EXEMPTION FOR ACCUMULATION OF INCOME IN EXCESS OF SPECIFIED LIMIT [SECTION 11(2)]

According to section 11(2) of Income Tax Act 1961, if 85% of income of a charitable or religious trust is not utilised in the previous year, then it can be accumulated for 5 years

Conditions to be satisfied for exemption for Accumulation of Income in excess of Specified Limit [Section 11(2)]

Where 85% of income derived from trust property is not applied or is not deemed to have been applied to charitable or religious purposes, but is accumulated or set apart for application to such purposes in India, exemption can be claimed for the income so accumulated or set apart in excess of 15% limit, provided the following conditions are complied with:

(a)   The trust/institution must apply in Form 10 as per Rule 17 to the Assessing Officer for permission to accumulate the income, specifying the purpose and period of accumulation setting apart, which shall, in no case, exceed 5 years. As per Rule 17, the notice has to be given on or before the due date of filing the return under section  139(1).

(b)   With effect from 01.04.2014, notice in Form 10 should be submitted electronically.

(d)    From assessment year 2016-17, the benefit of accumulation is not available if return of income is not furnished before due date of filing return as per Section 139(1).

(c)  With effect from assessment year 2016-17, the benefit of accumulation is not available, if Form 10 is not uploaded before the due date of filing return of income specified under section 139(1) for the fund or institution.

(d)   The money so set apart or accumulated should be invested or deposited in any one or more of modes  or forms specified in Section 11(5).

(e)   The time limit for filing Form 10 is the same time as for filing return under section 139(1). This time limit is prescribed in Rule 17. In case the Form 10 is not submitted before this date, then the benefit of accumulation would not be available and such income would be taxable at the applicable rate.

(f)    If in any year the accumulated income ceases to remain invested or deposited in the manner given above, it will be liable to tax as income of that year.

       MEANING OF ”15% INCOME”

S. No.	Particulars	Amount (in Rs.)
(i)	Gross Receipts	4,00,000
(ii)	Less : (i) Administration Expenses = 50,000           (ii) Depreciation                 = 25,000	75,000
(iii)	Balance	3,25,000
(iv)	15% of 3,25,000/- (to be accumulated)	81,250

Thus, section 11(2) grants exemption to income accumulated for specific objects up to a period of 5 years under certain conditions. As per section 11(2), where 85% of income is not applied to charitable or religious purposes in the aforesaid manner, the charitable trust or institution may accumulate or set  apart either the whole or part of its income for future application for such purposes in India. Such income so accumulated or set apart will not be included in the total income of the trust or institution in the year of receipt of income, provided such trust or institution has specified by means of notice to the Assessing Officer in Form 10, the purposes and period (which in no case can exceed 5 years) for which the income is accumulated or set-apart. Further, the money so set apart or accumulated should be invested or deposited in any one or more of modes or forms specified in section 11(5). In other words,

(a)  15% of the income can be accumulated indefinitely by the trust or institution, and

(b)   Where 85% of income is not applied to charitable or religious purpose in India during the previous year but as accumulated or set apart, either in whole or in part or application to such purposes in India. Such income, so accumulated or set apart shall not be included in the total income of the previous year of person.

KEY NOTE:—

In computing the period of 5 years, the period during which the income could not be applied for the purposes for which it was accumulated or set apart due to an order or injunction of any court shall be excluded.

Purpose of Accumulation must be specified

The provision of section 11(2) is a concession provision to enable a charitable trust to meet the contingency where the fulfillment of any project within its object or objects needs heavy outlay calling for accumulation to amass sufficient money to implement it. Section 11(2) requires specification of the purpose, which must be a concrete one, an itemized purpose or a purpose instrumental or ancillary to the implementation of the object or objects. Thus a trust cannot list all its objects as purposes for accumulation of income under section 11(2).

[DIT(E) v. Trustee of Singhania Charitable Trust (1993) 199 ITR 819 (Cal)

Accumulation – Specific purpose The assessee had accumulated a sum for promotion of its charitable objects. The Assessing Officer denied the exemption as the accumulation was not for a specific purpose. The Hon’ble High Court held that exemption could not be denied to the assessee in the present case as accumulation of income can be made by the assessee trust for plurality of purposes.

[DIT v. Raghuvanshi Charitable Trust (2006) 193 Taxation 334 (Del)]

Where out of 29 purposes/ objects stipulated in memorandum of association, assessee had specified eight purposes in Form No. 10 for which it was accumulating unspent income while claiming benefit under section 11, just because more than one purpose had been specified and just because details about plans which assessee had for spending on such purposes were not given, that may not be sufficient to deny exemption admissible to it under section 11.

[DIT (Exemption) v. Daulat Ram Education Society (2005) 278 ITR 260 : (2006) 156 Taxman 399 (Del)]

Plurality of the purposes for accumulation is not precluded but it depends on the precise purpose for which the accumulation is intended. (Related assessment year 1992-93)

[CIT v. Hotel & Restaurant Association (2003) 261 ITR 190 : 182 CTR 374 : 132 Taxman 76 (Del)]

Option to be exercise to spend the income in the next year

OPTION – 1 : CLAUSE (2) OF EXPLANATION 1 TO SECTION 11(1) [ACCUMULATE AND SPEND IN ONE YEAR]

If, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount—

(i)  for the reasons that the whole or any part of the income has not been received during that year, or

(ii) for any other reason,

      then—

(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and

(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount,

may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income), in such form and manner as may be prescribed be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.”

   PROVISION ILLUSTRATED:— INCOME NOT RECEIVED IN THE YEAR

In some cases, the full income is not actually received during the year. Such income can be spent in the year in which it is actually received. Or it can be spent in the next year. A Charitable Trust’s accounts show Rs. 10,00,000 as income in the year 2016-17 of this actually only Rs. 4,00,000 has been received in 2016-17. Balance amount is due. What will happen to its tax position.

SOLUTION :—
Total Income	10,00,000
Less : 15% allowed to be set apart	1,50,000
Balance	8,50,000
Less : Actually spent in the year	3,00,000
Shortfall	5,50,000
Less : Amount not realized	6,00,000
TAXABLE INCOME	Nil

Now suppose that the amount of Rs. 6,00,000 is realised in the year 2018-19. The Charitable Trust will be allowed to spend it in the year of receipt (2018-19) and in the next year (2019-20).

Ø  It will have to pay tax only if it is unable to spend the full Rs. 6,00,000/- in those two years.

OPTION – 2 : SECTION 11(2) (ACCUMULATE FOR YEARS FOR SPECIFIC PURPOSE)

(a)   Application in Form 10 before due date of filing of return of income under section 139(1).

(b)   Investment in modes specified in section 11(5).

Ø  If not spent in this time span, then taxable as income.

Such option is to be exercised in a prescribed form for the said accumulation is Form No. 9A read with Rule 17(1).

The said form is to be filled before the due date of filling of return under section 139 and it is to be furnished electronically either under Digital Signature or Electronic Verification Code. This application in Form No 9A is effective from assessment year 2016-17.

Procedure of obtaining permission for accumulation of funds

The trust(s) is required to apply in Form 10. The Form 10 shall be filed before the due date of filing return of income specified under section 139 of the Income Tax Act for the fund or institution. In case the Form 10 is not submitted before this date, then the benefit of accumulation would not be available and such income would be taxable at the applicable rate. Further, the benefit of accumulation would also not be available if return of income is not furnished before the due date of filing return of income.

Withdrawal of Exemption granted to Income accumulated under section 11(2)  [Section 11(3)]

Section11(3) specifies the circumstances under which the accumulations made under section 11(2) would be withdrawn.

The following are the circumstances where the accumulated income would be deemed as the income of the organization and exemptions will not be available:—

CONSEQUENCES IF SUCH ACCUMULATED INCOME IN EXCESS OF 15% IS NOT APPLIED/INVESTED IN THE PRESCRIBED MANNER

S. No.	CIRCUMSTANCES	CONSEQUENCES
(i)	If in any year the accumulated income is applied to purposes other than charitable or religious purposes or ceases to be accumulated or set apart for application to such purposes, [Section 11(3)(a)]	it will be subjected to tax as the income of that year.
(ii)	If in any year the accumulated income ceases to remain invested or deposited  in any of the modes of investment prescribed under section11(5). [Section 11(3)(b)]	it will be liable to tax as income of that year
(iii)	If the accumulated amount or any part thereof is not utilised for the purpose for which it is so accumulated or set apart during the period specified or in the year immediately following thereof (i.e. maximum up to 5 years). [Section 11(3)(c)]	the amount which has not been so utilised will be liable to tax as income of the previous year immediately following the expiry of the accumulation period.
(iv)	Where any amount, out of income accumulated or set apart is credited or paid to any trust or institution registered under section 12AA or to any specific fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) and (via). such amount shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter. [Section 11(3)(d)]	the amount which has not been so utilised will be liable to tax as income of the previous year immediately following the expiry of the accumulation period.

In other words, under any of the aforesaid circumstances, the amount involved shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or as the case may be, of the previous year immediately following the expiry of the specified accumulation period.

FOR EXAMPLE:—

In the instant case, the institution accumulated Rs. 25,00,000 in the previous year 2014-15 for acquiring and developing a land of construction of a new school for a period of 2 years. The assessee was required to utilize this amount by 31.03.2018. The assessee has spent Rs. 19,00,000 (out of accumulated sum Rs. 25,00,000) in the previous year 2017-18. Therefore, the unutilized amount of Rs. 6,00,000 is deemed to be income of the previous year 2017-18 (Assessment Year 2018-19).

KEY NOTE:—

However, in computing the aforesaid period of 5 years, the period during which the income could not be adopted for the purposes for which it is so accumulated or set apart due to an order or injunction of any court shall be excluded.

Purpose can be amended by a specific application to Assessing Officer [Section 11(3A)]

CIRCUMSTANCES WHERE THE ACCUMULATED INCOME IN EXCESS OF 15% CAN BE UTILIZED FOR A PURPOSE OTHER THAN THAT FOR WHICH IT WAS ACCUMULATED

Where the income invested or 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 inconformity to the objects of the trust.

The Assessing Officer in this case, may allow the application of such income to such other purposes. 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.

Delay in filing application Form No. 10 can not be condoned

In view of the amendments made in Section 11(2) and Section 13(9) of the Act, the exemptions under Section 11 of the Act to a trust recognized under Section 12(A) of the Act would be admissible only if the Form -10 and income-tax returns are filed within the time prescribed under Section 139(1) of the Act.

CBDT authorizes Commissioners of Income-tax (CIT), to admit belated applications in Form 9A and Form No. 10 in respect of Assessment year 2016-17 where such Form No. 9A and Form No.10 are filed after expiry of  time allowed under relevant provisions of the Act.

CBDT’s Circular No. 7/2018 dated : 20.12.2018

Subject: Condonation of delay under section 119(2)(b) of the Income-tax Act, 1961 in filing of Form no. 10 and Form No. 9A for Assessment year 2016-17

Under the provisions of section 11 of the Income-tax Act, 1961 (hereafter Act’) the primary condition for grant of exemption to trust or institution in respect of income derived from property held under such trust is that the income derived from property held under trust should be applied for the charitable purposes in India. Where such income cannot be applied during the previous year, it has to be accumulated and applied for such purposes in accordance with various conditions provided in the section.

2. The Finance Act, 2015 amended section 11 and section 13 of the Act with effect from 01.04.2016 (Assessment year 2016-17). Consequently, Income-tax Rules, 1962 (hereafter ‘Rules’) were also amended vide the Income-tax (1^st Amendment) Rules, 2016. As per the amended provisions of the Act read with rule 17 of the Rules, while 15% of the income can be accumulated indefinitely by the trust or institution, 85% of income can only be accumulated for a period not exceeding 5 years subject to the conditions, inter alia, that such person submits the prescribed Form No. 10 electronically to the Assessing Officer within the due date specified under section 139(1) of the Act.

3. Further, where the income from the property held under trust and applied to charitable or religious purposes falls short of 85% of the income derived during the previous year for the reason that the income has not been received during that year or any other reason, then on exercise of the option by submitting in Form No.9A electronically by the trust/institution on or before the due date of furnishing the return of income, such income shall be deemed to have been applied for charitable or religious purpose.

4. Representations have been received by the Board/ field authorities stating that the Form No. 9A and Form No.10 could not be filed in the specified time for AY 2016-17, which was the first year of e-filing of these forms. It has been requested that the delay in filing of Form No. 9A and Form No.10 for AY 2016-17 may be condoned under section 119(2) (b) of the Act.

5. Accordingly, in supersession of earlier Circular/ Instruction issued in this regard, with a view to expedite the disposal of applications filed by trusts for condoning the delay and in exercise of the powers conferred under section 119(2)(b) of the Act, the Central Board of Direct Taxes hereby authorizes the Commissioners of Income-tax, to admit belated applications in Form 9A and Form No. 10 in respect of AY 2016-17 where such Form No. 9A and Form No.10 are filed after the expiry of the time allowed under the relevant provisions of the Act.

6. The Commissioners will, while entertaining such belated applications in Form No. 9A and Form No.10, satisfy themselves that the assessee was prevented by reasonable cause from filing of applications in Form No. 9A and Form No.10 within the stipulated time. Further, in respect of Form No. 10 the Commissioners shall also satisfy themselves that the amount accumulated or set apart has been invested or deposited in any one or more of the forms or modes specified in sub-section (5) of section 11 of the Act.

Property held for charitable purposes – Advance to sister concern was out of surplus accumulated – No violation of provisions of section 11(2) – Exemption was to be allowed

Where assessee-trust spent 85 per cent of its income for construction of building to be used for educational purpose, mere fact that it advanced certain amount to its sister concern out of surplus accumulated which remained at its disposal, there was no violation of provisions of section 11(2) and, thus, assessee's claim for exemption of income was to be allowed. (Assessment year 2004-05)

[Chawara Educational Trust v. ITO (2016) 157 ITD 281 (ITAT Pune)]

Requirement of section 11(2)(b)

Setting off of deficit of earlier year against surplus of subsequent year under section 11 cannot qualify for exemption under section 11(2). In order to satisfy the requirements of section 11(2)(b), the investment must necessarily come out of the current year’s income, an investment made in the past obviously cannot satisfy this requirement; when income accumulated in an earlier year cannot qualify for exemption under section 11(2), the excess income applied in earlier assessment year will also not qualify for exemption.

[Pushpawati Singhania Research Institute for Liver, Renal & Digestive Diseases v. Dy. DIT (Exemption) – ITA No. 4481 Delhi of 2007 dated 18.07.2008 (ITAT Delhi)]

Certain amount set apart as provision was not actually applied for charitable purposes – Not entitled to exemption under section 11.

[Nachimuthu Industrial Association v. CIT (1999) 235 ITR 190 : 156 CTR 187(SC)]

 Explanation to Section 11(2) - Prohibits the donations to other charitable trusts out of accumulated funds

The Finance Act, 2002 has inserted an Explanation to Section 11(2), that prohibits the donations to other charitable trusts out of accumulated funds.

Inter charity donations out of accumulated funds will be permissible in case of dissolution of charitable organization [Proviso to Section 11(3A)]

The Finance Act, 2003 has inserted another proviso to section 11(3A) which provides that inter charity donations out of accumulated funds will be permissible in case of dissolution of charitable organization.

If income is accumulated for more than one purpose, it is not necessary to specify all of those purposes particularly  

It is enough if the assessee seeks accumulation for the objects of the trust. That the assessee had sought to accumulate the sum for purposes of the trust and had specified such objects.

[Bharat Krishak Samaj v. Deputy Director of Income-tax (Exemption) (2008) 306 ITR 153 (Del), Director of Income-tax v. Mitsui and Co. Environmental Trust (2008) 303 ITR 111 (Del), Bharat Kalyan Pratisthan v. Director of Income-tax (Exemption) (2008) 299 ITR 406 (Del)]

Benefit of Accumulation is available for more than one purpose  

[DIT (Exemption) v. Eternal Science of Man’s Society (2007) 290 ITR 535 (Del), Director of Income-tax (Exemption) v. Daulat Ram Education Society (2005) 278 ITR 260 (Del)]