Sections 11 to 13 of the Income-tax Act form the backbone of the taxation framework applicable to trusts and institutions registered under section 12AA or 12AB. Section 11(1) commences with the expression “subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income.” This introductory clause is critical because it sets the scope and limitations on the exemption provisions available to trusts. To fully comprehend section 11, it is essential to analyze the implications of sections 60 to 63, understand the meaning of the term “total income” as used in section 11, and assess how income should be computed under this provision.
Section 11(1)(a), (b), and (c) all refer to “income from trust property,” implying that the exemption is available only on such income. Therefore, understanding what constitutes income from trust property is crucial. According to section 12(1), voluntary contributions received by a trust established wholly for charitable or religious purposes shall be deemed to be income derived from property held under trust for such purposes. However, contributions specifically directed to form part of the corpus shall not be included in the income under section 11. Thus, any voluntary contribution not tagged for corpus purposes is considered income from trust property.
Section 11(4) expands the definition of “property held under trust” to include a business undertaking. Section 11(4A) allows profits and gains from business activities incidental to the objectives of the trust to be exempt, provided specific conditions are satisfied. This interpretation broadens the scope of section 11 to include income from business activities, so long as they are incidental and satisfy the relevant conditions.
Section 11(7) outlines the treatment of income that would otherwise qualify for exemption under section 10 but has been included under section 11. Therefore, a thorough understanding of how each of these components interacts is fundamental for interpreting the scope of section 11.
Applicability of Sections 60 to 63 and Its Effect on Section 11
Section 11’s exemption is subject to the overriding provisions of sections 60 to 63, which deal with income that, although legally received by one person, is deemed taxable in the hands of another. These sections address situations where there is a separation of ownership of an asset and the income arising from it. If the income of a charitable organization falls within the ambit of these provisions, it will not be eligible for exemption under section 11.
Transfer of Income Without Transfer of Assets
Section 60 applies when a person transfers income to another without transferring the ownership of the asset that generates the income. In such cases, the income continues to be taxed in the hands of the original owner. This provision is relevant to trusts because section 11 provides an exemption for income derived from property held under trust. If only income is transferred without the asset, it fails the test of being income from trust property.
In the case of CIT v. Maharajadhiraj Sir Kameshwar Singh, the settler allocated only the interest income from securities for charitable purposes while retaining ownership of the securities. The court held that this did not qualify for exemption under section 11, as there was no transfer of the asset. Similarly, in CIT v. Chhadami Lal Jain Trust, the court held that the intention to transfer property to a trust is insufficient unless there is a complete and valid legal transfer. These rulings confirm that unless a trust owns the property producing the income, the exemption under section 11 is not applicable.
Revocable Transfers and Their Tax Implications
Section 61 states that income arising from a revocable transfer of assets will be taxed in the hands of the transferor. The transfer is considered revocable if it includes a provision for the asset or income to revert to the transferor or gives the transferor the right to reassume control over it.
In CIT v. G.D. Naidu Industrial Educational Trust, the trust deed contained clauses allowing the settler to revoke the trust if its purposes were not being fulfilled. The court held that the income from such properties would be taxed in the hands of the settler, not the trust, thereby denying the benefit of section 11. This case underscores the importance of irrevocability for a trust to qualify under section 11.
Exceptions to Revocable Transfers under Section 62
Section 62 provides exceptions to section 61 by stating that if a transfer is not revocable during the lifetime of the transferee or for a period exceeding six years in case of transfers before April 1, 1961, and the transferor does not derive any benefit, then the provisions of section 61 shall not apply. However, these exceptions do not typically apply to public charitable or religious trusts because the beneficiaries in such cases are indefinite and their lifetimes cannot be ascertained.
Clause (ii) of section 62(1) applies only to trusts created before April 1, 1961. In any case, section 13(1)(c) ensures that a trust losing its charitable character due to private benefits to the settler will not qualify for the exemption under section 11.
Meaning of Transfer and Revocable Transfer under Section 63
Section 63 defines thtermsrm “transfer” and “revocable transfer” for sections 60, 61, and 62. A transfer is considered revocable if it includes provisions for the re-transfer of the whole or part of the income or assets to the transferor, or gives the transferor a right to reassume power over them.
In CIT v. Jayantilal Amratlal, the Supreme Court interpreted these definitions in detail. The court held that a trust deed that gives back pre-trust powers to the settlor renders the transfer revocable. However, a provision that merely allows the settlor to direct trustees on charitable activities does not imply a reassumption of power. Similarly, naming the settlor as a sole trustee or giving them veto power over management decisions does not amount to a revocable transfer if the settlor cannot benefit personally.
The key takeaway is that any clause in a trust deed that enables the settlor to benefit personally or take back assets or income results in revocability, thereby disqualifying the income under section 11.
Concept of Total Income and Its Relevance in Section 11
The Income-tax Act does not provide a strict definition of “income” in a universal sense. The term “total income” is defined in section 2(45) as the total amount of income referred to in section 5, computed by the provisions of the Act. However, section 11 uses the term “income” rather than “total income” in sub-clause (a), which deals with exemptions.
This distinction is significant. The term “income” for section 11 must be interpreted in a broader, more commercial sense. It includes real income available for application to charitable or religious purposes. The Central Board of Direct Taxes clarified this position in Circular No. 5-P dated 19 June 1968, where it stated that the income to be considered under section 11(1) is the real income available in the hands of the organization, and not the income computed under various heads as per section 14.
Clarification by the Board on the Scope of Income
The CBDT clarified through the same circular that in the case of a trust holding a business undertaking, the income should be as per the accounts of the undertaking. If the income determined by the Assessing Officer under the Act is higher than the income shown in the accounts, the difference is considered misapplied and taxable under section 11(3).
For trusts with income from house property, securities, capital gains, or other sources, the income should be computed based on commercial principles. Any application of income towards the purposes of the trust or for capital expenditure should be added back to arrive at the income to determine the minimum 85 percent application rule.
The income for purposes of section 11(1) includes business income disclosed in the accounts and other income computed on a commercial basis. The trust must apply at least 85 percent of this income to remain eligible for exemption.
Commercial Computation of Income Instead of Head-Wise Income Under Section 14
Section 14 of the Income-tax Act lists five heads of income, which apply to general taxpayers. However, these heads are not relevant for computing income for charitable or religious trusts. The trust’s income must be computed in a commercial sense, taking into account all expenditures regardless of whether they would be allowable under the Act for other taxpayers.
In DIT (Exemption) v. Girdharilal Shewnarain Tantia Trust, the Calcutta High Court held that section 14 does not apply to charitable trusts. The court reasoned that charitable income is to be computed based on its application and accumulation, not as per the five heads.
The Madras High Court in CIT v. Estate of V. L. Ethiraj held that the income of a trust should be determined in the normal commercial sense. Income that qualifies for exemption under section 11(1)(a) must be identified based on the income derived from property held under trust and not based on heads of income under section 14. This view was supported by the Supreme Court’s earlier observation in CIT v. Bipinchandra Maganlal and Co. Ltd., which stated that income should be interpreted in the commercial sense and not as an artificial construct created by tax provisions.
Income Received from Property Held under Trust
Section 11(1)(a) of the Income-tax Act exempts income derived from property held under trust wholly for charitable or religious purposes, provided such income is applied for such purposes in India. The word “property” in this context has a broad meaning and includes movable and immovable property, investments, business undertakings, and even actionable claims. The income derived from these assets, when applied toward charitable or religious objectives, is eligible for exemption. However, the benefit is available only if the trust is registered under Section 12A or 12AA. For a trust to qualify for exemption, the application of income must be real, and not merely earmarked or allocated. The trust must spend the income on charitable or religious activities. If income is accumulated or set apart for future application to charitable or religious purposes, such accumulation is allowed to the extent of 15% of income.
Conditions for Accumulation or Setting Apart of Income
The accumulation of income beyond 15% is permissible under Section 11(2), provided certain conditions are fulfilled. These include furnishing Form 10 before the due date of filing the return under Section 139(1), specifying the purpose for which the income is being accumulated, and investing or depositing such accumulated income in specified modes mentioned under Section 11(5). The trust must also apply the accumulated income within five years. If the income is not applied for the intended purpose or is misapplied, the accumulated amount becomes taxable. Further, if the trust fails to file Form 10 or does not invest the income in the prescribed modes, it will not be entitled to exemption for the accumulated income.
Voluntary Contributions and Their Treatment
Section 12 of the Act deals with voluntary contributions. Voluntary contributions received by a trust created wholly for charitable or religious purposes are deemed to be income derived from property held under trust and are treated accordingly under Section 11. However, voluntary contributions received with a specific direction to form part of the corpus of the trust or institution are not required to be applied for charitable or religious purposes during the year of receipt. Such corpus donations are fully exempt under Section 11(1)(d), provided they are invested or deposited in the modes specified under Section 11(5). Other donations not forming part of the corpus must be applied for charitable or religious purposes during the year or accumulated as per the provisions of Section 11(2) to claim exemption.
Business Income of Trusts
Income from a business carried on by a trust is eligible for exemption only if the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained. This condition is laid down in Section 11(4A). The term “incidental” means ancillary or subservient to the main objectives. For instance, a trust running a hospital may operate a pharmacy, which is considered incidental. However, a trust running a commercial venture unrelated to its charitable objectives will not qualify for exemption under Section 11 for such business income. The business activity must not overshadow the main objectives of the trust. The profits must be used solely for charitable purposes, and appropriate documentation and disclosures must be maintained.
Investments and Modes Specified under Section 11(5)
For exemption under Section 11 to apply, the accumulated income or corpus donations must be invested in specific modes mentioned under Section 11(5). These include savings certificates, post office savings accounts, deposits with scheduled banks, investments in units of the Unit Trust of India, or other prescribed forms of investment. Investments outside these specified modes may result in the forfeiture of the exemption. The purpose of prescribing specific modes is to ensure that the funds of the trust are invested safely and are available for future application to charitable or religious purposes. Non-compliance with this requirement can lead to the denial of exemption on the relevant portion of income.
Capital Gains and Reinvestment
If a trust sells a capital asset and reinvests the net consideration in another capital asset for charitable purposes, the capital gains are deemed to have been applied to charitable purposes under Section 11(1A). This means that capital gains are not taxed if they are reinvested in the acquisition of another capital asset for the trust’s charitable use. The reinvestment must be made within the prescribed time and should reflect a genuine application of funds for the trust’s objectives. The provision is designed to facilitate effective utilization of trust assets while encouraging modernisation and expansion of charitable services.
Application of Income Outside India
The exemption under Section 11 is primarily available for income applied to charitable or religious purposes in India. However, income applied outside India is allowed only in specific cases approved by the Board for the promotion of international welfare in which India is interested. The trust must obtain prior approval from the CBDT (Central Board of Direct Taxes) for applying income outside India. If approval is granted, the income applied abroad may still qualify for exemption under Section 11. In the absence of such approval, any application of income outside India would render that portion taxable, regardless of its purpose.
Non-Eligibility in Certain Cases
Certain categories of income or institutions are specifically excluded from exemption under Section 11. Trusts created after April 1, 1962, for the benefit of any particular religious community or caste are not eligible. Similarly, income from property held under a trust for private religious purposes not enuring for the benefit of the public is also not exempt. Any part of income applied for the benefit of specified persons, as defined in Section 13(3), may lead to forfeiture of exemption to the extent of such application. The Act contains detailed anti-abuse provisions to ensure that the benefits of tax exemption are not misused for private gain or non-charitable purposes.
Inter-Charity Donations
Trusts and institutions often make donations to other charitable trusts. Such donations are treated as application of income under Section 11. However, donations made out of accumulated income (under Section 11(2)) are not treated as applications and do not qualify for exemption. Furthermore, with effect from Assessment Year 2024–25, donations made to other trusts are allowed as an application only to the extent of 85% of the donation amount. This amendment was introduced to avoid the practice of round-tripping and layering of funds among multiple trusts without real application to charitable purposes. Consequently, if a trust donates ₹100 to another registered trust, only ₹85 will be treated as application of income.
Filing of Return and Audit Report
To claim exemption under Section 11, the trust must file its income tax return within the due date specified under Section 139(1). Additionally, if the total income before claiming exemption exceeds the basic exemption limit, the trust is required to get its accounts audited under Section 12A(b) and submit the audit report in Form 10B. Filing of Form 10B is mandatory and must be completed within the prescribed timeline. Failure to comply with these procedural requirements can lead to the loss of exemption. Therefore, timely and accurate compliance is crucial for retaining eligibility for benefits under Section 11.
Corpus Donations and Their Treatment under Section 11
Corpus donations refer to contributions made with a specific direction that they shall form part of the corpus of the trust or institution. These donations are capital receipts and do not form part of income under Section 11(1)(d), and hence are fully exempt. However, for the exemption to apply, the donation must be accompanied by a written direction from the donor that it is intended to be part of the corpus. Further, to retain exemption, corpus donations must be invested in the modes specified under Section 11(5). Interest or income earned from such corpus investments, however, is treated as income and is required to be applied as per Section 11.
Income from Business Undertakings Held under Trust
A charitable or religious trust can derive income from a business undertaking provided the business is incidental to the objectives of the trust, and separate books of account are maintained for such business as per Section 11(4A). If a business is not incidental to the objects or separate books are not maintained, then the exemption under Section 11 may not be available on such income. The determination of whether a business is incidental depends on a factual analysis of the activities of the trust. For example, running a printing press by an educational trust to print textbooks for its institutions could be considered incidental.
Capital Gains and Their Application
Capital gains earned by a charitable trust on the sale of capital assets are considered income under Section 11(1A). If the net consideration received on sale is fully utilized to acquire another capital asset, the entire capital gain is deemed to have been applied for charitable purposes and hence exempt. If only part of the net consideration is applied for acquisition, then the exemption is allowed proportionately. This provision ensures that trusts are not discouraged from restructuring their assets for better utility while ensuring the application of income.
Inter-Charity Donations and Their Implications
Donations made by one charitable trust to another with similar objects are generally considered as application of income under Section 11. However, certain restrictions have been introduced to avoid misuse, such as when a trust donates to another and claims application without ensuring the end use of the donation. The Finance Act, 2023, introduced a restriction whereby only 85% of such donations shall be treated as application of income in the hands of the donor trust. This discourages layering and encourages actual application of income towards charitable activities.
Maintenance of Books and Audit Requirements
To avail exemption under Section 11, a trust or institution is required to maintain proper books of account. If the total income before claiming exemption exceeds the basic exemption limit, the accounts must be audited by a Chartered Accountant, and the audit report in Form 10B must be furnished within the prescribed time. This audit ensures that the income has been applied correctly, and investments and accumulations are in compliance with the provisions of Section 11.
Forfeiture of Exemption under Section 11
Exemption under Section 11 is not absolute and can be forfeited in certain situations. If the income or property of the trust is used for the benefit of specified persons referred to under Section 13(3), the exemption may be denied under Section 13(1)(c). Similarly, violation of investment norms under Section 11(5), failure to apply 85% of income, or non-filing of the required returns and audit reports may also lead to forfeiture of exemption. Therefore, strict compliance with the statutory requirements is essential to retain the benefit.
Filing of Return and Other Compliance
A trust claiming exemption under Section 11 must file its return of income within the due date prescribed under Section 139(4C). Along with the return, it must also furnish the audit report (if applicable) and a statement of application and accumulation of income. Form 10 is required for accumulation of income under Section 11(2), and Form 9A is required for deemed application of income. Non-compliance with filing requirements may lead to the denial of exemption, even if the trust fulfills other conditions.
Taxation in Case of Non-Compliance
If a trust fails to meet the conditions prescribed under Section 11, the income becomes taxable at the maximum marginal rate. This applies in cases of misapplication of income, investment in prohibited modes, benefits extended to related parties, or non-compliance with filing and audit requirements. The income will be computed under normal provisions of the Income-tax Act and taxed accordingly. This provision acts as a deterrent against misuse and ensures accountability in the functioning of charitable organizations.
Position of Voluntary Contributions Not Being Corpus
Voluntary contributions that are not corpus donations are treated as income under Section 12(1) and enjoy the same exemption as other income under Section 11, subject to the condition of application of 85% and compliance with other statutory provisions. These contributions include general donations, grants, or aid received without any specific direction. They are part of the revenue income of the trust and are included in the computation for determining the amount to be applied or accumulated.
Treatment of Corpus Donations and Capital Gains
One significant feature of Section 11 is the treatment of corpus donations. Corpus donations are contributions received by a trust with a specific direction that they shall form part of the corpus of the trust. These are not treated as income under Section 11(1)(d) and are therefore fully exempt, provided they are invested or deposited in modes specified under Section 11(5). The donor must specify in writing that the donation is intended to form part of the corpus; otherwise, it is treated as a voluntary contribution under Section 12 and taxed unless utilized for charitable purposes.
Similarly, capital gains derived from the transfer of a capital asset held under trust are also treated in a specific manner under Section 11(1A). If the net consideration is reinvested in another capital asset for charitable purposes, the capital gain is exempt. The quantum of exemption depends on whether the entire or part of the net consideration is reinvested. If the whole of the net consideration is used to acquire another capital asset, the entire capital gain is exempt. If only part of the net consideration is used, the exemption is proportionate.
Treatment of Business Income
A trust can have income from a business activity and still claim exemption under Section 11, but only if the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained for such business. Section 11(4A) specifically mandates this. For example, a charitable trust running a printing press solely to publish its educational material may claim exemption. However, if the trust runs a general printing business catering to external clients, this income may not qualify for exemption unless the condition of incidental activity is satisfied.
Furthermore, if the income from business is substantial and not incidental to the main objects of the trust, it could lead to the denial of exemption under Section 11, especially in light of judicial interpretations. Therefore, careful attention must be paid to the nature and scale of the business activity undertaken.
Consequences of Violation of Section 11 Provisions
If a charitable or religious trust violates the conditions specified under Section 11, its entire income may become taxable at the maximum marginal rate. Some of the common violations include:
- Using income for purposes not by the objects of the trust.
- Income or property of the trust is being used for the benefit of specified persons (defined in Section 13).
- Failing to apply at least 85% of income in the relevant financial year.
- Non-maintenance of separate books for incidental business activities.
- Investment of funds in prohibited modes.
In such cases, the exemption under Section 11 is denied, and the entire income is subject to tax as per normal provisions of the Act. Therefore, strict adherence to the procedural and substantive requirements is necessary to ensure the trust enjoys the intended benefits under Section 11.
Audit and Filing Requirements
To avail exemption under Section 11, the trust or institution is required to get its accounts audited if its total income exceeds the maximum amount not chargeable to tax. The audit report must be in Form 10B, and it has to be submitted electronically before the due date of filing the income tax return.
Additionally, trusts are required to file Form 10 to notify the income that is accumulated or set apart for future application, and this form must also be filed before the due date. Failure to comply with the procedural requirements can result in the denial of exemption under Section 11, irrespective of the nature of the application of income.
Amendments and Judicial Interpretation
Over the years, various amendments and judicial pronouncements have shaped the understanding and implementation of Section 11. For instance, amendments have been made to prevent the misuse of exemptions by charitable trusts engaged in commercial activities. Courts have played a pivotal role in interpreting terms such as “charitable purpose,” “application of income,” and “incidental business.”
Recent rulings have stressed the need for transparency, the genuine charitable intent of the trust, and the actual application of income to charitable purposes. Any deviation from the stated objectives or misapplication of funds can lead to cancellation of registration under Section 12AB and denial of exemption under Section 11.
Conclusion
Section 11 of the Income-tax Act plays a critical role in promoting and supporting charitable and religious activities in India. It provides significant tax benefits to trusts and institutions that genuinely pursue charitable purposes. However, these benefits come with stringent conditions regarding registration, investment, application of income, and reporting requirements.