XYZ Charitable Trust, registered under Section 12AB, derives income from property held under trust of 500 lakh during the financial year 2024-25.…
CA Final · Direct Tax Laws and International Taxation · RTP · May 2025
XYZ Charitable Trust, registered under Section 12AB, derives income from property held under trust of 500 lakh during the financial year 2024-25. The trust decides to pay an amount 200 lakh to another trust, ABC Educational Trust, which is also registered under Section 12AB. I. (a) How much the amount paid by XYZ Charitable Trust will be considered as an application of income for charitable purposes, if such contribution is given - (i) with a direction that the same shall be used for general charitable purposes and not as corpus. (ii) with a specific direction that the amount shall form part of its corpus. (b) Would your answer change to the above questions, if such amount is paid out of accumulations of XYZ trust. If yes, what other tax implications arise in its hands. II. Also, examine the conditions which ABC Educational trust require to satisfy for not including the amount received from XYZ Charitable trust with specific direction for forming part as corpus in its total income. What other tax implications arise in the hands of ABC Educational trust if such conditions are not satisfied.
Suggested Answer and Working Notes:
(a) (I) (a) (i) As per Explanation 4 (iii) to Section 11 (1) , only 85% of the amount paid to ABC Educational trust (other than for corpus) is considered as an application of income. Accordingly,170 lakh will be treated as an application of income for charitable purposes. (ii) As per Explanation 2 to Section 11 (1) , any contribution made by one trust to another trust or institution (even if registered under Section 12AB or Section 10(23C) (iv) / (v) / (vi) /(via)) with a direction that such amount shall form part of corpus is not considered as an application of income for charitable purposes. Therefore, the 200lakhs given for corpus will not be treated as an application of income for XYZ Charitable Trust. (b) Where any amount of contribution given to another trust approved under section 12AB or registered under section 10(23C) (iv) / (v) / (vi) /(via) is out of accumulations then such amount would not qualify for application and would be deemed as income by virtue of section 11 (3) in both cases. Moreover, such an amount would fall within the definition of specified income u/s 115BBI and would be taxable @30%. (II) As per section 11 (1) (d), an amount received by a fund/ trust/ institution etc. would not be included in the total income, if such amount is received with a specific direction that it shall form part of the corpus and the said corpus contribution is invested in any of the modes specified under section 11 (5) . However, if the same is invested in modes otherwise than specified under section 11 (5) , then by virtue of section 115BBI the same would be considered as specified income and would be taxable @30%.
Topics: Assessment of Trusts and Institutions, Political Parties and Other Special Entities
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