Query with regard to the Charitable trusts/society registered u/s 12AB/12AA

Query with regard to the Charitable trusts/society registered u/s 12AB/12AA

One of the registered trusts has donated some amount to another trust which is registered u/s 12AB/12AA during the FY 2022-23. This amount donated is out of accumulated amount u/s 11(2) of the previous years (accumulation of FY2021-22 & prior).

My queries in this regard are as under:

1. Does this transaction attract non-compliance of income tax u/s 11(3)(d)?

2. Is this transaction become taxable @ 30% section 115I(2) Explanation(b) ? If yes, from which funds these tax are required to be paid?

3. Can this amount donated to another trust (having same object) be treated as 'applied to purposes of trust being charitable or religious purposes'.

Section 11(3)

(3) Any income referred to in sub-section (2) which—

(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or

(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or

(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section 72[or in the year immediately following the expiry thereof]*,

(d) is credited or paid to any trust or institution registered under section 12AA 73[or section 12AB] or to any fund or institution or trust 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,

shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.

Vikas Goyal

9873515356

Hi Vikas,

Your query about donations by a registered charitable trust/society to another registered trust under sections 12AA/12AB and the implications under section 11(3)(d) and section 115I(2) is quite pertinent. Here's a detailed response:

1. Does this transaction attract non-compliance under section 11(3)(d)?

Section 11(3)(d) states that if the accumulated income under section 11(2) (i.e., income set apart for application in future years) is credited or paid to any other trust/institution registered under 12AA/12AB or other specified institutions, then such amount is deemed to be the income of the trust paying the amount in the previous year in which it is so credited or paid (or the immediately following year if accumulation period expires).
This implies that accumulated income cannot be freely transferred to another trust as an application of income without tax consequences.
So, yes, this transaction will attract the provisions of section 11(3)(d), i.e., the amount donated out of accumulated income becomes taxable in the hands of the donor trust.

2. Is this transaction taxable @ 30% under section 115I(2) Explanation (b)? From which funds should this tax be paid?

Section 115I(2) applies to income deemed to be the income of the previous year under section 11(3)(d) and taxes it at a flat rate of 30%.
Hence, the amount donated out of accumulated income will be taxable at 30% in the year of payment or the immediately following year.
The tax liability arises with the donor trust, and it should pay this tax from its funds.
Usually, this tax is paid out of the accumulated funds or any other source available with the donor trust.

3. Can this amount donated to another trust (with the same object) be treated as 'applied to purposes of trust being charitable or religious purposes'?

For income to be exempt under section 11, the income must be "applied" to charitable or religious purposes by the trust itself.
Merely transferring the accumulated income to another trust, even if registered under 12AA/12AB with similar objects, is NOT considered 'application' of income in the hands of the donor trust.
Hence, the transfer is treated as income deemed to be received by the donor trust (as per 11(3)(d)) and taxed accordingly.
However, the receiving trust may apply the funds for charitable purposes and claim exemption on receipt.

Summary:

Query	Answer
1. Applicability of 11(3)(d)?	Yes, donation out of accumulated income attracts 11(3)(d) and is taxable.
2. Tax under 115I(2)?	Yes, taxable @ 30%, to be paid by the donor trust from its funds.
3. Treated as application?	No, transferring to another trust is not ‘application’ by donor trust.

Additional Notes:

To avoid tax under 11(3)(d), the accumulated income must be applied by the trust itself or remain invested/deposited in prescribed modes during the accumulation period.
Transferring accumulated income to another trust is generally treated as withdrawal from accumulation and triggers tax.
You may consult with the trust’s tax advisor to plan donations and accumulations properly.