be treated as income. It is only out of such income that an amount

to the extent of 85% is required to be spent on the objectives of the

trust. It was held by the Hon Kerala High Court in the case of

CIT V. Program for Community Organisations [1997] 228 ITR 620

(KER ) and later confirmed by the Hon Supreme Court [248] ITR

1 (SC) that the assessee was entitled to have the net income

reckoned as income. In its decision the Hon Supreme Court has

held as under :-

"The question that really requires consideration is whether, for

the purposes of section 11(1) (a) of the Income-tax Act, 1961, the

amount for the grant of exemption of twenty-five per cent, should

be the income of the trust or it should be its total income as

determined for the purposes of assessment to income-tax. This

question has to be answered in the light of these facts: The

assessee-trust received donations in the aggregate sum of Rs. 2,

57,376. It applied thereout for its charitable purposes the

aggregate sum of Rs. 1,70,369 leaving a balance of Rs. 87,010.

The question is whether the assessee is entitled to accumulate

twenty-five per cent, of Rs. 2,57,376 as it contends, or twenty-five

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per cent, of Rs. 87,010, as the Revenue appeared to

contend

In our view, therefore it is the real income which is to be

taken into amount account. The question of deduction which is

otherwise allowable in computing the income in a case not

covered by section 11 cannot arise while deciding the percentage

of application or accumulation. The question of deduction comes

only when the income is otherwise chargeable to tax under the

provisions of the Income-tax Act, 1961. It cannot be disputed that

section 11 has given benefit to an assessee-trust, which applies its

income for charitable or religious purpose. If the entire income is

applied for charitable purpose, the question on payment of any tax

would not arise. If a trust desires to accumulate income in excess

of the limits laid down in section 11(1), the conditions specified in

section 11(2) of the Act have to be fulfilled in respect of the entire

accumulation and not merely in respect of the accumulation in

excess of 25 per cent, of the income. Further, if the trust does not

comply with the conditions laid down in section 11(3) is the entire

income accumulated and not merely the income accumulated in

excess of the limits specified in section 11(1) of the Income-tax

Act, 1961. In other words such an assessee loses the benefit of the

accumulation permitted under section 11(1). The question of

chargeability of a part of income to tax which is not exempt arises

only when the accumulation is more than the permissible limit.

While making assessment of that part of the income which is in

excess of the specified percentage, such taxable income of a trust

cannot be classified under different heads. It is only when any

income is assessed under a particular head that the question of

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allowing deduction under that head arises for consideration. In a

case where an assessee-trust has income comes within the ambit of

taxation, it will not be possible for earmarking any part of such an

income to a particular head. The head of income is irrelevant

unless the entire income comes from one specific head. Since the

income from property held under trust has to be arrived at in

normal commercial manner and when the income from property

held under trust as such is excluded, there is no scope of

computing the income from property by applying the provision of

section 14 of the Act. The provision of section 14 cannot be

pressed into service in such a case.

Therefore, the question on allowing any statutory deductions as

contemplated by the different provisions of the act dealing with

different heads of income in computing the income' accumulated

does not arise when the trust loses the benefit of accumulation. "

The next question is about depreciation. Should depreciation be

considered in computing the income of a charitable trust or not ?

The income of a charitable trust as contemplated by s.l l(l)(a) is

required to be computed in accordance with the normal rules of

accountancy. The amount of depreciation debited has to deducted

to arrive at the income available for application to the objects of

the trust. In the case of CIT v. Bhoruka Public Welfare

Trust[1999] 240 ITR 513 (CAL), it has been held that :-

In this connection, we may usefully refer to the following

observations of the Karnataka High Court in CIT v. Society of the

Sisters of St. Anne [1984] 146 ITR 28, 31 :

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"The depreciation is nothing but decrease in value of property

through wear, deterioration or obsolescence

At the end of its effective life, the asset ceases to

earn revenue, i.e., the capital value has expired and the asset will

have to be replaced or a substitute found. Provision for

depreciation is the setting aside, out of the revenue of an

accounting period, of the estimated amount by which the capital

invested in the asset has expired during that period. It is the

provision made for the loss or expense incurred through using the

asset for earning profits, and should, therefore, be charged against

those profits as they are earned.

If depreciation is not provided for, the books will not contain a

true record of revenue or capital. If the asset were hired instead of

purchased, the hiring fee would be charged against the profits;

having been purchased, the asset is, in effect, then hired by capital

to revenue, and the true profit cannot be ascertained until a

suitable charge for the use of the asset has been made. Moreover,

unless provision is made for depreciation, the balance-sheet will

not present a true and fair view of the state of affairs; assets

should be shown at a figure which represent that part of their

value on acquisition which has not yet expired'. "

This has been clarified in CBDT circular no 5P of 1968,

dt. 19 June 1968. The circular states that :-

1. In Board's Circular No. 2-P(LXX-5), dated 15-5-1963, it was

explained that a religious or charitable trust, claiming exemption

under section 11(1), must spend at least 75 per cent of its total

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income for religious or charitable purposes. In other words, it was

not permitted to accumulate more than 25 per cent of its total

income. The question has been reconsidered by the Board and the

correct legal position is explained below.

2. Section 11 (I) provides that subject to the provisions of sections

60 to 63, "the following income shall not be included in the total

income of the previous year. . . . " The reference in clause (a) is

invariably to "Income " and not to "total income ". The expression

"total income" has been specifically defined in section 2(45) as

"the total amount of income computed in the manner laid down in

this Act". It would, accordingly, be incorrect to assign to the word

"income", used in section 1 l(l)(a), the same meaning as has been

specifically assigned to the expression "total income" vide section

2(45).

3. In the case of a business undertaking, held under trust, its

"income" will be the income as shown in the accounts of the

undertaking. Under section 11(4), any income of the business

undertaking determined by the ITO, in accordance with the

provisions of the Act, which is in excess of the income as shown in

its accounts, is to be deemed to have been applied to purposes

other than charitable or religious, and hence it will be charged to

tax under sub-section (3). As only the income disclosed in the

account will be eligible for exemption under section 11(1), the

permitted accumulation of 25 per cent will also be calculated with

reference to this income.

4. Where the trust derives income from house property interest on

securities, capital gains, or other sources, the word "income"

should be understood in its commercial sense, i.e., book income,

after adding back any appropriations or applications thereof

towards the purposes of the trust or otherwise, and also after

adding back any debits made for capital expenditure incurred for

the purposes of the trust or otherwise. It should be noted, in this

connection, that the amounts so added back will become

chargeable to tax under section 11(3) to the extent that they

represent outgoings for purposes other than those of the trust. The

amounts spent or applied for the purposes of the trust from out of

the income, computed in the aforesaid manner, should be not less

than 75 per cent of the latter, if the trust is to get the full benefit of

the exemption under section 11(1).

5. To sum up the business income of the trust, as disclosed by the

accounts plus its other income computed as above, will be the

"income" of the trust for the purposes of section 11(1). Further,

the trust must spend at least 75 per cent of this income and not

accumulate more than 25 per cent thereof. The excess

accumulation, if any, will become taxable under section 11(1). "

It has been also held that agricultural income of a trust also has to

satisfy the conditions as regards application and accumulation of

income . the Hon Madras High Court has held as under in the case

of Rev Fr Superior v. State of Tamilnadu [2000]242 ITR 148

(MAD) that :-

Section 4(b) of the Tamil Nadu Agricultural Income-tax Act reads

as under:

"any agricultural income derived from property held under trust,

wholly or partly for charitable or religious purposes, to the same

extent to which income derived from property held under trust

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wholly or partly for charitable or religious purposes, is not

included in the total income for purposes of the Income-tax Act,

1961 (Central Act XLIII of 1961);"

It was therefore necessary for the assessee to show that during the

relevant year of assessment, the assessee had been recognised as a

charitable and religious trust under the Income-tax Act and the

income derived from the property held by it under trust for

charitable and religious purpose had not been included in the total

income for the purposes of the Central Act, for the relevant

assessment year. "

This follows that even a charitable institute having only

agricultural income is required to register the institution u/s 12A

and follow all the conditions imposed on such institutions under

section 11 to 13.

4.8 Another important issue is regarding voluntary

contributions . " Voluntary contributions'" means donations proper.

It means and includes money gifted, or given gratuitously and

without consideration. But entrance fees and subscriptions paid by

entrants to a society or an institution as a condition precedent to

their membership and as the price of admission to the privileges

and benefits of the society or institution, are given under a contract

and are not part of voluntary contributions. From the very

beginning i.e. even under the 1922 Act, the voluntary contributions

received by a charitable or religious institution and applicable

solely to charitable or religious purposes were not to be included

in the total income of the trust or the institution, as the case may

be. This exemption was granted by Section 4(3) (ii) of the I.T. Act,

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1922. Section 12(1) of the Income-tax Act, 1961 also granted

similar exemption. But in the 1961 Act, a new sub-section (2) was

inserted in Section 12 of the Act to provide that where a voluntary

contribution was made to a trust or a charitable or religious

institution by another charitable or religious institution to which

the provisions of Section 11 were applicable, such voluntary

contributions were deemed as income derived from property in the

hands of the recipient trust. However, the Finance Act, 1972 made

drastic change; inter alia, in regard to the provisions relating to

voluntary contributions. As regards the objects of these changes, it

was stated in Circular No. 108 dated 20th March, 1973 issued by

the Central Board of Direct Taxes, New Delhi that these changes

were made with a view to ensuring that the tax exempt funds of

charitable and religious trusts or institutions are applied to the

purposes of such trusts and institutions, and are not diverted for the

benefit of the author of the trust, founder of the institution, persons

who have made substantial contributions or who manage the

affairs of the trust or institution. 11.13 By the Finance Act, 1972,

the definition of the word '"income" in Section 2(24) of the

Income-tax Act, 1961 was amended to specifically provide that

voluntary contributions received by a charitable or religious trust

or institution, regardless of whether such trust or institution had

been created or established wholly or partly for charitable or

religious purposes, will be regarded as ''income'''' for the purposes

of the Income-tax Act, 1961. Similarly, Section 12 of the Act was

recast to provide specifically that voluntary contributions received

by a trust or institution created or established wholly for

charitable or religious purposes shall for the purposes of Section

11 and 13 of the Act, be regarded as "income" derived from

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property held under trust wholly for charitable or religious

purpose. However, in Section 1 l(l)(d) as well as in Section 12 of

the Act, it is abundantly made clear that the voluntary

contributions, which are made by the donor with a specific

direction that they shall form part of the corpus of the trust or

institution, shall not be regarded as income in the hands of the

recipient trust. Thus, if a donor, while making the donation, makes

it clear that the donation so made shall form part of the corpus of

the trust or institution, it would be a capital receipt and shall not be

chargeable to tax. It must, however, be mentioned here that even

the earlier provisions contained in Section 4(3) (ii) of the I.T. Act,

1922 as well as section 12 of the I.T. Act, 1961 applied only where

the contribution constituted income of the receiving trust; they had

no application where what was received by the trust formed part of

its capital.

APPLICATION OF INCOME

4.9 When income is earned, it should be spent or saved. In

respect of trusts, however, spending for the purposes of the trust is

known as "application " and saving for the spending in future is

known as "accumulation " .Section 11 lays down how much

should be 'applied' or 'accumulated' and if required to be

'accumulated' under what conditions. In a decision pertaining to

the 1922 Act, the Hon Supreme Court has laid down the basic

principles which are still relevant . In the case of HEH

Nizam's v CIT [ 1966] 59 ITR 582 (SC), it was held that :-

"Under the said clause, trust income, irrespective of the fact

whether the said purposes were within or without the taxable

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territories, was exempt from tax in so far as the said income was

applied or finally set apart for the said purposes. Presumably, as

the State did not like to forgo the revenue in favour of a charity

outside the country, the amended clause described with precision

the class or kind of income that is exempt thereunder so as to

exclude therefrom income applied or accumulated for religious or

charitable purposes without the taxable territories. The

substantive part of clause (i) is in two parts : the first part relates

to the income derived from property held under trust wholly for

religious or charitable purposes and the second part, to income

derived from property so held in part only for such purposes. But

the necessary condition for attracting the first part of the clause is

that the said income is applied or accumulated for application to

such religious or charitable purposes within the taxable

territories; and to attract the second part, the income from the

property so held in part shall have been applied or finally set

apart for application to the said purposes. A comparative study of

the two parts clarifies the scope of the provision. The expression

used in the first part is "applied or accumulated for application"

and the expression used in the second part "applied or finally set

apart for application". The words "applied or finally set apart for

application" in the second part indicate that unless the income

from the said property is applied or finally set apart for the

purposes within the taxable territories, the said income does not

earn the exemption. There cannot be any reason why a different

meaning should be given to the expression "applied or

accumulated for application" in the first part of the clause, for, on

principle, there cannot be any possible distinction between such

income from the property wholly held under trust or a part of the

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property held in trust. The words "applied" and "accumulated",

therefore, must mean "applied or finally set apart". "Applied"

means that the income is actually applied for the said purposes in

the taxable territories; and "accumulated" means that the income

is set apart during the year for future spending on the said

purposes. The expression "accumulated for a purpose" involves a

conscious act in praesenti and posits a clear indication on the part

of the trustee to set apart the income for that purpose. It is,

therefore, manifest that under clause (i), only income from the

property wholly or in part held in trust actually applied or set

apart for application for future spending on religious or charitable

purposes within the taxable territories is exempted from inclusion

in the total income. "

4.10 Decisions of the various courts have indicated

different situations which are categorized as apphcation of income

. Some of the important ones are :

1. estabHshment expenses to be treated as application of

income- CIT v.Birla Janahit Trust [1994] 208 ITR 372(CAL)

2. Payment of tax out of the current year's income has to be

considered as application for charitable purposes .-CIT V Ganga

Charity Trust [1986] 162 ITR 612 (GUJ).

3. Application need not precede receipt of income/voluntary

contributions.-Siddrammana Charities Trust v CIT [1974] 96 ITR

275(MAD)

4. Repayment of loan as well as advancement of loan for the

purpose of the trust would amount to application of income -

Circular No 100 of CBDT dt 24 January 1973.

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5. Expenditure for capital outlay is allocation as this word has a

wider meaning than 'expenditure'

6. Donation to another charitable or religious trust counts as

application of income -CBDT Instruction NO 1132 dt January

5,1978.

7. Reinvestment of sale proceeds of a capital asset in another

capital asset should be treated as application - Circular No 52 of

CBDT dt 30 December 1970.

8. Discharge of past liability amounts to application -

R.BShreram Trust v. CIT [1998] 233 ITR 53 (SC)

These are only a few illustrative cases which bring about the

principle of application of income. There can be and will be

several unique situations resulting in the interpretation of this term.

ACCUMLATION OF INCOME

4.11 The trusts are allowed to accumulate or set apart

income derived by them from property held under the trust

,provided they fulfill the conditions laid out in section 11(2) read

with rule 17 and application in form no 10. The most primary

condition is that the purpose of accumulation should be specified

in Form NO 10. It has been held in the case of DIT(Exem) v

Trustees of Singhania Charitable trust [1993] 199 ITR 819(CAL)

that :-

"Section 11(1) itself provides for marginal setting apart and

accumulation not in excess of 25 per cent, of the income of the

trust. It is only such accumulation which can he taken for the

broad purposes of the trust as a whole that the statute does not

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require specification of the purpose. Such setting apart for any of

the purposes of the trust is, however, a short-term accumulation,

accumulation not beyond the year next succeeding. It is sub­

section (2) which provides for the long-term accumulation of the

income. Obviously, such long-term accumulation should be for a

definite and concrete purpose or purposes. What the assessee has

sought to be permitted to do here is to accumulate not for any

determinate purpose or purposes but for the objects as enshrined

in the trust deed in a blanket manner. Accumulation in such a

global manner is definitely not in the contemplation of section

11(2) when it is construed in its setting. The assessee's contention

that saving and accumulation of income for future application of

the same is for the purposes of the trust in the widest terms so as to

embrace the entirety of the objects clause of the trust deed would

render the requirement of specification of the purpose for

accumulation in that sub-section redundant. The purposes to be

specified cannot, under any circumstances, tread beyond the

objects clause of the trust. The Legislature could not have thought

of the need of specification of the purpose if it did not have in mind

the particularity of the purpose of purposes falling within the

ambit of the objects clause of the trust deed. When sub-section (2)

of section 11 requires specijication of the purpose, it does so

having in mind a statement of some specijic purpose or purposes

out of the multiple purposes for which the trust stands. Were it not

so, there would have been no mandate for such specification. For,

a charitable trust, in no circumstances, can apply its income,

whether current or accumulated, for any purposes other than the

objects for which it stands. The very fact that the statute requires

the purpose jbr accumulation to be specified implies such a

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purpose to be a concrete one, an itemized purpose or a purpose

instrumental or ancillary to the implementation of its object or

objects. The very requirement of specification of purpose

predicates that the purpose must have an individuality. In our

view, the provision of sub-section (2) is a concession provision to

enable a charitable trust to meet the contingency where the

fulfillment of any project within its object or objects needs heavy

outlay to call for accumulation to amass sufficient money to

implement it. Therefore, specification of purpose as required by

section 11 (2) admits of no amount of vagueness about such

The assessing officer has every right to scrutinize Form No 10 and

the application of the assessee regarding accumulation of income.

However , there is a major controversy regarding when the

investments covered by form no 10 are required to be made.

Paragraph 2 of Form 10 requires that the investment has to be

made before the expiry of six months commencing from the end of

the relevant previous year. The Hon. Madras High Court has held

in the case of ITO V. MCT trust [1976] 102 ITR 138 (MAD) that

"In the Income-tax Act itself generally time limits are provided by

the statutory provisions. See sections 139, 249, 253, and 256.

Section 200 provides for the rule-making authority prescribing the

time within which any person deducting tax had to pay it to the

credit of the Central Government. Therefore, it is not as if the

legislature has left the entire question of prescriptions of time to

subordinate legislation. If the legislature was so minded as to

think it necessary to leave the question of providing any time limit

100

in regard to section 11 of the Act to the rule-making authority then

it would have said so as in section 200. Else it would have itself

fixed the time limit as done in the other provisions mentioned

above. The forgoing discussions would clearly show that the

legislature does not part with the power to prescribe limitations,

which it jealously retains to itself unless it intends to do so in clear

and unambiguous terms or by necessary intendment. The

introduction of the time element in paragraph 2 of Form No. 10

prescribed by the Rules cannot, therefore, be sustained.

In the result, we agree with the learned judge in

holding that paragraph 2 of Form No. 10 was not validly

prescribed. Paragraph 4 of Form No. 10 would also have to be

struck down as ultra vires, as the prayer contained therein is made

conditional on the assessee complying with the time limit

prescribed in paragraph. "

The same view has been upheld by various other high courts also.

The rule has been subsequently modified prescribing the time limit

as the due date for filing of return u/s 139(1) of the Income Tax

Act, 1961 However the Hon. Supreme Court has held in the case

of CIT V. Nagpur Hptel Owner's ASSOCIATION [2001] 241 ITR

201(SC) that intimation under section 11 has to be furnished

before the assessing authority before the completion of the

relevant assessment.

4.12 The CBDT has also granted powers to the

jurisdictional CITs under section 119(2)(b) to condone the delay in

filing Form No. 10 if the following conditions are satisfied :

(i) The genuineness of the trust is not in doubt;

101

(ii) The delay is only due to oversight;

(iii) There has been no benefit to settler or trustee due to

delay;

(iv) The investment is made prior to condonation;

(v) The accumulation is necessary for the purposes of the

trust;

UTILISATION OF ACCUMULATED INCOME

4.13 The accumulated income has to be utilized for the

purposes of the trust within the specified time limits. Under the

following circumstances, the accumulated income becomes

chargeable to tax :

(i) Where the accumulated income is applied for other than

charitable or religious purposes, such income is liable to be taxed

in the year of such application [Sec 13 (3)(a)]

(ii) Where the accumulated income seizes to be accumulated

or set apart for application to religious or charitable purposes, such

income is liable to be taxed in the year of cessation [Sec 13 (3)(a)]

(iii) Where the accumulated income seizes to remain invested

or deposited in any of the forms or modes specified in Section

11(5), , such income is liable to be taxed in the year of cessation

[Secl3(3)(b)]

(iv) Where the accumulated income is not utilized for

specified purposes during the period of accumulation or in the year

immediately following the expiry of period of accumulation, such

income is liable to be taxed in the year immediately following the

expiry of the period of accumulation [Sec 13 (3)(c)]

102

Substantial changes have been made to this section by Finance Act

2001 and Finance Act 2002. By Finance Act 2001, the

maximum period of accumulation has been curtailed from 10

years to 5 years by inserting a proviso in section 11(2). It was

noticed that the period of 10 years available for accumulation of

unapplied income was too long a period and was needed to be

curtailed. This was because any income of a charitable trust is

required to be spent on charitable purposes and not just to be

accumulated ad infinitum. The period of 10 years was also

perceived to be creating an impediment for proper monitoring of

the trust by the Assessing Officer because of its sheer duration.

This period has now been curtailed to 5 years which is reasonable

period of time.

SCOPE OF EXEMPTION FOR BUSINESS CARRIED OUT BY

TRUST

4.14 Section ll(l)(a) grants exemption to the income

derived by trust from property held under the trust only for

charitable or religious purposes. Secfion 11(4) of the Act provides

that for purpose of Section 11, 'property held under trust' includes

business undertaking so held. Secfion 11 (4A), which came into

effect from April 1, 1984 and was later substituted w.e.f April 1,

1992 clarifies that any income of a trust, being profits and gains of

business will be exempt only if the business is incidental to the

attainment of the objectives of the trust and separate books of

accounts are maintained by such trust in respect of such business.

Section 11(4) of the Income-tax Act, 1961 lays down that

"property held under trust" for the purposes of Section 11 may

include a business undertaking held by the trust. It further states

103

that if a claim is made that the income of any such undertaking

should not be included in the total income of the trust, the Income-

tax Officer shall have power to determine the income of such

undertaking in accordance with the provisions of this Act relating

to assessment and determination of income under the head "Profit

and gains of Business or Profession." It, however, provides that if

the income so determined by the Income tax Officer is in excess of

the accounting profits of the undertaking held by the trust, such

excess shall be deemed to be applied to purposes other than

charitable or religious purposes. The result would be that the

provisions of Section 11(1) shall not apply to such excess and the

same will be charged to tax. It is now well-established that

""property is a term of widest import and business would

undoubtedly be property unless there was something to the

contrary in the enactment.

The issue as to whether a trust could be exempt even if

it carries on business if such business itself held as property

continues to be a matter of controversy. However, a decision of

the three member bench of the Hon'ble Supreme Court in the case

of ACIT Vs. Thanti Trust [2001] 247 ITR 785 (SC) over rides all

earlier decisions. The law as laid down in this case states that :-

"A public charitable trust may hold a business as part of its

corpus. It may carry on a business which it does not hold as a part

of its corpus. But it seems to us that the distinction has no

consequence insofar as s. 13(l)(bb) is concerned. Sec. 13(l)(bb)

provides, so far as is relevant to this case, that the provisions ofs^

11 shall not operate so as to include in the total income of the

previous year of a public charitable trust for the relief of the poor,

104

education or medical relief which carries on any business, any

income derived from such business unless the business is carried

on in the course of the actual carrying out of a primary purpose of

the trust. Sec. 13(l)(bb), therefore, will apply to a public

charitable trust for the relief of the poor, education or medical

relief that carries on a business, regardless of whether or not that

business is held by the trust in trust, that is, as a part of its corpus.

Even a business that is held by such a trust as a part of its corpus

is carried on by the trust and, therefore, s. 13(l)(bb) will apply to

such trust.

The requirement of s. 13(l)fbb) is that the exemption under

s. 11 will not be available to such a trust that carries on any

business unless the business is carried on "in the course of the

actual carrying out of the primary purpose of the trust", that is to

say, unless the business is carried on in the course of actually

accomplishing a primary purpose of the trust; the business must,

therefore, be carried on in the course of the actual

accomplishment of relief of the poor, education or medical relief.

As an example, a public charitable trust for the relief of the poor,

education and medical relief that carries on the business of

weaving cloth and stitching clothing by employing indigent women

carries on the business in the course of actually accomplishing its

primary object of affording relief to the poor and it would qualify

for the exemption under s. 11.

Sub-s. (4) of s. 11 remains on the statute book, and it defines

property held under trust for the purposes of that section to

include a business so held. It then states how such income is to be

determined. In other words, if such income is not to be included in

105

the income of the trust, its quantum is to be determined in the

manner set out in sub-s. (4)

Sub-s. (l)(a) of s. 11 says that income derived

from property held under trust only for charitable or religious

purposes, to the extent it is used in the manner indicated therein,

shall not be included in the total income of the previous year of the

trust. Sub-s. (4) defines the words "property held under trust" for

the purposes ofs. 11 to include a business held under trust. Sub-s.

(4A) restricts the benefit under s. 11 so that it is not available for

income derived from business unless (a) the business is carried on

by a trust only for public religious purposes and it is of printing

and publishing books or any other notified kind, or (b) it is carried

on by an institution wholly for charitable purposes and the work in

connection with the business is mainly carried on by the

beneficiaries of the institution, provided, in both cases, that

separate books of account are maintained by the trust or the

institution in respect of such business trusts and institutions are

separately dealt with in the Act (s. 11 itself and ss. 12, 12A and H,

for example).

4.15 Various developments in this regard would indicate

that wherever there is business income accruing to a trust , the

rigid requirement of law as to the condition for exemption for such

business income would require to be given due attention. Such

business income would not be automatically exempt merely

because the trust has charitable objects. In order to find out the

profit earned by an organistation with charitable objects, the test to

be applied is whether the predominant object of the business

activity is to subserve the charitable purpose or to earn profit.

106

Where profit making has been found to be the predominant object

of the activity the purpose would seize to be a charitable purpose

and the income would lose exemption u/s. 11. However, where the

predominant object of the activity is to carry out the charitable

purpose and not to earn profit, it would not lose its character of a

charitable purpose merely because some profit arises from the

activity.

Section 11 (4) can be applied to the income, by way of

profits and gains of business, carried on by trust, where the

business undertaking is a property held under trust. The

provisions of section 11(4A) cannot be applied in such a case. The

provisions of section 11 (4A) are applicable to a case where the

business undertaking is not held under trust provided the business

is incidental to the attainment of objectives of the trust and

separate books of accounts are maintained by the trust in respect of

such business.

4.16 Any income of a trust by way of capital gains will be

treated as applied for charitable purpose only to the extent to

which sale proceeds are utilized for acquiring a new capital asset.

If the capital gains are not utilised for acquiring a new capital

asset, the trust will lose exemption. Section 11(1 A) imposes a

specific condition for exemption of capital gains in respect of

charitable trusts. Unlike other income the capital gains have to be

invested in another capital asset and cannot be kept in permitted

securities as mentioned in section 11(5). The section also provides

that it is not necessary to reinvest the entire sale proceeds. Only if

a part of the sale proceeds, the exemption will be limited to a

proportionate part of the capital gains. The proportion of exempt

107

capital gains will be in the ratio of amount reinvested in another

capital asset to the net sale consideration.

Exemption granted under section 10(230 ;

4.17 Section 10 of the Income Tax Act lists out various

types of income which are not to be included in total income and

are totally exempt. Section 10 serves as a residuary section

serving as a basket where incomes, irrespective of its nature are

considered as exempt. It also acts as an accommodating section

for incomes which the government wants to be exempted. The

types of income included in section 10 therefore are of assorted

types and have no common characteristics except that they are

exempt from income tax.

On perusal of the provisions of section 10, it is seen

that this section deals with single purpose institution, income of

which are treated as exempt. However, there are certain sub

sections of section 10 which seem to over lap with section 11 also.

In respect of charitable trust, the overlapping provisions are

section 10(23C). This section 10(23C) treats income of certain

institutions as exempt. It is however noted in practice that most of

the institutions are either in the form of charitable trust or run by

charitable trust. They can therefore enjoy exemption u/s.ll also.

In other words, a charitable trust, running educational institution or

hospitals can enjoy exemption both under section 11 as well as

section 10(23C) of the Act. The provisions of section 11 have

already been discussed in detail. The provisions of section

10(23C) are now discussed.

108

Exemption for education or medical institution was

available u/s. 10(22) or section 10(22A) till A.Y.I998-99. From

A.Y.I999-2000 these sections were deleted. The exemption

provision were however clubbed in a new section - Section

10(23C) in the form of sub sections (iiiab) to (via) and introduced

by the Finance Act 1998, w.e.f. 1/4/1999.

A close study of this section shows that it can be broken up in

three parts.

(i) Section 10(23C)(i) / (ii) /(iii)/ (iiia) are regarding exemption

of income received by any person on behalf of the PM National

Relief Fund, PM Fund for promotion of Folk Art and PM Aid to

Students Fund and National Foundation for Communal Harmony.

(ii) Section 10(23C)(iiiab) and (iiiac) are in respect of

exemption of incomes of University or any other educational

institutes or medical institution, existing solely for educational /

philanthropic purposes and not for the purpose of profit, and which

are wholly or substantially financed by the government.

(iii) Section 10(23C)(iiiad) to section 10(23C)(via) are in respect

of exemption of incomes of University or any other educational

institutes or medical institution, existing solely for educational /

philanthropic purposes and not for the purpose of profit.

The first two sub sections i.e. Section 10(23C) (iiiab)

and (iiiac) talk of exemption for income of government aided

education and medical institutions. The only conditions are that

the institute should exist for education / philanthropic purposes

and not for the purpose of profit and it should be wholly or

109

substantially financed by the government. There are no other

conditions that are required to be complied with. Also, no

approval is required from any authorities.

The next two sub sections i.e Section 10(23C) (iiiad) and

(iiiae) grant exemption in respect of any educational / medical

institution, existing solely for education / philanthropic purposes

and not for the purpose of profit and where the aggregate annual

receipts of the institution do not exceed Rs. One crore ( as

prescribed vide Rule 2 BC ). The conditions required for

exemption are similar to those mentioned earlier. No approval is

required from any authorities in case of such institutions. There is

no stipulation on investment of excess fund as mentioned in

section 11(5).

However, when the aggregate annual receipts of the

educational or medical institute exceed Rs. One crore, specific

provisions are incorporated in section 10(23C)(vi) & (via).

Law prior to 1/4/1999 had three separate sections for

three separate categories of exemptions. Section 10(22) was

applicable to educational institutes , Section 10(22A) was

applicable for medical institutes and section 10(23C) was for other

approved institutions. Finance Act 1998 deleted section 10(22)

and 10(22A) and merged these sections with section 10(23C). The

rational behind this change is explained in CBDT Circular No.772

dt.23/12/1998 which reads as under :-

8. Provisions relating to exempting the income of educational

institutions, universities, hospitals and other medical institutions

8.1. Under the provisions of clauses (22) and (22A) of section 10

of the Income-tax Act, before amendment, educational and medical

institutions enjoyed a blanket exemption from income-tax if they

existed solely for educational purposes and not for the purposes of

profit. In the absence of any monitoring mechanism for checking

the genuineness of their activities, these provisions have been

misused.

8.2. The Act omits the aforesaid clauses (22) and (22A) from the

statute. The exemption would, however, continue in respect of any

university or other educational institution, hospital or other

medical institution which is wholly or substantially financed by

Government, under the new sub-clause (iiiab) and (iiiac) inserted

in section 10(23C) of the Income-tax Act, by the Finance (No. 2)

Act, 1998.

8.3. Further, under sub-clause (iiiad) and (iiiae) in section

10(23C), the income of other educational and medical institutions

would also be exempt if their annual receipts are below a limit to

be prescribed. The limit has since been prescribed at Rs. one crore

vide Notification No. S.O. 897(E) dated 12th October, 1998.

8.4. The income of the remaining educational and medical

institutions would be exempt if they are approved by the

prescribed authority on application made by them under sub­

clauses (vi) and (via) of section 10(23C). This approval would be

subject to their adherence of conditions similar to those specified

for sub-sections (iv) and (v) of section 10(23C) regarding

maintenance of accounts, expenditure and accumulation of funds

and investment of funds in specified assets. The accumulated

11

income is required to be invested in the modes specified in section

11(5). These institutions are given time upto 30th March, 2001 to

transfer their investments to specified securities. The Rules and

Forms in this regard have since been notified vide Notification No.

S.O. 897(E) dated 12th October, 1998. By this notification the

Central Board of Direct Taxes have been designated as the

Prescribed Authority for the purpose of approval under sub­

clauses (vi) and (via) of section 10(23C).

8.5. These amendments will take effect from 1st April, 1999 and

will, accordingly, apply in relation to assessment year 1999-2000

and subsequent years.

COMPARISON OF SECTION 11 AND SECTION 10(230

4.18 A chart comparing the provisions of section 11 and

section 10(23C) has been prepared . This will give an idea of the

actual operations similarities and differences in these two sections.

Issue

Compulsory spending of 85% of income.

Section 10(23C)(iiia iac)/ iiiad)/( No compulsion exists.

b)/(ii iiiae) such

Section 10(23C)(vi)/(v)/ (vi)/(via) 85% of the income received is to be spent in the same year. 15% of income can be accumulated indefinitely. [Third proviso, clause (a) of sec. 10(23C)].

Sections 11 to 13

85% of the income received is to be spent in the same year. 15% of income can be accumulated indefinitely. [Sec. 11(1)1 Relaxation where income not spent because not received during

12

Accumulati on of income.

Purpose of accumulation

Time period for spending of income.

Restriction on trusts not to benefit particular

No restriction on accumulation.

No provisions exist on purpose of accumulation.

No time period.

No such restriction

Income beyond 15% can be accumulated for five years. Accumulation has to be in one of the modes specified in 11(5) subject to exceptions. [Third proviso, clause (a) of sec. 10(23C)]

Accumulation of funds need not be for specific purposes but application has to be wholly and exclusively to its objects. [Third Proviso, clause (a) of section 10(23C)]

85% of the income to be spent in the same year [clause (a) of third proviso tosec. 10(23C)

No such restriction

the year or for any other reason. [Explanatio n (2) to section 11(1)]

Income beyond 15% can be accumulated for five years. Accumulation has to be in one of the modes specified in 11(5) subject to exceptions. [Sec. 11(2)]

Accumulation has to be for specific purpose and the purpose and period of accumulation has to be intimated to the AO in writing. [Sec. 11 (2)]

Under Explanation 2 of Sec. 11(1), unspent income can be spent in the subsequent year at the option of the assessee.

13

religious community or caste.

Self-dealing restrictions.

Treatment of voluntary contribution in the form of jewellery, furniture, etc.

Pre 1998 equity shares of public companies

Treatment of non-corpus

Not applicable.

No conditions exist.

No restrictions on investments

Exempt if applied to

No provision restricting self-dealing by the trustees, managers, founders, etc. (specified persons).

Voluntary contributions received and maintained in the form of jewellery, furniture, etc. need not be invested in the modes of seel 1(5). [Third proviso, clause (b), item (iv) of sec. 10(23C)]

Only University or other educational institution, hospital or other medical institution(clause (vi) and (via) of secretary 10(23C)) can hold such equity shares where such shares form part of corpus [Third proviso, clause (b), item (ia) of secretary. 10(23C).

Treated like any other income i.e.

114

donations.

Treatment of donations to corpus.

Value of medical or educational services provided to interested persons Filing of returns.

Auditing of accounts.

Approval

educational/med ical purposes

Exempt if applied to educational/med ical purposes

No restrictions

No obligation. (Now made mandatory vide TLAA 2006)

Not applicable.

No approval

exempt if applied to educational/medica 1 purposes or accumulated. [section 2(24)(iia)l No special treatment to corpus donation. In other words, corpus donations have to comply with conditions of spending and accumulation.

No restrictions

Required to file returns annually. [Sec. 139(4C)]

No explicit provision for audit. However, three years audited accounts are required to be enclosed while applying for approval [Form 56D](Now made mandatory that audited accounts be filed with return vide TLAA 2006)

Approval by the Registration once

115

and Renewal

Time limit for approval

Retrospectiv e approvals

Taxation of anonymous donations

necessary.

Not applicable

Not applicable

Taxable at 30%

CCIT/DGIT and renewal after every 3 years. Eighth proviso to section 10(23C) and Rule 2CA](Now one time approval vide TLAA 2006)

No time limit. (Now one year time limit in TLAA 2006)

Approvals could be given for any earlier years (Now asses see can only apply for the current and future financial years vide Finance Act, 2006. No power to condone delay)

Taxable @30% in case of all charitable entities. In case of wholly religious entities not taxable. In case of mixed purpose entities taxable if the anonymous donation is for an educational or medical institution

by CIT/DIT and no renewal [Sec.l2AA]

Six months from the end of the month in which the application was received. Section 12AA(2)

Assessee has to apply within one year from creation of trust or establishment of institution with provision for condonation of delay by CIT [Section 12A]

Taxable @30% in case of all charitable entities. In case of wholly religious entities not taxable. In case of mixed purpose entities taxable if the anonymous donation is for an educational or

run by the entity [Section 115BBC]

medical institution run by the entity [Section 115BBC]

4.19 What can be seen from the purview of these sections

is that the institute should exist solely for educational or

philanthropic purposes and not for purposes of profit. It is not

clear from the definition whether the expression solely qualifies

the phrase educational purposes or not for purposes of profit. A

reasonable approach would be to assume that it applies to both.

The exact meaning of this phrase has been brought out by the

decision of the Hon'ble Supreme Court in the landmark case of

ACIT Vs Aditanar Educational Institute [1997] 224 ITR 310 (SC).

In the said decision, the Hon'ble Supreme Court has commented as

under :-

"All that the High Court has stated in the penultimate

paragraph of the judgment is that counsel for the assessee gave a

right answer to a hypothetical question put forward by the Court

to the effect that the applicability ofs. 10(22) should be evaluated

or investigated every year and only if it is found that the

'institution' exists for educational purposes in the relevant year

and even if any profit results, which is only incidental to the

purpose of education, the income would be exempt. The High

Court has made an observation that any income which has a direct

relation or incidental to the running of the institution as such

would qualify for exemption. We may state that the language ofs^

10(22) of the Act is plain and clear and the availability of the

exemption should be evaluated each year to find out whether the

17

institution existed during the relevant year solely for

educational purposes and not for the purposes of profit. After

meeting the expenditure, if any surplus results incidentally from

the activity lawfully carried on by the educational institution, it

will not cease to be one existing solely for educational purposes

since the object is not one to make profit. The decisive or acid test

is whether on an overall view of the matter, the object is to make

profit. In evaluating or appraising the above, one should also bear

in mind the distinction/difference between the corpus, the objects

and the powers of the concerned entity. The following decisions

are relevant in this context : Governing Body of Rangaraya

Medical College vs. ITO (1979) 117 ITR 284 (AP) and Secondary

Board of Education vs. ITO (1972) 86 ITR 408 (Oh). We make this

position clear in order to allay the apprehensions expressed by

counsel. "

4.20 The main principle that emerges from the above

decision is that if any surplus results incidentally from the activity

carried on by the educational institutes, it will not seize to be one

existing solely for educational purposes, since the object is not one

to make profit . In other words, generation of profit will not take

an institution out of the purview of exemption if profit generation

is not an object. Similar view was expressed by the Hon'ble Kerala

High Court in the case of CIT Vs PuUikal Medical Foundation Pvt.

Ltd. [1994] 210 ITR 299 (KER). In the said decision, the Hon'ble

court has observed as under :-

"We respectfully adopt this dictum and hold that

merely because the assessee is running the hospital on commercial

lines, it will not be disentitled to the exemption under section 10

118

(22A) of the Act. As long as the dominant purpose is a

philanthropic one, the mere circumstance that the managing

director or director gets some advantages or exercises some

patronage while running the institution, that will not be a ground

to hold that the main purpose of the institution is not

philanthropic. These benefits would be merely incidental to the

carrying out of the main or primary purpose and so, such benefits

would not militate against the philanthropic character of the

institution. As long as the purpose of earning profit is to expend

such profit for the achievement of the main philanthropic purpose,

the assessee may carry on any activity for profit. The profit should

be re-deployed in the same institution or in another similar

institution

Another aspect to be considered is whether philanthropic purpose

will require a scheme for extending free consultation facility to the

poor patients. The Income-tax Officer after verifying the records

found out that it is the practice of the assessee to allow some

discount from certain bills and such discounts are accounted as

free treatment. It was also observed that such discounts need not

be to poor and indigent patients. The Officer also fairly stated that

there may be some cases where the assessee has rendered free

treatment to some patients. However, a substantial portion of the

expenditure debited as free treatment represents discounts allowed

by the management. According to the Income-tax Officer, there is

no element of "philanthropy" in granting such discounts. We

appreciate the care with which the Income-tax Officer has gone

into the accounts and fairly conceded the points in favour of the

assessee. However, free treatment to the poor and needy cannot be

19

the sole philanthropic activity of a hospital. However, we hasten to

add that it is one of the clear and apparent forms of philanthropic

activity which a hospital can perform and that it should be the aim

of a any hospital claiming to be a philanthropic institution to

render free treatment to the needy and the poor, for which it may

set out some specific principles. The assessee has not so far

formulated or practised any such principles or procedure. The

assessee should make proper remedial measures in this regard,

especially because in clause IIIA of the memorandum, one of the

object is to render free medical aid to poor patients. However, the

meaning of the words "philanthropic purposes" includes activities

promoting goodwill to mankind or activities beneficial to humanity

at large as opposed to activities solely for the benefit of a few

individuals. Eleemosynary is not one of the essential ingredients of

philanthropy. Acquiring costly machines for investigation and

examination of patients, providing the services of highly qualified

doctors for consultation, expansion of the hospital by including

rare super specialities, will all be philanthropic activities. We do

not agree with the opinion of the Officer that the employees of the

institution should also be guided by philanthropic motives in order

that the institution can claim to be a philanthropic institution.

Highly specialised doctors and technicians can be employed by the

institution only if salary commensurate with their qualifications is

paid to them. It has to be kept in mind that the present enquiry is

only whether the assessee is a philanthropic institution or

not

In case a hospital exists solely for philanthropic purposes, even if

incidentally profits is earned, the hospital is entitled to the benefit

120

under section 10 (22A) of the Act. In order to achieve the main

philanthropic objects, the hospital may do some profit earning

business provided such profit is appropriated towards the

expansion and development of the hospital or to start another

institution with the same philanthropic objectives. The real test to

be applied is what is the dominant or primary purpose of the

institution. If the Primary purpose is philanthropic, the inclusion

of some objects for earning profits for the implementation of the

primary object would not alter the character of that primary

object. In other words, this will not be a ground for holding that

the hospital is not existing solely for philanthropic purpose. All

cumulative factors will have to be taken into consideration in

order to decide whether the institution exists for philanthropic

purpose and not for purposes of profit. Neither the fortuitous

factor of having a large surplus in any particular year, nor the fact

of diverting some income to objects which are not philanthropic in

itself would be decisive of the matter. "

It can be seen from the above two decisions that the

scope of exemption u/s.lO(23C) is wider than the scope under

section 11. The plurality of exemption provisions available to

certain assessees u/s.ll as well as section 10(23C) is discussed

separately later.

There have been certain modifications regarding the

institutions covered u/s.lO(23C). Certain more requirements have

been introduced for more effective monitoring of such institutions.

The modifications are :-

121

•

(i) The institutions covered u/s.lO(23C) should file return of

income as per section 139(4C), if their income exceeds minimum

exemption Hmit.

(ii) With effect from 14/7/2006, compulsory audit has been

made mandatory for institutions covered by clauses (iv), (v), (vi)

& (via) of section 10(23C) if the income exceeds minimum

exemption limit.

(iii) The exempt income of the institutions covered u/s.l0(23C)

will not include income by way of anonymous donation as

mentioned in section 115BBC. This amendment is w.e.f

A.Y.2007-08.

DEDUCTION TO DONORS U/S 80G

4.21 Though the provisions of Section 80G do not grant

any direct exemption to a charitable trust , it is one of most

important sections from the trust's point of view. This is because ,

a donation given to a charitable trust u/s 80G entails the donor to

get a deduction, equal to prescribed percentage of the donation

given , from his income. Naturally given a choice any donor would

like to give a donation to a trust recognized u/s BOG as it results in

a direct monetary benefit to him .

The scheme of section BOG is as under :

Section 80G(1) states the deductions that will be allowed

while computing the total income of an assessee, in respect of

donations made by an assessee to specified persons.

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•

•

•

• >

Section 80G(2) gives the list of eligible persons to whom

the donations can be made for the purpose of claiming exemption

under section 80G.

Section 80G(4) specifies the limit for the donations. The

donations should not exceed 10% of the gross total income.

••• Section 80G(5) lays down the conditions for an

institution, referred to in section 80G(2)(a)(iv), in order to be held

eligible under the section.

Section 80G(5A) clarifies that where deduction in respect

of a sum is claimed under this section, such sum shall not qualify

for any other deduction under the Act.

^ Section 80G(5B) specifies that any institution or fund

incurring not being in excess of 5% of the total income, for

religious purposes, shall be deemed to be an institution to which

the provisions of this section apply.

Perusal of this section shows that this section has provided for two

types of deductions as under:-

1. 100% deduction is available without any precondition for

donations to specified funds;

2. 50% of the donation is allowable for donation to other

institutions which satisfy the requirements of Section

11,12,10(23AA) or 10(23C)

The main conditions for eligibility u/s 80G are

mentioned in S.80G (5). The donation to a trust would be held as

deductible in the hands of the donor only if the trust is registered

with the Commissioner of Income Tax and its income is exempt

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u/s 10 or 11. In the event the registration of the trust is cancelled

by the Commissioner of Income Tax, approval u/s 80G gets

automatically cancelled from the date on which registration itself

is cancelled.

4.22 Section 80G(5) lays down the conditions under which

the donations covered under section 80G(2)(a)(iv) shall be eligible

for the benefit of that section. The institution or trust to whom

such donation can be given should be

(i) established in India ;

(ii) for a charitable purpose ;

(iii) fulfills conditions laid down in section

80G(5)(i) to 80(5)(vi)

Certain important points that have emerged over the years in

respect of section 80G are as under :-

(i) For availing deduction u/s.80G, it is obligatory

on the part of the assessee to produce necessary proof of payment.

In the absence of such proof, the Assessing Officer can reject the

assessee's claim.

(ii) The assessee is entitled to deduction u/s.80G

only when he has a positive income. If the gross total income of

the assessee is negative, he is not entitled to the deduction u/s.80G

(iii) The deduction u/s.80G becomes eligible if

donations are actually made to the eligible trust during the

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previous year. The subsequent utilization or non utilization of

sucli donation by the trust or institution is of no consequence.

(iv) Another interesting issue is whether donation in

kind can also be claimed as deduction for the purpose of section

80G. The Hon'ble Supreme Court has ruled that section 80(2)(a)

contemplates only cash donations and not donations made in kind.

INFERENCES AND RECOMMENDATIONS

4.23 Section 11 & 12, Section 10(23C) and section 80G are

the main sections that provide exemptions to income of charitable

trusts. The provisions and the judicial pronouncements thereon

have been discussed in the preceding paragraphs. Section 11

mainly lays down the types of charitable organizations that will be

exempt and treatment to be given for capital gains arising out of

transfer of asset by a trust, method of application and

accumulation of income, modes of accumulation and treatment for

the income generated through business carried out by trusts.

Section 12 talks of the treatment to be given to the voluntary

contributions received by a trust. Section 10(23C) exempts the

income of institutions in the field of education and medical

services existing for philanthropic or charitable purposes and not

for the purpose of profit. Section 80G provides income to donors

giving donations to charitable trusts. Personal experience as well

as discussions and interviews with senior officers of the

department invariably lead to the conclusion that the provisions of

section 11 & 12 as well as section 80G have been drafted very

meticulously and cover all the plausible situations. There are very

few escape routes which can be resorted to by ill intended people.

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These provisions have evolved over the years and, in my opinion,

have now really matured.

4.24 The first finding that the researcher has to give is in

respect of modes of investment as laid down in section 1 l(5)(xii).

This section says "any other form or mode of investment or

deposit as may be prescribed." The other forms or mode of

investment are specified in Rule 17C. Rule 17C(1) permits

investment in units issued under any scheme of mutual fund

referred to in section 10(23D). The basic preamble specifying the

modes of investment is that trust money is public money and if at

all required to be invested, should be invested in safe modes,

devoid of any speculation which might result in erosion of its

value. Because of this reason, the trust funds are not allowed to be

invested in equity shares. However, it is surprising that investment

in units of mutual funds is a specified investment u/s.l l(5)(xii).

The mutual funds are also subject to market variation as the NAV

is linked with the investment made in mutual fund in the primary

and secondary market. The investment in units of mutual fund

cannot be equated on the same terms as the other investments like

fixed deposits with nationalized banks or bonds issued by the

central or state government.

4.25 The second observation is regarding the applicability

of 40(a)(i) and (ia) regarding non deduction / non deposit of

deducted TDS. As per the provisions of section 40(a)(i) and (ia),

any interest, royalty , commission or brokerage or fees for

professional or technical services or amounts payable to contractor

or sub-contractors shall not be allowed as a deduction in

computing the income chargeable under the head 'Profits & gains

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of business or profession' , if in respect of such sum, tax has not

been deducted or after deduction has not been deposited in the

Central Government Account within the prescribed time limit.

The purpose enacting this provision is to strengthen the TDS

provisions so that collection of tax should be prempted.

A charitable trust also makes lot of payments on

which tax is deductible. However, if the trust fails to deduct tax or

after deducting fails to deposit the same in government account, it

escapes the net cast by section 40(a)(i) and (ia). This is because

(a) The income of the trust cannot be computed

under the head 'Profits & gains of business or profession' ;

(b) Even if the said deduction is disallowed and

added back to the total income, the entire income of a charitable

trust is exempt under section 11 and hence the disallowance of

deduction has no effect as such.

To tide over this lacunae, it is recommended that if tax

is not deducted or if deducted and not deposited within the

prescribed time limit, wherever deductible a provision should be

enacted such that such amounts will not be included in the income

of the charitable trust treated as exempt under section 11 (or under

section 10(23C) as the case may be).

4.26 Though section 11, 12 & 80G have been immaculately

drafted, the same cannot be said about section 10(23C). As

discussed earlier, section 10(23C) exempts the income of

educational or medical institutes, wholly or substantially financed

by the government or private, existing solely for philanthropic or

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educational purposes and not for the purposes of profit. Section

10(23C)(iiiab) to 10(23C)(iiiae) exempts the income of

educational or medical institutes which are substantially granted

by the government or whose annual receipts are below Rs.one

crore. Earlier there was no check on such institutions. Now,

however, this lacuna has been removed by making it mandatory

for such concerns to get their accounts audited and also to file

returns of income. Section 10(23C)(vi) and (via) exempts income

of educational or medical institutes existing solely for educational

or philanthropic purposes and not for the purpose of profit and

where the receipts exceed Rs. One crore. There are two major

shortcomings in this section.

The first shortcoming is that the provisions of section

13 which has been so elaborately drafted to ensure the prevention

of misuse of trust property for the personal use of the trustees or

their relatives are not incorporated in section 10(23C). In other

words, a trust claiming exemption under this section is not subject

to forfeiture of exemption even in case the properties used for the

personal gain of the trustee or relatives. This is a major lacuna and

is required to be addressed by making the provisions of section 13

applicable in case of trusts or institutes claiming exemption

u/s.lO(23C).

The second lacuna, a more important one is the

structural fault. By virtue of this section, there exist two sections

whereby education or medical institutes can claim exemption of

income ie. Section 10(23C) and section 11. Such multiplicity of

exemptions is highly undesirable and does not serve any purpose.

The Public Accounts Committee 2006-07 had the following

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comments to offer in its 36 Report tabled before the Hon'ble

Parliament. :-

"15. While observing that separate yet overlapping

clauses in the Income Tax Act providing exemption under section

10(23C) and Sections 11 and 12 of the Act are being misused by

private educational institutions, the Committee in their earlier

Report, had recommended that the existing tax laws should be

made simpler and clearer in consultation with the Ministry of Law

and the lacunae in the law, if any, should be plugged suitably. In

this regard, the Ministry vide their Action Taken Note have

informed that necessary enabling changes have been brought in

the statute through the Taxation Laws Amendment Act, 2005. With

regard to the simplification of the existing tax laws, the Ministry

have stated that the exercise to simplify the Income Tax Act is

currently underway and the suggestions of the Committee to merge

the provisions [Sections 11, 12 and 10 (23C) (vi)J governing tax

exemptions for educational institutions have been forwarded for

consideration to the Expert Group constituted for this purpose.

The Committee desire that the Expert Group should be impressed

upon to consider the matter expeditiously and submit its findings

at the earliest. They would also like to be apprised about the

findings of the Expert Group and the consequential action taken by

the Government thereon

The Kelkar Committee, constituted for evaluation of

Direct Tax Act had also made the following categorical

recommendation.

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It is obvious that the think tank at the highest level in

the government have also visualized the ill effects of existence of

such multiplicity of exemptions. As recommended by the Kelkar

Committee, these provisions need to be immediately merged

together.

"7.18 The income of the Charitable Trust from property held under

trust is exempt to the extent it is applied for charitable purposes.

The surplus if any is allowed to be accumulated for future

application, subject to certain specified conditions. The benefit of

the exemptions is either enjoyed under various clauses of Section

10 or under Section 11 to 13. The compliance burden under the

two schemes is different. Infact, the Task Force received large

number of grievances particularly relating to delay in the issue of

exemption notification under Section 10 by the Central Board of

Direct Taxes. Such delays are inherent in the very procedure for

issuing any statutory notification. Therefore, the Task Force

recommends that the exemptions under Section 10(21), 10(23B)

and 10(23C)(iiiab) to (via), 10(29A) should be merged with Section

11 to ISA of the Income Tax Act. "

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