Trusts and Charitable Institutions Application of Income by Way of Donation to Another Trusts/Institutions—Recent Development

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The Tax Publishers Income Tax--Trusts and Charitable Institutions Application of Income by Way of Donation to Another Trusts/Institutions--Recent Development CA. Nisha Bhandari Recently the CBDT has issued Circular No. 3/2024, dt. 6-3-2024 with a view to provide clarity regarding treatment of balance 15 per cent of donation to other trust/institution which is not treated as application of income by virtue of clause (iii) of Explanation 2 to third proviso of section 10(23C) and by virtue of clause (iii) in Explanation 4 to section 11(1). The present article deals with this clarification along with related background. 1. Application of income one of the condition precedent for exemption in case of charitable trusts or institutions The income of the trusts and institutions under both regimes i.e. in case of institutions referred to in section 10(23C)(iv)/(v)/(vi)/(via) and in case of trusts/institutions registered under section 12AB is exempt subject to the fulfilment of certain conditions. Some of such conditions are as follows : (a) at least 85% of income of the trust or institution should be applied during the year for the charitable or religious purposes to ensure bare minimum application for charitable or religious purposes. (b) Trusts or institutions are allowed to either apply mandatory 85% of their income either themselves or by making donations to the trusts with similar objectives. (c) If donated to other trusts or institutions, the donation should not be towards corpus to ensure that the donations are applied by the donee trust or institutions. Thus, every trust or institution under both of the regimes is allowed to accumulate 15% of its income each year. 2. Application to be restricted upto 85 per cent in case of donation to other trusts Instances have come to the notice that certain trusts or institutions are trying to defeat the intention of the legislature by forming multiple trusts and accumulating 15% at each layer. By forming multiple trusts and accumulating 15% at each stage, the effective application towards the charitable or religious activities is reduced significantly to a lesser percentage compared to the mandatory requirement of 85%. In order to ensure intended application toward charitable or religious purpose, it is provided that only 85% of the eligible donations made by a trust or institution under the first or the second regime to another trust under the first or second regime shall be treated as application only to the extent of 85% of such donation. Accordingly, clause (iii) is inserted in Explanation 4 to section 11(1) to provide that any amount credited or paid, other than the amount referred to in Explanation 2 to the said sub-section, to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv)/(v)/(vi)/(via) section 10(23C) or other trust or institution registered under section 12AB as the case may be, shall be treated as application for charitable or religious purposes only to the extent of eighty-five per cent of such amount credited or paid. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--Trusts and Charitable Institutions

Application of Income by Way of Donation to Another Trusts/Institutions--Recent Development

CA. Nisha Bhandari

Recently the CBDT has issued Circular No. 3/2024, dt. 6-3-2024 with a view to provide clarity regarding treatment of balance 15 per cent of donation to other trust/institution which is not treated as application of income by virtue of clause (iii) of Explanation 2 to third proviso of section 10(23C) and by virtue of clause (iii) in Explanation 4 to section 11(1). The present article deals with this clarification along with related background.

1. Application of income one of the condition precedent for exemption in case of charitable trusts or institutions

The income of the trusts and institutions under both regimes i.e. in case of institutions referred to in section 10(23C)(iv)/(v)/(vi)/(via) and in case of trusts/institutions registered under section 12AB is exempt subject to the fulfilment of certain conditions. Some of such conditions are as follows :

(a) at least 85% of income of the trust or institution should be applied during the year for the charitable or religious purposes to ensure bare minimum application for charitable or religious purposes.

(b) Trusts or institutions are allowed to either apply mandatory 85% of their income either themselves or by making donations to the trusts with similar objectives.

(c) If donated to other trusts or institutions, the donation should not be towards corpus to ensure that the donations are applied by the donee trust or institutions.

Thus, every trust or institution under both of the regimes is allowed to accumulate 15% of its income each year.

2. Application to be restricted upto 85 per cent in case of donation to other trusts

Instances have come to the notice that certain trusts or institutions are trying to defeat the intention of the legislature by forming multiple trusts and accumulating 15% at each layer. By forming multiple trusts and accumulating 15% at each stage, the effective application towards the charitable or religious activities is reduced significantly to a lesser percentage compared to the mandatory requirement of 85%.

In order to ensure intended application toward charitable or religious purpose, it is provided that only 85% of the eligible donations made by a trust or institution under the first or the second regime to another trust under the first or second regime shall be treated as application only to the extent of 85% of such donation. Accordingly, clause (iii) is inserted in Explanation 4 to section 11(1) to provide that any amount credited or paid, other than the amount referred to in Explanation 2 to the said sub-section, to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv)/(v)/(vi)/(via) section 10(23C) or other trust or institution registered under section 12AB as the case may be, shall be treated as application for charitable or religious purposes only to the extent of eighty-five per cent of such amount credited or paid.