Application of Income - Important points to remember

§  Assessing Officer to verify the genuineness of the application of income

§  Every trust or institution should apply at least 85% of its income during the year for charitable or religious purposes for which it is registered.

§  If a trust or institution has applied any income for any purpose other than the purpose for which the trust or institution is registered, it shall be a specified violation and a reference is required to be sent to the PCIT/CIT for the cancellation of the registration of the Trust/Institution as per provisions of section 12AB(4) or the 15^th proviso to section 10(23C).

Application of income means

Application of income means utilisation of income for the charitable or religious purposes as enumerated in the instrument of the trust.

In other words, Application of income means “expenditure solely attributable to charitable or religious activities

Entire application has necessarily be towards the objects of the trust or institution for charitable or religious activities in India.

Effect : If not applied any income for any purpose other than the purpose for which the trust or institution is registered:

If a trust or institution has applied any income for any purpose other than the purpose for which the trust or institution is registered, it shall be a specified violation and a reference is required to be sent to the PCIT/CIT for the cancellation of the registration of the Trust/Institution as per provisions of section 12AB(4) or the 15th proviso to section 10(23C).

Points to remember

[1] Expenses should be genuine and is supported by appropriate documentary evidence

Assessing Officer may examine whether the claim of application on account of different expenses is genuine and is supported by appropriate documentary evidence.

Here, the focus of Assessing Officer  should be on the identification of cases of diversion of funds through bogus or inflated expenses

Ø  Otherwise, the entire exemption may be denied and a reference is required to be sent to the PCIT/CIT for specified violence

For example, in some cases, the company to whom bogus payments have been made is owned by one of the specified persons.

[2]  Application claimed should be towards an object specifically stated in the deed of registration

The provisions of section 12AB stipulate the following conditions for registration under section  12A of the Income Tax Act, 1961:-

(i)               The objects of the society should be of charitable in nature;

(ii)             The activities of the Trust should be genuine

Whether the assessee incurred expenses on such activity or not can be verified by the assessing authority and

if it is found that the assessee is not carrying any charitable activity and the expenditure is incurred for promotion of business of other entity,

the Assessing Officer is empowered to disallow the expenditure and request for cancellation of registration.

[3]  Concession does not form part of the income

The Assessing Officer may examine whether any fee concession, etc, has been shown both in the income and application side of the Income & Expenditure account.

It will result in an allowance of an extra 15% application on such concession since such concession does not form part of the income.

[4]   Application shall be allowed only when the sum is actually paid by the trust or institution

[i.e. Only on ‘payment’ basis]

[Explanation 3 to clause (23) of section 10 and Explanation to section 11]

         Method of accounting may be cash or mercantile but application on payment basis only

§  With effect from Assessment year 2022-23, any sum payable by any trust or specified institutions as application of income shall be considered as an application of income in the year in which such sum is actually paid by it irrespective of the method of accounting regularly employed by it.

§  Thereby incomes may be recognized on an accrual basis whereas the application shall be on a cash basis.

§  And in short, the trusts/institutions may ensure that expenses pertaining to/accrued in the current year be paid latest by 31 March of the relevant year for such expense to be treated as application of income in the current year

[5]   Expenses should be out of Current year’s Income

As per the proviso to these Explanations, the sum paid shall not be allowed as an application during the previous year, if the same has been claimed as an application during any previous year prior to the current previous year.

[6]   Acquisition of an Asset - Double deduction of depreciation and cost of acquisition not available [Section 11(6)]

Income of a trust used for acquisition of a capital asset is deemed as application of income.

WHERE COST OF ACQUISITION CLAIMED AS APPLICATION OF INCOME, NO DEDUCTION BY WAY OF DEPRECIATION IN COMPUTING INCOME 

Depreciation claim not allowed if cost of acquisition of asset was already claimed as application of income [Section 11(6)]

With effect from assessment year 2015-16, once the capital expenditure has been treated as application of income, the trust is not eligible to claim depreciation on such capital expenditure, in the current year or in the subsequent years.

Therefore, the Assessing Officer needs to verify that if capital expenditure has been claimed by the trust or institution as application, depreciation thereon shall not be claimed in any subsequent year with respect to the same asset.

[7]   Amount spend out of Loans or borrowed funds will not be treated as application -   Only Repayment of loan will be treated as APPLICATION (because Loans or borrowed funds is not a income)

 

       Application from proceeds of loans or borrowings shall not be considered as application for charitable or religious purposes [For the purposes of third proviso of clause (23C) and clauses (a) and (b) of Section 11].

§  Only Repayment of loan will be treated as application of income [Explanation 4(ii) to Section 11(1)]

When loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as application in the previous year in which it is repaid to the extent of such repayment. [From Assessment year 2022-23]

Assessing Officer to Examine whether any capital asset was acquired out of borrowed funds

The Assessing Officer may examine whether any capital asset was acquired out of borrowed funds and the cost of acquisition as well as the repayment of loan has been claimed as application.

Both the claims may also be made by the trust or institution in different years. This will result in a double deduction of the same application.

[8]  Donating to another trust/ institution with similar objectives and claimed them as applications, other than by way of corpus

§  If the trust or institution Donating to another trust/ institution with similar objectives and claimed them as applications, other than by way of corpus

§  Corpus donation to other charitable trust  out of current income is  not allowed  as application ,and   donation to other trust out of accumulated fund is violation .

Assessing Officer should verify :

§  Assessing Officer should verify whether the donee trust is also registered as a charitable institution with Income Tax Department and;

§  Donation is not in the nature of the corpus donation

[9]  Application of Income outside India under section 11(1)(c)

Income Tax Act does not provide exemption on application of income outside India otherwise valid approval from CBDT for application outside India is available with the trust or institution’

Assessing Officer may examine :

(i)      Whether a valid approval from CBDT for application outside India is available with the trust or institution and

(ii)     Whether the same is valid for the previous year under consideration or not. Such notifications are issued based on the following consideration :

(a)     Whether the trust or institution is allowed to carry out activities outside India as per the deed of registration.

(b)     Whether the activities carried out outside India are in the nature of charitable activities as defined in section 2(15).

(c)   Whether the activities carried out outside India tend to promote International Welfare in which India is interested.

[10]   Payment of taxes (including Income Tax)

The expenditure incurred by way of payment of tax out of the current year’s income has to be considered as application for charitable purposes.

This is because payment has been made to preserve the corpus, the existence whereof is essential for the trust itself.

[11]  Expenditure of Earlier year - No set off or deduction or allowance of any excess application, of any of the year preceding the previous year shall be allowed [Explanation 2 to twentieth proviso to Section 10(23C) & Explanation 5 to Section 11]

W.e.f. Assessment year 2022-23 - Excess application in an earlier year may not be set off against next year’s income

Where a trust or institution expends or applied more than its income, it can only mean that such excess amount is from corpus or future income.

§  The intention whether it is from corpus or future income should be manifest from the accounts.

§  If such deficit is debited to corpus, it should ordinarily mean that the corpus is used or applied for the purpose of the trust so that there can be no objection to such use.

§  On the other hand, if the deficit is merely carried forward, it would be clear, that the intention is to absorb such deficit against future income.

[12] Application for charitable or religious purpose out of corpus fund will not be treated as application

§  As corpus donation is not income, hence no application allowed

(a)         applies such corpus only for the purpose for which the voluntary contribution was made;

(b)         does not apply such corpus for making contribution or donation to any person;

(c)         maintains such corpus as separately identifiable

(d)         invests or deposits such corpus in the forms and modes specified under sub-section (5) of section 11.

If violation than it will be deemed to income

          NOTE

If amount spend from corpus fund in one year , and next year trust deposit back the amount on corpus fund out of regular income, it will be treated as income in that year .