Charitable Institutions and Income Tax act 1961
Charitable
Q.1 Are NGOs and other charitable and non-profit organizations entitled to claim tax exemption under income tax law in India? Are donors who contribute to such organizations also entitled to any tax deduction?
Ans. Yes, such exemption is available to,
(i) public charitable trusts or other legal obligations, [Section 11/ 12A]
(ii) university or other educational institutions, [section 10(23C)
(iii) hospital or other institutions for treatment of persons, [section 10(23C)]
(iv) research associations, [Section 35(1)(ii)/(iii), Section 10 (21)]
(v) a company formed under Section 25 of the Companies Act. Grant of exemption in each case is, however, subject to fulfilment of a set of specified conditions.
Donors who contribute to such organizations can also claim tax deduction to the extent of a specified proportion of their contribution (50 per cent in most cases).
Q.2 What is the justification for such exemption to Charitable Institutions ?
Ans. NGOs and other voluntary and non-profit organizations supplement governmental efforts in promoting economic and social development and thus serve as partners in advancement of welfare activities. Genuine voluntary organizations have the advantage of local presence, possess local knowledge, and also bring in additional resources which help meet social and economic goals of the government. The revenue foregone by way of tax exemption is, therefore, employed effectively for achieving the nation’s developmental goals.
Charitable Institutions
Q.3 Who are the authorities responsible for grant of such exemption to Charitable Institutions?
Ans. The provisions relating to the institutions and entities entitled to exemption under the direct tax laws are administered mainly by Director General of Income Tax (Exemption) and the Directorates
headed by the Director of Income Tax (Exemption) working under the Director General of Income Tax (Exemption) in seven cities, namely, Delhi, Kolkata, Ahmedabad, Mumbai, Chennai, Hyderabad and Bangalore. In places not covered under the jurisdiction of aforesaid seven Directorates, the said provisions are administered by the territorial Commissioners of Income Tax (CsIT).
The hierarchy of central government authorities dealing with charitable and religious trusts and institutions entitled to various kinds of tax incentives under the I-T Act is briefly as follows:
(i) The Central Government;
(ii) The Central Board of Direct Taxes (CBDT);
(iii) The Director General of Income Tax (DGIT);
(iv) The Director/Commissioner of Income Tax (DIT/ CIT);
(v) The Additional/Joint Director/Commissioner of Income Tax (Addl.DIT/ Addl.CIT/Jt.DIT/Jt.CIT);
(vi) The Deputy/Assistant Director/Commissioner of Income Tax (DDIT/ DCIT/ADIT/ACIT)
(vii) The Income Tax Officer (ITO); and
(viii) The Inspector of Income Tax (ITI).
As is clear from the above, outside of the seven cities where Directors of Income Tax (Exemption) are located, the Commissioners of Income Tax and the I-T authorities working below them perform functions parallel to that of the Directorate within their respective jurisdictions. In fact, the Act makes mention only of Commissioner of Income Tax. However, the Central Board of Direct Taxes (CBDT), in exercise of it’s powers under the Act has authorized( Notification S.No. 880(E) dated 14.09.01) the Director of Income Tax (Exemptions) to discharge all the functions of CIT in the aforesaid cities.
Q.4 What is a “trust”?
Charitable Institutions
Ans. Under general law, a ‘trust’ is defined as an obligation attached to the ownership of property, and arising out of the confidence reposed by the author of the trust in the trustees.
In the I-T Act, however, the word has been used in a wider sense to include any other legal obligation, even where the legal requirements for creation of a trust are not strictly met.
Q.5 Section 11 exempts income from property held for “charitable purposes”. What is meant by charitable purpose”?
Charitable Institutions
Ans. “Charitable purpose” under Income Tax law as it now stands includes,
(a) relief of the poor
(b) education,
(c) medical relief,
(d) preservation of the environment (including watersheds, forests and wildlife),
(e) preservation of monuments or places or objects of artistic or historic interest, and
(f) advancement of any other object of general public utility (as distinguished from benefit of individuals or narrowly defined interest groups).
From 01.04.2009 onwards, “advancement of any other object of general public utility” does not include carrying on of business activity of any kind, regardless of the manner in which income earned from such business activity is intended to be utilized (an exception, has been made in cases where receipts from such business activity do not exceed Rs. 10 lakhs, which stands increased to Rs.25 lakhs w.e.f.
01.04.2012).
Q.6 How is “income” defined in case of a charitable trust or institution?
Charitable Institutions
Ans. “Income” in the case of a charitable trust or institution has to be understood in the broadest of terms. As in the case of any other assessee, it will include income falling under different heads of income, including profits and gains of business or profession, capital gains, income from house property and income from other sources (such as dividends, interest on securities, etc.). Additionally, in the case of a
charitable trust or institution, donations received (“voluntary contributions”), which otherwise do not possess the character of “income”, are also to be included in income.
All these amounts will, in the first instance, be included in the income of the charitable trust or institution, and, thereafter, exemption can be claimed subject to fulfillment of prescribed conditions.
Q.7 What conditions are required to be fulfilled by a charitable or religious trust seeking exemption under Section 11?
Charitable Institutions
Ans. To ensure that only organizations engaged in bona fide charitable or religious activities are allowed to claim exemption from tax, the law has prescribed a number of legal and procedural requirements. Taxpayers would be well-advised to go through the relevant provisions, particularly, Sections 11, 12, 12A, 13, 115BBC and 139(4A) of the Income Tax Act, and Rules 17, 17A, 17B and 17C of the Income Tax Rules. For the sake of brevity and easy reference, however, the DOs & DON’Ts for the claim of exemption by a
charitable or religious trust under Section 11 are summarized below:-
Dos :-
(i) The trust must be a public charitable or public religious trust and not a private trust.
(ii) Income claimed to be exempt must be derived from property held under trust.
(iii) The trust must be wholly for charitable or religious purposes.
(iv) If the trust or institution has taxable income for the year before claiming exemption under Sections 11 and 12, its accounts must be audited by a Chartered Accountant (or other person competent to audit accounts under Income Tax Act) and audit report in the prescribed Form must be filed with the return of income.
(v) The trust must be registered by Commissioner/Director of Income Tax under Section 12AA.
(vi) Activities of the trust must be carried out in India.
specified exception exists s follow :-
Income applied outside India (in certain cases): Section 11(1)(c) permits deduction of expenditure incurred outside India provided that such application of income promotes international welfare in which India is interested. However, for deduction of such expenditure, prior approval of the Board is required.
(vii) 85 per cent or more of the income for the year must be applied to (i.e., put to use) for charitable or religious purposes, and the balance (i.e., 15 per cent or less) must be accumulated or set apart for future application to charitable or religious purposes
or
If 85 per cent of the income is not applied to charitable or religious purposes during the year, the same must be accumulated or set apart for future application for definite and specified purposes. For this purpose, the assessee must
a ) give a notice in writing (in Form No.10) to the Assessing Officer within the due date of filing of return of income
b) invest the money so accumulated or set apart only in specified modes [see Forms and modes of investing or depositing money referred to in Section 11(5)]. The maximum period for which such income can be accumulated or set apart is 5 years.
(viii) If income of the trust or institution includes any income from business, such business must be incidental to the objectives of the trust, and separate accounts must be maintained for such business.
(ix) If the trust or institution had taxable income during the year without giving effect to Sections 11 and 12, it must file a return of income.
(x) Capital gains, if any during the year (whether short or longterm), must be reinvested in a new capital asset in order to be deemed to have been applied to charitable purposes.
Don’ts:-
(i) Property must not be held under trust for private religious purposes but for the benefit of public.
(ii) The trust or institution must not have been created or established for the benefit of a particular religious community or caste (other than SC/ST/Backward Classes, women and children).
(iii) Under the terms of the trust or rules of the institution, no part of its income must directly or indirectly be for the benefit of the author/founder/trustee/ manager or other such interested person [for a list of such persons, see List of persons specified in Section 13(3)].
(iv) No part of the income or property of the trust or institution must actually be used or applied during the previous year either directly or indirectly for the benefit of any such person.
(v) None of its funds should be invested or continue to remain invested during the previous year otherwise than in the modes specified under Section 11(5) (this is subject to specified exceptions such as assets held as corpus, accretions to the same by way of bonus shares, debentures acquired under
certain circumstances etc.).
(vi) Anonymous donations, if any, will be taxable at the rate of 30 per cent.
A significant legal change has been brought about by Finance Act, 2006 with effect from 01.04.2007 by inserting a new provision (Section 115BBC) whereby anonymous donations will not enjoy exemption but would be chargeable to tax at the rate of 30 per cent from Assessment Year 2007-08 onwards. This provision, as it stands after further amendment by Finance Act, 2009 lays down that from
Assessment Year 2010-11 on wards, tax treatment of anonymous donations (i.e., donations in respect of which the assessee fund/trust/institution etc. does not maintain records of identity indicating the name and address, or other particulars of the donor as are prescribed under the I-T Act) would be as follows:
i. Anonymous donations received by wholly religious institutions shall remain exempt from tax.
ii. In the case of partly religious and partly charitable institutions, anonymous donations to medical or educational institutions run by them will be taxable at 30 percent if the same exceed 5 per cent of total donations received by such trust/institutionor Rs. 1 lakh, whichever is more.Donations to partly religious and partly charitable institutions which do not run such medical or educational institutions shall remain exempt from taxation.
iii. In the case of wholly charitable institutions, anonymous donations will be taxable at 30 percent if such donations exceed 5 per cent of total donations received by such trust or institution or Rs. 1 lakh, whichever is more.
(vii) The purposes for which income is sought to be accumulated or set apart for future accumulation must not be vague or non-specific, and cannot travel beyond the objects of the trust. The amount so accumulated cannot be applied to a different purpose, must continue to remain invested in the specified modes, and cannot be credited or paid to any other trust or institution.
Q.8 What is the procedure for registration of a to Charitable trust by the Commissioner of Income Tax?
Charitable Institutions
Ans. The procedure for registration by CIT under Section 12AA is briefly as follows:
1. Application to be made by the trust or institution in Form 10A accompanied by, (a) original/certified copy of trust deed/instrument and an extra copy, (if created without an instrument, original or certified copy of documents evidencing creation of the trust/institution and an extra copy), (b) in case the trust is not a new one, two copies of accounts for preceding three years;
2. CIT to verify the application and call for any documents/ information necessary to satisfy himself about th genuineness of the activities of the trust;
3. The CIT to pass order in writing granting or refusing registration (where he refuses registration, he must give an opportunity of being heard to the trust/institution);
4. Such order to be passed within six months from the end of the month in which the application was received.
Q. 9 When is registration ordinarily refused by the CIT to Charitable institution?
Ans. The CIT will ordinarily refuse registration if,
(i) The trust is not a public charitable/religious trust;
(ii) The objects of the trust are not charitable;
(iii) Some objects exist for the benefit of the settler or trustees or their relatives;
(iv) A provision exists for transfer of any part of the income or the assets of the trust to any private individual or body;
(v) The trust is created for the benefit of any specific religious community or caste or individual and not for the public at large
Q.10 Upon registration, from which Assessment Year does an assessee become eligible for exemption under Sections 11 and 12?
Ans. Upon registration exemption under Sections 11 and 12 are available from the Assessment Year immediately after the financial year in which the application was made.
Q.11 Who is competent to Audit the accounts of the trust for the purpose of Section 12A?
Ans. Please see Chapter-4 (Para 4.6). A Chartered Accountant or a person entitled to be appointed as an auditor of companies is authorized to carry out the requisite audit.
Q.12 What are “anonymous donations”? To what extent are they exempt in the hands of a charitable or religious trust or institution?
Charitable Institutions
Ans. “Anonymous donation” has been defined as a voluntary contribution where the trust or institution receiving such contribution does not maintain record of identity indicating the name and address and other requisite particulars of the person making such contribution.
A significant legal change has been brought about by Finance Act, 2006 with effect from 01.04.2007 by inserting a new provision (Section 115BBC) whereby anonymous donations will not enjoy exemption but would be chargeable to tax at the rate of 30 per cent from Assessment Year 2007-08 onwards. This provision, as it stands after further amendment by Finance Act, 2009 lays down that from
Assessment Year 2010-11 on wards, tax treatment of anonymous donations (i.e., donations in respect of which the assessee fund/trust/institution etc. does not maintain records of identity indicating the name and address, or other particulars of the donor as are prescribed under the I-T Act) would be as follows:
i. Anonymous donations received by wholly religious institutions shall remain exempt from tax.
ii. In the case of partly religious and partly charitable institutions, anonymous donations to medical or educational institutions run by them will be taxable at 30 percent if the same exceed 5 per cent of total donations received by such trust/institutionor Rs. 1 lakh, whichever is more.
Donations to partly religious and partly charitable institutions which do not run such medical or educational institutions shall remain exempt from taxation.
iii. In the case of wholly charitable institutions, anonymous donations will be taxable at 30 percent if such donations exceed 5 per cent of total donations received by such trust or institution or Rs. 1 lakh, whichever is more.
Q.13 What are “corpus donations”? Are they taxable in the hands of a charitable or religious trust or
institution?
Ans. Income in the form of voluntary contributions made with a specific direction from the donor that they shall form part of the corpus of the trust or institution, are generally referred to as “corpus donations”. Such donations are fully exempt from tax under Section 11(1)(d) of the Act.
Q.14 What is the rate of taxation applicable to the taxable income if any, of a charitable or religious trust or organization?
Charitable Institutions
Ans. Income derived from property held under trust wholly for charitable or religious purposes, to the extent it is not exempt under Sections 11 and 12 is liable to tax at normal rates applicable to an Association of Persons (AOP) except when the same is in the nature of anonymous donations which will be dealt with as mentioned in the answer to FAQ No. 12 above.
Further, in cases where exemption under Section 11 is forfeited by a trust or institution on account of a default under Section 13(1)(c) or 13(1)(d) (i.e., where the trust or institution either directly or indirectly benefits its author, founder or any other person mentioned under Section 13(3), or because the funds of the trust or institution were invested otherwise than in the specified modes), income of such trust
or institution will be taxable at the rate (including surcharge) applicable to the highest slab of income for the assessment year under consideration.
Q.15 What is the extent of tax deduction available to a donor who contributes to charitable or religious trust or institution?
Ans. Under Section 80 G of the I-T Act, donors to such organizations are eligible for deduction as a percentage of the amount donated by them. In most cases the rate of exemption applicable is 50 per cent of the amount donated. For a donor to claim such exemption, the trust or institution to which the donation has been made must be one which has been approved by the Income Tax Department for this
purpose.
Q.16 What is the procedure to be followed by a trust or institution for obtaining such approval under Section 80G?
Charitable Institutions
Ans. The legal and procedural requirements to be fulfilled before a trust or institution can get approval under Section 80G are as follow
(i) The income of the fund or institution would not be includible in its total income by virtue of provisions contained in Sections 11 and 12, Section 10(23AA) or Section 10(23C);
(ii) As per instrument under which the fund or institution was created and as per rules governing it, no part of its income or assets is transferable, or to be applied for any purpose other than charitable purpose. Charitable purpose here would not include religious purpose in view of Explanation 3 below Section 80G. However, Section 80G(5B) permits application upto 5 per cent of the income
for the year towards religious purposes;
(iii) The fund or institution is not expressed to be for the benefit of any particular religious community or caste;
(iv) It maintains regular books of account regarding its receipts and expenditure;
(v) The institution or fund is either constituted as a public charitable trust, or a society registered under Societies Registration Act (or its equivalent legislation), or a company registered under Section 25 of the Companies Act, or a statutory university or recognised educational institution, or an institution financed by the central or state government;
(vi) The institution or fund is approved by the Commissioner (or Director) in accordance with the rules made in this behalf.
The trust or institution which fulfils the conditions mentioned in above can make an application in Form No. 10G along with copies of relevant documents mentioned below :-
Rule 11AA prescribes that an application for approval under Section 80G shall be made in triplicate in Form No.10G It shall be accompanied by copies of following documents: –
(i) order of registration under Section 12A or notification under Section 10 (23C);
(ii) note on activities conducted since inception or in last three years, whichever is less; and
(iii) accounts of the institution since inception or for the last three years, whichever is less.
Time limit for Disposal of Application:-
The rule also provides that the application (Form No. 10G) made by the assessee shall be disposed of within six months of the date on which the application was made. However, the time taken by the assessee in providing information called for by the CIT or in responding to enquiries made by him shall be excluded while calculating the aforesaid limitation period of six months.
Procedure for disposal of the application:-
No formal procedure has been laid down either in the Act or the Rule for disposal of the applications. However, the fund or institution has a right to be heard before its application can be rejected.
Order Can be Challenged before ITAT
Orders passed by the Commissioner can now be challenged before the Income Tax Appellate Tribunal under Section 253.
Validity of Approval u/s 80G (5)
It is noteworthy that the Proviso to Section 80G(5)(vi) under which approvals granted by the Commissioner had a maximum validity period of five years has been deleted with effect from 1.10.2009. Accordingly, approval once granted is now valid forever unless withdrawn by the Commissioner where he is satisfied that the activities of the institution or fund are not genuine or are not being carried on in accordance with its objects
Case Laws u/s 80G (5)
In East India Industries (Madras) Pvt. Ltd.[[1997] 65 ITR 611 (SC).] the Hon. Madras High Court held that the question whether donation to an institution are deductible under Section 80G has to be decided
with reference to all the objects of the institution. If some objects are non charitable, the institution is not eligible for approval.
In Upper Ganges Sugar Mills Ltd.[227 ITR 578 (SC).] the Hon. Supreme Court has held that even if one object is wholly or substantially religious in nature, the institution is not eligible for approval under Section 80G
Q.17 What is the time frame available to the Commissioner of income tax to decide on an application made by a trust or institution under Section 80G? For what period is the approval granted by the Commissioner valid?
Ans. The Commissioner of Income Tax to whom the application is made has to dispose of the application within six months (excluding the period taken by the assessee for providing the information called for by the Commissioner in the process of granting approval).
After recent legal amendments, an approval granted to a trust or institution under Section 80 G is now valid for all future years unless it is withdrawn by the Commissioner where he is satisfied that the activities of the trust or institution are not genuine or are not being carried on in accordance with its objects
Q.18 What type of organizations can claim the benefit of exemption under Section 10(23C)?
Charitable Institutions
Ans. Apart from the various funds set up by the government (such as the Prime Minister’s National Relief Fund) which are specifically mentioned in Section 10(23C), a university or other educational institution, a hospital or other such institution as well as various other religious or charitable funds, trusts, institutions are eligible for the benefit of Section 10(23C) provided they are approved for this purpose by the prescribed authority [the jurisdictional Chief Commissioner of Income
Tax or Director General of Income Tax(E)].
The detailed procedure for seeking approval and the effect of grant of such approval by the prescribed authority is as follow :-
Clauses (iv), (v), (vi) and (via) of Section 10(23C) deal with exemption of income of various kinds of religious or charitable funds/ trusts/institutions etc. which are “approved by the prescribed authority” under the respective sub-clauses.
Of these, Sub-clause (iv) deals with exemption of income of any fund or institution established for charitable purposes which may be approved by the prescribed authority taking into account the objects of the fund or institution or its importance throughout India or throughout any state(s) of India. In order to be eligible for exemption, such trust or institution should not be involved in any trade, commerce or business activity or rendering of any service in relation to such activity.
Sub-clause (v) deals with exemption of income of any trust or institution wholly for public religious purposes or public religious and charitable purposes, which may be approved by the prescribed
authority taking into account the manner in which its affairs are administered and supervised so as to ensure that the income is applied for its objects. The restriction on trade, commerce or business activity or rendering of any service in relation to it which applies to Sub-Section (iv) also applies to this Sub-Section.
Sub-clause (vi) deals with exemption of income of any universityor educational institution other than those mentioned in Sub-clauses (iiiab) and (iiiad) which exists solely for educational purposes and not for purposes of profit, which may be approved by the prescribed authority.
And finally, Sub-clause (via) deals with exemption of income of any hospital or other institution
engaged in reception and treatment of persons suffering from illness or mental defectiveness or during convalescence or requiring medical attention or rehabilitation, other than those mentioned in
Sub-clauses (iiiac) and (iiiae) which may be approved by the prescribed authority.
The “prescribed authority” for the purposes of all these sub-clauses is now the Chief Commissioner or the Director General of Income Tax. [34Rules 2C and 2CA of I-T Rules. Also see Notification No.195/2007, dated 30-5- 2007]
The fund,trust, institution or other entity seeking exemption under each of the above sub-clauses [i.e., Sub-clauses (iv), (v), (vi), and (via)], is required to make an application in the prescribed forms, namely,
Form No.56 and 56D to the CCIT or DGIT concerned for grant or continuation of exemption. Such
application is required to be made before 30th September of the relevant Assessment Year from which exemption is being sought.
The prescribed authority is empowered to call for the requisite documents, audited annual accounts and other relevant information as it considers necessary and is also empowered to make necessary enquiries to satisfy itself about the genuineness of the activities of the fund/trust/institution etc. within 12 months from the end of the month in which such application was received. Prescribed authority has to either grant the approval sought or has to pass an order rejecting the application.
Conditions specified under Sub-Sections 11(1), 11(2) and 11(3) regarding application of income, accumulation of income and its use, are applicable to such a fund, trust, institution etc. As in the
case of trusts or institutions claiming exemption under Sections 11 and 12, a fund/trust/ institution seeking to claim exemption under Section 10(23C)(iv), (v), (vi) or (via) is also required to get its
accounts audited where its total income without giving effect to the said provisions exceeds the maximum amount not chargeable to tax during the year.
The provisions of Section 11(5) relating to the forms and modes in which funds of the assessee trust, institution, etc. are to be invested are also applicable, subject to the specified exceptions including assets held as part of corpus, contributions received and maintained in kind in certain circumstances, etc.[See Clause (b) of the Third Proviso to Section 10(23C)]
Similarly, as regards business income too, provisions parallel to Section 11(4A)have been incorporated into Section 10(23C) to specify that business income of such a fund, trust, institution etc. shall not be exempt unless the business is incidental to the attainment of its objects and separate books of account are maintained by it in respect of such business.
As in the case of trust or institutions claiming exemption under Section 11, assessees seeking to claim exemption under Section 10(23C) too are barred from paying any amounts accumulated for future application to any other entity registered under Section 12AA or approved under Section 10(23C)(iv),(v),(vi) or (via). Such amounts, if paid or credited to any such entity shall not be treated as application of income to the objects of the fund, trust, institution etc., but shall be treated as its income chargeable to tax in the hands of the assessee fund, trust, institution etc.
Anonymous donations (donations in respect of which the assessee fund/ trust/ institution etc. does not maintain records of identity indicating the name and address, or other particulars of the donor as are prescribed), also, will not be exempt but shall be included in the total income of the assessee fund, trust, institution etc.
Application for approval by the prescribed authority under Sub-clause (iv) or (v) of Secton 10(23C) has to be made in Form No.56
while application for approval by the prescribed authority under Sub-clause (vi) or (via) has to be made in form No. 56-D
It is noteworthy that the form to be filled up for notification under Sub-clauses (iv) and (v) is the same, namely, Form No. 56, and, similarly, the form to be filled up for approval under Sub-clauses
(vi) and (via) is the same, namely, Form No. 56D. However, the considerations which the prescribed authority will keep in mind are different in each case. For Sub-clause (iv), consideration has to be
given to the charitable objects of the fund or institution and its territorial importance.
Sub-clause (v) lays greater emphasis on the manner in which the affairs are administered so as to ensure that the income is applied properly for the objects of the trust.
Subclause(vi) lays emphasis on the factual position, namely, that the university or institution should be existing solely for educational purposes and not for profit.
Therefore, if the aims and objects of the institution include objects other than educational, then such an
institution will not be eligible for approval. For the same reason, the issue as to how the income of the institution is actually applied assumes great significance for the purposes of this sub-clause.
Sub-clause (via) lays emphasis on existence solely for philanthropic purposes and not for the purposes of profit. Therefore, the form should be carefully filled up having regard to provision contained in the relevant sub-clause under which approval is being sought.
The prescribed authority is also empowered to withdraw the approval granted to any such fund, trust, institution etc. where subsequent to grant of approval, the authority is satisfied that the assessee fund, trust, institution etc. has not applied its income wholly and exclusively to its objects or has invested in its funds in modes other than those prescribed or that the activities of the assessee fund, trust, institution etc. are not genuine or are not being carried out in accordance with one or more of the conditions subject to which approval was granted by the prescribed authority. Before withdrawing such approval, however, the prescribed authority is required to give a reasonable opportunity to the assessee to show
cause why the approval should not be withdrawn.
Q.19 What type of associations are entitled to seek notification under Section 35(1)(ii) or 35(1)(iii) and to exemption under Section 10(21)? What is the procedure for claiming such exemption?
Charitable Institutions
Ans. After the recent amendments, approved “research associations” (and not necessarily “scientific” research associations as was the case earlier) are now eligible for notification under Section 35 and exemption from tax under Section 10 (21). However, all such associations must be approved by the central government for this purpose. The restrictions which apply to a trust or institution claiming
exemption under Section 11 regarding manner of application and accumulation of income, investment of funds, business income etc. also apply to such research associations with necessary modifications.
Section 10(21) exempts from tax the income of a “research association” approved for the purposes of Section 35(1)(ii) and Section 35(1)(iii), subject to certain conditions. This sub-Section, which previously applied only to a “scientific research association”, now [With effect from 1.4.2011] also applies to associations undertaking research in social science or statistical research.
In order to be eligible for the benefit of deduction under Section 10(21), the research association has to fulfil the following conditions :-
(i) It must be approved by the central government;
(ii) It must apply its income or accumulate it for future application wholly and exclusively for its objects. Where it accumulates its income for future application, the provisions of Section 11(2) and 11(3) will apply to such accumulation subject to the modification that the notice for accumulation of income in Form No.10 in this case will have to be submitted to the central government and not the assessing officer.
(iii) Subject to certain very specific exceptions (e.g., assets held as corpus since 01.06.1973, debentures acquired before 01.03.1983, bonus shares issued on such corpus assets etc.), it must invest or deposit its funds in accordance with Section 11(5).
(iv) Business income, if any, shall not be exempt unless the business is incidental to attainment of its objects and separate books of account are maintained for such business.
The guidelines, form and manner in which approval under Section 35(1)(ii) or (iii) is to be obtained, have been specified in Rule 5C. An application for approval under Section 35(1)(ii) or (iii) by a research association has to be made in duplicate in Form No. 3CF-I .
whereas in the case of a university, college or other institution, it is to be made in Form No. 3CF-II .
The said application has to be made to the CIT/DIT(E) having jurisdiction over the applicant, at any time during the financial year immediately before the assessment year from which the approval is sought. If the association claims exemption under Section 10(21) of the Act, it has also to fill up the Annexure to Form No. 3CF-I.
If any defect is noticed in the application in Form No. 3CFI or 3CF-II or if any relevant document is not attached, the CIT/ DIT (E) will send a deficiency letter to the applicant within one month from the date of receipt of the application form in his office.The applicant is required to remove the deficiency within fifteen days (extendable to thirty days). If the applicant fails to remove the deficiency within a maximum of thirty days, the CIT/DIT (E) will send his recommendation to the Member (IT), CBDT for treating the application as invalid, upon which, the Central Government may pass an order treating the application as invalid.
Where the application form is complete in all respects, the CIT/DIT (E) may make necessary inquiry regarding the genuineness of the activity of the association/university/college/ institution and send his recommendation to the Member (IT) either for grant of approval or for rejection of the application. He is required to do so within three months from the end of the month in which the application form was received in his office.
Before granting approval under Section 35(1)(ii) or (iii), the Central Government may call for such documents or information from the applicant as it may consider necessary and may also get any inquiry made for verification of the genuineness of the activity of the applicant. Where the Central Government is satisfied, it may issue a notification under Section 35(1) to be published in the Official Gazette granting approval to the association or university or college or other institution. Otherwise, it may reject the application for reasons to be recorded in writing.
The Central Government may withdraw the approval so granted where it is satisfied that the research association/university/ college/other institution has ceased its activities or its activities are
not genuine or are not being carried out in accordance with all or any of the conditions under Rule 5D or Rule 5E.
The applicant is entitled to a reasonable opportunity of being heard before an order treating the application as invalid or rejecting the application or withdrawing the approval, is passed. A copy of
such order invalidating or rejecting the application or withdrawing the approval has to be communicated to the applicant, the Assessing Officer and the jurisdictional CIT/DIT (E).
As per the Proviso to Section 143(3), the Assessing Officer, where he is of the view that a contravention of Section 10(21) has taken place, is required to intimate the Central Government of the contravention. Thereafter, if the Central Government withdraws the notification, the assessment may be completed by denying the benefit of Section 10(21). Similarly, where the Assessing Officer is satisfied that the activities of the institution referred to in Section 35(1)(ii) or (iii) are not being carried out in accordance with any of the conditions subject to which it was approved under the said provision, he may, after giving a reasonable opportunity of showing cause to the assessee institution, recommend to the Central
Government to withdraw the approval and Central Government may, by an order, withdraw the approval and forward a copy of the order to the assessee and to the Assessing Officer.
The Form No. 3CF-I or II may be filled up carefully, having regard to the provisions contained in Sections 35(1)(ii)/(iii), 11(2), 11(3) and 11(5) as well as Rule 5D and Rule 5E . As the benefit is sought to be given in respect of scientific research, research in social science or statistical research activities, it has to be ascertained whether research is the sole object or only one of the objects of the university, association or institution. In case research is only one of the objects of the institution, then, it is incumbent on the institution to maintain separate books of account and furnish Income and Expenditure Account and Balance Sheet in respect of research activities. Such accounts
have to be audited by an auditor, who should certify that expenditure incurred was for research work. Following points should be kept in mind while filling up the form:—
(i) Where research is a part of the objects of the association/ institution/university/college whether Income & Expenditure Account and Statement of Affairs are separately maintained for research activity and audited by the auditor;
(ii) Whether income has been applied or accumulated, as the case may be, for research purposes only;
(iii) Whether surplus funds are invested in the modes prescribed in Section 11(5); (iv) Details of research projects completed and research projects intended to be taken up in the ensuing years;
(v) Any benefit granted to the interested/related persons, major donors etc.
Q.20 Where a trust fund or institution is approved by the central government under Section 35, can an Assessing Officer still reject the claim of such trust or fund or institution to exemption under Section 10 (21)?
Ans. In such cases, the Assessing Officer, if he is of the view that the contravention of Section 10(21) has taken place, is required to intimate the central government of the contravention. He can complete the assessment by denying the benefit of Section 10(21) only if the central government withdraws the notification.