Introduction
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The Income-tax Act, 1961, (‘the Act’) provides for exemption to the income of a charitable trust or institution or society which is wholly and solely for the charitable purposes. Chapter III (sections 10 to 13A) of the Act provides for certain categories of incomes which are completely exempt from the purview of the Act as though they are not included in the taxable income of the assessee. The exemption available under sub-sections 10 (23B), (23BBA) and (23C) is separate from or in addition to the exemption granted under section 11, read with sections 12, 12A, 12AA and 13 which provide for conditions relating to the accumulation of income by charitable trusts or institutions. The term ‘charitable purpose’ for the purpose of this Act is defined under section 2(15). Unfortunately, the amendment proposed in the Finance Bill, 2012 is so far-reaching that it will render most of the sections pertaining to charitable trusts nugatory and their fate will depend only on the meaning of the term ‘charitable purpose’.
Scope of the provisions granting exemption
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Under section 10, the income is exempt due to its very nature and under sections 11 to 13A income is exempt due to the character of the assessee. Section 11 excludes income of a charitable or religious trust from the total income of the person in receipt of such income. However, such exemption can be availed only if there is a valid trust or there is a legal obligation, and the income derived from the property held under such trust or legal obligation is applied for charitable or religious purposes.
Broadly, section 11 deals with the exemption of income from property held under the trust or other legal obligations for religious or charitable purposes (wholly or in part) and section 12 deals with exemption of income derived by such a trust from voluntary contributions. Sections 12A and 12AA prescribe the conditions as to the applicability of sections 11 and 12 and also procedure for registration of the trust. Section 13 enumerates the circumstances under which the exemption available under sections 11 and 12 will be denied.
The words “charitable purpose” has been defined in section 2(15) and reads as follows:
‘(15) “charitable purpose” includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity:
Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year;’
In nutshell, for availing exemption under the Act, the activities of the charitable or religious trust must fall within the four corners of the aforementioned definition.