[Opinion] Charitable Trust – Managing Application of Income on Actual Payment Basis

CA Naresh Kumar Kabra & Nikhil Agarwal – [2022] 145 taxmann.com 565 (Article)

“Now, the expense has to be done in reality”

We know that tax is one of the major sources of government revenue. But, Charitable Institutions (CIs) are enjoying a huge tax benefit for a long time. The CI covered under section 10(23C) and section 11 of the Income Tax Act, 1961 are exempt from paying income tax, after fulfilling certain conditions.

The CIs have to apply 85% of their income towards charitable objectives, however before the introduction of the Finance Act, 2022; there was no specific condition in the law that this application of income has to be calculated on an accrual basis or actually paid basis. It was the choice of CI, if CI is maintaining its Books of Accounts (BOA) on an accrual basis, then 85% of income was to be applied on the accrual basis and if BOA is maintained on a cash basis, then 85% of income was to be applied on actual payment basis.

Let’s understand the above scenario with an example.

For example, Dayalu Trust is maintaining its BOA on the accrual basis and the following is the data for F.Y 2021-22

In the above example, AOI is 85% which meets the threshold for claiming tax exemption, and hence the Tax payable is Nil.

However, with the introduction of the Finance Act, 2022, an amendment has been brought which has completely changed the law of Taxation of CIs which was in existence since its inception. Now, only those expenses which have been actually paid during the relevant F.Y. will be considered for the calculation of AOI to the tune of 85%. [Explanation 3 to clause (23C) of section 10 and Explanation to section 11].

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