[Opinion] Utilisation of Corpus Donations by Charitable Trusts—Legal Dilemmas and Tax Implications

V K Subramani – [2025] 179 taxmann.com 667 (Article)

Taxation of charitable trust has been quite challenging for the tax administration and to the charitable trusts or institutions. The reason for such complex legal provisions contained in the statute book has to be attributed to both the sides. If the taxpayer has found out a leeway to avail tax benefit/relief, the tax administration resorts to legal amendments which instead of blocking the loophole creates further ambiguity and uncertainty. The natural outcome of this is litigation at various forums across the length and breadth of the nation.

This refresher is to discuss the tax consequence of use of corpus donation for pursuing the objects of the charitable trust or institution.

1. Legal Provisions

Section 11(1) (d) says that ‘income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust’ shall not be included in the total income of the trust.

However, a limb is appended further in it (i.e. in clause (d)) by stating ‘subject to the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified’ in sub-section (5) of section 11 maintained specifically for such corpus.

Explanation 3A says that, where the property held under a trust or institution includes any temple, mosque, gurdwara, church or any other place notified under clause (b) of section 80G(2), any sum received by such trust as voluntary contribution for the purpose of renovation or repair of such temple, mosque or gurdwara, church or other place, may, at its option, be treated as forming part of the corpus, subject to the condition that the trust (a) applies such corpus only for the purpose for which the voluntary contribution was made; (b) does not apply such corpus for making contribution or donation to any person; (c) maintains such corpus separately identifiable; and (d) invests or deposits such corpus in the form or modes specified in section 11(5) of the Act.

Explanation 3B says that for the purposes of Explanation 3A, where any trust or institution has treated any sum received by it as forming part of the corpus, and subsequently any of the conditions specified in clause (a) or clause (b) or clause (c) or clause (d) of the said Explanation is violated, such sum shall be deemed to be the income of such trust or institution of the previous year during which the violation takes place.

Explanation 4 to section 11(1) says that for the purposes of determining the amount of application, under clause (a) or clause (b) – (i) application for charitable or religious purposes from the corpus as referred to in clause (d) of section 11(1), shall not be treated as application of income for charitable or religious purposes.

Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the amount or part thereof, is invested or deposited back, in to one or more of the forms or modes specified in section 11(5) maintained specifically for such corpus, from the income of that year and to the extent of such investment or deposit.

Further proviso to Explanation 4 says that the provisions of the first proviso shall apply only if there was no violation of the conditions specified – viz. (a) in clause (c) of this sub-section; (b) in Explanations 2, 3 and 5 of the sub-section; (c) in the Explanation to this sub-section; and (d) in clause (c) of section 13(1)(c) – at the time the application was made from the corpus.

Yet another proviso i.e. third proviso to Explanation 4 says that the amount invested or deposited back shall not be treated as application for charitable or religious purposes under the first proviso unless such investment or deposit is made within a period of 5 years from the end of the previous year in which such application was made from the corpus.

2. Interpreting Explanation 3A and Explanation 4

Explanation 3A is meant to cover only trust or institutions which are meant for any temple, mosque, gurdwara, church or any other place notified under section 80G(2)(b). It does not apply to other trust or institutions. It gives an option to the trust or institution to treat the amount received as forming part of the corpus of the trust or institution. Therefore, the option of choosing the voluntary contribution as corpus contribution is vested with the respective trust or institution notified under section 80G(2)(b).

There are some conditions for such institutions as regards usage of corpus fund so identified by it. It cannot make contribution or donation from such fund and it must be used only for the purposes for which the voluntary contribution was made. It must be kept separately as identifiable (like a separate bank account or deposits earmarked, etc.,) to satisfy the requirements of Explanation 3A.

Explanation 4 on the other hand does not give the option to the trust or institution to treat a voluntary contribution as a corpus fund or as corpus donation. The donor if says that the amount donated is to be kept as corpus either generally or specifically, the trust or institution having accepted the donation which such mandate is estopped from breaching the condition of the donor. It is altogether a different matter if the donor subsequently alters nature of donation so given by requesting the trust or institution to treat it as specific corpus donation or general corpus donation or as voluntary contribution.

Clause (i) to the Explanation 4 says that the amount applied out of corpus shall not be treated as application. The proviso hastens to add that the amount so not treated as application shall be treated as application when it is replenished in the corpus with a timeline of 5 years from the end of the previous year in which such application was made.

A comparative study of Explanation 3A and Explanation 4 would show that Explanation 4 is somewhat liberal by permitting the use of corpus fund by the trust or institution. A general corpus fund can be given as corpus donation to another trust or institution. Also, corpus money can be kept with other funds and need not be in identifiable form, much in contrast to conditions contained in Explanation 3A meant for trust and institutions covered by section 80G(2) (b).

Also, Explanation 3A says that corpus donation should be used only for the purpose for which such contribution was made. Explanation 3B says that any violation would lead to the sum so utilised being deemed as income of the trust of the previous year in which the violation takes place.Of course, this can be made tax neutral by applying the corpus donation to the objects of the trust in which case the deemed income and the corresponding application will not impact its total amount of income for the purpose of Income-tax.

On the other hand, if the corpus is utilised by trust or institution (not being a trust or institution covered by Explanation 3A)as per Explanation 4 including all the provisos attached to it there is no deeming provision for treating such violation as income of the trust. This seems to be the intent of the legislature to distinguish between a trust or institution to whom the conditions of Explanation 3A would apply vis a vis to those for whom Explanation 4 would apply.

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