Code of Taxation

Types of entities that can register as charitable institutions in India

For charitable purpose, the following entities can be constituted:

While above entities have separate incorporation laws, the Income Tax law applies uniformly for all these entities.


Definition of Charitable purpose in Income Tax

Section 2(15) "charitable purpose" includes:

✓ Relief of the poor,
✓ Education,
✓ Yoga,
✓ Medical relief,
✓ Preservation of environment (including watersheds, forests and wildlife) and
✓ Preservation of monuments or places or objects of artistic or historic interest, and
✓ The advancement of any other object of general public utility:

Provided that 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, irrespective of the nature of use or application, or retention, of the income from such activity, unless:

  1. Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
  2. The aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

Types of registration.png

Illustrated:

  1. 10(23C) approval
  2. 12A, 12AA now 12AB
  3. 10(46)-body notified by Central/State Govt S 35-approved institutions for scientific research etc.
  4. 80G Approval for tax deductions for donations


Section 10(23C) entities

Section

Non Approval

Section

Approval

10(23C)(iiiab)

Educational institution wholly/substantially financed by Govt

10(23C)iv

National Fund/Charitable institution of national importance

10(23C)(iiiac)

Medical institution wholly/substantially financed by Govt

10(23C)v

Religious institution or religious cum charitable institution notified by Govt

10(23C)(iiiad)

Educational institution gross receipts less than Rs.5 cr in a FY

10(23C)vi

Educational institution gross receipts more than Rs. 5 cr in a FY

10(23C)(iiiae)

Medical institution gross receipts less than Rs.5 cr in a FY

10(23C)via

Medical institution gross receipts more than Rs.5 cr in a FY


Two recent Landmark SC judgements in October 2022

New regime of registration for charitable organisations wef 1.4.2021


Types of Approvals:

  1. Re-registration/Revalidation of existing registered entities-5 years

  2. Provisional registration for new entities-3 years

  3. Regular registration for existing unregistered entities-5 years

  4. Provisional to Normal registration for new entities- Total period 5 years

  5. Modification of objects clause for 12A entities

  6. If registered both under 10(23C) or 10(46) and 12A, then retain 10(23C) or 10(46) for 5 years

  7. Renewal of registration after 5 years


New Regime and Forms

Coverage:

  1. Re registration/re approval under 10(23C)/12A/80G-existing registered

  2. Registration/re approval under 10(23C)/12A/80G-existing un-registered

  3. Provisional registration under 10(23C)/12A/80G-new entities

  4. Statement of donation u/s 80G

  5. Receipt/Certificate of donation u/s 80G

Forms:

  1. 10A-Re-registration and provisional registration

  2. 10AC-Approval of 10A by CIT

  3. 10AB-Registration of existing unregistered entities, conversion of provisional to normal registration, Renewal, change in objects and one of the two registrations made inoperative.

  4. 10AD- Approval of 10AB by CIT

  5. 10BD-Statement of donations u/s 80G

  6. 10BE-Receipt of donation u/s 80G


Action for existing registered entities

Action for existing un-registered entities

Existing unregistered entities:

Others:

Action for Provisional Registration

Section 80G

Statement of donation

  1. Donation type:
    • Corpus
    • Specific
    • Others
  2. UIN of donor-PAN, Aadhar
  3. If PAN / Aadhaar is not available then either the passport No. /Elector’s photo identity / Driving License/ Ration Card/Taxpayer identification Number where the person resides outside India.
  4. Mode of receipt-cash, kind, electronic and cheque, others
  5. File by 31st May for each FY
  6. Penalty for delayed filing


Receipt/certificate of donation

  1. Form 10BE

  2. Immediate issue after filing 10BD

  3. Linked to UIN of donor

  4. Penalty for delay

  5. Generation and download of donation receipt from web portal after filing 10BD

  6. Issue the system generated 10BE only to donors for claiming 80G benefit.

Code of Taxation for Charitable Institutions

Chapter III-Incomes which do not form part of total income

1.

Section 11

Income from property held under trust for charitable or religious purposes.

2.

Section 12

Income of trusts or institutions from voluntary contributions for charitable and relgious purposes.

Section 12A – Conditions for applicability of sections 11 and 12

Section 12AA – Procedure for Registration-repealed

Section 12AB – Procedure for Registration under new regime

3.

Section 13

Section 11 not to apply in certain cases.



Section 11

Income from property held for charitable or religious purposes

The following income shall not be included in the total income of the previous year of the person in receipt of the income:


Deemed Application-1 year

As per clause (2) of Explanation to section 11(1):

If, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount—

Then at the option of the person in receipt of the income (such option to be exercised before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income in form -9A), be deemed to be income applied to such purposes during the previous year in which the income was derived.

Note: If the amount accumulated as per clause (2) of Explanation to section 11(1) is not utilised in the next year then the amount accumulated will be taxable income.


Accumulation-5 years

As per section 11(2):

If, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:

  1. Such person furnishes a statement in the prescribed form (Form 10) and in the prescribed manner (Online) 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 sub-section (5) and utilised for the purpose for which accumulated

  3. Not transferred to an entity covered under Section 12A of the Act

  4. The statement referred to in clause (a) is furnished on or before the due date specified under sub- section (1) of section 139 for furnishing the return of income for the previous year.

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Illustrated: Less than 85% ➡️ Form 10 to AO ➡️ Specified modes for deposit ➡️ ITR to be filed u/S 139(1)

Section 11(4)

Business income of charitable institution


Section 11(5)

Modes of investment

The forms and modes of investing or depositing the money referred to in clause (b) of sub- section (2) shall be the following, namely:

  1. 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;

  2. Deposit in any account with the Post Office Savings Bank

  3. 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)

  4. Investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963)

  5. Investment in any security for money created and issued by the Central Government or a State Government

  6. 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

  7. Investment or deposit in any public sector company:

  8. 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

  9. 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;

  10. 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

  11. Investment in immovable property.


Further additions to 11(5)

Additional as per Rule 17C (March 2018)

Example of Computation

Case 1


Income derived from property held under trust wholly for charitable purposes

1000

Less: Expenditure (Income applied to charitable purposes in India)

-850

Less: Accumulation under section 11(1)(a) No Specific Form

-150

Taxable Income

NIL

Case 2


Income derived from property held under trust wholly for charitable purposes

1000

Less: Expenditure (Income applied to charitable purposes in India)

-600

Less: Accumulation under section 11(1)(a) No Specific Form

-150

Less: Accumulation under section (11) (2): Form 10, Specific Purpose

-250

Taxable Income

NIL

Case 3


Income derived from property held under trust wholly for charitable purposes (Rs 200 was received in March) 

1000

Less: Expenditure (Income applied to charitable purposes in India)

-650

Less: Accumulation under section 11(1)(a) No Specific Form (15% of 1000)

-150

Less: Accumulation as per clause (2) of Explanation to section 11(1), Form 9

-200

Taxable Income

NIL


Disallowance of Cash/bearer Payments

Section 40(A)(3) provides that “Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], exceeds Ten Thousand Rupees, no deduction shall be allowed in respect of such expenditure”.

Note:

  1. The expenditure as disallowed above, will be taxed @ 31.2% at the time of filing the Income Tax Return.
  2. The cash payments made by staffs and reimbursed by organisation shall also be treated as cash payment.
  3. Disclose non-compliances in ITR, if same noticed by Assessing Office during Income Tax Assessment, additional penalty and interests may also be levied.
  4. Exceptions in Rule 60D.

Disallowance for Non Deduction of Tax at Source

Section 40(a)(ia) provides that 'Where the assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B then the amount equal to 30% of expenditure shall not be allowed at the time of computation of Income’

Note:

  1. The expenditure as disallowed above, will be taxed @ 31.2% at the time of filing the Income Tax Return.

  2. Disclose non-compliances in ITR, if same noticed by the Assessing Office during Income Tax Assessment, additional penalty and interests may also be levied.

Example of Computation

Case 4


Income derived from property held under trust wholly for charitable purposes

1000

Less: Expenditure (Income applied to charitable purposes in India)

-650

Less: Accumulation under section 11(1)(a) No Specific Form (15% of 1000)

-150

Less: Accumulation under section (11) (2): Form 10, Specific Purpose

-200

Add: Expenditure disallowed under section 40 and 40A (30% Expenditure)

30

Taxable Income 30

30

Tax on Income @ 30%

9

Add: Surcharge @ 4%

0.36

Total Tax Liability

9.36


Section 12

Income of trust/ institution from Contribution

Section 12 (1):

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.


Section 12 (2):

The value of any services, being medical or educational services, made available by any charitable or religious trust running a hospital or medical institution or an educational institution, to any person referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13, shall be deemed to be income of such trust or institution derived from property held under trust wholly for charitable or religious purposes during the previous year in which such services are so provided and shall be chargeable to income-tax notwithstanding the provisions of sub-section (1) of section 11


Section 12A

Conditions for Applicability of Section 11 & 12

Conditions for Applicability of Section 11 & 12.png

Illustrated:

Section 13

Section 13 of Income Tax

Section 13(1):

Section 11 not to apply when:

  1. Trust for private religious purposes which does not ensure for the benefit of the public.

  2. Trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste.

  3. If such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income ensures, directly or indirectly for the benefit of any person referred to in sub-section (3).

  4. If any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3).

  5. Non compliance of Section 11(5)-permitted modes of investment


Section 13(6):

The exemption under section 11 or section 12 shall not be denied in relation to any income, other than the income referred to in sub-section (2) of section 12, by reason only that such trust has provided educational or medical facilities to persons referred to in sub section 3.


Section 13(3)

List of persons:

  1. The author of the trust or the founder of the institution.
  2. Any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees;
  3. Where such author, founder or person is a Hindu undivided family, a member of the family;
    1. Any trustee of the trust or manager (by whatever name called) of the institution;
  4. Any relative of any such author, founder, person, member, trustee or manager as aforesaid;
  5. Any concern in which any of the persons referred to in clauses 1, 2, 3, 3.1 and 4 has a substantial interest.
  6. "Relative", in relation to an individual, means:
    1. Spouse of the individual;
    2. Brother or sister of the individual;
    3. Brother or sister of the spouse of the individual;
    4. Any lineal ascendant or descendant of the individual;
    5. Any lineal ascendant or descendant of the spouse of the individual;
    6. Spouse of a person referred to in sub-clause 6.1, sub-clause 6.3, sub-clause 6.4 or sub-clause 6.5
    7. Any lineal descendant of a brother or sister of either the individual or of the spouse of the individual
Section 13(2): 

The income or the property of a trust deemed to have been used or applied for the benefit of a person referred to in 13(3)

  1. If any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3) for any period during the previous year without either adequate security or adequate interest or both.

  2. If any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3), for any period during the previous year without charging adequate rent or other compensation;

  3. If any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services;

  4. If the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation;

  5. If any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in sub-section (3) during the previous year for consideration which is more than adequate;

  6. If any share, security or other property is sold by or on behalf of the trust or institution to any person referred to in sub-section (3) during the previous year for consideration which is less than adequate

  7. If any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3)

Finance Act 2023 

Amendments for charitable entities


Finance Act 2022 

Amendments for charitable entities

  1. Monitoring and effective implantation:

  1. Consistency in 2 regimes with a view to have one regime in future:

  1. Clarity:


Finance Act 2021 

Amendments for charitable entities

  1. Use of Corpus no longer application : Application for charitable or religious purposes from the corpus fund shall not be treated as application of income for charitable or religious purposes. Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus, from the income of that year and to the extent of such investment or deposit.

  2. Exclusion of Corpus Fund from Income (conditional): Any Voluntary Contribution made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of such trust or institution unless such voluntary contribution is invested or deposited in one or more of the forms or mode specified in the act.

  3. Use of Loans / Borrowings no longer applies except during repayment : Any expenditure made for charitable or religious purpose out of loan or borrowing shall not be treated as application for charitable or religious purpose. Provided such amount shall be treated as application for charitable or religious purposes at the time of repayment of such loan.

  4. Carry forward of Losses not allowed: Calculation of income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding the previous year


Maintaining Books of accounts for NGOs

1. Books of accounts & other documents
The specified books of accounts shall include:

Other documents include:

2. Form of keeping books of accounts and documents: Kept in written form or electronic form or digital form or print-outs of data stored in electronic form or in digital form or any other form of electromagnetic data storage device.

3. Place of maintaining books of accounts and other documents: shall be kept and maintained at its "registered office“. If the accounts are maintained other than the registered office or at various project locations, intimate assessing Officer in writing, giving full address of the other places supported by resolution of the board

4. Period for which books of accounts & other documents should be kept: Kept and maintained for a period of ten years from the end of the relevant assessment year

Section 13(10) and (11) inserted wef AY 22-23 stating that Income chargeable to tax shall be computed after allowing a deduction for expenditure incurred for the objects of the institution as specified in this section subject to fulfilment of the following conditions, namely:

  1. Such expenditure is not from the corpus standing to the credit of such trust or institution

  2. Such expenditure is not from any loan or borrowing;

  3. Claim of depreciation is not in respect of an asset, acquisition of which has been claimed as an application of income in the same or any other previous year; and

  4. Such expenditure is not in the form of any contribution or donation to any person.

  5. Such expenditure violating section 40(3) and 40(a)(ia) disallowed

  6. Carry forward of loss and expenditure/decurion not allowed except under the Code from section 11-13.


Revision #14
Created 24 April 2024 06:20:54 by Pooja
Updated 4 December 2024 05:38:04 by Pooja