Section 11 is not to apply in certain cases.
Updated: Oct 7, 2022
This article highlights the various incomes of a charitable/religious trust/institution which would not be eligible for tax exemption under Section 13. Section 13 of the Income Tax Act, 1961 specifies the circumstances where exemptions under Section 11 and 12 would not be available for a Trust. Section 11 of the Income Tax Act deals with the exemption of income derived from property held in trust or other legal obligations, relating to religious or charitable purposes.
Income tax exemption will not be available for any part of the Income from the Property held under a trust for private religious purposes which does not ensure the benefit of the public under Section 13(1)(a). The basis of exemption under Section 11 is that the public benefits. Hence, whatever may be the theme of the Charitable activity of the trust, if the public isn’t benefited, tax exemptions shall not be applicable.
The date here is very important as institutions created before 1/4/1962, even if the purpose of the same is to propagate a particular caste or religion, would be eligible for exemption. Institutions or Trusts created after the particular date would incur the mentioned clause and thereby won’t be exempted. On the other hand, a trust created for the welfare of Scheduled Castes, backward classes, Scheduled Tribes, or women and children wouldn’t make it a religious trust. This means, that Section 11 can be applied and exemption can be claimed without any hassles.
Tax exemption will not be available for any type of Trust or Institution created after 1/4/1962 if, under the terms of the trust or rules governing the Institution, any part of the Income ensures the benefit of any person mentioned below:
The author of the trust or the founder of the institution.
Any person who has made a significant contribution amounting to rupees 50,000 by the end of the relevant previous year.
Where such author, founder, or person is a member of the Hindu Undivided Family.
Any trustee of the trust or manager (by whatever name called) of the institution.
Any person related to such author, founder, person, member, trustee, or manager as aforesaid.
Any concern in which any of the persons mentioned in the above clauses has a substantial interest.
If any person mentioned above is benefited with income from the Trust, an exemption under Section 11 would be denied and [Section 13(1)(c)] would be applicable. However, the exemption under Section 11 would be permitted if services are provided to educational or medical facilities.
Section 13(2) is applicable in the following cases, where tax exemption is not permitted. This is with reference to the persons mentioned in Section 13(3) only:
Granting of loans without interest or any element of security.
Usage of a property without any consideration for payment.
Excessive payment made to the persons mentioned in Section 13(3), despite the cost of the service being lower.
If the services of the trust are availed by the persons referred to in Section 13(3), but the remuneration is not being met.
Purchase of property from the persons referred to in Section 13(3), where the consideration paid for the same is excessive and above the normal rates.
Sale of a property to any person referred to in Section 13(3) for a rate much lower than the standard or normal rate.
If any income or property of the trust or institution is diverted during the previous year in favor of any person referred to in Section 13(3), where the value of the same exceeds Rs. 1000.
Investment of a substantial interest held by any person referred to in Section 13(3). Point to be noted here, Section 13(4) provides that where the aggregate of the funds invested in the said concern does not exceed 5% of the capital of that concern, the exemption under Section 11 will be denied only in relation to such income arising out of the said investment.
Section 13(3) prohibits a trust from investing its funds in any concern wherein any trustee or another interested person is involved. Donations made, though, are not considered an act of violation, and section 13(1)(d) prohibits benefits to the concerned person, but transaction with the person is allowed, provided that the payment of the goods and services are equivalent to their values and not excessive.