1

CHAPTER 1
INTRODUCTION

Income derived from property held under trust or of an institution (trust) wholly for
charitable/religious purpose is exempt, if 85% of the income is spent on the objects of the
trust, during the year. If the amount spent is less than 85% of the income, the shortfall is
taxable, unless the trust has complied with the conditions mentioned in the table below.
Charitable purpose includes relief of the poor, education, medical relief, and the
advancement of any object of general public utility. However, if it involves carrying on of
any activity in the nature of trade, commerce or business or any activity of rendering any
service in relation to 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 the said
activity, the same will not be regarded as advancement of any object of general public utility.
However, if the total receipts from such activities do not exceed Rs. 10,00,000/-, such
activities of the trust will continue to be regarded as activities for charitable purpose.
Preservation of environment (including watersheds, forests and wildlife) and preservation of
monuments or places or objects of artistic or historic interest would be considered as
charitable purpose other than advancement of any object of general public utility.
Voluntary Contribution received by any university or educational institution referred to in
section 10(23C)(vi) or hospital or other institutions referred to in section 10(23C)(via) shall
be deemed to be income (with retrospective effect from assessment year 1999-2000).
Similarly, voluntary contributions received by any university or other educational institution
or any hospital or other institution referred to in sections 10(23C)(iiiad) and 10(23C)(iiiae)
respectively will be deemed as income received by them.
With effect from 1st June, 2007 any fund or institution established for charitable purposes or
any trust established for public, religious and charitable purposes will be notified by
Prescribed Authority which hitherto was notified by Central Government.
Registration:-Registration under section 12AA will be granted from 1st day of the financial
year in which the application for registration is made. Commissioner not empowered to
condone the delay in application for registration. The Commissioner has power to cancel the
2

registration of the trust by an order in writing if he is satisfied that the activities of trust are
not genuine or are not being carried out in accordance with the objects of the trust.
Commissioner of Income tax now also has power to cancel registration of trust granted under
provisions of section 12A of the Income-tax Act, 1961.

Appeals :-Orders passed under section 12AA or under section 80G rejecting the registration
of trust/ rejecting approval under section 80G are appealable. The appeal lies to the Income
tax Appellate Tribunal.

Approval under section 80G:-From 1st October, 2009, approval once granted under section
80G will be valid in perpetuity unless revoked by the Commissioner of Income tax in
accordance with the provisions of section 80G(5)(vi) of the Income tax Act, 1961.
Audit:-To qualify for exemption u/ss. 11 and 12, a trust having total income (before
exemption u/ss. 11 and 12) exceeding the maximum amount not chargeable to tax must have
its accounts audited by a C.A.

Investments:-All investments of the trust must be in modes provided in s. 11(5). If not, they
must be brought in conformity within 1 year from the end of the previous year in which such
investments are acquired, or 31-3-1993, whichever is later. Contravention results in income
and wealth of the trust being taxed at maximum marginal rate. This restriction does not apply
to:
1. Any asset held as part of the corpus as on 1-6-1973;
2. Any accretion to shares, forming part of the corpus as on 1-6-1973, by way of
bonus shares;
3. Any debentures acquired before 1-3-1983. If debentures acquired after 28-2-1983
and before 25-7-1991, exemption is denied only in respect of income from such
debentures, provided debentures are disinvested by 31-3-1992.







3

CHAPTER 2

TAXATION OF CHARITABLE TRUSTS


Modes of Investment specified in S. 11(5)

1. Investment in Government savings certificates/other securities/ certificates issued
by Central Government under Small Savings Schemes;
2. Deposit in any account with the Post Office Savings Bank;
3. Deposit in any account with a scheduled/co-operative bank;
4. Investment in units of the Unit Trust of India;
5. Investment in any security of the Central/State Government;
6. Investment in debentures whose principal and interest are fully and unconditionally
guaranteed by Central/State Government;
7. Investment or deposit in any public sector company (PSC); Shares of PSC may be
retained for three years and other investments or deposits till its maturity once PSC
ceases to be a PSC;
8. Deposits with or investment in any bonds issued by an approved financial
corporation engaged in providing long-term finance for industrial development in
India;
9. Deposits with or investment in any bonds issued by an approved public company
with main object of carrying on business of providing long-term finance for
construction / purchase of houses in India for residential purposes or for urban
infrastructure;
10. Investment in immovable property;
11. Deposits with the Industrial Development Bank of India;
12. Any other prescribed form or mode of investment or deposit. (for example, Units
of mutual funds referred to in s. 10(23D), investment by way of acquiring equity
shares of a depository prescribed).
13. Investment in Indira Vikas Patra and Kisan Vikas Patra are in accordance with
the norms and modes specified in sec. 11(5) Circular No. 566, dt. 17-7-1990.


4

Corpus donations
U/s. 11(1)(d), voluntary contributions with specific direction that they shall form part of the
corpus of the trust are not includible in the total income of the trust. However, u/s 12 other
voluntary contributions would be deemed to be income of the trust.

Business income:-Exemption is not available in relation to any profit and gains of business
of a trust, unless the business is incidental to the attainment of the objectives of the trust and
separate books of account are maintained in respect of such business.

Capital gains:-The gains arising from transfer of a capital asset, is deemed to have been
applied to charitable/religious purposes, if the whole net consideration is used to acquire new
capital assets. If only part of the net consideration is so utilised, such gains, as equals the
excess of the amount so utilised over the cost of the transferred asset is deemed to have been
applied for charitable/religious purposes.

Anonymous donations:-The term anonymous donation is defined to mean any voluntary
contribution, where the person receiving such contribution does not maintain a record
consisting of the identity of the person making such contribution indicating the name and
address of the person and such other particulars as may be prescribed. Such anonymous
donations will be taxed @ 30%. However, the following anonymous donations are not
covered:
o donations received by a trust or institution which is created or established wholly
for religious purposes;
o donations received by any trust or institution created or established wholly for
religious and charitable purposes other than any anonymous donation 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.
o However, in case of partly religious and partly charitable institutions where the
anonymous donations are directed towards medical or educational institutions run
by such entities or anonymous donations are received by wholly charitable
5

institutions, it will be taxable to the extent such donations exceeds 5% of the total
income of institution or Rs.100,000/- whichever is more.

Time limit for application for claiming exemption:
Application by funds, trusts, institutions, universities, other educational institutions, hospitals
or medical institutions seeking exemption under section 10(23C), could now be made on or
before 30th September of the relevant assessment year.

Electoral Trust:
Electoral Trust to be approved by the Central Board of Direct Taxes. Voluntary contributions
received by Electoral Trust to be treated as income with effect from 1st April, 2010. Income
of Electoral Trust by way of voluntary contribution will be exempt subject to fulfillment of
following conditions:
o Such Electoral trust distributes to the political parties (registered under section 29A
of the Representation of the People Act, 1951) 95% of the donation received by it
during the previous year along with the surplus, if any brought forward from any
earlier years and;
o Electoral Trust functions in accordance with the rules made by the Central
Government.


6

CHAPTER 3
TAXATION OF PUBLIC TRUSTS
To find out the taxable income of a charitable or religious trust:-
Compute the income of a trust. Here,"income" includes voluntary
contributions received by a trust/institution created wholly or partially for
charitable or religious purposes. The income of a trust/institution is required to
be computed as per the provisions of the Income Tax Act.
Find out the part of income exempt under section 11 or section 12 of the Act.
Trusts/Institutions are required to register themselves under Section 12AA in
order to avail the exemptions. This can be done by writing an application
in Form 10A within a year from the date of setting of trust/institution.
Broadly, the scheme of the provisions regarding the exemptions may be
summarized as follows:-
o The creation of trust must be wholly for charitable purposes and the
objectives of the trust should be for charitable purposes, as defined
under the Act.
o The trust should not be created for the benefit of any particular
religious community or caste.
o The trust should not be created for carrying on business for profit.
o The properties settle upon the trust must be held in trust. It would not
suffice if only the income is held in trust.
o The trust deed must contain a provision that the income of the trust or
the property held in trust would be utilized, for charitable purposes in
India.
o It should be ensured that income or property of the trust does not
ensure for the benefit of the settlor/ author of the trust or his relatives.
Charitable or religious trusts, which may otherwise be eligible for tax exemption,
are liable to forfeit this exemption under Section 13 of the Act. It is applicable in
the following circumstances:-
7

Where the trust is created after March 31, 1962, any part of the income of the
trust ensures, under the terms of the trust deed, directly or indirectly, for the
benefit of specified categories of persons such as, the author of the trust,
trustee or manager of the trust, substantial contributor to the trust and any
relative of such author, trustee, etc.
Any part of the income or any property of the trust is used or applied during
the relevant year, directly or indirectly, for the benefit of specified categories
of persons.
The trust funds(with certain exceptions) are invested in contravention of the
investment pattern of such funds.
Where a charitable or religious trust forfeits tax exemption in the circumstances
mentioned at (a) to (c) above, the trust shall be charged to tax at the maximum
marginal rate. A trust will attract the maximum marginal rate of tax only on that part
of income which has forfeited exemption under the above circumstances and not on
the entire income of the trust.
Besides there are other provisions of the Act, which are relevant to the taxability
of the income of charitable or religious trusts. These provisions are summarized
as follows:-
Filing of return of income [Under section 139(4A)] by trustees of charitable
or religious trusts if the total income of trust exceeds the minimum amount
which is chargeable to income-tax without giving effect to provisions of
Section 11 and 12. Also, trusts/institutions whose income is exempted
under Section 11 and Section 12 are also required to file a return as assessee's
claim for exemption would be decided by the Income Tax Department only
after it has received the relevant material from the assessee.
The return of income has to be filed along with the audit report submitted by
chartered accountants in Form 10B after auditing accounts of various
trusts/institutions.
Liability of trustees as 'representative assessees' [Under section 161] wherein
they are liable to tax in their representative capacity in respect of income of
trust.
8

Under section 80G, deduction (special exemptions) in respect of donations to
certain funds, charitable institutions, etc is granted. In order to be eligible
under this section, the charitable trusts/institutions need to obtain a valid
certificate by making an application to them in Form 10G . The form should
be accompanied by following documents:-
o Copy of registration granted under Section 12A
o Notes on activities of institutions/fund/trusts since the time of its
inception or during last three years, whichever is less and
o Copies of accounts of trust/institution since the time of its inception or
during last three years, whichever is less.
Wealth tax is also not charged on properties held under trust, or other legal
obligation, for public purposes of a religious or charitable nature underSection
5(i) of Wealth Tax Act. In certain cases, however, Section 21A of the Wealth
Tax Act lays down that wealth of trust is chargeable to tax as if the property is
held by an individual who is a citizen of India and resident in India for the
purpose of Act.
Donors are given relief from income tax in respect of donations made to
institutions established in India for charitable purpose.
There are specific provisions relating to public charitable/religious trusts
under section 10 of the act. The incomes of these trusts do not form part of
total income or the income of such trusts is exempt from income tax.
The trustees of a charitable or religious trust are required to make an
application to the prescribed authority for allotment of a Permanent Account
Number (PAN) under the provisions of Section 139A of the Income Tax Act.
In certain cases, income of a charitable/religious trust, which is not subject to
exemption under section 11 or section 12, may be chargeable to tax as if it is the
income of an association of persons(AOP):-
Income from property held under trust wholly for charitable or religious
purposes
Voluntary contributions without any direction that they shall form part of
corpus of trust or
9

Income of trust or institution being profits and gains of business which is incidental to the
attainment of the objectives of trust and separate books of account are maintained.

10

CHAPTER 4
PRESCRIBED DOCUMENTS
So far as the prescribed documents are concerned there is no such list in Income Tax Act or
in Income Tax rules [Except providing for Indenture of Trust & details of Trustees]. CBDT is
purporting to make a standard Code of Procedure in this regard. We can expect it to come in
very short time. However, from the practical experience we can list out following certain
documents:
i. Duly filed Form No.10A
ii. Copy of Registration certificate under Public Trusts Act
iii. Certified Copy of Trust Deed [In English, if not in English]
iv. Certified Copy of Object Clause of trust Deed
v. List of Names & Addresses of all the trustees
vi. Copies of Pan Card of all the Trustees
vii. Audit Reports [Maximum to the Last three years]
viii. Undertaking under section 11(5) and 13(1)( c)
ix. Affidavit of the Managing Trustee for Utilization of Income for Objects Only

All this are the prima facie circumstantial evidences to satisfy the C.I.T that the trust is
genuine. After providing necessary documents Commissioner may pass an order either
granting or rejecting the registration.
However any order giving rejection to the registration cant be passed without giving
opportunity of being heard. Opportunity of being heard is given only by mean on written
show-cause notice to that regard.
However, the Communication of Acceptance or rejection of any application shall be made
within the six months from the end of the month in which the application was received. If no
communication is received within 6 months then trust will be deemed to be registered under
section 12AA. The various legal pronouncements of Tribunal & high courts have settled the
position to the greater extent. Ld. ITAT, Delhi B Special Bench, has held that the officers
11

are bound to pass the verdict to the application in the stipulated time [i.e Six Months]. Not
passing the order within 6 months and asking assesee to file application again means to put
the assesee to the grind all over again for no fault of his. The intention of legislature can
never be as such. Moreover, time frame of Six months is mandatory for the C.I.T to dispose
of the application for registration. Once CIT doesnt pass order within given time it becomes
Functus Officio, hence it cant make the assesee to file the application again. [ 111 ITD 175
]
Types of Trust & Taxation
Type of trust Taxation Effect

Oral trust Exemption not Allowed
Private Trust Exemption not Allowed
Public Trust Exemption Allowed Subject to Condition
Combined Trust (Public-cum-private) Exemption Allowed Subject to Condition

Effect of Registration u/s 12AA
The registration is granted on the basis of assessment years. As per general rule the
registration is granted from the assessment year relevant to previous year in which the
application was received in other terms registration is granted from the 1st day of financial
year in which the application was filed.
However for the applications made before 1st June 2007, if the commissioner is so satisfied
that there were certain reasonable causes for not making an application within a period of one
year, then commissioner, with reasons so recorded in writing may grant registration from the
date of creation of the trust.
However the benefit of this fictional extrapolation cant be extended the applications made on
or after 1st June 2007.
The income of the trust gets exempted from the Income tax subject to following conditions
mentioned u/s 11&12:
12

i. The trust shall expend 85% of the total donation received by it during the year in a year in
which it has been received. If the 85% of the total receipts is spent for its purpose then rest of
the 15% will not be treated as Income and thus it will be Exempt from the Tax.
ii. Trust can claim exemption even when it has not spent 85% of its income. If it sets apart the
residual amount for the specific objects of the trust and passes a resolution to spend it in next
5 years. However the Copy of the resolution along with form No.10 shall be sent to the
Assessing Officer before time specified u/s 139(1).
To claim the deduction of set apart amount the set apart amount shall be invested only in the
securities Specified u/s 11(5) of the Act and within the prescribed time limit and in prescribed
manner.

Corpus Donation Not an Income
The question of Exemption arises when there is an Income. There are certain donations which
are not the Income. Such as if Trust receives the Corpus donation then it is not treated as the
Income and thus criteria of 85% dont apply to the Corpus receipt.

What Constitutes a Corpus Donation?
There is no such definition of Corpus Donation in Income Tax Act neither in any governing
laws of trusts. In this situation of ambiguity there have been number of litigations involving
corpus donation pending. However in general parlance, any donation to be called as corpus
shall be donated by the specific instruction of donor specifying the modes and ways of its
utilization and shall specifically be instructed to be the part of corpus.
If any donation is given for the construction of fund and with the clear direction that only
interest of the fund shall be used then it is the Corpus donation.
Instructions need not to be in writing. However there must be circumstantial evidences to
support any donation as corpus donation.
13

Corpus donation is not routed through Income & Expenditure account, it is generally credited
to the respective fund account.

Consequences if Registration is not granted:
If application is rejected then assessee may challenge the decision in Income Tax Appellate
tribunal. However, if registration is not granted then,

i. Exemption u/s 11 & 12 is not available
ii. It doesnt become entitled to obtain registration u/s 80G
iii. The amount donated by it to any person becomes taxable income in the hands of receiver
u/s 56(2)(vi) [i.e as gift]

Common Grounds Of Rejection of Registration u/s 12AA:
i. Actual Activity has not been carried out by the Trust:
There used to be the objection of Income Tax Authorities that Registration u/s 12AA may not
be granted if Trust has not undertaken the Actual Activities as per its objects.
However Gujarat high court has settled this disputed position of law in its verdict in the case
of CIT vs Kutchi Dasa Oswal Moto Pariwar Ambama Trust.[29 Taxman 228] The
learned court has held that registration cant be denied merely on the ground that trust has not
undertaken any activities in the previous year.
ii. Inconsistencies in the Object clauses:
If there are any objects of the trust deed which gives the Commissioner reasons to believe
that the Beneficiaries of the Trust activities will be based on the particular cast, creed or sex.
Then he may refuse the registration.
14

iii. Inconsistencies in Revocation clause of Trust deed:
As per Bombay Public Trust Act 1950 the trusts are always irrevocable. Generally the trust
cant be revoked. However if the Circumstances arise than trust can be revoked by passing an
unanimous resolution by all the trusses to that effect and with the prior approval of the
Charity Commissioner. And in that scenario none of the asset will go in hands of any of the
trustess/settler or to the members of the trust, on the contrary it will be handed over to the
trust having same objects. Now days, Income tax officer demands such clear mention of all
this formalities in revocation clause of the trust deed. In many cases the trusts do not have
revocation clause altogether and if they have the resolution clause then it is not proper. In
such cases, Authorities may refuse the registration. However, when we have such a elaborate
provisions under Trusts act and when Charity Commissioner himself has granted the
registration, then I personally believe that it is out of jurisdiction of tax authorities to reject
the Application.
iv. Business Purpose in Objects:
If the commissioner is of the view that the objects of the trusts are not the charitable purposes
as defined u/s 2(15) and on the contrary the activities are such which is in the nature of trade
and Commerce. The commissioner may reject such application. Currently D.I.T [Exemption]
have rejected the application of Gujarat Cricket Assciation, Auda , GAHED etc.[Ref.
Navgujarat Samay 22nd April 14]
v. Rejection under any other section for exemption
This ground for rejection/cancellation was taken especially for the trusts which are rejected
registration under any other section for exemption. In Sunbeam English School Society Vs.
Commissioner Of Income Tax ITAT, Allahabad Bench has held that it is not justifiable to
reject the application u/s 12AA, on the ground that trust has been refused registration under
any other section.
All the above grounds of rejection have not been mentioned neither in Income tax Act
nor in Income Tax rules, these are the common practical grounds which assessing
officer extracts out of the verification and investigation of the records and its
correspondent legality and validity .
15

Remedies:
In case of all the above mentioned ground of rejection there are remedies. Ground 1 has
already been settled by the Gujarat High court. Where as in case when there is some
inconsistent object in object clause or revocation clause is not proper than such an improper
clause can be deleted and new proper clause can be inserted by submitting change report and
affidavit to that regard with Charity Commissioner. However the interpretation of Section
2(15) is subjective matter, in that matter only harmonious legal interpretation is the only way
left for saving.
The registration u/s 12AA is given on the basis of number of assessment years. The
registration is effective from the assessment year relating to the previous year in which
the application for registration u/s 12AA was made.

Consequences if the Compliance to the Conditions is not made:
The registration u/s 12AA is granted on the basis of the condition that all the condition u/s 11
& 12 will be fulfilled. If conditions are not satisfied then following situation may arise:
i. If 85% of the Income is not spent then the residual part of the Income will be subject to tax
at M.M.R.
ii. If the accumulated amount is not spent within 5 years then It will be part of the Total
income In 6th year.
iii. If the donation is general and shown as the corpus donation then the relevant amount will
be added as an Income.


16

SECTION 10
9.1 Section 10(23C) consists of twelve sub-clauses. Sub-clauses
(i), (ii), (iii) and (iiia) exempt from tax the income of Prime Ministers National Relief Fund,
Prime Ministers Fund for Promotion of Folk Art, Prime Ministers Aid to Students Fund
and National Foundation for Communal Harmony respectively. These do not require any
elaboration.

9.2 Sub-clause (iiiab) takes out of the purview of taxation income of any university or other
educational institution existing solely for educational purposes and not for profit, which is
wholly or substantially financed by the government. Sub-clause (iiiad) contains parallel
provisions exempting the income of a university even where it is not wholly or substantially
financed by the government, provided its aggregate annual receipts do not exceed a
prescribed limit (currently the limit is Rupees one crore)32.

9.3 Sub-clause (iiiac) of Section 10(23C) takes away from the ambit of taxation the income of
any hospital or other such institution for the reception and treatment of persons suffering
from illness or mental defectiveness, or for reception and treatment of persons during
convalescence, or of persons requiring medical attention or rehabilitation, provided that the
hospital or the institution exists solely for philanthropic purposes are not for profit and it is
wholly or substantially financed by the government. Clause (iiiae) contains parallel
provisions exempting the income of any hospital or other such institution even where it is not
financed wholly or substantially by the government, provided its aggregate annual receipts do
not exceed the prescribed limit (currently, the limit is Rupees one crore)33.

9.4 Clauses (iv), (v), (vi) and (via) of Section 10(23C) deal with exemption of income of
various kinds of religious or charitable funds/ trusts/institutions etc. which are approved by
the prescribed authority under the respective sub-clauses. Of these, Sub-clause
(iv) deals with exemption of income of any fund or institution established for charitable
purposes which may be approved by the prescribed authority taking into account the objects
17

of the fund or institution or its importance throughout India or throughout any state(s) of
India. In order to be eligible for exemption, such trust or institution should not be involved in
any trade, commerce or business activity or rendering of any service in relation to such
activity.
Sub-clause (v) deals with exemption of income of any trust or institution wholly for public
religious purposes or public religious and charitable purposes, which may be approved by the
prescribed authority taking into account the manner in which its affairs are administered and
supervised so as to ensure that the income is applied for its objects. The restriction on trade,
commerce or business activity or rendering of any service in relation to it which applies to
Sub-Section (iv) also applies to this Sub-Section.
Sub-clause (vi) deals with exemption of income of any university or educational institution
other than those mentioned in Sub-clauses (iiiab) and (iiiad) [see Para-9.2 above] which
exists solely for educational purposes and not for purposes of profit, which may be approved
by the prescribed authority And finally, Sub-clause (via) deals with exemption of income of
any hospital or other institution engaged in reception and treatment of persons suffering from
illness or mental defectiveness or during convalescence or requiring medical attention or
rehabilitation, other than those mentioned in Sub-clauses (iiiac) and (iiiae) [see Para-9.3
above] which may be approved by the prescribed authority. The prescribed authority for
the purposes of all these sub-clauses is now the Chief Commissioner or the Director General
of Income Tax34. The fund, trust, institution or other entity seeking exemption under each of
the above sub-clauses [i.e., Sub-clauses (iv), (v), (vi), and (via)], is required to make an
application in the prescribed forms, namely, Form No.56 and 56D [see Annexure-VII & VIII]
to the CCIT or DGIT concerned for grant or continuation of exemption. Such application is
required to be made before 30th September of the relevant Assessment Year from which
exemption is being sought.

9.5 The prescribed authority is empowered to call for the requisite documents, audited annual
accounts and other relevant information as it considers necessary and is also empowered to
make necessary enquiries to satisfy itself about the genuineness of the activities of the
fund/trust/institution etc. within 12 months from the end of the month in which such
application was received. Prescribed authority has to either grant the approval sought or has
to pass an order rejecting the application.
18

SECTION 11

SECTION 11: Income from property held under trust will be exempt if:

(1) Trust is registered with Commissioner of Income Tax u/s 12AA (vide application
Form 10A).

(2) Books are audited (vide form 10B) if income (including corpus donations) exceeds
Rs. 1,80,000 before claiming section 11 & 12 exemptions.

(3) At least 85% of income (excluding corpus donations) must be applied towards the
approved objects of the Trust.

Unapplied Income + Accumulated Income + Corpus Donations shall all be invested in
specified modes of investments as u/s 11(5)
Further conditions to note:

The property from which income is derived should be held under a trust.

The property should be held for charitable purposes.

The trust should not be created for the benefit of any particular religious community or
caste.

No part of the income should enure directly or indirectly for the benefit of any specified
person. [For list of specified persons, refer to Section 13(3)]

The trust can carry out business activities if the business activities are incidental to the
attainment of its objectives, and separate books are maintained.
Voluntary contributions (not being corpus donations) shall be deemed to be income derived
from property held under the trust.

19

SECTION 11(1) : INCOME FROM PROPERTY HELD FOR CHARITABLE
PURPOSE

The following incomes shall not be included in the total income of the charitable trust:

(a) 15% of income derived from property held under trust wholly for charitable purposes
(to be computed on the gross receipts) i.e. Standard Deduction

(b) 85% of income derived from property held under trust wholly for charitable purposes,
to the extent to which such income is applied to such purposes in India

(c) Income in the form of voluntary contributions made with a specific direction that they
shall form part of the corpus of the trust, i.e. corpus donations.

Note 1: Income derived from property held under trust wholly for charitable purposes
includes voluntary contributions i.e. donations except corpus donations.

Note 2: The words applied to charitable purposes includes

- Purchase of capital assets

- Revenue expenses

- Donations to religious/charitable trust registered under section 12AA or section
10(23C) *

- Repayment of loans taken for purchase of capital assets

- Depreciation on capital assets

* However once the trust decides to accumulate its income then contribution to another trust
out of its accumulated income will not qualify for exemption. An exception to this would be
for the year of dissolution of the trust, wherein the Assessing Officer may permit contribution
to another trust, without denying exemption.
20

In taxation lingo, a previous year is the financial year in question, and the year that
follows is the assessment year. For example, for the financial year April 2010 to March
2011, the previous year is 2010-11, and the assessment year is 2011-12. Tax returns
are filed in the assessment year, as per tax provisions relevant to the assessment year, for
the income earned in the previous year.

Note 3: If, in the previous year, the income applied to charitable purposes in India falls
short of 85% of the income derived during that year from property held under trust, by
any amount

(i) For the reason that the whole or any part of the income has not been received
during that year, and the assesse submits a declaration to the Assessing Officer
on or before the due date of filing of return that such income shall be applied to
such purposes in the year of receipt or in the immediately succeeding year, then
the amount for which such declaration is given shall be deemed to be applied to
such purposes during the previous year in which income was derived. If such sum
is not applied to such purposes in the year of receipt or in the immediately
succeeding year, then the amount not so applied shall be deemed to be the income
of the previous year immediately succeeding the previous year in which such
income is received.

Eg: Out of the total income, say Rs. 20 lakhs has not been received in the current
year, but has been received in the 5
th
year :

1
st
Year 5
th
Year
Net Income 100 lakhs 200 lakhs
(-) Basic Exemption 15% (15 lakhs) (30 lakhs)
Balance to be Applied 85 lakhs 170 lakhs
(-) Not Received (20 lakhs)
20 lakhs (now
received)
Net to be Applied 65 lakhs 190 lakhs

21

For any other reason, and the assesse submits a declaration to the Assessing Officer on or
before the due date of filing of return that such income shall be applied to such purposes in
the immediately following previous year, then the amount for which such declaration is given
shall be deemed to be applied to such purposes in the previous year in which such income
was derived. If such sum is not applied to such purposes in the immediately succeeding
previous year, then the amount not so applied shall be deemed to be the income of such
immediately succeeding previous year.
Note: The general provision is that if the 85% could not be applied by the end of the previous
year, then it can still be applied in the next previous year, but BEFORE the due date for filing
the tax returns. If it is not likely that this will be possible, then the specific declaration to the
AO has to be filed, as given in point (ii) above.

SECTION 11(2) : EXEMPTION IF INCOME ACCUMULATED FOR SPECIFIC
PURPOSES

Where 85% of the income referred to above is not applied to charitable purposes in India
during the previous year but is accumulated or set apart, either in whole or part, for
application to such purposes in India, such income so accumulated or set apart shall not be
included in the total income of the previous year of the person in receipt of the income,
provided the following conditions are complied with, namely:

(a) Such person specifies, by notice in writing given to the Assessing Officer in the
prescribed manner, the purpose for which the income is being accumulated or set
apart and the period for which the income is to be accumulated or set apart, which
shall in no case exceed 5 years. (This notice is required to be given before the
assessment is complete) and

The money so accumulated or set apart is invested or deposited in the forms or modes
specified in Section 11(5).
Accumulated funds shall be spent for specified purposes within a period of 5 years, failing
which they will be treated as income of the 6
th
year to be spent in the 6
th
year itself, failing
which they can be spent in the 7
th
year by the date of filing the tax returns for the 6
th
year.
22


SECTION 11(3) : EXEMPTION WITHDRAWN IF SPECIFIC CONDITIONS NOT
SATISFIED

Any income referred to in section 11(2) which

(a) Is applied to purposes other than the purpose for which it was accumulated or set
apart, then it shall be deemed to be the income of the previous year in which it is so
applied, or

(b) Ceases to remain invested in modes specified in section 11(5), then it shall be deemed
to be the income of the previous year in which it so ceases, or

(c) Is not utilized for the purpose for which it is so accumulated or set apart during the 5
year

period or in the year immediately following the expiry thereof, then it shall be deemed
to be the income of the previous year immediately following the expiry of the 5
th
year,
or
Is donated to any trust registered under section 12AA or to any specified institutions referred
to in section 10(23C), then it shall be deemed to be the income of the previous year in which
it is so donated.
SECTION 11(1A): CAPITAL GAINS DEEMED TO BE APPLIED FOR
CHARITABLE PURPOSES

For the purposes of subsection (1), -

Where a capital asset, being property held under trust wholly for charitable purposes, is
transferred and the whole or any part of the net consideration is utilized for acquiring another
capital asset to be so held, then the capital gain arising from the transfer shall be deemed to
have been applied to charitable or religious purposes to the extent specified hereunder,
namely:-

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(i) Where the whole of the net consideration is utilized in acquiring the new capital
asset, the whole of such capital gain;

(ii) Where only a part of the net consideration is utilized for acquiring the new capital
asset, then the following capital gains is exempt:



Cost of the new asset minus cost of the transferred asset
SECTION 11(4): PROPERTY HELD UNDER TRUST INCLUDES BUSINESS
UNDERTAKING

Income from business shall be treated as income derived from property held under trust and
shall be eligible for exemption under section 11(1) & 11(2) provided the business is
incidental to the attainment of the objectives of the trust and separate books of account are
maintained by such trust in respect of such business.

If in the assessment, the Assessing Officer finds any concealed income in respect of the
above business then, exemption under section 11(1) & 11(2) shall not be available in respect
of such concealed income.

SECTION 11(5): SPECIFIED MODES FOR INVESTING FUNDS OF THE TRUST

The forms and modes of investing or depositing the money shall be the following, namely:

(i) investment in savings certificates as defined in clause (c) of section 2 of the Government
Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by
the Central Government under the Small Savings Schemes of that Government

(ii) deposit in any account with the Post Office Savings Bank

(iii) deposit in any account with a scheduled bank or a co-operative society engaged in
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carrying on the business of banking (including a co-operative land mortgage bank or a co-
operative land development bank)

(iv) investment in units of the Unit Trust of India established under the Unit Trust of India
Act, 1963

(v) investment in any security for money created and issued by the Central Government or a

State Government

(vi) investment in debentures issued by, or on behalf of, any company or corporation both
the principal whereof and the interest whereon are fully and unconditionally guaranteed by
the Central Government or by a State Government

(vii) investment or deposit in any public sector company: Provided that where an investment
or deposit in any public sector company has been made and such public sector company
ceases to be a public sector company,

(A) such investment made in the shares of such company shall be deemed to be an
investment made under this clause for a period of three years from the date on which
such public sector company ceases to be a public sector company;

(B) such other investment or deposit shall be deemed to be an investment or deposit
made under this clause for the period up to the date on which such investment or
deposit becomes repayable by such company

(viii) deposits with or investment in any bonds issued by a financial corporation which is
engaged in providing long-term finance for industrial development in India

(ix) deposits with or investment in any bonds issued by a public company formed and
registered in India with the main object of carrying on the business of providing long-term
finance for construction or purchase of houses in India for residential purposes.
(ixa) deposits with or investment in any bonds issued by a public company formed and
25

registered in India with the main object of carrying on the business of providing long-term
finance for urban infrastructure in India.

Explanation.For the purposes of this clause,

(a) 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;

(b) public company shall have the meaning assigned to it in section 3 of the
Companies Act, 1956 (1 of 1956);

(c) urban infrastructure means a project for providing potable water supply,
sanitation and sewerage, drainage, solid waste management, roads, bridges and
flyovers or urban transport

(x) investment in immovable property.

Explanation.Immovable property does not include any machinery or plant (other
than machinery or plant installed in a building for the convenient occupation of the
building) even though attached to, or permanently fastened to, anything attached to
the earth

(xi) deposits with the Industrial Development Bank of India established under the
Industrial Development Bank of India Act, 1964

(xii) any other form or mode of investment or deposit as may be prescribed. (Under Rule
17C)




26

SECTION 12

SECTION 12A : CONDITIONS FOR APPLICABILITY OF SECTIONS 11 & 12

The income of a charitable trust is exempt under sections 11 and 12 if the following
conditions are satisfied:-

(a) The person in receipt of the income has made an application for registration of the
trust to the Commissioner and such trust is registered under section 12AA.
The provisions of section 11 and 12 shall apply in relation to income of such trust
from the financial year in which such application is made.

(b) Where the total income of the Trust computed without giving effect to the provisions
of sections 11 and 12 exceeds Rs.1,80,000/- in the previous year (relevant to AY 11-
12; check for applicable exemption limit in the case of any other assessment year)
then the accounts of the Trust for that year should be audited by a Chartered
Accountant and the report of such audit should be furnished along with the return of
income of the relevant assessment year.



SECTION 12AA: PROCEDURE FOR REGISTRATION

The Commissioner, on receipt of an application for registration of a Trust made under
Section 12A, shall

(a) Call for such documents and information from the Trust as he thinks necessary in
order to satisfy himself about the genuineness of the activities of the Trust and may
make further enquiries.
(b) After satisfying himself about the objects of the Trust and the genuineness of its
activities:
a. Pass an order in writing registering the Trust,

27

b. If he is not satisfied, pass an order in writing refusing to register the Trust or
Institution.

No order of refusal to register the Trust shall be passed unless the applicant has been given a
reasonable opportunity of being heard.
Every order granting or refusing registration shall be passed before the expiry of six months
from the end of the month in which application was received under Section 12A. If no order
is passed within the said six months then it shall be deemed that the Trust has been registered.
Where a trust or an institution has been granted registration under section 12AA and
subsequently the Commissioner is satisfied that the activities of such trust are not genuine or
are not being carried out in accordance with the objects of the trust, as the case may be, he
shall pass an order in writing cancelling the registration of such trust.

SECTIONS 12(2) AND 13(6): EDUCATIONAL AND MEDICAL FACILITIES TO
SPECIFIED PERSONS

Sections 12(2) and 13(6) provide as follows

1. As per section 13(1), income of a charitable trust will not be exempt if any part of
such income or any property of the trust is used or applied directly or indirectly for
the benefit of any person specified in section 13(3). Subsection (6) provides that a
charitable trust running an educational institution or a medical institution or a hospital
shall not be denied the benefit of exemption under section 11 or section 12, in relation
to any income by reason only that such trust has provided educational or medical
facilities to specified persons.

2. Section 12(2) provides that the value of any medical or educational services made
available by any charitable trust running a hospital or medical institution or any
educational institution to any specified person shall be deemed to be the income of
such trust derived from property held under trust wholly for charitable purposes
during the previous year in which such services are so provided and shall be
chargeable to income-tax and exemption under section 11(1) & 11(2) shall not be
available for such income.
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ANONYMOUS DONATIONS


SECTION 115BBC: ANONYMOUS DONATIONS TO BE TAXED IN CERTAIN CASES

SECTION 13(7): SECTION 11 or 12 NOT TO APPLY IN CASE OF ANONYMOUS
DONATIONS

Anonymous Donations means any voluntary contribution where a 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.

30% FLAT RATE OF TAX ON ANONYMOUS DONATION IN EXCESS OF THE
HIGHER OF THE FOLLOWING AMOUNTS, NAMELY:

(a) 5% of the total donations received by the assessee; or

(b) Rs. 1,00,000.

Anonymous donations are not taxable under section 115BBC if:

(i) Such donations are received by any trust/institution established wholly for
religious purposes. Therefore in case of a trust owning a temple, the
offerings/donations made by the devotees etc. shall not be taxable under this
section even if the names/addresses of donors are not there. Such donations shall
be subjected to provisions of section 11 & 12.

(ii) Such donations are received by any trust/institution established wholly for
religious and charitable purposes. However such donations shall be taxable under
section 115BBC if the anonymous donation is made with specific direction that
such donation is for any university/school/educational institution/hospital/medical
institution run by such trust.


29

For example:

Anonymous donations received by a trust wholly for charitable purposes are taxable
under section 115BBC.
Anonymous donations which are not taxable under section 115BBC shall be taxable
under the normal provisions and shall be subjected to section 11 and 12.

Anonymous donations which are taxable under section 115BBC shall not be entitled to
exemption under section 11 and 12 as per provision of section 13(7).
Wholly Charitable Trust --- Anonymous donations to be taxed u/s 115BBC

Wholly Religious Trust --- Anonymous donations not to be taxed u/s 115BBC

Wholly Religious & Charitable Purposes --- Anonymous donations not taxable u/s
115BBC. Taxable if donation made with a specific direction that such donation is for any
university/educational institution/hospital/medical institution run by such trust/institution.
FURTHER NOTES:

Even if the trust does not carry on business, or have business assets, it can claim
depreciation on assets. This can be on Straight Line Method basis or Written Down
Value basis. Depreciation will be reduced from Gross Income.
Loan advanced within the objects of the trust cannot be treated as an application or
expense unless it cannot be recovered and is written off in the books. It is treated as
an application in the year of write-off.

Reimbursements of expenses of earlier years are treated as application of funds in
the year of reimbursement.

Deficit of income can be carried forward indefinitely and set off.



30

FORMAT:
Gross Income (including Business Income and Capital Gains) xxx
(-) Direct Expenses and Depreciation (xxx)
Net Income xxx
(-) 15% Basic Exemption (xxx)
Balance 85% to be applied towards approved objects xxx
(-) Income not received during the year (xxx)
(-) Amount spent towards approved objects (xxx)
(-) Amount accumulated for spending (xxx)
TAXABLE INCOME xxx
(Taxed at slab rates)
Anonymous Donations taxed as per section 115BBC xxx
(Taxed @ 30% after exemptions)


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CHAPTER 5
CONCLUSION

Every person capable of holding property can become a trustee. However, where the trust
involves the exercise of discretion, he can accept or act as a trustee only if he is competent to
contract. No one is bound to accept trusteeship. Any number of persons may be appointed as
trustees. However, no trust is defeated for want of a trustee. Where there is no trustee in
existence, an official trustee may be appointed by the court and the trust can be administered.
An executor of a Will may become a trustee by his dealing with the assets under the
provisions of the Will. When an executor is functus officio to any of the assets and yet retains
them, he becomes a trustee in respect of those assets. Who can be a Beneficiary:- In a private
trust the beneficiaries are one or more ascertainable individuals. In a public trust the
beneficiaries are a body of uncertain or fluctuating individuals and may consist of a class of
the public or the whole public. Generally, a private trust is not a permanent one. But a public
trust is of a permanent nature. If properties are dedicated to temples and mosques or gifts are
made to religious or charitable institutions they create a trust.

32

BIBLIOGRAPHY

Website
www.taxguru.in/income-tax
www.incometaxindiapr.gov.in/incometaxindiacr
www.caclubindia.com

Book
The Tax Law of Charitable Giving - Bruce R. Hopkins
Direct & Indirect Tax - Dr. Varsha M. Ainapure