Sections 10, 10A, 10AA, 10B, 10BA, 11, 12, 13 and 13A deal with income

which does not form part of an assessee’s total income. While section 10
appends a list of income absolutely exempt from tax, sections 10A, 10AA,
10B, 10BA, 11, 12, 13 and 13A deal with specific exemptions available to
newly established industrial undertakings in free trade zones, charitable
trust and political parties. WHAT INCOME IS EXEMPTED UNDER SECTION
10 32. In the following cases, income is exempt from tax, as it does not
form part of total income. The burden of proving that a particular item of
income falls within this section is on the assessee.  Agriculture income —
see paras 185 to 188 10(1)  Payments received from family income by a
member of a HUF — see para 32.1 10(2)  Share of profit from a firm —
see para 219 10(2A)  Interest received by a non-resident from prescribed
securities 10(4)  Interest received by a person who is resident outside
India on amounts credited in the “Non-resident (External) Account” 10(4) 
Interest payable to a non-resident/foreign company by an Indian
company/business trust pertaining to money borrowed from a source
outside India by way of issue of rupee denominated bond during
September 17, 2018 and March 31, 2019 10(4C)  Any income accrued or
arisen to, or received by, a specified fund as a result of transfer of capital
asset [referred to in section 47(viiab)], on a recognised stock exchange
located in any International Financial Services Centre (and where the
consideration for such transaction is paid or payable in convertible foreign
exchange), to the extent such income accrued or arisen to, or is received
in respect of units held by a non-resident 10(4D)  Leave travel concession
provided by an employer to his Indian citizen employee — see para 44.7
10(5)  Remuneration received by foreign diplomats of all categories 10(6)
 Salary received by a foreign citizen as an employee of a foreign
enterprise provided his stay in India does not exceed 90 days 10(6)(vi) 
Salary received by a non-resident foreign citizen as a member of ship’s
crew provided his total stay in India does not exceed 90 days 10(6)(viii) 
Remuneration received by an employee, being a foreign national, of a
foreign Government deputed in India for training in a Government
establishment or public sector undertaking 10(6)(xi)  Tax paid on behalf
of foreign companies — see para 32.2 10(6A)  Tax paid by Government or
an Indian concern in the case of a non-resident/foreign company 10(6B) 
Income arising to notified foreign companies from services provided in or
outside India in project connected with the security of India 10(6C)  Any
income arising to a non-resident/foreign company by way of royalty from
(or fees for technical services rendered in or outside India to) the National
Technical Research Organisation 10(6D) CHAPTER 3 45  Foreign
allowance granted by the Government of India to its employees posted
abroad — see para 42 10(7)  Remuneration received from a foreign
Government by an individual who is in India in connection with any
sponsored co-operative technical assistance programme with a foreign
Government and the income 10(8) of the family members of such
employee and (9)  Remuneration/fees received by non-resident
consultants and their foreign employees 10(8A), (8B) and (9)  Death-
cum-retirement gratuity — see para 41.2 10(10)  Commuted value of
pension and any payment received by way of commutation of pension by
an individual out of annuity plan of LIC or any other insurer from a fund
set up by that corporation or insurer — see para 41.3 10(10A)  Leave
salary — see para 41.1 10(10AA)  Retrenchment compensation — see
para 41 10(10B)  Compensation received by victims of Bhopal gas leak
disaster 10(10BB)  Compensation from the Central Government or a
State Government or a local authority received by an individual or his
legal heir on account of any disaster 10(10BC)  Compensation received
from a public sector company at the time of voluntary retirement or
separation — see para 41.5 10(10C)  Tax on perquisite paid by employer
— see para 82.4 10(10CC)  Any sum (including bonus) on life insurance
policy (not being a Keyman insurance policy) — see para 32.3 10(10D) 
Amount received from statutory or recognised provident fund or public
provident fund — see para 10(11)/(12) 46  Any payment from Sukanya
Samriddhi Account 10(11A)  Amount from an approved superannuation
fund to legal heirs of the employee — see para 47 10(13)  House rent
allowance subject to certain limits — see para 42.1 10(13A)  Special
allowance granted to an employee — see para 42.3 10(14)  Interest from
certain exempted securities — see para 111.5 10(15)  Payment made by
an Indian company, engaged in the business of operation of an aircraft, to
acquire an aircraft on lease from a foreign Government or foreign
enterprise if a few conditions are satisfied — see para 32.4 10(15A) 
Scholarship granted to meet the cost of education — see para 32.5 10(16)
 Daily allowance of a Member of Parliament or State Legislature (entire
amount is exempt) and any other allowance subject to certain conditions
— see para 32.6 10(17)  Rewards given by the Central or State
Government for literary, scientific or artistic work or attainment or for
service for alleviating the distress of the poor, the weak and the ailing, or
for proficiency in sports and games or gallantry awards approved by the
Government 10(17A)  Pension and family pension of gallantry award
winners 10(18)  Family pension received by family members of armed
forces 10(19)  Notional property income of any one palace occupied by a
former ruler 10(19A)  Income of local authorities 10(20)  Any income of
housing boards constituted in India for planning, development or
improvement of cities, towns or villages 10(20A)  Any income of an
approved research association 10(21)  Income of specified non-agencies
10(22B)  Any income (other than interest on securities, income from
property, income received for rendering any specific services and income
by way of interest or dividends) of approved professional bodies — see
para 32.7 10(23A)  Any income received by any person on behalf of any
Regimental Fund or non-public fund established by the armed forces of
the Union for the welfare of the past and present members of such forces
or their dependents 10(23AA)  Income of funds established for the
welfare of employees — see para 32.8 10(23AAA) Para 32 Income that is
exempt from tax 46  Any income of the pension fund set up by LIC or any
other insurer approved by the Controller of Insurance or Insurance
Regulatory and Development Authority 10(23AAB)  Any income (other
than business income) of a trust or a society approved by Khadi and
Village Industries Commission 10(23B)  Income of an authority whether
known as Khadi and Village Industries Board or by any other name for the
development of Khadi and Village Industries 10(23BB)  Income arising to
any body or authority established, constituted or appointed under any
enactment for the administration of public, religious or charitable trusts or
endowments or societies for religious or charitable purposes 10(23BBA) 
Income of the European Economic Community derived in India by way of
interest, dividends or capital gains in certain cases under the European
Community International Institutional Partners Scheme, 1993 10(23BBB) 
Any income of SAARC Fund for Regional Projects 10(23BBC)  Any income
of Secretariat of Asian Organisation of Supreme Audit Institutions
10(23BBD)  Income of Insurance Regulatory Authority 10(23BBE) 
Income of the Central Electricity Regulatory Commission 10(23BBG) 
Income of Prasar Bharti (Broadcasting Corporation of India) 10(23BBH) 
Income received by any person on behalf of specified national funds,
approved public charitable institutions, educational institute/hospital,
Swachh Bharat Kosh and Clean Ganga Fund — see para 32.9 10(23C) 
Income of a Mutual Fund set up by a public sector bank or public financial
institution 10(23D)  Any income of a securitisation trust from the activity
of securitisation 10(23DA)  Income of investor protection fund 10(23EA) 
Income of Credit Guarantee Funds Trust for Small Industries 10(23EB) 
Income of Investor Protection Fund by way of contributions from
commodity exchange and the members thereof 10(23EC)  Any income of
Investor Protection Fund by way of contributions received from a
depository 10(23ED)  Specified income of Core Settlement Guarantee
Fund 10(23EE)  Income by way of dividend† or long-term capital gain of
venture capital fund/undertaking — see para 32.10 10(23FA)  Income of
venture capital fund/venture capital company — see para 32.11 10(23FB)
 Any income of an investment fund other than the income chargeable
under the head “Profits and gains of business or profession” 10(23FBA) 
Any income referred to in section 115UB, accruing or arising to, or
received by, a unitholder of an investment fund, being that proportion of
income which is of the same nature as income chargeable under the head
“Profits and gains of business or profession” 10(23FBB)  Any income of a
business trust by way of interest received or receivable from a special
purpose vehicle 10(23FC)  Any income of a business trust, being a real
estate investment trust, by way of renting or leasing or letting out any real
estate asset owned directly by such business trust. 10(23FCA)  Any
distributed income (referred to in section 115UA), received by a unit
holder from the business trust, not being that proportion of the income
which is of the same nature as the income referred to in clause (23FC)(a)
or clause (23FCA) 10(23FD)  Income by way of interest on securities,
property income and income from other sources of a registered trade
union or an association of registered trade unions 10(24)  Any income
received by a person on behalf of statutory provident fund, recognised
provident fund, approved superannuation fund, approved gratuity fund
and approved coal-mines provident fund 10(25)  Income of Employees’
State Insurance Fund 10(25A)  Income of a member of a scheduled tribe,
residing in Nagaland, Manipur, Tripura, Arunachal Pradesh, Mizoram and
Ladakh from any source arising by reason of his employment therein and
income by way of dividend and interest on securities 10(26)  Income of a
Sikkimese individual which accrues or arise to him/her from any source in
the State of Sikkim or income from dividend/interest on securities from
anywhere in the world (exemption not available to a Sikkimese woman
who, on or after April 1, 2008, marries a non-Sikkimese individual)
10(26AAA) 47 What income is exempted u/s 10 Para 32 †Other than
dividends referred to in section 115-O.  Income of an agricultural produce
market committee or board constituted for the purpose of regulating the
marketing of agricultural produce 10(26AAB)  Any income of a statutory
corporation or of a body/institution, financed by the Government formed
for promoting the interest of scheduled castes/tribes 10(26B)  Income of
National Minorities Development and Finance Corporation 10(26BB) 
Income of ex-serviceman corporations 10(26BBB)  Income of a co-
operative society formed for promoting interest of members of scheduled
castes/tribes 10(27)  Income of certain Commodity Boards/Authorities
10(29A)  Subsidy from the Tea Board for replanting or replacement of tea
bushes or for rejuvenation or consolidation of areas used for cultivation of
tea in India 10(30)  Subsidy received by planters 10(31)  Income of a
minor child up to Rs. 1,500 in respect of each minor child whose income is
includible under section 64(1A) — see para 127 10(32)  Capital gains on
transfer of US 64 — see para 95.2-1 10(33)  Dividend on or after April 1,
2003 from domestic companies — see para 32.12 10(34)  Any income
arising to a shareholder on account of buy back of unlisted shares (up to
July 4, 2019) or any share (on or after July 5, 2019) by the company as
referred to in section 115QA 10(34A)  Interest on units of a Mutual Fund
on or after April 1, 2003 — see para 32.12 10(35)  Any income by way of
distributed income referred to in section 115TA received from a
securitisation trust by any person being an investor of the said trust
10(35A)  Capital gains on transfer of listed equity shares — see para
95.2-2 10(36)  Capital gains on compensation received on compulsory
acquisition of urban agricultural land — see para 95.2-3 10(37)  Capital
gain arising to an individual/HUF under Andhra Pradesh Capital City Land
Pooling Scheme, 2015 – see para 95.2-8 10(37A)  Long-term capital gains
on transfer of securities not chargeable to tax (up to the assessment year
2018-19) in cases covered by securities transaction tax — see para 95.2-4
10(38)  Income of an international sporting event 10(39)  Grant received
by subsidiary company from holding company 10(40)  Capital gain in the
above case 10(41)  Income of notified non-profit body/authority 10(42) 
Any amount received by an individual as a loan (either in lump sum or
instalment) in a transaction of reverse mortgage — see para 32.13 10(43)
 Any income received by any person, or on behalf of, the New Pension
System Trust 10(44)  Perquisites/allowances to Chairman/members of
UPSC — see para 32.14 10(45)  Specified income of notified body or
authority or trust or board or commission — see para 32.15 10(46) 
Income of infrastructure debt fund — see para 32.16 10(47)  Any income
received in India in Indian currency by a foreign company on account of
sale of crude oil (or any other notified goods or notified service) to any
person in India 10(48)  Any income accruing or arising to a foreign
company on account of storage of crude oil in a facility in India and sale of
crude oil therefrom to any person resident in India 10(48A)  Any income
accruing or arising to a foreign company on account of sale of leftover
stock of crude oil, if any, from the facility in India after the expiry of the
agreement or the arrangement referred to in section 10(48A) (or on
termination of such agreement/arrangement in accordance with the terms
mentioned therein) if a few conditions (as notified by the Central
Government) are satisfied 10(48B)  Any income of the National Financial
Holdings Company Ltd. 10(49)  Any income arising from any specified
service provided on or after the date on which the provisions of Chapter
VIII of the Finance Act, 2016 comes into force and chargeable to
equalisation levy under that Chapter 10(50) 32.1 Receipts by a member
from a Hindu undivided family [Sec. 10(2)] - Any sum received by an
individual as a member of a Hindu undivided family either out of income
of the family or out of income of estate belonging to the family is exempt
from tax. Such receipts are not chargeable to tax in the hands of an
individual member even if tax is not paid or payable by the family on its
total income. The exemption is based upon the principle of avoidance of
double taxation. Income of a Hindu undivided family is taxable in its own
hand. Section 10(2), therefore, exempts income received by a member
from his Hindu Para 32.1 Income that is exempt from tax 48 49 Lease rent
of aircraft Para 32.4 undivided family. Only those members of a Hindu
undivided family can claim exemption under this clause who are entitled
to demand share on partition or are entitled to maintenance under the
Hindu law. Some of the receipts from a Hindu undivided family are,
however, taxable vide section 64(2) [see para 128]. Provisions illustrated
X, an individual, has personal income of Rs. 7,02,000 for the previous year
2019-20. He is also a member of a Hindu undivided family which has an
income of Rs. 4,08,000 for the previous year 2019-20. Out of income of
the family, X gets Rs. 2,10,000, being his share of income. Rs. 2,10,000
will be exempt in the hands of X by virtue of section 10(2). The position
will remain the same whether (or not) the family is chargeable to tax. X
shall pay tax only on his income of Rs. 7,02,000. 32.2 Tax paid on behalf
of foreign companies in respect of certain income [Sec. 10(6A)]- If a few
conditions are satisfied, tax liability of a foreign company (pertaining to
royalty/technical fees received from Government/ Indian concern under an
approved agreement made during April 1, 1976 and March 31, 2002)
borne by the payer, is not taxable in the hands of foreign company. 32.3
Amount received on life insurance policy [Sec. 10(10D)] - The table given
below highlights the provisions of section 10(10D) Nature of policy
Whether exemption is available under section 10(10D) 1. Any sum
received under section 80DD(3) Exemption not available 2. Keyman
insurance policy Exemption not available 3. Any other policy (sum
received on the death of a Exemption available, nothing is chargeable to
tax person) 4. Any other policy (not being the case when sum received on
the death of a person) 4.1 Policy issued before April 1, 2003 4.3 Policy
issued during 2012-13 Exemption available, nothing is chargeable to tax
4.2 Policy issued on or after April 1, 2003 but Exemption available only
when annual premium payable is not before April 1, 2012 more than 20%
of sum assured Exemption available only when annual premium payable is
not more than 10% of sum assured 4.4 Policy issued on or after April 1,
2013 Exemption available only when annual premium payable is not more
than 10%/15%3 of sum assured. Notes 1. For the purposes of points 4.2,
4.3 and 4.4, the value of any premium agreed to be returned or bonus
which is to be received under the policy shall not be taken into account to
calculate “actual capital sum assured”. 2. For the purpose of point 4.3 and
4.4, “actual capital sum assured” in relation to a life insurance policy shall
mean the minimum amount assured under the policy on happening of the
insured event at any time during the term of the policy. 3. If policy is
issued on or after April 1, 2013, 15 per cent is applicable in the case of a
policy on the life of any person who is,– a. a person with disability or a
person with severe disability as referred to in section 80U; or b. suffering
from disease or ailment as specified in the rules made under section
80DDB. Keyman insurance policy - A keyman insurance policy which has
been assigned to any person during its term, with or without
consideration, shall continue to be treated as a keyman insurance policy.
32.4 Lease rent of aircraft [Sec. 10(15A)] - Payment made to a foreign
Government or a non-resident foreign enterprise under an agreement
made before April 1, 1997 or during April 1, 1999 and March 31, 2007
(and approved by the Central Government) by an Indian company,
engaged in the business of operation of aircraft is not taxable in the hands
of recipient. However, the exemption is available only if payment is made
to acquire an aircraft or an aircraft engine (other than a payment for
providing spares, facilities or services in connection with operation of
leased aircraft) on lease. The aforesaid exemption shall be available only
in respect of agreement entered before April 1, 1997 or during April 1,
1999 and March 31, 2007. If the agreement is entered during April 1, 1997
and March 31, 1999, or after March 31, 2007 the exemption under section
10(15A) will not be available. However, if the tax is paid by the payer of
lease rent, the tax so borne by it, will not be grossed up in the hands of
recipient by virtue of the exemption given by section 10(6BB). Provisions
illustrated Under agreements approved by the Government of India, X
Airways Ltd. (an Indian company) pays lease rent to Y Inc. (a foreign
enterprise) for providing aircrafts on lease. During the previous year 2019-
20, the following payments are made by X Airways Ltd.— Para 32.5
Income that is exempt from tax Date of agreement under which payment
is made Lease rent of aircraft/air- craft engine 50 Payment for services and
spares Rs.  As per agreement dated March 1, 2004*- Payment to Y Inc.-
Tax borne by X Airways Ltd. Total  As per the agreement dated April 10,
1998†- Payment to Y Inc.- Total Rs. 15,40,000 — 2,90,000 60,000 Amount
taxable in the hands of Y Inc. Rs. 2,90,000 60,000 15,40,000 20,90,000
Tax borne by X Airways Ltd. 9,70,000 3,50,000 5,48,000 3,10,000
3,50,000 26,38,000 3,10,000 30,60,000 8,58,000 29,48,000 Note - In this
case, for the assessment year 2020-21, Y Inc. can claim exemption of Rs.
15,40,000 and Rs. 9,70,000 under section 10(15A) and 10(6BB),
respectively. 32.5 Educational scholarships [Sec. 10(16)] - Scholarship
granted to meet the cost of education is exempt from tax. In order to avail
the exemption, it is not necessary that scholarship should be financed by
the Government. The term “cost of education” takes within its ambit not
only tuition fee but all other incidental expenses incurred for acquiring
education. Once it is proved that the amount received is “scholarship”, it
will be fully exempt from tax irrespective of its terms of award. The
position remains so even if the scholarship is received for pursuing a
course of education not leading to a degree. The exemption in the hands
of recipient depends on what it is meant for the person paying or
disbursing the scholarships. If it is paid only for meeting the cost of
education, it is exempt from tax even if the recipient does not spend the
whole amount towards education or that he is able to save something out
of it. To put it differently, if the whole object of the payment is to meet
cost of education, then no further inquiry is called for in order to exclude
the amount from taxable income under section 10(16). 32.6 Daily
allowances of Members of Parliament [Sec. 10(17)] - Clause (17) of section
10 provides exemption to Members of Parliament and State Legislature in
respect of the following allowances : Cases Nature of allowance How much
is exempt Case 1 Daily allowance Case 2 Case 3 Any other allowance
received by a Member of Parliament under the Members of Parliament
(Constituency Allowance) Rules, 1986 Entire amount is exempt Entire
amount is exempt Constituency allowance received by any person by
reason of his member- Entire constituency allowance ship of any State
Legislature is exempt. 32.7 Income of professional institutions [Sec.
10(23A)] - Any income (other than income from house property, income
received for rendering any specific service, or income by way of interest or
dividend on investments) of a professional institution is exempt from tax if
a few conditions are satisfied. 32.8 Income of fund established for welfare
of employees [Sec. 10(23AAA)] - Income of a fund established for welfare
of employees is not chargeable to tax, if a few conditions are satisfied.
This exemption is available, if the fund is established for the purpose of
giving cash benefits to a member of the fund on superannuation, in the
case of illness of the member (including spouse and depending children),
to meet cost of education of dependent children or cash benefits to
dependents in the event of death of a member. 32.9 Income of certain
National Funds, educational institution and hospital [Sec. 10(23C)] -
Exemption given by section 10(23C) is given below — 32.9-1 INCOME OF
CERTAIN NATIONAL FUNDS - Any income received by any person on behalf
of the following funds is exempt from tax : a. Prime Minister’s National
Relief Fund [sec. 10(23C)(i)] ; or b. Prime Minister’s Fund (Promotion of
Folk Arts) [sec. 10(23C)(ii)] ; or c. Prime Minister’s Aid to Student Fund
[sec. 10(23C)(iii)] ; or *The same rule will be applicable if the agreement is
entered during April 1, 1999 and March 31, 2007. † The same rule will be
applicable if the agreement is made after March 31, 2007. 51 Income of
certain National funds Para 32.9 d. National Foundation for Communal
Harmony [sec. 10(23C)(iiia)] ; or e. Swachh Bharat Kosh [sec. 10(23C)
(iiiaa)]; or f. Clean Ganga Fund [sec. 10(23C)(iiiaaa)]; or g. Chief Minister’s
Relief Fund or the Lieutenant Governor’s Relief Fund [sec. 10(23C)
(iiiaaaa)]; or h. any other charitable fund or institution notified by the
Central Government [sec. 10(23C)(iv)]**; or i. any trust or institution
wholly for public religious purposes or wholly for public religious and
charitable purposes which is notified by the Central Government [sec.
10(23C)(v)**]. A fund or institution mentioned at (h) and (i) (supra) will
have to satisfy some conditions to claim exemption. 32.9-2 INCOME OF
EDUCATIONAL INSTITUTIONS - Income of the following educational
institutions is exempt from tax under section 10(23C)— Case 1 Any
university or other educational institution existing solely for educational
purposes and not for purposes of profit, and which is wholly or
substantially financed by the Government [sec. 10(23C)(iiiab)] Case 2 Any
university or other educational institution existing solely for educational
purposes and not for purposes of profit if the aggregate annual receipts of
such university or educational institution do not exceed the amount of
annual receipts as may be prescribed (i.e. Rs. 1 crore) [sec. 10(23C)(iiiad)]
Case 3 Any university or other educational institution existing solely for
educational purposes and not for purposes of profit, other than those
mentioned in Case 1 and Case 2 (supra) and which is to be approved by
the prescribed authority (i.e., the Chief Commissioner) [sec. 10(23C)(vi)].
An educational institution mentioned under Case 3 will have to satisfy
some conditions to claim exemption. 32.9-3 INCOME OF HOSPITAL - If the
following conditions are satisfied, the income of a hospital is exempt from
tax under section 10(23C) — Condition 1 Condition 2 Condition 3 Income
arises to a hospital or other institution for the reception and treatment of
persons — a. suffering from illness or mental defectiveness ; or b. during
convalescence ; or c. requiring medical attention or rehabilitation. The
hospital or other institution exists solely for philanthropic purposes and
not for the purpose of profit. The hospital or other institution is — a. wholly
or substantially financed by the Government [sec. 10(23C)(iiiac)] ; or b.
the aggregate annual receipts of such hospital or institution do not exceed
the amount prescribed (i.e., Rs. 1 crore) [sec. 10(23C)(iiiae)] ; or c.
approved by the prescribed authority (i.e., the Chief Commissioner) [sec.
10(23C)(via)] [one has to satisfy certain conditions for getting approval].
32.9-4 OTHER POINTS - The following points should be noted 1. A
notification relating to exemption under section 10(23C)(iv)/(v)/(vi)/(via) is
one time approval and remains valid till it is withdrawn – Circular No.
7/2010, dated October 27, 2010. 2. An entity which has been approved or
notified for claiming benefit of exemption under section 10(23C)(iv)/
(v)/(vi)/(via) is not entitled to claim any benefit of exemption under other
provisions of section 10 (except the exemption in respect of agricultural
income). Consequently, such entity is not entitled to claim exemption
pertaining to dividends, mutual fund interest, long-term capital gain, etc.
3. The aforesaid entity should apply its income or accumulate it for
application, wholly and exclusively for the objects for which it is
established. In a case where more than 15 per cent income of fund, trust,
institution, university, hospital, etc., is accumulated, the period of
accumulation (of the amount exceeding 15 per cent of the income) shall in
no case exceed 5 years. With effect from the assessment year 2019-20,
for the purpose of determining application of income under section
10(23C)(iv)/(v)/(vi)/(via), the provisions of sections 40(a)(ia) and
40A(3)/(3A), shall, mutatis mutandis, apply as they apply in computing the
income chargeable under the head “Profits and gains of business or
profession”. 4. Any anonymous donation referred to in section 115BBC
shall not be exempt under section 10(23C)(iv)/(v). 5. For the purpose of
section 10(23C)(iiiab)/(iiiac), any university/educational institution/hospital
shall be considered as being substantially financed by the Government for
any previous year, if the Government grant **A trust or institution
(pursuing advancement of any other object of public utility) is not eligible
for any exemption under section 10(23C)(iv)/ (v) for the previous year
during which receipts from commercial activities exceed 20 per cent of
total receipts of the relevant year. Para 32.10 Income that is exempt from
tax 52 to such university/institute/hospital exceeds 50 per cent of the total
receipts (including any voluntary contributions) of such university/institute
during the relevant previous year. 6. Where any income is required to be
applied (or accumulated or set apart for application), then, for such
purposes the income shall be determined without any deduction or
allowance by way of depreciation (or otherwise) in respect of any asset,
acquisition of which has been claimed as an application of income under
section 10(23C) in the same or any other previous year. 7. Any donation
given by an entity [which has been approved or notified for claiming
benefit of exemption under section 10(23C)(iv)/(v)/(vi)/(via)] to a
trust/institution [registered under section 12AA or referred to in section
10(23C)(iv)/(v)/(vi)/(via)] as contribution with specific direction that they
shall form part of the corpus of the recipient trust/institution, shall not be
treated as application of income. 32.10 Income by way of dividend and
long-term capital gains of venture capital funds and venture capital
companies [Sec. 10(23FA)] - Clause (23FA) is applicable if investment is
made during 1999-2000*. For investments made after March 31, 2000**,
exemption is available under section 10(23FB). 32.11 Income of venture
capital fund or venture capital company [Sec. 10(23FB)] - Any income of a
venture capital company (VCC) or venture capital fund (VCF) from
investment in a venture capital undertaking (VCU) is exempt from tax
under section 10(23FB). Moreover, section 115U provides that income
accruing or arising or received by a person out of investment made in a
VCC or VCF shall be taxable in the same manner as if the person had
made direct investment in the VCU. The aforesaid benefits are available
only to the funds which satisfy the investment and other conditions as are
provided in the SEBI (Alternative Investment Funds) Regulations, 2012
[hereinafter referred to as AIF regulations]. The following points should be
noted 1. The existing VCFs and VCCs (i.e., which have been registered
before May 21, 2012) and are regulated by the VCF regulations, as they
stood before repeal by AIF regulations, would continue to avail pass
through status as currently available. 2. In the context of AIF regulations,
the Venture Capital Company means a company and venture capital fund
means a fund set up as a trust, which has been granted a certificate of
registration as venture capital fund being a sub-category of Category I
Alternative Investment Fund and satisfies the following conditions a. at
least two-thirds of its investible funds are invested in unlisted equity
shares or equity linked instruments of venture capital undertaking; b. no
investment has been made by such AIFs in a VCU which is an associate
company; c. units of a trust set up as AIF or shares of a company set up as
AIF, are not listed on a recognised stock exchange. 3. In the context of AIF
regulations, the venture capital undertaking shall be defined as it is
defined in the Alternative Investment Funds Regulations. 32.12 Dividends
and interest on units [Sec. 10(34)/(35)] - The following income is not
chargeable to tax 1. Dividend from a domestic company [exemption is
given by section 10(34)]. 2. Income in respect of units of a mutual
fund/UTI [exemption is given by section 10(35)]. The following points
should be noted 1. Dividend distribution tax - The person paying dividends
on shares or interest on units will have to pay distribution tax on
dividend/income distributed under sections 115-O and 115R. 2. Dividend
income taxable in the hands of resident shareholder under section
115BBDA - Dividend income is taxable in the hands of shareholders under
section 115BBDA, if a few conditions are satisfied†. *Section 10(23FA) is
applicable from the assessment year 2000-01. A similar exemption is
available under section 10(23F) if investment is made up to March 31,
1999. **For investment made after March 31, 2000, exemption will be
available under section 10(23FB). † Dividend income from a domestic
company is generally exempt in the hands of recipient shareholders.
However, the exemption is not available if aggregate dividend received by
a resident shareholder during the previous year from all domestic
companies exceeds Rs. 10 lakh. In such a case, the aggregate dividend
[not being deemed dividend under section 2(22)(e)] (in excess of Rs. 10
lakh) is taxable (on gross basis, no deduction is allowed) under section
115BBDA at the rate of 10 per cent [+ SC + HEC]. But nothing is taxable
under section 115BBDA (or the entire dividend income from domestic
companies is exempt) –- if the shareholder is a domestic company or a
fund/institution [referred to in section 10(23C)(iv)/(v)/(vi)/(via)], or a
trust/institution registered under section 12A/12AA, or- if dividend is
deemed dividend under section 2(22)(e). 53 Income of infrastructure debt
fund Para 32.16 38.12A Income of a shareholder on account of buy-back
of shares [Sec. 10(34A)] - Income arising to a shareholder in respect of
buy-back of shares by certain companies is exempt from tax under section
10(34A). In such cases, additional income-tax is payable under section
115QA on distributed income by the company which opts for buy-back of
its shares. These two provisions [i.e., exemption to shareholders under
section 10(34A) and additional tax to companies under section 115QA] are
applicable pertaining to different shares is as follows Different shares
Exemptions to shareholders under Tax on distributed income under
section section 10(34A) 115QA payable by a company which buy-backs its
own shares Buy-back of unlisted shares (on or after June 1, 2013)
Exemption available Tax payable by company under sec tion 115QA Buy-
back of listed shares (public announcement of buy-back is made before
July 5, 2019) Buy-back of listed shares (if public Exemption not available
under sec- tion 10(34A) Tax on distributed income under sec tion 115QA,
not applicable Exemption available announcement is made on or after July
5, 2019) Tax payable by company under section 115QA 32.13 Reverse
mortgage scheme [Sec. 10(43)] - The periodic instalments or lump sum
paid by the lender to the borrower during his lifetime will be exempt from
income-tax. 32.13-1 MEANING OF REVERSE MORTGAGE SCHEME - Under
reverse mortgage, the borrower is generally a senior citizen. He owns a
house property but does not having a regular source of income. He
mortgages his property with a scheduled bank or a housing finance
company (i.e., lender). The lender in return pays periodic instalments or
lump sum to the borrower during his lifetime. The borrower can continue
to stay in the property during his lifetime and as well continue to receive
regular income from the lender. The borrower does not pay the principal
as well as interest to the lender during his lifetime. The lender will recover
the loan along with the accumulated interest by selling the house after the
death of the borrower. However, before resorting to disposal of the
property, an option will be given to the legal heirs to repay the loan
amount, along with the interest, and to get the mortgaged property
released. Any excess amount will be remitted back to the legal heirs of the
borrower. 32.14 Perquisites/allowances to Chairman/Members of UPSC
[Sec. 10(45)] - The following allowances and perquisites are not
chargeable to tax  In case of serving Chairman and members of Union
Public Service Commission (UPSC) a. the value of rent free official
residence; b. the value of conveyance facilities including transport
allowance; c. the sumptuary allowance; d. the value of leave travel
concession provided to a serving Chairman or member of the UPSC and
members of his family.  In case of the retired Chairman and retired
members of UPSC a. a sum of maximum Rs. 14,000 per month for
defraying the service of an orderly and for meeting expenses incurred
towards secretarial assistance on contract basis; b. the value of a
residential telephone free of cost and the number of free calls to the
extent of 1,500 per month (over and above the number of free calls per
month allowed by the telephone authorities). 32.15 Exemption of specified
income of notified body or authority or trust or board or commission [Sec.
10(46)] - Section 10(46) provides exemption from income-tax to any
specified income of a notified body, authority, board, trust or commission
which is set-up or constituted by a Central, State or Provincial Act or
constituted by the Central Government or a State Government with the
object of regulating or administering an activity for the benefit of the
general public. 32.16 Income of infrastructure debt fund [Sec. 10(47)] -
Section 10(47) provides enabling power to the Central Government to
notify any infrastructure debt fund which is set-up in accordance with the
prescribed guidelines. Once notified†, the income of such a debt fund
would be exempt from tax. However, such fund will have to submit return
of income under section 139. Other related amendments - The following
provisions have been incorporated to augment long-term, low cost funds
from abroad for the infrastructure sector— † Notified debt funds : India
Infradebt Ltd., IDFC Infrastructure Finance Ltd. Para 33 Income that is
exempt from tax 54 1. Any interest received by a non-resident from the
aforesaid notified infrastructure debt fund shall be taxable at the rate of 5
per cent on the gross amount of such interest income. 2. Tax shall be
deducted at the rate of 5 per cent by the aforesaid notified infrastructure
debt fund on any interest paid by it to non-resident.  WHAT ARE SPECIAL
PROVISIONS IN RESPECT OF NEWLY-ESTABLISHED UNDERTAKINGS IN FREE
TRADE ZONE, ETC. [SECS. 10A AND 10AA] 33. These provisions are given
in sections 10A and 10AA, which are given below— 33.1 Provisions of
section 10A - Deduction under section 10A is not available now-a-days.
33.2 Provisions of section 10AA - The provisions of section 10AA are given
below— 33.2-1 CONDITIONS - The following conditions should be satisfied
—  The assessee is an entrepreneur, i.e., a person who has been granted
a letter of approval by the Development Commissioner to set a unit in a
Special Economic Zone.  The unit in Special Economic Zone begins to
manufacture or produce articles or things or provide services on or after
April 1, 2005 but before April 1, 2020 (the benefit under section 10AA will
not be available to units commencing activities on or after April 1, 2020).
 It is not formed by the splitting up, or reconstruction, of a business
already in existence†.  It is not formed by the transfer to a new business,
of old plant or machinery. However, it can be formed by transfer of old
plant or machinery to the extent of 20 per cent.  The assessee has
exported goods or provided services out of India from the Special
Economic Zone by land, sea, air or by any other mode, whether physical
or otherwise.  Books of account of the taxpayer should be audited (audit
report in Form No. 56F shall be furnished electronically).  Deduction
should be claimed in the return of income. 33.2-2 AMOUNT OF
DEDUCTION - Deduction‡ depends upon quantum of profit derived from
export of articles or things or services (including computer software). It is
calculated as under— Profits of the business of the “undertaking” ×
Export turnover ÷ Total turnover of the undertaking. Deduction for first
five assessment years - 100 per cent of the profits and gains derived from
export of articles or things or from services is deductible for a period of 5
consecutive assessment years. Deduction for the first year is available in
the assessment year relevant to the previous year in which the unit
begins to manufacture or produce articles or things or provide services.
Deduction for sixth assessment year to tenth assessment year - 50 per
cent of the profits and gains derived from export of articles or things or
from services is deductible for the next 5 years. Deduction for eleventh
assessment year to fifteenth assessment year - For the next 5 years, a
further deduction would be available to the extent of 50 per cent of the
profit provided an equivalent amount is debited to the profit and loss
account of the previous year and credited to Special Economic Zone Re-
investment Allowance Reserve Account (hereinafter referred to as Special
Reserve Account). Double deduction not possible - If deduction is claimed
in respect of a specified business [as referred to in section 35AD(8)(c)]
under section 10AA, no deduction in respect of that business will be
available under section 35AD. † The transfer or redeployment of technical
manpower from existing unit(s) to a new unit (of development of software
or providing IT enabled services) located in SEZ, in the first year of
commencement of business, shall not be construed as splitting up or
reconstruction of an existing business, provided the assessee satisfies any
one of the following two tests given below Test 1 - The number of
technical manpower so transferred as at the end of the first financial year
does not exceed 50 per cent of the total technical manpower actually
engaged in development of software or IT enabled products in the new
unit. Test 2 - The net addition of the new technical manpower in all units of
the assessee (enterprise) is at least equal to the number that represents
50 per cent of the total technical manpower of the new SEZ unit during
such previous year. The assessee has a choice of complying with any one
of the two alternative tests (i.e., Test 1 or Test 2) given above. Moreover,
the above criteria is applicable only in the case of an assessee engaged in
the development of software or in providing IT Enabled Services – Circular
No. 14/2014, dated October 8, 2014. ‡ The amount of deduction under
section 10AA shall be allowed from the total income of the assessee
computed in accordance with the provisions of the Act (before giving
effect to the provisions of section 10AA) and the deduction under this
section shall not exceed such total income of the assessee. 55 How to
claim exemption in respect of income Para 36 33.3 A few common points -
There are a few common points which are applicable in the case of section
10A as well as section 10AA— Export turnover - For the purpose of
sections 10A and 10AA, ‘export turnover’ means the consideration in
respect of export by the undertaking of articles or things or computer
software received in (or brought into) India by the assessee in convertible
foreign exchange within the prescribed period but does not include the
following— a. freight; b. telecommunication charges; c. insurance
attributable to the delivery of the articles or things or computer software
outside India; d. expenses, if any, incurred in foreign exchange in
providing the technical services outside India. Site development - The
profits and gains derived from on site development of computer software
(including services for development of software) outside India shall be
deemed to be the profits and gains derived from the export of computer
software outside India. Brought forward losses - Brought forward losses
(incurred after April 1, 2001) cannot be deducted from profit of the
business of the undertaking. In other words, deduction under sections 10A
and 10AA will be available in respect of profit of an eligible undertaking
without setting off of brought forward losses. Consequences of claiming
deduction under sections 10A and 10AA - One should note the following
consequences— 1. Unabsorbed depreciation allowances (or unabsorbed
capital expenditure on scientific research or family planning)* are not
allowed to be carried forward and set off against the income of
assessment years following the period of deduction. 2. The losses under
section 72(1) or 74(1) or 74(3)* are not allowed to be carried forward in
assessment years succeeding the period of deduction (this restriction shall
apply only to post-tax holiday period). However, there is no bar regarding
intra-head set off under section 70 and inter-head set off under section 71.
3. The deductions under section 80-IA or 80-IB shall also not be available
to such undertakings after the expiry of tax holiday period. 4. In the
assessment year following period of deduction, the depreciation will be
computed on the written down value of the asset as if the depreciation
has actually been allowed in respect of each assessment year falling in
the period of exemption. Amalgamation/demerger - Where an
undertaking is transferred to another company under a scheme of
amalgamation or demerger, the deduction under section 10A or 10AA
shall be allowable in the hands of the amalgamated or the resulting
company for the unexpired period. However, no deduction shall be
admissible under these sections to the amalgamating company or the
demerged company for the previous year in which amalgamation or
demerger takes place†. Power of Assessing Officer to recompute profit -
For inter-unit transactions and transactions between the assessee and
inter-connected persons, the Assessing Officer has power to re-compute
profit eligible for exemption under sections 10A and 10AA.  WHAT ARE
SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABLISHED HUNDRED PER
CENT EXPORT-ORIENTED UNDERTAKINGS [SEC. 10B] 34. Deduction under
section 10B is not available from the assessment year 2012-13.  WHAT
ARE THE SPECIAL PROVISIONS IN RESPECT OF PROFIT FROM EXPORT OF
ARTISTIC HAND-MADE WOODEN ARTICLES [SEC. 10BA] 35. Deduction
under section 10BA is not available from the assessment year 2010-11. 
HOW TO CLAIM EXEMPTION IN RESPECT OF INCOME FROM PROPERTY
HELD FOR CHARITY [SEC. 11] 36. Income of a charitable trust is exempt
according to the provisions of sections 11, 12 and 13. The trust should be
one established in accordance with law and its objects should fall within
the definition of the term “charitable purpose”. *Pertaining to the
assessment year 2000-01 (in the case of section 10A) or the assessment
year 2005-06 (in the case of section 10AA) or earlier years. †A similar
benefit is available in the case of sections 10B, 80-IA, 80-IAB, 80-IB, 80-IC
and 80-IE, if transferor and transferee companies are Indian companies.
However, under section 80-IA the benefit is available only when
amalgamation/demerger takes place before April 1, 2007. Para 36.1
Income that is exempt from tax 56 36.1 Meaning of trust - A “trust” is an
obligation annexed to the ownership of property and arising out of a
confidence reposed in and accepted by the owner, or declared and
accepted by him, for the benefit of another, or of another and the owner.
36.2 Charitable purpose [Sec. 2(15)] - It is defined to include relief of the
poor, education, yoga, medical relief, preservation of environment
(including watersheds, forests and wildlife), preservation of monuments or
places or objects of artistic or historic interest and the advancement of
any other object of general public utility. “The advancement of any other
object of general public utility” shall not be a charitable purpose— a. if it
involves the carrying on of— i. any activity in the nature of trade,
commerce or business; or ii. any activity of rendering of any service in
relation to any trade, commerce or business, for a fee or cess or any other
consideration, irrespective of the nature of use or application of the
income from such activity, or the retention of such income, by the
concerned entity; and b. if the total receipts from any such activity in the
nature of trade, commerce or business, or any activity of rendering any
service in relation to any trade, commerce or business, exceed 20 per
cent‡ of total receipts of the relevant previous year of the trust
undertaking such activities. 36.3 Essential conditions for exemption [Sec.
11] - The compliance of the following main conditions is essential for
claiming exemption under section 11: The property from which income is
derived should be held under a trust or other legal obligation. The
property should be held for charitable or religious purposes. In the case of
a charitable trust created on or after April 1, 1962, the further conditions
are : a. the trust should not be created for the benefit of any particular
religious community or caste ; b. no part of the income should enure
directly or indirectly for the benefit of the settlor or other specified
persons; c. the property should be held wholly for charitable purposes.
The conditions mentioned at (b) and (c) also apply to religious trust
created on or after April 1, 1962. The exemption is confined to only such
portion of the trust’s income which is applied to charitable or religious
purposes or is accumulated for applying to such purposes within the limits
of accumulation permitted under section 11(1) and (2) [see paras 36.4
and 36.5]. The exemption is restricted to such portion of the income as is
applied to charitable or religious purposes in India except in the cases
covered by section 11(1)(c). Trust and institution can carry out business
activities if the business activities are incidental to the attainment of its
objective and separate books are maintained without losing complete
exemption from income-tax. The trust should apply for registration (by
uploading Form No. 10A for application) with the Commissioner of Income-
tax and such trust is registered under section 12AA. Unless and until an
institution is registered under section 12A, it cannot claim the benefit of
section 11. There is no time-limit for making application for registration. If
a trust applies for registration, the registration shall be effective (and the
benefit of exemption under section 11 is available) only from the previous
year in which application is made. Provisions illustrated A charitable trust
(created on April 1, 2012) applies for registration on December 1, 2014.
Registration is granted on April 10, 2015. Registration, in this case, will be
applicable only from the previous year 2014-15. Exemption under section
11 will not be available for previous years 2012-13 and 2013-14. However,
on this point law has been amended with effect from October 1, 2015.
Under the amended provisions 1. The benefit of exemption shall be
available in any assessment proceeding (for an earlier assessment year)
which is pending before the Assessing Officer as on the date of
registration (i.e., April 10, 2015 in this case), if there is no change in the
objects and activities of trust. 2. No action for reopening of an assessment
under section 147 shall be taken by the Assessing Officer for any earlier
assessment year merely for the reason that such trust or institution has
not obtained registration for the said assessment year. 3. The above
benefits would not be available in case of any trust or institution which at
any time had applied for registration and the same was refused or a
registration once granted was cancelled. The order granting or refusing
registration has to be passed within 6 months from the end of the month
in which the application for registration is received by the Commissioner
and a copy of such order shall be sent to the ‡In respect of such receipts,
exemption under section 11 is not available. 57 How to find out exemption
u/s 11 Para 36.4 applicant. If the Commissioner does not respond within 6
months, registration shall be deemed to have been granted. For instance,
registration application is made on February 24, 2018 and the concerned
Commissioner does not respond till August 23, 2018. Registration shall be
deemed to have been granted on August 24, 2018 CIT v. Society for
Promn. of Edn., [2016] 238 Taxman 330 (SC). Where a trust/institution has
been granted registration under section 12A/12AA and, subsequently, it
has adopted modifications of the objects which do not conform to the
conditions of registration, it shall be required to obtain fresh registration
(application for fresh registration should be submitted within a period of
30 days from the date of such adoption). The accounts of the trust should
be audited for such accounting year in which its income (without giving
effect to the provisions of sections 11 and 12) exceeds the exemption limit
and audit report in Form No. 10B should be submitted electronically.
Return of income of the trust/institution should be submitted within the
time allowed under section 139(1), if the total income of the
trust/institution (before giving exemption under sections 11 and 12)
exceeds the maximum amount which is not chargeable to tax. Voluntary
contributions (not being contributions made with a specific direction that
they shall form part of the corpus of trust) shall be deemed to be income
derived from property held under trust. Where a trust or an institution
has been granted registration for purposes of availing exemption under
section 11, and the registration is in force for a previous year, then such
trust or institution cannot claim any exemption under any provision of
section 10 [other than that relating to exemption of agricultural income
and income exempt under section 10(23C)] for that previous year. Funds
of the trust should be invested or deposited in any one or more of the
modes or forms mentioned in section 11(5) given below— 36.3-1 MODES
OF INVESTMENT [SEC. 11(5)] - The modes of investment are as follows—
a. investment in Government savings certificates; b. deposit in any Post
Office Savings Bank Account ; c. deposit in any account (i.e., saving
account, current account, FD, etc.) with any scheduled bank or a co
operative society engaged in carrying on banking business (including a
co-operative land mortgage bank or co-operative land development
bank); d. investment in any Central Government or State Government
securities ; e. investment in units of the Unit Trust of India; f. investment in
debentures (or bonds) of any corporate body, the principal whereof and
the interest whereon are guaranteed by the Central or a State
Government ; g. investment or deposit in any public sector company; h.
immovable property ; i. deposit or investment in any bonds issued by a
financial corporation [which is eligible for deduction under section 36(1)
(viii)] engaged in providing long-term funds for industrial development or
construction/ purchase of residential houses in India; j. deposit with IDBI;
k. deposit/investment as may be prescribed (some of the prescribed
deposits – investment in mutual fund units, deposit with housing boards,
investment in equity shares of an incubatee by an incubator, investment
in equity shares of NSDC, investment in debt instruments issued by any
infrastructure finance company registered with the RBI); and l. deposit
with or investment in bonds issued by an Indian public company carrying
on the business of providing long-term finance for urban infrastructure in
India. 36.4 How to find out exemption under section 11 - One has to
proceed as follows— Steps Income and exemption therefrom Remarks
Step 1 - Income Find out taxable income of the trust/institution One has to
find out taxable income of the trust/ institution applying different
provisions of the Income-tax Act but before giving any exemption under
section 11*. If a depreciable asset is ac *It is incorrect to state that income
of a trust/institution shall be calculated on commercial basis ignoring the
different provisions of the Income tax Act. Section 11 does not provide
mode of computation of income of a trust/institution. Section 11 provides
the quantum of exemption in respect of income from property held for
charitable or religious purposes. Para 36.4 Income that is exempt from tax
Steps Income and exemption therefrom 58 Remarks quired (acquisition of
which has been claimed as application of income for the purpose of
section 11), then depreciation under section 32 in respect of such asset is
not available. Step 2 Exemption General exemption - Fifteen per cent of
“income from property held for charitable or religious pur- poses” is
exempt for tax under section 11. It can be accumulated for future without
any specific time-frame Exemption based upon application of income -
Remaining 85 per cent of the “income from purposes in India para 36.4-1
Meaning of “income from property held for charitable or religious
purposes” is given in For the meaning of “application of income”, see para
36.4-2. There are specific provisions in the property held for charitable or
religious purposes” Act for those cases where application of income is
exempt if it is applied for charitable or religious falls short of 85 per cent
because of non-receipt of income during the year or because of the fact
that the trust/institution wants to apply the in come in the next previous
year Exemption based upon accumulation - Where 85 per cent of the
“income from property held for charitable or religious purposes” is not
applied for charitable purposes, etc. during the previous year, it can be
accumulated or set apart for application in future For availing exemption
in respect of amount accumulated or set apart for future, there are
specific provisions under section 11(2) [see para 36.5] 36.4-1 HOW TO
COMPUTE INCOME FROM PROPERTY HELD FOR CHARITABLE PURPOSES -
The amount deducted as tax at source cannot be considered as “income”
for this purpose. Voluntary contributions or donations are deemed to be a
part of income derived from property held under trust. But if a voluntary
contribution is made with a specific direction that it shall form a part of
the corpus of the trust, it will not be deemed to be part of income of the
trust. The onus is entirely on the assessee to show that donations received
were given with a direction that these shall form part of corpus of the
trust. The mere fact that in the audited accounts these were shown as
part of the corpus does not mean that the assessee had furnished
requisite evidence. Depreciation - Where any income is required to be
applied (or accumulated or set apart for application), then, for such
purposes the income shall be determined without any deduction or
allowance by way of depreciation (or otherwise) in respect of any asset,
acquisition of which has been claimed as an application of income under
section 11 in the same or any other previous year. 36.4-2 HOW TO
DETERMINE “APPLICATION” OF INCOME - The following points one should
note in this regard: 1. Repayment of loans taken to fulfil one of the objects
of trust is treated as an application of income for charitable purposes. 2.
Interest bearing loans, advanced by an educational trust, to students for
higher studies amount to application of income for charitable purposes in
the year of grant of such loans, if the object of trust is advancement of
education and granting of scholarship. As and when such loan is returned
to the trust, it will be treated as the income of that year. 3. Application of
the amount can be for revenue or capital purpose. 4. The expenditure
incurred by way of payment of tax out of the current year’s income has to
be considered as application for charitable purposes. 5. Donation given by
a charitable/religious trust to another charitable/religious trust is treated
as “applica tion” of income for the donor trust [and eligible for exemption
under section 11(1)]. However, the donor trust will not be able to avail
exemption under section 11(1) (with effect from the assessment year
2018-19), in respect of donations given with a specific direction that they
shall form part of the corpus of the donee trust. 6. Utilisation of income for
meeting expenses of earlier years is an “application”. 7. For capital gain
derived by a charitable trust, see problem 38-P1. 8. For the purpose of
determining application of income under section 11(1), the provisions of
sections 40(a)(ia) and 40A(3)/(3A), shall, mutatis mutandis, apply as they
apply in computing the income chargeable under the head “Profits and
gains of business or profession”. Consequently, for calculating
“application” of income if payment exceeding Rs. 10,000 is made in cash
or by bearer cheque, such payment will be disallowed from the
*Exemption under section 11 is 15 per cent of income derived from
property held under charitable purpose (and it is not 15 per cent of
amount remaining after expending money on charitable purposes)—CIT v.
Programme for Community Organisation [2001] 116 Taxman 608 (SC).
assessment year 2019-20. Likewise, if tax is deductible but not deducted
and payment is made to a resident, 30 per cent of such payment will be
disallowed while calculating “application” of income for the assessment
year 2019-20 (or any subsequent year). 36.4-3 WHEN APPLICATION OF
INCOME FALLS SHORT OF 85 PER CENT OF INCOME - If the income applied
to charitable or religious purposes, during the previous year, falls short of
85 per cent of the income derived during the year because of the reasons
given below [column 1 of the table given below], the charitable trust or
institution has been given the option to spend such income for charitable
or religious purposes in the manner given in column 2 of the table—
Application of income falls short of 85 per cent When the income can be
spent of income because of the reasons given below— a. Income has not
been received during Either during the previous year in which income is
received or during the relevant previous year the previous year
immediately following such year [see problem 36.4-P2] b. Because of any
other reason During the previous year immediately following the previous
year in which the income was derived [see problem 36.4-P1]  How to
avail the benefit of extended time - For availing of the benefit of extended
time beyond the relevant previous year, the charitable trust or institution,
has to take the following steps— 1. It has to exercise an option in writing
under Explanation (2) to section 11(1). 2. This option can be exercised by
uploading Form No. 9A (either under digital signature or electronic
verification code) before the expiry of time allowed for submission of
return of income under section 139(1) [for time-limit, see para 244.3].
Income applied to such purposes during the extended time is deemed to
have been applied to such purposes during the previous year in which it
was derived. 36.4-3a SURPLUS OF LAST YEAR - Amount of excess
application of the last year can be set off against the current year’s
deficiency. Problems 36.4-P1 The income of charitable trust for the
previous year 2019-20 is Rs. 8,60,000. The trust actually spends only Rs.
3,80,000 during the previous year 2019-20. Determine the taxable income
of the trust on the assumption that: (a) the trust has not applied for the
option under clause (2) of the Explanation to section 11(1), and (b) the
trust has applied for the option and has obtained extension of time for
applying the unutilised portion of income for charitable purposes during
the next previous year, i.e., 2020-21 and has actually spent Rs. 24,700
during that previous year. Rs. Solution : Income 8,60,000 Less : 15% set
apart for the future* 1,29,000 7,31,000 Less : Amount actually spent
during the previous year 3,80,000 Unutilised balance 3,51,000 On the first
assumption, Rs. 3,51,000 is taxable for the assessment year 2020-21
relevant to the previous year 2019-20. On the second assumption, Rs.
3,26,300 (i.e., Rs. 3,51,000—Rs. 24,700) will be treated as taxable income
for the assessment year 2021-22 relevant to the previous year 2020-21.
36.4-E1 During the previous year 2019-20, a charitable trust gets income
of Rs. 90,000 from the property held under the trust for charitable
purposes. The trust actually spends Rs. 25,000 during the previous year
2019-20. Determine the taxable income of the trust on the assumption
that : (a) the trust has not applied for the option under clause (2) of the
Explanation to section 11(1) ; and (b) the trust has applied for option and
has obtained extension of time for applying the unutilised portion of
income for charitable purposes during the next previous year, i.e., 2020-
21, and has actually spent Rs. 51,000 during that previous year. 36.4-P2
During the accounting period ending March 31, 2020 a charitable trust
gets (a) income from property held for charitable purposes : Rs. 2,60,000
(Rs. 1,10,000 received in cash and the remaining balance of Rs. 1,50,000
is to be received in the year 2021-22), (b) voluntary contributions (not
being contributions made with a specific direction that they shall form part
of corpus of the trust) : Rs. 70,000. During the previous year 2019-20, the
trust spends only Rs. 60,000 for charitable purposes. Determine its
taxable income, on the assumption that the trust has obtained extension
of time for applying the unrealised income of Rs. 1,50,000 in the year of
receipt, i.e., 2021-22, whereas it actually spends Rs. 80,000 in the year
2021-22 and Rs. 40,000 in the year 2022-23. 59 How to find out
exemption u/s 11 Para 36.4 Solution : For the assessment year 2020-21
(previous year 2019-20) Rs. Income from property held under trust for
charitable purposes 2,60,000 Voluntary contributions 70,000 Total income
3,30,000 Less : 15% set apart for future 49,500 Balance 2,80,500 Less :
Amount spent during the previous year 60,000 Shortfall 2,20,500 Less :
Amount not realised during the previous year [for which the trust has
obtained extension of time] 1,50,000 Taxable income 70,500 For the
assessment year 2023-24 (previous year 2022-23, i.e., the year next
following the previous year in which the unrealised income of the previous
year 2019-20 is received) : Rs. Rs. Income received during the previous
year 2021-22 1,50,000 Less : Amount spent- during the previous year
2021-22 80,000- during the previous year 2022-23 40,000 1,20,000
Amount deemed as income of the assessment year 2023-24 30,000 36.4-
E2 During the previous year ending March 31, 2020, a charitable trust
gets the following income: Rs. Voluntary contributions (without any
direction) 4,80,000 Income from property held under trust :  received
during 2019-20 32,70,000  accrued during 2019-20 (it will be received in
2021-22) 11,50,000 During the previous year 2019-20, the trust spends
only Rs. 9,86,000 for charitable purposes. Determine its net income
chargeable to tax, on the assumption that the trust has obtained
extension of time for applying unrealised income of Rs. 11,50,000 in the
year of receipt, i.e., 2021-22, whereas it actually spends Rs. 78,600 during
2021-22 and Rs. 8,09,200 during 2022-23. 36.5 Accumulation of income
[Sec. 11(2)] - Where 85 per cent of the income is not applied to charitable
or religious purposes in the manner discussed above, the charitable trust
or institution may accumulate or set apart either the whole or part of its
income for future application for such purposes. Such income so
accumulated, or set apart, is not included in the total income of the trust
in the year of receipt of income.  For this purpose, such trust has to
inform the concerned Assessing Officer the purpose and period (which in
no case can exceed 5 years*) for which the income is accumulated or set
apart. This information has to be given electronically in Form No. 10. The
benefit of accumulation is not available if Form No. 10 is not uploaded
before the due date of filing return of income specified under section
139(1) for the fund or institution.  Further, the money so set apart or
accumulated should be in the modes specified in section 11(5) [see para
36.3].  The benefit of accumulation is not available if return of income is
not furnished before the due date of filing return of income under section
139(1). 36.5-1 CONSEQUENCES OF DEFAULT - If in any year, the income
which is accumulated for the specified purpose (or purposes) of the trust,
is applied to purposes other than charitable or religious purposes or
ceases to be accumulated for application for such purposes, it will become
chargeable to tax as the income of that year.  If in any year, the
accumulations cease to remain invested in securities specified in section
11(5) then also the income so accumulated will become chargeable to tax
as the income of that year.  If the accumulations are not utilised for the
specified purposes during the period of accumulation or in the year
immediately following the expiry of that period, then the accumulations to
the extent they are not so utilised, will become chargeable to tax as
income of the previous year immediately following the expiry of that
period.  Payment to other trusts and institutions out of income from
property held under trust in the year of receipt of such income is treated
as application of income. However, any payment out of accumulated
income to other trust/institution (not being payment in the year in which
trust claiming exemption is dissolved) shall not be Para 36.5 Income that
is exempt from tax 60 *In computing the period of 5 years, the period
during which the income could not be applied for the purposes for which it
is accumulated or set apart, due to an order or injunction of any court,
shall be excluded. 61 Forfeiture of exemption Para 36.6 treated as
application of income and will be taxed in the year in which such payment
or credit is made out of accumulated income. Sometimes failure to apply
the income so accumulated or set apart in the specified manner may arise
due to circumstances beyond the control of trustees. In such a case, the
Assessing Officer may, on the receipt of an application from the person in
receipt of the income, allow such income to be applied for such other
charitable/ religious purposes in India as are in conformity with the objects
of the trust/institution. Problems 36.5-P1 During the previous year 2019-
20, a charitable trust gets the following income : Rs. a. Voluntary
contributions (with specific direction that they shall form part of the
corpus of the trust) b. Voluntary contributions (without any specific
direction) c. Income from property held in trust 12,90,000 18,30,000
8,66,000 During the previous year 2019-20, the trust spends Rs. 8,90,000
for charitable purpose in India. Besides, it gives donation of Rs. 85,480 to
public charitable trusts. It sets apart Rs. 14,00,000 for the purpose of
construction of a charitable hospital up to March 31, 2025. Determine the
taxable income of the trust on the assumption that the trust utilises Rs.
8,70,000 up to March 31, 2026 for the purpose of completing construction
of a charitable hospital. Besides, out of the accumulated amount, the trust
gives a donation of Rs. 1,00,000 to another charitable trust. Solution :
Assessment year 2020-21 (i.e., previous year 2019-20) Income from
property held under trust Add: Voluntary contributions Total income Less :
15% of Rs. 26,96,000 Balance Less : Amount spent during 2019-20
Amount spent for charitable purpose Donation given to other charitable
institutions Shortfall Less : Amount set apart for charitable hospital Net
income Rs. 8,90,000 85,480 Rs. 8,66,000 18,30,000 26,96,000 4,04,400
22,91,600 9,75,480 13,16,120 14,00,000 Nil Assessment year 2026-27
(previous year 2025-26, i.e., the previous year next following the previous
year ending March 31, 2025) Rs. Amount set apart (though the amount
set apart is Rs. 14 lakh, the amount allowed as deduction for the
assessment year 2020-21 is Rs. 13,16,120) 13,16,120 Less : Amount
actually spent (donation given to another trust out of accumulated
amount is not taken into consideration) Amount deemed as income of the
assessment year 2026-27 36.5-E1 During the previous year 2019-20, a
charitable trust derived the following income : Voluntary contributions
(without any specific direction) Income from property held under trust
8,70,000 4,46,120 Rs. 8,00,000 3,00,000 During the previous year 2019-
20, the trust spends Rs. 3,90,000 and sets apart Rs. 6,00,000 for the
purpose of construction of a charitable clinic at Delhi. The amount so set
apart is to be utilised up to the end of the previous year 2023-24.
Determine the taxable income of the trust on the assumption that the
trust spends, for the purpose of construction of clinic, Rs. 3,80,000 up to
March 31, 2024 and Rs. 1,05,000 during the year 2024-25. Besides, it
gives a donation of Rs. 45,000 (out of the accumulated amount) to a
public charitable trust which will be utilised by the donee for construction
of a clinic. 36.6 Forfeiture of exemption [Sec. 13] - The following income of
charitable/religious trusts/institutions do not qualify for exemption under
section 13 : 36.6-1 INCOME FOR PRIVATE RELIGIOUS PURPOSES - Any part
of income from property held under a trust for private religious purposes
which does not enure for the benefit of the public, is not eligible for
exemption under section 11 or 12. 36.6-2 INCOME FOR THE BENEFIT OF
PARTICULAR RELIGIOUS COMMUNITY - Entire income of a charitable
trust/institution (established on or after April 1, 1962) created for the
benefit of any particular religious community or caste is disqualified for
exemption under section 11 or 12. A trust or institution created or
established for the benefit of Para 36.6 Income that is exempt from tax 62
Scheduled Castes, backward classes, Scheduled Tribes or women and
children shall not be deemed to be a trust or institution created or
established for the benefit of a religious community or caste for this
purpose. 36.6-3 INCOME FOR THE BENEFIT OF INTERESTED PERSONS - If a
religious/charitable trust/institution is created or established after March
31, 1962 and any part of its income which enures directly or indirectly
under the rules governing the trust, for the benefit of any person specified
in section 13(3), then the entire income of such trust is not eligible for
exemption under section 11 or 12. 36.6-4 FUNDS NOT INVESTED IN
SECTION 11(5) SECURITIES/DEPOSITS - Income of a trust/institution is not
eligible for exemption under section 11 or 12 if its funds are
invested/deposited otherwise than in the forms specified in section 11(5)†.
36.6-5 EDUCATIONAL AND MEDICAL FACILITIES TO SPECIFIED PERSONS
[SECS. 12(2) AND 13(6)] - Sections 12(2) and 13(6) provide as follows— 1.
Income of a charitable or religious trust will not be exempt if any part of
such income or any property of the trust is used or applied, directly or
indirectly, for the benefit of any person such as the author of the trust,
trustee or any relative of such persons or any concerns in which such
persons have a substantial interest. A charitable or religious trust running
an educational institution or a medical institution or a hospital shall not be
denied the benefit of exemption under section 11 or section 12, in relation
to any income by reason only that such trust has provided educational or
medical facilities to interested persons. 2. The value of any medical or
educational services made available by any charitable or religious trust
running a hospital or medical institution or an educational institution to
any interested person shall be deemed to be the income of such trust or
institution derived from property held under trust wholly for charitable or
religious purposes during the previous year in which such services are so
provided and shall be chargeable to income tax notwithstanding the
provisions of section 11(1). 36.6-6 DONATION FOR PROVIDING RELIEF TO
VICTIMS OF EARTHQUAKE IN GUJARAT [SEC. 12(3)] - Any amount of
donation received by a trust or institution under section 80G(5C) which
has been utilised for purposes other than providing relief to the victims of
earthquake in Gujarat or which remains unutilised on March 31, 2004 and
not transferred to the Prime Minister’s National Relief Fund on or before
the said date shall be deemed to be the income of the previous year and
shall accordingly be charged to tax. 36.6-7 ANONYMOUS DONATION
[SECTION 13(7)] - Any anonymous donation will not be eligible for
deduction under sections 11 and 12. 36.6-7a WHAT IS ANONYMOUS
DONATION [SEC. 115BBC(3)] - The expression “anonymous donation” has
been defined as follows— 1. It is a voluntary contribution. 2. The person
receiving such contribution does not maintain a record of— a. the identity
indicating the name and address of the person making such contribution ;
and b. such other records as may be prescribed. 36.6-7b WHEN
PROVISIONS OF SECTION 115BBC ARE APPLICABLE - “Anonymous
donation” is taxable at a special rate under section 115BBC in Case 2 and
Case 3 given below— Institution receiving anonymous donations Tax
treatment Case 1 - Wholly religious entities Section 115BBC is not
applicable Case 2 - Partly religious and partly charitable entities If
anonymous donation is made to an educational or medical institution run
by such an entity, such anonymous donation is taxable under section
115BBC. Any other anonymous donation is not subject to tax under
section 115BBC Case 3 - Wholly charitable entities All anonymous
donations are taxable under section 115BBC 36.6-7c SPECIAL PROVISIONS
UNDER SECTION 115BBC - In the case of Case 2 and Case 3, “anonymous
donation” is taxable under the provisions of section 115BBC as follows—
1. If aggregate anonymous donation is Rs. 1 lakh or less, section 115BBC
will not be applicable. 2. If aggregate anonymous donation is more than
Rs. 1 lakh but it is not more than 5 per cent of the total donation received
by the assessee, section 115BBC will not be applicable. †See para 36.3-1.
3. If aggregate amount of anonymous donation is more than Rs. 1 lakh or
5 per cent of the total donation received by the assessee, whichever is
higher, the excess amount will be subject to tax at the rate of 30 per cent*
under section 115BBC. However, it will be taxable only in Case 2 and Case
3 given above. Provision illustrated XYZ is a wholly charitable trust. During
the previous year 2019-20, it reports the following income and
expenditure— Income How much is applied for Rs. charitable purposes Rs.
Income from property held for charitable purposes 15,00,000 6,00,000
Voluntary contribution for corpus of the trust (names and addresses of
donors available) 80,00,000 Nil Voluntary contribution without any
direction (names and addresses of donors available) 40,00,000 12,75,000
Voluntary contribution without any direction (names and addresses of
donors not available) 30,00,000 26,00,000 In this case, Rs. 80,00,000
(being voluntary contribution for corpus of the trust) is not chargeable to
tax. Anonymous donation is Rs. 30,00,000 (names and addresses of
donors are not available). In respect of anonymous donation, exemption
under section 11 is not available. Taxable income and tax liability will be
calculated as follows— Rs. Income from property held for charitable
purposes 15,00,000 Voluntary contribution for corpus of the trust (not
taxable) — Voluntary contribution without any direction 40,00,000
Anonymous donation 30,00,000 Total 85,00,000 Less : Anonymous
donation taxable under section 115BBC @ 30% (as calculated below)
26,50,000 Income subject to exemption under section 11 58,50,000 Less:
Exemption under section 11 (15% of Rs. 58,50,000 + Rs. 6,00,000 + Rs.
12,75,000) 27,52,500 Balance 30,97,500 Add: Anonymous donation
(taxable @ 30% under section 115BBC) 26,50,000 Taxable income
57,47,500 Computation of tax Tax on anonymous donation (total donation
is Rs. 40,00,000 + Rs. 30,00,000, i.e., Rs. 70,00,000. 5% of total donation
is Rs. 3,50,000. 5% of total donation or Rs. 1,00,000, whichever is higher,
is Rs. 3,50,000. Anonymous donation in excess of Rs. 3,50,000 is Rs.
26,50,000 which will be taxable @ 30%) 7,95,000 Tax on income other
than anonymous donation (i.e., normal tax on Rs. 30,97,500) 7,41,750
Total 15,36,750 Add: Surcharge @ 10% 1,53,675 Tax and surcharge
16,90,425 Add: Health and education cess 67,617 Tax liability 15,58,040
Note - The above calculations are applicable only if the trust is wholly
charitable entity (or it is partly religious and partly charitable and
anonymous donations are received for educational/medical institution run
by such entity). In other cases, section 115BBC is not applicable and
taxable income and tax liability will be calculated as under— Rs. Income
from property held for charitable purposes 15,00,000 Voluntary
contribution for corpus of the trust (not taxable) — Voluntary contribution
without any direction 40,00,000 Voluntary contribution without any
direction (names and addresses of donors not available) 30,00,000 Total
85,00,000 Less: Exemption under section 11 [(15% of Rs. 85,00,000) +
Rs. 6,00,000 + Rs. 12,75,000 + Rs. 26,00,000] 57,50,000 Taxable income
27,50,000 Computation of tax Tax on income (i.e., normal tax on Rs.
27,50,000) 6,37,500 Add: Health and education cess 25,500 Tax liability
(rounded off) 6,63,000 63 Forfeiture of exemption Para 36.6 * Plus SC +
HEC Para 36.7 Income that is exempt from tax 64 36.7 Public
charitable/religious trust - How chargeable to tax - Subject to rule
mentioned in para 36.7-1, in the following cases income of a
charitable/religious trust which is not exempt under section 11 or 12, is
chargeable to tax as if it is the income of an association of persons : a.
income from property held under trusts wholly for charitable or religious
purposes ; b. voluntary contributions without any direction that they shall
form part of corpus of trust; or c. income of trust or institution being
profits and gains of business which is incidental to the attainment of the
objectives of trust and separate books of account are maintained. 36.7-1
LEVY OF TAX AT MAXIMUM MARGINAL RATE IN CASE OF PUBLIC
CHARITABLE AND RELIGIOUS TRUSTS WHICH FORFEIT TAX EXEMPTION -
Charitable or religious trusts, which may otherwise be eligible for tax
exemption, are liable to forfeit this exemption in the following
circumstances, namely : 1. Where the trust is created after March 31,
1962, any part of the income of the trust enures under the terms of the
trust deed, directly or indirectly, for the benefit of specified categories of
persons such as, the author of the trust, trustee or manager of the trust,
substantial contributor to the trust and any relative of such author,
trustee, etc. 2. Any part of the income or any property of the trust
(whenever created) is used or applied during the relevant year, directly or
indirectly, for the benefit of specified categories of persons. 3. The trust
funds (with certain exceptions) are invested in contravention of the
investment pattern of such funds. Where a charitable or religious trust
forfeits tax exemption in the circumstances mentioned at (1) to (3) above,
the trust shall be charged to tax at the maximum marginal rate†. 36.7-2
LEVY OF TAX AT THE MAXIMUM MARGINAL RATE WHERE A CHARITABLE
TRUST CEASES TO EXIST OR CONVERTS INTO A NON CHARITABLE ENTITY
[SECS. 115TD TO 115TF] - In order to ensure that the benefit conferred
over the years to a charitable trust is not misused, section 115TD has
been inserted. This section provides for levy of additional income-tax in
case of conversion into, or merger with, any non-charitable form or on
transfer of assets of a charitable organisation on its dissolution to a non-
charitable institution. Further, a trust or institution shall be deemed to
have been converted into any form (not eligible for registration under
section 12AA), if its registration under section 12AA has been cancelled
during the previous year. Accreted income shall be amount of aggregate
of total assets as reduced by the liability as on the specified date (i.e., the
date of conversion, merger or dissolution). The accreted income shall be
taxable at the maximum marginal rate†.  HOW CAN A POLITICAL PARTY
CLAIM EXEMPTION [SEC. 13A] 37. The following categories of income
derived by a political party are not included in computing its total income :
a. any income which is chargeable under the heads “Income from house
property”, “Capital gains” and “Income from other sources”; and b. any
income by way of voluntary contributions. The term “political party” for
this purpose means an association or body of individual citizens of India
registered or deemed to be registered with the Election Commission of
India as a political party. 37.1 Conditions for claiming exemption under
section 13A - Exemption under section 13A is available only if the political
party satisfies the following conditions Books of account - The political
party should keep and maintain such books of account and other
documents as would enable the Assessing Officer to properly deduce its
income therefrom. Maintenance of record of voluntary contribution - The
political party should keep and maintain a record of each voluntary
contribution in excess of Rs. 20,000 and of the names and addresses of
persons who have made such contributions. However, this rule is not
applicable if voluntary contribution is received by way of electoral bond.
Audit of books of account - The accounts of the political party are audited
by a chartered accountant. Submission of report to election commission -
The treasurer of a political party (or any authorised person) shall in each
financial year prepare a report in respect of contribution received by the
political party in excess of † Maximum marginal rate of tax is 42.744 per
cent. 65 Problems on income exempt from tax Problem 38-P1 Rs. 20,000
from any person/company in that year and submit it (before due date of
submission of return of income) to the Election Commission. Donation
exceeding Rs. 2,000 to be received by account payee cheque/draft - No
donation exceeding Rs. 2,000 is received otherwise than by an account
payee cheque/draft/use of electronic clearing system through a bank
account (or through prescribed electronic mode), or through electoral
bonds. Submission of return of income - A political party (which wants to
avail exemption under section 13A) should furnish return of income [as
required by section 139(4B)] on or before the time-limit given in section
139(1). If return is not submitted (or if return is submitted belatedly),
exemption under section 13A will not be available.  EXEMPTION TO
ELECTORAL TRUST [SEC. 13B] 37A. Voluntary contribution received by an
electoral trust is treated as income under section 2(24)(iia). By virtue of
section 13B, donation received by an electoral trust will not be chargeable
to tax if the following conditions are satisfied— 1. The electoral trust is
approved by the Central Board of Direct Taxes in accordance with the
scheme made by the Central Government. 2. The electoral trust will have
to distribute to political parties 95 per cent of the aggregate donations
received by it during the previous year along with the surplus, if any,
brought forward from any earlier previous years. For this purpose, a
political party means a political party registered under section 29A of the
Representation of the People Act, 1951. 3. The electoral trust functions in
accordance with the rules made in this regard by the Central Government.
Problems on income exempt from tax 38-P1 Discuss and illustrate the tax
treatment of capital gain derived by a charitable trust as specified under
section 11(1A). Solution : Where a capital asset of a charitable trust is
transferred, then the tax treatment of capital gain will be as under — 1.
Where the whole of such net consideration is utilised in acquiring the new
capital asset (even investment for a fixed term in a bank is treated as
investment in capital asset) the entire amount of the capital gain is
regarded as having been applied to charitable or religious purposes, and
the entire capital gain is not chargeable to tax. 2. Where only a part of the
net consideration is utilised for acquiring the new capital asset, an
amount, if any, by which the cost of the new asset exceeds the cost of
asset transferred, is regarded as amount not chargeable to tax for such
purposes. 3. In a case where the asset (which is transferred) formed part
of property held under trust in part only for charitable or religious
purposes, a proportionate amount of the capital gain is regarded as
having been applied to charitable or religious purposes. Provisions
illustrated - To have better understanding of the above provisions, the
following examples are given — 1. A trust holds a capital asset (being
debentures of a company) income of which is fully utilised for charitable
purposes. The capital asset is transferred on March 1, 2020 and the
capital gain is calculated as under — Rs. Sale proceeds Less : Cost (i.e.,
cost of acquisition and cost of improvement) Expenses on transfer Capital
gain as per section 45 without giving any exemption 9,80,000 6,00,000
20,000 3,60,000 In this case, net sale consideration is Rs. 9,60,000 (i.e.,
Rs. 9,80,000 — Rs. 20,000). Suppose, the trust acquires another capital
asset for Rs. 9,60,000 (or more), then the entire capital gain of Rs.
3,60,000 will be exempt from tax. If, however, the amount invested is less
than Rs. 9,60,000, then the exemption will be lower than Rs. 3,60,000.
The amount of exemption shall be determined as follows — Amount of
investment in the new capital asset (1) Rs. Cost of the old asset which is
transferred (2) Rs. Amount exempt as the amount is Case 1 Case 2 Case 3
Case 4 Case 5 9,60,000 9,00,000 7,00,000 6,00,000 5,00,000 applied for
charitable purposes [(1) - (2)] Rs. 6,00,000 6,00,000 6,00,000 6,00,000
6,00,000 3,60,000 3,00,000 1,00,000 Nil Nil Income that is exempt from
tax 66 2. Suppose in the above case, the property is held under trust in
part only for charitable purposes [suppose 70% of the income of the trust
is utilised for charitable purposes], then the amount of exemption shall be
determined as follows— 70% of the amount invested in the new asset (1)
Rs. 70% of the cost of old asset (2) Rs. Amount applied for charitable
purposes [i.e., excess of (1) over (2)] Rs. Case 1 Case 2 Case 3 Case 4
Case 5 Expenses on transfer Cost of acquisition Cost of improvement Cost
of new asset purchased- Situation 1- Situation 2 6,72,000 6,30,000
4,90,000 4,20,000 3,50,000 4,20,000 4,20,000 4,20,000 4,20,000
4,20,000 2,52,000 2,10,000 70,000 Nil Nil 38-E1 A capital asset (being
bonds of Government of India) is transferred by a charitable trust on
March 11, 2020. The following particulars are available— Rs. Sale
proceeds 2,40,000 10,000 1,00,000 20,000 3,00,000 1,05,000 Find out the
amount of exemption if (a) the capital asset is held wholly for charitable
purposes, (b) the capital asset is held in part (80%) only for charitable
purposes. ● Test your knowledge For answer, see relevant paras indicated
at the end of each question. 1. “The Income-tax Act gives absolute
exemptions in respect of certain income, while some income is included in
the total income for determining the rate only”. Discuss. 2. “Casual
receipts” are exempt from income-tax. State the various exceptions
enunciated on this general principle. [para 32.4] 3. Enumerate with
reference to section 10 of the Income-tax Act, 1961, five types of income
which is totally exempt from tax. [para 32] 4. Enumerate any ten items
which are exempt from charge of income-tax. [para 32] 5. Describe five
items of “income receipts” totally excluded in computing total income
under the Income-tax Act. [para 32] 6. Give eight instances of income
completely exempt from tax giving a brief account of the conditions, if
any, to be fulfilled, in respect of each to be eligible for the exemption.
[para 32]. 7. Explain