Exemption-US-11-Of-Income-Tax-Act-1961

SBS Hyderabad 10th November 2018 Exemption U/S 11 Of Income Tax Act,1961 by N.Varshitha 1st year Intern M/s SBS and Company LLP [email protected] 1 [email protected] www.sbsandco.com 040-40183366113

Introduction  Section 11 deals with Income from property held for “Charitable or Religious purposes.”  The income shall be subjected to the provisions of o Section 60 - Transfer of Income where there is no transfer of assets o Section 61 - Revocable Transfer of Assets o Section 62 - Transfer irrevocable for a specified period 2 [email protected] www.sbsandco.com 040-40183366113

Charitable Purposes Section 2(15) of Income Tax Act,1961 says Charitable purposes include: a. Relief of poor b. Education c. Yoga d. Medical relief e. Preservation of Environment(Including water sheds, forests) f. Preservation of monuments or places or objects of artistic or historic interest g. Advancement of any other object of General public utility 3 [email protected] www.sbsandco.com 040-40183366113

Charitable Purposes Exception: Activity (g) shall not be considered as charitable purpose if  If it involves the carrying of any activity in nature of trade or commerce or business  For a cess or fee or any other consideration  Irrespective of the nature of use or application or retention of the income from such activity However, the above activity shall be considered as charitable purpose:  If such activity is for advancement of any other object of general public utility; and  The aggregate receipts from such activity should not exceed 20% of the total receipts of such trust or institution undertaking such activity. 4 [email protected] www.sbsandco.com 040-40183366113

Religious purposes  Religious Purpose includes the advancement, support or propagation of a religion and its tenets.  The exemption under section 11 is available only to public trusts but not to private trusts.  Private trust – Governed by Indian Trusts Act, 1882.  Public trust – Governed by general laws. 5 [email protected] www.sbsandco.com 040-40183366113

Property  The expression “property” includes any immovable and movable property like money, shares, securities, lands, buildings and houses. It may comprise interest in partnership firm and a business undertaking also. 6 [email protected] www.sbsandco.com 040-40183366113

Incomes _ Section 11(1)  Incomes on which exemption can be claimed are as follows:  Income derived from property held under trust wholly or in part for charitable or religious purposes in India  If the trust is created after 1-04-1952, then income derived from a property held under trust for a charitable purpose which tends to promote international welfare in which India is interested.  If the trust is created before 1-04-1952, then income derived from a property held under trust for a charitable purpose which tends to promote international welfare.  Income in form of voluntary contributions made with specific direction that they shall form part of corpus of the trust or institution. 7 [email protected] www.sbsandco.com 040-40183366113

Conditions _ Section 11(1)  The following conditions must be satisfied in order to claim the exemption:  The trust or institution carrying out the prescribed charitable or religious activities should be registered under section 12AA.  85% of the income derived/received shall be applied for such purposes in India.  15% of the income derived/received can be accumulated for future usage.  For the purpose of calculating such 15%, income from property held under trust also includes voluntary contributions i.e. donations but except corpus donations. 8 [email protected] www.sbsandco.com 040-40183366113

Application of Income _ Sec 11(1)  Application of Income: Income received by the trust can be applied for following various purposes and it is considered as application of income:  Revenue Expenses  Purchase of Capital Assets  Donations to another religious/charitable trust.  Repayment of Loans taken for purchase of capital assets etc., 9 [email protected] www.sbsandco.com 040-40183366113

Deemed application of Income_Sec 11(1)  If application of income falls short of 85% of the income derived during the previous year, by any amount a. For the reason that whole or part of the income has not been received during the year (or) b. For any other reason  Then assessee may make an application electronically in “Form 9A” to the AO on or before due date of filing of return that  For reason-a : Such income shall be applied in the P.Y in which it is received or succeeding P.Y  For reason-b : Such income shall be applied in P.Y immediately following the P.Y in which income is derived. 10 [email protected] www.sbsandco.com 040-40183366113

Deemed application of Income _Sec 11(1) Contravention of conditions:  If the income received is not applied for the charitable or religious purposes in the year it is received or the succeeding year (or) income derived is not applied for the charitable or religious purposes in the P.Y immediately following the P.Y in which it derived, then such income shall be added back as income in the hands of trust/ institution in the year of contravention and shall be taxed accordingly. 11 [email protected] www.sbsandco.com 040-40183366113

Accumulation of Income _ Sec 11(2)  If the trust or institution wants to accumulate more than 15% of the income then it should satisfy the following conditions:  Assessee should file “Form 10” on or before due date of filing of return specifying the amount and period for which the income shall be accumulated.  The period of such accumulation shall not exceed 5 years.  The money so accumulated is invested or deposited in modes specified under section 11(5). 12 [email protected] www.sbsandco.com 040-40183366113

Accumulation of Income _ 11(3)  The exemption under section 11(2) is withdrawn in the following cases and is deemed to be income of such person for such previous year in which it is utilised as below: a. If accumulated income is applied for purpose other than charitable or religious purposes. b. If such income is income is accumulated for the period less than period specified by assessee. c. If accumulated income is applied for purpose other than the purpose for which it is accumulated. d. If accumulated income is invested in any other mode than specified under section 11(5). e. If accumulated income is credited or paid to any trust/institution registered under section 12AA or any trust or institution mentioned under section 10(23C). 13 [email protected] www.sbsandco.com 040-40183366113

Exemption on Capital Gains _ Sec 11(1)  Capital Gain arising on sale of capital asset held wholly under trust for charitable or religious purposes is exempt to the extent specified here under: Amount used to buy new capital asset Exemption Whole net consideration Whole of the Capital Gains Part of the consideration Exempted Capital Gain = Cost of new asset- Cost of transferred asset 14 [email protected] www.sbsandco.com 040-40183366113

Exemption on Capital Gains _ Sec 11(1)  Capital gain arising on the sale of capital asset held partly under trust for religious or charitable purposes is exempt to the extent specified here under:  Note: Here it is assumed that 50% of the asset is only held for charitable or religious purposes Amount used to buy new capital asset Exemption Whole of Net Consideration Part of the consideration Capital gain*50% Exempted Capital gain= (Cost of new asset-Cost of transferred asset) *50% 15 [email protected] www.sbsandco.com 040-40183366113

Exemption on Capital Gains _ Sec 11(1) Example: If a trust had a capital asset costing Rs.1,00,000 and sold the same for Rs.1,50,000 and then bought a capital asset for Rs.1,30,000, then the working will be as follows: ` Particulars Amount Sale proceeds of old asset 1,50,000 Less: Cost of old asset (1,00,000) Capital Gain Cost of new asset 50,000 Cost of old asset 1,30,000 Capital Gain Utilised (1,00,000) Capital gain taxable 30,000 20,000 16 [email protected] www.sbsandco.com 040-40183366113

Business Income _ Sec 11(4)  If property held under trust includes a business undertaking and a claim is made that the income received from such undertaking can be claimed as exemption, then  A.O shall have the power to determine the income from such undertaking AND  Taxable Income = Income determined by the A.O – Income disclosed as per Books of Accounts.  Exemption under sub-section (1), sub-section (2), sub-section (3) of Section 11, shall not be applicable in relation to any income of a trust in the nature of Profits and Gains of business unless:  Such business is incidental to the attainment of the objectives of the trust AND  Separate books of accounts have ben maintained in respect of such business 17 [email protected] www.sbsandco.com 040-40183366113

Depreciation _ Sec 11(6) Claim of Asset treated as No Depreciation application of Yes Income 040-40183366113 Asset not treated as application of Income 18 [email protected] www.sbsandco.com

Exemption U/s 10 _ Sec 11(7)  Where a trust (or) an institution has been granted registration U/s 12AA, and  The said registration is in force for any previous year, then  Exemptions U/s 10 [other than sec 10(1) and 10(23C)] shall not operate for that Previous year i.e. trust cannot claim exemption U/s 10 for that particular previous year 19 [email protected] www.sbsandco.com 040-40183366113

Example  A trust “X” having registration u/s 12AA earned the following income in the previous year Particulars Amount Corpus Fund 2,00,000 Dividend received 2,00,000 Voluntary Donations 5,00,000 Income from main objects 7,00,000 Rent received 1,00,000 Agriculture Income 1,00,000 For the purpose of the example it is assumed that the trust has applied an amount of Rs.8,00,000 during the previous year for the attainment of its objects. 20 [email protected] www.sbsandco.com 040-40183366113

Example Total income of the trust will be calculated as follows: Amount 5,00,000 S.No Particulars 7,00,000 a. Voluntary Donations 1,00,000 b. Main Objects 2,00,000 c. Rent - d. Dividend - e. Agriculture Income 15,00,000 f. Corpus Donations 2,25,000 g. Total Income (a+b+c+d+e+f) 12,75,000 h. Less: Accumulation of Income @ 15% [ g*15%] 8,00,000 i. Total Income available for application [ g-h] 4,75,000 j. Less: Income applied during the previous year k. Taxable Income [ i-j] 040-40183366113 21 [email protected] www.sbsandco.com

Other Points  Amendment w.e.f 01-04-2018:  Any amount paid or credited to any other trust or institution registered under section 12AA, being a contribution made with specific direction that it shall form part of corpus of the trust or institution shall not be treated as application of income.  Amendment w.e.f 01-04-2019:  For determining the amount of application under this section, the provisions of 40(a)&(ia), 40A (3) &(3A) shall apply as they apply in computing the income chargeable under the head profits or gains of business or profession. 22 [email protected] www.sbsandco.com 040-40183366113

At Thank you!!! Venue: N. Varshitha SBS and company LLP, 1st Year Intern M/s SBS and Company LLP Hyderabad. [email protected] Our Presence: Hyderabad, Kurnool, Nellore, TADA, Vizag & Bengaluru: [email protected]; 040-40183366 Disclaimer: Please logon to: http://www.sbsandco.com/disclaimer/ Read our monthly SBS e-Journals [email protected] www.sbsandco.com/wiki 23 www.sbsandco.com www.0s4b0-sandco.com/digest 40183366113