Taxation

Read Details About Section 13 of the Income Tax Act, 1961

Taxation of a charitable trust is governed under Sections 11, 12, 13 of the Income Tax Act, 1961. Section 11 and 12 contain the provisions of conditions to be fulfilled by the charitable trust to claim certain exemptions. Section 12A and 12AA governs the registration and its procedure. Section 13 of the Income Tax Act contains the provisions for those trusts which are not eligible to claim deductions under section 11 & 12.

As the primary aim of these charitable trusts is the social development and welfare of the country, these are recognized and also receive preferential treatment, along with certain exemptions and deductions under the Income Tax Act, 1961.

What is a Charitable Purpose?

Section 2(15) of the Income Tax Act defines charitable purposes. Charitable purposes can be understood as an activity for providing relief to the poor, provision of education to the needy, medical relief, preservation of the environment, the advancement of general public utility, etc.

Charity is a good and selfless deed, and the same is recognized under the Income Tax Act for taxation purposes. Income Tax provides various exemptions and deductions to these trusts to promote the social welfare and economic development for the Indian society.

Under the Income Tax Act in India, any registered trust is considered as a charitable trust if its primary objective is to benefit the society at large.

Section 11- An Overview

Section 11(1) of the Income Tax Act states that profit or gain incurred by a charitable trust from the property held under it, which is used wholly for charitable or religious purposes, shall not be included in the total income of the trust.  To claim this exemption, a trust has to fulfill the necessary conditions as prescribed.

85% of the income of the charitable trust shall be applied to the charitable purpose to claim an exemption. In case of any shortfall in the application of such income below the statutory limit of 85% for charitable purposes, the trust cannot avail exemption, and thus, the entire income will be liable to tax.

Conditions to Claim an Exemption under Section 11

To secure the exemption u/s 11 following conditions are required to be fulfilled:

• Property held under trust must be used wholly for charitable purposes.
• Trust must obtain a registration certificate under section 12AA^[1] from Commissioner of Income Tax.
• Trust has to get its books of account audited with the qualified Chartered Accountant in case the total income of trust exceeds INR 2,50,000 for the previous year. CA shall furnish the audit report in Form 10B before filing Income Tax Return.

Forfeiture of Exemption under section 13

Following income of charitable trust doesn’t qualify for an exemption under section 11 by virtue of Section 11:

1. Part of the Income doesn’t ensure for the benefit of the public

As per section 13(1)(a), any income incurred by the charitable trust that doesn’t apply in the element of satisfying the public benefits cannot avail exemption under section 11. Income from the property held under trust for a private religious purpose that does not ensure the benefits of the public is not eligible for exemption under section 11. Provisions of section 13(1)(a) don’t apply in case the benefit is ensured for a large number of people, but the control is with a specified group of a person as it doesn’t matter where the control lies.

2. The income of trust established after 01.04.1962

As per section 13(1), (b)any income of the trust or institution established on or after 01.04.1962 cannot avail the exemption under Section 11 if such trust was created to promote the benefit of any particular community or caste. However, in case the trust is created before 01.04.1962, it can avail the exemptions of section 11 irrespective of the fact whether it has been created to promote a particular community or caste.

3. Income of the trust is utilized for the benefits of the interested person as mentioned in section 13(3)

As per section 13(1)(c), any income of the trust or institution that is created after 01.04.1962 and is utilized entirely for promoting the benefits to the author of the trust or such other person as mentioned under section 13(3), is not eligible for exemption under Section 11. These provisions are also applicable to the trust created before 01.04. 1962. However, the exemption is not forfeited if such trust complies with the mandatory provisions of the terms of the trust.

Following are included in the definition of interested persons under Section 13(3) referred here above:

• Author of trust or founder of an institution.
• Individual who had made any substantial contribution of exceeding INR 50000 during the previous year to the trust or institution
• Member of a HUF in case the author or founder of the trust is Hindu Undivided family.
• A trustee or the manager of the trust
• Relative of such founder, trustee or author of the trust
• Any of the above people have any substantial interest in any concern. Substantial interest in the concern means if any shares of the company that carries more than 20% of the voting power are owned beneficially by such person, either wholly or in parts.

Following are included in the definition of relative under Section 13(3):

• Spouse
• Brother or sister and their spouse
• Brother or sister of spouse and their spouse
• Ascendant or descendant and their spouse
• Ascendant or descendant of the spouse

4. Funds not invested as specified under section 11(5):

As per section 13(1)(d) to avail the exemption under section 11, a trust has to apply its 85% of income for charitable or religious purposes in India during the year, and the remaining 15% shall be invested in a manner as specified under section 11(5). 

Following are the cases where Section 13(1)(d) doesn’t apply:

• Trust could avail exemption if it held the property under trust and such an asset form part of the corpus of the trust as on 01.06.1973.
• Trust can avail the exemption if the shares form part of the corpus of such trust dated 01.06.1973, where the increase has taken place due to allotment of shares.
• The exemption is not forfeited if the trust has acquired the debenture before 01.03.1983. And if such debentures are acquired after 1^st march 1983 but before 25^th July 1991, an exemption will be denied in respect of Interest income. However, if such debentures are not disinvested by 31^st march 1992, the trust will lose the entire exemption.
• There will be no forfeiture of exemption in case the profit or gain is related to such separate businesses whose books of accounts are maintained by the trust.

5. Charitable trust provides education or medical facilities to specified persons as mentioned under section 13(3):

As per section 13(6), the income of the trust is not allowed to be exempted under section 11, if the income from such trust is applied for the benefits of the trustee, author, and relative of any such person. However, section 13(6) came into effect from the assessment year 2001-02. It says that no trust that is providing educational or medical facilities can be denied for an exemption due to the mere reason that it provides such facilities to the interested person.

Deeming provision of section 13(2)

Section 13(2) provides the following cases in which the income from property held by the trust is deemed to have been used for the benefits of an interested person as defined under section 13(3):

• Interest-free Loan [section 13(2)(a)]:  If any income or property held by a charitable trust is lent to the interested persons without adequate security or interest.
• Use of property without charging rent [section 13(2)(b)]:  If any land, building, or any property of the trust is being lent to the interested person without charging adequate rent or compensation.
• Extra payment for services [section 13(2)(c)]:  In case the service fee is paid by the trust out of the resources of the trust for acquiring the services from the interested person, and such fee is more than reasonable amount paid for similar services.
• No fees for services [section 13(2)(d)]:   If the trustor institution renders any service to the interested person without charging any adequate fees.
• Purchase of an asset [section 13(2)(e)]:  If any asset, property, shares, or securities are purchased by the trust from any of the interested people by paying the consideration, which is more than adequate or the one that prevails in the market.
• Sale of an asset [section 13(2)(f)]: If any asset, property, shares or securities are sold by the trust to any of the interested people for consideration which is less than adequate or the one that prevails in the market.
• Diversion of Income [section 13(2)(f)]:  If any income exceeding INR 1000 is diverted during the previous year in favor of an interested person.