Under section 11 of the Income Tax Act 1961, a charitable or religious organisation is required to apply 85% of its income for charitable/religious purposes. If the organisation fails to apply 85% during the previous year, then it can either carry forward the income to the next year and apply such deficit in the next year. On the other hand, the organisation can also accumulate the income for next five years following the provisions of the Act and Rules thereof. Before we understand the accumulation of these income, we have to understand the cardinal aspect that any income received by these Trust will have to be invested under the modes as specified under the section 11 (5) of the Income-tax Act, 1961 and if the same is not done then it will be disallowed Suo moto.
Under the prevailing rules, Form 9A is required to be filed if the organisation fails to apply 85% and accumulates the deficit to be applied in the next financial year or in the year of receipt of income. Further, Form 10 is required to be filed if the organisation fails to apply 85% and accumulates the deficit to be applied in the next five years.
Typically, a charitable trust may receive donations/voluntary contributions during the year, or it may accrue income based on the accrual method of accounting however the money may not be received for eg. Interest on Fixed Deposits which is recognised on gross basis and the tax deducted at source is also accounted at the year end. However, the money may be received in the next year or subsequent years depending on the period of these deposits. Therefore, the income can be classified in the following broad types:
- the whole or any part of the income has not been received during the previous year; or
- for any other reason, the assessee has an option to:
- apply such income referred to in clause (i) for such purposes during the previous year in which it is received or during the previous year immediately following the said previous year.
- apply such income referred to in clause (ii) for such purposes during the previous year immediately following the previous year in which the income was derived.
The major challenges faced by these institutions in these cases, how do they comply with the above provisions of section 11 i.e to spend 85% of the contributions when they have not received it.
The answer lies to the above problem in the following two Forms prescribed under the Income-tax Act,1961.
| Sr. No. | Form No. | Description | Period of Accumulation |
|---|---|---|---|
|
1 |
9A |
Application for exercise of option under clause (2) of the Explanation to sub-section (1) of section 11 of the Income – tax Act, 1961. (Rule 17 (1)) |
1 year. |
|
2 |
10 |
Statement to be furnished to the Assessing Officer/Prescribed Authority under clause (a) of the Explanation 3 to the third proviso to clause (23C) of section 10 or under clause (a) of sub-section (2) of section 11 of the Income-tax Act, 1961. (Rule 17 (1)) |
5 years. |
Option is to be exercised in Form 9A to be furnished electronically with or without digital signature by the trust within the time allowed for filing return of income u/s 139(1). Therefore, the income will have to be applied for the purposes of the Trust before the filing of the Income Tax Return as mentioned above. The effect of this form shall be that the income will be deemed to be applied in the year of receipt though actually not received and applied. Furthermore, the same amount of application of the money shall not be allowed in the subsequent year of receipt as the same is already allowed earlier.
Additionally, the Charitable Trust has the option of accumulating any income received or accrued as above to the next 5 financial years by exercising the option of filing form 10 electronically with or without digital signature by the trust within the time allowed for filing return of income u/s 139(1). If however, the income once accumulated is not used in the next 5 years then the income shall be taxable in the 5th Year.
Due dates for filing of Forms: As mentioned by the Finance Act 2023, the due date of these forms is 2 months before the due date for filing of return of Income as mentioned under section 139 (1) i.e 31st August 2023. However, vide circular no 6 of 2023 dated 24th May 2023 it has been clarified the accumulation of deemed accumulation shall not be denied to a trust as long as these forms are furnished on or before the due date of furnishing the return as provided in sub-section (I) of section 139 of the Act ie 31st October 2023.
Let us understand the specific usage of these forms by taking the following example:
| Gross income of the Trust for AY 23-24: |
Scenario 1 Amount (INR) |
Scenario 2 Amount (INR) |
Scenario 3 Amount (INR) |
|
|---|---|---|---|---|
|
a) Voluntary Contributions |
A |
5,00,000 |
5,00,000 |
5,00,000 |
|
b) Income Accrued or not Received |
B |
1,00,000 |
1,00,000 |
1,00,000 |
|
Total |
C |
6,00,000 |
6,00,000 |
6,00,000 |
|
Application of Income done in AY 24-25 till date as mentioned in section 139 (1) |
E |
50,000 |
50,000 |
50,000 |
|
Accumulation the Trust proposes to do case for 5 years (assumed amounts) |
F |
Nil |
2,00,000 |
1,50,000 |
|
Income deemed to be applied in AY 23-24 out of the above Income. |
|
|
|
|
|
if Form 9A is filed for AY 23-24 (Assumed) |
G |
50,000 |
Nil |
50,000 |
|
if Form 10 is filed for AY 23-24 (Assumed) |
H |
Nil |
2,00,000 |
1,50,000 |
|
Total Taxable Income: |
|
|
|
|
|
Option 1: C-(D+ G) i.e Form 9A is filed only. |
|
4,00,000 |
|
|
|
Option 2: C-(D+ H) i.e Form 10 is filed only. |
|
|
2,50,000 |
|
|
Option 3: C-(D+G+ H) i.e form 9A and 10 is filed. |
|
|
|
2,50,000 |
|
Tax Payable if Income Exceeds INR 2,50,000 |
|
YES |
NO |
NO |
Hence in Option 2 & 3 if the above amounts are not applied till AY 28-29 then same shall be taxable in AY 28-29 to the extent of the shortfall in the accumulation of the income which is applied.
However, if income is not accumulated as above, it is taxable as follows:
| Category of violation | Year of taxation |
|---|---|
|
If income is applied for purpose other than charitable or religious. |
Year of such application |
|
Income ceases to be invested as specified |
Year in which it ceases to be invested as specified |
|
Not utilised for the purpose for which it was accumulated or set aside up to 6 years |
6th year |
|
Donated to trust registered under Section 12AA or 10(23C) |
Year in which income is so donated |
Summary
While it is vey important to invest the donations/voluntary contributions received by the Trust in the modes as specified under section 11(5) of the Income-tax Act, due care needs to be taken to ensure the amounts are applied to the objects of the Trust. If the same cannot be done due to various factors mentioned above, then the same needs to be accumulated by using the above forms. This will help the Trust to not pay tax on the amounts which it could not otherwise utilised.