Consideration for the purpose of computing accumulation of income of 15% – i.e. Gross receipts or gross receipts after expenditure for charitable purpose i.e., the net receipts

The question that for the purposes of section 11(1)(a) of the Income-tax Act, 1961, the amount for the grant of exemption of 15% should be the income of the trust or it should be its total income as determined for the purposes of assessment to income-tax. This question has to be answered in the light of various decisions of the Courts.

Text of Section 11(1)(a)

Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% (25% up to assessment year 2002-03) of the income from such property.

Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate 15% of its income derived from property held under trust.

Gross Receipts

Gross receipts would have to be computed by taking into account all receipts, whether credited to the Income & Expenditure Account or directly to any fund, including corpus receipts.

Gross Receipts : Circular No. 5 of 1968 issued by the Central Board of Direct Taxes, in Paragraph 2 of the said Circular, the Board has clarified that concept of income in section 11 is different from the ‘total income’ in section 2(45).

 

Particulars	Taxability
15% of gross receipts from such trust property	Exempt
85% of gross receipt from such trust property
Income Applied for Charitable Purposes in India	85% of income from property to be applied for charitable and religious purpose in India as above and balance 15% can be accumulated or set aside.

 15 per cent accumulation for application in future has to be calculated on gross receipt and not on net receipt after deduction of revenue expenditure

Accumulation of income) - 15 per cent accumulation of income for application in future for charitable purpose has to be calculated on gross receipt and not on net receipt after deduction of revenue expenditure – [Kanehialall Lohia Trust v. ITO (Exemption) (2020) 185 ITD 498 : 120 taxmann.com 208 (ITAT Kolkata)]

Gross revenue, not net income, relevant for calculating Trust’s set apart amount under section 11(1)

Set apart amount under section 11(1) of the Act, should be calculated on gross revenue income and not on net income after expenses. The Hon’ble Supreme Court of India in the case of CIT vs. Programme for Community Organisation reported in (2001) 248 ITR 0001 (SC) has held as follows:-

“Charitable trust- Accumulation of income- Charitable trust is entitled to accumulate 25 per cent of its income derived from property held under trust and not 25 per cent of the income remaining after application of income for charitable purposes – therefore, assessee-trust was entitled to accumulate 25 per cent of donations received by it and not merely 25 per cent of unspent balance.”

The ‘B’ Bench of the ITAT in the assessee’s own case in ITA No. 2436/Kol/2018, order dated. 22.01.2020, for the Assessment Year 2012 “.....We note that in the provisions of section 11(1) it has been clearly mentioned “… 15% of the income”, hence it is gross income of the assessee trust and not the net income. Therefore, based on this factual position as me to allow 15% exemption on gross receipts. Respectfully following the same, we hold that the assessee is entitled to the accumulation of 15% on the gross receipt as per provisions of Section 11 of the Act. Consistent with the view taken therein, we hold that, the set apart amount under section 11(1) of the Act, should be calculated on gross revenue income and not on net income after expenses. [In favour of assessee] - [Eastern Zonal Cultural Centre v. ITO – Date of Judgement : 24.07.2020 (ITAT Kolkata)]

Section 11 - Exemption of income from property held under - As per statutory language of section 11(1)(a) 25% of income which is to be taken for purpose of accumulation is income derived by trust from property and any expenditure which is in shape of application of income is not to be taken into account. Having found that a trust is entitled to exemption under section 11(1), one has to go to stage of income before application thereof and take into account 25% of such income, which has to be taken on ‘Commercial’ basis and it need not be ‘total income’ as computed under Income-tax Act and, thus, any expenditure which is in shape of application of income is not to be taken into account. (Related Assessment year : 1981-82) – [Bai Sonabai Hirji Agiary Trust v. ITO (2005) 143 Taxman 41 : 93 ITD 70 (ITAT Mumbai)]

Assessee-trust was entitled to exemption under section 11 at 25 per cent of its total income derived, not on amount remained after expending money on charitable purposes out of its total income

The assessee-trust received donations in the aggregate sum of Rs. 2,57,376. It applied thereout for its charitable purposes the aggregate sum of Rs. 1,70,369 leaving a balance of Rs. 87,010. The Assessing Officer granted exemption under section 11 at 25 per cent on balance amount of Rs. 87,010. The assessee, on appeal, contended that exemption should be granted on total income derived. The Commissioner (Appeals), the Tribunal and the High Court reversed the order of the Assessing Officer. On appeal to the Supreme Court :

Held : Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent of its income derived from property held under trust. For the present purpose, the donations, the assessee received, in the sum of Rs. 2,57,376 would constitute its property and it was entitled to accumulate twenty-five per cent thereout. It was unclear on what basis the revenue contended that it was entitled to accumulate only twenty-five per cent of Rs. 87,010. For the aforesaid reasons, the civil appeal was dismissed. (Related Assessment year : 1978-79) - [CIT v. Programme for Community Organisation (2001) 248 ITR 1 : 166 CTR 401 : 116 Taxman 608 (SC)]

In CIT v. Birla Janahit Trust, the Calcutta High Court drew a distinction between the expenditures incurred for the purposes of earning the income, which are deductible in computing the income for the purposes of section 11 and the expenditure incurred for carrying out the purposes of the trust, which must be considered as application of income for charitable purposes. It is important to understand and appreciate this distinction, since permitted accumulation of 15% (then 25%) under section 11(1)(a) of the said Act is to be calculated with reference to the income of the trust to be computed first in a commercial sense and according to its accounts, as explained in Central Board’s said Circular dated 19th June, 1968. In other words, 85% of the income to be applied for charitable or religious purposes shall be the commercial income of the trust computed with reference to its books of accounts and not its total income as defined in section 2(45) of the Act. – [CIT v. Birla Janahit Trust (1994) 208 ITR 372 (Cal.)]  

Thus, it is clear from the above discussion, as per the statutory language of the section 11(1)(a), the income which is to be taken for purpose of accumulation is the income derived by the trust from property. Thus, any expenditure which is in the shape of application of income is not to be taken into account. Trust is entitled to exemption under section 11(1), one should go to the stage of income before application thereof and take into account 15 per cent of such income. The same has to be taken on ‘commercial’ basis and it need not be the ‘total income’ as computed under the Income-tax Act. The sum which is spent and applied by the assessee for charitable purposes should not be required to be excluded for purpose of taking amount to be accumulated. The outgoings which are in the nature of application of income are to be excluded. Fifteen per cent of the income (Gross) is allowable as a deduction.