13

CHARITABLE OR RELIGIOUS TRUSTS AND

INSTITUTIONS, POLITICAL PARTIES
AND ELECTORAL TRUSTS

LEARNING OUTCOMES
After studying this chapter, you would be able to -
 appreciate the conditions to be fulfilled by universities, other educational institutions, hospitals
and other medical institutions to claim the benefit of exemption under section 10(23C);
 identify the inclusions in the definition of “charitable purpose”, to appreciate whether a trust or
institution would qualify for the benefit of exemption under sections 11 and 12;
 appreciate the conditions to be fulfilled by a trust or institution to claim benefit of exemption under
section 11;
 appreciate the procedure to be followed for registration of a trust or institution;
 examine the special provisions relating to taxability of anonymous donations received by a trust
or institution;
 appreciate the special provisions for taxability of accreted income of certain trusts and institutions;
 analyse and apply the above provisions to compute the total income and tax liability of trusts and
institutions and address related issues;
 identify the income of political parties which are exempt from tax and the conditions to be satisfied
to avail the exemption;
 examine the conditions to be satisfied by an electoral trust to avail exemption in respect of
voluntary contributions received by it;
 apply the above provisions relating to political parties and electoral trusts in making computations
and addressing related issues.

© The Institute of Chartered Accountants of India

 13.2 DIRECT TAX LAWS

13.1 INTRODUCTION
Non-profit organisations in India cater to socio-economic and other needs of common people in the
country. Hence, the Government encourages such organisations with philanthropic objective by
providing tax exemptions subject to compliance of certain conditions. In this chapter, we will be
discussing the income tax exemptions and related aspects of non-profit organizations engaged in
charitable activities.
Section 10(23C), inter alia, exempts income received by any person on behalf of university, or other
educational institution or any hospital. Section 11 provides exemption in respect of income derived
from property held under trust wholly for charitable or religious purposes. Section 13A exempts
certain categories of income derived by a political party and section 13B exempts voluntary
contributions received by electoral trusts.
Exemption provisions in respect of trusts/fund/institutions
University or other educational Trust for Political Electoral Trust
institution, hospital or other medical charitable or Parties
Section 13B
institution, other fund or institution for religious
Section
charitable purposes, any trust or purposes
13A
institution wholly for public religious
Section 11 to
purposes or wholly for religious and
13
charitable purposes
Section 10(23C)

13.2 INCOME OF UNIVERSITIES, HOSPITALS,

EDUCATIONAL INSTITUTIONS, MEDICAL
INSTITUTIONS ETC. [SECTION 10(23C)]
As we have read in Chapter 3, exemption is available under section 10(23C) in respect of any income
received by any person on behalf of the certain funds and institutions. In particular, in this chapter,
we would be dealing with income of universities, educational institutions, hospitals and other medical
institutions covered under sub-clauses (iiiab), (iiiac), (iiiad), (iiiae), (iv), (v), (vi) and (via) of section
10(23C). Broadly, exemption to universities, educational institutions, hospitals and other medical
institutions under section 10(23C) is available in the following manner:
(1) Universities or Educational Institutions or Hospitals or Medical Institutions substantially
financed by the Government:
• any university or other educational institution wholly or substantially financed by
the Government which exists solely for educational purposes and not for profit [Sub-
clause (iiiab)];

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.3
POLITICAL PARTIES AND ELECTORAL TRUSTS
• any hospital or other institution wholly or substantially financed by the
Government, which exists solely for philanthropic purposes and not for profit and
which exists for the reception and treatment of persons suffering from illness or mental
defectiveness or for the reception and treatment of convalescing persons or persons
requiring medical attention or rehabilitation [Sub-clause (iiiac)];
If the government grant to a university or other educational institution, hospital or other
institution during the relevant previous year exceeds 50% of the total receipts (including
any voluntary contributions), of such university or other educational institution, hospital or
other institution, as the case may be, then, such university or other educational institution,
hospital or other institution shall be considered as being substantially financed by the
Government for that previous year.

(2) Universities or Educational Institutions or Hospitals or Medical Institutions whose annual

receipts not exceed ` 1 crore:
• any university or other educational institution existing solely for educational purposes
and not for profit and its aggregate annual receipts do not exceed ` 1 crore [Sub-
clause (iiiad)];
• any hospital or other institution as described in (1) above if its aggregate annual
receipts do not exceed the prescribed limit of ` 1 crore [Sub-clause (iiiae)];
(3) Universities or Educational Institutions or Hospitals or Medical Institutions or Specified
Charitable Institutions exempted subject to certain conditions:
• any other fund or institution for charitable purposes approved by the prescribed
authority having regard to the objects of the fund or institution and its importance
throughout India or throughout any State or States [Sub-clause (iv)];
• any trust (including any other legal obligation) or institution wholly for public
religious or wholly for public religious and charitable purposes approved by the
prescribed authority having regard to ensure the income applies for the objects of
the fund or institution [Sub-clause (v)];
• any other university or educational institution existing solely for educational purposes
and not for purposes of profit and which may be approved by the prescribed authority
other than referred in (1) and (2) above [Sub-clause (vi)];
• any other hospital, or other medical institution other than referred in (1) and (2) above
approved by the prescribed authority [Sub-clause (via)].
(4) Approval of the prescribed authority: The Universities or Educational Institutions or
Hospitals or Medical Institutions or specified Charitable Institutions mentioned in (3) above
for grant of approval is required to make an application in the prescribed form and manner to
the prescribed authority.

© The Institute of Chartered Accountants of India

 13.4 DIRECT TAX LAWS

• Commissioner of Income-tax (Exemptions) to act as “prescribed authority”:

Commissioner of Income-tax (Exemptions) is empowered to call for such documents
or information as it considers necessary in order to satisfy itself about the genuineness
of the activities of the fund or trust or institution or any university or other educational
institution or any hospital or other medical institution, and the compliance of such
requirements under any other law for the time being in force by such fund or trust or
institution or any university or other educational institution or any hospital or other
medical institution, as the case may be, as are material for the purpose of achieving
its objects before approving the same under section 10(23C)(iv)/(v)/(vi)/(via). Such
documents may include audited annual accounts. The prescribed authority may also
make such inquiries as it may deem necessary for this purpose.
• Time limit for making an application for grant of exemption - The time limit for
making an application for grant of exemption or continuation thereof under section
10(23C) by a fund or trust or institution or any university or other educational institution
or any hospital or other medical institution referred to in sub-clauses (iv)/(v)/(vi)/(via)
of section 10(23C) has been specified in respect of such applications made on or after
1.6.2006. Such applications have to be filed on or before 30th September of the
succeeding financial year.
For example, if an educational institution seeks exemption under clause (vi) for
P.Y.2020-21 (i.e. A.Y.2021-22), it has to make an application for grant of exemption
by 30.9.2021.
• Time limit for passing order of approval/rejection - Where an application form for
exemption is made on or after 13.7.2006, every notification under sub-clause (iv)/(v)
shall be issued or approval under sub-clause (iv)/(v)/(vi)/(via) shall be granted or an
order rejecting the application shall be passed within the period of 12 months from the
end of the month in which such application was received.
(5) Conditions to be fulfilled for exemption: For exemption under section
10(23C)(iv)/(v)/(vi)/(via), the fund or trust or institution etc. must fulfill the following conditions:
(i) It should apply its income or accumulate it for application wholly and exclusively to the
objects for which it is established,
(ii) In case where more than 15% of its income is accumulated, the period of accumulation
of the amount exceeding 15% of its income shall be maximum 5 years.
(iii) Funds should be invested or deposited in the forms or modes specified in section
11(5). This condition would, however, not apply to the following funds–
— any assets held by the fund, trust or institution or any university or other
educational institution or any hospital or other medical institution, where such
assets form part of the corpus of the fund, trust or institution or any university

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.5
POLITICAL PARTIES AND ELECTORAL TRUSTS
or other educational institution or any hospital or other medical institution as on
1.6.1973;
— any asset, being equity shares of a public company, held by any university or
other educational institution or any hospital or other medical institution where
such assets form part of its corpus as on 1.6.1998;
— any debentures, issued by or on behalf of any company or corporation, acquired
by the fund, trust or institution, etc. before 1.3.1983;
— any bonus shares allotted to the fund, trust or institution, etc. in respect of the
shares mentioned above forming part of the corpus of such fund, etc.
— voluntary contributions received and maintained in the form of jewellery,
furniture or other article as the Board may specify for any period during the
previous year.
Note – The income of a fund or trust or institution or any university or other educational
institution or any hospital or other medical institution, shall not include income in the
form of voluntary contributions made with a specific direction that they shall form part
of the corpus of such fund or trust or institution or any university or other educational
institution or any hospital or other medical institution.
(iv) Applicability of exemption to profits and gains of business of the trust/fund etc.
-Exemption under section 10(23C)(iv)/(v)/(vi)/(via) would not apply to profits and gains
of business in all cases. However, where the business is incidental to the attainment
of its objectives and separate books of account are maintained in respect of the
business, the exemption would apply to such business profits also.
(v) Audit of accounts- If the total income of any entity referred to in sub-clauses (iv), (v),
(vi) and (via) of section 10(23C), without giving effect to the provisions of the said sub-
clauses, exceeds the basic exemption limit in any previous year, it shall –
(1) get its accounts audited in respect of that year by a chartered accountant; and
(2) furnish such audit report on or before the specified date i.e., one month prior
to due date for filing return of income for the relevant assessment year. The
report must be in the prescribed form, duly signed and verified by the
accountant, and must contain such particulars as may be prescribed.
Notes:
(1) Amount credited or paid out of income of any fund, trust etc. by way of corpus
donation to any other fund or institution or to any trust or institution not
considered as application - Any amount credited or paid out of income of 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)/(v)/(vi)/(via), to any other

© The Institute of Chartered Accountants of India

 13.6 DIRECT TAX LAWS

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)/(v)/(vi)/(via) or to any trust or institution registered under section 12AA, being
voluntary contribution made with a specific direction that they shall form part of the
corpus of the trust or institution, shall not be treated as application of income to the
objects for which such fund or trust or institution or university or educational institution
or hospital or other medical institution, as the case may be, is established.
(2) Payment or credit to another fund, trust etc. out of accumulated income not to
be considered as application of income - Where the fund/ trust/ institution/ university/
hospital etc. does not apply its income during the year of receipt and accumulates it, and
subsequently makes a payment or credit out of such accumulated income, to any
institution or trust registered u/s 12AA or to any fund/ trust/ institution/ university/
hospital, such payment or credit shall not be considered to be an application of income
for its specified objectives.
(3) Provisions of sections 40(a)(ia), 40A(3) and 40A(3A) apply in case of application
of income by Fund/ Trust/ Institution etc. – In case where an expenditure is incurred
on which tax is deductible at source under Chapter XVII-B and such tax has not been
deducted or after deduction, has not been paid on or before the due date under section
139(1), 30% of sum paid would not be treated as application of income in that
year. The same would be, however, be treated as application in the year in which tax
is deducted and paid.
Likewise, where the trust/fund etc. incurs any expenditure in respect of which a
payment or aggregate of payments made to a person in a day, otherwise than by an
account payee cheque/bank draft/ECS, exceeds ` 10,000, the same would not be
considered as application of income.
Further, where any liability incurred has been allowed as application during the P.Y.,
say P.Y. 2020-21 and subsequently, say during the P.Y. 2021-22, the
trust/fund/institution etc. makes payment in respect thereof, otherwise than by way of
account payee cheque/bank draft/ECS, payment so made shall be deemed as income
of the trust/fund/institution etc. of the year in which payment is made, if the payment
or aggregate of payments made to a person in a day exceeds ` 10,000.
(4) Anonymous donation to be included in total income - Any anonymous donation
referred to in section 115BBC on which tax is payable in accordance with the
provisions of the said section shall be included in the total income.
(5) Trust not entitled to exemption if its commercial receipts exceed 20% of total
receipts - If the purpose of a trust or institution referred to in sub-clauses (iv)/(v) of
section 10(23C) does not remain charitable in a previous year on account of the
commercial receipts exceeding 20% of total receipts of the trust or institution, then,

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.7
POLITICAL PARTIES AND ELECTORAL TRUSTS
such trust or institution would not be entitled to get benefit of exemption in respect of
its income for that previous year in which the commercial receipts exceed the specified
threshold. The denial of exemption would be compulsory by operation of law and would
not be dependent on any approval being withdrawn or registration being cancelled or
a notification being rescinded.
Such trust and institution cannot get benefit of tax exemption in the year in which its
receipts from commercial activities exceed 20% of total receipts, whether or not the
registration or approval granted or notification issued is cancelled, withdrawn or
rescinded in respect of such trust or institution.
(6) No benefit of exemption under section 10 to entities eligible for exemption under
section 10(23C) - Entities which have been approved or notified for claiming benefit of
exemption under section 10(23C) would not be entitled to claim any benefit of exemption
under any other provision of section 10 [except exemption under section 10(1) in respect
of agricultural income]. This is to ensure that once a trust or institution voluntarily opts
for the special dispensation under this section, it should be governed by these provisions
and should not be allowed the flexibility of being governed by the general provisions of
section 10. Allowing such flexibility may have adverse effects on the objective for which
this section was enacted.
(7) Depreciation not allowable if cost of asset claimed as application - Income for the
purposes of application under section 10(23C) shall be determined without allowing
any deduction or allowance for depreciation or otherwise, where the cost of acquisition
of the asset has been claimed as application of income under section 10(23C) in the
same previous year or any other previous year.
(8) Withdrawal of approval - The prescribed authority shall have the power to withdraw
the approval or rescind the notification if:
(a) such fund/institution/university/hospital etc. has not applied its income or
invested/deposited its funds in accordance with the provisions; or
(b) the activities of such fund, etc. are not genuine; or
(c) such activities are not being carried out in accordance with the conditions based
upon which it was notified or approved; or
(d) such fund/institution/university/hospital etc. has not complied with the
requirement of any other law for the time being in force, and the order, direction
or decree, by whatever name called, holding that such non-compliance has
occurred, has either not been disputed or has attained finality
However, the approval can be withdrawn or rescinded only after issuing a show cause
notice and giving reasonable opportunity to such fund, etc. of being heard. After
withdrawing the approval or rescinding the notification, a copy of the order is to be

© The Institute of Chartered Accountants of India

 13.8 DIRECT TAX LAWS

forwarded to the concerned fund/institution, etc. as well as to the Assessing Officer.

ILLUSTRATION 1
An educational institution having annual receipts of ` 1.20 crore during the P.Y. 2020-21, has to
make an application to the prescribed authority before 31.3.2021 for claiming tax exemption under
section 10(23C). Discuss the correctness or otherwise of this statement.
SOLUTION
This statement is not correct.
According to the first proviso to section 10(23C), an educational institution having aggregate annual
receipts exceeding` 1 crore, is required to make an application to the prescribed authority for grant
of exemption under section 10(23C)(vi). Further, it is provided that such application can be made on
or before 30th September of the relevant assessment year from which the exemption is sought.
Therefore, in the given case, the educational institution (having annual receipts of `1.20 crore during
the P.Y. 2020-21) can make an application for grant of exemption in the prescribed form to the
prescribed authority on or before 30th September, 2021, for claiming exemption under section
10(23C)(vi) for previous year 2020-21.

ILLUSTRATION 2
An educational institution having annual receipts of ` 80 lakhs during the P.Y. 2020-21, has availed
exemption under section 10(23C)(iiiad). The Assessing Officer has denied the exemption on the
grounds that the educational institution has not made any application to the prescribed authority for
approval under the said section 10(23C)(iiiad). Examine the action of the Assessing Officer in
denying the exemption.
SOLUTION
As per section 10(23C)(iiiad), income of any university or other educational institution existing solely
for educational purposes and not for purposes of profit would be exempt if the aggregate annual
receipts of such university or educational institution do not exceed ` 1 crore. Exemption available
under this section is available without making any application to the prescribed authority for grant of
exemption.
Therefore, the action of the Assessing Officer in denying the exemption to the educational institution
is not correct.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.9
POLITICAL PARTIES AND ELECTORAL TRUSTS

13.3 CHARITABLE OR RELIGIOUS TRUSTS AND

INSTITUTIONS [SECTIONS 11 TO 13]
Overview

• Exclusion of the following income from total income of the trust:

• Income derived from property held under trust wholly or partly for
Section 11 charitable and religious purposes, applied for such purposes; and
• Income in the form of voluntary contributions made with a specific
direction that they shall form part of the corpus of the trust

• Income derived by a trust from voluntary contributions (other than

corpus donations) deemed to be income derived from property held
under trust for the purposes of section 11;
Section 12 • Value of medical and educational services made available to
specified persons deemed to be income of the trust running a hospital
or medical or educational institution notwithstanding the provisions of
section 11(1).

• prescribes the conditions for availing the benefits u/s 11 and

Section 12A
12

• enumerates the circumstances under which the exemption

Section 13
available u/s 11 and 12 will be denied

(1) General discussion on trusts – NGOs are normally set up either as a trust or society or a
company registered under section 8. Trust is, however, the most common and preferred legal form.
Therefore, before considering the provisions of sections 11 to 13 which govern the exemption in
respect of income from property held for charitable or religious purposes, let us see briefly what
exactly the term trust signifies, the types of trusts and the manner of their creation. Though this
aspect of the topic does not strictly fall within the purview of income-tax, such a general knowledge
would be useful in understanding the provisions of tax laws relating to charitable trusts.

© The Institute of Chartered Accountants of India

 13.10 DIRECT TAX LAWS

Meaning of certain terms

• is an obligation annexed to the ownership and arising out of

a confidence reposed in and accepted by the owner if
Trust
declared and accepted by him for the benefit of another or of
another and the owner.
Author of the trust • the person who reposes or declares the confidence
Trustee • the person who accepts the confidence
Beneficiary • the person for whose benefit the confidence is accepted
Trust property • the subject matter of the trust
Beneficial interest or
interest of the • is his right against the trustees or owner of the trust property
beneficiary
Instrument of trust • the instrument, if any, by which trust is declared

Trusts can be broadly classified into two groups - Public and Private.

Types of Trusts

Public Trust [Sections 11 to 13] Private trust

Specific Discretionary

Beneficiaries & shares of Beneficiaries or shares of

beneficiaries specified beneficiaries not specified

Distinction between a public and private trust

The distinction between a public and private trust is that, whereas in the former, the beneficiaries
are the general public or a class thereof, in the latter they are specific individuals. While in the former,
the beneficiaries constitute a body which is incapable of ascertainment, in the latter they are persons
who are ascertained or capable of being ascertained. In some cases, private trusts may enure for

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.11
POLITICAL PARTIES AND ELECTORAL TRUSTS
the benefit of the public. Public trusts are constituted mainly for the benefit of public at large. Some
religious trust may also be in the nature of public-cum-private trust.
Private trusts are governed by the Indian Trust Act, 1882. This Act does not apply to the following:
(i) The rules of Mohammedan law as to waqf;
(ii) The mutual relations of the members of undivided family as determined by any customary or
personal law;
(iii) Public or private religious or charitable endowments; and
(iv) Trust to distribute prizes taken in war among the captors.
From the above, it will be clear that public charitable trusts are not governed by the Indian Trust Act
and only private trusts are governed under the Indian Trust Act.
There are three requirements for creation of a public trust. They are
(i) a declaration of trust which is binding on the settlor,
(ii) setting apart definite property and depriving himself of the ownership, and
(iii) a statement of objects for which the property is thereafter to be held. In the case of a private
trust also, more or less similar requirements exist.
The word ‘trust’ as used in the context of sections 11 to 13 includes, in addition to the ‘trust’ as
explained above, ‘any other legal obligation’. This is made clear in Explanation 1 to section 13. The
words ‘any other legal obligation’ are wide enough to cover Muslim wakfs, Hindu endowments and
dedications to deities. It would also cover a case in which the trustees of a settlement are to pay the
income to other trustees who in their turn are bound to apply it for purposes which are religious or
charitable.
(2) Tax Exemption [Section 11] - Subject to the provisions of sections 60 to 63, the income of
a religious or charitable trust or institution, to the extent specified in the Act, is exempt from tax when
certain prescribed conditions are fulfilled. The relevant income does not even form part of the total
income of the trust or institution.
(i) Income from property held for charitable or religious purposes in India - 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 and religious
purposes to the extent such income is applied in India for such purpose.
(b) Income derived from property held under trust in part only for such purpose, to the
extent such income is applied in India for such purposes. However, the trust in
question must have been created before 1.4.1962.

© The Institute of Chartered Accountants of India

 13.12 DIRECT TAX LAWS

(c) Income derived from property held under trust, created on after 1.4.1952 for charitable
purpose which tends to promote international welfare in which India is interested to
the extent to which such income is applied to such purpose outside India. This does
not cover religious trusts.
Income derived from property held under a trust for charitable or religious purposes,
created before 1.4.1952, to the extent to which such income is applied for such
purposes outside India.
In both the cases, the CBDT should have, by general or special order, directed that
such income shall not be included in the total income of the person in receipt of such
income.
(d) Income in the form of voluntary contributions made with a specific direction that they
shall form part of the corpus of the trust or institution.
Thus, it may be noted that only such income derived from property held under trust wholly for
charitable or religious purposes is exempt. If the property is held in part only for such
purposes, it is necessary that such a trust must have been created before the commencement
of the Act. In both the cases, the exemption is limited to the extent such income is applied in
India for such specified purposes.
(ii) Income from property held international purposes- To get exemption in respect of income
applied outside India, the trusts are divided into two types:
(a) If the object of the trust is to promote international welfare in which India is interested,
such trust may have been created on or after 1.4.1952.
(b) If the trust is for any other charitable purpose it must have been created before
1.4.1952.
Here also, the exemption is limited to the extent to which such income is applied outside India
for such specified purposes. It is to be noted, however, that a direction from CBDT by a general
or special order is necessary before such exemption can be claimed.
(iii) Conditions for claiming exemption
(a) Property should be held under trust - The exemptions explained in the preceding
paragraphs are available if and only if there is a valid trust or there is a legal obligation,
under which the income derived from the property held under such trust or legal
obligation is to be applied for charitable or religious purposes. If there is no trust nor
any legal obligation, the income will not be exempt even if the whole of such income
is applied to charitable or religious purposes. A mere creation of a trust for the income
is not sufficient, there must be a trust of the property out of which the income is derived
before one can consider any exemption under section 11.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.13
POLITICAL PARTIES AND ELECTORAL TRUSTS
(b) Income should be applied for charitable purposes - Section 2(15) states that
‘charitable purpose’ includes relief of the poor, education, yoga, medical relief,
preservation of environment (including watersheds, forests and wildlife) and
preservation of monuments or places or objects of artistic or historic interest and the
advancement of any other object of general public utility.
The definition of “charitable purpose” includes “any other object of general public
utility” The question arises as to what is an object of “general public utility”. This
expression has not been defined anywhere in the Act.
In CIT v. Gujarat Maritime Board (2007) 295 ITR 561, the Supreme Court observed
that the Gujarat Maritime Board was established for the predominant purpose of
development of minor ports within the State of Gujarat, the management and control
of the Board was essentially with the State Government and there was no profit motive.
The assessee, Gujarat Maritime Board, was under a legal obligation to apply its
income which was directly and substantially from the business held under trust for the
development of minor ports in Gujarat. Therefore, the Supreme Court held that the
assessee was entitled to be registered as “charitable trust” under section 12A.
A number of entities functioning on commercial basis claim exemption of their income
either under section 10(23C) or section 11 on the foundation that they are charitable
institutions. This is based on the contention that they are engaged in the “advancement
of an object of general public utility” as is included in the fourth part of the present
definition of “charitable purpose”. There were many decisions rendered in the past
supporting the view that if unconnected business is held under a trust for promoting the
object of general public utility and if profits are used for promoting such objects, income
thereof shall be exempt, for example, the decision of the Supreme Court in CIT v. Madras
Stock Exchange Ltd. (1981) 130 ITR 184. However, such a claim in respect of an activity
carried out on commercial basis, goes against the basic intention of the provision.
Advancement of any other object of general public utility” would not be a
charitable purpose: In order to limit the ambit of the phrase “advancement of any other
object of general public utility”, section 2(15) provides that “the advancement of any
other object of general public utility” would not be a charitable purpose if it involves the
carrying on of –
(a) any activity in the nature of trade, commerce or business or,
(b) any activity of rendering of any service in relation to any trade, commerce or
business,
for a fee or cess or any other consideration, irrespective of the nature of use or
application of the income from such activity, or the retention of such income, by the
concerned entity.

© The Institute of Chartered Accountants of India

 13.14 DIRECT TAX LAWS

Thus, the advancement of any other object of general public utility shall not be a
charitable purpose, if it involves the carrying on of any activity in the nature of trade,
commerce or business, or any activity of rendering any service in relation to any trade,
commerce or business, for a cess or fee or any other consideration, irrespective of the
nature of use or application, or retention, of the income from such activity, unless,-
(1) such activity is undertaken in the course of actual carrying out of such
advancement of any other object of general public utility; and
(2) the aggregate receipts from such activity or activities, during the previous year,
does not exceed 20% of the total receipts, of the trust or institution
undertaking such activity or activities, for the previous year .
Therefore, in effect, “advancement of any other object of general public utility” would
continue to be a “charitable purpose”, if the activity in the nature of trade, commerce or
business is undertaken in the course of actual carrying out of such advancement of any
other object of general public utility and the aggregate receipts from any activity in the
nature of trade, commerce or business, or any activity of rendering any service in relation
to any trade, commerce or business does not exceed 20% of the total receipts of the
trust or institution undertaking such activity or activities, for the previous year.

ILLUSTRATION 3
An institution having its main object as “advancement of general public utility” received
` 30 lakhs in aggregate during the P.Y.2020-21 from an activity in the nature of trade. The
total receipts of the institution, including donations, was ` 140 lakhs. It applied 85% of its
total receipts from such activity during the same year for its main object i.e. advancement of
general public utility.
(i) What would be the tax consequence of such receipt and application thereof by the
institution?
(ii) Would your answer be different if the institution’s total receipts had been ` 150 lakhs
(instead of ` 140 lakhs) in aggregate during the P.Y.2020-21?
(iii) What would be your answer if the main object of the institution is “relief of the poor”
and the institution receives` 30 lakhs from a trading activity, when its total receipts
are ` 140 lakhs and applies 85% of the said receipts for its main object?

SOLUTION
(i) As the main object of the institution is “advancement of object of general public utility”,
the institution will lose its “charitable” status for the P.Y.2020-21, since it has received `
30 lakhs from an activity in the nature of trade, which exceeds ` 28 lakhs, being 20% of
the total receipts of the institution undertaking that activity for the previous year. The
application of 85% of such receipt for its main object during the year would not help in

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.15
POLITICAL PARTIES AND ELECTORAL TRUSTS
retaining its “charitable” status for that year. The institution will lose its charitable status
and consequently, the benefit of exemption of income for the P.Y.2020-21, irrespective
of the fact that its approval is not withdrawn or its registration is not cancelled.
(ii) If the total receipts of the institution is ` 150 lakhs, and the institution receives ` 30
lakhs in aggregate from an activity in the nature of trade during the P.Y.2020-21, then
it will not lose its “charitable” status since receipt of upto 20% of the total receipts of
the institution in a year from such activity is permissible. The institution can claim
exemption subject to fulfilment of other conditions under sections 11 to 13. Further,
such activity should also be undertaken in the course of actual carrying out of such
advancement of any other object of general public utility.
(iii) The restriction regarding carrying on a trading activity for a cess, fee or other
consideration will not apply if the main object of the institution is “relief of the poor”.
Therefore, receipt of ` 30 lakhs from a trading activity by such an institution will not
affect its “charitable” status, even if it exceeds 20% of the total receipts of the
institution. The institution can claim exemption subject to fulfilment of other conditions
under sections 11 to 13.
ILLUSTRATION 4
(a) “Save Wild Life” an institution having its main object as ‘preservation of wildlife’, used
the entire income derived from an activity in the nature of trade for its main object during
the previous year ended on 31.03.2021. Would such utilization of its income be treated
as utilisation for “charitable purpose”? Examine. Would your answer be different, if the
main object of the institution is “advancement of object of general public utility”?
(b) A charitable trust derives its income from the business of providing mineral water to
various companies situated in Software Technology Park in Hyderabad. A sum of
` 30 lakhs has been derived as net income from such business activity, which has
been applied for the object of general public utility. The total receipts of the trust during
the P.Y. 2020-21 was ` 140 lakhs. Examine the taxability of application of the income,
if the income so derived relates to the previous year 2020-21. Would your answer be
different, if the trust runs a school in a backward district and applies the profits from
the business for such school's activity?
SOLUTION
(a) Section 2(15) defines “charitable purpose” to include relief of the poor, education, yoga,
medical relief, preservation of environment (including watersheds, forests and wildlife)
and preservation of monuments or places or objects of artistic or historic interest and the
advancement of any other object of general public utility. However, the “advancement of
any other object of general public utility” shall not be a charitable purpose, if the
institution is carrying on any activity in the nature of trade, commerce or business, or any
activity of rendering any service in relation to any trade, commerce or business, for a

© The Institute of Chartered Accountants of India

 13.16 DIRECT TAX LAWS

cess or fee or any other consideration, irrespective of the nature of use or application,
or retention, of the income derived from such activity.
Therefore, preservation of wildlife is included in the definition of “charitable purpose” under
section 2(15). Further, an institution having the preservation of wildlife as its main object
would not be subject to the restrictions which are applicable to the “advancement of any
other object of general public utility”. Such institution would continue to retain its
“charitable” status, even if it derives income from an activity in the nature of trade.
However, if an institution having its main object as “advancement of any other object
of general public utility”, derives income from an activity in the nature of trade during
a financial year, it would lose its “charitable” status for that year, even if it applies such
income for its main objects.
It may be noted that if the receipts from such activity does not exceed 20% of the total
receipts in that year, then, the institution would not lose its “charitable” status, even if
its main object is “advancement of any other object of general public utility”, if such
activity is undertaken in the course of actual carrying out of such advancement of any
other object of general public utility.
(b) In the first case, net income from the business of supplying mineral water to various
companies i.e., ` 30 lakhs is not eligible for exemption under section 11, since the
receipt from such activity exceeds 20% of total receipts (i.e., 20% of ` 140 lakhs)
during the year. This is because “advancement of any object of general public utility”
would not be a charitable purpose if it involves carrying on of any activity in the nature
of trade, commerce or business, for example, supply of mineral water for a
consideration, as in this case. It is immaterial that the net income from such business
is applied for the object of general public utility.
On the other hand, where the trust runs a school in a backward district, this restriction
is not applicable. The reason is that the restriction contained in section 2(15) is
applicable only to the last limb of the definition of “charitable purpose” i.e.
advancement of object of general public utility. It does not affect the other limbs of the
definition viz. “relief of the poor”, “education”, “medical relief” etc.
Section 11(4) clarifies that “property held under trust” includes a business undertaking
so held. As per section 11(4A), exemption can be availed in respect of profits and
gains of business, if such business is incidental to the attainment of the objectives of
the trust and separate books of account are maintained in respect of such business.
Therefore, in the second case, the profit from the business shall be eligible for
exemption under section 11, assuming that the said business is incidental to the
attainment of the objects of the trust (i.e., education) and books of account for such
business activity is maintained separately.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.17
POLITICAL PARTIES AND ELECTORAL TRUSTS
Circular No.11/2008 dated 19.12.2008
Exemption under section 11 in case of an assessee claiming both to be a charitable
institution as well as a mutual organisation
The proviso to section 2(15) will apply only to entities whose purpose is advancement of any
other object of general public utility i.e. the last limb of the definition of charitable purpose
contained in section 2(15). Hence, such entities will not be eligible for exemption under
section 11 or under section 10(23C), if they carry on commercial activities. Whether such an
entity is carrying on an activity in the nature of trade, commerce or business is a question of
fact which will be decided based on the nature, scope, extent and frequency of the activity.
There are industry and trade associations who claim exemption from tax under section 11 on
the ground that their objects are for charitable purpose as these are covered under any other
object of general public utility. Under the principle of mutuality, if trading takes place between
persons who are associated together and contribute to a common fund for the financing of some
venture or object and in this respect have no dealings or relations with any outside body, then
any surplus returned to the persons forming such association is not chargeable to tax. In such
cases, there must be complete identity between the contributors and the participants.
Therefore, where industry or trade associations claim to be both charitable institutions as well
as mutual organizations and their activities are restricted to contributions from and
participation of only their members, these would not fall within the purview of the proviso to
section 2(15) owing to the principle of mutuality. However, if such organizations have dealings
with non-members, their claim to be charitable organizations would be governed by the
additional conditions stipulated in the proviso to section 2(15).
In the final analysis, however, whether the assessee has, for its object, the advancement of
any other object of general public utility is a question of fact. If such assessee is engaged in
any activity in the nature of trade, commerce or business or renders any service in relation to
trade, commerce or business, it would not be entitled to claim that its object is charitable
purpose. In such a case, the object of general public utility will be only a mask or a device to
hide the true purpose which is trade, commerce or business or the rendering of any service
in relation to trade, commerce or business. Each case would, therefore, be decided on its
own facts and no generalization is possible.
Circular No.395, dated 24.9.1984– Promotion of sports and games is considered to be a
charitable purpose within the meaning of section 2(15). Therefore, an association or
institution engaged in the promotion of games and sports can claim exemption under section
11 even if it is not approved under section 10(23).
A trust will be treated as a charitable trust under section 2(15) even if its object involves the
carrying on of an activity for profit. Such a trust will not be denied exemption under section
11 on the ground that its objects are non-charitable.

© The Institute of Chartered Accountants of India

 13.18 DIRECT TAX LAWS

(iv) Application and accumulation - We have seen that the exemption is limited to the extent
to which such income is applied in India or outside India, as the case may be. Is it necessary
that the entire income should be so applied? The Act gives a concession here. It is possible
to claim the exemption even if the trust or institution applies only 85% of the income derived
from the trust property for the purpose of the trust, during the relevant previous year.
An accumulation not exceeding 15% of the income from such property is permissible. For
computing this 15%, voluntary contributions referred to in section 12 shall be deemed to be
part of the income. It must be clearly noted that accumulation must be with the object of
application of the accumulated amount for charitable or religious purpose in India at a later
date. Such a facility for accumulation is not available for those trusts whose income is to be
applied outside India.
(v) Inability to apply in full 85% of the income - It is clear from the above discussion that free
accumulation not exceeding 15% of income 1 from property is permissible. Hence, the balance
85% must be applied during the previous year for the purposes for which the trust has been
created. However, it is possible that the trust is unable to apply the minimum of 85% of its
income during the previous year due to either of the following reasons.
(1) The whole or any part of the income has not been received during that year.
(2) Any other reason.
In the first class of cases, the period of application is extended to cover the previous year in
which the income is actually received and the previous year immediately following the year.
However, the amount which may be so claimed to have been so applied during the
subsequent previous year cannot exceed the amount of the income which had not been
received earlier but received during a subsequent previous year. In the second case, the
period of application is extended to the previous year immediately following the previous year
in which the income was derived.
Example 1
During the previous year ending 31st March, 2021, a charitable trust earned an income of
` 1,00,000 but it received only ` 60,000 in that year. The balance of ` 40,000 is received
in the year ending 31-3-2022.
`
Total income earned during the P.Y.2020-21 1,00,000
Actual receipt in P.Y.2020-21 60,000
Permissible accumulation @15% of ` 1,00,000 15,000

1As per the Supreme Court ruling in CIT v. Programme for Community Organisation (2001) 116 Taxman 608, 15%
of gross receipts would be eligible for accumulation under section 11(1)(a).

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.19
POLITICAL PARTIES AND ELECTORAL TRUSTS
Balance to be applied during P.Y.2020-21 45,000
Amount received in P.Y.2021-22 to be applied in P.Y.2021-22 or P.Y.2022-23 40,000
Since this amount of ` 40,000 is received during the P.Y. 2021-22, this can be applied in
the P.Y.2021-22 or in the [Link] the entire amount of ` 40,000 is duly spent for
charitable purposes in these two years, the exemption is fully available but if only part of
the amount is so spent within the period, the exemption is restricted to that part only.
There may be a case where the inability springs from some other reason e.g., late receipt
of the income making it impossible to spend it before the end of the year.
Example 2
A trust receives a sum of ` 50,000 on 30th March, 2021. Its previous year ends on
31-3-2021.
It is obvious that it is impossible to apply the requisite sum within one day. Therefore, it
has been provided that such sum can be applied at any time during the immediately
following previous year i.e., up to 31-3-2022.

(vi) Amount credited or paid out of income of any trust by way of corpus donation not to
be considered as application - Any amount credited or paid, out of income derived from
property held under trust, to any fund or trust or institution or any university or other
educational institution or any hospital or other medical institution referred to in section
10(23C)(iv)/(v)/(vi)/(via) or other trust or institution registered under section 12AA, being
contribution with a specific direction that it shall form part of the corpus, shall not be treated
as application of income for charitable or religious purpose.
(vii) Provisions of sections 40(a)(ia), 40A(3) and 40A(3A) apply in case of application of
income by trust – In case where an expenditure is incurred on which tax is deductible at
source under Chapter XVII-B and such tax has not been deducted or after deduction, has not
been paid on or before the due date under section 139(1), 30% of sum paid would not be
treated as application of income in that year. The same would be, however, be treated as
application in the year in which tax is deducted and paid.
Likewise, where the trust incurs any expenditure in respect of which a payment or aggregate
of payments made to a person in a day, otherwise than by an account payee cheque/ bank
draft/ ECS or through such other prescribed electronic mode [Credit card, debit card, net
banking, IMPS (Immediate Payment Services), UPI (Unified Payment Interface), RTGS (Real
Time Gross Settlement), NEFT (National Electronic Fund Transfer), BHIM (Bharat Interface
for Money) Aadhar Pay], exceeds ` 10,000, the same would not be considered as application
of income.
Further, where any liability incurred has been allowed as application during the P.Y., say P.Y.
2020-21 and subsequently, say during the P.Y. 2021-22, the trust makes payment in respect
thereof, otherwise than by way of account payee cheque/bank draft/ECS or through such

© The Institute of Chartered Accountants of India

 13.20 DIRECT TAX LAWS

other prescribed mode, payment so made shall be deemed as income of the trust of the year
in which payment is made, if the payment or aggregate of payments made to a person in a
day exceeds ` 10,000.

(viii) Procedural Formalities: Exercise of option -To avail the facility of the extended period of
application of income, the trust has to exercise an option in writing that the income applied
later as prescribed may be deemed to be income applied to the relevant charitable purposes
during the previous year in which the income was derived. Such option has to be exercised
before the expiry of the time allowed statutorily under section 139(1).
The income so deemed to have been applied shall, however, not be taken into account in
calculating the amount of income applied to such purposes, during the previous year in which
the income is actually received or during the immediately following previous year, as the case
may be. Thus, in the Example 1 given above, the amount of ` 40,000, received subsequently
in the year 2021-22 and applied to charitable purposes in the year 2021-22, will by virtue of the
option exercised by the trust, be deemed to be applied for charitable purposes in the year 2020-
21 itself. Therefore, such an amount will not be taken into consideration in determining the
amount of income applied for charitable purposes in the year 2021-22.
Section 11(1B) provides that where the income for which an option has been exercised as
discussed above, is not actually applied, it is to be treated as the income of the previous year
immediately following the year of receipt or the previous year in which it was derived, as the
case may be.
(ix) Conditional accumulation- As per section 11, application of income derived from property
held under trust for charitable purposes in India is the main condition for grant of exemption
to trust or institution in respect of income derived from property held under such trust. In case
such income cannot be applied during the previous year, the same can be accumulated and
applied for such purposes, subject to satisfaction of the conditions provided therein.
Section 11 permits accumulation of 15% of the income indefinitely by the trust or institution.
However, 85% of income can only be accumulated for a period not exceeding 5 years subject
to the conditions that such person submits the prescribed form i.e., Form 10 to the Assessing
Officer and the money so accumulated or set apart is invested or deposited in the specified
forms or modes.
If the accumulated income is not applied for charitable purposes or ceases to be accumulated
or set apart for accumulation or ceases to remain invested or deposited in specified modes,
then, such income is deemed to be taxable income of the trust or institution.
For the purpose of clarifying the period within which the assessee is required to file Form 10,
and to ensure due compliance of the above conditions within time, section 11(2) provides
that-

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.21
POLITICAL PARTIES AND ELECTORAL TRUSTS
(1) such person should furnish a statement in the prescribed form (Form 10) and in the
prescribed manner to the Assessing Officer, stating the purpose for which the income
is being accumulated or set apart and the period for which the income is being
accumulated or set apart, which shall, in no case, exceed five years.
In computing the period of five years, the period during which the income could not be
applied for the purpose for which it is so accumulated or set apart, due to an order or
injunction of any court, shall be excluded.
(2) the money so accumulated or set apart should be invested or deposited in the modes
specified in section 11(5).
(3) the statement in Form 10 should be filed on or before the due date of filing return of
income specified under section 139(1).
In case the statement in Form 10 is not submitted on or before this date, then, the
benefit of accumulation would not be available and such income would be taxable at
the applicable rate. Further, the benefit of accumulation would also not be available if
return of income is not furnished on or before the due date of filing return of income
specified in section 139(1) [Section 13(9)].
ILLUSTRATION 5
A charitable institution registered under section 12AA of the Income-tax Act, 1961 filled in
Form No.10 for seeking permission to accumulate unapplied income under section 11(2) of
the Act for the objects of the institution and submitted it to the Assessing Officer along with
the resolution for accumulation. The Assessing Officer found that the objects for which
accumulation was sought were not particularised in as much as they covered the entire range
of objects of the institution. Can the Assessing Officer deny the benefit of accumulation in
such a case?
SOLUTION
Section 11(2) permits a charitable trust or institution to accumulate its unspent income where
85% of the income is not applied or is not deemed to have been applied to charitable or
religious purposes in India during the previous year. The institution or trust has to specify, by
notice in writing given to the Assessing Officer, the purpose for which the income is being
accumulated or set apart and the period for which such income is to be accumulated or set
apart.
In the given case, the assessee institution sought the permission of the Assessing Officer to
accumulate unapplied income for the objects of the institution. The institution had not stated
any objects in particular for which the unspent income was sought to be accumulated or set
apart. In Bharat Krishak Samaj vs. Deputy Director of Income-tax (Exemption) (2008) 306
ITR 153 (Del.), it was held that it is not necessary for a charitable trust to particularize each
and every object for which accumulation is sought. It is enough if the assessee seeks

© The Institute of Chartered Accountants of India

 13.22 DIRECT TAX LAWS

permission for accumulation for the objects of the trust. Therefore, the Assessing Officer
cannot deny the benefit of accumulation in such a case.
Modes specified in section 11(5):
(1) Investment in Government Saving Certificates.
(2) Deposits with Post Office Savings Banks.
(3) Deposit with Scheduled banks or Co-operative Banks.
(4) Investment in units of the Unit Trust of India.
(5) Investment in Central or State Government Securities.
(6) Investments in debentures issued by or on behalf of any company or corporation.
However, both the principal and interest thereon must have been guaranteed by the
Central or the State Government.
(7) Investment or deposits in any public sector company.
Where an investment is made in the shares of any public sector company and such
public sector company ceases to be a public sector company, the investment so made
shall be deemed to be an investment made for a period of three years from the date
of such cessation and in the case of any other investment or deposit, till the date of its
maturity.
(8) Investment in bonds of approved financial corporation providing long term finance for
industrial development in India and eligible for deduction under section 36(1)(viii).
(9) Investment in bonds of approved public companies whose principal object is to provide
long-term finance for construction or purchase of houses in India for residential
purposes and eligible for deduction under section 36(1)(viii).
(10) 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.
"Long-term finance" means any loan or advance where the terms under which moneys
are loaned or advanced provide for repayment along with interest thereof during a
period of not less than five years.
"Urban infrastructure" means a project for providing potable water supply, sanitation
and sewerage, drainage, solid waste management, road, bridges and flyovers or urban
transport.
(11) Investment in immovable property excluding plant and machinery, not being plant and
machinery installed in a building for the convenient occupation thereof.
(12) Deposits with Industrial Development Bank of India.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.23
POLITICAL PARTIES AND ELECTORAL TRUSTS
(13) Any other mode of investment or deposit as may be prescribed. Rule 17C
specifies the following other modes:
(i) Investments in units issued under any scheme of mutual fund referred to in
section 10(23D);
(ii) Any transfer of deposits to Public Account of India;
(iii) Deposits made with an authority constituted in India or under any law enacted
either for the purpose of dealing with and satisfying the need for housing
accommodation or for the purpose of planning, development or improvement of
cities, towns and villages, or for both;
(iv) investment by way of acquiring equity shares of a ‘depository’;
(v) investment by a recognized Stock Exchange, in the equity shares of a company
promoted by it to acquire the membership rights of other stock exchanges,
where at least 51% of the paid-up share capital is held by the Stock Exchange
and the balance is held by its members;
(vi) investment by way of acquiring equity shares of an incubatee by an incubator;
(vii) investment by way of acquiring shares of National Skill Development
Corporation;
(viii) investment in debt instruments issued by any infrastructure finance company
registered with RBI;
(ix) investment in Stock Certificate as defined in of Sovereign Gold Bonds Scheme,
2015.
Amount credited or paid, out of accumulated income of any trust, to any trust or
institution registered under section 12AA or referred to in section 10(23C)(iv)/(v)/(vi)/
(via), not considered as application of income [Explanation to section 11(2)]
Any amount credited or paid, out of income derived from property held under trust, which is
not applied, but is accumulated or set apart, to any trust or institution registered under section
12AA or to any fund or institution or trust or any university or other educational institution or
any hospital or other medical institution referred to in sub-clause (iv)/(v)/(vi)/(via) of section
10(23C), shall not be treated as application of income for charitable or religious purpose,
either during the period of accumulation or thereafter.
Deemed income in case of non-utilisation or mis-utilisation of accumulated amount
Where the accumulated income of the trust -
(a) is applied for purposes other than charitable or religious purposes; or
(b) ceases to be accumulated or set apart for application thereto; or

© The Institute of Chartered Accountants of India

 13.24 DIRECT TAX LAWS

(c) ceases to remain invested or deposited in any of the modes mentioned under section
11(5) above; or
(d) is not utilised for the purpose for which it is so accumulated or set apart during the period
specified (not exceeding 5 years) or in the year immediately following thereof.
However, in computing the aforesaid period of 5 years, the period during which the
income could not be applied for the purposes for which it is so accumulated or set
apart due to an order or injunction of any Court shall be excluded.
(e) accumulated or set apart for application to charitable and religious purposes in India,
is credited or paid to any trust or institution registered under section 12AA or to any
fund or institution or trust or any university or other educational institution or any
hospital or other medical institution referred to in sub-clause (iv)/(v)/(vi)/(via) of section
10(23C), such income shall be deemed to be the income of the previous year –
(a) in which it is so applied; or
(b) in which it ceases to be accumulated or set apart; or
(c) in which it ceases to remain so invested or deposited; or
(d) immediately following the expiry of the period aforesaid; or
(e) in which it is paid or credited.
In DIT (Exemption) v. Khetri Trust (2014) 367 ITR 723 (Del), where the properties
bequeathed to a trust could not be transferred to it due to ongoing court litigation and
pendency of probate proceedings, a question arose if violation of the provisions of
section 11(5) would be attracted. In the facts of the case, the trustees paid ` 1,10,000
for raising a memorial for late Raja Bahadur Sardar Singh and the said amount was
given to a business entity for this purpose. However, due to the ongoing dispute, such
project was not completed. The validity of the will has been challenged in the probate
proceedings; therefore, till the ‘will’ is probated and affirmed as genuine, the trust
would not acquire the legal right on the property for the purpose of Act. In case the
probate is denied, the properties would not devolve on the trust. The shares in foreign
company were still in the name of the donor and its acquisition by the trust is
dependent upon adjudication of the probate.
Further, with regard to the advance given to the business entity, the Commissioner
(Appeals) found that the said amount cannot be treated as an investment which was
covered and regulated by section 11(5), since the intent and purpose behind the
payment was not investment. Based on the above factual findings, elucidated and
affirmed by the Commissioner (Appeals) and the Tribunal, the High Court held that
there was no violation of section 11(5) in this case.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.25
POLITICAL PARTIES AND ELECTORAL TRUSTS
Application to be made to Assessing Officer for application of income for other
purposes
It is possible that due to circumstances beyond the control of the person in receipt of the
income, any income invested or deposited in approved modes cannot be applied for the
purpose for which it was accumulated or set apart. In such a case, an application may
be made to the Assessing Officer specifying such other purposes as are in conformity
with the objects of the trust. The Assessing Officer may allow the application of income
to such other purposes. If such a permission is granted by the Assessing Officer, the
new purposes will be deemed to be purposes specified in the written notice given to the
Assessing Officer.
It is to be noted that the Assessing Officer cannot allow transfer of any such accumulated
income to other charitable trusts/institutions as application of income towards charitable
purposes. This has created genuine problems for those trusts and institutions which are
wound up. However, in case of a trust or institution which has invested or deposited its
income in any of the forms mentioned in section 11(5), the Assessing Officer can allow
application of such income for crediting or payment to any trust or institution registered
under section 12AA or any fund or institution or trust or university or education institution
or hospital or medical institution covered by section 10(23C). Such application can be
allowed only in the year in which such trust or institution is dissolved.
(x) No deduction for depreciation where cost of asset has been claimed as application of
income-Income for the purposes of application under section 11 shall be determined without
allowing any deduction or allowance for depreciation or otherwise, in respect of any asset,
the cost of acquisition of which has been claimed as an application of income under this
section in the same or any other previous year [Section 11(6)].
ILLUSTRATION 6
MSO Foundation, a charitable institution set up on 1st April, 2020 and registered under section
12AA with effect from that date, is engaged in providing education in hotel management. The
organisation acquires a building for using the same for holding classes and office activities.
It has approached you for your opinion on its eligibility to claim the cost of the building and
also depreciation thereon in the current year and the subsequent year. Advise the institution
indicating the reasons.
SOLUTION
(i) 15% of income from property held for charitable purposes is exempt from tax under
section [Link] remaining 85% of such “income” would be exempt if it is “applied” for
charitable purposes in India.
(ii) Application of the amount can be for revenue or capital purposes. As long as the
expenditure is incurred out of income earned by the trust and for the purposes of

© The Institute of Chartered Accountants of India

 13.26 DIRECT TAX LAWS

carrying on the objects of the trust, it would be treated as application of income even
if such expenditure is for capital purposes. Therefore, since the building is acquired by
the organization for holding classes and office activities, which is for the purposes of
carrying on the objects of the charitable institution i.e., for providing education in hotel
management, the cost of the building would be treated as application of income.
However, section 11 provides that where the cost of building is claimed as application,
no other deduction for depreciation or otherwise would be allowed as an application of
income in respect of such asset for the same or any other previous year.
(xi) No claim for exemption under section 10 permissible where trust has been granted
registration for availing exemption under section 11 [Section 11(7)]-Where a trust or an
institution has been granted registration for purposes of availing exemption under section 11,
and the registration is in force for a previous year, then, such trust or institution cannot claim
any exemption under any provision of section 10 [other than exemption of agricultural income
under section 10(1), exemption available under section 10(23C) or exemption available
under section 10(46)]. Thus, with effect from 1.6.2020, exclusion is also available to
entities claiming exemption under section 10(46) which are established or constituted
under a Central or State Act or by the Central or State Government.
The registration granted for availing exemption under section 11 would become
inoperative from the date on which the trust or institution is approved under section
10(23C) or is notified under section 10(46), as the case may be, or the date on which
this proviso has come into force i.e., with effect from 1.6.2020, whichever is later.
The trust or institution, whose registration has become inoperative, may apply to get
its registration operative under section 12AA subject to the condition that on doing so,
the approval under section 10(23C) or notification under section 10(46), as the case
may be, to such trust or institution shall cease to have any effect from the date on
which the said registration becomes operative and thereafter, it shall not be entitled to
exemption under section 10(23C) or under section 10(46).
(xii) Cases where trust property consists of a business undertaking -Section 11(4) clarifies
that for the purposes of section 11, property held under trust may consist of a business
undertaking so held. If that be so, the trustees may claim that the income of such undertaking
enjoys exemption under section 11. Section 11(4) provides for the following -
(a) The Assessing Officer shall have the power to determine the income of the undertaking
in accordance with the provisions of the Act relating to assessment, and
(b) Where the income determined by the Assessing Officer is in excess of that shown in
the books of the undertaking, such excess shall be deemed to be applied to purposes
other than charitable or religious purposes.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.27
POLITICAL PARTIES AND ELECTORAL TRUSTS
(xiii) Charitable trust engaged in business activity [Section 11(4A)]-Consequently, a
charitable trust engaged in business activity will be liable to any tax on income from the
activity. However, exemption would be available to the trust in respect of income earned from
such business activity if –
(a) such business is incidental to the attainment of the objects of the trust/institution; and
(b) separate books of account are maintained by such trust/institution in respect of such
business.
Note – Profits derived by a trust/institution referred to in clauses (21), (23A), (23B), (23BB)
and (23C) of section 10 will continue to be exempt from income-tax, since section 11(4A)
does not override the provisions of section 10.
(xiv) Instances where capital gains would be deemed to have been applied for charitable
purposes [Section 11(1A)]
(a) Transfer of a capital asset held under trust wholly for charitable or religious
purposes [Section 11(1A)(a)] -Where the whole of the net consideration from the
transfer of the capital asset is utilised for acquiring a new capital asset which is held
under trust wholly for charitable or religious purposes, the entire amount of capital
gains arising from the transfer would be deemed to have been applied for charitable
or religious purposes. If, however, only a part of the net consideration is utilised in
acquiring the new capital asset, the amount of capital gains deemed to have been
utilised for charitable or religious purposes shall be equal to the excess of the proceeds
utilised over the cost of the asset transferred.
Example 3
Original cost of capital asset transferred ` 1,00,000
Consideration for which it is transferred ` 1,50,000
Situation 1 Cost of new capital asset acquired ` 1,50,000
Situation 2 Cost of new capital asset acquired ` 1,20,000
Amount that will be deemed to have been applied for charitable purposes.
Situation 1 ` 50,000
Situation 2 ` 20,000
(b) Transfer of a capital asset held under trust in part only for charitable and
religious purposes [Section 11(1A)(b)] - Where only a part of a capital asset has
been transferred, only the “appropriate fraction” of the capital gain arising from the
transfer shall be deemed to have been applied to charitable or religious purposes.
Where the whole of the net consideration is utilised in acquiring the new capital asset,
the whole of the appropriate fraction of such capital gain will be deemed to have been
so applied. In any other case, the exemption will be limited to so much of the

© The Institute of Chartered Accountants of India

 13.28 DIRECT TAX LAWS

appropriate fraction of the amount utilised for acquiring the new asset as exceeds the
appropriate fraction of the cost of the transferred asset.
“Appropriate fraction” means the fraction which represents the extent to which the
income derived from the capital asset transferred was applicable to charitable or
religious purposes before such transfer.
Example 4
A capital asset is being held under trust. Two-thirds of the income derived from
such capital asset are being utilised for the charitable purposes of the trust. The
asset is being transferred.
Cost of transferred asset ` 1,20,000
Net consideration ` 1,80,000
Cost of new asset acquired ` 1,50,000
Capital gains ` 60,000 [` 1,80,000 – ` 1,20,000]
Appropriate fraction 2/3rd
Income represented by ‘appropriate fraction’ = 2/3rds of ` 60,000 = ` 40,000
Since the entire net consideration has not been utilised in acquiring the new asset,
the amount deemed to have been utilised for charitable purpose will be (2/3rds of
` 1,50,000) – (2/3rds of ` 1,20,000) = ` 1,00,000 – ` 80,000 = ` 20,000.

(xv) Voluntary Contributions [Section 12]- Any voluntary contribution received by a trust
created wholly for charitable or religious purposes or by an institution established wholly for
such purposes shall, for the purposes of section 11, be deemed to be income derived from
property held under trust wholly for charitable or religious purposes. However, corpus
donations (i.e. contributions made with a specific direction that they shall from part of the
corpus of the trust or institution) shall not be treated as income. Such corpus donations are
treated as capital receipts not chargeable to tax. Other voluntary contributions would be
treated as income. However, exemption can be claimed in respect of such income subject to
fulfillment of the conditions mentioned below –
(a) The trust should be registered under section 12AA with the Principal Commissioner or
Commissioner of Income-tax;
(b) If the total income of the trust exceeds the basic exemption limit, the accounts of the
trust should be audited.
(c) The trust should apply at least 85% of its income for the approved purposes.
(d) The balance should be invested or deposited in specified forms or modes.
Note– It may be noted that the corpus donations are to be considered for the purpose of
determining whether the accounts of the trust are to be audited. Further, corpus donations

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.29
POLITICAL PARTIES AND ELECTORAL TRUSTS
have to be invested only in the investments approved under section 11(5). If invested
elsewhere, the income from unapproved investment would be chargeable to tax.

ILLUSTRATION 7
Hundi (charitable box) superscribing “contributions in this hundi form part of corpus of trust
fund” kept at Lord Venkateshwara Temple, Tirumala, was opened on 30.3.2020. Cash of
` 100 lakhs and valuable articles worth ` 250 lakhs were found to have been contributed by
the devotees. Discuss the tax implications.

SOLUTION
As per section 11(1)(d), income in the form of voluntary contributions made with a specific
direction that they shall form part of the corpus of the trust or institution shall not be included
in the total income of the recipient. In the given case, there is a specific declaration by the
temple authorities that the contributions being put in the hundi (charity box) would form part
of the corpus of the trust fund. Therefore, it is possible to take a view that those who put the
contributions in the hundi give a tacit declaration that the contributions would form part of the
corpus. Hence, a view can be taken that such contributions shall not be included in the total
income of the recipient trust.
Further, it may be noted that the provision relating to taxability of anonymous donations under
section 115BBC does not apply to voluntary contributions received by a trust or institution
created or established wholly for religious purposes.
(3) Conditions for applicability of sections 11 & 12 [Section 12A]
(i) Conditions to be satisfied and the assessment year from which exemption would be
available: The exemption provisions contained in section 11 and 12 as explained above shall not
apply in relation to the income of any trust or institution unless the following conditions are satisfied:
(a) In respect an application for registration of trust was made before 1.6.2007, the
requirement was that such application had to be made one year from the date of
creation of the trust and the exemption provisions of section 11 and 12 applied from
the date of creation of the trust or establishment of the institution [Section 12A(1)].
(b) This requirement of filing an application for registration under section 12A within one
year of creation of the religious or charitable trust or institution has been removed in
respect of applications made on or after 1.6.2007. The application can be filed at any
time now.
(c) Accordingly, in respect of applications filed in the prescribed form to the Principal
Commissioner or Commissioner on or after 1st June, 2007, the provisions of sections 11
and 12 would apply from the assessment year relevant to the financial year in which the
application is made i.e., the exemption would be available only with effect from the

© The Institute of Chartered Accountants of India

 13.30 DIRECT TAX LAWS

assessment year relevant to the previous year in which the application is filed. It would
not be available in respect of any earlier assessment year [Section 12A(2)].
(d) Thus, under section 12A, a trust or an institution can claim exemption under sections
11 and 12 only after registration under section 12AA has been granted. Also, in case
of trusts or institutions which apply for registration after 1st June, 2007, the registration
shall be effective only prospectively.
(ii) Fresh registration of a trust in the event of adoption or undertaking modifications of
the objects after the registration has been granted [Section 12A(ab)]: Where a trust or
an institution has been granted registration under section 12AA or has obtained registration
at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act,
1996] and, subsequently, it has adopted or undertaken modifications of the objects which do
not conform to the conditions of registration, it shall be required to obtain fresh registration
by making an application within a period of thirty days from the date of such adoption or
modification of the objects, to the Principal Commissioner or Commissioner, in the prescribed
form and manner.
(iii) Circumstance when exemption would be granted for an earlier assessment year:
Non-application of registration for the period prior to the year of registration causes genuine
hardship to charitable organisations. On account of non-registration, tax liability gets attracted
in those years even though they may otherwise be eligible for exemption due to compliance
with other substantive conditions. Further, condonation of delay in seeking registration is also
not permitted. Therefore, three provisos have been inserted in section 12A by the Finance
(No.2) Act, 2014, in order to remove the genuine hardship and provide relief to the trusts.
In case where a trust or institution has been granted registration under section 12AA, the
benefit of sections 11 and 12 shall be available in respect of any income derived from property
held under trust in any assessment proceeding for an earlier assessment year which is
pending before the Assessing Officer as on the date of such registration.
(a) Condition for grant of such exemption - The objects and activities of such trust or
institution in the relevant earlier assessment year should be the same as those on the
basis of which such registration has been granted.
(b) Reassessment proceedings not to be initiated for earlier years due to reason of
non-registration - No action for reopening of an assessment under section 147 shall
be taken by the Assessing Officer in the case of such trust or institution for any
assessment year preceding the first assessment year for which the registration
applies, merely for the reason that such trust or institution has not obtained the
registration under section 12AA for the said assessment year.
(c) Non-availability of above benefits to a trust or institution in certain cases - The
above benefits would, however, not be available in case of any trust or institution which

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.31
POLITICAL PARTIES AND ELECTORAL TRUSTS
at any time had applied for registration and the same was denied or a registration
granted to it was cancelled at any time under section 12AA.
ILLUSTRATION 8
Can a trust created for charitable purposes in April 2020, having filed application for
registration as per section 12A on 11.4.2021, claim benefits of sections 11 and 12 from
Assessment Year 2021-22?
SOLUTION
In respect of applications filed on or after 1st June, 2007, the provisions of sections
11 and 12 shall apply from the assessment year relevant to the financial year in which
the application is made i.e., the exemption would be available only with effect from the
assessment year relevant to the previous year in which the application is filed. It would
not be available in respect of any earlier assessment year.
Therefore, since the trust has filed application for registration only on 11.4.2021, it
cannot claim benefit of sections 11 and 12 from A.Y.2021-22. Assuming that the
registration has been granted under section 12AA, the exemption would be available
only from the A.Y. 2022-23, being the assessment year relevant to the previous year
in which application is filed [i.e., P.Y. 2021-22].
However, where a trust has been granted registration under section 12AA in the P.Y.
2021-22, the benefit of sections 11 and 12 shall be available in respect of any income
derived from property held under trust for assessment year 2021-22, being the
assessment year preceding the assessment year in which application is filed i.e.,
A.Y.2022-23, if assessment proceedings in respect of that year is pending before the
Assessing Officer as on the date of such registration.
It may be noted that exemption in respect of an earlier assessment year can be
claimed only if the objects and activities of such trust or institution in the relevant earlier
assessment year are the same as those on the basis of which such registration has
been granted.
ILLUSTRATION 9
Help All, a trust created on 1st January, 2021 for providing relief to the poor, applied
for registration under section 12A on 1st March, 2021. On that date, its corpus fund
comprised only of the initial contribution made by the trustees. The Commissioner
denied registration solely on the ground that the trust had not commenced any
charitable activity, due to which he could not satisfy himself about the genuineness of
the trust. Is the ground for denial of registration by the Commissioner justified in this
case? Discuss.

© The Institute of Chartered Accountants of India

 13.32 DIRECT TAX LAWS

SOLUTION
The Karnataka High Court, in DIT (Exemptions) v. Meenakshi Amma Endowment Trust
(2013) 354 ITR 219, opined that an application under section 12A for registration of the trust
can be sought even within a week of its formation. The activities carried on by the trust are
to be seen in a case where the registration is sought much later after formation of the trust.
The High Court further observed that the corpus fund included contribution made by
the trustees only, which indicated that the trustees were contributing the funds by
themselves in a humble way and were intending to commence charitable activities.
The assessee-trust had not also collected any donation for the activities of the trust,
by the time its application came up for consideration before them. When the application
for registration was made, the trust, therefore, did not have sufficient funds for
commencement of its activities.
The High Court observed that, with the money available with the trust, it cannot be
expected to carry out activity of charity immediately. Consequently, in such a case, it
cannot be concluded that the trust has not intended to do any activity of charity. In
such a situation, where application is made shortly after formation of the trust, the
objects of the trust as mentioned in the trust deed have to be taken into consideration
by the authorities for satisfying themselves about the genuineness of the trust and not
the activities carried on by it. Later on, if it is found from the subsequent returns filed
by the trust, that it is not carrying on any charitable activity, it would be open to the
concerned authorities to withdraw the registration granted or cancel the registration as
per the provisions of section 12AA(3).
Applying the rationale of the above ruling, the Commissioner cannot deny registration
solely on the ground that the trust had not commenced any charitable activity in this
case, since the trust has applied for registration under section 12A within two months
after its formation and the corpus fund comprised only of contribution made by the
trustees. The Commissioner has to take into consideration the objects of the trust as
mentioned in the trust deed to satisfy itself about the genuineness of the trust.
(iv) Audit - Where the total income of the trust without giving effect to the provisions of section
11 and 12 exceeds the maximum amount which is not chargeable to income-tax in any
previous year, the accounts of the trust must be audited by a chartered accountant and the
report of such audit in the prescribed form duly signed and verified by such accountant and
setting forth such prescribed particulars, should be furnished on or before the specified
date i.e., one month prior to the due date for filing return of income.
(v) Mandatory filing of return: In order to provide further clarity, section 12A provides for further
condition that the person in receipt of the income chargeable to income-tax shall furnish the
return of income within the time allowed under section 139(4A) of the Act.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.33
POLITICAL PARTIES AND ELECTORAL TRUSTS
(4) Procedure for Registration [Section 12AA]- The Principal Commissioner or Commissioner,
on receipt of an application for registration of a trust or institution made under section 12A(1) shall
proceed as follows :
(i) He would call for such documents or information from the trust or institution as he thinks
necessary in order to satisfy himself about –
(a) the genuineness of activities of the trust or institution and
(b) the compliance of such requirements of any other law for the time being in force by
the trust or institution as are material for the purpose of achieving its objects
and may also make such enquiries as he may deem necessary in this behalf.
(ii) After satisfying himself about the objects of the trust or institution and the genuineness of its
activitiesas required in (i)(a) above and compliance of the requirements under (i)(b) above,
he shall pass an order in writing registering the trust or institution.
(iii) If he is not satisfied, he shall pass an order in writing refusing to register the trust or institution.
(iv) A copy of such an order issued under (ii) or (iii) above shall be sent to the applicant. However,
an order under (iii) shall not be passed unless the applicant has been given a reasonable
opportunity of being heard.
(v) Every order granting or refusing registration shall be passed within six months from the end
of the month in which the application for registration of trust or institution is received by the
Principal Commissioner or Commissioner.
(vi) Where a trust or an institution has been granted registration and subsequently, if the Principal
Commissioner or Commissioner of Income-tax is satisfied that the activities of any trust or
institution are not genuine or are not being carried out in accordance with the objects of the
trust or institution, he can pass an order in writing canceling the registration granted under
section 12AA and 12A (as it stood before its amendment by the Finance (No.2) Act, 1996).
However, the trust or institution should be given a reasonable opportunity of being heard.
(vii) Any order passed by the Principal Commissioner or Commissioner of Income-tax under
section 12AA refusing registration is appealable under section 253 to the Income-tax
Appellate Tribunal.
(viii) Where a trust or an institution has been granted registration, and subsequently it is noticed
that its activities are being carried out in such a manner that,—
(a) its income does not enure for the benefit of general public;
(b) it is for benefit of any particular religious community or caste;
(c) any income or property of the trust is applied for benefit of specified persons like author
of trust, trustees etc.; or

© The Institute of Chartered Accountants of India

 13.34 DIRECT TAX LAWS

(d) its funds are invested in prohibited modes,

then, the Principal Commissioner or the Commissioner may cancel the registration of such
trust or institution. The Commissioner may also cancel the registration of such trust or
institution, if it has not complied with the requirement of any other law and the order, direction
or decree, by whatever name called, holding that such non-compliance has occurred, has
either not been disputed or has attained finality. However, if the trust or institution proves that
there was a reasonable cause for the activities to be carried out in the above manner, the
registration shall not be cancelled.
ILLUSTRATION 10
Educare, a trust created with the objective of promoting primary education in rural areas, filed
an application for registration under section 12A on 30th April, 2020. Since the application
was not disposed of by the Commissioner on or before 31st October, 2020 as required under
section 12AA(2), the trust contended that it was deemed to be registered as per the provisions
of section 12AA(1). Examine the correctness of contention of the trust.
SOLUTION
As per the provisions of section 12AA(2), every order granting or refusing registration under
section 12AA(1)(b), shall be passed by the registering authority before the expiry of six
months from the end of the month in which the application was received under section
12A(1)(a) or section 12A(1)(aa).
The Supreme Court, in CIT v. Society for Promotion of Education (2016) 382 ITR 6, held that
once an application under section 12AA was made and the same was not responded to within
six months, the trust would be deemed as registered with effect from the date following the
expiry of the six month period.
Applying the rationale of the above Supreme Court ruling in this case, the trust would be
deemed as registered with effect from 1.11.2020. The contention that the trust is deemed to
be registered, since its application for registration has not been disposed of within six months
is, therefore, correct.
Note: The benefit of exemption under section 11 and 12 would be available from the A.Y. 2021-
22, being the assessment year relevant to the financial year in which such application is made.
ILLUSTRATION 11
A charitable trust, whose income can be exempt under section 11 of the Income-tax Act,
1961, was formed on 1st March, 2018. For the accounting year ended 31st March, 2021, it
earned income of ` 3,60,000.
It filed with the Commissioner of Income-tax its application for registration on 31st August,
2020 explaining that for good and sufficient reasons, it was prevented from filing the
application for so long.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.35
POLITICAL PARTIES AND ELECTORAL TRUSTS
Examine -
(i) by which date the application for registration should have been filed;
(ii) whether such an application could have been filed before the formation of the trust;
(iii) in the absence of an order of registration from the Commissioner, can the trust be
deemed to be registered;
(iv) the steps to be taken by the trust to secure exemption from income-tax;
(v) whether a certificate of registration once granted can be cancelled and if so, the
conditions there for.
SOLUTION
(i) The requirement of filing an application for registration under section 12A within one
year of creation of the trust has been removed. The application can be filed at any
time now. Accordingly, the provisions of sections 11 and 12 would apply from the
assessment year relevant to the financial year in which the application is made i.e. the
exemption would be available only with effect from the assessment year relevant to
the previous year in which the application was filed.
However, where registration has been granted to the trust under section 12AA and on
the said date, assessment proceedings relating to earlier assessment years are
pending, then, the benefit of sections 11 and 12 shall be available in respect of income
derived from property held under trust in those years, provided the objects and
activities of the trust remain unchanged.
(ii) No. The application for registration under section 12A cannot be filed before the
formation of the trust.
(iii) As per section 12AA(2), every order granting or refusing registration should be passed
before the expiry of 6 months from the end of the month in which the application was
received under section 12A. The Supreme Court, in CIT v. Society for Promotion of
Education (2016) 382 ITR 6, held that the trust would be deemed as registered if the
application under section 12AA is not disposed of within the stipulated period of six
months. Therefore, in this case, the trust would be deemed as registered with effect
from 1st March, 2021. The benefit of exemption under section 11 and 12 would be
available from A.Y. 2021-22, being the assessment year relevant to the financial year
in which the application is made.
(iv) The following are the steps to be taken by the trust to secure exemption from income-
tax:
(1) The trust should be registered with the Principal Commissioner or
Commissioner of Income-tax under section 12AA.

© The Institute of Chartered Accountants of India

 13.36 DIRECT TAX LAWS

(2) The accounts of the trust for the previous year must be audited by a Chartered
Accountant if its total income without giving effect to the provisions of section
11 and section 12 exceeds the maximum amount which is not chargeable to
tax. The audit report in the prescribed form, duly signed and verified by the
Chartered Accountant, should be furnished along with the return of income of
the trust for the relevant assessment year.
(3) At least 85% of the income is required to be applied for the approved purposes.
(4) The unapplied income and the money accumulated or set apart should be
invested or deposited in the specified forms or modes, after filing statement in
Form 10 on or before the due date of filing return of income specified under
section 139(1).
(v) Yes, the certificate of registration can be cancelled by the Commissioner. According
to section 12AA, if the Commissioner is satisfied that the activities of the trust are not
genuine or are not being carried out in accordance with the objects of the trust, he
shall, after giving the trust a reasonable opportunity of being heard, pass an order in
writing cancelling the registration of the trust.
Further, section 12AA(4) provides that where a trust or an institution has been granted
registration, and subsequently it is noticed that its activities are being carried out in
such a manner that,—
(i) its income does not enure for the benefit of general public;
(ii) it is for benefit of any particular religious community or caste;
(iii) any income or property of the trust is applied for benefit of specified persons
like author of trust, trustees etc.; or
(iv) its funds are invested in prohibited modes,
then, the Commissioner may cancel the registration of such trust or institution. The
Commissioner may also cancel the registration of such trust or institution, if it has not
complied with the requirement of any other law and the order, direction or decree, by
whatever name called, holding that such non-compliance has occurred, has either not
been disputed or has attained finality. However, if the trust or institution proves that
there was a reasonable cause for the activities to be carried out in the above manner,
the registration shall not be cancelled.
(5) Denial of Exemption [Section 13]
(i) Income not eligible for exemption under sections 11 and 12
(a) Income from property held under a trust for private religious purposes - Where
the property is held under a trust for private religious purposes, no part of the income
will be exempt if it does not ensure for the benefit of the public [Section 13(1)(a)].

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.37
POLITICAL PARTIES AND ELECTORAL TRUSTS
(b) Income from trust established for benefit of any particular religious community
or caste -Where a trust set up for charitable purposes or a charitable institution has
been established for the benefit of any particular religious community or caste, the
income thereof will not be eligible for exemption. However, a trust or institution created
or established for the benefit of scheduled caste, backward classes, scheduled tribes
or women and children shall not be treated as a trust or institution created or
established for the benefit of a religious community or caste within the meaning of
section 13(1)(b).
(c) Income of trust enuring for the benefit of any person referred to in section 13(3)
- Where the trust or the institution has been created or established after 31.3.1962, if
any part of its income enures directly or indirectly for the benefit of any person referred
to in section 13(3).
Irrespective of the date of the creation of the trust or the establishment of the
institution, if any part of its income or any property belonging to it during the relevant
previous year is used or applied directly or indirectly for the benefit of any person
referred to in section 13(3) [Section 13(1)(c)].
(d) Deposit or investment of funds in impermissible modes -Any income of a trust or
institution, if –
(1) its funds are invested or deposited otherwise than in the forms or modes
specified in section 11(5);
(2) it holds shares in a company other than -
(i) a public sector company; or
(ii) shares prescribed as a form or mode of investment under section
11(5)(xii).
However, these restrictions do not apply in respect of :
(a) any assets forming part of corpus of the trust as on 1-6-1973.
(b) any accretion to the corpus shares by way of bonus shares allotted to the trust.
(c) debentures issued by or on behalf of any company or corporation and acquired
by the trust before March 1, 1983.
(d) any asset not covered under section 11(5), where such asset is held for not
more than one year from the end of the previous year in which such asset is
acquired.
(e) any funds representing the profits and gains of business, being profits and gains
of any previous year relevant to the assessment year 1984-85 or any
subsequent assessment year. However, such relaxation of the restriction will

© The Institute of Chartered Accountants of India

 13.38 DIRECT TAX LAWS

be denied unless the trust keeps separate accounts for the business. As
already noted, subject to certain exceptions, such business profits are no longer
eligible for exemption under section 11.
(ii) Prohibited use or application -We have noted above that when any part of the income or
any property of the trust whenever created, is, during the previous year, used or applied
directly, for the benefit of any person referred to in section 13(3), the denial of exemption
operates. Section 13(2) specifies a few particular instances where the income or the property
is to be deemed to have been used for the benefit of a person referred to in section 13(3). It
should be noted that those particular instances do not in any way restrict the general meaning
of the expression “used or applied for the benefit of a person”. The provisions of section 13(2)
are as follows:
The income or the property of the trust or institution or any part of such income or property is
to be deemed to have been used or applied for the benefit of a person referred to in section
13(3) in the following cases:
(a) Loan without adequate interest or adequate security - If any part of the income or
the property of the trust or institution is or continues to be lent to any person referred
to in section 13(3) for any period during the previous year without either adequate
security or adequate interest or both.
(b) Allowing use of property without adequate rent -If any land, building or other
property of the trust or institution is or continues to be, made available, for the use of
any person referred to in section 13(3) for any period during the previous year without
charging adequate rent or other compensation.
(c) Excess payment for services - If any amount is paid out of the resources of the trust
or institution to any of the persons referred to in section 13(3) for services rendered to
the trust or institution but such amount is in excess of a reasonable sum payable for
such services.
(d) Inadequate remuneration for services rendered - If the services of the trust or
institution are made available to any person referred to section 13(3) without adequate
remuneration or other compensation.
(e) Excess payment for purchase of property - If any share, security or other property
is purchased by or on behalf of the trust or institution from any person referred to in
section 13(3) during the previous year for a consideration which is more than
adequate.
(f) Inadequate consideration for property sold - If any share, security or other property
is sold by or on behalf of the trust or institution to any person referred to in section
13(3) during the previous year for a consideration which is less than adequate.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.39
POLITICAL PARTIES AND ELECTORAL TRUSTS
(g) Diversion of income or property exceeding `1,000 - If any income or property of
the trust or institution is diverted during the previous year in favour of any person
referred to in section 13(3) provided the aggregate value of such income and property
diverted exceeds `1,000.
(h) Investment in substantial interest concerns - If any funds of the trust or institution
are, or continue to remain, invested for any period during the previous year in any
concern in which any person referred to in section 13(3) has a substantial interest.
Section 13(4) provides some respite where the aggregate of the funds invested in the
said concern does not exceed five per cent of the capital of that concern. In such a
case, the exemption under section 11 will be denied only in relation to such income as
arises out of the said investment.
(iii) Prohibited category of persons - Section 13(3) gives the list of persons, use or application
of the income or property of a trust for whose direct or indirect benefit results in a denial of
the exemption contemplated in section 11 for a charitable or religious trust or institution. The
said persons are:
(1) The author of the trust or the founder of the institution.
(2) Any person who has made a substantial contribution to the trust or institution, that is,
any person whose total contribution up to the end of the relevant previous year
exceeds ` 50,000.
(3) Where the author, founder or the person making a substantial contribution is a HUF,
any member of the family.
(4) Any trustee of the trust or manager (by whatever name called) of the institution.
(5) Any relative of any such author, founder, person, member, trustee or manager as
referred to above.
(6) Any concern in which any of the persons referred to in clauses (1) to (5) above has a
substantial interest.
Relative - The expression “relative”, in relation to an individual, means -
(a) spouse of the individual;
(b) brother or sister of the individual;
(c) brother or sister of the spouse of the individual;
(d) any lineal ascendant or descendant of the individual;
(e) any lineal ascendant or descendant of the spouse of the individual;
(f) spouse of a person referred to in (b), (c), (d) or (e) above;

© The Institute of Chartered Accountants of India

 13.40 DIRECT TAX LAWS

(g) any lineal descendant of a brother or sister of either the individual or the spouse of the
individual;
Substantial interest in a concern - Section 13(2)(h), section 13(3) and section 13(4) refers
to cases where a person has a substantial interest in a concern. These references occur
where the “Prohibited use or application” and “Prohibited category of persons” have been
described. The circumstances in which a person shall be deemed to have a substantial
interest in a concern, have been laid down in Explanation 3 to section 13.

Circumstances when a person is deemed to have substantial interest in a concern

Where the concern is a company In any other case

If equity shares carrying 20% or more of voting If such person is entitled, or such person
power are beneficially owned by such person or and one or more of the person referred to
partly by such person and partly by one or more in section 13(3) are entitled in the
of the other persons referred to in section 13(3) aggregate, to receive 20% or more profit of
at any time during the P.Y. such concern at any time during the P.Y.

(iv) Exemption not to be denied to charitable trusts providing educational or medical

facilities to specified persons [Section 13(6)]- A charitable or religious trust running an
educational institution or a medical institution or a hospital shall not be denied the benefit of
exemption under section 11 merely due to the reason that the benefit of educational or
medical facilities have been provided to the specified persons referred to in section 13(3).
However, the value of such facilities provided to such specified persons either free of cost or
at a concessional rate would be deemed to be the income of the trust. Such income would
not be eligible for exemption under section 11.
(v) Anonymous donations [Section 13(7)]-The exemption provisions contained in section 11
or section 12 shall not be applicable in respect of any anonymous donation referred to in
section 115BBC on which tax is payable in accordance with the provisions of that section.
For example, section 11(1)(d) provides that any income in the form of voluntary contributions
made with a specific direction that they shall form part of the corpus of the trust or institution
shall not be included in the total income of such trust/institution for the relevant previous year.
However, if a trust or institution established wholly for charitable purposes receives an
anonymous donation with a specific direction that the donation shall form part of the corpus
of the trust or institution, such anonymous donation would not be exempt by virtue of section
11(1)(d). It would be taxable at 30% as provided in section 115BBC.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.41
POLITICAL PARTIES AND ELECTORAL TRUSTS
(vi) Exemption to be denied to a charitable trust having its main object as “advancement
of any other object of general public utility” if its trading receipts exceed the specified
threshold irrespective of withdrawal of approval or cancellation of registration or
rescindment of notification [Section 13(8)]
(a) Under sections 11 and 12, income of any charitable trust or institution is exempt if
such income is applied for charitable purposes in India and such institution is
registered under section 12AA.
(b) The definition of “charitable purpose” under section 2(15) provides that the advancement
of any other object of general public utility shall not be a charitable purpose, if it involves
the carrying on of any activity in the nature of trade, commerce or business, or any activity
of rendering any service in relation to any trade, commerce or business, for a cess or fee
or any other consideration, irrespective of the nature of use or application, or retention, of
the income from such activity, unless,-
(1) such activity is undertaken in the course of actual carrying out of such
advancement of any other object of general public utility; and
(2) the aggregate receipts from such activity or activities, during the previous year,
does not exceed 20% of the total receipts, of the trust or institution undertaking
such activity or activities, for the previous year .
(c) Thus, a charitable trust or institution pursuing “advancement of object of general public
utility” may be a charitable trust in one year and not a charitable trust in another year
depending on the percentage of receipts from commercial activities vis-à-vis its total
receipts.
(d) Therefore, no exemption would be available to a trust or institution for the previous year in
which the receipts from commercial activities exceed 20% of the total receipts of that year.
However, this temporary excess in one year may not be treated as altering the very nature
of the trust or institution so as to lead to cancellation of registration or withdrawal of
approval or rescinding of notification issued in respect of trust or institution.
(e) Therefore, there is need to ensure that if the purpose of a trust or institution does not
remain charitable in a previous year on account of the commercial receipts exceeding
the specified percentage of total receipts, then, such trust or institution would not be
entitled to get benefit of exemption in respect of its income for that previous year in
which the commercial receipts exceed the specified percentage of total receipts. The
denial of exemption would be compulsory by operation of law and would not be
dependent on any approval being withdrawn or registration being cancelled or a
notification being rescinded.
(f) Accordingly, section 13(8) ensures that such trust and institution does not get benefit
of tax exemption under section 11 or 12 in the year in which its receipts from

© The Institute of Chartered Accountants of India

 13.42 DIRECT TAX LAWS

commercial activities exceed the specified percentage of total receipts, whether or not
the registration or approval granted or notification issued is cancelled, withdrawn or
rescinded in respect of such trust or institution.
Clarification regarding cancellation of registration u/s 12AA of the Income-tax Act,
1961 in certain circumstances [Circular No - 21/2016 dated: May 27, 2016]:
The CBDT has clarified that it shall not be mandatory to cancel the registration already
granted u/s 12AA to a charitable institution merely on the ground that the cut-off specified
(20% of the total receipts) in the proviso to section 2(15) is exceeded in a particular year
without there being any change in the nature of activities of the institution.
If in any particular year, the specified cut-off is exceeded, the tax exemption would be
denied to the institution in that year and cancellation of registration would not be mandatory
unless such cancellation becomes necessary on the ground(s) prescribed under the Act.
With the introduction of Chapter XII-EB in the Act vide Finance Act, 2016, prescribing special
provisions relating to tax on accreted income of certain trusts and institutions, cancellation of
registration granted under section 12AA may lead to a charitable institution getting hit by sub-
section (3) of section 115TD and becoming liable to tax on accreted income. The cancellation
of registration without justifiable reasons may, therefore, cause additional hardship to an
assessee-institution due to attraction of tax-liability on accreted income. The field authorities
have therefore been advised not to cancel the registration of a charitable institution granted
u/s 12AA just because the proviso to section 2(15) comes into play. The process for
cancellation of registration is to be initiated strictly in accordance with section 12AA(3) and
12AA(4) after carefully examining the applicability of these provisions

(vii) Non-submission of statement in prescribed form on or before the due date of filing return
of income under section 139(1) [Section 13(9)]- In case the statement in Form 10 is not
submitted on or before the due date of filing return of income under section 139(1), then, the
benefit of accumulation would not be available and such income would be taxable at the applicable
rate. Further, the benefit of accumulation would also not be available if return of income is not
furnished on or before the due date of filing return of income specified in section 139(1).
(6) Anonymous Donations received by Charitable Trusts/Institutions to be subject to tax
[Section 115BBC]
(i) As per the provisions of the Income-tax Act, 1961, tax exemption under section 10(23C) and
section 11 are available to certain entities, as briefed in the table below, on fulfillment of the
conditions prescribed under the relevant sections –
Entity Applicable section
Charitable or religious trusts/institutions 11
Universities and other educational institutions 10(23C)(iiiad) and (vi)

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.43
POLITICAL PARTIES AND ELECTORAL TRUSTS
Hospitals and other medical institutions 10(23C) (iiiae) and (via)
Notified funds or institutions established for 10(23C)(iv)
charitable purposes
Notified trusts or institutions established wholly for 10(23C)(v)
public religious purposes or wholly for public religious
and charitable purposes

(ii) Section 115BBC has been inserted to tax anonymous donations received by the above
entities at 30%.
(iii) In order to provide relief to these trusts and institutions and to reduce their compliance
burden, an exemption limit has been introduced, and only the anonymous donations in excess
of this limit would be subject to tax@30% under section 115BBC.
(iv) The exemption limit is the higher of the following –
(1) 5% of the total donations received by the assessee; or
(2) ` 1 lakh.
(v) The total tax payable by such institutions would be –
(1) tax@30% on anonymous donations exceeding the exemption limit as calculated
above; and
(2) tax on the balance income i.e. total income as reduced by the anonymous donations
which have been subject to tax@30% under section 115BBC.
(vi) The following table illustrates the calculation of anonymous donations liable to tax @30% under
section 115BBC –
I II III IV V VI
Situation Total Anonymous Exemption Anonymous Donations
donations donations donations subject to
(`)
during the received taxable@30% tax at
year during the (`) normal
year (`) rates# (`)
(`)
A 15,00,000 4,00,000 1,00,000 3,00,000 12,00,000
B 30,00,000 7,00,000 1,50,000 5,50,000 24,50,000
C 40,00,000 10,00,000 2,00,000 8,00,000 32,00,000

# It is possible to take a view that the remaining donations reflected in Column VI which are
taxable at normal rates would be eligible for application of income and thereby, the benefit of
exemption under section 11 can be claimed in respect of such donations.

© The Institute of Chartered Accountants of India

 13.44 DIRECT TAX LAWS

(vii) For this purpose, “anonymous donation” means any voluntary contribution referred to in
section 2(24)(iia), where the person receiving such contribution does not maintain a record
of the identity indicating the name and address of the person making such contribution and
such other particulars as may be prescribed.
(viii) However, the above provision does not apply to a trust or institution created or established
wholly for religious purposes.
(ix) Further, anonymous donations to trusts/institutions created or established wholly for religious
and charitable purposes (i.e. partly charitable and partly religious institutions/trusts) would be
taxed only if such anonymous donation is made with a specific direction that such donation
is for any university or other educational institution or any hospital or other medical institution
run by such trust or institution. Other anonymous donations received by such
trusts/institutions are not taxable.
(x) Section 13(7) provides that the exemption provisions contained in section 11 or section 12
shall not be applicable in respect of any anonymous donation referred to in section 115BBC
on which tax is payable in accordance with the provisions of that section.
(xi) For example, section 11(1)(d) provides that any income in the form of voluntary contributions
made with a specific direction that they shall form part of the corpus of the trust or institution
shall not be included in the total income of such trust/institution for the relevant previous year.
However, if a trust or institution established wholly for charitable purposes receives an
anonymous donation with a specific direction that the donation shall form part of the corpus
of the trust or institution, such anonymous donation would not be exempt by virtue of section
11(1)(d). It would be taxable at 30% as provided in section 115BBC.
(xii) Similarly, section 10(23C) provides that any anonymous donation referred to in section
115BBC on which tax is payable in accordance with the provisions of the said section shall
be included in the total income. Consequently, sections 10(23C) and 13 provide that any
income by way of any anonymous donation which is taxable under the provisions of section
115BBC shall not be excluded from the total income of the trust or institution.
ILLUSTRATION 12
The following trusts claim that anonymous donations received by them during the financial
year 2020-21 are not liable to tax under section 115BBC:
(i) A charitable trust referred to in section 11 which applied the entire amount of
anonymous donations for purposes of the trust during the relevant financial year.
(ii) A trust established wholly for religious purposes which applied 85% of the amount of
anonymous donations for the purposes of the objects of the trust during the relevant
financial year.
Examine the validity of the claim made by the trusts.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.45
POLITICAL PARTIES AND ELECTORAL TRUSTS
SOLUTION
(i) Section 115BBC provides for levy of tax @ 30% on anonymous donation received by,
inter alia, charitable trusts or institutions referred to in section 11 in the following manner:
(a) the amount of income-tax calculated @30% on the aggregate of anonymous
donations received in excess of 5% of the total donations received by the
assessee or one lakh rupees, whichever is higher; and
(b) the amount of income-tax with which the assessee would have been chargeable
had his total income been reduced by the aggregate of the anonymous
donations received in excess of 5% of the total donations received by the
assessee or ` 1 lakh, as the case may be.
Further, section 13(7) provides that the exemption provisions contained in sections 11
and 12 shall not be applicable in respect of any anonymous donation liable to tax under
section 115BBC. As such, application of the anonymous donations received by the
charitable trust for charitable purposes does not confer any exemption from tax.
Therefore, the claim for non-taxability under section 115BBC of anonymous donations
received by the charitable trust is not valid in law.
However, a view may be taken that anonymous donation upto higher of 5% of total
donations or ` 1 lakh, which is taxable at normal rates would be eligible for application
of income and thereby, the benefit of exemption under section 11 would apply.
(ii) Section 115BBC(2) provides that the provisions contained in section 115BBC(1) relating
to the taxability of anonymous donations are not applicable to any trust or institution
created or established wholly for religious purposes. As such, the trust established wholly
for religious purposes is not liable to be taxed in respect of the anonymous donations
received by it. Therefore, the claim made by the trust is valid in law. The application or
non-application of such anonymous donation for the purposes of trust during the relevant
financial year is not germane to the issue of taxability under section 115BBC.

13.4 TAX ON ACCRETED INCOME OF CERTAIN TRUSTS

AND INSTITUTIONS [CHAPTER XII-EB]
(1) Background for introduction of Exit Tax
(i) As per section 2(24), "income" includes any voluntary contribution received by a
charitable trust or institution or a fund.
(ii) Sections 11 and 12 provide exemption to trusts or institutions in respect of income
derived from property held under trust and voluntary contributions, subject to the
conditions stipulated thereunder.

© The Institute of Chartered Accountants of India

 13.46 DIRECT TAX LAWS

(iii) The exemption is subject to the condition that the income derived from property held
under trust should be applied for charitable purposes; and where such income cannot
be applied during the previous year, it has to be accumulated and invested in the
modes prescribed and applied for such purposes in accordance with specified
conditions.
(iv) If the accumulated income is not applied in accordance with the conditions provided
in the said section within a specified time, then such income is deemed to be taxable
income of the trust or the institution. Section 12AA provides for registration of the trust
or institution which entitles them to be able to get the benefit of sections 11 and 12. It
also provides the circumstances under which the registration can be cancelled.
Section 13 of the Act provides for the circumstances under which exemption under
section 11 or 12 in respect of whole or part of income would not be available to a trust
or institution.
(v) A society or a company or a trust or an institution carrying on charitable activity may –
(1) voluntarily wind up its activities and dissolve; or
(2) merge with any other charitable or non-charitable institution; or
(3) convert into a non-charitable organization.
There is, however, no specific provision in the income-tax law as to how the assets of
such a charitable institution should be dealt with.
(vi) Under section 11, certain amount of income of prior period can be brought to tax on
failure of certain conditions. However, there is no provision in the Income-tax Act,
1961, which ensure that the corpus and asset base of the trust accreted over a period
of time, with promise of it being used for charitable purpose, continues to be utilised
for charitable purposes and is not used for any other purpose.
(vii) Consequently, it is always possible for charitable institutions to transfer assets to a
non-charitable institution.
(viii) In order to ensure that the benefit conferred over a period of time by way of exemption
is not misused and to plug the gap in law that allows the charitable trusts having built
up corpus/wealth through exemptions being converted into non-charitable
organisation with no tax consequences, Chapter XII-EB imposes additional income-
tax in the nature of an exit tax when the organization is converted into a non-charitable
organization or gets merged with a non-charitable organization or does not transfer
the assets to another charitable organisation.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.47
POLITICAL PARTIES AND ELECTORAL TRUSTS
(2) Salient Features:
Section Provision
(i) 115TD(1) Circumstances where levy of tax on accreted income is attracted:
The accreted income of a trust or institution registered under section
12AA shall be taxable at the maximum marginal rate (@34.944%) on
–
(1) conversion of the trust or institution into a form not eligible for
grant of registration under section 12AA; or
(2) merger with an entity not having similar objects and
registered under section 12AA; or
(3) non-distribution of assets on dissolution to any charitable
institution registered under section 12AA or approved under
section 10(23C) within a period of 12 months from the end of the
month in which the dissolution takes place.
This levy of exit tax shall be in addition to income chargeable in the
hands of the entity.
(ii) 115TD(3) Deemed conversion into non-eligible form - Circumstances:
A trust or an institution shall be deemed to have been converted into
any form not eligible for registration under section 12AA in a previous
year, if,—
(i) the registration granted to it under section 12AA has been
cancelled; or
(ii) it has adopted or undertaken modification of its objects which
do not conform to the conditions of registration and,—
(a) it has not applied for fresh registration under section
12AA in the said previous year; or
(b) it has filed application for fresh registration under
section 12AA but the said application has been
rejected.
(iii) 115TD(2) Meaning of Accreted Income:
Aggregate FMV of total assets as on the specified date
Less
Total liability computed in accordance with the prescribed method of
valuation[See Method of Valuation prescribed by CBDT given at the
end of para 13.4]
Notes –
(1) Accreted income attributable to any asset which is established
to have been directly acquired by the trust or institution out of

© The Institute of Chartered Accountants of India

 13.48 DIRECT TAX LAWS

its agricultural income exempt under section 10(1) would be

ignored. Liability, in relation to such asset, also has to be
ignored.
(2) Accreted income attributable to any asset acquired by the trust
or institution during the period beginning from the date of its
creation or establishment and ending on the date from which
the registration under section 12AA became effective 2, if the
trust or institution has not been allowed any benefit of sections
11 and 12 during the said period, would be ignored. Liability,
in relation to such asset, also has to be ignored.
(3) The asset and the liability of the charitable organisation which
have been transferred on dissolution to another charitable
trust or institution registered under section 12AA or a
fund/institution/trust/university/educational
institution/hospital/medical institution approved under section
10(23C) within specified time have to be ignored while
calculating accreted income.
Meaning of specified date [Explanation below section 115TD(7)]:
Case Specified Date
(i) conversion of the trust or institution The date of
registered u/s 12AA into a form not conversion
eligible for registration u/s 12AA
(ii) merger with an entity not having The date of
similar objects or not registered u/s merger
12AA
(iii) non-distribution of assets on dissolution The date of
to any charitable institution registered dissolution
u/s 12AA or approved u/s 10(23C) within
a period twelve months from dissolution.
Date of conversion [Explanation below section 115TD(7)]:
Case Specified Date
(i) Where the registration granted to it u/s The date of the
12AA has been cancelled order cancelling
registration u/s
12AA

2
Where the benefit under sections 11 and 12 have been allowed to the trust or institution in respect of any previous
year or years beginning prior to the date from which the registration under section 12AA became effective, then, the
registration shall be deemed to have become effective from the first day of the earliest previous year. Thus,
registration under section 12AA shall include any registration obtained under section 12A as it stood before its
amendment by the Finance (No.2) Act, 1996.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.49
POLITICAL PARTIES AND ELECTORAL TRUSTS
(ii) Where it has adopted or undertaken The date of
modification of its objects which do not adoption or
conform to the conditions of registration modification of
and has not made an application for fresh any object.
registration or the application made has
been rejected.
(iv) 115TD(4) Exit tax payable even if no income-tax is payable by the
Trust/Institution:
Even if no income-tax is payable by the trust or institution on its total
income, tax on accreted income shall be payable by the trust or
institution, like any other additional income-tax.
(v) 115TD(5) Period within which tax on accreted income has to be paid to the
credit of the Central Government:
The principal officer or the trustee of the trust or the institution, as the
case may be, and the trust or the institution shall also be liable to pay
the tax on accreted income to the credit of the Central Government
within fourteen days from,—
Circumstance Relevant date
(1) Where the registration the date on which –
granted u/s 12AA has (a) the period for filing appeal
been cancelled under section 253 against the
order rejecting the application
expires and no appeal has
been filed by the trust or the
institution; (or)
(b) the order in any appeal,
confirming the cancellation of
the application, is received by
the trust or the institution
(2) Where the trust has the end of the previous year
modified its objects and
has not applied for fresh
registration u/s 12AA
(3) Where the trust has the date on which –
modified its objects and (a) the period for filing appeal
has filed application for under section 253 against the
fresh registration u/s order rejecting the application
12AA, but the same was expires an no appeal has
rejected been filed by the trust or
institution; (or)

© The Institute of Chartered Accountants of India

 13.50 DIRECT TAX LAWS

(b) the order in any appeal,

confirming the cancellation of
the application, is received by
the trust or the institution
(4) Where trust has merged the date of merger
with an entity not having
similar objects or not
registered u/s 12AA
(5) Where the trust fails to the date on which the period of
transfer upon dissolution 12 months expires.
all its assets to another
registered trust or
institution or approved
fund or institution within
12 months from the end
of the month in which the
dissolution takes place
(vi) 115TD(6) No credit available for tax paid on accreted income:
The tax on accreted income shall be final tax for which no credit can
be taken by the trust or institution or any other person.
(vii) 115TD(7) Non-availability of deduction under any other provision of the Act:
No deduction is allowable under any other provision of the Act to the
trust or institution or any other person in respect of the income which
has been charged to tax or the tax thereon.
(viii) 115TE Interest for non-payment of tax within prescribed time:
In case of failure of payment of tax within the prescribed time, a simple
interest@1% p.m. or part of it shall be applicable for the period of
non-payment.
Period of non-payment:
Beginning from Ending with
The date immediately after the last The date on which the tax is
date on which such tax was actually paid.
payable
(ix) 115TF Circumstance when trust or institution is deemed to be
assessee-in-default:
The principal officer or the trustee and the trust or the institution shall
be deemed to be assessee-in-default for non-payment of tax and all
provisions related to the recovery of taxes shall apply. Further, in the
case of transfer of assets upon dissolution of the trust or institution to
a recipient, which is not a charitable organisation, the recipient of

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.51
POLITICAL PARTIES AND ELECTORAL TRUSTS
assets of the trust shall also be liable to be held as assessee-in-
default in case of non-payment of tax and interest. However, in such
a case, the recipient's liability shall be limited to the extent to which
the assets received by him is capable of meeting the liability.
Note - As per section 115TD(2), “Accreted Income” means the aggregate FMV of total assets
as on the specified date less total liability computed in accordance with the prescribed method
of valuation. Accordingly, the CBDT has inserted Rule 17CB from 1.6.2016 providing for
method of valuation of assets and liabilities.
Method of valuation for the purposes of sub-section (2) of section 115TD
Rule Provision
(1) The aggregate fair market value of the total assets of the trust or institution, shall
be the aggregate of the fair market value of all the assets in the balance sheet
as reduced by—
(i) any amount of income-tax paid as deduction or collection at source or as
advance tax payment as reduced by the amount of income-tax claimed as
refund under the Act, and
(ii) any amount shown as asset including the unamortised amount of deferred
expenditure which does not represent the value of any asset.
(2) The fair market value of the asset shall be determined in the following manner,
namely -
(I) Shares and securities
(a) Quoted shares and (i) the average of the lowest and
securities highest price of such shares and
securities quoted on a recognised
stock exchange as on the specified
date; or
(ii) where on the specified date, there is
no trading in such shares and
securities on a recognised stock
exchange, the average of the lowest
and highest price of such shares
and securities on a recognised
stock exchange on a date
immediately preceding the
specified date when such shares and
securities were traded on a
recognised stock exchange,

© The Institute of Chartered Accountants of India

 13.52 DIRECT TAX LAWS

(b) Unquoted equity (A+B - L) × (PV)

shares (PE)
where,
A = book value of all the assets in the balance
sheet (other than bullion, jewellery, precious
stone, artistic work, shares, securities, and
immovable property) as reduced by-
(i) any amount of income-tax paid as
deduction or collection at source or as
advance tax payment as reduced by the
amount of income-tax claimed as refund
under the Act; and
(ii) any amount shown in the balance sheet
as asset including the unamortised
amount of deferred expenditure which
does not represent the value of any
asset;
B = fair market value of bullion, jewellery,
precious stone, artistic work, shares,
securities and immovable property as
determined in the manner provided in this
rule;
L= book value of liabilities shown in the
balance sheet, but not including the following
amounts, namely: —
(i) representing contingent liabilities other
than arrears of dividends payable in
respect of the paid-up capital in respect
of equity shares;
(ii) the amount set apart for payment of
dividends on preference shares and
equity shares;
(iii) reserves and surplus, by whatever
name called, even if the resulting figure
is negative, other than those set apart
towards depreciation;
(iv) any amount representing provision for
taxation, other than amount of income-
tax paid as deduction or collection at
source or as advance tax payment as

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.53
POLITICAL PARTIES AND ELECTORAL TRUSTS
reduced by the amount of income-tax
claimed as refund under the Act, to the
extent of the excess over the tax
payable with reference to the book
profits in accordance with the law
applicable thereto;
(v) any amount representing provisions
made for meeting liabilities, other than
ascertained liabilities;
(vi) any amount of cumulative preference
shares;
PE = total amount of paid up equity share
capital as shown in the balance-sheet;
PV = the paid up value of such equity share.
(c) Shares and The fair market value of shares and
securities other than securities other than equity shares shall be
equity shares estimated to be price it would fetch if sold in
the open market on the specified date on the
basis of the valuation report from a merchant
banker or an accountant in respect of such
valuation.
II. Immovable property
The fair market value of an immovable property shall be higher of the
following:
(a) price that the property shall ordinarily fetch if sold in the open
market on the specified date on the basis of the valuation report
from a registered valuer; and
(b) stamp duty value as on the specified date.
III. A business undertaking
The fair market value of a business undertaking, held by a trust or
institution, shall be its net assets determined in accordance with the
following formula:
Fair market value = (A + B - L),
The value of A, B and L would be determined in the same manner as
discussed above in the case of unquoted equity shares.
IV. Any other asset
The fair market value of any asset, other than those referred to in (I),
(II) and (III), shall be the price that the asset shall ordinarily fetch if

© The Institute of Chartered Accountants of India

 13.54 DIRECT TAX LAWS

sold in the open market on the specified date on the basis of valuation
report from a registered valuer.
However, in case no valuer is registered for valuation of such assets,
the valuation report shall be obtained from a valuer who is a member
of any one of the professional valuer bodies viz. Institution of Valuers,
Institution of Surveyors (Valuation Branch), Institution of Government
Approved Valuers, Practicing Valuers Association of India, the Indian
Institution of Valuers, Centre for Valuation Studies, Research and
Training, Royal institute of Chartered Surveyors; India Chapter,
American Society of Appraisers, USA; Appraisal institute, USA or a
valuer who is appointed by any public sector bank or public sector
undertakings for valuation purposes.
(3) The total liability of the trust or institution shall be the book value of liabilities in
the balance sheet on the specified date but not including the following amounts,
namely -
(i) capital fund or accumulated funds or corpus, by whatever name called;
(ii) reserves or surpluses or excess of income over expenditure, by whatever
name called;
(iii) any amount representing contingent liability;
(iv) any amount representing provisions made for meeting liabilities, other than
ascertained liabilities;
(v) any amount representing provision for taxation, other than the amount of
tax paid as deduction or collection at source or as advance tax payment as
reduced by the amount of income-tax claimed as refund under the Act, to
the extent of the excess over the income-tax payable with reference to the
income in accordance with the law applicable thereto.
Expla- Meaning of certain terms
nation
Term Meaning
Accountant A fellow of the Institute of Chartered Accountants of India
within the meaning of the Chartered Accountants Act, 1949
who is not appointed by the trust or institution as an auditor;
Balance The Balance Sheet of such trust or institution (including the
sheet notes annexed thereto and forming part of the accounts) as
drawn up on the specified date which has been audited by an
accountant.
Quoted A share or security quoted on any recognised stock exchange
share or with regularity from time to time, where the quotations of such
security

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.55
POLITICAL PARTIES AND ELECTORAL TRUSTS
shares or securities are based on current transaction made in
the ordinary course of business;
Specified The date referred to in Explanation to section 115TD of the Act.
date
Meaning of specified date [Explanation below section
115TD]:
Case Specified Date
(i) Conversion of the trust or The date of
institution registered u/s conversion
12AA into a form not eligible
for registration u/s 12AA
(ii) merger with an entity not The date of merger
having similar objects or not
registered u/s 12AA
(iii) non-distribution of assets on The date of dissolution
dissolution to any charitable
institution registered u/s 12AA
or approved u/s 10(23C)
within a period twelve months
from dissolution
Stamp duty The value adopted or assessed or assessable by any authority
value of the Central Government or a State Government for the
purpose of payment of stamp duty in respect of an immovable
property.
Unquoted Share or security which is not a quoted share or security.
share and
security

13.5 SPECIAL PROVISIONS RELATING TO INCOME OF

POLITICAL PARTIES [SECTION 13A]
Section 13A of the Income-tax Act, 1961 grants exemption from tax to political parties in
respect of their income specified below:

Exempt Income

Income from house Income from other Voluntary

property Capital Gains contributions received
sources

© The Institute of Chartered Accountants of India

 13.56 DIRECT TAX LAWS

The aforesaid categories of income would qualify for exemption provided additional conditions for
availing the benefit of the said section which are as under are met :

Maintains such books of account and other documents to enable the A.O. to properly
deduce its income therefrom
Conditions to be satisfied by political party

Maintains a record of each such voluntary contribution (other than electoral bonds) in
excess of ` 20,000 and the name and address of the contributor

Audit of accounts of the political party by a chartered accountant

No donation exceeding ` 2,000 to be received otherwise than by an A/c payee

cheque/bank draft or use of ECS through a bank account or through such other
prescribed electronic mode or electoral bond

Submission of report u/s 29C(3) of the Representation of the People Act, 1951 for the
financial year

Furnishing of return of income for the P.Y. in accordance with section 139(4B)

Meaning of “Political Party” and “Electoral bond”:

Political Party A political party registered under section 29A of the
Representation of the People Act, 1951

Electoral Bond A bond issued by a scheduled bank (as authorised by

the Central Government) under a scheme notified by
the Central Government.

ILLUSTRATION 13
Explain in the context of provisions of the Act, whether the income derived during the year ended on
31.03.2021 in following case shall be subject to tax in the A.Y. 2021-22:
A political party, duly registered under section 29A of the Representation of the People Act, 1951,
received rent of ` 1,25,000 per month of one of its building let out to a bank from 01.06.2020.

SOLUTION
Rent received by the political party from the bank is an income chargeable under the head "Income
from house property". However, according to the provisions of section 13A, income from, inter alia,
house property shall not be included in total income of a political party registered under section 29A

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.57
POLITICAL PARTIES AND ELECTORAL TRUSTS
of the Representation of the People Act, 1951, provided the political party fulfils the conditions as
specified therein including furnishing a return of income for the previous year in accordance with the
provisions of section 139(4B) on or before the due date under section 139. Therefore, if the stipulated
conditions are fulfilled by the political party, rent of ` 1,25,000 per month received by the registered
political party from letting out of its building to a bank would not be included in its total income.

13.6 SPECIAL PROVISIONS RELATING VOLUNTARY

CONTRIBUTIONS RECEIVED BY ELECTORAL
TRUSTS [SECTION 13B]
(1) Voluntary contribution treated as income: Any voluntary contribution received by an
electoral trust (as may be approved by the CBDT in accordance with the scheme to be made
by the Central Government) shall be treated as its income under section 2(24).
(2) Conditions for availing exemption under section 13B: Any voluntary contributions
received by an electoral trust would be exempt, if such electoral trust:
(I) distributes to a registered political party during the previous year, 95% of the aggregate
donations received by it during the year along with the surplus if any, brought forward
from any earlier previous year and
(II) function in accordance with the rules made by the Central Government.
(3) Functions of an electoral trust: Accordingly, the Central Government has notified Rule
17CA which provides that the following shall be the functions of an electoral trust referred to
in section 13B –
(i) The electoral trust may receive voluntary contributions from
(a) an individual who is a citizen of India;
(b) a company which is registered in India; and
(c) a firm or Hindu undivided family or an Association of persons or a body of
individuals, resident in India.
(ii) A receipt indicating the following shall be issued by the trust immediately on receipt of
any contribution indicating the following:
(a) name and address of the contributor;
(b) Permanent account number of the contributor or passport number in the case
of a citizen who is not a resident;
(c) amount and mode of contribution including name and branch of the Bank and
date of receipt of such contribution;
(d) name of the electoral trust;

© The Institute of Chartered Accountants of India

 13.58 DIRECT TAX LAWS

(e) Permanent account number of the electoral trust;

(f) date and number of approval by the prescribed authority; and
(g) Name and designation of the person issuing the receipt.
(iii) The electoral trust shall not accept contributions-
(a) from an individual who is not a citizen of India or from any foreign entity whether
incorporated or not;
(b) from any other electoral trust which has been registered a company under
section 25 of the Companies Act, 1956 3and approved as an electoral trust
under the Electoral Trusts Scheme, 2013;
(c) from a Government company as defined in section 2(45) of the Companies Act,
2013; and
(d) from a foreign source as defined in section 2(j) of the Foreign Contribution
(Regulation) Act, 2010.
(iv) The electoral trust shall accept contributions only by way of an account payee cheque
drawn on a bank or account payee bank draft or by electronic transfer to its bank
account and shall not accept any contribution in cash.
(v) The electoral trust shall not accept any contribution without the PAN of the contributor, who
is a resident and the passport number in the case of a citizen of India, who is not a resident.
(vi) A political party registered under section 29A of the Representation of the People Act,
1951 shall be an eligible political party and an electoral trust shall distribute funds only
to the eligible political parties.
(vii) (a) The electoral trust may, for the purposes of managing its affairs, spend upto
5% of the total contributions received in a year subject to an aggregate limit of
` 5 lakh in the first year of incorporation and ` 3 lakh in subsequent years;
(b) the total contributions received in any financial year alongwith the surplus from
any earlier financial year, if any, as reduced by the amount spent on managing
its affairs, shall be the distributable contributions for the financial year;
(c) an electoral trust shall be required to distribute the distributable contributions
received in a financial year, referred to in point (b) above, to the eligible political
parties before 31st March of the said financial year, subject to the condition that at
least 95% of the total contributions received during the financial year along with the
surplus brought forward from earlier financial year, if any, are distributed.

3
Section 8 of the Companies Act, 2013

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.59
POLITICAL PARTIES AND ELECTORAL TRUSTS
(viii) The trust shall obtain a receipt from the eligible political party indicating the name of
the political party, its permanent account number, registration number, amount of fund
received from the trust, date of the receipt and name and designation of person signing
such receipt.
(ix) The electoral trust shall not utilize any contributions for the direct or indirect benefit of
the members or contributors, or for any of the following persons, namely:
(a) the members (including members of its Executive Committee, Governing
Committee or Board of Directors) of the electoral trust;
(b) any relative of such Members;
(c) where such member or contributor is a Hindu undivided family, a member of
that Hindu undivided family;
(d) any person who has made a contribution to the trust;
(e) any person referred in section 13(3); and
(f) any concern in which any of the persons referred to in clauses (a),(b),(c),(d)
and (e) has a substantial interest.
(x) (a) An electoral trust shall keep and maintain such books of account and other
documents in respect of its receipts, distributions and expenditure as may enable
the computation of its total income in accordance with the provisions of the Act;
(b) The electoral trust shall also maintain a list of persons from whom contributions
have been received and to whom the same have been distributed, containing
the name, address and permanent account number (PAN) of each such person
along with the details of the amount and mode of its payment including the
name and branch of the bank.
(xi) Every electoral trust shall get its accounts audited by an accountant as defined in the
Explanation below section 288(2) and furnish the audit report in Form No.10BC along
with particulars forming part of its Annexure, to the Commissioner of Income-tax or the
Director of Income-tax, as the case may be, having jurisdiction over the electoral trust,
on or before the due date specified for furnishing the return of income by a company
under section 139.
(xii) An electoral trust shall maintain a regular record of proceedings of all meetings and
decisions taken therein.
(xiii) Every electoral trust shall furnish a certified copy of list of contributors and a list of
political parties, to whom sums were distributed in the manner prescribed in (vii)
above, to the Commissioner of Income-tax or the Director of Income-tax, as the case
may be, every year along with the audit report;

© The Institute of Chartered Accountants of India

 13.60 DIRECT TAX LAWS

(xiv) Any change in the shareholders, subsequent to the approval granted under the
Electoral Trusts Scheme, 2013 shall be intimated to the Board within thirty days of
such change.
Section 2(22AAA) defines ‘Electoral Trust’ to mean a trust so approved by the CBDT,
in accordance with the scheme made in this regard by the Central Government.
In exercise of the powers conferred by section 2(22AAA), the Central Government, has
through Notification No.9/2013 dated 31.1.2013, notified the Electoral Trusts Scheme, 2013
to lay down the procedure for grant of approval to an electoral trust which will receive
voluntary contributions and distribute the same to political parties.
Eligibility
A company registered for the purposes of section 25 of the Companies Act, 1956 satisfying
all of the following conditions shall be eligible to make an application for approval as an
electoral trust, namely –
1. The company should be registered on or after 1.4.2012 for the purposes of section 25
of the Companies Act, 1956;
2. The name of the company registered for the purposes of section 25 of the Companies
Act, 1956 has to include the phrase “electoral trust”;
3. The sole object of the electoral trust should be to distribute the contributions received
by it to the political party, registered under section 29A of the Representation of the
People Act, 1951;
4. The electoral trust should have a permanent account number.
Criteria for Approval
An electoral trust shall be considered for approval if it fulfills all of the following conditions,
namely –
1. The company registered for the purposes of section 25 of the Companies Act, 1956,
which satisfies the above conditions;
2. The object of the electoral trust shall not be to earn any profit or pass any direct or
indirect benefit to its members or contributors, or to any person referred to in section
13(3) or any person referred to in Rule 17CA(10) of the Rules;
3. It has made adequate arrangement for recording the receipts from the contributors in
accordance with Rule 17CA;
4. The stipulations contained in Rule 17CA for functioning of the electoral trust are
specifically included in the articles of association of the company registered for the
purposes of section 25 of the Companies Act, 1956.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.61
POLITICAL PARTIES AND ELECTORAL TRUSTS
Renewal of approval
1. The approval shall be valid for the assessment year relevant to the financial year in
which such application has been made and for a further period, not exceeding three
assessment years, as may be specified in the approval.
2. The electoral trust may apply for renewal of approval at any time during the financial
year immediately preceding the last assessment year, for which the approval has been
originally granted, and such renewal of approval may be granted after examining the
application in the same manner as laid out for approval in this scheme.
Withdrawal of approval
1. The CBDT may withdraw the approval granted under this Scheme if it is satisfied that
the electoral trust has ceased its activities or its activities are not genuine or are not
carried out in accordance with all or any of the conditions laid down under this Scheme
or the provisions of Rule 17CA of the Rules, or any other condition imposed in the
approval granted.
2. In order to ascertain whether an electoral trust, after its approval, is functioning in
accordance with the provisions of Rule 17CA of the Rules, the CBDT may call for
information or documents as it may deem fit from the electoral trust or may get an enquiry
conducted in this regard by an income-tax authority or any other agency.
3. If the Commissioner of Income-tax or the Director of Income-tax is satisfied that an
approved electoral trust is not fulfilling any of the conditions specified under this Scheme
or the conditions subject to which approval was granted to it or does not function in
accordance with Rule 17CA, he may, after making appropriate enquiries, furnish a report
to the CBDT in this regard and the Board may take such action on the report as it may
deem fit.
4. An order for withdrawal of the approval shall be passed after giving the electoral trust an
opportunity of being heard, and shall record the reasons in writing for the withdrawal of
approval.
5. A copy of the order withdrawing the approval shall be sent to the applicant, the
Assessing Officer and the Commissioner of Income-tax or the Director of Income-tax,
as the case may be.

ILLUSTRATION 14
The books of account maintained by a National Political Party registered with Election Commission
for the year ended on 31.3.2021 discloses the following receipts:
`
(a) Rent of property let out to a departmental store at Chennai 6,00,000
(b) Interest on deposits other than banks 5,00,000
(c) Contribution) of ` 21,000 each from 100 persons (who have secreted 21,00,000
their names

© The Institute of Chartered Accountants of India

 13.62 DIRECT TAX LAWS

(d) Contribution from 10 persons by way of electoral bonds of ` 25,000 2,50,000

each
(e) Cash contribution @ ` 2,100 each from 1,000 members (recorded in 21,00,000
books of account)
(f) Net profit of cafeteria run in the premises at Delhi 3,00,000

Compute the total income of the political party for the assessment year 2021-22, with reasons for
inclusion or otherwise.
SOLUTION
The total income of a political party registered with the Election Commission is to be computed as
per section 13A under which the income derived from house property, income from other sources
and income by way of voluntary contributions received from any person, on fulfilling of the conditions
as mentioned thereunder, are exempt from tax. However, in this case, since cash contribution in
excess of ` 2,000 is received from 1000 persons, the political party has violated the condition of
receipt of donation through account payee cheque/draft or prescribed electronic modes. Further, the
political party has also violated the condition of maintenance of records in case of donations
exceeding ` 20,000 received otherwise than by way of electoral bonds. Hence, its total income has
to be computed as under without providing for exemption available under section 13A:
Computation of total income of National Political Party
Particulars `
(a) The rent of the property of ` 6 lacs located at Chennai [assuming the 4,20,000
same to be the Gross Annual Value] less 30% of Rs.6 lacs, being
deduction u/s 24
(b) Interest received on deposits 5,00,000
(c) Contribution from 100 persons (who have secreted their names) of ` 21,00,000
21,000 each
(d) Contribution from 10 persons by way of electoral bonds of ` 25,000 2,50,000
each
(e) Cash contribution @ ` 2,100 each from 1,000 members (recorded in 21,00,000
books of account)
(f) Net profit of cafeteria at Delhi 3,00,000
Total Income 56,70,000

Note – Alternatively, the political party can contend that only ` 45 lakh is taxable on account of non-
maintenance of records and receipt of cash donations, in which the case the total income would be
computed as under:

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.63
POLITICAL PARTIES AND ELECTORAL TRUSTS
Computation of total income of National Political Party
Particulars `
(a) Rent of the property of ` 6 lacs located at Chennai Exempt
(b) Interest received on deposits Exempt
(c) Contribution from 100 persons (who have secreted their names) of ` 21,000 21,00,000
each
(d) Contribution from 10 persons by way of electoral bonds of ` 25,000 each Exempt
(e) Cash contribution @ ` 2,100 each from 1,000 members (recorded in books 21,00,000
of account)
(f) Net profit of cafeteria at Delhi 3,00,000
Total Income 45,00,000
Note: It is presumed that the conditions regarding maintenance of books of account, audit,
submission of report under section 29C of the Representation of the People Act, 1951 and filing of
return of income under section 139(4B) are fulfilled by the political party, and hence it is eligible for
exemption of income under section 13A.

© The Institute of Chartered Accountants of India

 13.64 DIRECT TAX LAWS

SIGNIFICANT SELECT CASES

1. Where an institution engaged in imparting education incidentally makes profit, would
it lead to an inference that it ceases to exist solely for educational purposes?
Queen’s Educational Society v. CIT (2015) 372 ITR 699 (SC)
Facts of the case: The assessee, an educational institution, showed a net surplus of
` 6.59 lakhs and ` 7.83 lakhs, respectively, for the assessment years 2000-01 and
2001-02. Since it was established with the sole object of imparting education, it claimed
exemption under section 10(23C)(iiiad). The Assessing Officer rejected the claim of
exemption on the ground that the assessee has made profits and did not exist solely for
educational purposes. The Commissioner (Appeals) allowed the assessee’s claim and the
Tribunal dismissed the Revenue’s appeal holding that the assessee was engaged
undoubtedly in imparting education and the profit was only incidental to the main object of
spreading education. However, the High Court restored the order of the Assessing Officer on
the reasoning that the institution made profit, year on year, and hence, was not eligible for
tax exemption.
Supreme Court’s Observations: The Supreme Court observed that the provisions of section
10(23C)(iiiad) provide for three requirements, namely,
(i) the education institution must exist solely for educational purposes;
(ii) it should not be for purposes of profit; and
(iii) the aggregate annual receipts of such institution should not exceed the amount as
may be prescribed. Such monetary limit is ` 1 crore as per Rule 2BC.
The Supreme Court concurred with the Tribunal’s reasoning that profit is only incidental to
the main object of spreading education. If there is no surplus arising out of the difference
between receipts and outgoings, the trust will not be able to achieve the objectives. Any
education institution cannot be run in rented premises for all the times and without necessary
equipment and without paying to the staff engaged in imparting education. The assessee is
not getting any financial aid/assistance from the Government or other philanthropic agency
and, therefore, to achieve the objective, it has to raise its own funds. However, such surplus
would not come within the ambit of denying exemption under section 10(23C)(iiiad).
Further, the Apex Court made reference to the tests culled out in its own decisions in the
case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1, Aditanar
Educational Institution v. Addl. CIT [1997] 224 ITR 310 and American Hotel and Lodging
Association Educational Institute v. CBDT [2008] 301 ITR 86,which would apply for
determining whether an educational institution exists solely for education purposes and not
for purposes of profit.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.65
POLITICAL PARTIES AND ELECTORAL TRUSTS
The Apex Court, after analyzing the legal provisions and precedents, summed up the law
common to section 10(23C)(iiiad)/(vi):
(a) Where an educational institution carries on the activity of education primarily for
educating persons, the fact that it makes a surplus does not lead to the conclusion
that it ceases to exist solely for educational purposes and becomes an institution for
the purpose of making profit;
(b) The predominant object test must be applied – the purpose of education should not be
submerged by a profit making motive;
(c) A distinction must be drawn between the making of surplus and an institution being
carried on “for profit”. Merely because imparting of education results in making a profit,
it cannot be inferred that it becomes an activity for profit;
(d) If after meeting expenditure, surplus arises incidentally from the activity carried on by
the educational institution, it will not cease to be one existing solely for educational
purposes; and
(e) The ultimate test is whether on an overall view of the matter in the concerned
assessment year, the object is to make profit as opposed to educating persons.

Apex Court’s Decision: Based on the above principles and tests, the Apex Court upheld the
Tribunal’s view that the assessee was engaged in imparting education and the profit was only
incidental to the main object of spreading education. Hence, it satisfies the conditions laid
down in section 10(23C)(iiiad) for claim of exemption thereunder.

2. Would imparting education/training in specialized field like communication, advertising

etc. and awarding diplomas/certificates constitute an “educational purpose” for grant of
exemption under section 10(23C)(vi)?
CIT v. St. Peter’s Educational Society (2016) 385 ITR 66 (SC)
Facts of the case: The assessee-society registered under the Societies Registration Act,
1860 as well as under the provisions of the Bombay Public Trust Act, 1950 was engaged in
imparting higher and specialized education. It imparted education in the field of
communication including advertising and its related subjects. It was granted registration
under section 12A of the Act originally.
The assessee later submitted an application for exemption under section 10(23C)(vi) and for which
after calling for details, the CIT refused to grant exemption under section 10(23C)(vi). The reasons
for refusal were (i) the society was not having education as the sole purpose; (ii) it is engaged in
conducting coaching / training courses for and on behalf of industry, trade and commercial
organizations; (iii) it is engaged in various social activities of general public utility; and (iv) it was not
conducting educational courses as charitable activity but for the purpose of making profit.

© The Institute of Chartered Accountants of India

 13.66 DIRECT TAX LAWS

High Court’s view: The Court noted that the object clause of the society which indicated that
the institution was awarding diplomas, certificates etc after providing training in
communication, advertising and related subjects. The memorandum of the assessee showed
that the fee collected shall not exceed the cost of training, hostel expenses etc and it is not
precluded from subsidizing such costs. It observed that providing training to the individuals
as well as those persons who have been sponsored by the companies to meet the needs of
Indian industry and commerce, would not make the assessee-society as carrying on activity
of service in relation to any trade, commerce and industry.
It held that teaching does not mean teaching the students only in the manner and method,
the regular schools or colleges adopt to teach. In the progressive world, it is expected from
certain institutions that they educate, teach and train persons so that those persons can
compete with similar experts worldwide. It thus rejected the argument of the Revenue and
held that providing latest information and training to persons to become super specialists in
a particular field would still be treated as education.
Supreme Court’s Observations: The Apex Court took note of the observations of the High
Court and made reference to its own precedent in the case of Queen’s Educational Society
v. CIT (2015) 372 ITR 699 (SC) where it had summarized the legal position as under:
“The law common to sections 10(23C)(iiiad) and (vi) may be summed up as follows:
(i) Where an educational institution carries on the activity of education primarily for
educating persons, the fact that it makes a surplus does not lead to the conclusion
that it ceases to exist solely for educational purposes and becomes an institution for
the purpose of making profit;
(ii) The predominant object test must be applied – the purpose of education should not be
submerged by a profit making motive;
(iii) A distinction must be drawn between making of a surplus and the institution being
carried on ‘for profit’. No inference arises that merely because imparting education
results in making a profit, it becomes an activity for profit;
(iv) If after meeting the expenditure, a surplus arises incidentally from the activity carried
on by the educational institution, it will not cease to be one existing solely for
educational purposes;
(v) The ultimate test is whether on an overall view of the matter in the concerned
assessment year, the object is to make profit as opposed to educating persons”.
The Apex Court, in Queen’s Educational Society’s case, noted the divergence of opinion
among various High Courts on this issue. In that case, it had approved the decision of Delhi,
Bombay and Punjab & Haryana High Courts and set aside the judgement of Uttarakhand High
Court.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.67
POLITICAL PARTIES AND ELECTORAL TRUSTS
The Apex Court held that the correct tests for determining whether an institution exists solely
for educational purposes and not for the purposes of profit were laid down in the Supreme
Court decisions in CIT (Addl. ) v. Surat Art Silk Mfg. Association (1980) 121 ITR 1; Aditanar
Educational Institution v. Addl. CIT (1997) 224 ITR 310; and American Hotel & Lodging Assn.
Educational Institute v. CBDT (2008) 301 ITR 86.
It further observed that the Thirteenth proviso to section 10(23C) is of great importance to the
assessing authorities who must continuously monitor from assessment year to assessment
year to know whether such institutions continues to apply their income and invest or deposit
their funds in accordance with the law laid down. The activities of such institutions must be
looked at carefully. If they are not genuine or are not being carried out in accordance with all
or any of the conditions subject to which approval was given earlier, such approval and
exemption must forthwith be withdrawn.

Supreme Court’s Decision: Applying the rationale of the Supreme Court ruling in Queen’s
Educational Society’s case, the Apex Court, in this case, held that the institution is
established for the sole purpose of imparting education in a specialized field. The Supreme
Court, thus, allowed the petition and set aside the order of the Chief Commissioner of Income-
tax refusing exemption under section 10(23C)(vi).

Note: Institutions engaged in providing specialized training in certain fields and awarding
diplomas and certificates are also eligible for tax exemption in terms of section 10(23C)(vi).
It is not mandatory for such institutions to impart education in formalized manner or conduct
only recognized educational courses. Further, when corporates depute employees for gaining
specialized knowledge, such imparting of knowledge by the institution would not mean that
the institution is engaged in the activity of general public. Making of profit incidentally will not
make the institution as existing for making profit. This is the jist of the above Supreme Court
ruling.

3. In a case where the charitable trust is deemed to be registered under section 12A due
to non-disposal of application within the period of 6 months, as stipulated under
section 12AA(2), from when would such deemed registration take effect?
CIT v. Society for the Promotion of Education (2016) 382 ITR 6 (SC)
Facts of the case: In the present case, the Allahabad High Court held that once an
application for registration of the trust is made under section 12A and in case the same is not
responded to within six months, the trust would be deemed to be registered under section
12AA. The High Court opined that non-consideration of the application for registration within
the time fixed by the legal provision would lead to deemed grant of registration and there is
no reason to make the assessee suffer merely because the Income Tax Department is not
able to keep its officers under check and control so as to take timely decisions on the matter.

© The Institute of Chartered Accountants of India

 13.68 DIRECT TAX LAWS

The Revenue appealed against this decision and raised an apprehension that since the date
of application was February 24, 2003, the deemed registration would operate only after six
months from the date of application.

Supreme Court’s Decision: The Apex Court clarified that deemed registration would
commence only after 6 months from the date of application. Therefore, the registration of the
application under section 12AA of the Income-tax Act, in the case of the assessee trust shall
take effect from August 24, 2003.

Note:
This decision is based on the provisions of section 12A prior to insertion of clause (aa) in sub-
section (1) of section 12A and sub-section (2) in section 12A by the Finance Act, 2007 with
effect from 1st June, 2007. The position prior to the amendment by the Finance Act, 2007 was
that an application for registration has to be made before the expiry of one year from the date
of creation of the trust. However, where an application for registration was made thereafter,
the exemption provisions under sections 11 and 12 would apply from the date of creation of
the trust, if the Principal Commissioner or Commissioner, for reasons to be recorded in
writing, is satisfied that the person in receipt of the income was prevented from making the
application before the expiry of one year. If he is not so satisfied, the exemption would apply
from 1st day of the financial year in which the application was made.
The Finance Act, 2007 has inserted sub-section (2) in section 12A to provide that where an
application has been made on or after 01.06.2007, the provisions of section 11 and 12 shall
apply in relation to the income of such trust from the assessment year immediately following
the financial year in which such application is made.
In Society for the Promotion of Education’s case, the Supreme Court has decided that the deemed
registration would be effective only after six months from the date of application, in the sense, that
it would not have retrospective application. The Supreme Court ruling assumes significance in the
current context, since it affirms that non-consideration of application within the time period of six
months from the end of the month in which application is received would tantamount to deemed
registration. However, in the light of the current provisions of section 12A(2), the exemption
provisions of sections 11 and 12 would apply in relation to the income of the trust from the
assessment year immediately following the financial year in which such application is made, even
though the effective date of deemed registration would be after expiry of the six month period as
per the above Supreme Court ruling.

4. Where a charitable trust applied for issuance of registration under section 12A within
a short time span (two months, in this case) after its formation, can registration be
denied by the concerned authority on the ground that no charitable activity has been
commenced by the trust?
Ananda Social and Educational Trust v. CIT /DIT (Exemptions) v. Foundation of
Ophthalmic and Optometry Research Education Centre (2020) 426 ITR 340 (SC)

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.69
POLITICAL PARTIES AND ELECTORAL TRUSTS
Facts of the case: In the present case, the assessee, being a trust was formed as a society
on 30.05.2008 and it applied for registration on 10.07.2008 i.e. within a period of about two
months. No activities had been undertaken by the trust before the application was made. The
Commissioner rejected the application on the sole ground that since no activities have been
undertaken by the trust, it was not possible to register it, presumably because it was not
possible to be satisfied about whether the activities of the trust are genuine. The Tribunal
reversed the order of the Commissioner.
Issue: The issue under consideration is whether registration under section 12AA can be
denied on the ground of non-commencement of charitable activity, where an application for
registration has been made within a short-time span after the formation of the trust.
High Court’s View: The Department appealed to the High Court, which upheld the order of
the Tribunal and concluded that in case of a newly registered trust even though there were
no activities, it was possible to consider whether the trust can be registered under section
12AA.

Supreme Court’s Observations and Decision: The Supreme Court noted that the purpose of
section 12AA is to enable registration only of such trust or institution whose objects and
activities are genuine. The Commissioner is bound to satisfy himself that the objects of the trust
are genuine and that its activities in furtherance of the objects are equally genuine.
Since section 12AA pertains to the registration of the trust and not to assessments of what a
trust has actually done, the term ‘activities’ in the provision includes ‘proposed activities’ as
well. It mentions that a Commissioner is bound to consider whether the objects of the trust are
genuinely charitable in nature and whether the activities which the trust proposes to carry on
are genuine, in the sense that they are in line with the objects of the trust.
In contrast, the position would be different where the Commissioner proposes to cancel the
registration of a trust under section 12AA(3). For this purpose, the Commissioner would be
bound to record the finding that an activity or activities actually carried on by the trust are not
genuine being not in accordance with the objects of the trust. Similarly, the situation would be
different where the trust has before applying for registration found to have undertaken activities
contrary to the objects of the trust.
Accordingly, the Apex Court affirmed the decision of the High Court that in this case, since the
trust is newly registered, it is possible to consider whether the trust can be registered under
section 12AA, even though there were no activities actually carried on till that time.

© The Institute of Chartered Accountants of India

 13.70 DIRECT TAX LAWS

TEST YOUR KNOWLEDGE

Question 1
A trust, unless created for "charitable purpose", does not qualify to claim exemption under Chapter
III of the Act. In this context, explain the meaning of "charitable purpose" and examine whether the
following objects constitute part of it:
(i) Rural reconstruction and upliftment of the masses through Cottage Industry.
(ii) Welfare of industrial workers with a stipulation that the workers of settlor of trust have got
preference over others.
Answer
Section 2(15) defines “charitable purpose” to include relief of the poor, education, medical relief,
yoga, preservation of environment (including watersheds, forests and wildlife) and preservation of
monuments or places or objects of artistic or historic interest and the advancement of any other
object of general public utility. However, “advancement of any other object of general public utility”
would not be a charitable purpose, if it involves carrying on of any activity in the nature of trade,
commerce or business or, any activity of rendering of any service in relation to any trade, commerce
or business, for a fee or cess or any other consideration, irrespective of the nature of use or
application of the income from such activity or the retention of such income, by the concerned entity.
“Advancement of any other object of general public utility” would continue to be a “charitable
purpose”, if the total receipt from any activity in the nature of trade, commerce or business, or any
activity of rendering any service in relation to any trade, commerce or business does not exceed
20% of the total receipts of the trust in the previous year, and such activity is undertaken in the
course of actual carrying out of such advancement of any other object of general public utility.
(i) The Supreme Court has, in Thiagarajar Charities vs. Addl. CIT (1997) 225 ITR 1010,
observed that “cottage industry” is associated with the idea of a small, simple enterprise or
industry in which employees work in their own houses or in a small place, gathered together
for the purpose, using their own equipments and is usually found in rural areas or so carried
on, by the poorer section of the society. In substance, the activity of rural reconstruction and
upliftment of masses through cottage industry is to afford relief to the poor and consequently,
it is for charitable purpose.
(ii) The welfare of industrial workers with a stipulation that the workers of settlor of trust have
preference over others would also constitute “charitable purpose” within the meaning of
section 2(15). The Patna High Court has, in CIT v. Tata Steel Charitable Trust (1993) 203
ITR 764, observed that exemption under section 11(1) can be availed only if the following
conditions are satisfied –
(1) the trust is created for a charitable purpose; and

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.71
POLITICAL PARTIES AND ELECTORAL TRUSTS
(2) no part of the income of such trust enures or has been used or applied directly or
indirectly for the benefit of any person referred to in section 13(3).
The list of persons contained in section 13(3) does not include employees of the settlor of the
trust. Section 13(3)(d), which includes any relative of the author, can have no application
because “relative” means a person connected by birth or marriage with another person. A
person having relationship pursuant to a contract like that of an employer and an employee
cannot be said to be a relative. The High Court concluded that it was immaterial that any
employee of the settler of the trust had acquired any benefit out of the income of the trust as
an ordinary member of the community. Therefore, the application of part of the income of the
trust for the benefit of the employees of the settler cannot disentitle the trust from claiming
exemption under section 11.
Question 2
How do you deal with the following situation? Give reasons for your answer.
Ramji Charitable Trust has filed return of income for the Assessment Year 2021-22 within the
stipulated time under section 139(1) and applied only 50% of its income for specified purposes. It
intends to accumulate the balance 35% of income to be spent in future years. While completing the
assessment, the Assessing Officer disallowed the accumulated income of 35% and taxed the same
on the ground that the trust has not made any application under section 11(2) along with return of
income. Discuss the validity of the action of the Assessing Officer in this case.
Answer
Section 11(2) provides that a charitable trust has to apply 85% of its income to charitable purposes
and where 85% of its income is not applied for such purposes, the trust may accumulate or set apart
either the whole or part of its income for future application for such purposes in India. The
requirement of the Act is that the trust has to make an application/intimation in the prescribed form,
for accumulation of income, specifying the purpose and the period (not exceeding 5 years). The
application should be filed or furnished before the assessing authority on or before the due date
specified under section 139(1). Further, the money so set apart or accumulated should be
invested/deposited in any one or more of these modes or forms specified under section 11(5).
Thus, this requirement of filing application is mandatory and without those particulars, the assessing
authority cannot entertain the claim of the assessee under section 11. In case the statement in Form
10 is not submitted on or before the due date of filing return of income under section 139(1), then,
the benefit of accumulation would not be available and such income would be taxable at the
applicable rate. Further, the benefit of accumulation would also not be available if return of income
is not furnished on or before the due date of filing of return of income under section 139(1).
Therefore, the action of the Assessing Officer in this case is valid.

© The Institute of Chartered Accountants of India

 13.72 DIRECT TAX LAWS

Question 3
An institution operating for promotion of education claiming exemption under section 11 since 1994
furnishes the following data for the assessment year 2021-22:

S. Particulars ` in crores
No.
(i) Fees collected from students 14
(ii) Construction of a new computer science laboratory 0.50
(iii) Land acquired to be used as a cricket field for the students 2
(iv) Amount earmarked and set apart for construction of an arts block 4
within the next 4 years.

Compute the total income of the institution for the A.Y.2021-22.

Answer
Computation of total income of the institution for the A.Y. 2021-22
Particulars ` (in crores)
Fees received 14.00
Less : 15% (exempt even if not spent for the objects of the institution) 2.10
11.90
Less : Accumulated for specified purpose (See Note 2) 4.00
Balance to be spent 7.90
Actual amount spent on construction of computer science lab (See Note 1) 0.50
Actual amount spent on purchase of land for cricket field (See Note 1) 2.00
Total Income 5.40

Notes:
(1) The institution must utilise 85% of its income within the previous year for the objects of the
institution. The institution can apply its income either for revenue expenditure or for capital
expenditure provided the expenditure is incurred for promoting the objects of the institution.
Land acquired and meant for use as cricket field for students is a capital expenditure incurred
for promoting the objects of the institution and hence, eligible for deduction. Likewise, the
amount spent on construction of computer science laboratory is also eligible for deduction.
(2) Section 11(2) provides that a trust/institution can accumulate or set apart its income for a
specified purpose by furnishing statement in prescribed format to the concerned Assessing
Officer. However, the period for which the funds can be accumulated cannot exceed 5 years.

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.73
POLITICAL PARTIES AND ELECTORAL TRUSTS
The amount so accumulated should be invested in the specified forms and modes. In this
case, the institution has to furnish statement in Form 10 on or before the due date of filing
return of income to the Assessing Officer, stating the purpose for which the income is being
accumulated or set apart and the period for which the income is being accumulated or set
apart, which shall, in no case, exceed five years. Further, the institution has to invest ` 4
crore in the specified forms and modes.

Question 4
A public charitable trust registered under section 12AA, for the previous year ending 31.3.2021,
derived gross income of ` 21 lakhs, which consists of the following:
(` in Lacs)
(a) Income from properties held by trust (net) 10
(b) Income (net) from business (incidental to main objects) 4
(c) Voluntary contributions from public 7

The trust applied a sum of ` 11.60 lacs towards charitable purposes during the year which includes
repayment of loan taken for construction of orphanage` 3.60 lacs.
Determine the taxable income of the trust for the assessment year 2021-22.
Answer
Computation of taxable income of public charitable trust
Particulars `
(i) Income from property held under trust (net) 10,00,000
(ii) Income (net) from business (incidental to main objects) 4,00,000
(iii) Voluntary contributions from public 7,00,000
Voluntary contribution made with a specific direction towards corpus
are alone to be excluded under section 11(1)(d). In this case, there is
no such direction and hence, included.
21,00,000
Less: 15% of the income eligible for retention / accumulation without 3,15,000
any conditions 17,85,000
Less: Amount applied for the objects of the trust
(i) Amount spent for charitable purposes
(` 11,60,000 - ` 3,60,000) 8,00,000
(ii) Repayment of loan for construction of orphan home 3,60,000
Taxable Income 6,25,000

© The Institute of Chartered Accountants of India

 13.74 DIRECT TAX LAWS

Question 5
A charitable trust registered under section 12AA of the Income-tax Act, 1961 has, out of its income
of ` 3,90,000 for the year ending 31.3.2021 and sale proceeds of a capital asset, held by it for less
than 24 months, amounting to ` 9,60,000, purchased a building during the year ending 31.3.2021
for ` 13,50,000. The capital asset was sold during the year ending 31.3.2021. The building is held
only for charitable purposes. The trust claims that the purchase of the building amounts to application
of its income for charitable purposes and that the capital gain arising on the sale of the capital asset
is deemed to have been applied to charitable purposes. Is the claim made by the charitable trust
valid in law?
Answer
Section 11(1)(a) stipulates that in order to avail exemption of income derived from property held
under trust wholly for charitable or religious purposes, the trust is required to apply for charitable or
religious purposes, 85% of its income from such property. In this case, the trust has earned income
of ` 3,90,000 for the year ended 31.3.2021. It has also earned short term capital gain from sale of
capital asset for ` 9,60,000. The trust had utilized the entire amount of ` 13,50,000 for the purchase
of a building meant for charitable purposes.
The Supreme Court, in [Link]. M. CT. M. Tiruppani Trust v. CIT (1998) 230 ITR 636, ruled that the
assessee-trust, which applied its income for charitable purposes by purchasing a building for use as
a hospital, was entitled to exemption under section 11(1) in respect of such income.
The ratio of the decision squarely applies to the case of the charitable trust in question. Therefore,
the charitable trust is justified in claiming that the purchase of the building amounted to application
of its income for charitable purposes.
Under section 11(1A), where the whole of the sale proceeds of a capital asset held by a charitable
trust is utilised by it for acquiring another capital asset, the capital gain arising therefrom is deemed
to have been applied to charitable purposes and would be exempt. Section 11(1A) does not make
any distinction between a long-term capital asset and a short-term capital asset. The claim of the
charitable trust to the effect that the capital gain is deemed to have been applied to charitable
purposes is tenable in law.
Question 6
Work out, from the following particulars, the amount of capital gain which shall be deemed to have
been applied for charitable or religious purpose arising out of sale of a capital asset utilized for the
purposes of trust to the extent of 60%:
Particulars `
Cost of transferred asset 2,40,000
Sale consideration 3,60,000
Cost of new asset purchased 3,00,000

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.75
POLITICAL PARTIES AND ELECTORAL TRUSTS
Answer
In this case, since the asset which is transferred is utilized for the purposes of the trust only to the
extent of 60%, only the proportionate amount (i.e. 60%) of the capital gain would be regarded as
having been applied for charitable or religious purposes.
As per section 11(1A), where a capital asset held under trust is transferred, and only a part of the
net consideration is utilized for acquiring a new capital asset, only so much of the capital gain as is
equal to the amount, if any, by which the amount so utilized exceeds the cost of the transferred asset
shall be considered to have been applied for the objects of the trust.
In this case, only a part of the net consideration of ` 3,60,000 is utilized for acquiring the new capital
asset costing ` 3,00,000. The amount utilized in acquiring the new asset (i.e.` 3,00,000) exceeds
the cost of the transferred asset (i.e. ` 2,40,000) by ` 60,000.
Therefore, only 60% of (` 3,00,000 – ` 2,40,000) = 60% of ` 60,000 = ` 36,000 is deemed to be
applied for the objects of the trust.
Question 7
An electoral trust approved by the CBDT is not liable to income-tax in respect of voluntary contribution
received and other income - Examine the correctness of the statement.
Answer
Section 13B provides exemption in respect of voluntary contribution received by an electoral trust
approved by the CBDT in accordance with the scheme to be made by the Central Government.
Voluntary contribution received by an electoral trust would be treated as its income under section
2(24), but shall be exempt under section 13B if the trust distributes to a registered political party
during the year, 95% of the aggregate donations received by it during the year along with surplus
brought forward from any earlier years. Another condition for availing the benefit under this section
is that the electoral trust should function in accordance with the rules framed by the Central
Government.
It may be noted that the exemption under section 13B will be available only in respect of voluntary
contribution received by an electoral trust. The exemption cannot be claimed in respect of any other
income of the electoral trust.
Therefore, the given statement is not correct.
Question 8
Helpage is a charitable trust set up on 1.4.2010 with the object of providing relief to the poor. Later
on, in April, 2012, it changed its object to medical relief. It applied for registration on the basis of its
new object, i.e., medical relief, on 1.9.2012 and was granted registration on 1.2.2013.
On 1.4.2020, Helpage got merged with M/s. Medicare (P) Ltd, a pharmaceutical company not entitled
for registration under section 12AA. All the assets and liabilities of the erstwhile trust became the

© The Institute of Chartered Accountants of India

 13.76 DIRECT TAX LAWS

assets and liabilities of M/s. Medicare (P) Ltd. The trust appointed a registered valuer for the
valuation of its assets and liabilities. From the following particulars (including the valuation report),
calculate the tax liability in the hands of the trust arising as a result of such merger:
(i) Land
Location Date of Stamp duty Value which Book Value
purchase value on the land on 1.4.2020
1.4.2020 would fetch,
if sold in the
open market
on 1.4.2020
` ` `
Noida 1.9.2010 55 lakhs 58 lakhs 50 lakhs
Gurgaon 1.9.2013 100 lakhs 120 lakhs 110 lakhs

(ii) Shares
Type of Date of Face Purchase Price at which each Open market
shares purchase value price of share is quoted on value as on
of each BSE as on 1.4.2020 1.4.2020 #
each share Highest Lowest
share price price
` ` ` ` `
5000 1.5.2014 100 110 320 300
Quoted
equity
shares of
A Ltd.
2000 1.9.2015 100 100 - - 180
Preference
shares of B
Ltd.
# on the basis of report of Merchant Banker
(iii) Liabilities
Book value of liabilities on 1.4.2020 = ` 120 lakhs. This includes –
(a) Corpus fund ` 12 Lakhs.
(b) Provision for taxation ` 8 lakhs; and
(c) Reserves and Surplus ` 18 lakhs

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.77
POLITICAL PARTIES AND ELECTORAL TRUSTS
Answer
As per section 115TD, the accreted income of “Helpage”, a charitable trust, registered under section
12AA which is merged with M/s Medicare (P) Ltd., an entity not entitled for registration under section
12AA, would be chargeable to tax at the rate of 34.944% [30% plus surcharge @12% plus
cess@4%].
Computation of accreted income and tax liability in the hands of the Helpage trust arising as
a result of merger with M/s. Medicare (P) Ltd.
Particulars Amount (`)
Aggregate FMV of total assets as on 1.4.2020, being the specified date (date 1,39,10,000
of merger) [See Working Note 1]
Less: Total liability computed in accordance with the prescribed method of
valuation [See Working Note 2] 82,00,000
Accreted Income 57,10,000
Tax Liability @ 34.944% of ` 57,10,000 (rounded off) 19,95,300
Working Notes:
(1) Aggregate fair market value of total assets on the date of merger
- Land at Noida, being immovable property, purchased on 1.9.2010 -
Since the trust was registered only on 1.2.2013 and benefit of section 11
and 12 was available to the trust only from A.Y.2013-14, relevant to
P.Y.2012-13, being the previous year in which the application for
registration is made, the value of land purchased in P.Y.2010-11, in
respect of which benefit under sections 11 and 12 was not availed, has
to be ignored for computing accreted income.
- Land at Gurgaon, being an immovable property, purchased on 1,20,00,000
1.9.2013
[The fair market value of land would be higher of ` 120 lakhs i.e., price
that the land would ordinarily fetch if sold in the open market and ` 100
lakhs, being stamp duty value as on the specified date, i.e., 1.4.2020]
- Quoted equity shares of A Ltd. [5,000 x ` 310 per share] 15,50,000
[` 310 per share, being the average of the lowest (` 300) and highest
price (` 320) of such shares on the specified date]
- Preference shares of B Ltd. [2,000 x ` 180 per share]
[The fair market value which it would fetch if sold in the open market on
the specified date i.e. FMV on 1.4.2020] 3,60,000
1,39,10,000

© The Institute of Chartered Accountants of India

 13.78 DIRECT TAX LAWS

(2) Total liability

- Reserves and Surplus ` 18 lakhs [not includible] -
- Corpus Fund of ` 12 lakhs [not includible] -
- Provision for taxation ` 8 lakhs [not includible] -
- Other Liabilities
[` 120 lakhs - ` 18 lakhs - ` 12 lakhs - ` 8 lakhs] 82,00,000
82,00,000

Question 9
“Serving the poor”, a charitable trust, is registered under section 12AA of the Act. On 1.4.2020, it
got merged with M/s. AP Ltd., which is a company engaged in manufacturing of steel utensils.
All the assets and liabilities of the erstwhile trust became the assets and liabilities of M/s. AP Ltd
who is not entitled for registration under section 12AA of the Act.
The trust appointed a registered valuer for the valuation of its assets and liabilities. From the
following particulars (including the valuation report), calculate the tax liability in the hands of the
trust arising as a result of such merger:
(i) Stamp duty value of land held ` 15 lakhs. However, if this land is sold in the open market, it
would ordinarily fetch ` 17 lakhs. The book value of the land is ` 20 lakhs.
(ii) 75,000 equity shares in Ink Ltd. traded in Delhi Stock Exchange. The lowest price per share
on 1.4.2020 was ` 75 and the highest price on that day was ` 85. The book value was
` 67 lakhs.
(iii) 55,000 preference shares held in N Ltd. The shares will fetch ` 44 lakhs, if they are sold in
the open market on 1.4.2020. Book value was ` 25 Lakhs.
(iv) Corpus fund as on 1.4.2020 ` 15 Lakhs.
(v) Outside liabilities ` 90 lakhs
(vi) Provision for taxation ` 5 lakhs.
(vii) Liabilities in respect of payment of various utility bills ` 6 lakhs.
Answer
As per section 115TD, the accreted income of “Serving the poor”, a charitable trust, registered under
section 12AA which is merged with M/s AP Ltd., an entity not entitled for registration under section
12AA, would be chargeable to tax at maximum marginal rate @ 34.944% [30% plus surcharge
@12% plus cess@4%].

© The Institute of Chartered Accountants of India

 CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS, 13.79
POLITICAL PARTIES AND ELECTORAL TRUSTS
Computation of accreted income and tax liability in the hands of the trust arising as a result of
merger with AP. Ltd. for A.Y. 2021-22
Particulars Amount (`)
Aggregate FMV of total assets as on 1.4.2020, being the specified date 1,21,00,000
(date of merger) [See Working Note 1]
Less: Total liability computed in accordance with the prescribed method of
valuation [See Working Note 2] 96,00,000
Accreted Income 25,00,000
Tax Liability @ 34.944% of ` 25,00,000 8,73,600
Working Notes:
(3) Aggregate fair market value of total assets on the date of
merger
- Land, being an immovable property 17,00,000
[The fair market value of land would be higher of ` 17 lakhs i.e.,
price that the land would ordinarily fetch if sold in the open market
and ` 15 lakhs, being stamp duty value as on the specified date]
- Quoted equity shares in Ink Ltd. [75,000 x ` 80 per share] 60,00,000
[` 80 per share, being the average of the lowest (` 75) and highest
price (` 85) of such shares on the date of merger]
- 55,000 preference shares of N Ltd.
[The fair market value which it would fetch if sold in the open market on
the date of merger i.e. FMV on 1.4.2020] 44,00,000
1,21,00,000
(4) Total liability
- Outside liabilities 90,00,000
- Corpus Fund of ` 15 lakhs [not includible] -
- Provision for taxation ` 5 lakhs [not includible] -
- Liabilities in respect of payment of various utility bills [since this
liability is an ascertained liability] 6,00,000
96,00,000

© The Institute of Chartered Accountants of India