How Charitable Institutions are assessed for Income Tax? Accumulation of surplus and utilization of NGO, Section 25 Company, Charitable Trust and Society

Concept of Income of a Charitable Institution

Since the charitable trust or institution may be wholly or partly religious or charitable in nature, various provisions will be applicable to the activities or purposes which are charitable or religious in nature. Section 12 firstly excludes corpus donations from the ambit of income. Thus, voluntary contributions received with a specific direction that they shall form part of the corpus are to be excluded from the definition of the term income. It may be noted here that these contributions have to be used in accordance with the directions of the donor. And secondly, the value of any medical or educational service, by a trust etc. running an educational institution or a hospital, to a person referred to in section 13(3) of the Act will be deemed to be the income of the trust or institution. If the beneficiary has made any payment for such service, then such payment shall be deducted from the value of the service in arriving at the income.
 

 

 

Application of Income of a Charitable Trust or Society
Section 11 permits deduction of expenditure from income. The expenditure incurred by a trust or institution by way of application of income in India towards religious or charitable purposes, as per its Memorandum, is deductible from the income. The assessee may also set apart and accumulate 15% of income for such application and such amount will also be taken as expenditure of the year. These provisions are applicable mutatis-mutandis to a partly religious or charitable trust. This section also permits deduction of expenditure incurred outside India, provided that such application of income promotes international welfare in which India is interested. However, for deduction of such expenditure, prior approval of the Board is required. In conformity with section 12, corpus donations constitute deductible expenditure under section 11(1)(d)



Capital Gain of Charitable Institution
Section 11(1A) of Income Tax Act have provisions deals with Capital Gains arising or accruing to a charitable trust or institution. The position of law is that if the whole of the net consideration (Consideration minus the expenditure incurred in connection with transfer) is applied towards acquiring a new capital asset, then, the capital gains is taken to have been applied for charitable or religious purpose. However, if only a part of the net consideration is applied for acquiring a new capital asset, then, the capital gains to the extent of differences between amount so applied and original cost of the asset is taken to be applied for religious or charitable purpose. The provision applies mutatis-mutandis where the capital asset is held partly for religious or charitable purpose.



Accumulation of Income of Charitable Institutions
As per the Act apart from accumulation of 15% of income permitted u/s 11(1) of the Act, a trust or institution is permitted to accumulate or set apart income for specific purpose (s) (emphasis supplied) u/s 11(2). The accumulation and setting apart of income has to be for specific purpose as distinguished from general purpose (s) mentioned in the Memorandum.

We may refer to the following case in this behalf:-
If the charitable institution did not utilized the specified percentage of income in a particular year, Form 10 needs to be filed with Income Tax Department.

 

Business Income of a Charitable Institute
As per Section 11(4) of Income Tax Act a business as a going concern can be held as property under trust. Therefore, a legitimate claim can be made that the income of such business may not be included in the total income of the person receiving such income. In such a case, the assessing officer is required to assess the income of such business under the provisions of the Act. The difference between income so determined and the income shown in accounts shall not be deemed to have been applied towards religious or charitable purpose, but applied to other purposes. The point to be noted is that the income of the business has to be calculated under usual provisions contained in Chapter IV-D and not as per Chapter III of the Act, applicable to income of charitable trusts and institutions.



Incidental Business Income
Section 11(4A) of Income tax Act has provision related to income of a trust or institution by way of a business, which is incidental to attainment of its objects. The income of such a business will be entitled to exemption u/s 11 if separate books of account are maintained, otherwise, the income will not be entitled to benefit of exemption under section 11 and section 12. The cases on this issue have already been discussed in paragraph.