Taxability of income of charitable or religious trusts

A charitable and religious trust is taxable in accordance with the provisions of Section 11 to Section 13. Section 11 provides for exemption in respect of income derived from property held under trust for charitable or religious purposes to the extent to which such income is applied or accumulated during the previous year for such purposes. The exemption is allowed on fulfilment of conditions specified in Section11, Section 12, Section 12A, Section 12AA/12AB, and Section 13 of the Income-tax Act.

Meaning of ‘Charitable Purpose’

Section 2(15) of the Income-tax Act provides an inclusive definition of ‘charitable purpose’. It includes the following:

(a) Relief of the Poor;
(b) Education;
(c) Yoga;
(d) Medical Relief;
(e) Preservation of the environment (including watersheds, forests, and wildlife);
(f) Preservation of monuments or places or objects of artistic or historic interest;
(g) Advancement of any other object of general public utility.

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.

This exception, however, does not apply if such activity is undertaken in the course of the actual carrying out of such advancement of any other object of general public utility and the aggregate receipts from such activity during the previous year, do not exceed 20% of the total receipts of such trust during that previous year.

Registration of Trust
The income of a trust shall not be exempt under Section 11 unless it has obtained registration under Section 12AA/12AB. The person in receipt of the income is required to make an application for registration of trust in the prescribed form. The process of registration up to 31-03-2021 is governed by Section 12AA. A new Section 12AB has been inserted with effect from 01-04-2021 which lays down the new process to obtain registration and the period for which such registration shall be granted.

The registration of trusts or institutions shall be required in the following circumstances:
Trust registered under old Section 12A/12AA

The trusts or institutions that had been granted perpetual registration before 01-04-2021 are required to make an application for re-registration under the new scheme of registration under Section 12AB. The registration obtained under Section 12AB shall remain valid for a period of 5 years.

A trust/institution has to make an online application in Form 10A for registration within 3 months from the date on which the provision comes into force.
Conversion of provisional registration into regular registration

The trust or institution provisionally registered under Section 12AB shall be required to convert such provisional registration into normal registration by filing an application in Form 10AB at least 6 months before the expiry of the period of the provisional registration or within 6 months of commencement of its activities, whichever is earlier. 

Registration of trust whose registration has become inoperative

The registration under Section 12AB shall become inoperative if approval is obtained under Section10(23C) or the institution is notified under Section 10(23EC) or Section 10(46) or Section 10(46A). Thus, if the registration becomes inoperative, the trust or institution will not be entitled to claim an exemption under Section 11 or 12.
The trust or institution, whose registration has become inoperative may apply to get its registration again operative under Section 12AB. The application for registration in such cases shall be made at least 6months before the assessment year from which the said registration is sought to be made operative. Once the registration becomes operative, the trust or institution will not be entitled to claim an exemption under Section 10(23C)/10(23EC)/10(46)/10(46A).

Section 10(23C)

Any income received by any person on behalf of the following funds shall be exempted from Income –Tax

10(23C)(i) : The Prime Minister's National Relief Fund [or the Prime Minister's Citizen Assistance and Relief in Emergency Situations Fund (PM CARES FUND)]

10(23C)(ii) : The Prime Minister's Fund (Promotion of Folk Art); 

10(23C)(iii) :The Prime Minister's Aid to Students Fund;

10(23C)(iiia) : The National Foundation for Communal Harmony;

10(23C)(iiiaa) : The Swachh Bharat Kosh, set up by the Central Government; 

10(23C)(iiiaaa) : The Clean Ganga Fund, set up by the Central Government; 

10(23C) (iiiaaaa) : The Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund in respect of any State or Union territory as referred to in sub-clause (iiihf) of clause (a) of sub-section (2) of section 80G; There is not mandatory to file the income tax return and no requirement for auditing under Income Tax Act for all the above.

10(23C)(iiiab) : Any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government; There is income tax return and ITR-7 are mandatory from the A.Y 2016-17.

10(23C)(iiiac): Any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, and which is wholly or substantially financed by the Government.

10(23C)(iiiad) : Any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual do not exceed five crore rupees;

10(23C)(iiiae) :any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or existing solely for philanthropic purposes and not for purposes of profit, if the aggregate annual do not exceed five crore rupees. There is ITR-7 and auditing are not mandatory for 10(23C)(iiiac),(iiiad),(iiiae).

10(23)(iv) : Any other fund or institution established for charitable purposes having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States; (Notified by Central or State Government)

10(23C)(v) :Any trust) or institution wholly for public religious purposes or wholly for public religious and charitable purposes, having regard to the manner in which the affairs of the trust.(Notified by Central or State Government)

10(23C)(vi) :Any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad). Audit and ITR are mandatory in form 10B/10BB and Form ITR-7.

10(23C)(via) :Any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or existing solely for philanthropic purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiac) or sub-clause (iiiae)

Registration in conformity with the modified objects

If the trust or institution has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, then such trusts or institutions are required to make an application for fresh registration under this provision. Application for fresh registration in such cases is required to be made within 30 days from the date of adoption or modification of objects of such trust or institution.
Direct regular registration

Until 30-09-2023, the trust or institution has to apply for two registrations (provisional and regular) simultaneously, even if it has commenced the activities. However, on or after 01-102023, a trust or institution can apply directly for regular registration if it has already commenced the activities without applying for provisional registration.

The trusts or institutions satisfying the following two conditions can apply directly for regular registration:
(a) A trust/institution that has already commenced its activities.
(b) No income or part thereof of the said trust or institution has been excluded from the total income on account of applicability of Section 10(23C)(iv)/(v)/(vi)/(via), or Section 11 or Section 12, for any previous year ending on or before the date of such application, at any time after the commencement of such activities.

Period for which income is exempt

The exemption to a trust is generally available from the assessment year relevant to the previous year in which the application for registration is made. Hence, once the registration is granted, the exemption under Sections 11 and 12 shall be available from the assessment year immediately following the financial year in which the application is made.
In other words, the exemption shall be available prospectively from the following previous years:
(a) If the trust or institution has applied for the provisional registration at least one month before the subsequent previous year, the exemption shall be available for that subsequent previous year for which the provisional registration has been granted, provided the provisional registration has been converted into a normal registration within the prescribed time limit;

(b) If the trust or institution has applied directly for the normal registration, the exemption shall be available from the previous year in which the application for normal registration has been filed, and the registration has been granted.
 

Maintenance of Books of Account
 

CBDT notifies Income tax rules 17AA. Books of account and other documents to be kept and maintained by institution or trust or any university or other educational institution or any hospital or other medical institution u/s 10(23C) or Sec 12A vide Notification No. 94/2022-Income Tax Dated: 10th August, 2022 – Income-tax (24th Amendment) Rules, 2022.

Every fund or institution or trust or any university or other educational institution or any hospital or other medical institution which is required to keep and maintain books of account and other documents under clause (a) of tenth proviso to clause (23C) of section 10 of the Act or sub-clause (i) of clause (b) of sub-section (1) of section 12A of the Act shall keep and maintain the following, namely:-

(i)   cash book;

(ii)  ledger; 

(iii) journal;

(iv) copies of bills, whether machine numbered or otherwise serially numbered, wherever such bills are issued by the assessee, and copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by the assessee;

(v)  original bills wherever issued to the person and receipts in respect of payments made by the person;

(vi) any other book that may be required to be maintained in order to give a true and fair view of the state of the affairs of the person and explain the transactions effected;

Record of the following, out of the income of the person during the previous year, namely:

(I) application of income, in India, containing details of amount of application, name and address of the person to whom any credit or payment is made and the object for which such application is made

(II) amount credited or paid to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution containing details of their name, address, permanent account number and the object for which such credit or payment is made;

(III) application of income outside India containing details of amount of application, name and address of the person to whom any credit or payment is made and the object for which such application is made

(IV) deemed application of income referred in clause (2) of Explanation 1 of sub-section (1) of section 11 of the Act containing details of the reason for availing such deemed application

(V) income accumulated or set apart as per the provisions of the Explanation 3 to the third proviso to clause (23C) of section 10 or sub-section (2) of section 11 of the Act which has not been applied or deemed to be applied containing details of the purpose for which such income has been accumulated.

Money invested or deposited in the forms and modes specified in sub-section (5) of section 11 of the Act; (VII) money invested or deposited in the forms and modes other than those specified in sub­section (5) of section 11 of the Act;

Record of voluntary contribution made with a specific direction that they shall form part of the corpus,

Record of contribution received for the purpose of renovation or repair of temple, mosque, gurdwara, church or other place notified under clause (b) of sub-section (2) of section 80G which is being treated as corpus as referred in Explanation 1A to the third proviso to clause (23C) of section 10 or Explanation 3A to sub-section (1) of section 11

Record of loans and borrowings,-

Record of properties held by the assessee,

Record of specified persons

The books of account and other documents may be kept in the following forms:

(a) Written;

(b) Electronic form;

(c) Digital form;

(d) Print-outs of data stored in electronic or digital form; or

(e) Any other form of electromagnetic data storage device.

Audit of Accounts

Further, to avail the exemption under Section 11 and Section 12, it is mandatory for a trust to get its books of accounts audited. The books of accounts are required to be audited where the total income of the trust before exemption under sections 11 and 12 exceeds the maximum amount not chargeable to tax. The accounts of the trust for that year should be audited by a Chartered Accountant upto 30 September of the following year. The audit report has to be furnished in Form 10B or Form 10BB at least one month prior to the due date of submission of the return of income.
Filing of return of income

The entities registered under Section 12AB are required to file the return of income under Section139(4A) if the total income without giving effect to the provisions of Sections 11 and 12 exceeds the maximum amount which is not chargeable to Income-tax. The return of income tax should be filled upto 31 October of the following year.

The exemption shall be available only if the return of income is filed within the time allowed to file the original return of income under Section 139(1) or the belated return of income under Section 139(4). Therefore, it means that the trusts or institutions cannot claim the exemption by filing an updated return of income under Section 139(8A).

Introduction: Section 11

Section 11 of the income Tax Act 1961, which is a charging section, is applicable to charitable or religious institutions, provides exemption on the application of income. The language provides that the exemption would apply when the income derived from the property held under trust is applied or is deemed to have been applied for charitable or religious purposes.

Parts of section 11

1. The income must be derived from the property held under trust or legal obligation.
2. Such trusts or other legal obligation should be wholly for religious or charitable purposes.
3. Such income is applied or accumulated for application to such religious or charitable purposes within the taxable territories of India.
4. To the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.

Such income

Section 11 of the Income Tax Act 1961, uses the expression ‘such income’ in section 11(1).
It includes all income which is derived from the property held under trust and includes the income which is deemed as income derived from property held under trust. For example, the voluntary contributions are deemed as income derived from property held under trust and treated as income under section 224)(iia) of Income Tax Act 1961

Meaning of such income

1. Income from the activities of the trust
2. Interest income
3. Dividend income
4. Voluntary contribution
5. Income from the property
6. Capital gains on sale of property
7. Income derived from the investments.

Such purposes in India

The most important part of section 11(1) is ‘such purposes’. 
Meaning of such purposes are following:
1. It means the charitable or religious purposes.
2. It means the purposes which are traversed in the constitution.
3. It means the objects which are mentioned in the instrument.
4. It means the purposes which are constituted and which are notified at the time of seeking registration.

The occurring of the expression, ‘Such purposes in India’ has a special significance. In order to claim exemption applying income for such purposes in India is a pre-requisite condition.

In this regard, the issue which arises for consideration is as follows:
1. Whether the application should be in India?
2. Weather such proposes in India includes amount applied outside India for the objects in India?

Application in India

The first view is that for the purposes of claiming exemption the application of income has to be made in India. The application, in other words, means the amount has to be spent in India. If the amount is applied outside India, it does not satisfy the condition as required under Section 11 of the Income Tax Act 1961.

Application outside India, purposes in India

The second possible view is that the application made outside India but for the purposes in India, therefor, there is no infringement of section 11(1) of the Income Tax Act 1961. However, if the application and purpose is outside India a permission from the CBDT has required.
Hypothetical income: In the case of CIT v/s Shoorji Vallabh Das & Co. (1962) 46 ITR 144 (SC). The income to be received in real sense in hand of the trust.
Head wise computation not applicable: In the case of CIT v/s Rao Bahadur Calavala Cunnan ITR 12(Mad), it was held that the income has to be arrived in the normal commercial manner without applying section14.
Example:-
Rent income received from the house property cannot be computed under section 22.
Section 11(1)(a)

Section 11 income from property held for charitable or religious purposes

Section 11(1) subject to the provisions of sections 60 to 63. The following income shall not be included in the total income of the previous year of the person in receipt of the income-

(a) Income derived from property held under trust or institutions wholly for charitable or religious purposes to the extent that such income is applied to charitable and religious purposes in India, and where any income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.
Meaning of applied- The word applied has been used in a broadest sense this term upholds all expenditures whether revenue or capital incurred for the purposes of charitable or religious.

1. It recognizes not only the amount spent but also earmarked for future spending. This is evident from reading of section 11(2) of the income tax act, 1961.
2. It consists of all expenditures incurred irrespective of revenue or capital in nature.
3. Deemed application is an ‘application’. This is apparent from reading of section 11(2) of the income tax act, 1961.
4. Mere passing book entry without earmarking of funds could not be said to ‘be applied’.

Examples of the application of income:

1. Establishment expenses
2. Administrative expenses
3. Capital expenditure
4. Payment of taxes
5. Repayment of debts
6. Salary paid to trustees and managers
7. Inter charity voluntary donation from the current year income

Section 11(2) Accumulation of income

[Section 11(2)] : Accumulation or Setting apart of the Trust Income for a Specific Purpose

Accumulation of income in excess of 15% of the income earned [Section 11(2)]

As already mentioned, assessee is allowed to accumulate upto 15% of the income earned during the year for application for charitable or religious purposes in India in future. If the assessee wants to accumulate or set apart the income in addition to 15% of the income, he can do so if certain conditions are satisfied. In this case, the amount accumulated in excess of 15% shall be deemed to have been applied for charitable or religious purposes in India during the previous year itself.

Section 11(2) further liberalizes and enlarges the exemption given under section 11(1)(a). A combined reading of both the provisions would clearly show that section 11(2), while enlarging the scope of exemption, removes the restriction imposed by section 11(1)(a) but it does not take away any the exemption allowed by section 11(1)(a).

Conditions to be satisfied

Exemption under section 11(2) shall be allowed subject to the following conditions being satisfied:
1. Such person furnishes a statement in Form No. 10 electronically either under digital signature or electronic verification code 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 to be accumulated or set apart, which shall in no case exceed five years;
2. The money so accumulated or set apart is invested or deposited in the forms or modes specified in section 11(5);
3. The statement referred to in clause (a) is furnished on or before the due date specified under section 139(1) for furnishing the return of income for the previous year. 

Section 11(3) in The Income Tax Act, 1961

Any income referred to in sub-section (2) which—
(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto,

(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or

(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section.

(d) is credited or paid to any trust or institution registered under section 12AA [or section 12AB] 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) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10,

Shall be deemed to be the income of such person in the previous year-  
If the accumulated income is not applied within 5 years, the same shall be taxed in the 5th year itself under section 11|(3)(c).
Up to Assessment year 2022-23, it was taxed in the 6th year under section 11|(3)(c) of the Act.

For example:

In the instant case, the institution accumulated Rs. 25,00,000/- in the previous year 2022-23 for acquiring and developing a land of construction of a new hospital for a period of 3 years. The assessee was required to utilize this amount by 31.03.2026.  the assessee has spent Rs. 19,00,000/- (out of accumulated sum Rs. 25,00,000/-) in the previous year 2025-26. Therefore, the unutilized amount of Rs. 6,00,000/- is deemed to be income of the previous year 2025-26 (Related Assessment Year : 2026-27).

Section 11(3A)

Section 11(3A) provides that where the Income invested/deposited in approved modes cannot be applied for the purposes for which it was accumulated or set apart, due to circumstances beyond the control of the assessee, such assessee can make an application to the assessing officer specifying such other purpose for which he wants to utilize such accumulated income. Such other purposes should be in conformity to the objects of the trust. The Assessing officer in this case, may allow the application of such income to such other purposes.

Relaxation under Section 11(2), due to circumstances beyond its control.

Conditions for availing the relaxation;

1. Request the Assessing officer to allow the application to some other charitable purposes.
2. Satisfaction of the Assessing officer that the non-application was beyond the control of the organization.
3. The unutilized amount will be applied for such other objects which are in conformity with the objects of the trust.

Section-11(4)

Profits and gains from a business undertaking held under a trust

Section 11(4) provides that a business undertaking held by a trust will be treated as a property held under a trust in the other words for the purposes of section 11. "property held under trust" includes a business undertaking so held, and where the income determined by the Assessing officer exceeds the income as shown in the books of account of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes and thus, it will be liable to be taxed accordingly. In other words, if income shown in accounts of such business undertaking is less than income determined by Assessing Officer, then such excess will not be exempt.

Section 11(5) Of Income Tax Act
Section 11(5) of the IT Act deals with the modes of investment prescribed under Section 11 :
• Immovable property investments (not including machinery and plants).
• Investment in 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;
• Savings certificates and other securities or certificates issued by the Central Government
• Public sector company’s shares are subject to the conditions specified.
• Deposit with a scheduled bank or a cooperative society engaged in banking (including a cooperative land mortgage bank or a cooperative land development bank).
• Deposits in Post Office Savings Bank Accounts.
• Investments in UTI units.
• Securities issued by financial corporations that take part in long-term industrial financing in India are eligible for availing deductions as per Section 36(1)(viii).
• Deposits or investments 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.
• Debentures issued for or by companies for which the Central Government guarantees the principal and interest amount.  
• Shares and mutual fund units of National Skill Development Centre.
• Deposits with Industrial Development Bank of India.
• Other modes of investment as per the Central Government. 

Text of section 11(5) 

The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) 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 carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).
Explanation.- In this clause, "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 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 and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;
(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 and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;
(ixa) 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.
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 375 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 (18 of 1964);
(xii) any other form or mode of investment or deposit as may be prescribed.

Section 11(6) in The Income Tax Act, 1961
In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.
Key note:
Inserted by the finance (No. 2) Act, 2014 with effect from 01.04.2015.
1. The finance (No. 2) Act, 2014 with effect from 01.04.2015 lays down that depreciation will not be considered as application of income if the assets on which depreciation has been charged has already been considered as a part of application of income, earlier.
2. Depreciation shall be permissible on assets bit created out of income
3. Depreciation cannot be claimed if cost of acquisition is Nil.
4. The depreciation rates provided by the Income-tax laws are not mandatory.
5. Section 32 will have no application to charitable organization.

Section 11(7) in The Income Tax Act, 1961
Where a trust or an institution has been granted registration [under section 12AA or section 12AB] or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and the said registration is in force for any previous year, then, nothing contained in section 10 [other than [clause (1), clause (23C) and clause (46)] thereof] shall operate to exclude any income derived from the property held under trust from the total income of the person in receipt thereof for that previous year:
[Provided that such registration shall become inoperative from the date on which the trust or institution is approved under clause (23C) of section 10 or is notified under clause (46) of the said section, as the case may be, or the date on which this proviso has come into force, whichever is later:
Provided further that the trust or institution, whose registration has become inoperative under the first proviso, may apply to get its registration operative [under section 12AA] [or section 12AB] subject to the condition that on doing so, the approval under clause (23C) of section 10 or notification under clause (46) of the said section, 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 the respective clauses.]
[Explanation. - For the purposes of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it
Provided that where during any previous year, any sum has been claimed to have been applied by the trust or institution, such sum shall not be allowed as application in any subsequent previous year.

Section 12 of Income Tax Act
"Income of trusts or institutions from contributions"
Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.

Accumulation of Income

An organisation can accumulate 15% of its income indefinitely. In other words, up to 15% of income can be transferred to the corpus every year. Income accumulated or set apart in excess of 15% of the income where such accumulation is not allowed under any specific provisions of the Act shall be taxable under Section 115BBI. The exemption is allowed to a trust for the income accumulated in excess of 15% subject to fulfilment of certain conditions. This exemption, however, shall be withdrawn if such conditions are not complied with by the assessee.

As per Section 11(2), if a trust is not able to apply 85 per cent of its income in a particular year, it can accumulate the shortfall to be used for religious or charitable purposes within the next 5 years. This accumulation is allowed if the assessing officer is informed about the purpose of the accumulation and the period for which the income is being accumulated. The information is to be furnished in Form 10 at least two months prior to the due date specified under Section 139(1) for furnishing the return of income for the previous year.

Even if a charitable institution is not able to utilize 85% of its income for charitable or religious purposes in India, it shall be deemed to be applied for such purposes in the situations described below. Such deemed application of income shall be considered when the institution furnishes the details electronically in Form9A at least two months prior to the due date specified under Section 139(1) for furnishing the return of income for the previous year.

(a) Where income has not been received in the previous year;
(b) Where income could not be applied due to other reasons.
 

Taxation of income accumulated u/s 11(2)
 

The circumstances in which the exemption for the accumulated amount under section 11(2) shall be withdrawn and the year in which such amount shall be taxable have been mentioned below:

(a) If the amount is applied for purposes other than religious or charitable or ceases to be accumulated or set apart for application to religious or charitable purposes. It shall be deemed to be the income of the previous year in which it is so applied or ceases to be so accumulated or set apart.

(b) If it ceases to remain invested in the statutory form of investment specified under Section 11(5). It shall be deemed to be the income of such person of the previous year in which it ceases to remain so invested or deposited.

(c) If it is not utilized for the purpose for which it is so accumulated within the allowed period of 5 years. It shall be deemed to be the income of such person of the previous year being the last previous year of the period, for which the income is accumulated or set apart but not utilized for the purpose for which it is so accumulated or set apart.

(d) It is credited or paid to any other trust or institution registered under Section 12AA/12AB or any other fund, institution, trust, hospital, university or other educational institution, or hospital or any other medical institution referred under Section 10(23C)(iv), (v), (vi) and (via). It shall be deemed to be the income of such person of the previous year in which it is credited or paid to such trust, or institution.

The amount so accumulated by the trust shall be utilized for the charitable and religious purposes for which it has been created. Until its utilization, the amount shall be invested in the statutory forms as specified in Section 11(5). Any use of the accumulated funds for any other purpose or if it is not utilized at all, the exemption allowed in the year of accumulation shall be withdrawn.

Where it is beyond the control of the assessee trust or institution to spend the income for which it was accumulated, the Assessing Officer may allow the trust to apply the income so accumulated for any other religious or charitable purposes provided such other purposes are in conformity with the objects of the trust. In such cases, the exemption, granted to the assessee, cannot be withdrawn and the provisions of Section 11(2) will continue to apply. Assessee may apply to the assessing officer for further extension.

Some of the instances of default where the tax implication imposed by npo

(d)Non-applying for renewal of Registration or for making the provisional Registration into a normal registration.

6. Not applying for Re-registration for confirming the modification of the object Clause.

7. Violation of section 13(1)

(a) Income applied for the private religious purpose [Section 13(1)(a)]

(b) Income applied for particular religious community or caste [Section 13(1)(b)]

(c) Benefit to interested person [Section 13(1)(c)]

(d) Investment of funds in an unspecified manner [Section 13(1)(d)].

8. Incidental business activity in excess of 20% of gross receipt [Section 13(8)]

9.Anonymous donations in excess of the exemption limit [Section 13(7)]

Different Tax Rates for NPO

1. Section 115BBI Applicable in case of taxation of Specified Income mentioned in the explanation of section 15BBI at a rate of 30%.

2. When benefits of Sections 11 and 12 are withdrawn for a specified reason, the income will be subject to tax as per section 13(10), read with section 164(2).

3. As of Normal Assessee: - When the assessee has not applied for the registration or approval under the income tax act.

4. Section 115BBC: Tax will be applicable @ 30% without any set-off or deduction under any other head on the anonymous donation received by trust.

Violation by Assesses

Taxing specified @30% u/s 115BBI

Registration to continue and taxing net income under section 13(10)

Registration to be cancelled

Taxing specified @30% u/s 115BBI

The Finance Act, 2022 inserted a new Section 115BBI, to provide a special rate of tax for the specified incomes of trust, which is applicable from Assessment year 2023-24

(a) Income accumulated or set apart in excess of fifteen per cent of the income

(b) Violations section 11(3) , Amount not spend with in five year after filing form no 10

     Violation section  11(1B) Amount not spend with in  time  after filing form no 9A

(c) Income invested in modes other than 11(5)

(d) Benefits to specified persons section 13(1)(.c.)]

(e) Application outside India without Board approval [section 11(1)(.c.)]

Different situation in which the benefit will cease under section 11(1B) and 11(3) 

(a) It is applied for purposes other than religious or charitable

(b) It ceases to remain invested in statutory form of investment specified under section 11(5);

(c) It is not utilized for the purpose for which it is so accumulated within the allowed period of 5 years.

(d) Donation to other fund, institution, trust cover to sec 11 and 10(23C) (iv), (v), (vi) and (via).(e)Income is applied for private religious purposes or for the benefit of a particular religious community or a particular interested person which does not endure for the benefit of public as a whole.

Registration to continue and taxing net income under section 13(10)

(a) If the trust or institution does not maintain books of accounts as prescribed by rule 17AA

(b) Return of income has not been furnished within time

(c)  Audit report not submitted within time

(d) Commercial activities are carried out by the trust or institution and proviso to clause (15)of section 2 of the Act is applicable.

The income of the trust or institution is to be computed on a net basis as follows

(a) Revenue expenses are allowed

(b) Expenses should be in India

(c) Expenses should be for the objects of the trust or institution

(d) Expenditure should not be from corpus as of 31st March of the previous year

(e) Expenditure should not be from loans and borrowings

(f ) Depreciation on assets not allowed if the cost of asset claimed as application

(g) Expenditure should not be donations to other persons

(h) Section 40A(3)/(3A)/40(a)(ia) shall apply

(i)  No deduction in respect set-off of any loss shall be allowed

The most severe violations, the registration of the NPO is cancelled.

(a) Application beyond objects

(b) Non maintenance of books of incidental business

(c) Application for private religious purpose

(d) Benefits to particular religious community or caste

(e) In genuine activity/violation of conditions for registration

(f) Violation of other laws

(g) Incomplete, false, or incorrect application in registration

(h) The registration is not removed from the old regime to the new regime or cancelled by the Income Tax or after getting the provisional not applied for within the time for regular.

Section 115TD

Section 115TD was introduced by the Finance Act, 2016. It provides for the taxation of accreted income of the trust in certain cases. Accreted value of the assets is required to be taxed which is the fair market value of all the assets as reduced by the liabilities

Conversion into any form which is not eligible for grant of registration under section 12AA.

Merger with an entity which is not having similar objectives and not registered u/s 12AA.

Failure to transfer, upon dissolution, all its assets to any other trust or institution registered under section 12AA or approved u/s 10(23C) within a period of twelve months from the end of the month in which the dissolution takes place.

Not applied for provisional / regular registration within time, to be imposed 115 TD/115TE/115TF (In budget 2023)

Conversion into a form which is not eligible for grant of registration’ – Meaning

The specified registration granted to it has been cancelled

It has adopted or undertaken modification of its objects

(i)  Has not applied for fresh registration to obtain specified registration in the said previous year

(ii) Has filed application for fresh registration to obtain specified registration but the said application has been rejected

(iii) It fails to make an application for approval in accordance with clause (i)/(ii)/(iii) of first proviso to section 10(23C) or for registration under section 12A(1)(ac)(i)/(ii)/(iii), within the period specified therein, which expires in the said previous year.