BLOG on Income Tax Management for - AY 2022-23 & 2023-24

[Section 11(2)] : Accumulation or Setting Apart of the Trust Income for a Specific Purpose

(A). Accumulation of income in excess of 15% of the income earned [Section 11(2) and Rule 17]

As already mentioned, assessee is allowed to accumulate upto 15% of the income earned during the year for application for charitable or religious purposes in India in future. If the assessee wants to accumulate or set apart the income in addition to 15% of the income, he can do so if certain conditions are satisfied. In this case, the amount accumulated in excess of 15% shall be deemed to have been applied for charitable or religious purposes in India during the previous year itself.

Section 11(2) further liberalises and enlarges the exemption given under section 11(1)(a). A combined reading of both the provisions would clearly show that section 11(2), while enlarging the scope of exemption, removes the restriction imposed by section 11(1)(a) but it does not take away any the exemption allowed by section 11(1)(a).

Conditions to be satisfied

Exemption under section 11(2) shall be allowed subject to the following conditions being satisfied:

such person furnishes a statement in Form No. 10 electronically either under digital signature or electronic verification code to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years;
the money so accumulated or set apart is invested or deposited in the forms or modes specified in section 11(5);
the statement referred to in clause (a) is furnished on or before the due date specified under section 139(1) for furnishing the return of income for the previous year.

Provided that in computing the period of five years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.

(B) Exemption under section 11(2) not be allowed unless the statement mentioned in section 11(2)(a) and the return of income of the trust is furnished before the due date of filing the return specified under section 139(1) [Section 13(9)]

Nothing contained in section 11(2) shall operate so as to exclude any income from the total income of the previous year of a person in receipt thereof, if—

the statement referred to in clause (a) of section 11(2) (mentioned above) in respect of such income is not furnished on or before the due date specified under section 139(1) for furnishing the return of income for the previous year; or
the return of income for the previous year is not furnished by such person on or before the due date specified under section 139(1) for furnishing the return of income for the said previous year.

In other words, benefit of accumulation shall not be allowed under section 11(2) unless the said statement in prescribed form as well as the return of income are furnished before the due date of filing the return of income specified under section 139(1).

Mode of investment.—

Section 11(5) specifies the following modes of deposit/ investment:

Investment in Government Saving Certificates and any other Securities or Certificates issued by the Central Government under its Small Saving Scheme.
Deposits with Post Office Savings Banks.
Deposits with Scheduled Banks or Co-operative Banks (including a Cooperative Land Mortgage Bank or a Cooperative Land Development Bank).
Investments in the units of Unit Trust of India.
Investments in Central or State Government Securities.
Investments in debentures issued by or on behalf of any company or corporation. However both the principal and interest thereon must have been guaranteed by the Central or the State Government.
Investment or deposits in any public sector company.
Investment in bonds of approved financial corporation providing long term finance for industrial development.
Investment in bonds of approved public companies whose principal object is to provide longterm finance for construction or purchase of houses in India for residential purposes.
Investment in immovable property excluding plant and machinery, not being plant and machinery installed in a building for the convenient occupation thereof.
Deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India. Explanation.—For the purposes of this clause,—
1. long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;
2. public company shall have the meaning assigned to it in section 3 of the Companies Act, 1956;
3. urban infrastructure means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport.
Deposits with the Industrial Development Bank of India.
Any other form or mode of investment or deposit as may be prescribed.

(C). Consequences if such Accumulated Income in excess of 15% is not Applied / Invested in the prescribed manner [Section 11(3)]:

Where the income of the trust referred to in section 11(2)—

is applied for purposes other than charitable or religious purposes, or ceases to be accumulated or set apart for application thereto, or
ceases to remain invested or deposited in any mode mentioned under section 11(5) above, or
is not utilized for the purpose for which it is so accumulated or set apart during the period specified (not exceeding 5 years) or in the year immediately following thereof.
is credited or paid to any trust or institution registered under section 12AA or any institution or trust referred to in section 10(23C)(iv), (v), (vi) or (via),

such income shall be deemed to be the income,—

in case of (a) of the previous year in which it is so applied for other purpose or ceases to be accumulated or set apart, or
in case (b) of the previous year in which it ceases to remain so invested or deposited, or
in case of (c) of the previous year immediately following the expiry of period specified therein, or
in case of (d) of the previous year in which it is paid or credited.

(D). Circumstances where the Accumulated Income in excess of 15% can be utilized for a purpose other than that for which it was Accumulated [Section 11(3A)]:

Where the income invested/deposited in approved modes cannot be applied for the purposes for which it was accumulated or set apart, due to circumstances beyond the control of the assessee, such assessee can make an application to the Assessing Officer specifying such other purpose for which he wants to utilize such accumulated income. Such other purposes should also be in conformity to the objects of the trust. The Assessing Officer in this case, may allow the application of such income to such other purposes. On such an application being allowed by the Assessing Officer, the funds may be accumulated and/or applied for the purposes newly specified and the provisions regarding withdrawal of exemption will be applicable on the basis that new purposes were the ones that had been specified in the notice for accumulation given under section 11(2).

However, the Assessing Officer shall not allow application of such income by way of payment or credit made for donation to other trust or other institutions, but the Assessing Officer may allow application of such accumulated income for the purpose of donation to other trust or institution in the year in which such trust or institution was dissolved.