WHAT IS INCOME SEC-11 CHARITABLE TRUST.

The above question is raised by CA Abishek Aggarwal in the forum and I have rearranged the question /Answer For the benefit of the Member.

Qus.:

A)To avail the exemption U/s 11 of Income tax act the trust should apply at least 85 % of the Income for charitable purpose now the question is what is the the Meaning of "Income "here .Is it the "Gross Receipt" or is it the "Surplus", that we need to apply during the year.?

1. In respect of Business Income.
2. In case of Donations.

B)whether Depreciation will allowed as expenditure to compute "income " or it will treated as application of money"


Ans:CA Abishek Aggarwal himself of the opinion that

1. In respect of Business:net receipt (after expenditure ) will be Treated as Income.
2. In Case of charity,donation Gross amount should be considered as Income .

Again our star contributor CA Sanjeev Bedi has given to the point answer and it is slightly different from what the Abishek ji is Thinking.

• There's nothing arcane, esoteric or mysterious about the word "Income" used in Section 11.
  
• Scores of decided laws have laid down that what constitutes "Income" in terms of Section 11 has to be determined in a commonsensical manner, according to the normal rules of accountancy.
  
• By Income here we mean nothing more than what a layman would understand it to be. So it is fair to say that in case of donations and other receipts in connection with which we do not incur any expenses, we would need to calculate the figure that we have to spend by applying the percentage of 85 to the total amount of Cash Inflow the trust has had during the year.
  
• But in case of business or other receipts, to know what's our "income" we'd have to look at the figure of Surplus, 85 per cent of which we shall be liable to spend on charitable activities.
  

CASE LAW

• The Income should Be Real: The emphasis in case laws, of whom there are numerous, has been on the Real Income. Real Income means the income that's actually been received, and not simply that's accrued to us. The expenses like salary and general administration incurred in connection with keeping the trust going aren't application of income and so they will have to be deducted to arrive at "income" that needs to be applied for charitable purposes. This has been held in the case of CIT v. Birla Janahit Trust [1994] 208 ITR 372/73 Taxman 465 (Cal.).

• Depreciation is an allowable expenditure. In CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust [1992] 198 ITR 598/[1993] 70 Taxman 228 (Guj.) it was said depreciation as per normal rules of accountancy should be allowed while computing income, as the income of the trust is not to be computed in accordance with the provisions of the Act but in a commercial manner.

• Tax free Incomes are not to be included:It may be noted that tax-free income like Agricultural income does not form part of total income for the purpose of computing the percentage to be applied or accumulated for future application. CIT v. Nabhinandan Digamber Jain [2002] 257 ITR 91/[2003] 128 Taxman 779(MP).

• Application may in Revenue or capital Exapenditure:As far as the application of income is concerned, all sorts of layouts, whether on capital or revenue account, would qualify as having been applied towards the charitable ends.

CA SANJEEV BEDI

From the above discussion we can conclude that Income meaning should taken here as it it taken by the layman so net income should be taken even in case of donations received the administrative expenses etc should also be reduced.

One more relevant point is here that The finance act 2008 has changed the definition of Charitable purpose wef 01.04.2009 so as per new finance act the meaning of charitable purpose is

• "(15) charitable purpose includes relief of the poor, education, medical relief, 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;

so from the above new amendment it is clear that where the there is business activity than it will not be treated as charitable purpose no matter application or retention of money.

This topic has many and vast implication so we will try to cover the issue in our new posts.

please comment

You may also read Institute study paper on this subject though the publication has been done in 2002 but its helpful in today's word also.

TAXATION OF CHARITABLE TRUST AND INSTITUTIONS