CHAPTER- 4 EXEMPTIONS AVAILABLE TO PUBLIC CHARITABLE TRUSTS UNDER THE INCOME TAX ACT,1961

Transcription

1 CHAPTER- 4 EXEMPTIONS AVAILABLE TO PUBLIC CHARITABLE TRUSTS UNDER THE INCOME TAX ACT,1961

2 CHAPTER 4 EXEMPTIONS AVAILABLE TO PUBLIC CHARITABLE TRUSTS UNDER THE INCOME TAX ACT,1961 CATEGORIES OF EXEMPTIONS 4.1 The basic principle of taxation is that any person earning income should pay some portion of the same to the exchequer by way of taxes, popularly known as Income Tax or Corporate Tax. However, the Income Tax Act has specifically provided certain incomes to be exempt from the purview of taxation. The income of charitable trusts is made exempt, the rationale behind which has already been discussed in the preceding chapters. 4.2 The exemptions granted to charitable trusts and other similar institutions, under the Income Tax Act, can be broadly classified in three categories. The categories are:- Category 1-Blanket Exemptions D Un-monitored and blanket tax exemption for - * Educational institutions/ hospitals wholly or substantially financed by Government [10(23C)(iiiab), (iiiac)] * Educational institutions/ hospitals with aggregate annual receipts below Rs.l crore. [10(23C)(iiiad) and (iiiae)] D Category 2-Exemptions with some restrictions Charitable Fund or institution with importance throughout India /States [10(23C)(iv)] 80

3 D Public religious or public religious and charitable trust or institution [10(23C)(v)] n Educational institutions/hospitals with aggregate annual receipts above Rs.l crore [10(23C)(vi),(via)] n Category 3- Exemptions with full restrictions Public religious charitable trusts or legal obligations [Sections 11 to 13] The detailed scheme of exemptions under the various sections is mow proposed to be discussed with a view to understand the legislative intent and the actual operation of these sections. 4.3 The two main sections that grant exemption to the income of trusts are Section 11 and Section 12 of the Income Tax ACT, In addition to these two sections, Section 10(23C ) also exempts the income of institutions working in the field of education or medical relief existing solely for charitable or philanthropic purposes and not for the purpose of profit and also income of institutions like universities, colleges etc. which have been substantially funded by the government. As majority of the charitable trusts run educational institutes and/or hospitals, this is a relevant section from their point of view. In addition to these two sections, a very important section is Section 80G of the Act which grants tax exemption to the donor in respect of the donation given by him to a trust recognized under this section. It is easier for a trust to get donation when it is recognized under Section 80G.

4 In addition to these sections, Section 35(1 )(ii) allows deduction of expenditure on scientific research while section 35AC allows expenditure on eligible projects or schemes. These two sections are also sometimes used by charitable trusts. However, as the scheme of these two sections is totally different from that of exemption to charitable trust, these two sections are not considered in this treatise. 4.4 As mentioned earlier, section 11, 12, 10(23C) & section 80G form the back bone of the exemptions given to a charitable trust. The exact sections as appearing in the Income Tax Act, 1961, alongwith the necessary rules and forms are enclosed as Annexure -A to the thesis. From the researcher's point of view it is however necessary to understand the scheme of these sections and various issues emerging out of these sections by way of assessments as well as judicial pronouncements. As mentioned earlier, there has been a plurality of opinions and interpretations about the correct meaning of these sections. Fortunately, now over the years, the meanings have become clear due to judicial pronouncements of the various high courts as well as the Hon Supreme court. The few of the issues that have been debated can be briefly summarised as under : 1. What is income? Does it refer to the gross income,total income or net income? 2. How is it to be computed for the purpose of section 11? 3. What is property held under a trust referred to in sec. 11(1 )(a)? 4. What is application of income? 5. What is accumulated or set apart for application? 82

5 6. What treatment is to be provided to the business carried out by the trust? The various issues are discussed below. At this point, it is necessary to mention that it is neither possible to cover all the judicial discussions on this issue nor is the intention of the study. Effort has been made to largely cover the salient features emerging from the plethora of judicial pronouncements available. SECTION 11 OF THE INCOME TAX ACT, Section 11 lays down in detail the statutory provisions for exempting income from property held for charitable or religious purposes. The scheme of this section is as under : Section 11(1) describes the types of income that shall not be included in the total income of the person for the previous year. This income includes income derived from property held under trust wholly for charitable or religious purposes to the extent such income is applied for such purposes in India. If the income is not applied but accumulated or set apart for application the extent to which such income is not in excess of 15% of the income from such property is also held as exempt. This section also holds income in the form of voluntary contributions forming corpus of the trust or institution to be exempt. Section 11(1 A) describes the treatment to be given to the capital gains arising out of the transfer of capital assets being property held under trust wholly for religious or charitable purposes.

6 Section 11(1B) is a deeming provision in respect of the income covered under clause 2 of sub section 1. Section 11(2) describes the mode of accumulation or setting apart of income in case 85% of the income is not utilized for charitable purposes. < Section 11(3) is another deeming provision. It specifies that (a) income referred to in sub section (2) applied for another than charitable purposes, (b) income that ceases to be accumulated or set apart for application, (c) income which ceases to remain invested or deposited in the forms or modes specified in section 11(5), (d) income which is paid or credited to any other trust or institution shall be deemed to be income of the person for the previous year. Section 11 (3A) authorizes the assessing officer to condone the default of the assessee as mentioned above, due to circumstances beyond the control of the person in receipt of the income. * Section 11(4) specifies that property held under trust includes a business undertaking so held. It also empowers the AO to determine the income of such business undertaking as per the provisions of the Act. If the income determined by the AO is in excess of the income as shown by the trust, the excess shall be deemed to be applied to purposes other than charitable or religious purposes. 84

7 Section 11(5) lays down the forms and modes in detail for investing or depositing the accumulated income. Section ll(5)(xii) refers to any other form or mode of investment or deposit as may be prescribed thus leaving a route open for the government to include any further modes of investment as deemed fit. SECTION Section 12 describes the treatment to be given to income of trusts or institutions from contributions. The scheme of the section is as under : 'I* > Section 12(1) describes the treatment to be given to voluntary contributions received by trusts or institutions created wholly for charitable or religious purposes. This section deems such contributions to be income derived from property held under trust. It also specifies that the provisions of section 13 regarding forfeiture of exemptions will apply to such income. Section 12(2) specifies that value of any medical or educational services, made available by any charitable or religious trust, running a medical or educational institution, to any person referred to in section 13, shall be deemed to be income of such trust and shall be chargeable to income tax, notwithstanding the provisions of section 11(1). THE CONCEPT OF INCOME 4.7 Section 11(1) provides that subject to the provisions of Section 60 to 63, "the following income shall not be included in 85

8 the total income of the previous year"... The reference in subsection (a) is invariably to "income" and not to "total income". The expression "total income" has been specifically defined in Section 2(45) of the Act as "the total amount of income computed in the manner laid down in this Act." It would, accordingly, be incorrect to assign to the word "income" used in Section 11(1) (a), the same meaning as has been specifically assigned to the expression "total income" vide Section 2(45) of the Act. This is the view taken by the Central Board of Direct Taxes in its Circular No. 5 LXX-6 of 1968 dated 19th June The Board further explained in the said Circular that where the trust derives income from house property, interest on securities, capital gains or other sources, the word "income" should be understood in its commercial sense. In C.I.T. v. Rao Bahadur Calavala Cunnan Chetty Charifies [1982]135ITR485(MAD) their Lordships of the Madras High Court held that taking into account 1 the purposes for which the condifions of Sec. 11(1) (a) are imposed, it would be clear that one has to consider the income as arrived at in the context of what is available in the hands of the assessee, subject of course to any adjustment for expenses extraneous to the trust. The expression "income" has to be understood in the popular or general sense and not in the sense in which the income is arrived at for purposes of assessment to tax by the applications of some artificial provisions either giving or denying deductions. If the expression "income" is so understood, then the Court held that the assessing authorities have to take the accounts of a charitable institution with reference to the receipts and deduct there form the expenses necessary for earning or looking after that income. The net amount that remains would be available for distribution or 86

9 application for charitable purposes. In applying the income for charitable purposes, even capital expenditure may be incurred. Therefore, the nature of the expenditure in the hands of the entity, which receives the money, is not the criterion. The Court further held that there is no need or scope to arrive at the income of a charitable trust in the manner contemplated by the Income Tax Act, i.e. Sec. 14. Since income has to be understood in commercial sense, it is only the net income after meeting the expenses that can be treated as income. It is only out of such income that an amount to the extent of 85% is required to be spent on the objectives of the trust. It was held by the Hon Kerala High Court in the case of CIT V. Program for Community Organisations [1997] 228 ITR 620 (KER ) and later confirmed by the Hon Supreme Court [248] ITR 1 (SC) that the assessee was entitled to have the net income reckoned as income. In its decision the Hon Supreme Court has held as under :- "The question that really requires consideration is whether, for the purposes of section 11(1) (a) of the Income-tax Act, 1961, the amount for the grant of exemption of twenty-five per cent, should be the income of the trust or it should be its total income as determined for the purposes of assessment to income-tax. This question has to be answered in the light of these facts: The assessee-trust received donations in the aggregate sum of Rs. 2, 57,376. It applied thereout for its charitable purposes the aggregate sum of Rs. 1,70,369 leaving a balance of Rs. 87,010. The question is whether the assessee is entitled to accumulate twenty-five per cent, of Rs. 2,57,376 as it contends, or twenty-five 87

10 per cent, of Rs. 87,010, as the Revenue appeared to contend In our view, therefore it is the real income which is to be taken into amount account. The question of deduction which is otherwise allowable in computing the income in a case not covered by section 11 cannot arise while deciding the percentage of application or accumulation. The question of deduction comes only when the income is otherwise chargeable to tax under the provisions of the Income-tax Act, It cannot be disputed that section 11 has given benefit to an assessee-trust, which applies its income for charitable or religious purpose. If the entire income is applied for charitable purpose, the question on payment of any tax would not arise. If a trust desires to accumulate income in excess of the limits laid down in section 11(1), the conditions specified in section 11(2) of the Act have to be fulfilled in respect of the entire accumulation and not merely in respect of the accumulation in excess of 25 per cent, of the income. Further, if the trust does not comply with the conditions laid down in section 11(3) is the entire income accumulated and not merely the income accumulated in excess of the limits specified in section 11(1) of the Income-tax Act, In other words such an assessee loses the benefit of the accumulation permitted under section 11(1). The question of chargeability of a part of income to tax which is not exempt arises only when the accumulation is more than the permissible limit. While making assessment of that part of the income which is in excess of the specified percentage, such taxable income of a trust cannot be classified under different heads. It is only when any income is assessed under a particular head that the question of 88

11 allowing deduction under that head arises for consideration. In a case where an assessee-trust has income comes within the ambit of taxation, it will not be possible for earmarking any part of such an income to a particular head. The head of income is irrelevant unless the entire income comes from one specific head. Since the income from property held under trust has to be arrived at in normal commercial manner and when the income from property held under trust as such is excluded, there is no scope of computing the income from property by applying the provision of section 14 of the Act. The provision of section 14 cannot be pressed into service in such a case. Therefore, the question on allowing any statutory deductions as contemplated by the different provisions of the act dealing with different heads of income in computing the income' accumulated does not arise when the trust loses the benefit of accumulation. " The next question is about depreciation. Should depreciation be considered in computing the income of a charitable trust or not? The income of a charitable trust as contemplated by s.ll(l)(a) is required to be computed in accordance with the normal rules of accountancy. The amount of depreciation debited has to deducted to arrive at the income available for application to the objects of the trust. In the case of CIT v. Bhoruka Public Trust[1999] 240 ITR 513 (CAL), it has been held that :- Welfare In this connection, we may usefully refer to the following observations of the Karnataka High Court in CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28, 31 : 89

12 "The depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence At the end of its effective life, the asset ceases to earn revenue, i.e., the capital value has expired and the asset will have to be replaced or a substitute found. Provision for depreciation is the setting aside, out of the revenue of an accounting period, of the estimated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned. If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance-sheet will not present a true and fair view of the state of affairs; assets should be shown at a figure which represent that part of their value on acquisition which has not yet expired'. " This has been clarified in CBDT circular no 5P of 1968, dt. 19 June The circular states that :- 1. In Board's Circular No. 2-P(LXX-5), dated , it was explained that a religious or charitable trust, claiming exemption under section 11(1), must spend at least 75 per cent of its total 90

13 income for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question has been reconsidered by the Board and the correct legal position is explained below. 2. Section 11 (I) provides that subject to the provisions of sections 60 to 63, "the following income shall not be included in the total income of the previous year...." The reference in clause (a) is invariably to "Income " and not to "total income ". The expression "total income" has been specifically defined in section 2(45) as "the total amount of income computed in the manner laid down in this Act". It would, accordingly, be incorrect to assign to the word "income", used in section 1 l(l)(a), the same meaning as has been specifically assigned to the expression "total income" vide section 2(45). 3. In the case of a business undertaking, held under trust, its "income" will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the ITO, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed in the account will be eligible for exemption under section 11(1), the permitted accumulation of 25 per cent will also be calculated with reference to this income. 4. Where the trust derives income from house property interest on securities, capital gains, or other sources, the word "income" should be understood in its commercial sense, i.e., book income,

14 after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1). 5. To sum up the business income of the trust, as disclosed by the accounts plus its other income computed as above, will be the "income" of the trust for the purposes of section 11(1). Further, the trust must spend at least 75 per cent of this income and not accumulate more than 25 per cent thereof. The excess accumulation, if any, will become taxable under section 11(1). " It has been also held that agricultural income of a trust also has to satisfy the conditions as regards application and accumulation of income. the Hon Madras High Court has held as under in the case of Rev Fr Superior v. State of Tamilnadu [2000]242 ITR 148 (MAD) that :- Section 4(b) of the Tamil Nadu Agricultural Income-tax Act reads as under: "any agricultural income derived from property held under trust, wholly or partly for charitable or religious purposes, to the same extent to which income derived from property held under trust 92

15 wholly or partly for charitable or religious purposes, is not included in the total income for purposes of the Income-tax Act, 1961 (Central Act XLIII of 1961);" It was therefore necessary for the assessee to show that during the relevant year of assessment, the assessee had been recognised as a charitable and religious trust under the Income-tax Act and the income derived from the property held by it under trust for charitable and religious purpose had not been included in the total income for the purposes assessment year. " of the Central Act, for the relevant This follows that even a charitable institute having only agricultural income is required to register the institution u/s 12A and follow all the conditions imposed on such institutions under section 11 to Another important issue is regarding voluntary contributions. " Voluntary contributions'" means donations proper. It means and includes money gifted, or given gratuitously and without consideration. But entrance fees and subscriptions paid by entrants to a society or an institution as a condition precedent to their membership and as the price of admission to the privileges and benefits of the society or institution, are given under a contract and are not part of voluntary contributions. From the very beginning i.e. even under the 1922 Act, the voluntary contributions received by a charitable or religious institution and applicable solely to charitable or religious purposes were not to be included in the total income of the trust or the institution, as the case may be. This exemption was granted by Section 4(3) (ii) of the I.T. Act, 93

16 1922. Section 12(1) of the Income-tax Act, 1961 also granted similar exemption. But in the 1961 Act, a new sub-section (2) was inserted in Section 12 of the Act to provide that where a voluntary contribution was made to a trust or a charitable or religious institution by another charitable or religious institution to which the provisions of Section 11 were applicable, such voluntary contributions were deemed as income derived from property in the hands of the recipient trust. However, the Finance Act, 1972 made drastic change; inter alia, in regard to the provisions relating to voluntary contributions. As regards the objects of these changes, it was stated in Circular No. 108 dated 20th March, 1973 issued by the Central Board of Direct Taxes, New Delhi that these changes were made with a view to ensuring that the tax exempt funds of charitable and religious trusts or institutions are applied to the purposes of such trusts and institutions, and are not diverted for the benefit of the author of the trust, founder of the institution, persons who have made substantial contributions or who manage the affairs of the trust or institution By the Finance Act, 1972, the definition of the word '"income" in Section 2(24) of the Income-tax Act, 1961 was amended to specifically provide that voluntary contributions received by a charitable or religious trust or institution, regardless of whether such trust or institution had been created or established wholly or partly for charitable or religious purposes, will be regarded as ''income'''' for the purposes of the Income-tax Act, Similarly, Section 12 of the Act was recast to provide specifically that voluntary contributions received by a trust or institution created or established wholly for charitable or religious purposes shall for the purposes of Section 11 and 13 of the Act, be regarded as "income" derived from 94

17 property held under trust wholly for charitable or religious purpose. However, in Section 1 l(l)(d) as well as in Section 12 of the Act, it is abundantly made clear that the voluntary contributions, which are made by the donor with a specific direction that they shall form part of the corpus of the trust or institution, shall not be regarded as income in the hands of the recipient trust. Thus, if a donor, while making the donation, makes it clear that the donation so made shall form part of the corpus of the trust or institution, it would be a capital receipt and shall not be chargeable to tax. It must, however, be mentioned here that even the earlier provisions contained in Section 4(3) (ii) of the I.T. Act, 1922 as well as section 12 of the I.T. Act, 1961 applied only where the contribution constituted income of the receiving trust; they had no application where what was received by the trust formed part of its capital. APPLICATION OF INCOME 4.9 When income is earned, it should be spent or saved. In respect of trusts, however, spending for the purposes of the trust is known as "application " and saving for the spending in future is known as "accumulation ".Section 11 lays down how much should be 'applied' or 'accumulated' and if required to be 'accumulated' under what conditions. In a decision pertaining to the 1922 Act, the Hon Supreme Court has laid down the basic principles which are still relevant. In the case of HEH Nizam's v CIT [ 1966] 59 ITR 582 (SC), it was held that :- "Under the said clause, trust income, irrespective of the fact whether the said purposes were within or without the taxable 95

18 territories, was exempt from tax in so far as the said income was applied or finally set apart for the said purposes. Presumably, as the State did not like to forgo the revenue in favour of a charity outside the country, the amended clause described with precision the class or kind of income that is exempt thereunder so as to exclude therefrom income applied or accumulated for religious or charitable purposes without the taxable territories. The substantive part of clause (i) is in two parts : the first part relates to the income derived from property held under trust wholly for religious or charitable purposes and the second part, to income derived from property so held in part only for such purposes. But the necessary condition for attracting the first part of the clause is that the said income is applied or accumulated for application to such religious or charitable purposes within the taxable territories; and to attract the second part, the income from the property so held in part shall have been applied or finally set apart for application to the said purposes. A comparative study of the two parts clarifies the scope of the provision. The expression used in the first part is "applied or accumulated for application" and the expression used in the second part "applied or finally set apart for application". The words "applied or finally set apart for application" in the second part indicate that unless the income from the said property is applied or finally set apart for the purposes within the taxable territories, the said income does not earn the exemption. There cannot be any reason why a different meaning should be given to the expression "applied or accumulated for application" in the first part of the clause, for, on principle, there cannot be any possible distinction between such income from the property wholly held under trust or a part of the 96

19 property held in trust. The words "applied" and "accumulated", therefore, must mean "applied or finally set apart". "Applied" means that the income is actually applied for the said purposes in the taxable territories; and "accumulated" means that the income is set apart during the year for future spending on the said purposes. The expression "accumulated for a purpose" involves a conscious act in praesenti and posits a clear indication on the part of the trustee to set apart the income for that purpose. It is, therefore, manifest that under clause (i), only income from the property wholly or in part held in trust actually applied or set apart for application for future spending on religious or charitable purposes within the taxable territories is exempted from inclusion in the total income. " 4.10 Decisions of the various courts have indicated different situations which are categorized as apphcation of income. Some of the important ones are : 1. estabhshment expenses to be treated as application of income- CIT v.birla Janahit Trust [1994] 208 ITR 372(CAL) 2. Payment of tax out of the current year's income has to be considered as application for charitable purposes.-cit V Ganga Charity Trust [1986] 162 ITR 612 (GUJ). 3. Application need not precede receipt of income/voluntary contributions.-siddrammana Charities Trust v CIT [1974] 96 ITR 275(MAD) 4. Repayment of loan as well as advancement of loan for the purpose of the trust would amount to application of income - Circular No 100 of CBDT dt 24 January

20 5. Expenditure for capital outlay is allocation as this word has a wider meaning than 'expenditure' 6. Donation to another charitable or religious trust counts as application of income -CBDT Instruction NO 1132 dt January 5, Reinvestment of sale proceeds of a capital asset in another capital asset should be treated as application - Circular No 52 of CBDT dt 30 December Discharge of past liability amounts to application - R.BShreram Trust v. CIT [1998] 233 ITR 53 (SC) These are only a few illustrative cases which bring about the principle of application of income. There can be and will be several unique situations resulting in the interpretation of this term. ACCUMLATION OF INCOME 4.11 The trusts are allowed to accumulate or set apart income derived by them from property held under the trust,provided they fulfill the conditions laid out in section 11(2) read with rule 17 and application in form no 10. The most primary condition is that the purpose of accumulation should be specified in Form NO 10. It has been held in the case of DIT(Exem) v Trustees of Singhania Charitable trust [1993] 199 ITR 819(CAL) that :- "Section 11(1) itself provides for marginal setting apart and accumulation not in excess of 25 per cent, of the income of the trust. It is only such accumulation which can he taken for the broad purposes of the trust as a whole that the statute does not 98

21 require specification of the purpose. Such setting apart for any of the purposes of the trust is, however, a short-term accumulation, accumulation not beyond the year next succeeding. It is subsection (2) which provides for the long-term accumulation of the income. Obviously, such long-term accumulation should be for a definite and concrete purpose or purposes. What the assessee has sought to be permitted to do here is to accumulate not for any determinate purpose or purposes but for the objects as enshrined in the trust deed in a blanket manner. Accumulation in such a global manner is definitely not in the contemplation of section 11(2) when it is construed in its setting. The assessee's contention that saving and accumulation of income for future application of the same is for the purposes of the trust in the widest terms so as to embrace the entirety of the objects clause of the trust deed would render the requirement of specification of the purpose for accumulation in that sub-section redundant. The purposes to be specified cannot, under any circumstances, tread beyond the objects clause of the trust. The Legislature could not have thought of the need of specification of the purpose if it did not have in mind the particularity of the purpose of purposes falling within the ambit of the objects clause of the trust deed. When sub-section (2) of section 11 requires specijication of the purpose, it does so having in mind a statement of some specijic purpose or purposes out of the multiple purposes for which the trust stands. Were it not so, there would have been no mandate for such specification. For, a charitable trust, in no circumstances, can apply its income, whether current or accumulated, for any purposes other than the objects for which it stands. The very fact that the statute requires the purpose jbr accumulation to be specified implies such a 99

22 purpose to be a concrete one, an itemized purpose or a purpose instrumental or ancillary to the implementation of its object or objects. The very requirement of specification of purpose predicates that the purpose must have an individuality. In our view, the provision of sub-section (2) is a concession provision to enable a charitable trust to meet the contingency where the fulfillment of any project within its object or objects needs heavy outlay to call for accumulation to amass sufficient money to implement it. Therefore, specification of purpose as required by section 11 (2) admits of no amount of vagueness about such The assessing officer has every right to scrutinize Form No 10 and the application of the assessee regarding accumulation of income. However, there is a major controversy regarding when the investments covered by form no 10 are required to be made. Paragraph 2 of Form 10 requires that the investment has to be made before the expiry of six months commencing from the end of the relevant previous year. The Hon. Madras High Court has held in the case of ITO V. MCT trust [1976] 102 ITR 138 (MAD) that "In the Income-tax Act itself generally time limits are provided by the statutory provisions. See sections 139, 249, 253, and 256. Section 200 provides for the rule-making authority prescribing the time within which any person deducting tax had to pay it to the credit of the Central Government. Therefore, it is not as if the legislature has left the entire question of prescriptions of time to subordinate legislation. If the legislature was so minded as to think it necessary to leave the question of providing any time limit 100

23 in regard to section 11 of the Act to the rule-making authority then it would have said so as in section 200. Else it would have itself fixed the time limit as done in the other provisions mentioned above. The forgoing discussions would clearly show that the legislature does not part with the power to prescribe limitations, which it jealously retains to itself unless it intends to do so in clear and unambiguous terms or by necessary intendment. The introduction of the time element in paragraph 2 of Form No. 10 prescribed by the Rules cannot, therefore, be sustained. In the result, we agree with the learned judge in holding that paragraph 2 of Form No. 10 was not validly prescribed. Paragraph 4 of Form No. 10 would also have to be struck down as ultra vires, as the prayer contained therein is made conditional on the assessee complying with the time limit prescribed in paragraph. " The same view has been upheld by various other high courts also. The rule has been subsequently modified prescribing the time limit as the due date for filing of return u/s 139(1) of the Income Tax Act, 1961 However the Hon. Supreme Court has held in the case of CIT V. Nagpur Hptel Owner's ASSOCIATION [2001] 241 ITR 201(SC) that intimation under section 11 has to be furnished before the assessing authority before the completion of the relevant assessment The CBDT has also granted powers to the jurisdictional CITs under section 119(2)(b) to condone the delay in filing Form No. 10 if the following conditions are satisfied : (i) The genuineness of the trust is not in doubt; 101

24 (ii) (iii) delay; (iv) (v) trust; The delay is only due to oversight; There has been no benefit to settler or trustee due to The investment is made prior to condonation; The accumulation is necessary for the purposes of the UTILISATION OF ACCUMULATED INCOME 4.13 The accumulated income has to be utilized for the purposes of the trust within the specified time limits. Under the following circumstances, the accumulated income becomes chargeable to tax : (i) Where the accumulated income is applied for other than charitable or religious purposes, such income is liable to be taxed in the year of such application [Sec 13 (3)(a)] (ii) Where the accumulated income seizes to be accumulated or set apart for application to religious or charitable purposes, such income is liable to be taxed in the year of cessation [Sec 13 (3)(a)] (iii) Where the accumulated income seizes to remain invested or deposited in any of the forms or modes specified in Section 11(5),, such income is liable to be taxed in the year of cessation [Secl3(3)(b)] (iv) Where the accumulated income is not utilized for specified purposes during the period of accumulation or in the year immediately following the expiry of period of accumulation, such income is liable to be taxed in the year immediately following the expiry of the period of accumulation [Sec 13 (3)(c)] 102

25 Substantial changes have been made to this section by Finance Act 2001 and Finance Act By Finance Act 2001, the maximum period of accumulation has been curtailed from 10 years to 5 years by inserting a proviso in section 11(2). It was noticed that the period of 10 years available for accumulation of unapplied income was too long a period and was needed to be curtailed. This was because any income of a charitable trust is required to be spent on charitable purposes and not just to be accumulated ad infinitum. The period of 10 years was also perceived to be creating an impediment for proper monitoring of the trust by the Assessing Officer because of its sheer duration. This period has now been curtailed to 5 years which is reasonable period of time. SCOPE OF EXEMPTION FOR BUSINESS CARRIED OUT BY TRUST 4.14 Section ll(l)(a) grants exemption to the income derived by trust from property held under the trust only for charitable or religious purposes. Secfion 11(4) of the Act provides that for purpose of Section 11, 'property held under trust' includes business undertaking so held. Secfion 11 (4A), which came into effect from April 1, 1984 and was later substituted w.e.f April 1, 1992 clarifies that any income of a trust, being profits and gains of business will be exempt only if the business is incidental to the attainment of the objectives of the trust and separate books of accounts are maintained by such trust in respect of such business. Section 11(4) of the Income-tax Act, 1961 lays down that "property held under trust" for the purposes of Section 11 may include a business undertaking held by the trust. It further states 103

26 that if a claim is made that the income of any such undertaking should not be included in the total income of the trust, the Incometax Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment and determination of income under the head "Profit and gains of Business or Profession." It, however, provides that if the income so determined by the Income tax Officer is in excess of the accounting profits of the undertaking held by the trust, such excess shall be deemed to be applied to purposes other than charitable or religious purposes. The result would be that the provisions of Section 11(1) shall not apply to such excess and the same will be charged to tax. It is now well-established that ""property is a term of widest import and business would undoubtedly be property unless there was something to the contrary in the enactment. The issue as to whether a trust could be exempt even if it carries on business if such business itself held as property continues to be a matter of controversy. However, a decision of the three member bench of the Hon'ble Supreme Court in the case of ACIT Vs. Thanti Trust [2001] 247 ITR 785 (SC) over rides all earlier decisions. The law as laid down in this case states that :- "A public charitable trust may hold a business as part of its corpus. It may carry on a business which it does not hold as a part of its corpus. But it seems to us that the distinction has no consequence insofar as s. 13(l)(bb) is concerned. Sec. 13(l)(bb) provides, so far as is relevant to this case, that the provisions ofs^ 11 shall not operate so as to include in the total income of the previous year of a public charitable trust for the relief of the poor, 104

27 education or medical relief which carries on any business, any income derived from such business unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust. Sec. 13(l)(bb), therefore, will apply to a public charitable trust for the relief of the poor, education or medical relief that carries on a business, regardless of whether or not that business is held by the trust in trust, that is, as a part of its corpus. Even a business that is held by such a trust as a part of its corpus is carried on by the trust and, therefore, s. 13(l)(bb) will apply to such trust. The requirement of s. 13(l)fbb) is that the exemption under s. 11 will not be available to such a trust that carries on any business unless the business is carried on "in the course of the actual carrying out of the primary purpose of the trust", that is to say, unless the business is carried on in the course of actually accomplishing a primary purpose of the trust; the business must, therefore, be carried on in the course of the actual accomplishment of relief of the poor, education or medical relief. As an example, a public charitable trust for the relief of the poor, education and medical relief that carries on the business of weaving cloth and stitching clothing by employing indigent women carries on the business in the course of actually accomplishing its primary object of affording relief to the poor and it would qualify for the exemption under s. 11. Sub-s. (4) of s. 11 remains on the statute book, and it defines property held under trust for the purposes of that section to include a business so held. It then states how such income is to be determined. In other words, if such income is not to be included in 105

28 the income of the trust, its quantum is to be determined in the manner set out in sub-s. (4) Sub-s. (l)(a) of s. 11 says that income derived from property held under trust only for charitable or religious purposes, to the extent it is used in the manner indicated therein, shall not be included in the total income of the previous year of the trust. Sub-s. (4) defines the words "property held under trust" for the purposes ofs. 11 to include a business held under trust. Sub-s. (4A) restricts the benefit under s. 11 so that it is not available for income derived from business unless (a) the business is carried on by a trust only for public religious purposes and it is of printing and publishing books or any other notified kind, or (b) it is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution, provided, in both cases, that separate books of account are maintained by the trust or the institution in respect of such business trusts and institutions are separately dealt with in the Act (s. 11 itself and ss. 12, 12A and H, for example) Various developments in this regard would indicate that wherever there is business income accruing to a trust, the rigid requirement of law as to the condition for exemption for such business income would require to be given due attention. Such business income would not be automatically exempt merely because the trust has charitable objects. In order to find out the profit earned by an organistation with charitable objects, the test to be applied is whether the predominant object of the business activity is to subserve the charitable purpose or to earn profit. 106

29 Where profit making has been found to be the predominant object of the activity the purpose would seize to be a charitable purpose and the income would lose exemption u/s. 11. However, where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. Section 11 (4) can be applied to the income, by way of profits and gains of business, carried on by trust, where the business undertaking is a property held under trust. The provisions of section 11(4A) cannot be applied in such a case. The provisions of section 11 (4A) are applicable to a case where the business undertaking is not held under trust provided the business is incidental to the attainment of objectives of the trust and separate books of accounts are maintained by the trust in respect of such business Any income of a trust by way of capital gains will be treated as applied for charitable purpose only to the extent to which sale proceeds are utilized for acquiring a new capital asset. If the capital gains are not utilised for acquiring a new capital asset, the trust will lose exemption. Section 11(1 A) imposes a specific condition for exemption of capital gains in respect of charitable trusts. Unlike other income the capital gains have to be invested in another capital asset and cannot be kept in permitted securities as mentioned in section 11(5). The section also provides that it is not necessary to reinvest the entire sale proceeds. Only if a part of the sale proceeds, the exemption will be limited to a proportionate part of the capital gains. The proportion of exempt 107

30 capital gains will be in the ratio of amount reinvested in another capital asset to the net sale consideration. Exemption granted under section 10(230 ; 4.17 Section 10 of the Income Tax Act lists out various types of income which are not to be included in total income and are totally exempt. Section 10 serves as a residuary section serving as a basket where incomes, irrespective of its nature are considered as exempt. It also acts as an accommodating section for incomes which the government wants to be exempted. The types of income included in section 10 therefore are of assorted types and have no common characteristics except that they are exempt from income tax. On perusal of the provisions of section 10, it is seen that this section deals with single purpose institution, income of which are treated as exempt. However, there are certain sub sections of section 10 which seem to over lap with section 11 also. In respect of charitable trust, the overlapping provisions are section 10(23C). This section 10(23C) treats income of certain institutions as exempt. It is however noted in practice that most of the institutions are either in the form of charitable trust or run by charitable trust. They can therefore enjoy exemption u/s.ll also. In other words, a charitable trust, running educational institution or hospitals can enjoy exemption both under section 11 as well as section 10(23C) of the Act. The provisions of section 11 have already been discussed in detail. The provisions of section 10(23C) are now discussed. 108

31 Exemption for education or medical institution was available u/s. 10(22) or section 10(22A) till A.Y.I From A.Y.I these sections were deleted. The exemption provision were however clubbed in a new section - Section 10(23C) in the form of sub sections (iiiab) to (via) and introduced by the Finance Act 1998, w.e.f. 1/4/1999. A close study of this section shows that it can be broken up in three parts. (i) Section 10(23C)(i) / (ii) /(iii)/ (iiia) are regarding exemption of income received by any person on behalf of the PM National Relief Fund, PM Fund for promotion of Folk Art and PM Aid to Students Fund and National Foundation for Communal Harmony. (ii) Section 10(23C)(iiiab) and (iiiac) are in respect of exemption of incomes of University or any other educational institutes or medical institution, existing solely for educational / philanthropic purposes and not for the purpose of profit, and which are wholly or substantially financed by the government. (iii) Section 10(23C)(iiiad) to section 10(23C)(via) are in respect of exemption of incomes of University or any other educational institutes or medical institution, existing solely for educational / philanthropic purposes and not for the purpose of profit. The first two sub sections i.e. Section 10(23C) (iiiab) and (iiiac) talk of exemption for income of government aided education and medical institutions. The only conditions are that the institute should exist for education / philanthropic purposes and not for the purpose of profit and it should be wholly or 109

32 substantially financed by the government. There are no other conditions that are required to be complied with. Also, no approval is required from any authorities. The next two sub sections i.e Section 10(23C) (iiiad) and (iiiae) grant exemption in respect of any educational / medical institution, existing solely for education / philanthropic purposes and not for the purpose of profit and where the aggregate annual receipts of the institution do not exceed Rs. One crore ( as prescribed vide Rule 2 BC ). The conditions required for exemption are similar to those mentioned earlier. No approval is required from any authorities in case of such institutions. There is no stipulation on investment of excess fund as mentioned in section 11(5). However, when the aggregate annual receipts of the educational or medical institute exceed Rs. One crore, specific provisions are incorporated in section 10(23C)(vi) & (via). Law prior to 1/4/1999 had three separate sections for three separate categories of exemptions. Section 10(22) was applicable to educational institutes, Section 10(22A) was applicable for medical institutes and section 10(23C) was for other approved institutions. Finance Act 1998 deleted section 10(22) and 10(22A) and merged these sections with section 10(23C). The rational behind this change is explained in CBDT Circular No.772 dt.23/12/1998 which reads as under :- 8. Provisions relating to exempting the income of educational institutions, universities, hospitals and other medical institutions

33 8.1. Under the provisions of clauses (22) and (22A) of section 10 of the Income-tax Act, before amendment, educational and medical institutions enjoyed a blanket exemption from income-tax if they existed solely for educational purposes and not for the purposes of profit. In the absence of any monitoring mechanism for checking the genuineness of their activities, these provisions have been misused The Act omits the aforesaid clauses (22) and (22A) from the statute. The exemption would, however, continue in respect of any university or other educational institution, hospital or other medical institution which is wholly or substantially financed by Government, under the new sub-clause (iiiab) and (iiiac) inserted in section 10(23C) of the Income-tax Act, by the Finance (No. 2) Act, Further, under sub-clause (iiiad) and (iiiae) in section 10(23C), the income of other educational and medical institutions would also be exempt if their annual receipts are below a limit to be prescribed. The limit has since been prescribed at Rs. one crore vide Notification No. S.O. 897(E) dated 12th October, The income of the remaining educational and medical institutions would be exempt if they are approved by the prescribed authority on application made by them under subclauses (vi) and (via) of section 10(23C). This approval would be subject to their adherence of conditions similar to those specified for sub-sections (iv) and (v) of section 10(23C) regarding maintenance of accounts, expenditure and accumulation of funds and investment of funds in specified assets. The accumulated 11