| 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.
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