The taxation of charitable trusts/non-profit organisations has become an area of extensive litigation in the last three decades. Up to assessment year 1970-71, the law was fairly liberal for charitable trusts and the entire income of a charitable trust was unconditionally exempt. From assessment year 1971-72, the exemption was only to the extent of application but even at that time the voluntary contributions to charitable trusts continued to be exempt without fetter. However, in the definition of income voluntary contributions by one charitable trust to another were to be included. There was a gradual tightening of the exemption provisions under the Income Tax Act 1961, hereinafter referred to as “The Act”. In the year 1973 a procedure for registration of trusts was brought on the statute.

The principal reason for granting a tax exemption to charitable and religious institutions is that the exemption enables such entities to preserve their resources, which are then available for charitable purposes. It is well accepted that non-profit non-government organisations spend their resources far more efficiently than the government itself. The activities of such institutions augment the efforts of the state in its pursuit of welfare activities. This results in public participation in these areas.

However, the use of this tax exemption for collateral purposes by some entities/persons has resulted in a trust deficit of the authorities in charitable entities. This has led to the legislating authorities making amendments which have made life difficult for genuine institutions while the unscrupulous continue to exploit the loopholes of law with impunity. This article attempts to discuss some of these changes in the direct tax law. I have tried to refrain from referring to judicial pronouncements to the extent possible and restricted myself to an analysis od the provisions and their impact.

Definition of Charitable purpose

The exemption is available to entities which exist for charitable purposes. This is defined in an inclusive manner in section 2(15) with the proviso carving out an exception. For ease of reference the said section and the proviso are reproduced hereunder

(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—

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

The proviso was first introduced in Finance Act 2008 with effect from 01.04.2009 and has undergone a number of amendments thereafter. The proviso excludes the advancement of any other object of general public utility from being a charitable purpose if the conditions in the proviso stand attracted. At the time introduction of the Finance bill 2008 the honourable Finance Minister introducing the provision stated on the floor of the house.

“Charitable purpose includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt as they should be. However, some entities carrying on a regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purpose would also fall under charitable purpose. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organisations will not in any way be affected.”

While this was undoubtedly the intent, its interpretation has caused innumerable problems.

Some of the issues that the proviso has created are

  1. while the proviso does not apply to the objects contained in the first limb and applies only to any other object of general public utility what is the position if the entity has a mixed object for example education as well as any other object of general public utility?

  2. If the business is carried on in pursuance of the charitable objects of the entity on an examination of which registration under section 12A has been granted will the exemption be vitiated?

  3. the second clause of the proviso provides for a monetary threshold limit. Does this mean that whether the objects of the entity constitute a charitable purpose or not has to be tested in each year?

  4. If in one year the aggregate receipts of the entity from the business is below the threshold while it is breached in the subsequent year what is the tax treatment in respect of application made out of income accumulated in the earlier year?

  5. In understanding the term charitable purpose does one look at the dominant purpose or is a single activity in the nature of business sufficient to vitiate the claim for exemption?

  6. The provisions of section 11(4A) have not been omitted nor has their application been circumscribed 12 years after the proviso was inserted. In such a situation what is the exact import of the said provision after the insertion of the proviso?

The attraction of the proviso results in a complete denial of the exemption in terms of section 13(8). It appears that the extent of the infringement and the penal consequence do not at all correspond with each other. It needs to be pointed out that the proviso to section 2(15), is to be applied only at the stage of assessment and not at the stage of granting registration under section 12A/12AA. Despite the law being clear and emphasised as such by the CBDT circular no 21/2016 dated 27th May 2016, the authorities continue to refer to the same for denying registration.

As a consequence of this proviso there has been rampant denial of registration as well as exemption in assessments to absolutely genuine trusts resulting in untold hardship. These institutions have had to litigate matters right up to the High Court. At the time of writing this article, these issues have reached the doorstep of the Supreme Court and it is hoped that the Supreme Court will clarify the position and read it down so that its true intent is achieved.

Restriction on manner of computing application of income

As of now the general category of trusts {other than those whose sole object is education or medical relief and therefore enjoy exemption under section 10(23C)}, are entitled and exemption under section 11 if they are registered under section 12A. Such an exemption is to the extent of application of income.

Income which is not applied in the relevant previous year but accumulated or set apart cannot be donated or contributed to another charitable trust. Such contribution is not treated as application {Explanation to section 11(2) with effect from A.Y.2003-04}

Any income of a charitable entity received during the previous year or in respect of which an option of spending it in the subsequent year is exercised, cannot be donated /contributed to the corpus of another charitable trust as such a contribution is not treated as application of income {explanation 2 to section 11(1) with effect from A.Y. 2018-19}

The object of restrictions appears to be to ensure that the income is spent by the charitable institution itself. While an ultimate utilisation of the monies donated to trust for charitable purposes should certainly be a requirement, such restrictive clauses stifle the operation of trusts. While the avowed objective of the government is creating an environment of “ease of carrying on business”, one wonders why such stepmotherly treatment has been given to charitable entities.

Corpus donations

A corpus donation is in fact a capital receipt and not income. Such donations were artificially included in the definition of income but exempted under section 11(1)(d). While a corpus donation has not been specifically defined in the Act, it is a voluntary contribution made with a specific direction that it shall form part of the corpus of the trust or institution. A further restriction has been inserted with effect from assessment year 2022-23, inasmuch as such a contribution has to be now invested or deposited in one of the forms or modes specified in section 11(5), maintained specifically for such corpus. Ordinarily the inclusion of such a capital receipt in the definition of income is tax neutral as long as the entity enjoys the exemption and complies with the conditions However an accidental crossing of the threshold prescribed in the proviso could have catastrophic effect. This can be illustrated by the following example.

Let us assume that a charitable trust is engaged in the promotion of cleanliness and hygiene. It receives a contribution towards its corpus of rupees 1 crore with the direction that the interest thereon should be utilised to promote hygienic habits in the rural areas. The institution also holds a seminar which is attended by various experts in the country to discuss the manner in which these objects can be promoted. The institution receives an aggregate fee of 30 lakhs from the delegates. The conduct of this seminar is treated as a business by the authorities and since the receipt of 30 lakhs crosses 20% of the aggregate receipts the exemption under section 11 is denied. As a consequence, the exemption would be denied even to 1 crore of corpus donation. This will result in the trust suffering huge tax as well as not being able to comply with the philanthropic objects of the donor. It can of course be urged that this is inherently a capital receipt, and the operation of section 56 is specifically excluded, but this will involve avoidable litigation.

Denial of exemption on technical infractions of the law

Section 12A(1)(b)-failure to furnish the audit report by the specified date. The ingredients of the provision are

  1. total income of the trust is computed without considering the exemption under section 11 exceeds the maximum amount not chargeable to tax

  2. it is required to carry out an audit of its accounts and a report is to be issued in the prescribed form duly signed and verified by an accountant and

  3. the report is to be furnished electronically before the specified date.

A failure to comply with, the provision would result in a denial of the exemption. While it is undoubtedly true that entities desiring to claim a concession must comply with the law it is an avowed principle that the penal consequence must correspond with the degree and character of the infringement. The return of income of such an entity is required to be furnished on or before 31st October of the assessment year. {This date has been extended this year}. As a corollary the audit report will have to be furnished electronically on or before 30th September of the assessment year. A marginal delay can result in the denial of the exemption. It would have been appropriate to prescribe a monetary penalty possibly a heavy one as well to ensure discipline but denying exemption is an excessive penal consequence

Section 12A(1)(ba) denial if return is not filed by the due date

Prior to A.Y. 2018-19, the delay in filing a return of income by a charitable trust would attract a small penalty. With effect from A.Y. 2018-19 it would result in complete denial of exemption. No power to condone delay is available with any authority except by way of an order by the CBDT under section 119(2)(b).

Registration Travails

Prior to 01-04-1973, a trust desirous of enjoying exemption under section 11 did not require any registration provided it satisfied the conditions of the section itself.

Registration was introduced from 01-04-1973, and a charitable trust was required to get itself registered by making an application before the 1st day of July 1973 or before the expiry of a period of one year from the date of creation of the trust. The Commissioner was empowered to condone the delay which was caused for sufficient reasons. The power of condonation was deleted with effect from 1st day of June 2007.

Prior to 01-04-1997 there was no statutorily defined procedure for registration of a trust. This was introduced from that date and mandated an examination of-

  1. genuineness of activities of the trust or institution; and

  2. the compliance osf such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects.

Prior to 01-04-1973, there was no registration requirement but when it was introduced, the discretion vested with the Commissioner as regards the tests that he would apply. From 1997 the scope of enquiry was defined, and it created numerous controversies. The requirements of clause (b) created hardships as different Commissioners interpreted the law as per their own understanding.

Thankfully the registration once granted was permanent unless the charitable entity undertook a modification of its objects. This required of fresh registration which was mandated by 12A (1) (ab) (From A.Y. 2018-19). In certain circumstances the registration granted could be cancelled. The condition is contained in section 12AA (3), which is a finding subsequent to the registration of the trust, that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust.

The registration which was hitherto permanent is now required to be obtained once again by all charitable trusts seeking to make a claim under section 11. Those trusts that are recognised/approved under section 10(23C) would also be required to obtain a fresh recognition / approval.

The circumstances/conditions in which such an application is required to be made are contained in section 12A(1)(ac).

As of now these applications have to be preferred before 31st March 2022. The registration process is defined in section 12AB.

The categories of trusts requiring registration are

  1. Those already registered under section 12A/12AA

  2. Where the trust is registered under section 12AB and the registration is due to expire (at least 6 months prior to the date of expiry)

  3. Where the trust is provisionally registered under section 12AB at least 6 months prior to the expiry of provisional registration

  4. Where registration of the trust has become inoperative in terms of section 11(7) at least 6 months prior to the commencement of the assessment year from which the said registration is sought to be made operative.

  5. Where the trust has undertaken a modification of objects within a period of 30 days from the date of such modification

  6. In any other case at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought

The objective of requiring such a large number of trusts to register again is really not understood. While an identification of trusts in order to ensure that they adhere to regulatory discipline is welcome this could possibly be achieved with a different modality.

The proposal as envisaged today could create a huge number of problems and one solitary illustration would suffice to explain the impact.

Take a case where an educational institution is enjoying an exemption under section 10(23C)(iiiab). The said exemption requires the said institution to be wholly or substantially financed by the government. It however does not require any separate recognition.

From assessment year 2015-16 Rule 2BBB provides that the institution shall be treated as wholly and substantially financed by government only if the government grants are 50% or more of its receipts.

The uncertainty of the time frame in which such grants will be received from the government are well known. Therefore, such an institution would know of its qualification for the claim of exemption only at the close of the financial year or thereabouts. However, if it then desires to claim an exemption under section 11 it will fall under the residuary clause mentioned above. That requires a registration one month prior to the commencement of the previous year.

In the scenario just described an educational institution for no fault of its own will be denied exemption and will be subjected to tax. These situations ought to have been contemplated and provided for.

Draconian Chapter XII EB

This chapter is one of the most uncharitable amendments in regard to charitable trusts. The chapter provides for taxation of “accredited” income of a trust registered under section 12AA /12AB in case any of the following events occur.

  1. The trust is converted to any form which is not eligible for grant of registration.

  2. It is merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA/12AB.

  3. It fails to transfer upon dissolution its assets to any other trust or institution of charitable nature within a period of 12 months from the end of the month in which dissolution takes place.

The term conversion of a trust includes

  1. The registration granted to it is cancelled.

  2. It has adopted or undertaken modification of its objects which do not conform to the conditions of registration.

The manner in which registration of trusts have been cancelled in the recent past, is well known. If any of these eventualities occur the charitable trust will be liable to tax on its accredited income which is virtually its net worth. The rationale of such a chapter is not understood. Fortunately, since its introduction, this provision has rarely been invoked.


The above will indicate that the law on charitable trusts has travelled a long way. Commencing from the decade of the 70s where the law was a liberal, discretion was vested with the quasi-judicial authorities and was exercised in a humane manner, we have come to a scenario where every charitable institution or trust is viewed with suspicion. This has resulted in an extremely rigid interpretation of the law and an unduly heavy onus being cast on the institutions claiming exemption. One hopes that the lawmakers appreciate the ratio of the decision of the apex court in Commissioner of Customs Mumbai v. Dilip Kumar 9SCC FB(1) where the court ruled that at the threshold stage at which the exemption was being tested one had to be strict but once the hurdle was crossed one had to be liberal to ensure that the purpose of the grant of exemption was achieved.

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