Trusts and institutions established for charitable and religious purpose may be notified by the Central Government in the Official Gazette, so that their income is completely exempted from tax. In considering such cases, the Central Government will have regard to the objects of the trust/institution and its importance throughout India State or States. The eligible trust is required to make an application for grant/renewal of exemption on year to year basis and the exemption is allowed for assessment year/years as notified by the Central Government for such periods not exceeding three years including an assessment year or years commencing before the date on which the notification is issued.
I. Institutions Statutorily Exempted from Tax
The total income of the following funds/trusts/ institutions is exempt from income tax.
• Any income of an approved scientific research association.
• Any income of a university or other educational institution existing solely for educational purposes and not for purposes of profits
• Income of a hospital or medical institutions running not for profit.
• Income of a notified news agency.
• Any income (other than interest on securities, income from property, income received for rendering any specific services and income by way of interest or dividends) of approved professional bodies.
• Income of Funds established for welfare of employees.
• Any income (other than business income) of a trust or a society approved by Khadi and Village industries Commission.
• Income of an authority established for the development of Khadi and Village Industries.
• Income arising to any other body or authority established, constituted or appointed under any enactment for the administration of public, religious or charitable trusts or societies for religious or charitable purposes.
A. Scientific Research Institutions-Section 10 (21)
• As per Section 10(21), any income of an approved scientific research association u/s 35(I) (ii), shall be exempt, subject to fulfillment of certain conditions.
1. The income of the trust is applied or accumulated for application, to the undertaking of scientific research.
2. The trust/association invests its funds in specified modes or forms.
• The income of an eligible scientific research association shall be exempt u/s 10(21), to the extent it is applied, or accumulated for application, wholly and exclusively to the objects of the association i.e. undertaking of scientific research. The application or accumulation of income shall be subject to the provisions of Section 11(2) and (3). There is nothing in this clause which requires that the income to qualify for exemption should be wholly spent in the relevant year itself.
B. PROFESSIONAL INSTITUTIONS – SECTION 1- (23A)
1. Income of a professional institution or association (other than income from house property or any other income received for rendering specific services or income by way of interest or dividend) will be exempt.
2. The object of the institution should be the control, supervision, regulation or encouragement of the profession of law, medicine, accountancy, engineering or architecture or other notified professions.
3. The institution shall apply its income or accumulate it for application wholly for the objects for which it is established.
4. The institution should be approved by the Central Government.
C. EDUCATIONAL INSTITUTIONS AND HOSPITALS AND OTHER HEALTH CARE INSTITUTIONS-SECTION 10 (23C)
1. Section 10 (23C) (iiiab) (iiiad) & (vi) would apply to Universities, or Other educational institutions
2. Section 10 (23C) (iiiac) (iiiae) & (via) would apply to Hospitals, and Other institutions for the reception and treatment of persons suffering from illness or mental defectiveness, or persons during convalescence, or persons requiring medical attention or rehabilitation
3. The institution should exist solely for philanthropic purpose and not for profit.
4. To avail of the exemption, the institution shall also fulfill any one of the following requirements:
The institution shall be wholly or substantially financed by the Government, OR
The aggregate annual receipts of the institution shall not exceed the prescribed amount, (presently the prescribed amount is Rs. 1 Crores), OR
Where the total receipts exceed one crore rupees in any previous year, the Fund or Trust or Institution or University or other educational Institution or hospital or other institution, as the case may be, shall fulfill the conditions as to :
(a) application and accumulation of the income,
Note: (1) The period of accumulation in relation to the amount exceeding 15% of the total income, accumulated on or after 1.4.2002 shall not exceed 5 years.
(2) Any amount credited or paid out of accumulated income to any trust or institution registered u/s 12 AA or any fund/trust/institution/university/other educational institution/hospital/other medical institution referred to u/s 10(23C) (iv)/(v)/(vi)/(via), shall not be treated as application of income to the objects of an educational institution.
(b) investment of funds in specified modes and deposit, and
(c) exemption for business income, prescribed in relation to trusts covered u/s 10 (23C) (iv) and (v)
Trusts/institutions not fulfilling any of the above conditions, may claim exemption u/s 11.
The requirement of publishing annual accounts in a newspaper by a trust/institution whose total receipts exceed Rs. 1 crore has been dispensed with.
Audit of Educational and Medical Institutions having annual receipts exceeding Rs. 1 Crore
All educational and medical institutions claiming exemption under Section 10(23C) would be required to get their accounts audited by a Chartered Accountant in case their total income exceeds the maximum amount which is not chargeable to tax (presently Rs. 1 lakh)
This requirement of audit would be applicable to all educational and medical institutions where the annual receipt exceeds Rs. 1 Crore. The criteria for audit would be the total income before claiming exemption under Section 10(23C).
Futher, trusts and institutions notified by the Central Government claiming exemption under section 10(23C)(iv)and public religious institutions notified by the Central Government and claiming exemption under section 10(23C) (v) would also be required to get their account audited in case their total income exceeds the maximum amount which is not chargeable to tax, i.e., Rs 1 lakh at present.
The new requirement of getting the accounts audited and filing return are effective from the A.Y. 2006-07.
D. ADDITIONAL CONDITIONS FOR CLAIMING EXEMPTION
Section 12(1)(c) and (d) lay down two additional conditions to be fulfilled for claiming exemption under sections 11 and 12. These are:
(i) No part of the income or property of a charitable or religious trust/institution, should ensure or be used or applied for the benefit of any person specified u/s 13(3), otherwise the entire income of the trust will be denied exemption.
(ii) No part of the trust funds should be invested or deposited in any mode or forms other than those specified u/s 11 (5).
E. EXEMPTION BASED ON UTILISATION (SEC.11)
1. The institution shall be registered with the Commissioner of Income Tax under section 12A within one year from the date of creation of the trust or establishment of the institution.
Application for registration shall be made in Form No.10A in triplicate. Copies of the instrument constituting the institution shall be attached thereto, i.e., Memorandum of Association, Trust Deed, etc. and copies of accounts. The Commissioner has power to condone delay in presenting the application.
2. Under section 12A (a) Commissioner has got power to call for further information to ascertain the genuineness of the institution. He can conduct inquiries in this regard. After considering the application and other information, he may or may not grant the registration. In either case, the other has to be issued within 6 months from the end of the month in which application is filed. If the application is rejected, the institution can prefer an appeal before the Income Tax Appellate Tribunal.
3. If the income for any year exceeds Rs. 50000, the accounts of the institution shall be got audited by a Chartered Accountant. The Audit Report is issued in Form No.10B
4. At least 85% of the income of the institution shall be utilized for charitable purposes ‘Income’ for this purpose means total of ‘Income from Property held under trust’, i.e. Voluntary contributions, income from house property, income from permitted business, interest, capital gains, etc. Out of the voluntary contributions, corpus donations are not regarded as income.
5. Un-applied income and monies accumulated and set apart out of the 85% mentioned in para 4 above can be deposited in specified investments.
II. SPECIFIED INVESTMENTS (Section 11(5)
Where income is accumulated the same is required to be kept invested or deposited in the forms or modes specified in sub-section (5).
These forms and modes of investing or depositing the money are as follows:
(i) investment in saving certificate as defined in section 2(c) of the Government Savings Certificate Act, 1959 and any other securities or certificate issued by the Central Government under the Small Saving Schemes of that Government;
(ii) deposit in any account with the Post Office Saving Bank;
(iii) 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.
(iv) investment in units of the Units Trust of India established under the Units Trust of India Act, 1963;
(v) investment in any security for money created and issued by the Central Government or a State Government;
(vi) 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;
(vii) investment or deposit in any public sector company;
(viii) 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 section 36(1)(viii);
(ix) 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 house in India for residential purpose and which is eligible for deduction under section 36(1)(viii);
(x) 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.
(xi) investment in immovable property. It is clarified through an Explanation that “immovable property” does not include any machinery or plant even though attached to, or permanently fastened to anything attached to, the earth;
(xii) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964;
any other form or mode of investment or deposit as may be prescribed.
III. NON APPLICATION OF INCOME
Due to non receipt
To avail of the exemption, it is sufficient that the amount is utilized in the year in which it is received or in the next subsequent year.
Due to any another reason
To avail exemption, the amount shall be utilized in the year immediately following the year in which such income is derived but before the date of filling of the Return of income or due date for filling the Return of Income, whichever is earlier.
IV. ACCUMULATION OF INCOME (SECTION 11(2))
a. Out of 85% of the Income to be utilized, the institution can accumulate or set apart whole or part of its income for some specified purposes for a period not exceeding 5 years (for incomes accumulated after 01-04-2001).
b. The assessing Officer has to be intimated about such accumulation in the prescribed form i.e Form No.10.
c. The monies accumulated shall be invested in specified securities.
d. If the monies accumulated are not utilized within the specified period or in the immediately following years, it will form part of the income of the year immediately following the date of expiry of the specified period.
Where the non-utilization is due to reasons beyond the control of the assessee, the Assessing Officer may permit, on application, the institution to utilize the amount in any other manner on conformity with its objects.
V. BUSINESS INCOME (SECTION 11(4A))
Business income shall be eligible for exemption subject to the following conditions:
a. Business carried on should be incidental to the attainment of the objects of the institution, e.g. printing jobs done by inmates of an orphanage.
b. It should maintain separate books of accounts for each such business.
VI. CAPITAL GAINS (SECTION 11(1A))
Where the entire net consideration is utilitsed for charitable purposes
In this case, the entire capital gain is deemed to have been applied and there will be no taxable capital gain.
Where only a part of the net consideration is applied
TAXABLE CAPITAL GAINS = TOTAL CAPITAL GAINS – CAPITAL GAINS UTILISED
Total Capital Gain = Net Consideration received minus Cost of the transferred asset
Capital Gain utilized = Amount utilized minus cost of the asset
Net Consideration = Gross Consideration minus Expenditure for sale