6th March 2024
The Central Board of Direct Taxes (CBDT), has clarified manner of computation of exemption for donations made by an eligible Trust/instituition to another eligible Trust/institution [considering the amendment introduced vide Finance Act, 2023] via Circular No. 3/2024 dated 6 March 2024.
Summary of the Circular:
It has been reiterated that eligible donations made by a Trust/institution to another Trust/institution under any of the two regimes shall be treated as application for charitable or religious purposes only to the extent of 85% of such donations. Hence, when a Trust/institution donates INR 100 to another trust/institution, it will be considered to have applied 85% (INR 85) for the purpose of charitable or religious activity.
Further, it clarifies that 15% (INR 15) of such donations by the donor Trust/institution shall not be required to be invested in specified modes under section 11(5) of the ITA [relating to accumulated/set apart income to be invested or deposited in specific forms or modes] as the entire amount of INR 100 has been donated to the other Trust / institution and is accordingly, eligible for exemption under the first or second regime.
llustrations Trust 1, Trust 2, and Trust 3 are Trusts or institutions under any of the two regimes. Further, Trust 1 is making eligible donation to Trust 2 and Trust 2 is further making eligible donation to Trust 3.
Background
Income of any fund or institution or Trust or any university or other educational institution or any hospital or other medical institution referred to in certain clauses of section 10(23C) of the Income-tax Act, 1961 (ITA) [‘first regime’] or any Trust or institution registered under section 12AA or 12AB of the ITA (‘second regime’) is exempt, subject to the fulfilment of certain conditions. The conditions, inter-alia, include the following:- a)at least 85% of income of the Trust/institution should be applied during the year for charitable or religious purposes; b)Trusts or institutions are allowed to apply mandatory 85% of their income either themselves or by making donations to the Trusts with similar objectives; and c)If donated to other Trust/institution, the donation should not be towards corpus
In order to ensure intended application towards charitable or religious purposes, Finance Act, 2023 (FA 2023) provided that eligible donations made by a Trust/institution shall be treated as application for charitable or religious purposes, only to the extent of 85% of such donations and accordingly, the FA 2023 made the following amendments: (a) inserted clause (iii) in Explanation 2 to third proviso of section 10(23C) of the ITA 1 (b) inserted clause (iii) in Explanation 4 to section 11(1) of the ITA 2
The CBDT has now issued a Circular 3 dated 6 March September 2024 [‘Circular’] clarifying whether the remaining 15% of donation to other Trust / institution would be taxable or would be eligible for 15% accumulation (since the funds would not be available having been already disbursed).
1 "any amount credited or paid out of the 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 subclause (via), 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), or trust or institution registered under section 12AB, 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”.
2“any amount credited or paid, other than the amount referred to in Explanation 2, 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, as the case may be, or other trust or institution registered under section 12AB, 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”.
3Circular No. 3/2024 issued under section 119 of the ITA
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