DEEMED APPLICATION
 
DEEMED APPLICATION WHERE MONEY IS NOT ENTIRELY SPENT IN PREVIOUS YEAR

01 According to explanation 2 to section 11(1), if in the previous year, a charitable organisation is not able to utilise 85% of its income (75% prior to 1-4-2003), as aforesaid due to the fact that such income has not been received in the previous year or for any other reason then the organisation has an option to apply such income in the year of the receipt or in the year, immediately following the year of accrual of income.

02 It may so happen that an NGO is unable to utilise the 85% of income due the fact that such income is not received in the previous year or is received towards the end of the year. In such curcumstances the NGO has an option to apply the income in succeeding year but it will be treated as deemed to have been spent in the previous year.

THE METHODOLOGY INVOLVED

03 Under Accrual System of Accounting, Charitable oOganisations may have accrued income which actually is not received in the year of accrual. In such circumstances, there is a genuine problem which prevents the organisation from applying the income in the year of accrual. By exercising the option available under explanation - 2 to section 11(1), the organisation can apply such income in the year of receipt or the year immediately following the year in which the income is accrued. Similarly, in some circumstances where the income was received but could not be applied for charitable purposes for any other reason -for instance income received towards the end of the financial year- such income could also be applied in the immediately following year after exercising the option available under explanation 2 to section 11(1). In both the above cases, the income will be deemed to have been applied in the year in which it is accrued. Some illustrations have been given to provide a clearer understanding of the issue

Illustration-1 : The income of an organisation for the year, 2002-03 is Rs. 1,00,000/- out of which only Rs. 60,000/- was received during the year and Rs. 40,000/- was received in the year 2003-04. The organisation has actually applied Rs. 55,000/- during the year. The organisation wants to exercise option available under Expln.- 2 to section 11(1).

Solution :

Income during the year 2002-03 Rs. 1,00,000
Less : Application during the year Rs.    55,000
  ---------------
Remaining Income Rs.    45,000
Less : Deemed application u/s. 11(1) Expl. 2(ii) Rs.    40,000
  ---------------
Income accumulated u/s. 11(2) or subject to tax Rs.      5,000
  ===========

When the organisation exercises option under Explanation-2 to section 11(1) it cannot retain 15% of income for indefinite accumulation. In this above case when the organisation receives Rs. 40,000/- in 2003-04 it will have to apply Rs. 25,000/- and the remaining Rs. 15,000/- can be accumulated indefinitely on account of the year 2002-03. The amount of Rs. 25,000/- applied in 2003-04 will be deemed to have been applied in the year 2002-03. The total application will be as under :

Income during the year 2002-03 Rs. 1,00,000
Less : Application during the year 2002-03 Rs.   55,000
  ---------------
  Rs.   45,000
Less : Accumulation u/s. 11(2) or income subjected to tax Rs.     5,000
  ---------------
Remaining amount Rs.   40,000

Less : Application during the year 03-04
(Deemed to be applied in 2002-03)

Rs.   25,000
  ---------------

Indefinite Accumulation for 2002-03
Rs.   15,000
  ============

In the above illustration Rs. 5,000/- will become subject to tax, in the year 2002-03 unless the assessee also exercises the option of accumulating the income for 5 years by applying section 11(2). In 2002, the organisation will either pay tax on Rs. 5,000/- or accumulate it. If the income is accumulated then the organisation can spend it in the next 5 years. There is one more possibility with regard to the amount of Rs. 5,000/- which remained unutilised in 2002-03, the organisation, if it has valid reasons, can also apply for the option under explanation -2(ii) i.e. income received but could not be utilised for some other reason.

Illustration-2 : The income of an organisation for the year, 2002-03 is Rs. 1,00,000/- out of which only Rs. 90,000/- was actually received during the year. Out of the income actually received, Rs. 20,000/- was received on the last day of the year. Rs. 10,000/- was received in the year 2003-04. The organisation has actually applied Rs. 50,000/- during the year. The organisation wants to exercise option available under Expln.- 2(i) and (ii) to section 11(1).

Solution :

Income during the year 2002-03 Rs. 1,00,000
Less : Application during the year Rs.   50,000
  ---------------
Remaining Income Rs.   50,000
Less : Deemed application u/s. 11(1) Expl. 2(i) Rs.   10,000
  ---------------
Remaining Income Rs.   40,000
Less : Deemed application u/s. 11(1) Expl. 2(ii) Rs.   20,000
  ---------------
Remaining Income Rs.   20,000
Less : Appropriate portion of 15% indefinite accumulation Rs.     5,000
  ---------------
Accumulation under section 11(2)/subject to tax Rs. 15,000
  ============

In the above illustration, though Rs. 20,000/- is available but the organisation will not be entitled to accumulate 15% indefinite accumulation which is otherwise available, in view of CBDT circular no. 204, dt. 24.07.1976, which provides that to avail the option under explanation-2(i) the organisation has to spend all the income received for charitable purposes and the indefinite accumulation will be allowed from the income accrued but not received, when it is received in the next year.

Illustration-3 : The income of an organisation for the year, 2002-03 is Rs. 1,00,000/- out of which only (i) Rs. 80,000/- was received during the year and Rs. 20,000/- was received in the year 2003-04. The organisation has actually applied Rs. 80,000/- during the year. But, the organisation wants to spend 85% of its income. (ii) Rs. 80,000/- was received during the year and Rs. 20,000/- was received in the year 2003-04. The organisation has actually applied Rs. 80,000/- during the year. But, the organisation wants to spend 100% of its income. (iii) Rs. 90,000/- was received during the year and Rs. 10,000/- was received in the year 2003-04. The organisation actually applied Rs. 80,000/- But, the organisation wants to spend 85% of its income. (iv) Rs. 90,000/- was received during the year and Rs. 10,000/- was received in the year 2003-04. The organisation actually applied Rs. 90,000/- But, the organisation wants to spend 100% of its income. The organisation wants to exercise option available under expln.- 2 to section 11(1).

Solution : The illustration has been solved on the basis of two different circumstances available to the organisation, one when the organisation wants to apply 85% of its income, second when the organisation wants to apply 100% of its income :

  (i) (ii) (iii) (iv)
Income actually received during
the year 2002-03
80,000 80,000 90,000 90,000
  ------------- ------------- ------------- -------------
Income accrued during the
year 2002-03
1,00,000 1,00,000 1,00,000 1,00,000
Less : Application during
the year
80,000 80,000 80,000 90,000
  ------------- ------------- ------------- -------------
Remaining Income 20,000 20,000 20,000 10,000
Less : Deemed application
u/s. 11(1) expl.
2 5,000 20,000 Nil 10,000
  ======== ======== ======== ========

In case (i), the organisation has received only 80% of accrued income, therefore, it will be allowed to apply Rs. 5,000/- in the year of receipt. (ii) the organisation has received only 80% of accrued income, but if the organisation wants to forego the indefinite accumulation and apply 100% of income then it can avail the benefit of deemed application to the extent of Rs. 20,000/- provided it has to spent the entire outstanding income in the year of receipt. (iii) the organisation has received Rs. 90,000/- but has only applied Rs. 80,000/- which is 80% of income therefore, the organisation will be liable to pay tax on Rs. 5,000/- and the benefit of deemed application will not be available. (iv) the organisation has received and applied Rs. 90,000/- but if it wants to forego the benefit available for indefinite accumulation then it can make deemed application to the extent of Rs. 10,000/-. The 85% requirement is the basic limit and the organisation can always go beyond it. In this case, the organisation by opting to apply 100% of income has not transferred 15% to its corpus.

OVERALL SUMMARY

04 The provisions of this chapter can be summarised as under :

i) When an organisation is unable to apply 85% of its income because it has not been received any portion thereof or for any other reason, then it can exercise the option under explanation-2 to section 11(1). Then, such unutilised/unapplied income would be treated as deemed application.

ii) The organisation can exercise this option when the income is accrued but not received. In such cases, the organisation can spend it in the year of receipt or the year succeeding the year in which the income accrued, which ever is later.

iii) The organisation can also exercise this option when the income is received, but it could not be applied due to some valid circumstantial reasons. In such cases, the organisation can spend the income in the year succeeding the year in which the income accrued.

iv) To exercise this option, the organisation has to apply to the assessing officer in writing before the time limit specified under section 139(1) for filing return of income.

v) It has been held that the time limit to exercise this option is not mandatory and only directory in nature and therefore, the assessing officer can condone the delay.

vi) If the income is not applied in the year of receipt or the year succeeding the year of accrual of income, as the case may be, then such income will become taxable in the year succeeding the year in which it was received or it was required to be applied.

vii) If the income is not applied in the year of receipt or the year succeeding the year of accrual of income, as the case may be, then such income will not be eligible for accumulation under section 11(2) for 5 years.