Forfeiture of Exemption of Incomes of Charitable / Religious Trusts / Institutions by virtue of Section-13

The following incomes of charitable/religious trusts/institutions do not qualify for exemption under Section 11 and 12 by virtue of section 13:

1. Any part of Income of Trusts for Private Religious Purposes – which does not enure for the benefit of the public [Section 13(1)(a)].

Section 13(1)(a) shall not be applicable if the element of public benefit has been satisfied. It does not matter where the control lies, if the benefit accrues to public at large but the control is with specific group of persons, then section 13(1)(a) will not be attracted.

Any part of income from a property held under a trust for private religious purposes which does not enure for the benefit of the public is not eligible for exemption under section 11 or 12.

2. Income of Trusts established on or after 1.4.1962 for the Benefit of particular Religious Community or Caste [Section 13(1)(b)] –

Any income of trust/institution created/established for charitable purposes on or after 1.4.1962, if such trust or institution is created or established for the benefit of any particular religious community or caste [Section 13(1)(b)].

The exemption is however, available to a charitable trust or institution created or established before 1.4.1962 even if it is for the benefit of any particular religious community or caste.

Assessment of 'Trust'
Assessment of ‘Trust’

A trust or institution created or established for the benefit of Scheduled Castes, backward classes, Scheduled Tribes or women and children shall not be deemed to be a trust or institution created or established for the benefit of a religious community or caste within the meaning of clause (b) of subsection (1).

3. Income of Trusts for the Benefit of Interested Persons referred to in sub-section 13(3) [ Section 13(1)(c)]

If religious/charitable trust/institution is created or established after 1.4.1962 and any part of its income enures directly or indirectly under the rules governing the trust, for the benefit of any person specified in section 13(3) then the entire income of such trust is not eligible for exemption under section 11 or 12.

Entire income of a trust/institution created/established after March 31, 1962 is also not eligible for exemption under section 11 or 12 if the income/property is used/applied, during the relevant year, for the direct/indirect benefit of the author of the trust and other persons mentioned in section 13(3) . This provision is also applicable in the case of a trust/institution created/established prior to April 1, 1962 but in such case exemption is not forfeited if such use of the trust income/property is in compliance with a mandatory provision in the terms of the trust or mandatory rule governing the institution.

4. Fund not Invested by Trusts in Section 11(5)

Income of a trust/institution is not eligible for exemption under section 11 or 12 if its funds are invested/deposited otherwise than in the forms specified in section 11(5).

In this regard the following points should be noted:

  1. The exemption under section 11(1)(a) is available only if at least 85 % of the income is applied for charitable/religious purposes in India during the year and the remaining amount is invested in the forms/ modes specified under section 11(5). Thus, both the requirements will have to be fulfilled before the trust can claim and avail of the exemption under section 11(1)(a).

Example :

A trust derives income from property held for charitable purposes to the extent of Rs. 40,000 in a year. Under section 11(1)(a) it has to spend at least Rs. 34,000 (i.e. 85% of Rs.40,000) on the charitable purposes. The balance of Rs. 6,000 will have to be invested in the forms/modes prescribed under section 11(5). It is only then that the entire income of the trust will get exemption—

  1. Any charitable or religious trust or institution will forfeit exemption from tax if any funds of the trust or institution are invested or deposited, after February 28, 1983, otherwise than in any one or more of the modes specified in section 11(5).Such trusts and institutions will also forfeit exemption from tax if any part of their funds invested before March 1, 1983 otherwise than in any one or more of the forms or modes specified in section 11(5), continue to remain so invested or deposited after November 30, 1983. Trusts or institutions which continue to hold any shares in a company [other than shares in a public sector company or shares which are prescribed as mode of investment under section 11(5)(xii)] after the said date will also forfeit exemption from income-tax.

5. EXCEPTION – In the cases given below, Exemption is Not Forfeited even if funds are invested otherwise than in the Modes specified in section 11(5): [Section 13(1)(d)]

The provisions of section 13(1)(d) shall not apply to the under mentioned:

  1. The exemption is not denied in relation to assets held by the trust or institution where such assets form a part of the corpus of the trust or institution as on June 1, 1973.
  2. Similarly, exemption is not denied in relation to any accretion to the assets, being shares of a company forming part of the corpus of the trust or institution as on June 1, 1973, where such accretion arises by way of allotment of bonus shares.
  3. Exemption is not forfeited in relation to debentures acquired by the trust or institution before March 1, 1983. Where debentures of an Indian company are acquired by the trust or institution after February 28, 1983 but before July 25, 1991, the exemption from tax under section 11 will be denied only in respect of interest on such debentures†. If, however, such debentures are not disinvested by March 31, 1992, the trust or institution will lose exemption under section 11.
  4. Exemption is not forfeited in relation to any funds representing the profits and gains of a business, if the trust/institution maintains separate books of account in respect of such business.
  5. Acceptance of donations in kind or acquiring any asset not conforming to the provision of section 11(5) will not make the fund or trust or institution lose tax exemption. The trust or institution shall be required to dispose of or convert the asset not conforming to the requirement of section 11(5) into permissible investment within one year from the end of the financial year in which such assets are acquired or March 31, 1993, whichever is later.

6. Charitable Trusts not to lose Exemption if Educational or Medical Facilities provided to Specified Persons [Section 13(6)]:

Sections 12(2) and 13(6) provide as follows—

  1. Income of a charitable or religious trust will not be exempt if any part of such income or any property of the trust is used or applied directly or indirectly for the benefit of any person such as the author of the trust, trustee or any relative of such persons or any concerns in which such persons have a substantial interest .

    Sub-section (6) was inserted in section 13 with effect from the assessment year 2001-02. It provides that a charitable or religious trust running an educational institution or a medical institution or a hospital shall not be denied the benefit of exemption under section 11 or section 12, in relation to any income by reason only that such trust has provided educational or medical facilities to interested persons.

  2. Sub-section (2) was inserted in section 12 with effect from the assessment year 2001-02. It provides that the value of any medical or educational services made available by any charitable or religious trust running a hospital or medical institution or an educational institution to any interested person shall be deemed to be the income of such trust or institution derived from property held under trust wholly for charitable or religious purposes during the previous year in which such services are so provided and shall be chargeable to income-tax notwithstanding the provisions of section 11(1).

Meaning of ‘INTERESTED PERSON’ by virtue of Section 13(3) –

For the purposes of section 13, the following are interested persons:

  1. the author of the trust or the founder of the institution;

  2. any person who had made a total contribution (up to the end of the relevant previous year) of an amount exceeding Rs. 50,000 (substantial contributor);

  3. any member of the HUF (or any relative of such member) where such author or founder or substantial contributor is a HUF;

  4. any trustee of the trust or manager (by whatever name called) of the institution;

  5. any relative of such author, founder, substantial contributor, member, trustee or manager;

  6. any concern in which any of the persons referred to above has a substantial interest.

‘When an income or property is deemed to have been used or applied for the benefit of a person referred to in section 13(3) [Section 13(2)]:

the income or the property of the trust or institution or any part of such income or property is to be deemed to have been used or applied for the benefit of a person referred to in section 13(3) in the following cases:

    1. Interest free loan or loan without security:

If any part of the income or the property of the trust or institution is or continues to be lent to any person referred to in Section 13(3) for any period during the previous year without either adequate security or adequate interest or both. [Section 13(2)(a)]

    1. Use of properties without charging adequate rent:

If any land, building or other property of the trust or institution is or continues to be, made available, for the use of any person referred to in section 13(3) for any period during the previous year without charging adequate rent or other compensation. [Section 13(2)(b)]

    1. Letting out of trust property to an interested person is violation of section 13(2):

Where the trust property is let out to a partnership in which the trustee was a partner for a meagre rent, there is clear violation of the requirements of section 13(2)(b), so that the trust has to lose its exemption. [Ram Bhawan Dharamshala v State of Rajasthan (2002) 258 ITR 725 (Raj)]

    1. Excessive payment for services:

If any amount is paid out of the resources of the trust or institution to any of the persons referred to in section 13(3) for services rendered to the trust or institution but such amount is in excess of a reasonable sum payable for such services. [Section 13(2)(c)]

    1. Services of trust without adequate remuneration:

If the services of the trust or institution are made available to any person referred to Section 13(3) without adequate remuneration or other compensation. [Section 13(2)(d)]

    1. Purchase of property for trust for excessive consideration:

If any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in section 13(3) during the previous year for a consideration which is more than adequate. [Section 13(2)(e)]

    1. Sale of trust property for inadequate consideration:

If any share, security or other property is sold by or on behalf of the trust or institution to any person referred to in section 13(3) during the previous year for a consideration which is less than adequate. [Section 13(2)(f)]

    1. Diversion of income or property exceeding Rs. 1,000:

If any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in section 13(3) provided the aggregate value of such income and property diverted exceeds `1,000. [Section 13(2)(g)]

    1. Investment in substantial interest concerns:

If any funds of the trust or institution are or continue to remain, invested for any period during the previous year (not being a period before the 1.6.1971 in any concern in which any person referred to in section 13(3) has a substantial interest. [Section 13(2)(h)]

However, section 13(4) provides that where the aggregate of the funds invested in the said concern does not exceed 5% of the capital of that concern, the exemption under section 11 will be denied only in relation to such income as arises out of the said investment.

‘RELATIVE’ – Meaning of by virtue of Explanation-1 to Section 13 –

A “relative” in relation to an individual means:

  1. spouse of the individual;

  2. brother or sister of the individual;

  3. brother or sister of the spouse of the individual;

  4. any lineal ascendant or descendant of the individual;

  5. any lineal ascendant or descendant of the spouse of the individual;

  6. spouse of a person referred to in (b), (c), (d) or (e) above;

  7. any lineal ascendant or descendant of a brother or sister of either the individual or of the spouse of the individual.

‘SUBSTANTIAL INTEREST’ – MEANING OF by virtue of Explanation-3 to Section 13 –

For the purposes of this section, a person shall be deemed to have a substantial interest in a concern,—

  1. in a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than 20% of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person and partly by one or more of the other persons referred to in sub-section (3);

  2. in the case of any other concern, if such person is entitled, or such person and one or more of the other persons referred to in sub-section (3) are entitled in the aggregate, at any time during the previous year, to not less than 20% of the profits of such concern.