Taxation of unexempt income of Public Charitable Trusts

all Law.

Section 11 of the Income-tax Act, 1961 inter alia exempts the income of a registered Trust, earned from property held under Trust, while Section 13 of the Act contains certain anti-abuse provisions to deny exemption upon certain applications of the Trust income. Where any part of Trust income is applied / invested directly or indirectly, for the benefit of specified person is violative of Section 13(1)(c) while investment of any part of Trust income other than in public sector company or modes specified under Section 11(5) is violative of Section 13(1)(d).

This podcast firstly addresses the controversy regarding the expansiveness of Section 13(4). Notably, Section 13(1)(c) and Section 13(1)(d) function as independent bars on Section 11 exemption. Section 13(4) has been drafted in such a manner that any protection guaranteed by Section 13(4) may relax requirements of Section 13(1)(c), but Section 13(1)(d) will continue to apply towards any exempted income under Section 11.

The other issue addressed by the podcast is pertaining to historical disputes around the denial of exemption vide Section 13, i.e., whether violation of Section 13 results in denial of exemption under Section 11 in toto, or only to the extent of such violation. Conflicting judicial views persisted on either position of law. The Finance Act 2022 seeks to put an end to this conflicting view by clarifying that only that part of income which has been applied / invested in violation of the Section 13(1)(c) / Section 13(1)(d) shall be liable to denial of Section 11 exemption and be taxable under the newly introduced Section 115BBI of the Act.

Audio Source: An article published on the LKS website in February 2023.
Taxation of unexempt income of Public Charitable Trusts
Authors: Samyak Navedia , Associate LKS,