It is clear from Application of Income by Trust during Previous Year that for claiming full exemption at least 85% of the income should be applied during the previous year, towards the purpose for which the trust has been created. Income applied during the previous year for this purpose includes the following:
(a) income actually applied during the previous year for charitable and religious purposes,
(b) income deemed to have been applied for charitable or religious purposes in India during the previous year.
Income deemed to have been applied during the previous year for charitable or religious purposes [Clause 2 of the Explanation 1 to Section 11(1)]:
If the income applied to charitable or religious purposes during the previous year falls short of 85% of the income derived during the year either:
(a) for the reason that whole or part of the income has not been received during the previous year, or
(b) for any other reason, then the charitable trust has been given the option to spend such income for charitable or religious purposes in the following manner:
(i) In case of (a) either during the previous year in which the income is so received or in the immediately following previous year.
Example: , if the income of previous year 2021-22 is received on 15.4.2024, such income should be applied for charitable or religious purposes either during previous year 2024-25 and/or 2025-26.
(ii) In case of (b) during the previous year immediately following the previous year in which the income was derived. If the income is received on 28.1.2022 and it could not be spent in the previous year 2021-22 for any reason, it could be applied in the next previous year, i.e., 2022-23.
To avail the facility of the above extended period of application of income, the trust has to exercise such option before the expiry of the time allowed under section 139(1) for furnishing the return of income in Form No. 9A and it will be furnished electronically either under digital signature or electronic verification code in the manner given under rule 17.
If such option is exercised by the trust, such income shall be deemed to have been applied for charitable and religious purposes during the previous year in which the income is earned, though it is actually spent at a later date. In this case, as such income is deemed to have been applied during the previous year in which it was derived, it shall not be treated as application of income for charitable purposes, of the previous year in which it is actually spent.
1. Repayment of a Debt incurred for Charitable Purposes by a Charitable Trust and Loans Advanced by Educational Trusts are Application of Income:
Section 11 of the Income-tax Act requires 100% of the income of a charitable and religious trust to be applied for religious and charitable purposes to be entitled to the exemption under the said section. Two questions have been considered regarding the application of income:
(i) Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust? and
(ii) Whether loans advanced by an educational trust to students for higher studies would be treated as application of income for charitable purposes?
Board has decided that repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of trust is to give interest- bearing loans for higher studies, it will amount to carrying on of money-lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting of loans, even interest-bearing, will amount to the application of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year.
When the amount is returned by the beneficiaries of the trust, the receipt in the hands of the trust can only be its income of the years in which it is received.
Application out of loans and borrowings not to be treated as application of the relevant previous year but can be treated as application of the subsequent year(s) subject to certain conditions [Explanation 4 to section 11(1)(a) or (b)]
For the purposes of determining the amount of application under clause (a) or clause (b), of section 11(1), application for charitable or religious purposes, from any loan or borrowing, shall not be treated as application of income for charitable or religious purposes:
Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the loan or borrowing, or part thereof, is repaid from the income of that year and to the extent of such repayment.
2. Payment of Taxes held Application:
Expenditure by way of payment of tax out of current year’s income has to be considered as application for charitable purposes because the payment has been made to preserve the corpus, the existence whereof is essential for the trust itself.
3. Donation of Current Year Income by one Charitable Trust to another Amounts to Application:
When a charitable trust donates its income to another charitable trust, the provisions of section 11(1)(a) can be said to have been met by the donor-trust and the donor-trust can be said to have applied its income for charitable and religious purposes.
However, any donation made out of income referred to in section 11(1 )(a) or (b) read with explanation to that sub-section which is not applied, but is accumulated or set apart either during the period of accumulation or thereafter to any trust or institution registered under section 12AA or w.e.f. 1.4.2021, 12AB or to any fund, institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via) shall not be treated as application of income for charitable or religious purposes.
4. Restriction on Exemption in case of Corpus Donation by Exempt Entities to other Exempt Entities Registered under section 12AA [Explanation 2 to section II and 12th. Proviso under Section 10(23Q]
Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to any other trust or institution registered under section 12AA, being contribution with a specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income for charitable or religious purposes.
Explanation 2 under section 11(1) modified w.e.f. 1.4.2020 [A.Y. 2021-22]
As the corpus donation will now be also exempt in the hands of funds/trust/institutions covered under section 10(23C)(iv)(v)(vi)(via), Explanation 2 under section 11(1) has been modified to provide as under:
Explanation 2.—
Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv)(v)(vi)(via), or other trust or institution registered under section 12AA or w.e.f. 1.4.2021, 12AB, as the case may be, being contribution with a specific direction that it shall form part the corpus, shall not be treated as application of income for charitable or religious purposes.
5. Other Cases of Application of Income:
Other cases holding that in the facts of those cases, the expenditure or outgoing did constitute application of income for charitable purposes, are:
(1) CIT v Kannika Parameswari Devasthanam & Charities (1982) 133 ITR 779 (Mad) [capital expenditure incurred on improving or maintaining property of the trust].
(2) Application of surplus funds in construction of additional buildings with the purpose of letting them out and utilising the rent for the objects of the trust would amount to applying funds for religious and charitable purposes.
[St. George Forana church (1988) 170 ITR 62 (Ker)1
(3) Spending on production and exhibition of a film, as also spending for the construction of a overhead tank on land belonging to the legal heirs of the founder of the assessee-trust is application.
[CIT v Divine Light Mission (1990) 183 ITR 56 (Del)]
(4) Expenditure on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust must be considered as application for charitable purposes.
[CIT v Birla Janahit Trust (1994) 208 ITR 372 (Cal)]
(5) Where the assessee is a charitable institution, legal expenses incurred by the assessee-association for defending the persons running the association against criminal charges are allowable as a permissible deduction while computing the total income of the assessee association.
[Ananda Marga Pracharaka Sangha v CIT (1996) 218 ITR 254 (Cal)]
(6) Income for the purposes of section 11 should be understood in its commercial sense and, therefore, loss on sale of shares to make investments in specified investments within the meaning of section 11(5) has to be treated as application of income of the trust.
[Chidambaram Chettiar Foundation v ITO (1991) 39 TTJ 82 (AT) (Mad)]
6. Depreciation is Not an Application of Income [Section 11(6)]
Income for the purposes of application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.
Consequently, if acquisition of an asset has not been claimed as application of income, then depreciation on that asset can be claimed as application of income under section 11.
7. Excess Application Not Allowed to be Carried Forward and Set Off in the Subsequent Year [Explanation 5 to section 11(1)]
For the purposes of section 11(1), it is clarified that the calculation of income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding the previous year.
However, the benefit has been given in a different manner to such trust by inserting Explanation 4.
