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 Income-tax (21st Amendment) Rules, 2017

Charitable treatment
July, 15th 2006

Far from buffeting charities, the I-T Act in fact suspends the normal rules of income computation in favour of charitable trusts so as to encourage charity.

The generous handout to charity by Mr Warren Buffet, the richest person in the world next only to the redoubtable Mr Bill Gates, has understandably attracted worldwide attention and admiration not only on account of the size of the largesse to noble causes but, more importantly, for turning the aphorism, charity begins at home, on its head.

A well-known writer has bemoaned lack of such noble endeavours on the part of Indians of late and blamed it on our tax laws, which he says insist on income from charities being spent forthwith in order to be eligible for exemption from income-tax. This is not true. The Income-Tax Act, 1961 permits accumulation of income by charitable trusts for five years (earlier this was 10 years). A period of five years is sufficient for a trust to identify projects and causes needing its munificence. When gestation period for massive industrial projects is being cut down, thanks to excellent project management skills, there is no reason to apprehend that charitable trusts would end up paying taxes on their accumulated income merely due to their inability in identifying worthy causes within the time allowed.

Encouraging charity

Far from buffeting charities, the I-T Act in fact suspends the normal rules of income computation in favour of charitable trusts so as to encourage charity. To wit, buying or constructing a building would be a capital expenditure for a business qualifying only for depreciation. But not for a charity. A charitable trust would be deemed to have applied its income as soon as it has invested in a building to be used as a hospital or an educational institution. Ditto for expensive diagnostic and other equipments acquired.

Moreover, a very liberal definition of the term `charitable purpose' has been given by the I-T Act and by the courts so much so that charity in India can even assume the form of promoting the game of cricket or football if you like. There are of course provisions to ensure proper utilisation of funds earmarked for charity.

Investments in shares of companies listed or unlisted is a strict no-no, lest trusts set up ostensibly for charitable purposes are used to prop up somebody or a group. Again, the funds of a charitable trust must not be utilised for the benefit of the author of the trust or his relatives. Even this rigour has been relaxed to permit reasonable acts. For example, because the child of the trustee is getting education in the institution owned by the trust would not result in the trust forfeiting income-tax exemption.

Similarly, the funds should, pending utilisation, remain invested in prescribed avenues set out in Section 11(5). An Indian can, therefore, rise to the dizzy heights achieved by Mr Warren Buffet. And like him Mr Buffet has announced handing over of the wealth to Melinda Gates Foundation, apparently impressed by the noble work done by it over the years, thanks especially to the excellent delivery system it has designed he need not even set up a trust himself.

The I-T Act, while frowning upon the practice of applying the income through other charitable trusts, makes an exemption in favour of voluntary contributions with a specific direction that they shall form the corpus of the trust to which it is given, by exempting such contributions from the income of the recipient trust and thus sparing it the need to apply the same forthwith or within five years, which is the maximum period for which accumulations are allowed.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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