Charitable Trust- Application of Income.

Utilisation of Charitable trust assets for donation to other charitable trust in view of provision of explanation to section 11(2) of Income Tax Act- Whether application of Income in the hands of Donor trust.

Considered following case of Trust A:

The breakup of Trust Corpus upto 4^th year is as under:-

1.      Original Corpus                                   - Rs. 10,00,000

2.      15% income accumulated year each - Rs.      64,500

3.      Accumulation u/s 11(2)                      - Rs.  1,75,000

4.      TOTAL                                                 - Rs. 12,40,000

Facts: Trust A wants to make donation of Rs. 2,00,000 (in excess of current year income of Rs. 1,20,000) in Year 5 (Current years) to other charitable trust.

Explanation to section 11(2) of Income Tax Act

[Explanation.—Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.]

Question:

Can a Trust make donations in any financial year to another trust registered under 12 A of the Income Tax act in excess of its income of that financial year?  What are income tax implications

Comments

As per explanation to section 11(2), trust cannot utilise the amounts accumulated u/s 11(2) for making donation to other charitable trust. The same view is also endorsed by ICAI in its guidance note issued on Taxation of Charitable trust 

 If trust does so, then such payment to other charitable trust will be treated as income in the hands of Donor Trust (Trust A in this case)

 There appears to be no embargo on utilisation of following amounts for making donation to other charitable trust:-

a)      Income earned in current year

b)      Past year income accumulated to the extent of 15% year each

c)       Out of corpus of trust, not including the corpus accumulated u/s 11(2).

So Trust can make donation of Rs. 2,00,000 to other charitable trust in excess of current year income of Rs.  1,20,000, by utilising the Original corpus (10,00,000) and 15% income accumulated each year (Rs. 64,500)