In accordance with the provisions of the Income Tax Act, taxpayers are permitted to accumulate up to 15% of the income received during the year for the application of trust purposes in India. Should a taxpayer attempt to accumulate or set aside income exceeding 15% of the revenue, certain conditions must be met for such accumulation. It is important to note that any amount accumulated beyond 15% is deemed to have been applied for charitable or religious purposes in India in the preceding fiscal year.
Additionally, Section 11(2) expands and enhances the exemption outlined in Section 11(1)(a). A comprehensive interpretation of both provisions reveals that Section 11(2), while broadening the scope of exemption, removes the constraints imposed by Section 11(1)(a). Nevertheless, it does not eliminate the exceptions provided by Section 11(1)(a). In this blog, we shall understand about application & accumulation of income by trust through case laws.
Modes Of Investment Specified Under Section 11(5)
The modes of investment specified under Section 11(5) of the Income Tax Act include:
1. Investment in Government Saving Certificates as well as other Securities or Certificates issued by the Government under its Small Saving Scheme.
2. Invested Deposits with the Post Office Savings Banks.
3. Invested Deposits with Scheduled Banks or Co-operative Bank.
4. Investments deposited in units of Trust of India.
5. Investments deposited in Central and also State Government Securities.
6. Investments deposited in debentures issued by a company or corporation in India, provided that the principal and interest are guaranteed by the Central or State Government.
7. Investments deposited in any of the PSUs.
8. Investment deposited in bond of certified financial corporations implementing long-term finance for industrial development.
9. Investment deposited in bond of approved public undertakings whose principal object is to provide long-term funding for the construction or acquisition of houses in India for residential purposes.
10. Investment deposited in fix property, excluding plant and machinery.
11. Investments deposited in any bonds issuing by public company undertakings formed and registered in India, with the main object of producing long-term finance for urban infrastructure in India.
12. Investment deposited with the Industrial Development Bank of India.
13. Investment deposited in any other form or mode of finance or deposit as may be prescribed.
These modes provide a range of options for trusts to invest their accumulated income in compliance with Section 11(5) of the Income Tax Act.
Consequences If Accumulated Income Is More Than 15% Not Applied Or Invested As Per Section 11(3)
The consequences of accumulated income being more than 15% and not applied or invested as per Section 11(3) of the Income Tax Act are as follows:
1. Application for Non-Charitable/Religious Purposes:
· If the accumulated income is applied for purposes other than charitable or religious, or if it ceases to be accumulated or set apart for application, the income will be considered as:
· The income of the previous year applied for another purpose, or
· The income of the last year in which it ceases to remain accumulated or set apart.
2. Cessation of Investment in Specified Modes (Section 11(5)):
· If the accumulated income ceases to remain invested or deposited in any mode specified under Section 11(5), the income will be considered as:
· The income of the previous year applied for another purpose, or
· The income of the last year in which it ceases to remain so invested.
3. Failure to Employ for Designated Purpose or Within Specified Term:
· If the accumulated income is not employed for the purpose for which it is accumulated or set apart during the specified term (not exceeding five years) or in the year immediately following, the income will be considered as:
· The income of the previous year applied for another purpose, or
· The income of the last year in which it is not employed for the designated purpose.
Relevant Case Laws Determining Various Aspects of Accumulation & Application of Income by Trust
Here are some relevant case laws determining various aspects of the application & accumulation of income by trust:
1. Negating the assessee’s claim for the accumulation of unused income (Section 11)
Case: Bharat Krishak Samaj v. Deputy Director of Income-tax (Exemption) (2008) 306 ITR 153 (Del)
Summary: The High Court held in regard to application & accumulation of income by trust that it is not essential for a charitable trust to specify every object for which accumulation is required; it is sufficient if the assessee seeks accumulation only for the considered purposes of the trust.
2. The accumulation of income needs to point toward some specific purpose
Case: Director of Income-tax (Exemption) v. Trustee of Singhania Charitable Trust
Summary: In this judgment on application & accumulation of income by trust, the Calcutta High Court held that when a charitable trust provides notice for accumulation of income under Section 11(2), it must point toward some specific purpose or purposes.
3. Repayment of borrowed funds applied for construction of a commercial complex (section 11)
Case: Director of Income-tax (Exemption) v. Govindu Naicker Estate (2009) 315 ITR 237 (Mad.)
Summary: In this judgment on application & accumulation of income by trust, the High Court held that the ‘repayment of loan’ reserved from the bank for the construction of a commercial complex was eligible for exemption under section 11 of the Act via the application of income for charitable purposes.
4. Carried activity for charitable purposes as per 2(15) and aiming the Commissioner of Income-tax to grant registration U/s 12AA
Case: CIT v National Institute of Aeronautical Engineering Educational Society (2009) 315 ITR 428 (Uttarakhand)
Summary: In this judgment on application & accumulation of income by trust, the High Court held that section 12AA of the Act provides the process for registration and empowers the Commissioner to request necessary documents or evidence to satisfy him about the genuineness of the activities of the trust or institution.
5. The assessee is entitled to accumulate 15%Trust Income under section 11(1) (a)
Case: CIT v Programme of Community Organisation (2001) 248 ITR 1 (SC)
Summary: In this judgment on application & accumulation of income by trust, the Supreme Court held that the assessee was permitted to accumulate 15% of its Trust income under Income Tax Act, and even if 85% of the income applied for charitable or religious purposes throughout the prior year, the assessee can claim 100% exemption of the revenue earned during the previous year.
6. The Capital expenditure or outgoing on maintaining the property of trust
Case: CIT v Kannika Parameswari Devasthanam & Charities (1982) 133 ITR 779 (Mad)
Summary: In this judgment on application & accumulation of income by trust, the capital expenditure incurred on improving or maintaining the property of the trust constitutes an application of income for charitable purposes.
7. Application of surplus funds would amount to applying funds for charitable purposes of Trust
Case: St. George Forana Church (1988) 170 ITR 62 (Ker)
Summary: In this judgment on application & accumulation of income by trust, the application of surplus funds in the construction of new buildings to lease them out and apply the rent for the objects of the trust will aggregate the amount for using funds for religious and charitable purposes.
8. Salaries and miscellaneous expenses would get considered as an application for charitable purposes
Case: CIT v Birla Janahit Trust (1994) 208 ITR 372 (Cal)
Summary: In this judgment on application & accumulation of income by trust, the expenditure on salaries and miscellaneous payments to transport and carry out the objects and purposes of the trust must be measured as an application for charitable purposes.
9. Legal expenses incurred are allowable as a permissible deduction
Case: Ananda Marga Pracharaka Sangha v CIT (1994) 76 Taxman 88 (Cal)
Summary: In this judgment on application & accumulation of income by trust, legal expenses incurred for defending persons running the association against criminal charges are permissible as a deduction while calculating the total income of the assessee Trust.
10. Loss on the sale of shares to make investments will get treated as an application of Income
Case: Chidambaram Chettiar Foundation v ITO (1991) 39 TTJ 82 (AT)(Mad)
Summary: In this judgment on application & accumulation of income by trust, loss on the sale of shares to make investments in specific investments should be within the connotation of section 11(5) to get preserved as an application of income of the trust.
11. Excess expenditure in an earlier year may set off against next year’s Income
Case: CIT v Maharana of Mewar Charitable Foundation [(1987) 164 ITR 439 (Raj)
Summary: In this case for application & accumulation of income by trust, the application of Income for the next year, the carried forward debit, should stand first to be set off against the income of the following year.
Final Thoughts
The application & accumulation of income by trusts under Section 11 of the Income Tax Act play a vital role in ensuring compliance with charitable objectives. Various legal precedents emphasise the necessity for specific purposes when accumulating income, allowing flexibility for charitable trusts. Courts have affirmed the eligibility of diverse expenditures, such as loans repayment and agricultural income, for tax exemption. Proper documentation and adherence to timelines for statements and returns are crucial. The judicial stance emphasises the importance of aligning trust activities with defined charitable goals, facilitating tax benefits while promoting the broader societal welfare envisioned by the legislative framework.
