Mr. Dindayal Dhandaria and Mr. Naveen Kumar Dhandaria (Chartered Accountants) discuss the issue of inter-charity donations and the proposed amendment in the conditions for application of income by the charitable trust or institution, by the Finance Bill, 2023. The authors apprise that the Income-tax Act has been amended over the years to provide that all the inter-charity donations of a charity institution are not considered as ‘application of income’ even though the same are authorised by the Trust Deed. They highlight that income of the charity institutions is exempt subject to the fulfilment of certain conditions, which includes: (i) application of at least 85% of income of the charity institution for the charitable or religious purposes during the year, either by themselves or through donations to the trusts with similar objectives, (ii) Not to make donations to the corpus of other trusts or institutions to ensure that the same are applied by the donee trust or institutions. In order to deal with the abuse of the abovestated conditions by the trusts through forming multiple trusts and accumulating 15% of income at each stage, the Finance Bill, 2023 proposes that only 85% of the eligible donations made by a trust or institution to another trust shall be treated as application only to the extent of 85% of such donation. They are of the view that the proposed amendment will effectively reduce the accumulation of income by the charitable trusts or institutions.

Treatment of Inter-charity Donations  

INTRODUCTION

[In this Article, the term “Charity Institutions” is used to mean a Trust, or an Institution approved or registered under either of the sub-clauses (iv) to (via) of clause (1023C) or sections 11 to 13 of the Income Tax Act, 1961 (“the Act”) and the term “Inter-charity donations” is used to mean donation by a charity institution to another].

In accordance with the provisions of its Trust Deed or the Instrument creating it, a charity institution accounts for its receipts and surplus as Corpus or Earmarked or General Fund and utilises these funds for the purposes specified therein.  As “End justifies the means”, Inter-charity donations are permissible subject to the condition that the donor and the donee have similar objects. In CIT v. J.K. Charitable Trust [(1992) 196 ITR 31 (All.)] = [TS-5429-HC-1991(Allahabad)-O], it was held that contribution to other charitable trust was within the power and competence of the trustees. Further in the case of CIT v. Shamnur Savithramma Kallappa Public Trust [TS-5062-HC-2011(Karnataka)-O] also, it was held that inter-charity donation was valid application.  The Supreme Court in CIT v. Thanti Trust [(1999) 239 ITR 502 (SC)] = [TS-5043-SC-1996-O], has also upheld the treatment of inter-charity donations as valid application of funds.    

OVERVIEW OF EXISTING RESTRICTIONS ON INTER-CHARITY DONATIONS

But over the years, the Act has made provisions whereby all donations made by a Charity Institution are not considered as “application of income” even though the same are authorised by the Trust Deed or the Instrument creating the Institution.   They are stated in brief as follows:

►As per amendments made by Finance Act, 2017 and Finance Act, 2020, corpus donations given by any charity institution to another is not considered as application of income.

►Explanation to sub-section (2) of section 11 inserted by Finance Act, 2002 prohibits inter-charity donations out of the accumulated funds. However, it was clarified by Delhi High Court in the case of DIT(E) v. Bagri Foundation [(2010) 192 Taxman 309 (Delhi)] = [TS-5474-HC-2010(Delhi)-O] that this Explanation applied only to accumulations in excess of 15 per cent under section 11(2) and not to accumulations upto 15 per cent under section 11(1)(a).

►Finance Act, 2003 had inserted another proviso to sub-section (3A) of section 11 which provided that inter-charity donation out of accumulated funds will be permissible in case of dissolution of a charitable organisation.

PERMISSIBLE INTER-CHARITY DONATIONS

The income of the charity institutions is exempt subject to the fulfilment of certain conditions. Some of such conditions are as follows:

a) at least 85% of income of the charity institution should be applied during the year for the b) charitable or religious purposes.

Charity institutions are allowed to either apply mandatory 85% of their income either themselves or by making donations to the trusts with similar objectives.

c) If donated to other trusts or institutions, the donation should not be towards corpus to ensure that the donations are applied by the donee trust or institutions.

d) Thus, every trust or institution under both the regimes is allowed to accumulate 15% of its income each year.

ABUSE OF THE PROVISIONS

The Memorandum accompanying the Finance Bill, 2023 states that instances have come to the notice that certain trusts or institutions are trying to defeat the intention of the legislature by forming multiple trusts and accumulating 15% at each layer. By forming multiple trusts and accumulating 15% at each stage, the effective application towards the charitable or religious activities is reduced significantly to a lesser percentage compared to the mandatory requirement of 85%.

This is illustrated by the following example:

Thus, the group of institutions together effectively spend 61.41% of their income and accumulate 38.59%  (15+12.75+10.84) of their income, instead of the permissible limit of 15%.  

PROPOSED AMENDMENTS

In order to ensure intended application toward charitable or religious purpose, it is proposed that only 85% of the eligible donations made by a trust or institution under the first or the second regime to another trust under the first or second regime shall be treated as application only to the extent of 85% of such donation.

Accordingly, the following amendments are proposed with effect from 1^st April 2024 and will apply for Assessment Year 2024-25 and subsequent years:

“a) insert clause (iii) in Explanation 2 to the third proviso of clause (23C) of section 10 of the Act to provide that any amount credited or paid out of income of any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 of the Act, other than the amount referred to in the twelfth proviso, to any other fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause(iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 of the Act or trust or institution registered under section 12AB of the Act, as the case may be, shall be treated as application for charitable or religious purposes only to the extent of eighty-five per cent. of such amount credited or paid;

b) insert clause (iii) in Explanation 4 to sub-section (1) of section 11 of the Act to provide that any amount credited or paid, other than the amount referred to in Explanation 2 to the said sub-section, to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 of the Act or other trust or institution registered under section 12AB of the Act, as the case may be, shall be treated as application for charitable or religious purposes only to the extent of eighty-five per cent. of such amount credited or paid.”

IMPACT OF THE AMENDMENT

The impact of the amendment is illustrated by continuing with the foregoing example:

Thus, the aggregate of shortfall by the group of charity institutions would be 32.80% (12.75 + 10.84 + 9.21).

The concerned Charity Institution will have either to apply for accumulation of the above shortfall or pay tax thereon.