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Income Tax Act for The Voluntary Sector

– A Study Report

Voluntary Action Network India (VANI)

Income Tax Act for the Voluntary Sector — A Study Report

Author: Voluntary Action Network India (VANI)

March 2016

Copyright © Voluntary Action Network India The content of this book can be reproduced in whole or in parts with due acknowledgement to the publisher.

Supported by: Bread for the World

Published by:Voluntary Action Network India (VANI)BB-5, Ist Floor, Greater Kailash Enclave-II, New Delhi 110 048Phone: 011-29228127, 29226632Telefax: 011-41435535E-mail: [email protected]: www.vaniindia.org

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Voluntary Action Network India (VANI)BB-5, Ist Floor, Greater Kailash Enclave-II,

New Delhi - 110 048 (INDIA)Phone: 011-29228127/6632, Telefax: 011-41435535

E-mail: [email protected] Website: www.vaniindia.org

Voluntary Action Network India (VANI)3

CONTENTSAcknoledgement................................................................................................................. 03Preface................................................................................................................................. 04

CHAPTER 1Overview of Taxation in India.......................................................................... 08

CHAPTER 2Income of Voluntary Organizations and its Relative Computation.................. 11

CHAPTER 3Project Grants................................................................................................. 14

CHAPTER 4Voluntary Contributions................................................................................... 18

CHAPTER 5Examination of Utilization and Accumulation Through Exemption.................. 20

CHAPTER 6Charitable Purposes........................................................................................ 24

CHAPTER 7Business Activity Under Section 2(15)............................................................. 28

CHAPTER 8Service Tax on Voluntary Organizations.......................................................... 32

CHAPTER 9Examining Section 10(23AC).......................................................................... 36

CHAPTER 10Examining Section 80G................................................................................... 39

CHAPTER 11Registration of VOs Under Income Tax for Claiming Exemption..................... 47

CHAPTER 12Examining Section 35(AC).............................................................................. 49

CHAPTER 13Comparative Analysis of Taxation Regimes in Different Countries................. 52

CHAPTER 14Petitions by VANI to Finance Ministry............................................................. 58

CHAPTER 15Analysis and Recommendations for Improving the Income Tax Act.............. 65

References......................................................................................................................... 68


In the completion of this study report, we would like to acknowledge the academic contribution of Mr. Sanjay Patra,FMSF, Mr. Noshir Dadrawala, Center for Advancement of Philanthropy , Mr. Shivakumar, Gandhigram Trust, Ms.Benedicte Hermelin, Coordination SUD, Mr. Mark Sidel, ICNL, Mr. Aoi Horuchi, JANIC, Mr. Kazuho Tsuchiya,Japan NGO Center, Burkhard Gnärig and Miriam Niehaus International Civil Society Center, Germany.

Regards,

VANI Team


An array of social infirmities exists in India, requiring focused attention in inhibiting their effects through targetedpublic policies. Acting as the direct interfaces with the people and partnering with the Government of India, voluntaryorganizations have been crucial in being change makers in the template of social development. Functioning in serviceprovision and right based advocacy from populated urban centers to lowest denominations of rural areas in India,voluntary organizations/ non-profit entities or non-governmental organizations are steadily increasing their role inimplementing social programs which assuage social blockages and congestions and provide uniform pattern ofinclusive development. However implementing social programs crafted to provide support to people do not carrythe required fiscal and legal environment for non-profit organizations need. One of the most contested issues in thefiscal framework that many voluntary organizations face trouble with is the provisions of Income Tax governingthem. The Income Tax for the voluntary sector has been deluged by numerous issues that have sought to createproblems for many organizations falling under its fiscal ambit.

The non-existence of specific definitions concerning voluntary organizations or NGOs has raked a multitude ofconcerns and problems when assessed by the Income Tax Act. Similarly associated with them are issues hoveringthat stymie the potential of the sector by placing conditions debilitating for many grassroot organizations (for examplesection 2(15) earnings to 20% of Total receipts). The voluntary sector has steadily advocated for reforms in the Actthat are regarded to deliver justice and equally provide a rational basis for impetus to their social developmentoperations. On the basis of these concerns, VANI conducted a study on the provisions of the Income Tax thatimmediately required intervention from the government and the voluntary sector alike. Through its study it was feltthat there were areas within the Act that needed renovation and accordingly design an approach that would prove toa toolkit for the voluntary sector to be informed over this issue. This study therefore emphasizes of certain segmentswhich need academic and practical understanding of concepts and the position of voluntary organizations under thelense of Income Tax. Thereforethis study more importantly is presented from the perspective of civil society and thevoluntary sector for the enlightenment of multiple stakeholders.

I would like to extend my gratefulness for our fraternal national platforms and international organizations such asCoordination SUD, ICNL, JANIC, International Civil Society Center Berlin, for providing us case laws of theirprevailing taxation systems for non-profit sector. I would also thank VANI’s expert committee who reviewed andprovided inputs in making this study more enriched. I also extend my thanks to Mr. Arjun Phillips for the overallresearch and preparation of the study and to the staff of VANI involved in its compilation. We earnestly hope thatthe study will cater to your requirements in understanding and comprehending the applicability and functioning ofIncome Tax applicable for Voluntary Organizations.

Best Regards

Harsh JaitliChief Executive Officer


The primary task of the study is to reveal the essence of the IT Act, which has till yet remained confined to theknowledge of financial experts and remained ambiguous to the understanding of those not from non-financebackgrounds. The study will focus to-

• Simplifying in understanding the Act through selected provisions

• Chart out the applicability of taxation on the kind of income

• Detail how taxation works by elaborating on the practical application of the act

• Comparing taxation practices of the voluntary sector of different countries

• Establish the blueprint for evolving a model policy for taxation

The study on Income Tax is undertaken to amalgamate various issues and highlight the operational problemsvoluntary organizations face when working within the legal taxation framework. The Indian voluntary sector ismultifarious and variegated and its vastness is exhibited by the magnitude of social work rendered by the countlessorganizations working on different thematic issues.

The Income tax Act has laid down specified provisions for voluntary organizations and regulates them accordingly.It has been observed that many voluntary organizations grapple in understanding clauses and sections of IncomeTax Act and hence are prone to harassment. During numerous consultations and workshops of VANI, organizationshave raised queries on the technical know-how of the Act and therefore a need was

With this study, the aim is to educate organizations on the fundamental concepts of Income Tax applicable onvoluntary organizations and explore the legal implications associated with it. The study essentially caters toknowledge addition with regards to the operability of the Act and can be used as a handbook for understanding theminutest sections.

The various tools for conducting the study-

Desk Research- The study is completed using primary data accomplished by detailed analysis, through extensivereading and compilation from different sources.

Interviews- Expert opinions were solicited from different financial experts.

Comparative Analysis- In designing the best practices, information was solicited from various international voluntarysector conglomerates to provide the prevailing taxation regimes and its effect on their respective voluntary sector intheir countries.

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The study as pointed above can be used as a handbook in understanding the overall architecture of the taxationregime and its effect on the voluntary sector. It was felt that numerous manuals present on taxation were not sufficientin providing a starting point for inquiring into how the act works. Overlap by many provisions and clauses thatroutinely applied somewhere or the other, confusion pervaded organizations on how and when the provisions ofIncome Tax came to apply.

To clearly provide a structure, the study focuses on the genesis of income and its treatment and proceeds to examinewhat is taxable and what is exempt. It then also conducts an examination of the exemptions that are commonly usedby organizations. Through this method organizations will be at ease in surveying through the Act as the studyempathizes with their concerns. For convenience we have segmented the study into three parts-

1) Analyzing the sources of funds in light of the IT Act- Tracing the different sources of funds to organizations,their income from project grants and voluntary contributions whether they are exposed or exempt to taxation.These chapters are written to enhance the reader’s understanding of how the Income Tax views income from theperspective of the voluntary sector.

2) Determining Business Activity - These chapters discuss how Section 2(15) and its defining features placevoluntary organizations as charitable trusts and subsequently deal in giving them exemptions through certainconditions.

3) Analysis of various exemptions voluntary organizations can avail- Subsequent chapters deal with the differentexemptions listed in the Income Tax Act.


CHAPTER 1

Considered to be one of the main instruments of financing a government’s treasury, taxation as a system has been inexistence since ancient times. Its evolution has undergone seminal changes which have endorsed it to be a key driverfor providing economic growth, efficiency and stability. Taxation as a policy reflects the government’s ideology andthe relative economic and political objectives. It ensures economic sufficiency and self-reliance and equips the statewith fiscal resilience. Passing through various stages of development combined with expansion of industries andcommerce, taxes have similarly undergone alterations in its modus operandi, with its usages aiding in modernizationand development.

The first recorded mention of taxation in India is found in Kautilya’s ‘Arthshastra’ and the Hindu code of‘Manusmriti’. Manu in his treatise on society appointed the sovereign to be the appropriator of all taxes which hadto be charged according to the professions of the subjects. While Kautilya’s magnum opus on public finance andeconomics proposed a sophisticated state like apparatus, which levied and collected taxes within a specified timeframe for subsequent utilization in militaristic expansion of the Maurya Empire. Similarly the Mughal era also sawtaxation systems such as khiraj or Dahsala levied on the populace to supplement the state revenues. It was only whenthe British Empire established control over the territories of India, did taxation based on Income’s commenced.

The Income Tax Act of 1860 proved to be the first modern act for collecting taxes, as it was uniformly implementedall over India following the financial setback received by the Imperial Government of Britain during the 1857 mutiny.The duration period of this act was limited to five years as its computation was arbitrary, according to differentincome heads, which were strenuously burdensome leading to its ineptitude in tax collection. It eventually led to itsrepeal and in 1921, the Government constituted. All India Income Tax Committee and on the basis of recommendationof this committee a new Act (Act XI of 1922) was enacted. This Act is a landmark in the history of Indian IncomeTax system. This Act made income tax a central subject by shifting the tax administration from the ProvincialGovernments to the Central Government. The organizational history of the Income-tax Department starts in theyear 1922. The Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-taxauthorities. The foundation of a proper system of administration was thus laid. In 1924, Central Board of RevenueAct constituted the Board as a statutory body with functional responsibilities for the administration of the Income-tax Act. Commissioners of Income- tax were appointed separately for each province and Assistant Commissionersand Income-tax Officers were provided under their control.1

The Indian Income tax Act continued its tenure as the charging authority for direct taxation in post-independentIndia. Since then numerous amendments came and went transfiguring its statutes from being a colonial legislationto the modern form enacted by the Parliament.

Containing complexities with regards to amendments altering and confusing its ramifications, the Government ofIndia referred to the Law Commission in 1956 to streamline the legislation according to the needs of the Post-worldwar India. In 1958, latter amendments in the act resulted in its ultimate replacement by the Income tax Act of 1961.

The Income Tax Act 1961 has been brought into force with 1 April 1962.It applies to the whole of India and Sikkim(including Jammu and Kashmir). Over the years the act has seen numerous amendments in its structure and provisionswhich are contained in the Finance Bills proposed in both houses. Following its enactment other amendments have

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also made forays in changing itsstructure such as Taxation LawsAmendment Act 1984, Direct TaxesAmendment Act 1987, Direct TaxesLaw (Amendment) Acts of 1988and 1989, Direct Taxes Law(Second Amendment) Act 1989 andat last the Taxation Law(Amendment) Act 1991.

For long it was thought that theprevailing Income Tax Act of 1961,be replaced by the Direct TaxesCode (DTC) but the governmentquashed the impasse when itretracted from implementing it onIndian taxation system hasundergone tremendous reformsduring the last decade. The tax rateshave been rationalized and tax lawshave been simplified resulting inbetter compliance, ease of taxpayment and better enforcement.The process of rationalization of taxadministration is ongoing in India.

Direct Tax Code, 2009

The Direct Taxes Code Bill, 2010, introduced in Lok Sabha71 on 30August, 2010 with the objective of simplifying and rationalizing thedirect taxation regime in India. Although the proposed code simplifiestaxation for corporate and individual tax payers, it reverses this wherethe voluntary sector is concerned• The proposed code wanted to replace the term ‘charitable

purpose’ with ‘permitted welfare activities’.• The current provision of 15% indefinite accumulation of income

by non-profits has been withdrawn in this bill.• Carrying forward of unspent balance to the next financial year will

not be allowed. The revised bill states that 90% of gross receiptsor 85% of income received in a year must be spent during thesame year.

• The provision of taxing the entire net worth at the rate of 30% ifthe voluntary organisations do not have any activities

• For the last few years many voluntary organisations are involvedin raising funds locally by either producing greeting cards, whichare also means to spread social development message, orcharging nominal user fees to provide sustainability to the localinitiatives. Under the proposed DTC bill all these activities arecategorized as business activities and will be taxable

Administrative Structure and authorities pertinent to Income TaxThe provisions relating to the institutions and entities entitled to exemption under the direct tax lawsare administered mainly by Director General of Income Tax (Exemption) and the Directorates headedby 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 andBangalore. In places not covered under the jurisdiction of aforesaid seven Directorates, the saidprovisions are administered by the territorial Commissioners of Income Tax (CsIT).

The hierarchy of central government authorities dealing with charitable and religious trusts andinstitutions 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).


Voluntary Organizations are associations working on aspecific social agenda, with an aim to provide tangible benefitsto society at large relatively based on a non- profit system. Thevoluntary sector in India is magnanimous and diverse, as itstretches over a number of thematic areas, creativelyinnovating social panaceas for alleviating societal constraints.Voluntary organizations therefore contribute substantiallytowards development as they are involved in charitable effortsto promote social equity.

The Act defines voluntary organizations according to the“charitable work” clause which further states that thoseorganizations involved in relief for the poor, education,medical relief, and the advancement of any objects of generalpublic utility not involving any activity for profit.

The income tax laws applicable for voluntary organizationsalso contain provisions which allow for exemptions andbuilding their corpus funds. In general these laws promotegiving to the voluntary sector. Only a few select institutionscan avail exemptions from being taxed under the section 10(23C) on the grounds that their activities are of importance toa state or the nation. The Income tax act under 80G and 35ACprovides incentives to donors to provide resources tovoluntary organizations doing “charitable work”. In the caseof 80G the donor gets 50 per cent exemption from income taxand in the case of 35 AC they get full exemption from incometax amount that they give to projects that are deemed to servethe interests of the poor.2

However the provisions dealing with voluntary organizationsare obsolete as the term “charitable work” has remained inert since the Income Tax Act of 1922.

Non-Governmental Organizations (NGOs),whether public trusts, associations, or othernon-profit entities (including non-profitcompanies), perform a vital role insupplementing governmental efforts inpromoting economic development andsocial welfare. There is a need for suchorganizations not only because theresources at the command of thegovernment are insufficient relative to need,but also because of their outreach and thewealth of local knowledge they possess, allof which can fruitfully be utilized for thebenefit of society. NGOs exist in allcountries, whether developed or developing.Tax administrations the world over recognizevoluntary effort and provide incentives togenuine charitable organizations. Mostoften, this is done by either partially or fullyexempting their incomes from tax, and alsoby providing tax incentives to donors in orderto encourage them to contribute resourcesto such organizations. The Indian IncomeTax Act, 1961too incorporates several provisions toextend tax breaks and incentives to suchorganizations as well as to their donors.

Clauses defining Voluntary Organizations in the Income Tax Act1

Terms defining Voluntary Organizations according to Income Tax Act

Provisions and Clauses

1. Charitable Purpose

2. Claiming exemption for non-profit activities

3. Income

1. Section 2(15) of the Income tax Act

2. Section 11 of the Income tax Act and

Form 10A

3. Section 11, 12, 2(24)(ii a)

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CHAPTER 2

Income can be defined as the money that an individual, business or an organization receives in exchange for providinga good or service or through investing capital. Income is consumed to fuel day-to-day expenditures.

Framework for the Preparation and Presentation of Financial Statements issued by the Institute of CharteredAccountants of India (ICAI) defines income as follows:

“Income is increase in economic benefits during the accounting period in the form of inflows or enhancements ofassets or decreases of liabilities that result in increases in equity, other than those relating to contributions fromequity participants.”Income tax is defined as Annual charge levied on both earned income (wages, salaries, commission) and unearnedincome (dividends, interest, rents). In addition to financing a government's operations, progressive income taxationis designed to distribute wealth more evenly in a population, and to serve as automatic fiscal stabilizer to cushionthe effects of economic cycles

What forms the taxable income for voluntary organizations has been a question of concern for many engaged in theNGO sector. To examine the taxable income we will first have to visit the provisions of Section 11(1) to get a startingpoint for originating the income tax.

11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total incomeof the previous year of the person in receipt of the income.

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to whichthe income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;

(b) income derived from property held under trust in part only for such purposes, the trust having been createdbefore the commencement of this Act, to the extent to which such income is applied to such purposes in India;and, where any such income is finally set apart for application to such purposes in India, to the extent to whichthe income so set apart is not in excess of fifteen per cent of the income from such property;

(c) income derived from property held under trust—

The very first examination of Income tax should begin with income and how it boils to the technical interpretationof what constitutes real and total income for a voluntary organization. ‘What is taxable and what is not’, ‘whichlaws are applicable and which are not’ have been an urging questions that needs clarification through the lensof the clauses governing them.


(i) created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote internationalwelfare in which India is interested, to the extent to which such income is applied to such purposes outsideIndia, and

(ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which suchincome is applied to such purposes outside India: Provided that the Board, by general or special order, hasdirected in either case that it shall not be included in the total income of the person in receipt of such income;

(d) Income in the form of voluntary contributions made with a specific direction that they shall form part of thecorpus of the trust or institution.

From the above given act, it becomes clear that that the following cannot form the taxable base for income tax.

Then how is Taxable Income computed? Taxable Income is computed on the basis of the previous year comparativeto the rates of the Assessment year which is known as the Total Income. Therefore total income forms the base forIncome Tax.

For the purpose of computing total income and charging tax thereon, income from various sources is classified underthe following heads:

Salaries

Income from House Property

Profits and Gains of business or profession

Capital Gains

Income from Other Sources

However in our analysis we will observe that there seems to be clash in the usages of the definition of ‘total income’.This section of 11(1) was seen in conflict with Section 2(45) which states-

"total income" means the total amount of income referred to in section 5, computed in the manner laid downin this Act;

There is contestation regarding ‘total income’ as it overlaps with the Section 2, clause 45 of the Income Tax Act.“Total Income” mentioned in the Section 11 (1) (a) does not mean actual total income as illustrated above but asdefined according to Section 5, which states Scope of total income.

5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a residentincludes all income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or(c) accrues or arises to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6)* ofsection 6, the income which accrues or arises to him outside India shall not be so included unless it is derivedfrom a business controlled in or a profession set up in India.

A clarification by the Central Board of Direct Taxes regarding the differentiation between income and Total incomein its Board Circular No. 5 LXX-6, dated 19-6-1968 stated “Section 11 (1) provides that subject to the provisions ofsections 60 to 63, the following income shall not be included in the total income of the previous year…the referenceto income is invariably to ‘Income’ and not to ‘total income’. The expression ‘total income’ has been specificallydefined in section 2 (45)…It would accordingly be incorrect to assign to the word ‘income’ used in section 11(1)(a), the same meaning as has been specifically assigned to the expression ‘total income’ vide section 2 (45).”

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“Total income” means the total amount of income referred to in Section 5 and for the purposes of Section 11 (1) (a),which deals with the income from property held under trust. Hence the term ‘income’ should not be assigned themeaning of the term ‘total income’. The intention of the government is to treat income in a more commercial, generaland popular sense rather than giving it a technical meaning, The circular was explicit in stating that for the purposesof Section 11(1), the income should be the real income at the disposal of the organization, inspite of the factthat as per the definition of total income under section 2(45) many items could be included in the incomethough they are not available for application. For example tax deducted at source may form a part of the totalincome but in reality it is not available for application. The total income under section 2 (45) is artificially computedas per the provisions and may be actually different from actual income.3

Judicial Rulings in favor of not treating “total income” as real income2

Rulings Observances

CIT vs Jayshree Trust[1986] 159 ITR 280

CIT vs Birla Janahit Trust [1990] 208 ITR 372

CIT vs Rao Bahadur Calavala Cunnan ChettyCharities [1982] 135 ITR 485

Section 11 limited to real income of thecharitable organization Using the word “total income” in Sec-tion 11 in a commercial senseTotal Income referred to net incomeafter deductions

It is noteworthy that the definition, although very wide in scope, is stillonly an inclusive one, and not exhaustive or exclusive. In other words,in addition to the things specifically mentioned under Section 2(24),such other things which the word signifies in natural or common usagewill also fall within the meaning of “income”. Further, the concept ofincome in the case of a religious or charitable trust or institution differsfrom the concept of income in the case of other assesse organizationsunder the income tax law in one very significant respect. Under Section 2(24) (iia) of the Act, voluntary contributions (donations)received by these entities from their donors are to be taken as theirincome. This provision applies equally to a trust or institution whichwas created or established only partly for religious or charitablepurposes. The Act deals with such voluntary contributions which aredeemed to be the income of the trust or institutions under clause (iia) ofSection 2(24) primarily in three ways.• Firstly, anonymous contributions (if any) out of these are dealt with

in the manner provided under Section 13(7) and 115BBC asdescribed in the Para-5.4 below.

• Secondly, voluntary contributions which are in the nature of corpusdonations are eligible for unconditional exemption (i.e., rules regarding the extent of application or accumulationof income do not apply to corpus donations) under Section 11(1)(d).

• Thirdly, voluntary contributions which are neither anonymous nor corpus donations are eligible for exemptionunder the other provisions of Section 11, subject to fulfilment of conditions specified therein.*

Filing of Return

A charitable or religious trust orinstitution is mandatorily required tofile a return of income under Section139(4A) if its income without givingeffect to the provisions of Sections11 and 12 exceeds the maximumamount not chargeable to income-tax. In other words, such a trust orinstitution must file a return ofincome if it has taxable income forthe year before claiming exemptionunder Sections 11 and 12. Thereport of the auditor in Form 10Bmentioned in Para-4.6 has to befiled along with the return.


CHAPTER 3

Most voluntary organizations rely on raising resources through either fees from services or sale of products, Donationsfrom public, Grants from Government or donor agencies. Some organisations also receive income from assets (suchas land or buildings) or investments. Of these sources, grants form a major source of funds for most NGOs. Grantsmay be project grants, capital grants or core-support grant.4

There is bountiful amount of confusion pertaining to the treatment of project grants as taxable or not. In this chapterwe will seek to understand project grants so as to ease the elusiveness surrounding its nature.

In brief, project grants are non-voluntary contributions, which are funded by a donor for a predetermined objectiveto be fulfilled by an organization.

It has to be clear that that Section 12(1) of the Income tax Act clearly indicates voluntary contributions are consideredto be income for the purpose of Section 11

12. (1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by aninstitution established wholly for such purposes (not being contributions made with a specific direction that theyshall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be incomederived from property held under trust wholly for charitable or religious purposes and the provisions of that sectionand section 13 shall apply accordingly.

However it must be noted that grants received for a specific purpose are not within the gamut of taxation. Projectgrants as observed in the Nirmal Agricultural Society vs ITO[1999] 71 ITD 152 (Hyd)“…received from a foreign donor were for specific purposes and did not belong to the assesse society; as they did

not from the corpus of the assesse or its income” An analysis of the ruling will reveal that the grant received from the donor will not be computed in the income.Further expenses borne, independent of the project grants will be deducted as revenue expenses.

The reason for the exclusion of project grants is due to the fact that voluntary contributions are unrestricted forapplication to the assesse organizations as they do not carry any stipulation, thereby giving the assesse organizationthe discretionary powers of utilization. But in the case of project grants a specific instruction is attached by thedonor which makes it exempt from taxation.

In invoking the observation made in the Nirmal Agricultural Society vs ITO [1999] 71 ITD 152 (Hyd) It is importantto note that when the assesse organizations receives tied up grants or specific contribution it is not entitled to freely

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The reliance on foreign funding from donors foreign donors is a well-known issue that has resulted in manyinquiring to its place within the ambit of the Income Tax Act. ‘Foreign funds’ to organizations are defined by theterminology of Project Grants, as they are specifically intended for purpose as stated by the donor. The followingchapter inspects the clauses and definition of Project Grants and its utility in the Act.


dispose it and therefore acts as a ‘trustee’ of aspecial fund granted by the donor, which cannot beamalgamated with the income or the normal corpus.

Reiterating the same, in Sukhdeo Charity vs CIT[1984] 149 ITR 470; it was discussed that if thedonor has a motive behind his grant, then thatcannot be considered as voluntary in nature. Sincethe term voluntary comes to mean an obligation onthe part of a donor to contribute towards the assesseorganization’s own usages. The distinguishing factorbetween voluntary contribution and project grant isthe ‘letter of intent/instruction issued by the donorto the assesse organization, which lay’s the basis thatthe amount so received is not a voluntarycontribution. As observed in the judgment-

“The word voluntary in its very inception connotesthe absence of any obligation on the part of thedonor. The intention of the donor in such voluntarycontribution is either specific, i.e. with instructionsto use the amount for specific purpose or it may begathered from the facts and circumstances or thecorrespondence, if any, in the matter.”

It has been held in various courts that project grants should not be treated as voluntary contribution and therefore,cannot be treated as income. In a recent case, the Delhi High Court reaffirmed that any grant with specific directionfrom the donor cannot be treated as income, DIT v. Society for Development Alternatives [2012] 18 Taxmann.com364 (Delhi). In this case, the assesse organization had received grants for specific purposes/projects from thegovernment, non-government, foreign institutions etc. These grants were to be spent as per the terms and conditionsof the project grant. The amount, which remained unspent at the end of the year got spilled over to the next year andwas treated as unspent grant. It was held that the unspent grant being a legal obligation/liability cannot be treated asvoluntary contribution subject to the provision of utilisation and application as per the Income Tax Act.5

Project grants and restricted funds shall not be treated as service. However, if the grant agreement has any clausewhere any benefit or business value is going back to the donor, then it shall be treated as a taxable service. Someexample of such benefit could be as under:(i) If the donor puts a clause that the implementing organisation has to display its logo or name at the places of

activity, then it could be considered as a taxable service.

When Project Grants was Treated as Taxable

In The Little Tradition v. Deputy Director of Income-tax(Exemption), Trust Circle-IV [2009] 119 ITD 127(DELHI), it was held that a project grant for specificactivities shall be treated as voluntary contribution. TheTribunal was of the opinion that the donor was notexpecting anything in return and the grant was also nottowards the corpus. Therefore, even if it was for specificpurposes, it should be treated as voluntary contribution.The tribunal relied on two High Court cases, TheNational Institute Of Immunology vs MunicipalCorporation of Delhi, AIR 2002 Delhi 192, 96 (2002)DLT 41 and Commissioner of Income tax, Bombay City-IV v. Gem & Jewellery Export Promotion Council,(1983) 143 ITR 579. The Delhi Tribunal in The LittleTradition supra held that such project grants are subjectto 85% application of funds and should be consideredas voluntary contributions chargeable to tax as incomeof the assesse organization within the meaning ofsection 2(24)(iia) of the Act.

There is a need to have clarity on whether grants with specified instructions fall into the purviewof service tax, apart from Income Tax as this has implications for the many voluntaryorganizations.

– Subhash Mittal, Socio Research and Reform Foundation


(ii) If the implementing organisation is conducting some research, survey or activity in which the donor is interestedand the implementing organisation is under obligation to provide certain specified output to the donor, thenthe service can be considered as taxable service. For example, if the donor keeps a condition that theimplementing organisation shall provide activity report or utilisation statements, then it will not be treated astaxable service. However, if the donor keeps a condition that the implementing organisation shall provide.

(iii) specific data or specific research report as an outcome of the activity, then it will be treated as a taxable service.

The problem for organizations arises when they have to utilize 85 % of their grant in a year. In compliance withSection 11 of the Income Tax Act, project grants have to be shown as income. If the donor credits an amount whichhas to be spent over three years with a stipulated condition, an organization faces contradiction with the donor’sintention of utilization and Section 11 of Income Tax Act. The organization has to accumulate the income under section 11(2) to be spent in next 5 years. There is no legalnecessity for invoking section 11(2) when the grant by virtue of the project agreement was not available to theorganization for utilization.The organization has to be cognizant that the grant made it to it has to be utilized according to the intentstated by the donor. No discretion can be entertained by the organization in utilizing it for its own purposes.

SECTION 11(2)

11 (2) if, in the previous year, the income applied to charitable or religious purposes in India falls shortof eighty-five per cent of the income derived during that year from property held under trust, or, asthe case may be, held under trust in part, by any amount—(i) for the reason that the whole or any part of the income has not been received during that year, or(ii) for any other reason,

then—(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India

during the previous year in which the income is received or during the previous year immediatelyfollowing as does not exceed the said amount, and

(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in Indiaduring the previous year immediately following the previous year in which the income was derivedas does not exceed the said amount,

may, at the option of the person in receipt of the income 87[(such option to be exercised in writingbefore the expiry of the time allowed under sub-section (1) of section 139 for furnishing the returnof income)] be deemed to be income applied to such purposes during the previous year in whichthe income was derived;

and the income so deemed to have been applied shall not be taken into account in calculating theamount of income applied to such purposes, in the case referred to in sub-clause (i) during the previous year in which the income is received or during the previous year immediately

following, as the case may be, and, in the case referred to in sub-clause(ii) during the previous year immediately following the previous year in which the income was

derived.

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Further it is important for the organization tomaintain a separate donor account from whichapplication to projects has to be compiled with.

It is extremely important for an organization to stickto the letter of intent delivered by the donor as it isa valid proof for the organization in differentiatinga project grant from a voluntary contribution.

Grant-in-aid, are in nature voluntary contributionsand hence cannot be considered to be project grants.Yet again no specification of the grant-in-aid by thedonor results in bringing it under the purview ofSection 12(1). Grants-in-aid are also computed in income tax when funded by the government to voluntaryorganizations.

The observation made by the Bombay High Court’s ruling rested on the fact that the grant made by any donor, waspurely for the purpose of enabling a ‘charitable organization’ to carry on with their charitable activities*. The natureof the grant does not demand that the donor receives a return for utilization by an organization. Voluntary contributionswill be discussed in detail in the next chapter.

The Income Tax Act, does not define the meaningof corpus but it is understood as the capital of theorganizations. According to Section 11 (1) (d)voluntary contributions received towards the corpuswith a specified direction shall be treated as thecorpus of the organization and shall not be includedin the total income.

Corpus donation’s omission from originates fromthe specified direction that it entails with it. Asexplained with regard to project grants,contributions towards the corpus cannot be appliedto discretionary uses by the organization.

As such for the purposes of claiming an exemptionthe organization has to provide a written directionfrom the donor, after which its treatment will not be seen in contxt of income of the organization.

The CIT v. Eternal Science of Man’s Society [1981] 128 ITR 456 (Delhi), observed that an organization in receiptof corpus donation cannot have its donation be designated as Income and hence was outside the ambit of Section 12.


CHAPTER 4

Voluntary Contributions constitute the contributions received by an organization by a donor who has not attached aspecified condition as to the utilization. Organizations, receive donations from public and individuals and hencehave no stipulations attached in their application.

As per section 2(24)(iia) of the Income Tax Act’1961voluntary contributions received by a trust or institutionexisting for charitable purposes is the income of the trust orinstitution6

2(24) (ii a) voluntary contributions received by a trustcreated wholly or partly for charitable or religious purposesor by an institution established wholly or partly for suchpurposes 8 or by an association or institution referred to inclause (21) or clause (23), or by a fund or trust or institutionreferred to in subclause (iv) or sub- clause (v) of clause(23C) of section 10] Explanation.—For the purposes of thissub-clause, "trust" includes any other legal obligation ;

12. (1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by aninstitution established wholly for such purposes (not being contributions made with a specific direction that theyshall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income.

Section 12(1) clearly mentions that voluntary contributions will be treated as income of the assesse organization.Voluntary contributions, by their nature are do not fall in the category of ‘income’, unlike other incomes.7

At the same it is necessary to invoke Section 11(1)(d) of the Income tax Act which states that voluntary contributionswith a specific direction forming a part of the corpus of the trust or institution shall not be computed in the totalincome.

11(1)(d)- income in the form of voluntary contributions made with a specific direction that they shall form part ofthe corpus of the trust or institution.]

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As seen in the previous chapter of Project Grants, Voluntary Contributions also have a similarity when theyhave a condition attached to them. In this chapter voluntary contributions and the defining acts are discussedat length with the clauses that overlap with each other ultimately bringing the clarity in its placement in the Act.


Section 12(1), makes it clear that voluntary contributions received by an organization shall accordingly be treated asincome accruing from its property. With the insertion of section 2 (24) (ii a), voluntary contributions are now broughtunder the scope of income. A circular was issued by the CBDT juxtaposed to this clause which considered thevoluntary contributions as income.

Prior to 1-4-1973, voluntary contributions were out of the ambit of income computation accruing for assesseorganizations. When we look at the concept of income voluntary contributions are more akin to a gift than income,Hence it is important to note that voluntary payments attached with considerations is not income. Hence voluntarycontributions constitute to be deemed income only when they overlap within the scope of Section 2(24) (ii a) andSection 12 (1).

In the Chairman, Andhra Pradesh Welfare Fund v. CIT[1983] 143 ITR 82, the court held that no part of the voluntarycontribution could be used for non-charitable purposes as they will lose the entire benefit of being exempt from tax.Hence their application has to be only for the stated objectives of the organization.

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CHAPTER 5

The monetary relief granted to an individual or organization from excluding a certain portion of income from thetaxable income is known as exemption

Voluntary organizations are granted exemption dueto their nature of being charitable or religiousorganizations. Due to their involvement in publicservice to society, the Income Tax Act grants themexemption from the taxable income.

However when exemption is sought, Section 11 ofthe Income Tax comes into force as the defininghead under which organizations can claimexemptions. Its listing provides the list of incomeswhich shall not be included when computing thetotal income of the organization for the purposes ofcharging taxes.

The conditions are given as follows-

i) The organization should be existing for the sole purpose of the public benefit, which can either be religious orcharitable

ii) The organization should refrain from indulging in business activity unless such activities are incidental to theattainment of the objectives of the organizations and it should maintain a separate book of accounts for suchactivities.

iii) The organization has to apply at least 85% of its income every year for charitable or religious purposes.

iv) If the organization is unable to apply at least 85% of its income where the income has accrued but receivedthen the organization can apply the income immediately in the succeeding year.

v) If the organization cannot apply 85% of its income for reasons stated by it, then it can exercise the option ofapplying the income in the immediate succeeding year.

vi) If the organization cannot apply 85% of its income then it has the option of accumulating the portion of incomewhich could not be applied for stated purposes.

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An important part of the Income Tax Act is the exemptions and how voluntary organizations can avail them.However the provision of section 11 of the Act, gives the point of reference for an organization to conductutilization and obtain requisite exemptions if the organization satisfies certain conditions. The chapter will helpthe reader in understanding those conditions for both utilization and exemption.


vii) The accumulated income then has to be applied within the next 5 years, which failing to do so will be taxable.

viii) The accumulated income then has to be applied only for the purposes it was accumulated for

ix) The organization has to be registered with the CIT under Section 12A.

Section 11, as mentioned before is the locus standi of how exemption can be claimed by an organization with thegiven set of conditionality’s attached to its clause. The following points elaborate clause wise description of theconditions associated with Section 11

This provision clearly mentions thatincome will not be subjected to a tax chargeif the organization has applied its utilizationin India only. Further reading of the Section11(1), points that the organization will beallowed to accumulate 15% of the incomeas retained income and will not be underany compulsion to apply it. It is to be notedthat the provision of ‘15% accumulation’was inserted w.e.f from financial year 2002-03. Earlier an organization could retain 25%of the income and had to utilize 75% of theincome for utilization.

Further the provision of 85% utilizationshall account voluntary contributions butnot voluntary contributions made with a specific direction towards the corpus.

Section 11(a) and 11(b) also give the liberty to an organization to apply 15% in excess of their income. Under Section11(2), an organization can accumulate income in excess of 15% only after a consent has been provided by theAssessing Officer and accordingly the accumulations will have to be applied for charitable purposes within a period of 5 years.

11. (1)(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent towhich such income is applied to such purposes in India; and, where any such income is accumulated or set apart forapplication to such purposes in India, to the extent to which the income so accumulated or set apart is not in excessof fifteen per cent of the income from such property;

As discussed above, the organization has facility of retaining 15% of accumulation by not applying them for charitablepurposes minus the time period. This means that the organizations can accumulate their income indefinitely.

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The Income Tax Act gives an option to organization to apply their income succeeding years if they are unable toapply them in the year of receipt.

NGOs often enter into multi-year agreements with donor agencies. These may run for 3-5 or even more years. Insome cases, the donor agency may disburse the full project-funding in the first year itself. The Income Tax Act allowsNGOs to accumulate such income for a particular project. They can spend it over the next five years or less. For thispurpose, the NGO must pass a resolution. It should also fill up form 10. Both should be filed along with the IncomeTax return.8

An organization has to fill Form 10 with an application to the Assessing Officer before the prescribed time limitstated by Section 139 (1).

As mentioned, certain organizations fail to utilize 85% of their income owing to non-receipt in the previous year orfor other reasons that may be cited.

Section 11 (2) if, in the previous year, the income applied to charitable or religious purposes in India falls short ofeighty-five per cent of the income derived during that year from property held under trust, or, as the case may be,held under trust in part, by any amount—

(i) for the reason that the whole or any part of the income has not been received during that year, or

(ii) for any other reason,

then—

(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during theprevious year in which the income is received or during the previous year immediately following as does notexceed the said amount, and

(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during theprevious year immediately following the previous year in which the income was derived as does not exceed thesaid amount,

may, at the option of the person in receipt of the income 87[(such option to be exercised in writing before the expiryof the time allowed under sub-section (1) of section 139 for furnishing the return of income)] be deemed to be incomeapplied to such purposes during the previous year in which the income was derived; and the income so deemed tohave been applied shall not be taken into account in calculating the amount of income applied to such purposes, inthe case referred to in sub-clause (i), during the previous year in which the income is received or during the previousyear immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previousyear immediately following the previous year in which the income was derived.

Therefore as per the clause, the organization can utilize it the succeeding year but is deemed to have applied it in theprevious year and shall not be taken into account when calculating the total income.

Explanation for this arises due to the accrual system of accounting employed by organizations, which creates hasslesfor them from utilizing the income in the year of receipt. Likewise an organization circumstantially may not be ableto apply the income for the stated purposes due to the receipt of the amount during the end of the year. Due to theaccrual of income and not its receipt in the year an organization can utilize the amount in the year succeeding the year.

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In Trustees Of Tulsdas Gopalji & Charitable & Chaleshwar Temple Trust v. CIT [1994] 207 ITR 368 (Bom.), it washeld for the purposes of explaining Section 11(1) on non-utilization in a year Sub-section (1) and (4) of Section 139have to be read together for filing a return before making as assessment.

In CIT v. Ziarat Mir Syed Ali Hamdani [2001] 248 ITR 769 (J &K), the income to applied was mandatory but thetime limit to exercise the option was left to the discretion of the assessing officer who could condone the delay.

11(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 or in the year immediately following the expiry thereof,

(d) is credited or paid to any trust or institution registered under section 12AA or to any fund or institution or trustor 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,

• Section 11(3) (a) Exemptions on accumulated income can be terminated or withdrawn if the income is appliedfor purposes other than for charitable and religious.

• Section 11(3) (b) Exemptions on accumulated income can be terminated if it ceases to remain in any modesof investment under Section 11 (5)

• Section 11 (3) (c) Exemptions on accumulated to be terminated when not utilized within the period ofaccumulation

• Section 11 (3) (d) Exemptions on accumulated to be terminated when donated to another charity

In conjunction, Section 139 (1) and 11 (1) provide the option to an organization to file a belatedapplication in case of deemed income i.e. when accumulation cannot be applied in the firstyear of receipt.


CHAPTER 6

Organizations created for the purpose of philanthropic rather than pecuniary pursuits.A charity is a group designed to benefit society or a specific group of people. Its purpose may be educational,humanitarian, orreligious. A charity goes beyond giving relief to the indigent, extending to the promotion of happinessand the support of manyworthy causes.

The law favors charities because they promote goodwill and lessen the government's burdens. They are thereforeordinarily exempt from paying income or property taxes.

Charitable purpose is stated according to five parts

Laws regarding charitable giving and nonprofit status of organizations are covered under sections 10, 11, 12, 13 and80 G of the Income Tax Act of 1961. Section 80G specifies that any donation paid to an organization which has an80G exemption gives the donor the benefit of 50% tax deduction on the donated amount.

When an organization satisfies these 5 parameters ( Yoga to be w.e.f 1. April. 2016) it is considered to qualify forexemption. Voluntary organizations are not directly identified in the Income Tax but are seen as entities existing for

Charitable Purposes

Relief of

PoorEducation Medical

ReliefPreservation ofEnvironment &

momuments

General Public Untility Yoga

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What is charity, what are charitable purposes, are they subject to taxation or fall out of its reach? These areconcerns voiced by organizations who find the tax laws complex, especially with the non-clarity of section 2(15).In the subsequent chapter, readers will get knowledge regarding what constitutes charitable purposes and whatare the parameters governing this particular section.

5


charitable and religious purposes. Hence voluntary organizationsand social development NGOs derive their definition from the termcharitable purposes stated in Section 2(15).

To avail an 80G exemption, organizations must secure taxexemption status under the Sections 10 through 13 of the IncomeTax Act of 1961. According to these sections, voluntaryorganizations are defined as "religious and charitable" organizations.

These two types of organizations are further sub-classified intoorganizations that are totally exempt from income tax and those thatcan acquire income tax exemptions. Organizations that are totallyexempt from income tax are:

• Scientific/Research Association.

• University/College or other educational institutions existing solely for educational purposes.

• Hospitals or any medical institutes existing solely for medical treatment to suffering persons and not for profit.

• Any associations or organizations existing solely for the encouragement of games like cricket, hockey, football,etc.

• Any such organization existing solely for the protection or encouragement of Khadi and Village industries (andshould be registered with the Khadi and Village Industries Commission)."

The law further states that "such organizations are totally exempted from Income tax if they continue working ontheir objectives and utilize their income for those objects only"9. Organizations that are not included in the precedinglist, but are "charitable" in nature can acquire the exemption. Under Section 2 (15) of the Income Tax Act of 1961the term "charitable purpose" includes "relief of the poor, education, medical relief, and advancement of any otherobject of public utility not involving the carrying on of any activity for profit". Each of these concepts is defined below.

Relief of the Poor: NPOs that are generally working to help the poor can qualify for this status. Relief of the poorincludes providing food, getting them married, and giving them gifts. Gifts for the relief of the poor can take threeforms: direct distribution of money; indirect distribution of money through establishment of institutions such as ahome for the destitute; and supporting NPOs that are helping the poor. To qualify for tax exemption, the NPOs thatreceive support must be public in nature.

Education: Education is defined as "systematic instruction, schooling, or training given to the young in preparationfor the work of life". Thus, mainly institutions such as schools, colleges, and universities can acquire this status.Other activities that qualify as educational include vocational training, providing scholarships, running libraries, andnon-formal schools.

Medical Relief: Any organization that is formed with the objective of providing medical relief, nursing, and medicalfacilities for the poor can qualify under this status. The organization can at the same time cater to needs of othersocial classes, provided that it does not affect the "charitability" of the organization. The services offered, however,must be available to the general public.

To qualify for deductions, donationsmust not be less than Rs 250(approximate 1990 value = Rs 2,300 orUS $128).54 The maximum amount thatcan be donated to a charitableorganization cannot be more than Rs500,000 (approximate 1990 value = Rs4.5 million or US $250,000) or 10% ofthe total income of the organization(whichever is less).

It is interesting to note that these six limbs define charitable purposes. Many of thegovernment’s flagship programs also do not find space within them.

– Harsh Jaitli, VANI


General Public Utility: The concept of general public utility isan open one and difficult to define. It includes any activity that iscarried out for the benefit of the public in general and not strictlyfor any particular group of people. For example, digging wellsand ponds, construction or maintenance of community centers,or establishment of cultural societies will fall under the realm ofpublic utility.

In addition, organizations must fulfill the following conditions toacquire exemptions:

• Property from which income is generated should be heldunder a trust;

• Property should belong to a charitable organization;

• Trusts formed after April 1, 1962, cannot be for the benefitof any particular caste or community, or utilize any part of itsincome for the benefit of the trustees;

• The part of the income that is entitled for exemption must beused and/or accumulated for charitable purposes;

• Accumulated income can be applied only in India;

• Income of trusts involved in business activity are calculatedon the basis of Section 11 (4A) of the income Tax Act of 1961

Definition of charitable purpose shall include “yoga” as a separate category on the lines of education and medicalrelief Relevant Abstract from Finance Bill :-

(i) after the word “education,”, the word “yoga” shall be inserted;

1. Prior to Assessment Year 2009-10, business income of a charitable trust or institution was also eligible forexemption subject to conditions that such business should be incidental to the attainment of its objects, and thatseparate books of account are maintained for such business. With effect from 01.04.2009 (i.e., from assessmentyear 2009-10 onwards), however, the “advancement of any other object of general public utility” shall not qualifyas a “charitable purpose” if the same involves the carrying on of any activity in the nature of trade, commerceor business, or rendering of any service in relation to any trade, commerce or business, for a consideration. Thisnew restriction applies irrespective of the nature of use or application of the income arising from such activity.However, the rigour of this amendment has been reduced somewhat by a subsequent amendment brought in bythe Finance Act, 2010 (with retrospective effect from 1-4-2009) to the effect that the said restriction shall notapply if the aggregate value of receipts from such activity during the given financial year does not exceed Rs.10,00,000.

2. Further, w.e.f. 01.04.09, preservation of environment (including watersheds, forests and wildlife), andpreservation of monuments or places, or objects of artistic or historic interest have specifically been includedwithin the ambit of “charitable purpose”.

It may be added that the definition of“charitable purpose” remains aninclusive one and is not an exhaustive orexclusive one. In other words, purposessimilar to those mentioned in theaforesaid definition could also constitute‘charitable purpose’ under the Act.Courts have held that the expression‘charitable purpose’ is sufficiently wide inscope to include a variety of activities.For instance, promotion of sports andgames is a charitable purpose3, as ispromotion of trade and commerce, evenwhen the beneficiaries are confined onlyto a particular line of trade or commodity.At the same time, however, the fact thatremote and indirect benefits are derivedby members of the public will not besufficient to make the purpose a“charitable purpose” under the Act.(Assessment of Charitable Institutions,Income tax Department)

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3. It may be added that the definition of “charitable purpose” remains an inclusive one and is not an exhaustive orexclusive one. In other words, purposes similar to those mentioned in the aforesaid definition could also constitute‘charitable purpose’ under the Act. Courts have held that the expression ‘charitable purpose’ is sufficiently widein scope to include a variety of activities. For instance, promotion of sports and games is a charitable purpose3,as is promotion of trade and commerce, even when the beneficiaries are confined only to a particular line oftrade or commodity4. At the same time, however, the fact that remote and indirect benefits are derived bymembers of the public will not be sufficient to make the purpose a “charitable purpose” under the Act. Mentionedbelow are a few significant cases which help clarify the meaning of the expression “charitable purpose” for thepurposes of income tax.10

"charitable purpose" includes relief of the poor, education, 13[yoga,] medical relief, preservation of environment(including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historicinterest, 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 itinvolves the carrying on of any activity in the nature of trade, commerce or business, or any activity of renderingany service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespectiveof the nature of use or application, or retention, of the income from such activity:

Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activitiesreferred to therein is twenty-five lakh rupees or less in the previous year;

Following proviso shall be substituted for the existing first and second provisos to clause (15) of section 2 bythe Finance Act, 2015, w.e.f. 1-4-2016 :

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if itinvolves the carrying on of any activity in the nature of trade, commerce or business, or any activity of renderingany service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespectiveof the nature of use or application, or retention, of the income from such activity, unless—(i) such activity is undertaken in the course of 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 centof the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

Advancement of any other object of general public utility - Ceiling of Rs. 25 lakh from business income now changedto 20% of the total receipts. This has been a major amendment in the Income Tax Act as now the limit of 25 lakhshas been changed to the aggregate 20% percent of total receipts. Hence if activities pursued are incidental to theobjectives of the organization and are within the prescribed limit then the organization can claim exemptionirrespective of the nature of its application or retention.

VANI along with FMSF has requested to the Finance Ministry that the limit of Rs. 25 Lakhs be increasedto Rs. 1 Crore. A similar limit is available in Section 10 (23c) ) (iiiad)(iiiae) in the IT Act. It is also feasiblethat the VO’s be taxed according to their business activities without withdrawing their ‘non-profit’character. Maintaining separate verifiable books of accounts with regards to organizations undertakingactivities under the purview of Section 2(15) under the 6th arm of ‘Charitable purpose’ with referenceto general public utility and allow such organizations to retain their registration under Section 2(15)


CHAPTER 7

In the previous chapter, Section 2(15) was explored in context of charitable purposes which included relief to thepoor, education, medical relief and advancement of any other activity of general public utility. The Finance Act,2008, w.e.f 1-4-2008 amended the definition of ‘charitable purpose’ under Section 2(15).

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if itinvolves the carrying on of any activity in the nature of trade, commerce or business, or any activity of renderingany service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespectiveof the nature of use or application, or retention, of the income from such activity. The Finance Act 2008 had substituted sect. 2(15) of the Act w.e.f. 1.4.2009 with first proviso. The first proviso tothis Sec.2(15) states that “the advancement of any other object of general public utility shall not be a charitablepurpose, if it involves the carrying on of any activity in the nature of trade, commerce, or business or any activity ofrendering 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.” Para 180 of FinanceAct brought by Finance Minister Mr. Chidambaram had specified the following

”Charitable purposes” includes relief of the poor, education, medical relief and any other object of general publicutility. These activities are tax exempt as they should be. However some entities carrying on regular trade, comer orbusiness or providing services in relation to any trade, commerce or business and earning incomes have sought toclaim their purposes would also fall under “Charitable Purposes’. Obviously, this was not the intention of Parliamentand hence I propose to amend the law to exclude the aforesaid cases. However Genuine charitable organizationswill not in any way affected.” The aforesaid provision is operative from 1.4.2009 onwards. In order to clarify theabove, circular no. 11 of 2008 dt 19.11.2008 was issued by income tax dept wherein the implications of theamendment were given. “The newly inserted proviso to sec.2(15) will not apply in respect of the first three limbs ofsec.2(15) i.e. relief of the poor, education, or medical relief.

Any commercial activities in connection with these three activities will come under ‘Charitable activities”. Theproposed Finance Bill 2015, seeks to change this provision of Rs. 25 lakhs to 20% of the total receipts of theorganization.11

Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on acommercial activity subject however to conditions stipulated under sec.10(23C) or Sec.11(4A) which states that thebusiness should be incidental to attainment of the objects of entities (trusts).

Separate books of accounts should be maintained in respect of such business.

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This is an oblivious issue concerning the definition of business activities under Section 2(15) and its functioning.The Income Tax Act defines certain specific conditions with regard to this clause, noting that an organizationcan pursue a business activity external from the purview of the income tax if the activity is incidental to thebusiness.


The above conditions are applicable to second and third limb also.

So this newly inserted proviso to sec.2(15) will apply only to entities whose purpose is “advancement of any otherobject of general public utility” i.e. Sixth limb of sec.2(15). Hence such entities will not be eligible for exemptionunder Sec.11 or Sec 10(23C) of the Act if they carry commercial activities.

In order to help the small trusts which rely on profit fromsmall trade etc,, second proviso has been added to sec. 2(15)vide the Finance Act 2010 with retrospective effect from1.4.2009.The second provisio to this Sec.2(15) states that“The first proviso shall not apply if the aggregate value ofthe receipts from the activities referred to therein is Rs.10lakh rupees or less in previous year.”

Subsequent to this the 2010 amendment has seen theinclusion of a limit placed for organizations to indulge incommercial activities if they did not exceed the limit of Rs.25 Lakhs.

This was an important amendment with respect toorganizations being able to earn profit from its activities andnot taxed for the purposes of income tax. In light oforganizations that render services such as those involved forpublishing cards and charging a nominal value, this provisogives them a relief to be out of the ambit taxation andthereby pursue activities incidental to the objectives of theirorganization. w.e.f. 01.04.2009 the income from trade,commerce or business pertaining to those NGOs which come under the sixth category of 'charitable purpose' werenot be treated as charitable activity and the entire exemption of such NGOs was at stake. Consequently, such organisations were not eligible for any exemption under section 11 or other provisions whichprovide exemptions towards charitable purpose. It may be noted that the issue of incidentality of business will notbe relevant to such group of NGOs. Whether the business activity is incidental or not, is of no consequence, as thissixth category of NGOs would lose the charitable status. However, the Finance Bill, 2011 had provided a great relief to the sixth category NGOs as NGOs having businessactivities to the extent of rupees 25 lakh (receipt) will not be affected. It is pertinent to note that all other NGOs(other than the NGO coming under the sixth category) can have business related activity beyond ` 25 lakh, aspermitted under section 11(4A), and other provisions pertaining to business activities shall be applied without anychanges.Section 11(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relationto any income of a trust or an institution, being profits and gains of business, unless the business is incidental to theattainment of the objectives of the trust or, as the case may be, institution, and separate books of account aremaintained by such trust or institution in respect of such business.

The amendment of section 2(15) proposed in the Finance Bill 2015 is as follows:It is proposed to amend the provisions of section 2(15) of the Income-tax Act so as to include ‘yoga’ as a specificcategory of activity in the definition of ‘charitable purpose’ and also to provide relief for activities in the nature of

It is worthwhile to recall that the amendmentsin the definition of 'charitable purpose' undersection 2(15) in the year 2008 had far reachingimplications on the business income ofcharitable organisations. It may be noted thatthe NGOs engaged in advancement of anyother object of general public utility, were notallowed to have any incidental businessactivity. The Finance Act, 2010 retrospectivelyprovided relief to small NGOs by providing alimit of ` 10 lakh. And Finance Bill 2011 hadfurther increased this limit to ` 25 lakh.However, this enhancement was prospectivein nature and will be applicable from theassessment year 2012-13.


business undertaken by genuine charitable organizations subject to the condition that aggregate receipts from suchactivity is less than 20% of the total receipts.The above proposal has given a much needed relief to Charitable institutions whose purpose is advancement of anyother object of general public utility and hence were not eligible for exemption u/s 11 or under 10(23C) if they carryon commercial activities. Section 13(8) inserted wref AY 2009-10 by the Finance Act, 2012, to provide that exemptionshall not be allowed for the previous year in which commercial receipts of such trust exceed Rs.25 lakhs whether ornot registration is cancelled in respect of the Trust.The other benefit to charitable institutions falling under the limb of advancement of any other object of generalpublic utility is that the maximum amount of fee cess in the nature of trade or activity carried on by the trust willnow be limited to 20% of the total receipts and not Rs.25 lakhs as was earlier. This will benefit large institutions but may be adversarial to small institutions whose total receipts is below Rs. 1.25-crores. It is worth noting that the expression “activity for profit” has been elucidated in the Apex Court in the caseof Additional commissioner of Income tax vs Surat Art Silk Cloth Manufacturer’s Association, 121 ITR 1, it washeld that the test that must be applied is not ‘whether as a matter of fact an activity results in profit” but ‘whetherthe activity is carried on with the object of earning profit’.12

1) It has been clarified that Charitable Organisations engaged in advancement of any other object of general publicutility, can have incidental business activities to the extent of 20% of the total receipts. It will immensely helplarge organisations which were suffering because of the existing 25 lakh limit. However, there is no claritywhether the total receipt shall also include the business receipts to determine 20% amount and at the same timethis may have impact on small NGOs which are presently getting a blanket limit of Rs.25 Lakhs irrespective oftheir total receipts.

2) It has been clarified that Charitable Organisations engaged in advancement of any other object of general publicutility, can have incidental business activities only if it pertains to advancement of their charitable objectives.This will create litigation and hardship for the seventh limb organisations i.e. Charitable Organisations engagedin advancement of any other object of general public utility, other organisations can have even unrelated incidentalbusiness activities in the light of the Supreme Court decision in the case of Asstt. CIT v. Thanti Trust [2001] 247ITR 785, wherein it was held that if the income generated from a business of publishing newspaper is totallyused for charitable purposes then such business should be considered as incidental. In this case, the assessee washaving the business of publishing newspaper and the entire income was used for charitable purposes. In otherwords, newspaper publication itself is not a charitable purpose but can be held as an incidental business, subjectto the provision of sections 2(15) and 11(4A)

The Finance Bill has made an honest effort to rationalise the provisions, particularly pertaining to business activitiesof Trusts and NGOs, it will provide great relief to both the asessee and the revenue from needless litigations whichare currently galore. However, the business activity related provisions are still subject to different interpretation andcontroversies thereof. Further, the shift from 25 lakh to 20% of receipt regarding business activity will help largeNGOs but may create hardship to small NGOs.

“The six limbs of Section 2(15) confer exemption to an organization for conducting businessactivities incidental to objectives of the organization, but this is not the case with the last limb:‘General Public Utility’ which only provides an organization to utilize 20% of total receipts. Thishas to be reformed to provide fair play within all the limbs.”

– Sanjay Patra, FMSF

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Charitable purpose inclusive of non-profit activity in the In-come Tax Act(1961-1984)

w.e.f from 1-4-1984,the Income Tax Actwas amended andactivity of profitwas ommitted

w.e.f. 1-4-2009, athreshold limit ofRs. 10 lakh was included for the organizations topursue businessactivites

w.e.f. 1-4-2013, athreshold limit of Rs.25 lakh was includedfor the organizationsto pursue businessactivites


CHAPTER 8

In the new service tax system, all services, other than services specified in the negative list, provided or agreed tobe provided in the taxable territory by a person to another would be taxed under section 66B. The term ‘Service’ hasbeen defined in clause (44) of the new section 65B of the Service Tax Act and it means –1. any activity2. for consideration3. carried out by a person for another4. and includes a declared service.As per the above definition, an activity for consideration carried out by a person for another person can be includedas service and it may also include a declared service.

In other words, any service provided for a fee orwhen something is received in return shall beconsidered as a service. All services except thoseprovided in the negative list shall be considered astaxable services13.

One of the taxes which have been controversial andsubject to numerous questions is that of the Servicetax applicable on Voluntary Organizations/Non-Governmental Organizations. The Finance Act of2013 was explicit in bringing all services underpurview of its taxation except a negative list whichlisted out certain activities which were exempt fromtaxation.

Form 12AA ensures that exemption is given to organizations who are conducting non-taxable activities the IncomeTax Act, 1961 stipulates that they have to register under Form 12AA-1 NGO engaged in public health by way of -

(a) care or counselling of

(i) terminally ill persons or persons with severe physical or mental disability,

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The issue of applying service tax on the activities of Voluntary Organizations has caused confusion due to thelack of public information on its applicability. Voluntary Organizations are majorly involved in activities which arebeyond the jurisdiction of Service Tax rules however there are certain times when service tax is chargeable andhence demands attention.


(ii) persons afflicted with HIV or AIDS, or

(iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or

(b) public awareness of preventive health, family planning or prevention of HIV infection;

2 NGO engaged in advancement of religion;

3 NGO engaged in advancement of educational programmes or skill development relating to,-

(a) abandoned, orphaned or homeless children;

(b) physically or mentally abused and traumatized persons;

(c) prisoners; or

(d) persons over the age of 65 years residing in a rural area;

4 NGO engaged in preservation of environment including watershed, forests and wildlife; or

In the light of the above definition, Service Tax shall be applicable –

a) to NGOs which are not registered u/s. 12AA of the Income Tax Act, 1961. For example NGOs registeredu/s. 10(23C) etc. This seems to be a drafting error as the intent could not have been to deprive NGOsregistered u/s. 10(23C) etc. from the benefits which are available to NGOs which are registered u/s. 12AA.

b) to NGOs which are engaged in relief to poor, preventive health, informal education programmes, etc.

The negative list released under titular Service Tax covers all those services which are listed for being excluded fromthe purview of its tax chargeability. Voluntary Organizations have to find their respective activity which correlatesto the negative list. If the service rendered by a non-exempt NGO does not fall under negative list then also there isno liability of service tax up to the value of ` 10 lakhs. This means even if a non-exempt NGO provides taxableservice for an amount up to` 10 lakhs in a year, there is no implication of service tax.

The negative list released under titular Service Taxcovers all those services which are listed for beingexcluded from the purview of its tax chargeability.Voluntary Organizations have to find their respectiveactivity which correlates to the negative list. If theservice rendered by a non-exempt NGO does not fallunder negative list then also there is no liability ofservice tax up to the value of ̀ 10 lakhs. This means evenif a non-exempt NGO provides taxable service for anamount up to` 10 lakhs in a year, there is no implicationof service tax.


When it comes to Project Grants, no service charge can be applied if and until there is business value that is beingappropriated from the grant which has to be sent back to concerned donor. However the determining factor behindthe rationale of applying service tax on project grants is the donor specification. The detailed analysis was coveredby FMSF in their ‘Standards & Norms, Issue of June 2013’-

(i) If the donor puts a clause that the implementing organisation has to display its logo or name at the places ofactivity, then it could be considered as a taxable service.

(ii) If the implementing organisation is conducting some research, survey or activity in which the donor is interestedand the implementing organisation is under obligation to provide certain specified output to the donor, then theservice can be considered as taxable service. For example, if the donor keeps a condition that the implementingorganisation shall provide activity report or utilisation statements, then it will not be treated as taxable service.However, if the donor keeps a condition that the implementing organisation shall provide specific data or specificresearch report as an outcome of the activity, then it will be treated as a taxable service.

When we come to discussing about CSR, we find that the grants made to organizations by corporates may carrywith itself a certain clause in its utilization. If the corporate donation is intended to have a business advantage to anorganization then service tax will be levied.

Yes Consultancy will also be included for charging under Service Taxdue to its commercial nature. As the negative list gives a full detail ofactivities exempted from service charges consultancy on commercialbasis is not included.

There is a need to broaden the ‘General Public Utility’ Clause under12AA so as to include other activities carried out by organizations whichcan be discretionally interpreted and may be wrongly assumed forservice tax.

Voluntary Organizations sometimes face problems when it comes when TDS is charged on certain earned incomes.When confronted by problem of having large TDS deductions from income there are possibilities when non-deductioncan be used for foregoing such substantial amounts for service tax charge.

1) The very first thing for an organization to avail non-deduction is to fill Form 13 which will be assessed by theIncome Tax Officer who will evaluate whether there is justification for deducting TDS.

2) Following this Officer will also issue a certificate which will be based on the exemption certificates possessedby an organization under 12AA and 10(23)(C)

Form 15G

No deduction of tax is to be made inthe case of a payee (other than acompany or firm), if he furnishes adeclaration in writing in duplicate inthe prescribed form [Form No. 15G]and verified in the prescribedmanner, to the payer of suchincome to the effect that tax on hisestimated income of the relevantprevious year will be nil.

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How 197A has to be utilizedThe payer of the income is required to deliver to the Commissioner of Income-tax one copy of theaforesaid declaration on or before the 7th day of month following the month in which the declarationis furnished to him [section 197A]. Where payments are to be made to the same person more thanonce in a year, the declaration in the relevant form may be furnished before the first payment in ayear becomes due. It may also be noted that in the declaration, particulars of only such securitiesare to be furnished the income from which is payable, by the person to whom declaration isfurnished-Circular No. 351, dated November 26, 1982.

Restriction on Filing Self-Declarations with Effect from 1-6-2002 - Under sub-section (1B) ofsection 197A, inserted by the Finance Act, 2002 with effect from 1-6-2002,the provisions of section197A shall not apply where the amount of income on the following items, or the aggregate of suchincome, exceeds the maximum amount which is not chargeable to tax :(a) Interest on securities(b) Dividends(c) Interest other than interest on securities(d) Payments in respect of deposits under National Savings Scheme(e) Income in respect of units.

In what has been observed as a trend manyorganizations taking grants from corporates orinternational donors tend to have a TDSdeduction on their grants. According to Section12, grants are distinct from voluntary contributionin the sense they carry a specific direction forapplication. This carried an implication for thegrant as TDS had to be deducted from a contractand not the grant. Thus the Corporate donor dueto deduction of TDS on the grant was giving aService Contract and not a ‘Grant’. Hence thisservice contract due to its nature then becomes acommercial activity and held implications after 3years of disbursement.

Case: Such a problem was recounted in one of VANI’smeeting held on 9th February 2016:A participant hadrecounted an experience of the implication TDS wherethe organization despite being registered as Societyand possessing 12(A) was charged under 194 (J) of theIncome Tax for professional services as the donoragency was raising TDS on the grant provided to them.Elaborating further on this issue, the participant saidthat the Assessing Officers interpreted that theorganization was conducting a commercial activity andthereby was rendering professional service. Hence theproblem, the organization faced was in explaining to theassessing officer that the activity was of a charitablenature and not professional


CHAPTER 9

Section 10(23C) is a clause giving directions for an assesse organization obtain exemptions as given by the law-

any income received by any person on behalf of—

(i) the Prime Minister's National Relief Fund; or

(ii) the Prime Minister's Fund (Promotion of Folk Art); or

(iii) the Prime Minister's Aid to Students Fund; or

(iiia) the National Foundation for Communal Harmony; or

(iiiaa) the Swachh Bharat Kosh, set up by the Central Government; or

(iiiaaa) the Clean Ganga Fund, set up by the Central Government; or]

(iiiab) any university or other educational institution existing solely for educational purposes and not for purposesof profit, and which is wholly or substantially financed by the Government; or

(iiiac) any hospital or other institution for the reception and treatment of persons suffering from illness or mentaldefectiveness or for the reception and treatment of persons during convalescence or of persons requiring

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In this section, the exemption of 10 23(C) is elaborated, informing the various head wise projects and schemeswhich give the voluntary organization the opportunity to avail exemption.


medical attention or rehabilitation,existing solely for philanthropicpurposes and not for purposes of profit,and which is wholly or substantiallyfinanced by the Government.

[Explanation.—For the purposes of sub-clauses (iiiab) and (iiiac), any universityor other educational institution, hospitalor other institution referred therein,shall be considered as beingsubstantially financed by theGovernment for any previous year, ifthe Government grant to such university or other educational institution, hospital or other institutionexceeds such percentage of the total receipts including any voluntary contributions, as may be prescribed48,of such university or other educational institution, hospital or other institution, as the case may be, duringthe relevant previous year]; or

(iiiad) any university or other educational institution existing solely for educational purposes and not for purposesof profit if the aggregate annual receipts of such university or educational institution do not exceed theamount of annual receipts as may be prescribed; or

(iiiae) any hospital or other institution for the reception and treatment of persons suffering from illness or mentaldefectiveness or for the reception and treatment of persons during convalescence or of persons requiringmedical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit,if the aggregate annual receipts of such hospital or institution do not exceed the amount of annual receiptsas may be prescribed; or

(iv) any other fund or institution established for charitable purposes which may be approved by the prescribedauthority, having regard to the objects of the fund or institution and its importance throughout India orthroughout any State or States; or

(v) any trust (including any other legal obligation) or institution wholly for public religious purposes or whollyfor public religious and charitable purposes, which may be approved by the prescribed authority, havingregard to the manner in which the affairs of the trust or institution are administered and supervised forensuring that the income accruing thereto is properly applied for the objects thereof;

(vi) any university or other educational institution existing solely for educational purposes and not for purposesof profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved53

by the prescribed authority; or

(via) any hospital or other institution for the reception and treatment of persons suffering from illness or mentaldefectiveness or for the reception and treatment of persons during convalescence or of persons requiringmedical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit,other than those mentioned in sub-clause (iiiac) or sub-clause (iiiae) and which may be approved by theprescribed authority:


Section 10 (23C), provides exemption to the income of charitable and religious organizations, trusts and funds,universities, educational institutions, hospitals and medical institutions. Earlier, many organizations could takeadvantage of 10 (23C) (iv) and (v) as specific conditions of Section 11,12,12A and 13 were not applicable. Similarlythe provision of utilization was also absent and the scheme of retention was further reduced with the introduction ofthe Finance Act, 2002 which limited accumulation to 15 % from 25%. Also given that the Finance Act, 2002 madeit mandatory on organizations to file their returns as per section 139 (1), there has been a discernible amount ofreduction in the advantages organizations could enjoy earlier.

Exemption u/s 10 (23C) (IV) or (V) is obtained by a charitable institution, in addition to the exemption granted u/s11 which also deals generally with charitable or religious activities. The requirement in respect of exemption u/s 10(23C) (iv) or (v) is:

• That the fund or the trust or institution applies its income, or accumulates it for application, wholly andexclusively, to the objects for which it is established and

• Invests or deposits its funds in any one or more of the forms or modes specified in sub-section (5) of section 11of Income Tax Act

Two major advantages of such exemption are:

• The fund, trust or institution may engage itself in business which may be incidental to the attainment of theobjectives (provided separate books of accounts are maintained by it in respect of such business) and

• The fund, trust or institution need not necessarily spend 75% of its income in any financial year (on the objectsof the trust) as required u/s 11 or apply for accumulation.

10 (23C) provides an organization to claim exemption, However the exemption that has been granted to theorganization is only limited to a few assessment years and at most does not exceed three assessment years at a time( not exceeding three years, was deleted from the eight proviso to section 10 (23C), however an organization canfile a renewal for continuing the exemption.

Claiming an exemption under section 10 (23C) requires the filling of Form 56 which is to be submitted to the ChiefCommissioner or the Director General (Income Tax Exemptions) whereas the Universities, educational institutions,hospital or medical institutions make application through Form 56D.

Charitable and religious trusts/ associations/societies can avail exemption under 10(23C) by directly filing theirForm 56 to the Commissioner of Income Tax under whose jurisdiction the case of the trust/association/ society fall.The charitable or religious organization have to accordingly file relevant documents for seeking notification by theCentral Government under section 10(23C)(iv)/(v).

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CHAPTER 10

In the previous chapters we have seen the various advantages offered to organizations to claim exemption fromincome taxation by applying through different exemption heads provided in the IT Act. However the same treatmentof exemptions is available to donors. To invite potential donors for funding different projects of an organization, theIncome Tax Act offers Section 80G for claiming exemption. Voluntary organizations can make use of Section 80Gto exempt their donors fromtaxation by which they candonate specific amounts towardsvarious projects undertaken byorganizations

Under different computations thedonor is allowed deduction ontaxable income up to 100% ofthe donations that are made.

Registration under section 80Gof Income Tax Act providesbenefit to NGOs. If NGO has80G certificate with them, donorgets financial benefit in his/hertaxable amount of their income.If an NGO gets itself registeredunder section 80G then theperson or the organizationmaking a donation to the NGOwill get a deduction of 50% from his/its taxable income. By availing 80G Certificate, NGO can attract more donors.

If an NGO gets itself registered under section 80G then the person or the organisation making a donation to theNGO will get a deduction of 50% from his/its taxable income. The NGO has to apply in Form No. 10G As perAnnexure-29 to the Commissioner of Income Tax for such registration. Normally this approval is granted for 2-3 years.

This chapter deals with know-how of Section 80G and the exemption granted under it. Section 80 G is seen tobe enabling in granting exemption to a donor. The chapter elucidates on the provisions of this section and theconditions for which the donor has to satisfy to avail it.


The Finance Act, 2009, has deleted the five year restriction under proviso to sub section (5) clause (vi). In otherwords, registration certificates issued after 1st October, 2009 can be considered as one time registration unless anyspecific restriction is provided in the certification itself.

Inspite of all the contributions made to social causes, there is a huge gap between the demand of money from theneedy and the amount donated by philanthropists. This probably, is the reason why the Government has given taxbenefits on donations. The amount donated towards charity attracts deduction under section 80G of the Income TaxAct, 1961. Section 80G has been in the law book since financial year 1967-68 and it seems it’s here to stay. Severaldeductions have been swept away but the tax sop for donations appears to have survived the axe. The main featuresof tax benefit with respect to charity are as follows:

Allowable to all kind of Assessee:- Any person or ‘assessee’ who makes an eligible donation is entitled to get taxdeductions subject to conditions. This section does not restrict the deduction to individuals, companies or any specificcategory of taxpayer.

Donation to Foreign Trust:- Donations made to foreign trusts do not qualify for deduction under this section.

Donation to Political Parties:- You cannot claim deduction for donations made to political parties for any reason,including paying for brochures, souvenirs or pamphlets brought out by such parties.

Only donation made to made to prescribed funds and institutions qualify for deduction: – All donations arenot eligible for tax benefits. Tax benefits can be claimed only on specific donations i.e. those made to prescribedfunds and institutions.

Maximum allowable deduction:- If aggregate of the sums donated exceed 10% of the adjusted gross total income,the amount in excess of 10% ceases to be entitled for tax benefit.14

There is ceiling limit up to which the benefit is allowable to the donor. If the amount of deduction to a charitableorganisation or trust is more than 10% of the Gross Total Income computed under the Act (as reduced by income onwhich income-tax is not payable under any provision of this Act and by any amount in respect of which the assesseeis entitled to a deduction under any other provision of this Chapter), then the amount in excess of 10% of GrossTotal Income shall not qualify for deduction under section 80G.

In other words, while computing the total income of an assessee and for arriving at the deductible amount undersection 80G, first the aggregate of the sums donated has to be found out. Then 50 per cent of such donations has tobe found out and it should be limited to 10 per cent of the gross total income. If such amount is more than 10 percent of the gross total income, the excess will have to be ignored. The persons or organisation who donates undersection 80G gets a deduction of 50% from their taxable income. Here at times a confusion creeps in, that the taxadvantage under section 80G is 50%, but actually it is not so. 50% of the donation made is allowed to be deductedfrom the taxable income and consequently tax is calculated.

The extent of deduction allowable is prescribed in Section 80G(1)(i). While contributions to certain funds/entitiessuch as the Prime Minister’s National Relief Fund, contributions to a university or educational institution of nationaleminence, and to specified funds set up by state governments for disaster relief etc. are entitled to 100 per centdeduction, others are eligible for exemption to the extent of 50 per cent of the amount donated. It may be noted herethat with effect from 01.04.2013, donations exceeding Rs.10,000/- must be made other than in cash in order to beeligible for deduction.

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Section 80G(5) lays down the preconditions which must be satisfied cumulatively before a trust or institution canqualify for approval under Section 80G. These conditions are summarized as under:-

(i) The income of the fund or institution would not be includible in its total income by virtue of provisions containedin 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 itsincome or assets is transferable, or to be applied for any purpose other than charitable purpose. Charitable purposehere would not include religious purpose in view of Explanation 3 below Section 80G. However, Section80G(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 SocietiesRegistration 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 stategovernment;

(vi) The institution or fund is approved by the Commissioner (or Director) in accordance with the rules made in thisbehalf.

Under Section 80 G, three main programs of government have been granted 100% donor exemption which includes • Swacch Bharat Abhiyan• Clean Ganga Campaign • National Fund for Drug Abuse

80G. (1) In computing the total income of an assessee, there shall be deducted, in accordance with and subject to the

provisions of this section,—

i) in a case where the aggregate of the sums specified in sub-section (2) includes any sum or sums of the naturespecified in sub-clause (i) or in sub-clause (iiia) or in sub-clause (iiiaa) or in sub-clause 45[(iiiab) or in sub-clause (iiib)] or in sub-clause (iiie) or in sub-clause (iiif) or in sub-clause (iiig) or in sub-clause (iiiga) orsub-clause (iiih) or sub-clause (iiiha) or sub-clause (iiihb) or sub-clause (iiihc) or sub-clause (iiihd) or sub-clause (iiihe) or sub-clause (iiihf) or sub-clause (iiihg) or sub-clause (iiihh) or sub-clause (iiihi) or sub-clause(iiihj) or46[sub-clause (iiihk) or sub-clause (iiihl) or] 47[sub-clause (iiihm) or] in sub-clause (vii) of clause(a) or in clause (c) or in clause (d) thereof, an amount equal to the whole of the sum or, as the case may be,sums of such nature plus fifty per cent of the balance of such aggregate; and

(ii) in any other case, an amount equal to fifty per cent of the aggregate of the sums specified in sub-section (2).

(2) The sums referred to in sub-section (1) shall be the following, namely :—

(a) any sums paid by the assessee in the previous year as donations to—

(i) the National Defence Fund set up by the Central Government; or


(ii) the Jawaharlal Nehru Memorial Fund referred to in the Deed of Declaration of Trust adopted by theNational Committee at its meeting held on the 17th day of August, 1964; or

(iii) the Prime Minister's Drought Relief Fund; or

(iiia) the Prime Minister's National Relief Fund; or

(iiiaa) the Prime Minister's Armenia Earthquake Relief Fund; or

(iiiab) the Africa (Public Contributions - India) Fund; or

(iiib) the National Children's Fund; or

(iiic) the Indira Gandhi Memorial Trust, the deed of declaration in respect whereof was registered at NewDelhi on the 21st day of February, 1985; or

(iiid) the Rajiv Gandhi Foundation, the deed of declaration in respect whereof was registered at New Delhion the 21st day of June, 1991; or

(iiie) the National Foundation for Communal Harmony; or

(iiif) a University or any educational institution of national eminence as may be approved by the prescribedauthority48 in this behalf; or

(iiig) the Maharashtra Chief Minister's Relief Fund during the period beginning on the 1st day of October,1993 and ending on the 6th day of October, 1993 or to the Chief Minister's Earthquake Relief Fund,Maharashtra; or

(iiiga) any fund set up by the State Government of Gujarat exclusively for providing relief to the victimsof earthquake in Gujarat; or

(iiih) any Zila Saksharta Samiti constituted in any district under the chairmanship of the Collector of thatdistrict for the purposes of improvement of primary education in villages and towns in such districtand for literacy and post-literacy activities.

Explanation.—For the purposes of this sub-clause, "town" means a town which has a populationnot exceeding one lakh according to the last preceding census of which the relevant figures havebeen published before the first day of the previous year ; or

(iiiha) the National Blood Transfusion Council or to any State Blood Transfusion Council which has itssole object the control, supervision, regulation or encouragement in India of the services related tooperation and requirements of blood banks.

Explanation.—For the purposes of this sub-clause,—

(a) "National Blood Transfusion Council" means a society registered under the Societies RegistrationAct, 1860 (21 of 1860) and has an officer not below the rank of an Additional Secretary to theGovernment of India dealing with the AIDS Control Project as its Chairman, by whatever namecalled;

(b) "State Blood Transfusion Council" means a society registered, in consultation with the NationalBlood Transfusion Council, under the Societies Registration Act, 1860 (21 of 1860) or underany law corresponding to that Act in force in any part of India and has Secretary to theGovernment of that State dealing with the Department of Health, as its Chairman, by whatevername called; or

(iiihb) any fund set up by a State Government to provide medical relief to the poor; or

(iiihc) the Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air Force Central

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Welfare Fund established by the armed forces of the Union for the welfare of the past and presentmembers of such forces or their dependants; or

(iiihd) the Andhra Pradesh Chief Minister's Cyclone Relief Fund, 1996; or

(iiihe) the National Illness Assistance Fund; or

(iiihf) the Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund in respect of any State orUnion territory, as the case may be :

Provided that such Fund is—

(a) the only Fund of its kind established in the State or the Union territory, as the case may be;

(b) under the overall control of the Chief Secretary or the Department of Finance of the State or theUnion territory, as the case may be;

(c) administered in such manner as may be specified by the State Government or the LieutenantGovernor, as the case may be; or

(iiihg) the National Sports Fund to be set up by the Central Government; or

(iiihh) the National Cultural Fund set up by the Central Government; or

(iiihi) the Fund for Technology Development and Application set up by the Central Government; or

(iiihj) the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation andMultiple Disabilities constituted under sub-section (1) of section 3 of the National Trust for Welfareof Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999 (44of 1999); or

49[(iiihk) the Swachh Bharat Kosh, set up by the Central Government, other than the sum spent by the assesseein pursuance of Corporate Social Responsibility under sub-section (5) of section 135 of theCompanies Act, 2013 (18 of 2013); or

(iiihl) the Clean Ganga Fund, set up by the Central Government, where such assessee is a resident andsuch sum is other than the sum spent by the assessee in pursuance of Corporate Social Responsibilityunder sub-section (5) of section 135 of the Companies Act, 2013 (18 of 2013); or]

Following sub-clause (iiihm) shall be inserted after sub-clause (iiihl) of clause (a) of sub-section(2) of section 80G by the Finance Act, 2015, w.e.f. 1-4-2016 :

(iiihm) the National Fund for Control of Drug Abuse constituted under section 7A of the Narcotic Drugsand Psychotropic Substances Act, 1985 (61 of 1985); or

(iv) any other fund or any institution to which this section applies; or

(v) the Government or any local authority, to be utilised for any charitable purpose other than the purposeof promoting family planning; or

(vi) an authority constituted in India by or under any law enacted either for the purpose of dealing withand satisfying the need for housing accommodation or for the purpose of planning, development orimprovement of cities, towns and villages, or for both;

(via) any corporation referred to in clause (26BB) of section 10; or

(vii) the Government or to any such local authority, institution or association as may be approved in thisbehalf by the Central Government, to be utilised for the purpose of promoting family planning;

(b) any sums paid by the assessee in the previous year as donations for the renovation or repair of any suchtemple, mosque, gurdwara, church or other place as is notified by the Central Government in the Official


Gazette to be of historic, archaeological or artistic importance or to be a place of public worship of renownthroughout any State or States;

(c) any sums paid by the assessee, being a company, in the previous year as donations to the Indian OlympicAssociation or to any other association or institution established in India, as the Central Government may,having regard to the prescribed guidelines, by notification in the Official Gazette, specify in this behalf for—(i) the development of infrastructure for sports and games; or

(ii) the sponsorship of sports and games, in India;

(d) any sums paid by the assessee, during the period beginning on the 26th day of January, 2001 and ending onthe 30th day of September, 2001, to any trust, institution or fund to which this section applies for providingrelief to the victims of earthquake in Gujarat.

(3) [Omitted by the Finance Act, 1994, w.e.f. 1-4-1994.]

(4) Where the aggregate of the sums referred to in sub-clauses (iv), (v), (vi), (via) and (vii) of clause (a) and inclauses (b) and (c) of sub-section (2) exceeds ten per cent of the gross total income (as reduced by any portionthereof on which income-tax is not payable under any provision of this Act and by any amount in respect ofwhich the assessee is entitled to a deduction under any other provision of this Chapter), then the amount in excessof ten per cent of the gross total income shall be ignored for the purpose of computing the aggregate of the sumsin respect of which deduction is to be allowed under sub-section (1).

(5) This section applies to donations to any institution or fund referred to in sub-clause (iv) of clause (a) of sub-section (2), only if it is established in India for a charitable purpose and if it fulfils the following conditions,namely :—

(i) where the institution or fund derives any income, such income would not be liable to inclusion in its totalincome under the provisions of sections 11 and 12 or clause (23AA) or clause (23C) of section 10 :

Provided that where an institution or fund derives any income, being profits and gains of business, thecondition that such income would not be liable to inclusion in its total income under the provisions of section11 shall not apply in relation to such income, if—

(a) the institution or fund maintains separate books of account in respect of such business;

(b) the donations made to the institution or fund are not used by it, directly or indirectly, for the purposes ofsuch business; and

(c) the institution or fund issues to a person making the donation a certificate to the effect that it maintainsseparate books of account in respect of such business and that the donations received by it will not beused, directly or indirectly, for the purposes of such business;

(ii) the instrument under which the institution or fund is constituted does not, or the rules governing theinstitution or fund do not, contain any provision for the transfer or application at any time of the whole orany part of the income or assets of the institution or fund for any purpose other than a charitable purpose;

(iii) the institution or fund is not expressed to be for the benefit of any particular religious community or caste;

(iv) the institution or fund maintains regular accounts of its receipts and expenditure;

(v) the institution or fund is either constituted as a public charitable trust or is registered under the SocietiesRegistration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of Indiaor under section 25 of the Companies Act, 1956 (1 of 1956), or is a University established by law, or is any

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other educational institution recognised by the Government or by a University established by law, oraffiliated to any University established by law, or is an institution financed wholly or in part by theGovernment or a local authority;

(vi) in relation to donations made after the 31st day of March, 1992, the institution or fund is for the time beingapproved by the Commissioner in accordance with the rules made in this behalf; and

(vii) where any institution or fund had been approved under clause (vi) for the previous year beginning on the1st day of April, 2007 and ending on the 31st day of March, 2008, such institution or fund shall, for thepurposes of this section and notwithstanding anything contained in the proviso to clause (15) of section 2,be deemed to have been,—

(a) established for charitable purposes for the previous year beginning on the 1st day of April, 2008 and endingon the 31st day of March, 2009; and

(b) approved under the said clause (vi) for the previous year beginning on the 1st day of April, 2008 and endingon the 31st day of March, 2009.

(5A Where a deduction under this section is claimed and allowed for any assessment year in respect of any sumspecified in sub-section (2), the sum in respect of which deduction is so allowed shall not qualify for deductionunder any other provision of this Act for the same or any other assessment year.

(5B) Notwithstanding anything contained in clause (ii) of sub-section (5) and Explanation 3, an institution or fundwhich incurs expenditure, during any previous year, which is of a religious nature for an amount not exceedingfive per cent of its total income in that previous year shall be deemed to be an institution or fund to which theprovisions of this section apply.

(5C) This section applies in relation to amounts referred to in clause (d) of sub-section (2) only if the trust or institutionor fund is established in India for a charitable purpose and it fulfils the following conditions, namely :—

(i) it is approved in terms of clause (vi) of sub-section (5);

(ii) it maintains separate accounts of income and expenditure for providing relief to the victims of earthquakein Gujarat;

(iii)the donations made to the trust or institution or fund are applied only for providing relief to the earthquakevictims of Gujarat on or before the 31st day of March, 2004;

(iv)the amount of donation remaining unutilised on the 31st day of March, 2004 is transferred to the PrimeMinister's National Relief Fund on or before the 31st day of March, 2004;

(v) it renders accounts of income and expenditure to such authority and in such manner as may be prescribed,on or before the 30th day of June, 2004.

(5D)No deduction shall be allowed under this section in respect of donation of any sum exceeding ten thousandrupees unless such sum is paid by any mode other than cash.

Explanation 1.—An institution or fund established for the benefit of Scheduled Castes, backward classes,Scheduled Tribes or of women and children shall not be deemed to be an institution or fund expressed to be forthe benefit of a religious community or caste within the meaning of clause (iii) of sub-section (5).

Explanation 2.—For the removal of doubts, it is hereby declared that a deduction to which the assessee isentitled in respect of any donation made to an institution or fund to which sub-section (5) applies shall not bedenied merely on either or both of the following grounds, namely :—

(i) that, subsequent to the donation, any part of the income of the institution or fund has become chargeable totax due to non-compliance with any of the provisions of section 11, section 12 or section 12A;


(ii) that, under clause (c) of sub-section (1) of section 13, the exemption under section 11 or section 12 is deniedto the institution or fund in relation to any income arising to it from any investment referred to in clause (h)of sub-section (2) of section 13 where the aggregate of the funds invested by it in a concern referred to inthe said clause (h) does not exceed five per cent of the capital of that concern.

Explanation 3.—In this section, "charitable purpose" does not include any purpose the whole or substantiallythe whole of which is of a religious nature.

Explanation 4.—For the purposes of this section, an association or institution having as its object the control,supervision, regulation or encouragement in India of such games or sports as the Central Government may, bynotification in the Official Gazette, specify in this behalf, shall be deemed to be an institution established inIndia for a charitable purpose.

Explanation 5.—For the removal of doubts, it is hereby declared that no deduction shall be allowed under thissection in respect of any donation unless such donation is of a sum of money.

(6) [* * *]

Anonymous Donations

A significant legal change has been brought about by Finance Act, 2006 with effect from 01.04.2007by inserting a new provision (Section 115BBC) whereby anonymous donations will not enjoyexemption 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 downthat from Assessment Year 2010-11 onwards, tax treatment of anonymous donations (i.e.,donations in respect of which the assesse fund/trust/institution etc. does not maintain records ofidentity indicating the name and address, or other particulars of the donor as are prescribed underthe 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 medicalor educational institutions run by them will be taxable at 30 percent if the same exceed 5 per centof total donations received by such trust/institution or Rs. 1 lakh, whichever is more. Donations topartly religious and partly charitable institutions which do not run such medical or educationalinstitutions shall remain exempt from taxation.

iii. In the case of wholly charitable institutions, anonymous donations will be taxable at 30 percentif such donations exceed 5 per cent of total donations received by such trust or institution or Rs. 1lakh, whichever is more.

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“There should be no hassle for trusts obtaining deductions under 80G focused on Welfare ofMinorities”

– Noshir Dadrawala, CEO,Centre for Advancement of Philanthropy


CHAPTER 11

In order to claim exemption, voluntary organizations are required to have themselves registered under 12A of theIncome Tax Act with the Commissioner of Income Tax. It is to be noted that 12A does not bestow the right of anorganization to claim exemption but at the same time works as a precondition to claim exemption.

One of the key preconditions for charitable trusts and institutions seeking to claim exemption under Sections 11 and12 of the Income Tax Act is registration under the Act. Section 12A enacts that the provisions of Section 11 andSection 12 which provide for exemption of income to such trusts and institutions, will not be applicable unless suchtrust or institution has made an application in the prescribed form for registration to the Commissioner or Director,and it has been registered by the Commissioner or Director.

Under the amended provisions of this Section which have come into effect from 01.06.2007, the earlier requirementof filing such an application within one year of creation of the trust (or establishment of the institution) has beenremoved. Similarly, the power of the Commissioner or Director to condone the delay in filing such application andto grant the benefit of exemption retrospectively from the date of creation of trust or establishment of the institutionhas also been done away with.

Under the amended provisions, where an application is filed on or after the 1st day of June, 2007, exemption underSections 11 and 12 shall be available only on a prospective basis from the assessment year which immediatelyfollows the financial year in which the application is made.

Section 12AA of the Income Tax Act and Rule 17A of the Income Tax Rules prescribe the procedure for registrationof a trust where an application for registration under Section 12A has been received by the Commissioner or Director.

On receipt of the application, the CIT/DIT (E) has to pass an order either registering the trust or institution or rejectingthe application. The registration may be rejected on the ground that the trust or its activities are not genuine. Undersub-Section (2) of Section 12A such an order registering or refusing registration has to be passed within a period ofsix months from the end of the month in which the application is made.

The conditions required for registration have been stated briefly and in simple language. It mandates that theCommissioner or Director should satisfy himself about:-

The application for registration has to be made in Form No. 10A It should be accompanied bythe following documents:-(i) Copy of the instrument by way of which the trust or institution etc. is created;(ii) If it has been in existence in the years prior to the year in which application is made,

accounts of the prior years (not exceeding three years).

This section mainly highlights the registration under Section 12A to claim exemptions within the Income TaxAct. It also elaborates the case of rejection and the appellate procedure granted to voluntary organizations.


(i) the objects of the trust or institution, and(ii) the genuineness of its activities.It follows that the Commissioner or Director will enquire whether the object(s) of the trust or institution constitutereligious or charitable purpose(s) within the meaning of Section 2(15). Section 12A(b) prescribes another importantcondition for claiming exemption under Sections 11 and 12.

It requires a trust or an institution whose income for the previous year before claiming the deduction contemplatedunder Sections 11 and 12 falls within the tax bracket (i.e., its income exceeds the maximum amount which is notchargeable to income-tax without giving effect to the provisions of Section 11 and Section 12), to get its accountsaudited by an Accountant. The Accountant’s report in Form No.10B has to be filed along with the return of income.A Chartered Accountant or other person mentioned in the Explanation to Section 288(2) of the Act is authorised tocarry out such an audit.

Under Section 12AA as inserted by Finance Act, 2004, the Commissioner can cancel the registration of anorganization, if he/she is satisfied that the activities of such a trust/ institution are not in alignment with the objectivesof the trust/institution. However before cancelling the registration, the CIT has to give the opportunity of explanationto the assesse organization.

12AA. (1) The 97[Principal Commissioner or] Commissioner, on receipt of an application for registration of a trustor institution made under clause (a) or clause (aa) of sub-section (1) of section 12A, shall—

(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfyhimself about the genuineness of activities of the trust or institution and may also make such inquiries as hemay deem necessary in this behalf; and

(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he—

(i) shall pass an order in writing registering the trust or institution;

(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,

and a copy of such order shall be sent to the applicant :

Provided that no order under sub-clause

(ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.

The aggrieved organization is also given the opportunity to file an appeal in the appellate tribunal under section 253.This provision was inserted w.e.f 1-6-1999(vide Finance Act, 1999). Previously no such provision existed forappealing against the decision of the CIT but CBDT circular no. 762 dated 18-2-1998 and Circular No. 779 dated14-9-1999 explained the scope and effect of Section 12AA.

Under 12AA before cancelling the registration, for exemption the Commissioner has to provide-1) An opportunity of being heard to the applicant 2) Record the reason for such refusal

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CHAPTER 12

Like Section 80G, Section 35(AC) of the Income Tax Act, provides exemption benefits to a donor, allowing 100percent exemption and thus giving the opportunity to a charitable organization to invite potential donors for projectsand activities. The exemptions are placed for a specified list of projects approved by the Central Government. Section35AC is available to assessees who have income from the head ‘business’ or ‘profession’. Therefore, for the assesseeswho do not have income from business or profession, section 80GGA provides for deduction on donations made toeligible projects under section 35AC.

35 (AC) approvals helps organizations, to encourage their donors towards fundraising for their specific approvedsocial welfare projects and the organization issues donation certificate for tax exemption.

35AC.(1) Where an assessee incurs any expenditure by way of payment of any sum to a public sector company or a local

authority or to an association or institution approved38 by the National Committee for carrying out any eligibleproject or scheme, the assessee shall, subject to the provisions of this section, be allowed a deduction of theamount of such expenditure incurred during the previous year :Provided that a company may, for claiming the deduction under this sub-section, incur expenditure either byway of payment of any sum as aforesaid or directly on the eligible project or scheme.

(2) The deduction under sub-section (1) shall not be allowed unless the assessee furnishes along with his return ofincome a certificate—

(a) where the payment is to a public sector company or a local authority or an association or institutionreferred to in sub-section (1), from such public sector company or local authority or, as the case may be,association or institution;

(b) in any other case, from an accountant, as defined in the Explanation below sub-section (2) of section 288,in such form, manner and containing such particulars (including particulars relating to the progress in the workrelating to the eligible project or scheme during the previous year) as may be prescribed.

Explanation.—The deduction, to which the assessee is entitled in respect of any sum paid to a public sectorcompany or a local authority or to an association or institution for carrying out the eligible project or schemereferred to in this section applies, shall not be denied merely on the ground that subsequent to the payment ofsuch sum by the assessee,—(a) the approval granted to such association or institution has been withdrawn; or

As in the case of previous chapters discussing exemptions, section 35(AC) also focuses on the respectiveprovisions of this exemption clause. Discussed in detail it focuses on the exemption granted to the donor whohave income from profession.


(b) the notification notifying the eligible project or scheme carried out by the public sector company or localauthority or association or institution has been withdrawn.

(3) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditurereferred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under any otherprovision of this Act for the same or any other assessment year.

(4) Where an association or institution is approved by the National Committee under sub-section (1), andsubsequently—(i) that Committee is satisfied that the project or the scheme is not being carried on in accordance with all or

any of the conditions subject to which approval was granted; or(ii) such association or institution, to which approval has been granted, has not furnished to the National

Committee, after the end of each financial year, a report in such form and setting forth such particulars andwithin such time as may be prescribed,

the National Committee may, at any time, after giving a reasonable opportunity of showing cause against theproposed withdrawal to the concerned association or institution, withdraw the approval:Provided that a copy of the order withdrawing the approval shall be forwarded by the National Committee tothe Assessing Officer having jurisdiction over the concerned association or institution.

(5) Where any project or scheme has been notified as an eligible project or scheme under clause (b) of theExplanation, and subsequently—(i) the National Committee is satisfied that the project or the scheme is not being carried on in accordance with

all or any of the conditions subject to which such project or scheme was notified; or(ii) a report in respect of such eligible project or scheme has not been furnished after the end of each financial

year, in such form and setting forth such particulars and within such time as may be prescribed,such notification may be withdrawn in the same manner in which it was issued:

Provided that a reasonable opportunity of showing cause against the proposed withdrawal shall be given by theNational Committee to the concerned association, institution, public sector company or local authority, as thecase may be:Provided further that a copy of the notification by which the notification of the eligible project or scheme iswithdrawn shall be forwarded to the Assessing Officer having jurisdiction over the concerned association,institution, public sector company or local authority, as the case may be, carrying on such eligible project orscheme.

(6) Notwithstanding anything contained in any other provision of this Act, where—(i) the approval of the National Committee, granted to an association or institution, is withdrawn under sub-

section (4) or the notification in respect of eligible project or scheme is withdrawn in the case of a publicsector company or local authority or an association or institution under sub-section (5); or

(ii) a company has claimed deduction under the proviso to sub-section (1) in respect of any expenditure incurreddirectly on the eligible project or scheme and the approval for such project or scheme is withdrawn by theNational Committee under sub-section (5),

the total amount of the payment received by the public sector company or the local authority or the associationor the institution, as the case may be, in respect of which such company or authority or association or institutionhas furnished a certificate referred to in clause (a) of sub-section (2) or the deduction claimed by a companyunder the proviso to sub-section (1) shall be deemed to be the income of such company or authority or associationor institution, as the case may be, for the previous year in which such approval or notification is withdrawn andtax shall be charged on such income at the maximum marginal rate in force for that year.

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Explanation.—For the purposes of this section,—(a) "National Committee" means the Committee constituted by the Central Government, from amongst persons

of eminence in public life, in accordance with the rules made under this Act;(b) "eligible project or scheme" means such project or scheme for promoting the social and economic welfare

of, or the uplift of, the public as the Central Government may, by notification in the Official Gazette, specifyin this behalf on the recommendations of the National Committee.

For the purposes of claiming exemptions, the Central Government has notified various types of projects and schemesunder which charitable institutions can apply. These projects and programmes are promoted by the NationalCommittee for the promotion of social and economic welfare. The committee is constituted by eminent publicpersonalities.

Under section 35AC, organisations having income from business or profession can get 100 per cent deduction.Charitable Organisations can get registered themselves u/s. 5AC by applying to the National Committee under rule11F to 11-O, if they are carrying on any business. The Central Government has specified various types of projectsof national needs for which Charitable Organisations can make donations. Business houses making donations forthe purpose of section 35AC, should be careful that the donee organisation continues to enjoy approval u/s. 35AC.As the approval under section 35(AC) is not permanent in nature.

Section 80 GGA

Section 35(AC) provides exemptions to assesses who have income from head ‘business’ or‘profession’, whereas Section 80 GGA provides deductions on donations from other incomes. Thebroader coverage of Section 80 GGA also provides deductions for contributions made towardsscientific research. 100 percent deduction is available under Section 80GGA subject to the availablegross total income under Section 80A. This exemption is suitable only for the professional incomepeoples or business people. Other than business person or professionals, this 35 ac tax exemptionwill not be a valid one. So the people other than business or professional income shall claim theexemption under 80 GGA - [80GGA (2) (bb)] who are unable to claim tax exemption in any of the35 ac related sections. In 80 GGA section also there is no limitation for the donors to donate. Pleaserefer with your chartered person for the current notification of tax exemption to the donors.

In section 35 ac (i) (iii) the donor gets 125% tax exemption, which is suitable for the donors who arein business or who makes professional incomes. As this 35 ac (i) (iii) is approved only for theorganization and institutions which undergo research and development in social sciences likePsychology, sociology, history, anthropology, economics, geography, civics, or statistical researchorganizations.(http://www.nonprofitngo.com/indian-ngo/ngo-tax-exemptions/35ac.html#sthash.ZtWxrgnf.dpuf)


CHAPTER 13

In this section we will explore the taxation regimes spanning different countries and their effect on the voluntarysector. The comparison will provide a rich acumen of how different governments perceive their voluntary sector.Contemporary era is marked by how governments use taxation to dominate and control activities of certainentities/movements/ organizations restricting them to the periphery and suffocating their work space. Whilerestrictions on civil society are more markedly found across totalitarian states, democratic countries have also notlagged behind in twisting laws both fiscal and regulative to overcome dissent and opposition. Few countries haveallowed civil society to be vibrant; acknowledging their contribution and importance of being a vital organ in makingdemocracy healthy. Taxation as a means, has acted in circumventing the growth of the voluntary sector in India. Thelegislations that have been in place are more generic i.e. in dissuading non-profit entities from profiting and engagein non-profit activities of social development. The need for differentiating between profits oriented companies andnon-profits is found mainly in the taxation laws. All definitions referencing to non-profits are discernible in tax lawsgoverning them.

For example the Indian Income Tax specifically mentions charitable institutions as entities who are engaged inspecific activities as defined by the provisions of the Act. The Act has also been affected by several interpretationsof the CBDT, supplemented with years of amendments and rulings which have been taken in cognizance whenapplied. While the structure remains the same the act has imbibed different features. Not to forget that voluntaryorganizations are also defined according to the different exemptions.

We will see in the following section how the other countries taxation regimes function and how classification andstratification exist in their respective understanding of charitable organizations. Not going wholly into the fiscalregulations we are presenting the substance, gist of how these different acts operate and what stands conspicuouslynoticeable and defining their charity and taxation laws.

Whether a non-profit organisation has to pay income tax will depend on whether or not the organisation is exemptfrom income tax. Only certain categories of organisation are exempt from income tax. They come from these broadgroups: 1. registered charities 2. community service organisations 3. cultural organisations 4. educational organisations 5. employment organisations

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In this section we explore, globally the different taxation systems of other countries, which will serve useful forthe readers to draw comparisons and insight of the establishment’s view of civil society and its relativenesswith fiscal laws. There is a marked diversity in taxation but a common thread runs through them in beingstructurally similar to each other


6. health organisations 7. resource development organisations 8. scientific organisations 9. sporting organisations.

There is a system of endorsement under which charities must apply to us to be exempt from income tax: Charitiesthat are endorsed to access income tax exemption are referred to as tax concession charities (TCCs). Organisationsthat are not charities can self-assess their entitlement to income tax exemption. They do not need to be endorsed tobe exempt from income tax. Most have additional tests and rules that must be met before the organisation can beexempt.

Taxable non-profit organisations are generally treated as companies for income tax purposes, whether or not theyare incorporated.

Capital gains tax Capital gains tax (CGT) applies to non-profit clubs, societies and associations that are treated ascompanies for income tax purposes in the same way as it does for other companies that pay income tax. CGT is thetax a person or organisation pays on any capital gain it makes and includes in its annual income tax return. There isno separate tax on capital gains – it is just a component of income tax. An organisation is taxed on its net capitalgain at the company tax rate.

Goods and services tax (GST) is a broad-based tax of 10% on the sale of most goods, services and anything elseconsumed in Australia. GST is a tax on transactions. Where a non-profit organisation is registered (or required to beregistered) for GST, the price of most sales of goods and services and anything else will be inclusive of GST.Similarly, the organisation may be entitled to claim GST credits on the purchases it makes in carrying out its activities.If an non-profit organisation has a GST turnover of $150,000 or more (or $75,000 for organisations that are not non-profit), it must register for GST. If an organisation has a GST turnover of less than $150,000, it can choose to registerfor GST. The decision to voluntarily register for GST should be made based on the administrative needs of anorganisation. Generally, an organisation that registers for GST must then stay registered for at least 12 months, evenif its GST turnover is less than $150,000.

If an organisation is registered (or required to be registered) for GST, it generally includes GST in the price of mostgoods and services and anything else it sells. These sales are called taxable sales.

There are other types of sales where an organisation does not include GST in the price. These are called GST-freesales and input taxed sales.

The association law 1901 is by nature non profit-making. However, when associations develop economic activities,this only criterion is not sufficient for the association to be exempted from the commercial taxes (VAT, corporate taxand business tax). The article 206 of the C.G.I. exempts in a general way the non-profit organizations from


commercial taxes, including the VAT. This exemption is however balanced by the requirement, on one hand, of adisinterested management and on the other hand, of an absence of competition with a commercial company orany other structure liable for the commercial taxes.

It is however advisable to specify that an association that develops activities which are mainly exercised for thebenefit of companies (which remove from it a competitive advantage) will be inevitably considered as having alucrative character and will thus be submitted to all the commercial taxes ; the simple defence of collective interestnot being considered as a lucrative activity. Besides, the lucrative activities of the association should not bedominating.

The main activity of the association should not enter in competition with another subject to tax structure (companyor association). If such a competition exists, the association has to make sure that it exercises its activity in a differentway than the other structures of the competitive sector. It is advisable to apply the rule 4PProduct: the association has to cover needs which are not taken into account by the market in a satisfactory way.Public: the association has to intervene mainly for the benefit of people in difficult economic or social situation

Price: the practised prices must be clearly lower than the prices practised by companies for comparable servicesPublicity: the association does not use commercial methods such as the advertising.

The fact that the main activity of an association is not lucrative does not prevent it from having also secondaryactivities which can be lucrative. It is advisable to analyse, with regard to the rule of 4P, each of the activities of theassociation susceptible to be subjected to the VAT.

Any sale of goods and services, offered in return of a remuneration, is subjected to the VAT, since there is a directlink between these two elements (the sale or service on one hand and the compensation) The existence of a directlink implies that the goods or the services are individualized and there is a necessary relation (but not necessarilyequivalent) between the the obtained advantages and the exchange value.

Associations which are not subjected to the commercial taxes (according to the previous paragraphs rules) benefit,for their secondary activities possibly subjected to the VAT, from a franchise within the limits of 60.000 euros.

This franchise allows a globally non profit-making association to exercise some lucrative activities without havingto assume on these the VAT or to echo the cost.

Germany chooses to have different kinds of civil society organizations allowing for both formal and informalactivities. The tax laws governing are the Corporate Income Tax and the Trade Tax Act. This allows both individualand corporations to deduct from their personal or incomes and avail tax benefits if they contribute towards publicbenefit activities. This allowance is limited to 20 % of the gross annual income or 4% of the sum of gross annualrevenue of an organization.

German donors are also eligible for specific tax benefits. Donations exceeding 20% ceiling can also be deducted upto one million euros so long as the contribution made is an endowment of the fund. The German Income Tax lawsdifferentiate between four spheres representing a different source of funds. The first sphere is eh idealistic or non-

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material sphere concerning income derived from collection of fees. While taxation is not imposed on it but there areother hidden charges. Second type of taxation is income derived from asset management. This includes returns frominvestments and shares. This form of income is generally exempted from taxation. The third type is income derivedfrom purpose related activities which further the purpose of the organization. This form is generally exempted fromincome taxes so long as it does not distort the competitiveness of the market. The fourth sphere involves earningsderived from unrelated economic activities which are subject to income tax. Such as income earned from shares,dividends etc. When it comes to tax benefits for charities Germany has the Sales Tax, the Gift and Inheritance TaxLaw, The Value Added Tax Laws etc. However due to various European harmonization agreements that Germany isparty to, tax benefits usually depend on the specific nature of the activities of charity. This in turn means having acharity status is necessary but not sufficient for receiving, condition for receiving income tax benefits.

According to various section of the Income Tax Act, Corporate Income Tax Act and Trade tax Act both individualsand corporations may deduct from their personal or corporate income taxes contributions made to CSOs engaged incauses with public benefits. This allowance is limited to 20% of an individuals yearly income or four percent grossrevenue and salaries per annum in case of enterprises. Introduced in 2000, German donors are eligible for a specifictax benefit available for donation to foundations-with or without any legal personality involved provided that thecontribution made is individual and not by the company.

The primary legal form for CSOs in Nepal is the association, which in Section 2 of the Association Registration Actis defined as “an association, institution, club, circle, council, study centre etc. established for the purpose ofdeveloping and extending social, religious, literary, cultural, scientific, educational, intellectual, philosophical,physical, economical, vocational and philanthropic activities, and also includes friendship associations.”

Nepalese tax law recognizes a category of tax-exempt organizations which includes political parties and CSOs whorequest this status. For CSOs that have received a tax-exemption certificate from the Department of Internal Revenue,income from grants, donations, and investments is not taxed. The certificate remains valid so long as the CSO carriesout the public benefit purposes mentioned in the organization’s by-laws and does not carry out income generatingactivities.

Section 22(2) of the Social Welfare Act reinforces the audit requirement for social organizations or institutionsaffiliated with the Social Welfare Council by requiring them to “submit an audit report to the [Social Welfare] Councilwithin six months after the completion of the fiscal year along with the detail descriptions of last year’s progressand next year’s work and activities.” Section 18, Sub-Section (5) of the Social Welfare Act provides that if the SocialWelfare Council “so wishes, [it] may inspect or cause to inspect the accounts document along with cash and kind ofthe social organization and institutions affiliated with the Council at any time.”

CSOs in Japan are broadly-divided into more than 10 legal entities and each of them is regulated by different laws.Public Interest Corporation (PIC) had been reformed in 2008 and PIC under the old Article 34 of Civil Code is nowunder the transitional period. PICs must make decisions about how they will shift their legal status by December2013. General Nonprofit Corporation (GNC) has been established in 2008 at the same time PIC reformed. BecomingGNC is the first step towards applying for PIC authorization to enjoy the best tax treatment of all the CSO sectorsin Japan.

To become GNC is the easiest way to receive CSO legal status compared with other CSO groups. Only registrationat registry office is required.


Specified Nonprofit Corporation certificated by prefectural Government is Not-for-profit entities whose activitiesinclude those in promotion of health, education, community development, arts, culture, sports, disaster relief,international cooperation, administration of organizations engaging in these activities, etc. To receive better taxtreatment, it will be necessary for SNPC to apply for the authorization of prefectural government for the approvedSNPC status.

Public Charitable Trust permitted by competent government agency is with the objectives of worship, religion,charity, education, arts and crafts, and other purposes in the public interest. In addition to the legal entities aspreviously indicated, there are Special PICs including Social Welfare Corporation, Private School Corporation,Religious Corporation, Medical Services Corporation, the Relief and Rehabilitation Corporation that are organizedand registered pursuant to special laws developed after the world war second in connection with the Article 34 ofCivil Code. The total number of CSO groups of registered organizations, more than 360 thousand exist and of whichreligious corporation accounts for more than a half of total registered CSOs.

In our comparative analysis we will deal specifically with General Non-Profit Corporations and Specified Non-Profit Corporations.

Public benefit organizations (both charitable organizations and social welfare organizations), are generally exemptfrom federal income tax however with certain exceptions. Most organizations must apply to the Internal RevenueService to be recognized as tax-exempt. The exception to this rule is that churches generally are presumed tax-exempt even without registering with the IRS. To qualify as a public charity or social welfare organization, anorganization must (1) be organized and operated exclusively for an appropriate public benefit purpose; (2) not allowprivate inurement to insiders; (3) serve a class large and indefinite enough that the operations do not produce anysubstantial private benefit; and (4) abide by the restrictions on political activity and (for charitable organizations)lobbying.

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As a general matter, state nonprofit laws provide corporate powers broad enough to include engaging in business activity.Historically, trust law has been more restrictive, assuming in the absence of specific authorization from the trust’s creatorthat the trust should obtain income only through passive investment. Federal tax laws recognize that economic activitiescan be both an important source of funding for nonprofits and an important means by which they further their charitableservices. Public benefit organizations under sections 501(c)(3) and (4) of the Code are therefore allowed to engage inbusiness activities, so long as they do not cause the organization to violate the fundamental rule that they not have anysubstantial purpose or activity other than their charitable one. If the business activity furthers the charitable purposes, itwill normally be unproblematic, even if it is a substantial amount of the organization’s overall activity. Even if theorganization conducts unrelated business activities itself instead of through a taxable subsidiary, income from that activityis subject to tax.

Charitable trust is a significant area of law in the United Kingdom, as charitable trusts enjoy some advantages over othertrusts. Above all, UK charities do not pay income tax on their investment income devoted solely to charitable purposesunder s505 of the Taxes Act 1988. Charitable trusts do not pay capital gains tax on the disposal of assets provided theyare devoted to charitable purposes only, under s256 of the Taxation of Chargeable Gains Act 1992. However, charitiesare required to pay Value Added Tax on goods and services purchased.The problem with the law on charities is that it does not define “charitable purposes.” This article attempts to clarify thereforms recently made to the law and to determine the extent to which the Charities Act 2006 clarifies the definition ofcharitable purposes. The definition of charity2 is “any institution, corporate or not, which is established for charitablepurposes and is subject to the control of the high court.” The Charities Act 1990 defines charitable purposes in s46 as“purposes which are exclusively charitable according to the law of England and Wales.” This leaves us in very unclearsituation.

The Charity Commission was established by the Charitable Trusts Act in 1853. The purpose of its creation was to provideinexpensive and simple means of dealing with problems encountered by charities. Until then, they were dealt with bythe Court of Chancery. The constitution of the Charity Commission is now governed by the Charities Act 1993.

Charities do not have to pay taxes on income and gains if they use it for charitable purposes - this is known as ‘charitableexpenditure’.This includes tax:• on donations• on profits from trading• on rental or investment income, eg bank interest• on profits when sold or ‘disposed of’ an asset, like property or shares• purchase of property

Charities have to pay taxes on:• dividends from UK companies• profits from developing land or property• purchases - but there are special VAT rules for charities

Charities pay business rates on non-domestic buildings, but they get an 80% discount.Charities have to pay tax on any money which they don’t use for charitable purposes. This is known as ‘non-charitableexpenditure’.


CHAPTER 14

Shri A. JaitleyHon’ble Minister of Finance,Ministry of FinanceGovernment of IndiaRoom No. 134, North BlockNew Delhi

Humble Suggestion from Voluntary Development Organizations for the Budget FY 2014-2015.Option 1: Bring sec. 2(15) closer to actual activities of the sector:

The definition of Charitable Purpose be made more specific and in tune with current nature of activities undertakenby the voluntary sector, while retaining the bar on commercial activities. However, providing services or goods atsignificantly lower prices will not attract the disqualification. The proposed revised section 2(15) is given below:

“Charitable purpose” includes —(a) the prevention or relief of poverty;(b) the advancement of education;(c) the advancement of health or the saving of lives, including the prevention or relief of sickness, disease or human

suffering;(d) the prevention and mitigation of disasters;(e) the advancement of citizenship or community development, including rural or urban regeneration, empowerment

of Panchayats and Municipalities, and the promotion of civic responsibility, volunteering, the voluntary sectoror the effectiveness or efficiency of charitable or religious organizations;

(f) the advancement of the arts, culture, heritage or science;(g) the preservation of monuments or places of or objects of artistic or historic interest, (h) the advancement of amateur sport meaning thereby sports or games which promote health by involving physical

or mental skill or exertion;(i) the advancement of human rights, rights of the disadvantaged or marginalized persons;(j) the advancement of conflict-resolution or reconciliation or the promotion of religious, communal, gender, tribal,

caste harmony or equality and diversity;

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The following petitions listed below are major recommendations sent by VANI to the Finance Ministry as part ofits evidence based advocacy. VANI has been time and again negotiating for a definite taxation structure forvoluntary organizations which would create an enabling environment for voluntary organization to operate in.


(k) the advancement of environmental protection or improvement (including watershed, forest and wildlife);(m) the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage,

including relief given by the provision of accommodation or care to such persons;(n) the advancement of animal welfare;(o) the promotion of the efficiency of the armed forces of India, or of the efficiency of the police, fire and rescue

services, or ambulance services;(p) the advancement of any other object of general public benefit;Provided that the advancement of any other object of general public benefit shall not be a charitable purpose, if itinvolves carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering anyservice in relation to any trade, commerce, or business, for a cess or fee or any other consideration, irrespective ofthe nature of use or application, or retention, of the income from such activity;

Provided however that, for the purpose of this clause, any amounts collected by a trust from purchasers or usersof such services or goods shall not constitute trading, commercial or business receipts if such services or goodsare provided at prices substantially below the market rates for comparable services or goods;

Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referredto therein is twenty five lakh rupees or less in the previous year.

Option 2: Exclude recoveries for concessionally priced goods and services from first proviso to sec. 2(15)

The present proviso to sec. 2(15) covers even nominal recoveries made from beneficiaries. These are not made forprofit but to ensure efficient use of material, and to give more control to beneficiaries. This creates hardship for alarge number of NGOs. Inserting a clarification after first proviso will help achieve the desired relief without dilutingthe purpose of the section:

“Charitable purpose” includes relief of the poor, medical relief, preservation of environment (including watershed,forest and wildlife) and preservation of monuments or places of or objects of artistic or historic interest, and theadvancement 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 itinvolves carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering anyservice in relation to any trade, commerce, or business, for a cess or fee or any other consideration, irrespective ofthe nature of use or application, or retention, of the income from such activity;

Provided however that, for the purpose of this clause, any amounts collected by a trust from purchasers or usersof such services or goods shall not constitute trading, commercial or business receipts if such services or goodsare provided at prices substantially below the market rates for comparable services or goods;

Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referredto therein is [twenty five lakh rupees] or less in the previous year.

If amending the definition of “Charitable Purpose” is not the appropriate way at this stage, shall we humbly requestto take corrective measures. The current amended provisions have changed the definition of charitable purpose, asa result any the voluntary organization will lose its charitable status even if its object clause permit certain incidentalbusiness activities. In other words without doing any business activity also the exemptions will be lost. Secondly,by virtue of the current amended provisions the entire income of a charitable organization shall be subjected to tax


even if a very small negligible activity is towards incidental business activities. In the interest of natural justice, allthe voluntary organization should be permitted incidental business activities. And no voluntary organization shouldbe permitted to do unrelated commercial activities.

Option 3: The voluntary sector appreciates the changes suggested in section 2 (15) “provided further that the firstproviso shall not apply if the aggregate value of the receipt from the activities referred to therein is twenty fivelakh rupees or less in the previous year”. We would further urge to at least treat NPO as a small business category(as done in section 47) where the presumptive taxation limit could be raised to Rs. 10 Crore.

Option 4: A new proviso may be added to section 11(4A). The suggested proviso is as under:

“Provided that the business or any commercial activity should be integrally related to the charitable or religiousactivity of the organization and any income of a trust or an institution, being profits and gains of business shallnot be considered as incidental to the attainment of the objectives of the trust only because the entire income isapplied for charitable purposes or religious purposes,.”

The recently passed Companies bill as well as the proposed next five year plan, underscores the need of very vibrantand active voluntary development organizations in the country. Unfortunately, this potential is restricted by thecurrent provisions of the Income Tax Act.

We do understand that due some bad apples in the sector, there has been the misuse of provisions of the charitablestatus. But equally important is to provide enabling environment to the genuine development organizations in thecountry. We need to generate as much financial resources from within the country to address the local issues.

On behalf of thousands of small and medium sized voluntary development organizations active in the remotest areasof the country and working with most marginalized communities, we would appeal to the finance minister to lookinto the matter as they are on the verge of extinction. Recognizing the statements made by the leaders of the countrythat a vibrant voluntary sector is as important for the country as the strong private sector and government, we appealyou to rescue us from the doom.Thanking you

Sincerely,


60


Shri P. ChidambaramHon’ble Minister of Finance,Ministry of FinanceGovernment of IndiaRoom No. 134, North BlockNew Delhi

Sub.: Humble Suggestion from Voluntary Development Organizations for the Budget FY 2013-2014.Respected Sir,

On behalf of voluntary development organizations of India and its national apex body, Voluntary Action NetworkIndia (VANI), we would like to congratulate for presenting well balanced budget for FY 2013-2014. We do recognizethat in spite of pressure of global economic crisis and domestic realities, you have drafted a budget which takes careof the economically marginalized masses. The increased allocation with focus on delivery is clear indication of thepriority of the government in coming months.

Sir, in the last appeal to you on some important concerns from the voluntary sector we had highlighted the changein the fiscal and financial environment in which we operate. Today, majority of voluntary organizations are workingin hand with the government projects which are also major source of their revenue. As you have rightly pointed outin your previous addresses, the Indian Voluntary Sector is also trying to generate resource from local sources withless and less dependency on foreign funding sources. In order to strengthen Indian voluntary developmentorganizations further to contribute in nation building we would like to request few changes:

Option 1: Bring sec. 2(15) closer to actual activities of the sector:

The definition of Charitable Purpose be made more specific and in tune with current nature of activities undertakenby the voluntary sector, while retaining the bar on commercial activities. However, providing services or goods atsignificantly lower prices will not attract the disqualification. The proposed revised section 2(15) is given below:

“Charitable purpose” includes —(a) the prevention or relief of poverty;(b) the advancement of education;(c) the advancement of health or the saving of lives, including the prevention or relief of sickness, disease or human

suffering;(d) the prevention and mitigation of disasters;

(e) the advancement of citizenship or community development, including rural or urban regeneration, empowermentof Panchayats and Municipalities, and the promotion of civic responsibility, volunteering, the voluntary sectoror the effectiveness or efficiency of charitable or religious organizations;

(f) the advancement of the arts, culture, heritage or science;(g) the preservation of monuments or places of or objects of artistic or historic interest, (h) the advancement of amateur sport meaning thereby sports or games which promote health by involving physical

or mental skill or exertion;(i) the advancement of human rights, rights of the disadvantaged or marginalized persons;(j) the advancement of conflict-resolution or reconciliation or the promotion of religious, communal, gender, tribal,

caste harmony or equality and diversity;


(k) the advancement of environmental protection or improvement (including watershed, forest and wildlife);(m) the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage,

including relief given by the provision of accommodation or care to such persons;(n) the advancement of animal welfare;(o) the promotion of the efficiency of the armed forces of India, or of the efficiency of the police, fire and rescue

services, or ambulance services;(p) the advancement of any other object of general public benefit;Provided that the advancement of any other object of general public benefit shall not be a charitable purpose, if itinvolves carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering anyservice in relation to any trade, commerce, or business, for a cess or fee or any other consideration, irrespective ofthe nature of use or application, or retention, of the income from such activity;Provided however that, for the purpose of this clause, any amounts collected by a trust from purchasers or usersof such services or goods shall not constitute trading, commercial or business receipts if such services or goodsare provided at prices substantially below the market rates for comparable services or goods;Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referredto therein is twenty five lakh rupees or less in the previous year.

Option 2: Exclude recoveries for concessionally priced goods and services from first proviso to sec. 2(15)The present proviso to sec. 2(15) covers even nominal recoveries made from beneficiaries. These are not made forprofit but to ensure efficient use of material, and to give more control to beneficiaries. This creates hardship for alarge number of NGOs. Inserting a clarification after first proviso will help achieve the desired relief without dilutingthe purpose of the section:

“Charitable purpose” includes relief of the poor, medical relief, preservation of environment (including watershed,forest and wildlife) and preservation of monuments or places of or objects of artistic or historic interest, and theadvancement 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 itinvolves carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering anyservice in relation to any trade, commerce, or business, for a cess or fee or any other consideration, irrespective ofthe nature of use or application, or retention, of the income from such activity;Provided however that, for the purpose of this clause, any amounts collected by a trust from purchasers or usersof such services or goods shall not constitute trading, commercial or business receipts if such services or goodsare provided at prices substantially below the market rates for comparable services or goods;Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referredto therein is [twenty five lakh rupees] or less in the previous year.

If amending the definition of “Charitable Purpose” is not the appropriate way at this stage, shall we humbly requestto take corrective measures. The current amended provisions have changed the definition of charitable purpose, asa result any the voluntary organization will lose its charitable status even if its object clause permit certain incidentalbusiness activities. In other words without doing any business activity also the exemptions will be lost. Secondly,by virtue of the current amended provisions the entire income of a charitable organization shall be subjected to taxeven if a very small negligible activity is towards incidental business activities. In the interest of natural justice, allthe voluntary organization should be permitted incidental business activities. And no voluntary organization shouldbe permitted to do unrelated commercial activities.

62


Option 3: The voluntary sector appreciates the changes suggested in section 2 (15) “provided further that the firstproviso shall not apply if the aggregate value of the receipt from the activities referred to therein is twenty fivelakh rupees or less in the previous year”. We would further urge to at least treat NPO as a small business category(as done in section 47) where the presumptive taxation limit could be raised to Rs. 10 Crore.

Option 4: A new proviso may be added to section 11(4A). The suggested proviso is as under: “Provided that the business or any commercial activity should be integrally related to the charitable orreligious activity of the organization and any income of a trust or an institution, being profits and gains ofbusiness shall not be considered as incidental to the attainment of the objectives of the trust only becausethe entire income is applied for charitable purposes or religious purposes,.”

The recently passed Companies bill as well as the proposed next five year plan, underscores the need of very vibrantand active voluntary development organizations in the country. Unfortunately, this potential is restricted by thecurrent provisions of the Income Tax Act. We do understand that due some bad apples in the sector, there has beenthe misuse of provisions of the charitable status. But equally important is to provide enabling environment to thegenuine development organizations in the country. We need to generate as much financial resources from within thecountry to address the local issues. On behalf of thousands of small and medium sized voluntary developmentorganizations active in the remotest areas of the country and working with most marginalized communities, wewould appeal to the finance minister to look into the matter as they are on the verge of extinction. Recognizing thestatements made by the leaders of the country that a vibrant voluntary sector is as important for the country as thestrong private sector and government, we appeal you to rescue us from the doom.

Towards the end, we would urge you to recall your promise to the nation at the time of introducing thisamendment in sec. 2(15), that genuine voluntary organisations will not suffer due to this amendment.Unfortunately, the spirit of the amendment is lost during assessment proceedings as the Assessing Officersfeel bound by the words of the Act rather than the spirit. Your timely action in this regard will make sure thatyour promise is fulfilled in both letter and spirit.

Sir, we would also like to thank you for inviting representatives of voluntary development organizations for pre-budget consultations. We sincerely hope that close collaboration between voluntary sector and government willdefinitely help all of us in achieving the national development targets.

Thanking you

Sincerely,

Harsh JaitliChief Executive OfficerDate:


Dear Shri Md. Aftab Alam,Economic OfficerDepartment of Economic Affairs

Greetings from VANI!

This is regarding the suggestions called by the Ministry of Finance, Government of India from the social sector inconnection with Union Budget 2016 – 17. In the last few years the fiscal and financial environment in the countryhas changed substantially, along with also have changed the expectation from the voluntary developmentorganisations (VO’s). Today, most of the VO’s are either working on government projects or trying to raise resourcesfrom within and outside the country. There is also very specific focus of the current government to engage privatesector and VOs to projects related to national priority. However, the fiscal status of the voluntary sector is still veryold and requires a fresh thinking.

Keeping all this in mind we would like to humbly put forward the following suggestions:

1. Realignment of Section 2 (15) of Income Tax Act: The definition of Charitable purpose under section 2 (15)of the Income tax act, the only and very important section which defines the sector. Reforming this section willalso help in defining and differentiating organizations engaged in development activities from other non-for-profit entities. Today, many activities undertaken to implement the flagship development programmes of IndianGovernment are not defined under the section 2(15). This will also help the entities that are really into businessshould be taken away from the nomenclature of NGO sector, to make the definition clear.

2. Method of calculating business income: The clause of Section 2(15) offers that organizations should not involvethemselves in activities which are not in unison with their stated organizational objectives. Notwithstanding theintegrity of this clause it does needs to include that the exemption limit offered, i.e. 20% of total receipts has tobe increased to 1 crore as this will be beneficial for grassroots organizations. Accordingly it becomes morereasonable to have separation of business activities from the objectives of the organizations and allow a divisionin their books of accounts without influencing their charitable purposes, if so they tend to accrue income fromnon-charitable nature. secondly, most of the activities undertaken under government projects or CSR are countedas business activities.

3. Establishment of mechanism of regular dialogue between NGOs, Finance Ministry and Banks

4. NGOs may be allowed to work outside India: Under section 11(1)(c) of the Income-tax Act, any incomeapplied on activities outside India is not eligible for exemption. Hence the ministry should grant exemption tothe organizations interested in working outside India. This will also help in furthering the developmentpartnership agenda of government through NGOs through people to people collaboration on developmentalactivities.

Thanking you

Sincerely,


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CHAPTER 15

The Income Tax Act is due for a reform which will suit to the workings of the voluntary sector and build an ecosystemfor them to flourish without unfazed problems and stymies critical to their strive towards objectives of socialdevelopment. The extensive analysis presented.

As in the second chapter we had seen that the taxable base for Income tax does not include the items from (a) to (d)of Section 11(1). Especially with regards to

1) Income accruing from property of charitable or religious nature as such by which this income is only accumulatedto the tune of 15%. Also the utilization of this non-taxable income has only to be applied in India.

2) Income cannot be taxed which promotes international welfare if it is applied to purposes outside India( subjectto whether the institution was created or after the 1st Day of April 1952)

3) Income which are voluntary contributions and come with a specific direction.

It may be observed that there is a usage of income in the subsequent clauses of Section 11; however it is importantto note that this income is not synonymous with ‘total income’ which is defined by section 2(45) and the aboveprovisions confer exemption.

In chapter 3, it becomes more important to refinethe definition of ‘project grants’ as observed thatjudicial rulings may interpret them as voluntarycontributions and levy suitable taxation as amountsexpended by an organization. However whileproject grants come with a stated stipulation, itunlikely given the that Section 12(1) read with theprecedent established by the judicial ruling NirmalAgricultural Society vs ITO[1999] 71 ITD 152(Hyd) can make foreign grants liable for taxation.But the most important in this section is howservice taxation on project grants is seen. In thisentire section we have seen that the entire

The final chapter of the study explores the different recommendations and analyses that are imperative inmaking the IT Act more enabled for voluntary organizations. These recommendations have been seen to bepanacea to the existing laggards in the Act. By constructing these recommendations it is hoped that the GoI willinstitute them and deliver a more robust mechanisms for the entire voluntary sector.


dependence of the organization to remainexempt from taxation is governed by theagreement between the assesse organizationand the donor. In chapter 4, it is observed thatvoluntary contributions towards organizationsare not exempted from taxation contrary toproject grants which come with an instructionas to the utilization. Section 12(1) clearlystates that organizations receiving voluntarycontributions are to be taxed accordingly. Theincome earned from utilization is the ‘deemedincome’ of an organization. In analyzing itmay be noted that voluntary contributionsbefore may be income accruing which are later

contributed, and hence begs us to ask the question whether it is liable for taxation as this leads to double taxation.

In chapter 5, we see the exemption and accumulation of income stated by Section 2(15) of the Act. The condition of85% of income should be utilized with the 15% set for accumulation also the activities provided for coming underthe titular charitable activities should be expanded along the lines of public benefit. Seeing the indispensability ofreferring to chapter 6, the general public utility has to be more inclusive in offering a template of activities whichwill save undue interpretation from the assessing officers.

In chapter 7, the issue of business activities is worth a debate. The clause of Section 2(15) offers that organizationsshould not involve themselves in activities which are not in unison with their stated organizational objectives.Notwithstanding the integrity of this clause it does needs to include that the exemption limit offered, i.e. 20% oftotal receipts has to be increased to 1 crore as this will be beneficial for grassroot organizations. This is due to theaugmentation and diversification of the scale of economies taking place in the voluntary sector. Accordingly itbecomes more reasonable to have separation of business activities from the objectives of the organizations and allowa division in their books of accounts without influencing their charitable purposes, if so they tend to accrue incomefrom non-charitable nature. It is important here to refer to the petitions VANI has submitted which urged the FinanceMinister to exclude income accruing for the purpose of this clause, any amounts collected by a trust from purchasersor users of such services or goods shall not constitute trading, commercial or business receipts if such services orgoods are provided at prices substantially below the market rates for comparable services or goods;

1) To have distinction on the basis of taxation laws for voluntary organizations as done in Australia and Japan. Thiswould require a registration law that would be more in tune with the prevailing environment as a transfigurationof the law is pending.

2) Enlarging the definition of charitable purpose so as to accommodate social development activities of all huesthat take cue from the general utility purpose as mentioned in Section 2(15). An inclusive band of variouscharitable activities will be easier to concur with and exclude cases of interpretation during assessment. Withthis regard it becomes necessary to also advocate for exemption under General Public Utility limb in the sameprovided to other limbs of Section 2(15).

66


3) While instituting a charity commission for sole determination of charities and voluntary developmentorganizations so as to provide a conducive and enabling environment for voluntary organizations may not workout in India It is necessary to have a department dedicated to voluntary affairs for the advancement of thevoluntary agenda and mushrooming of false organizations that have hijacked the mandate of innumerablevoluntary organizations working for the benefit of the deprived sections of society.

4) Capacity building of income tax officials to institute developing skills in order to make them more reasonableand empathic to organizations in distress and concomitantly understand the objectives and mission of voluntaryorganizations

5) It is also necessary to see the nature of taxing donations as these are incomes which have already been taxed andthus are liable for double taxation when they have forwarded amounts towards donations.

6) To increase the threshold limit up more than Rs. 25,00,000 rather than 20% under Section 2(15) as this mightaffect smaller voluntary organizations carrying out business activities incidental to their charitable objectives. Athreshold of Rs. 1 crore – Rs. 10 crore will be a welcomed so as to provide a boost to the activities of grassrootorganizations.

7) Treatment of grants-in-aid, since this is the amount received for specific activities, the amount should not beincluded under the head ‘Income’ as this creates problems during accounting and difficulties for interpretationby the assesse officer.

8) There is a need for encouraging fund raising by the IT Act by making provisions for tax breaks on Corporateand Individual donations. CSR should be provided exemption by through the prism of 35(AC).

9) There is also a need for instituting specific exemptions for organizations under TDS. Also under Service Tax, isimportant that CSR activities do not get included for service tax based upon the Service Contract made betweena corporate and an organization.

10) Opacity on the service tax clause where project grants are concerned need to be resolved. Many timesorganizations face problems where IT officers charge service tax on projects of voluntary organizations even ifthey possess 12A. Rationalizing this in conjunction with Section 2(15) and 194(J) can provide ease to manyorganizations.

The above recommendations are calculated observances and are seen as counters to the major impediments in theextant Act. The petitions incessantly placed by VANI are part of its ongoing advocacy which is part of its campaignto strive for an enabling environment for voluntary organizations.

The study as informed in its introduction was placed before expert panels that the churned out the necessary backlogsin the Act and provided their expert opinion in its march towards reformation. If solicited, these recommendationswill be able to provide comprehensive legislations for voluntary organizations and ease their operational capacities.


1) http://www.incometaxindia.gov.in/Pages/about-us/history-of-direct-taxation.aspx2) Neelima Khetan, Funding, Sustainability and Regulatory Environment, Society, Politics & the Voluntary

Sector3) Fogla, M, Income of Charitable Organizations, Taxation of Trusts & NGOs4) AccountAble, Issue # 86; Dec-025) Standard & Norms, Legal Series Vol. V, Issue 2, May 20126) http://taxguru.in/income-tax/taxation-voluntary-contributions-received-trusts-charitable-

institutions.html#sthash.dCvIZ72M.dpuf7) Fogla, M, Taxxman8) AccountAble, Issue # 91; May-03; Released: Feb – 049) PRIA, 1990:16310) http://taxindia.pz10.com/2013/06/charitable-purpose-us-215-of-income-tax.html11) Venkata Ramani, Indian trusts-SEC-2(15) of Income Tax is it a Boon for the Public charitable Trusts12) Ravi. K, Expanded scope of Sec 2(15) proviso – Is 20% threshold better than Rs 25 lakhs?13) Standards & Norms, June 201314) http://taxguru.in/income-tax/all-about-deduction-under-section-80g-of-the-income-tax-act-1961-for-dona-

tion.html#sthash.pDYfhp1n.dpu

1) Page 102) Page 133) Page 194) Page 215) Page 246) Page 317) Page 56

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LIST OF VANI PUBLICATIONS

• Civil Society Accountability Principles and Practice (India Toolkit) (English)• Enabling environment for Voluntary Organisations A Global Campaign (English)• Model Policies for International Good Governance in Voluntary Organizations • The Hand Book in Good Governance for the Voluntary Sector • Status of the Voluntary Sector in India A Study Report• Status of the Voluntary Sector in India (Primer) English & Hindi))• Civil Society Engagement in Aid Effectiveness Discourse• Changing Dynamics Between VOs and Private Sector• Involving Voluntary Organizations in Governments Plans and Projects• India’s Global Footprints• India’s Development Assistance: Trends, Challenges and Implications for CSOs• India’s Role in the G20: A Civil Society Approach• Contribution and Challenges of Voluntary Organizations Working on Religious Minority A Primer of

the Study Report (English & Hindi)• Contribution and Challenges of Voluntary Organisations Working with Women A Primer of the Study

Report (English & Hindi)• Role and Contribution of Voluntary Organisations in Health & Nutrition A Primer of the Study Report

(English & Hindi)• Challenges of the Grassroots Voluntary Organisations A Primer of the Study Report (English & Hindi)• Role and Contribution of Voluntary Organisations on Water & Sanitation A Primer of the Study Report

(English & Hindi)• Contribution and Challenges of Voluntary Organizations Working with Dalits A Primer of the Study

Report (English & Hindi)• Contribution of CSR on Thematic Issues of Education, Health and Nutrition, and Water and Sanitation

A Primer of the Study Report (English & Hindi)• Revisiting the National Policy on Voluntary Sector and Need for a National Policy on Volunteering

(English & Hindi)• Policy Brief of Revisiting the National Policy on Voluntary Sector and Need for A National Policy on

Volunteering (English & Hindi)• Enabling Environment of the Voluntary Sector in India A Study Report (English & Hindi)• Policy Note on Reforms in the Voluntary Sector (English & Hindi)• Critical Review of Financial Inclusion – In G20 Countries with Focus on India English & Hindi)• Bringing People in from the Cold – Ensuring Inclusive Growth in India (English & Hindi)• Sustainable Development in India – Review and Way Forward (English & Hindi)• Corruption and Governance in India – Current Status and Way Forward (English & Hindi)• India-Africa Partnership: A Civil Society Perspective (English)• Development Finance and Cooperation in SSC with Special focus on India (English & Hindi)• Status of Voluntary Organizations in Disturbed States — A Study Report (English & Hindi)• Model Policy on Registration — A Study Report (English)

IntroductionBread for the World is the globally active relief and development agency of the ProtestantChurches in Germany. In almost 100 countries all across the globe they empower thepoor and marginalised to improve their living conditions by themselves. Key issues oftheir work are food security, the Promotion of health and education, respect for humanrights as well as the integrity of creation.

Guiding principlesBread for the world is rooted in the faith that bears witness to the world as God’s creation,in the love that encounters the Loard precisely in our disenfranchised and poorestneighbour, and in the hope that acts in accordance with God’s will in expectation of ajust world. Bread for the World considers itself part of the blobal Christian community.They seek cooperation with churches and church agencies throughout the world andassume our responsibility in ecumenical networks.

WorkBread for the World primarily focuses on the support of projects in the countries of theGlobal South. An essential feature of their projects is the close and continuous cooperationwith local, often church-related partner organizations. Upon request, Bread for the Worldprovides them with specialists and volunteers. Through lobbying, public relations andeducation in Germany and Europe, we week to influence political decisions in favor ofthe poor and to raise awareness for the necessity of a sustainable way of life

About Bread for the World

Voluntary Action Network India (VANI) is an apex body of the Voluntary Organisations.• Founded in 1988 to act as a promoter/Protector and collective voice of the voluntary

sector.• Base of 10000 non-governmental organisations spread in 25 states of India.• Resource Centre for publications, research work, articles, important documents and

information about and related to the voluntary sector.

Objectives:• As a platform, to promote voluntarism and create space for voluntary action.• As a network, attempt to bring about a convergence of common sectoral issues and

concerns for building a truly national agenda of voluntary action in India. In addition,facilitate linkages of various efforts and initiatives of the Indian voluntary sector, whichsucceed in strengthening a united and sustainable movement of change.

• An association, work towards fostering value based voluntary action and long termsustainability especially amongst our members.

Areas of work• Promoting practices of good governance in the voluntary sector.• Strengthening networks• Articulating independent voices of the sector.• Research and advocacy of policies and law effecting the voluntary sector.

About Voluntary Action Network India (VANI)

Voluntary Action Network India (VANI)BB-5, Ist Floor, Greater Kailash Enclave-II,

New Delhi - 110 048 (INDIA)Phone: 011-29228127, 29226632, Telefax: 011-41435535Email: [email protected] Website: www.vaniindia.org

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