• Avar Lamba, Shubhit Shokeen

Charitable Institutions - Legal Equivocation

[Avar and Shubhit are law students.]

The Income-Tax Act 1961 (Act), through incentive provisions encompassed in Section 11, entitles trusts that are created for charitable or religious purposes to claim an exemption on the income they apply towards such purposes in India. Essentially, charitable or religious trusts can mitigate limit their tax liability if they apply the income derived from their property (including non-corpus donations falling under Section 12) during the relevant previous year (P/Y) to such purposes for which the trust has been established. The rationale behind Section 11 is to provide relief to institutions engaged in general public advancement, but the language of Section 11(1)(a) and Section 11(1)(d) tends to dilute the script of law by dissolving the thin line of separation between permissible tax mitigation and tax avoidance.

Situs of Expenditure

Section 11(1)(a) of the Act lays down the basic framework as per which charitable or religious trusts can claim an exemption. The provision precludes ‘income derived from property held under trust wholly for charitable or religious purposes’ from the ambit of total taxable income of the trust, provided that ‘such income is applied to such purposes in India’.

There has been substantial discussion with regard to the interpretation of the latter part of the above-mentioned provision due to its equivocal nature. The ambivalent language used by the legislature fails to clarify the context in which the word applied has been used in the provision. Thus, the question that is presented before us is whether the income needs to be applied to ‘such purposes’, or whether it needs to be applied to ‘such purposes in India’, i.e. whether income spent outside the taxable territories of India to promote its purposes within India would amount as ‘application of income’ falling within the scope of Section 11.

This question has been posed before different courts of Law, resulting in conflicting judgements. In the case of H.E.H. Nizam’s Religious and Charitable Trust v. Commissioner of Income Tax (1981), the court relied upon the judgement of Commissioner of Income-Tax v. Trustees of H.E.H. The Nizam's Charitable Trust (1966), where the High Court observed that the phrase 'applied or finally set apart for application' suggested that the revenue from the property did not qualify for the exemption unless it was applied or finally set aside for religious or charitable purposes inside the taxable regions. "'Applied’ meant that the income was actually applied for charitable or religious purposes in the taxable territories.” However while the above case explained the meaning of the word 'applied' contained in Section 4 of the Income Tax Act 1922, the ITAT of Delhi in Indian Brand Equity’s case, while discussing the same issue in the context of Section 11 of the Income Tax Act 1964 held that “The implication of the term 'application' is different under the new Act. It is clear that the word applied is synonymous to the word spent in the context of Section 11 of the IT Act and hence it is mandatory the amount should be spent and applied in India.”

Contradicting the aforementioned cases, it was held in the case of Gem & Jewellery Export Promotion Council v. Sixth Income-tax Officer, that “A bare reading of sub-section 11(1)(a) does not leave us in doubt that the requirement under Section 11 is for application of income for purposes in India and it does not restrict the application of income within the territory of India.” Based on this reasoning, the Income Tax Appellate Tribunal (ITAT) of Delhi in National Association of Software and Services Companies (Nasscom) v. Deputy Director of Income-tax (Exemptions) held that the application of income need not be in India, but the application should result and should be for charitable and religious purpose in India. However, the decision was reversed on appeal by the Delhi High Court, which gave a similar reasoning to the one given by the ITAT in Brand Equity Foundation’s case, demonstrating a grammatical breakdown of Section 11(1)(a) to hold that application of income must be within the taxable territories of India. Later on, this judgement was contradicted by the Karnataka High Court where it was stated that “(The gap) between 'is applied' and 'in India' shows that the application of income need not be in India, but the application should result and should be for the charitable and religious purpose in India.

The discrepancy between these precedents represents the ambiguity that surrounds the provision. It is still unclear whether a charitable trust could claim exemption for spending money outside India to raise funds which would ultimately be applied to its purposes in India. In such instances, the obscurity of Section 11(1)(a) will benefit both the trust requesting for the exemption as well as the Assessing Officer denying the exemption, by bolstering their claims based on the aforementioned interpretations of the said section.

Based on the above analysis, there is an intelligible need of incorporating an explanation in Section 11 of the Act to lucidly spell out the importance of place of expenditure with respect to application of income. An absence of the same would only give rise to more situations where conflicting decisions would confound the persons governed by the said provision.

Voluntary Contribution to Corpus

Section 11(1)(d) of the Act excludes ‘income in the form of voluntary contributions made with a specific direction to form part of the corpus’ from the ambit of total income of the P/Y, and conversely, a voluntary contribution made without such a direction falls under the ambit of Section 12 of the Act and is considered as part of the taxable income of a trust. In the context of this Act, the word ‘corpus’ has been used to refer to the capital of an assessee/estate/trust/institution. Thus, any donation received by a trust, if made with a specific direction to form part of the capital of the trust, is to be excluded while calculating its final tax liability.

While the forethought of the lawmakers was to distinguish contributions made with a specific direction towards the corpus of the trust from other voluntary contributions, the provision itself tends to askew from the intention. The Rajasthan High court in Sukhdeo Charity Estate v. CIT Rajasthan, held that “in case there is specific direction there is no difficulty to understand the motive or intention.” Thus, at the time of making such a contribution, the intention of the donor to treat the donation as part of the corpus must be absolutely clear to the donee. However, in a catena of cases, voluntary contributions, where there is no specific direction at the time of donations, have been considered as forming part of the corpus of the trust through an analysis of the surrounding circumstances. This understanding can be seen in the case of Commissioner of Income Tax, Central Circle, Bangalore v. Bharatiya Sanskriti Vidyapeeth Trust, where the High Court observed that “where there is [no] written communication, only means to find out as to what the specific direction is can be gathered by considering how the recipient of the amount (i.e. the ‘donee’) has accounted for it.” Further, in Director of Income Tax v. Ramakrishna Sewa Ashram, the Karnataka High Court held that “it is not necessary that a voluntary contribution should be made with a specific direction to treat it as ‘corpus’.”

This goes to show the dichotomy of the provision that on the one hand, there is an explicit requirement of a ‘specific direction’ from which the intention of the donor should be clearly exhibited, but contrarily, situations where such a direction is latent in the facts of the case are allowed to fall under the wide umbrella of Section 11(1)(d). The fact of the matter is that Section 11(1)(d) does not prescribe the mode in which such direction is to be given and neither does it state that the direction should be provided at the time of the donation. This creates a window of opportunity for trusts to treat voluntary contributions not made with any specific directions, as part of the corpus and transmute them in such a manner, that on the face of it, it appears as if the intention of the donor was to make a contribution towards the corpus of the trust (a manner of doing so could be to create an endowment fund in the name of the donor after receiving the contribution and then depositing it in a fixed deposit account in a nationalized bank). Thus, charitable trusts have been provided with an opportunity to treat voluntary contributions falling under Section 12 as part of their corpus, resulting in a misdirection of the funds originally intended for another purpose, and a reduction in the final tax liability of the trust.

The authors are of the opinion that the language of Section 11(1)(d) needs to be amended and the mode in which the specific direction is to be given along with the time at which it is to be communicated to the donee needs to be stipulated to stamp out the possibilities of tax avoidance by sorting out the obscurity created not only by the provision, but also by the multiple judgments pronounced on it.


Section 11 contains incentive provisions that need to be construed strictly. However, the current ambiguities which are inherent in the section significantly drift the actual meaning of the section away from what was contemplated by the legislature. The vague nature of Section 11(1)(a) and Section 11(1)(d) allows charitable institutions to avail tax benefits that were never intended by the law makers, resulting in possibilities of tax avoidance. This signifies the urgent requirement to remove any uncertainty with respect to the language of the section.


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