‘Application of Income’ by Charitable or Religious Trust [Section 11(1)]

(A). Application of Income [Section 11(1)]

The following points one should note in this regard:

  1. Repayment of loans taken to fulfil one of the objects of trust is treated as an application of income for charitable purposes.
  2. Interest bearing loans, advanced by an educational trust, to students for higher studies amount to application of income for charitable purposes in the year of grant of such loans, if the object of trust is advancement of education and granting of scholarship. As and when such loan is returned to the trust, it will be treated as the income of that year.
  3. Application of the amount can be for revenue or capital purpose.
  4. The expenditure incurred by way of payment of tax out of the current year’s income has to be considered as application for charitable purposes.
  5. Donation given by a charitable/religious trust to another charitable/religious trust is treated as “application” of income for the donor trust [and eligible for exemption under section 11(1)].However, the donor trust will not be able to avail exemption under section 11(1) (with effect from the assessment year 2018-19), in respect of donations given with a specific direction that they shall form part of the corpus of the donee trust.
  6. Utilisation of income for meeting expenses of earlier years is an “application”.
  7. For capital gain derived by a charitable trust.
  8. For the purpose of determining application of income under section 11(1), the provisions of sections 40(a)(ia) and 40A(3)/(3A), shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.Consequently, for calculating “application” of income if payment exceeding Rs. 10,000 is made in cash or by bearer cheque, such payment will be disallowed from the assessment year 2019-20. Likewise, if tax is deductible but not deducted and payment is made to a resident, 30 % of such payment will be disallowed while calculating “application” of income for the assessment year 2019-20 (or any subsequent year).

(B). When Application of Income falls Short of 85% of Income –

If the income applied to charitable or religious purposes, during the previous year, falls short of 85 per cent of the income derived during the year because of the reasons given below [column 1 of the table given below], the charitable trust or institution has been given the option to spend such income for charitable or religious purposes in the manner given in column 2 of the table—

Application of income falls short of 85 % of income because of the reasons given below—When the income can be spend
(a). Income has not been received during the relevant previous yearEither during the previous year in which income is received or during the previous year immediately following such year
(b). Because of any other reasonDuring the previous year immediately following the previous year in which the income was derived

How to avail the benefit of extended time by Charitable Trust –

For availing of the benefit of extended time beyond the relevant previous year, the charitable trust or institution, has to take the following steps—

  1. It has to exercise an option in writing under Explanation (2) to section 11(1).
  2. This option can be exercised by uploading Form No. 9A (either under digital signature or electronic verification code) before the expiry of time allowed for submission of return of income under section 139(1) .

Income applied to such purposes during the extended time is deemed to have been applied to such purposes during the previous year in which it was derived.

(C). Excess Application in an earlier year may be Set Off against next year’s income:

Where a trust or institution expends or applied more than its income, it can only mean that such excess amount is from corpus or future income. The intention whether it from corpus or future income should be manifest from the accounts. If such deficit is debited to corpus, it should ordinarily mean that the corpus is used or applied for the purpose of the trust so that there can be no objection to such use. On the other hand, if the deficit is merely carried forward, it would be clear, that the intention is to absorb such deficit against future income. This decision has been given in the following cases.

Example :

The income of charitable trust for the previous year 2018-19 is Rs. 8,60,000. The trust actually spends only Rs. 3,80,000 during the previous year 2018-19. Determine the taxable income of the trust on the assumption that:

  1. the trust has not applied for the option under clause (2) of the Explanation to section 11(1), and

  2. the trust has applied for the option and has obtained extension of time for applying the unutilised portion of income for charitable purposes during the next previous year, i.e., 2019-20 and has actually spent Rs. 24,700 during that previous year.

Solutions :

Income 8,60,000
Less : 15% set apart for the future 1,29,000
Less : Amount actually spent during the previous year 3,80,000
Unutilised Balance 3,51,000

On the first assumption, Rs. 3,51,000 is taxable for the assessment year 2019-20 relevant to the previous year 2018-19. On the second assumption, Rs. 3,26,300 (i.e., Rs. 3,51,000—Rs. 24,700) will be treated as taxable income for the assessment year 2020-21 relevant to the previous year 2019-20.