A charitable or religious trust, society, NGO or Section 8 company does not
enjoy an unconditional exemption merely because it has obtained registration
under the Income-tax Act.
The exemption available under Sections 11 and 12 of the Income-tax Act, 1961 is
subject to several statutory conditions. Section 13 specifies circumstances in
which the benefit of Sections 11 and 12 is denied, wholly or partly, in respect
of income covered by the relevant violation.
Accordingly, it is more accurate to say that an organisation can lose the
benefit of exemption in respect of specified income, rather than stating that
every violation automatically forfeits the entire exemption of the institution.
Recent amendments have also introduced specific consequences for certain
violations, including taxation under Section 115BBI, penalty provisions and, in
specified cases, cancellation of registration.
Section 13 is titled "Section 11 not to apply in certain cases."
It identifies circumstances in which the exemption otherwise available under
Sections 11 and 12 will not operate.
The principal situations include:
1. income from property held under a private religious trust which does not
benefit the public;
2. a charitable trust or institution established for the benefit of a particular
religious community or caste, subject to statutory exceptions;
3. income or property used for the benefit of specified related persons;
4. investments or deposits made otherwise than in the modes prescribed under
Section 11(5); and
5. other specified violations covered by the statutory provisions.
Under Section 13(1)(a), Section 11 does not apply to income from property held
under a trust for private religious purposes where the trust does not enure for
the benefit of the public.
Therefore, a private religious arrangement that does not benefit the public
cannot claim the normal Section 11 exemption merely by describing itself as
religious.
Under Section 13(1)(b), a charitable trust or institution created or established
after commencement of the Income-tax Act, 1961 for the benefit of a particular
religious community or caste is subject to denial of the Section 11 benefit in
respect of the relevant income.
However, there is an important statutory exception.
A trust or institution established for the benefit of:
Scheduled Castes;
Scheduled Tribes;
backward classes;
women; or
children
is not treated as being established for the benefit of a particular religious
community or caste merely because it benefits those groups.
Therefore, the old statement that every institution benefiting a particular
group automatically loses exemption is too broad.
One of the most important provisions concerns the use of income or property of a
charitable or religious institution for the direct or indirect benefit of
persons specified in Section 13(3).
These persons broadly include:
the author of the trust;
founder of the institution;
a person who has made a substantial contribution;
relatives of such persons;
trustees or managers;
certain relatives of trustees/managers;
concerns in which specified persons have substantial interest; and
other persons covered by Section 13(3).
The exact definition and statutory conditions must be examined in each case.
If trust income or property is used or applied, directly or indirectly, for the
benefit of a specified person, the exemption can be denied to the extent
provided by Section 13.
Examples of Benefit to Interested Persons
Potential Section 13 issues can arise where a trust:
gives an interest-free loan to a trustee;
provides trust property to a trustee or related person for personal use;
pays excessive salary or remuneration to a specified person;
allows a related party to use trust assets without adequate consideration;
purchases property from a specified person at an excessive price;
sells trust property to a specified person for inadequate consideration; or
otherwise applies trust income or property for the private benefit of a
specified person.
Not every transaction with a trustee or related person is automatically
prohibited. The statutory provisions and applicable exceptions must be examined,
including whether the transaction is at adequate consideration and falls within
an exception under Section 13.
A charitable or religious trust must generally invest or deposit its funds only
in the forms and modes specified under Section 11(5).
Section 13 contains provisions denying exemption where funds are invested or
deposited in prohibited modes.
Examples may include investments that do not satisfy the statutory requirements
of Section 11(5).
However, the provision contains several specific exceptions and qualifications.
Therefore, each investment should be examined against the actual wording of
Section 11(5) and Section 13 rather than applying a blanket rule.
A charitable institution may carry on certain business activities, but the
Income-tax Act imposes conditions.
Under Section 11(4A), income from a business undertaking held under trust can
qualify for the statutory treatment where the business is incidental to the
attainment of the objectives of the trust or institution and separate books of
account are maintained in respect of the business.
Therefore, the mere existence of business receipts does not automatically result
in forfeiture of exemption.
The nature of the activity, its connection with the charitable objects and
compliance with the applicable accounting requirements are important.
The Income Tax Department also identifies non-incidental business activity and
failure to maintain separate books as significant compliance issues for
charitable institutions.
A trust registered for charitable purposes must apply its income in accordance
with its charitable objects and the conditions of Sections 11 and 12.
If income is applied for purposes outside the permitted charitable/religious
objects, the relevant exemption may be denied.
The Income Tax Department's current guidance identifies application of income
for purposes other than the objects of the trust or institution as a specified
violation in the relevant circumstances.
Is the Entire Exemption Forfeited?
Not necessarily.
This is an important correction to the wording commonly found in older articles.
Section 13 does not mean that every violation automatically makes the entire
income of the trust taxable.
In several situations, the law provides for denial of exemption to the relevant
part of the income or for taxation under specific provisions.
For example, where income or property is used for the benefit of a specified
person, the consequences depend upon the particular provision and amount
involved.
Therefore, the correct approach is:
Identify the specific violation -> determine the income/property affected -> apply
the relevant charging or denial provision.
A major development after the original publication of this article is the
introduction of Section 115BBI.
Section 115BBI provides for taxation of specified income of certain trusts and
institutions at the maximum marginal rate, subject to the statutory provisions.
The Income Tax Department's current guidance specifically states that where a
trust or institution passes on benefits to related persons, the relevant amount
is taxable under Section 115BBI.
Thus, an article stating simply that the Assessing Officer "forfeits exemption"
is incomplete under the present law.
The consequences may include:
denial of exemption for relevant income;
taxation under Section 115BBI;
interest and other tax consequences;
penalty in specified circumstances; and
cancellation of registration in cases involving specified violations.
The Finance Act introduced a specific penalty provision for certain benefits
provided by a trust or institution to specified persons.
Under Section 271AAE, penalty consequences can arise in specified cases
involving benefits provided to persons referred to in Section 13(3).
The Income Tax Department's current publication states that this penalty
provision applies from Assessment Year 2023-24.
Therefore, trustees and governing-body members should exercise particular care
before providing loans, benefits, facilities or other advantages to related
persons.
The consequences of non-compliance can extend beyond taxation of a particular
amount.
Under the current Section 12AB framework, a trust or institution can face
cancellation of its registration in specified circumstances.
The Income Tax Department identifies the following among the circumstances that
can constitute a "specified violation":
application of income for purposes other than the institution's objects;
non-incidental business activity or failure to maintain separate books;
application of income for private religious purposes;
application for the benefit of a particular religious community or caste;
activities that are not genuine;
false or incorrect information in the registration application; and
violation of other applicable laws.
Consequently, Section 13 compliance is now closely connected with the continued
validity of Section 12AB registration.
Cancellation or other specified cessation of charitable registration can also
have a separate consequence under Section 115TD.
In specified circumstances, tax may be imposed on the accreted income of the
trust or institution.
This provision is particularly important where an organisation:
ceases to be eligible for registration;
merges in circumstances not satisfying the prescribed conditions;
converts into a non-charitable form; or
is dissolved without transferring its assets in the manner required by law.
Accordingly, an organisation should obtain professional advice before changing
its legal structure or dissolving.
To avoid loss of exemption or other adverse consequences, a charitable
institution should ensure that:
1. Its activities remain within its objects
Activities should genuinely correspond with the objects contained in its trust
deed, memorandum or other constitutional document.
2. Trust property is not used for private benefit
Trust property should not be used for personal purposes of trustees, founders or
related persons except where specifically permitted by law.
3. Related-party transactions are properly documented
Any transaction involving trustees or specified persons should be examined for
compliance with Section 13 and the applicable exceptions.
4. Investments comply with Section 11(5)
All investments and deposits should be reviewed periodically.
5. Separate books are maintained for incidental business
Where the institution carries on a permitted incidental business, separate books
should be maintained as required.
6. Books of account are maintained under Rule 17AA
The current law prescribes books and documents to be maintained by charitable or
religious trusts and institutions.
7. Audit requirements are followed
Where the statutory audit requirement applies, the prescribed audit report
should be obtained and furnished within the prescribed time.
8. Income-tax return is filed on time
Timely filing is an important condition for continuing to claim the applicable
exemption.
9. Donation reporting is completed
Where applicable, the institution must furnish the prescribed statement of
donations, including Form 10BD, and issue the corresponding Form 10BE to donors.
The Income Tax Department's current guidance expressly lists Form 10BD among the
annual compliance requirements of charitable institutions.
Can an NGO or Section 8 Company Lose Its Tax Exemption?
Yes.
The legal form of the organisation does not provide immunity from Section 13.
A:
charitable trust;
society;
NGO;
Section 8 company; or
other eligible charitable institution
must comply with the applicable Income-tax provisions if it is claiming
exemption under Sections 11 and 12.
The old terminology "Section 25 company" should now generally be replaced with
"Section 8 company" when referring to companies incorporated under the Companies
Act, 2013.
Practical Examples
Example 1 Personal use of Trust Property
A charitable trust owns a residential property.
A trustee uses the property for his personal residence without satisfying the
applicable statutory conditions.
This may constitute a benefit to a specified person and can trigger consequences
under Section 13.
The exact tax consequence depends upon the facts, amount involved and applicable
statutory provisions.
Example 2 Prohibited Investment
A trust invests its funds in a mode that does not qualify under Section 11(5).
The investment should be reviewed immediately because Section 13 contains
provisions denying exemption in respect of income associated with prohibited
investments, subject to statutory exceptions.
Example 3 Incidental Business
A charitable educational institution operates a canteen for students as an
activity incidental to its charitable objects and maintains separate books as
required.
The mere fact that the institution receives business income does not
automatically mean that its charitable exemption is forfeited.
Example 4 Private Benefit
A trust provides an interest-free personal loan from trust funds to a trustee.
This is a high-risk transaction under Section 13 and should not be undertaken
without examining the statutory provisions and applicable exceptions.
A charitable institution should periodically verify:
[ ] Objects are genuinely charitable/religious.
[ ] Activities are consistent with the registered objects.
[ ] No trust income/property is improperly used for specified persons.
[ ] Trustee remuneration is properly authorised and reasonable.
[ ] Related-party transactions are documented.
[ ] Investments comply with Section 11(5).
[ ] Incidental business has separate books.
[ ] Books are maintained under Rule 17AA.
[ ] Income-tax return is filed within the prescribed time.
[ ] Audit report is furnished where required.
[ ] Accumulation requirements are complied with.
[ ] Form 10 is filed wherever required.
[ ] Donation statements are correctly reported.
[ ] Form 10BD is filed within the prescribed time.
[ ] Form 10BE is issued to donors.
[ ] Section 12AB registration remains valid.
[ ] Changes in objects are dealt with under the applicable registration
provisions.
[ ] No false or misleading information is furnished to the Income-tax
Department.
[ ] Compliance with other applicable laws is maintained.
Conclusion
Section 13 is an important anti-abuse provision applicable to charitable and
religious institutions claiming exemption under Sections 11 and 12.
The old description that an Assessing Officer simply "forfeits the exemption" of
an NGO, trust, society or company whenever Section 13 is violated is too broad
under the present law.
Depending upon the nature of the violation, the consequences can include:
1. denial of exemption in respect of specified income;
2. taxation of specified income under Section 115BBI;
3. penalty under Section 271AAE in specified cases;
4. cancellation of Section 12AB registration for a specified violation; and
5. tax on accreted income under Section 115TD in applicable cases.
Therefore, charitable institutions should maintain strict controls over
related-party transactions, investments, application of income, business
activities, accounts, audit, return filing and statutory reporting.
Important: This article explains the Section 13 framework under the Income-tax
Act, 1961, particularly for earlier assessment years and transitional matters.
The Income-tax Act, 2025 applies from 1 April 2026 for tax years governed by
that Act, and the corresponding provisions should be checked for transactions
and tax years falling under the new law.
This article is for general information and should not be treated as legal or
tax advice for a particular trust or institution. The precise tax consequence of
a Section 13 issue depends on the facts, relevant assessment year and applicable
statutory provisions.
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