This article deals with Charitable/Religious trust/institution which is not registered under Section 12AA/12AB of the Income Tax Act, 1961 (“the Act”). Also, it does not cover any trust/institution referred to in clause (23C) of section 10 of the Act.

1. Definition of Charitable/Religious Activity

First, we have to ascertain whether the trust activity falls under the definitions of Charitable/Religious purpose.

As per Section 2(5) of the Act: “Charitable purpose includes relief of the poor, education, yoga, 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 unless— (i) such activity is undertaken in the course of the actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year do not exceed twenty per cent of the total receipts of the trust or institution undertaking such activity or activities of that previous year.”

Religious Activity is not defined in the Act. Hence, the religious purpose has to be ascertained from common parlance. If there is a Temple, Masjid, Church, Gurudwara etc., their activities can be said to be of religious activity.

2. Provisions of the Act regarding Taxability

If the trust/institution falls under the definition of Charitable/Religious purpose, then we have to look into the taxability of the same.

The taxability of Income is contained in Section 11, 12, and 13 of the Act, for those Trusts registered under Section 12AA/12AB of the Act.

For those trusts not registered under Section 12AA/12AB of the Act, it is governed by Section 164 (2) of the Act.

Section 164 (2) says:

“(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of the nature referred to in sub-clause (iia) of clause (24) of section 2, or which is of the nature referred to in sub-section (4A) of section 11, tax shall be charged on so much of the relevant income as is not exempt under section 11 or section 12, as if the relevant income not so exempt were the income of an association of persons:

Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate”.

Section 167 (B) says:

“167B. (1) Where the individual shares of the members of an association of persons or body of individuals (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India) in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate:

Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such a higher rate.”

3. Case Laws relating to taxability of Unregistered Trusts

1. Hon’ble Delhi High Court in the case of DDIT (E) vs Petroleum Sports Promotion Board (362 ITR 235) has held that in case of a charitable society even if benefit u/s 11 & 12 of the Income Tax Act, 1961 is denied and its income was brought to tax as income from other sources, all relevant expenditures were also to be allowed. The relevant observation of the Hon’ble High Court reads as under: –

“7. The learned standing counsel for the revenue submitted that the order of the Tribunal is untenable since it indirectly confers the benefit of Section 11 upon the assessee. Weare, however, not inclined to accept the contention. The CIT (Appeals) has actually not held so. He never examined the question whether the assessee was eligible for the exemption under Section 11 since there was no ground before him, taken by the assessee, to that effect. All that the assessee claimed before the CIT (Appeals) was that the entire expenditure should be allowed as a deduction since it was incurred for the very objects for which the assessee was established in 1979 i.e. promotion of sports and, therefore, the assessing officer was not justified in restricting the allowance of expenditure to Rs.1,20,000/- only for all the three years. It was this claim that was accepted by the CIT (Appeals). The objection of the learned standing counsel for the revenue that since the grants were assessed under the residual head, there was no scope for allowing the expenditure incurred on the promotion of the sports activities is not acceptable since even under Section 57(iii), any expenditure incurred for the purpose of making or earning the income is allowable as a deduction. It is open to the income-tax authorities to deny the exemption under Section 11 of the Act in the absence of registration under Section 12A and if they do so, then the assessment has to be completed in accordance with the provisions of the Income Tax Act; if the income is assessed under the residual head full play must be allowed to Section 57(iii). Though prima facie it would appear that the phraseology employed in Section 57(iii) is different from Section 37(1), it has been held by the Supreme Court in CIT vs. Rajendra Prasad Moody, 115 ITR 519 that Section 57(iii) must be construed broadly and the somewhat wider language of Section 37(i) should not affect the interpretation of Section 57(iii). The assessee in the present case was created in 1979 with the object of promoting sports; there was no other object and all its constituents were giving grants/ funds only for that purpose. In truth and reality, the assessee was merely acting as a custodian or conduit to the constituents for the purpose of promoting sports activity inside and outside the country. The expenditure incurred by the assessee is only for the purpose of promoting the sports events and activities and in this respect, there is no challenge to the finding of fact recorded by the Tribunal. If such expenditure is not allowed, it may amount to taxing the gross receipts of the assessee and not the income, which is not permissible under the income tax law. Moreover, up to the assessment year 2002-03 the assessee was exempt from tax under Section 10(23C); from the assessment year 200607 it has been granted registration or a charitable institution under Section 12A making it eligible for the exemption under Section 11.”

2. ITAT, Delhi in case of Vidya Vihar Shiksha Samiti vs ACIT (7641 ITR Delhi 2019)

The assessee is a registered society with charitable objects and is running two recognized educational schools and in respect of income derived therefrom (aggregate receipts Rs. 1,46,73,932/-) filed its return of income in Form ITR-7 u/s 139(4A) of the Act, declaring total income of Rs. 2,40,752/- without claiming any exemption u/s ll/12/10(23C)(iiiad)/10(23C)(vi) of the Act, as the society is neither registered u/s 12A nor approved u/s 10 (23C) (vi) of the Act. In the intimation u/s 143(1) dated 10.03.2016 CPC charged maximum marginal rate without allowing the basic exemption limit. 

Held that assessee is entitled to claim expenditure against gross receipts and also entitled to claim basic exemption limit and tax rate applicable was normal tax rates (as applicable to an individual assessee) instead of Maximum Marginal rate.

3. Shri Sanatan Dharam Mandir Sabha Vs ITO (ITAT Delhi) ( ITA No.5791/DEL/2019)

The assessee is a registered society registered with Registrar of Society Delhi. It has neither applied nor received any registration u/s 12A of the Act. For the AY 2013-14, the assessee filed its ITR-7 showing taxable at Rs. 2,18,060/- after reducing the application of income of Rs. 4,85,564/- from gross receipts of Rs. 7,03,624/-. The income was shown under the head “Income from Other Sources”. The CPC Bangalore processed the return u/s 143(1) and disallowed the expenses of Rs.4,85,564/- claimed in the return. Further the CPC, Bangalore denied the benefit of threshold limit and charged the income tax at maximum marginal rate on the gross receipt.

The assessee filed an application u/s 154 before the AO on 31.05.2018. The AO, however, rejected the application of the assessee by holding that since the status of the assessee is AOP (Trust) on which there is no threshold limit, therefore, the calculation of the tax rate at maximum marginal rate is correct. However, the AO did not elaborate regarding the disallowance of entire expenditure claimed by the assessee i.e. 143(1) by the CPC, Bangalore.

Held that as per Hon’ble Delhi High Court in the case of DDIT (E) vs Petroleum Sports Promotion Board (Supra) it is clear that in case of a charitable society even if benefit u/s 11 &12 of the Income Tax Act, 1961 is denied and its income was brought to tax as income from other sources, all relevant expenditures were also to be allowed. Also, the assessee is entitled to claim basic exemption limit and tax rate applicable was normal tax rates (as applicable to an individual assessee) instead of Maximum Marginal rate.

4. Joharimal High School Versus Ito (Exemptions) , Cuttack (ITA No. 135/CTK/2021)

The relevant extract of the judgement is as under: 

“Undisputedly rather admittedly, the assessee does not enjoy registration u/s.12AA of the Act and as per e return filed before the Bench, as per column 3, the assessee has shown receipt of income of Rs.97,10,521/- and as per column 4(i), amount applied during the previous year or expenditure incurred during the previous year as per revenue account was Rs.73,10,521/-. In absence of registration u/s.12AA of the Act, the assessee has to be treated as an AOP for the purpose of calculation of tax liability in the hands of the assessee. In this situation, as per normal accounting principles and keeping in view the preposition rendered by Indore Bench of ITAT in the case of Shri Vaishnav Polytechnic College Govern by VSK Market Tech Educational Society(supra), all incidental expenditure incurred by the assessee during the relevant financial period, wholly or exclusively for the purpose of marking or earning such income/receipts has to be allowed as per provisions of section 57(iii) of the Act and this legal provision has not been controverted by ld SR DR.”

5. Dy. Commissioner of Income Tax (Exemption), Bhopal Vs. Shri Vaishnav Polytechnic College Govn by VSK Market Tech Educational Society, MOG Lines, Indore

The relevant extract of the judgement is as under: 

“……Even for a while it is presumed that the assessee is not eligible for exemption u/s 10(23C)(iiiab) of the Act then also in view of the judgment of Hon’ble High Court of Delhi in the case of Petroleum Sports Promotion Board (supra) if the income is assessed under the residual head as the A.O denied exemption u/s 11 of the Act full play must be allowed to Section 57(iii) of the Act towards any expenditure incurred for the purpose of making or earning income.

11. In the instant case also the assessee society is a registered under the Madhya Pradesh Society Registration Act 1959 since 26.06.1962 with the sole purpose of establishing and running institution to impart technical education in Civil, Mechanical and Electrical and such other branches of Engineering. The assessee institute runs solely for educational purposes and not for the purpose of earning profits. Most of the grants are received from Government of Madhya Pradesh. Irrespective of the fact that the assessee is eligible for exemption u/s 10(23C)(iiiab) of the Act or not even if the revenue authorities wanted to tax receipts during the year as income under the head income from other sources, they were not justified in grossly denying the benefit of genuine claim of incidental expenditure of Rs. 7,27,11,645/- u/s 57(iii) of the Act being the expenditure (not been in the nature of capital expenditure) laid out by the assessee institution wholly or exclusively for the purpose of making or earning such income. We thus confirm the finding of Ld. CIT(A) to this effect and allow the claim of expenses of Rs.7,27,11,645/- u/s 57(iii) of the Act and dismiss revenue’s Ground No.3.”

4. Which ITR Form is applicable? ITR 5 or ITR-7?

4.1 As per Section 139(4A) of the Act, 

“ (4A)  Every person in receipt of income derived from property held under trust or other legal obligation wholly for charitable or religious purposes or in part only for such purposes, or of income being voluntary contributions referred to in sub-clause (iia) of clause (24) of section 2, shall, if the total income in respect of which he is assessable as a representative assessee (the total income for this purpose being computed under this Act without giving effect to the provisions of sections 11 and 12) exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be furnished under sub-section (1).”

4.2 Also, as per Rule 12 (1) (g) of the Income Tax Rules, 1962, 

“(g)  in the case of a person including a company whether or not registered under section 25 of the Companies Act, 1956 (1 of 1956), required to file a return under sub-section (4A) or sub-section (4B) or sub-section (4C) or sub-section (4D) 23[***] of section 139, be in Form No. ITR-7 and be verified in the manner indicated therein;”

4.3 Hence, the ITR form applicable for Unregistered Charitable/ religious trust/institution is ITR-7 and not ITR-5.  But there may be practical difficulties in using ITR-7 to file the return. After fling the return, the possibility of getting intimation notices under Section 143 (1) of the Act asking to pay tax at maximum marginal rate on gross receipts (disallowing expenditures) is very high. Against this, proper replies supported by case laws and documents can be submitted, and appeal provisions can be utilized if such circumstances arise.

5. Donation/ Voluntary Contribution Received is covered under Section 56(2)(x)?

The question arises as to whether donations/ voluntary contribution received is covered u/s 56(2)(x) (a)of the Income Tax Act.

5.1 As per Section 56 of the Act,

 “56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.”

 (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—

(i)

(ii)

…

…

“(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

  (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;”

The exception to the above is provided in the proviso to the said sub-clause (x) which says:

“ Provided that this clause shall not apply to any sum of money or any property received—

(I)………..

(II)………

…

…

(VII) from or by any trust or institution registered under section 12A or section 12AA or section 12AB; or ”

So, the exception of 56(2)(x) applies to trust or institution registered under section 12A or section 12AA or section 12AB. 

What about the trust/ institution not registered u/s 12A/12AA/12AB?

5.2 Let us check the income as per section 2 (24), which is an inclusive definition. As per Section 2(24):

“ (24) “income” includes—

  (i) 

 (ii) 

(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust.

…

…

…

(xviia) any sum of money or value of property referred to in clause (x) of sub-section (2) of section 56;”

So, Income includes voluntary contribution received by a trust created wholly or partly for charitable or religious purposes. 

5.3 Section 2(24) reveals the presence of clause (iia), encompassing voluntary contributions received by trusts or institutions. Simultaneously, another clause, (xviia), pertains to income under section 56(2)(x). Notably, (iia) contains a specific mention of trusts or institutions, but (xviia) lacks that. This distinction emphasizes the separate and special consideration accorded to voluntary contributions received by trusts or institutions within the definition of income. It aligns with the established legal principle that special provisions take precedence over general ones in governing a particular domain

In this scenario, can we say that receipt as intended in sec.56(2)(x) is different than in section 2(24)(iia)? The answer must be yes only. 

Hence, the trust or institution may receive money or any property etc. without consideration, and it is not covered u/s 56(2)(x). 

6. Corpus Donation/ Contribution is Income?

6.1 From para 5, above, as per Section 2(24)(iia), voluntary contribution received by trust created wholly or partly for charitable or religious purposes is income. 

Corpus donations are those donations received by trust/institution with a specific direction that the donation becomes part of the corpus/ capital of the trust, which shall be used only for that specific purpose.

For trusts registered under section 12A or section 12AA or section 12AB, exemption to corpus donation has been provided as per provision of section 11(1)(d). 

What about unregistered trusts/ institution?

6.2 There are many judicial pronouncements which confirms that corpus donations are capital receipts and not chargeable to tax.  Few of them are:

1. ITO v. Smt. Basanti Devi & Shri Chakhan Lal Garg Education Trust, ITA No. 5082/Del./2010 date 19.1.2011, Delhi Tribunal.
2. Director Income Tax v. Smt. Basanti Devi & Shri Chakhan Lal Garg Education Trust, ITA No. 927/2009 date 23.9.2009, Delhi Tribunal.
3. ITO v. Gudiya Granth Anuved Trust (2013) 28 ITR (Trib) 161 (Agra) (Trib).
4. Indian Society of Anaesthesiologists v. ITO (2014) 32 ITR (Trib) 152 (Chennai Trib).
5. ITO v. Vokkaligara Sangha (2015) 44 CCH 509 (Bang) (Trib)
6. Shri Shankar Bhagwan Estate v. ITO (1997) 61 ITD 196 (Cal. Trib).
7. Gaudiya Granth Anuved Trust v. Department of Income Tax, ITA No. 386/Agra/2012.
8. Pentafour Software Employees Welfare Foundation v. Asstt. CIT [I.T. Appeal Nos. 751 & 752 (Mds.) of 2007]
9. Shree Jain Swetamber Deharshar … vs Asst Cit Palghar Circle, Palghar,  ITA No.264/Mum/2016
10. Society for Integrated Development in Urban & Rural Areas v. Dy. CIT [2004] 90 ITD493 (Hyd)
11. ITO vs. Serum Institute of India Research Foundation, (2018) 195 TTJ 0820 (Pune), AY 2005-06
12. Bank of India Retired Employees Medical Assistance Trust vs. ITO (Exemption) (2018) 196 TTJ 0706 (Mumbai)-AY 2012-13
13. ITO vs. Gaudiya Granth Anuved Trust, (2014) 65 SOT 0137 (Agra) ((URO)) – AY 2007-08

However, there are few judgements which says that corpus donations are taxable for trusts not registered u/s 12A/ 12AA/12AB:

1. Ramsahaimal Sahuwala & Sons Charitable Trust Vs ACIT (ITAT Chennai) ITA No. 53 to 61/Chny/2023.
2.  Veeravel Trust in ITA No.2064/Chny/2019

6. Conclusions

From the points discussed above, the following are the conclusions:

6.1 Income for Unregistered Charitable/ religious trusts/ institutions have to computed under five heads of Income.

For eg, if the trust/ institution has business/ profession income, Income has to be computed under “Profits and Gains from Business or Profession”. 

The receipt of donations/ voluntary contributions is to be shown under the head, “Income from Other Sources. All expenditures for the purpose/ objectives of the trust are allowed as deductions including administrative expenses, relief/ charity provided as objective of the trust etc. Other provisions of the Act regarding disallowance of expenses etc. are applicable.

6.2 The trust is entitled to basic exemption limit and tax rate applicable is normal tax rates (as applicable to an individual assessee) instead of Maximum Marginal rate.

6.3 Income of the trust includes voluntary contributions as per Section 2(24)(iia) of the Act. But corpus donations do not constitute income.

6.4 Voluntary contributions (whether corpus donations or not) received are not covered under Section 56(2)(x).

Disclaimer: The views expressed herein are strictly personal. This document is intended solely for informational purposes and does not constitute professional advice or recommendations. The entire content of this document has been formulated based on relevant provisions and information available at the time of preparation. Although diligent efforts have been made to furnish authentic information, it is advised to seek a better understanding and obtain professional advice after a thorough examination of the specific situation. The author disclaims any liability for any loss or damage of any kind arising from the information in this article and any actions taken in reliance thereon.