01 It has been held in various cases that donation made by one Charitable Organisation to another shall be considered as application of income for the objectives of the organisation provided the donee organisation also has objects similar to the object donor organisation.

DONATIONS TO OTHER CHARITABLE INSTITUTIONS AFTER 1-4-2002

02 The Finance Act, 2002 has inserted an Explanation to sub-section (2) of section 11. This Explanation prohibits donations to other Charitable Organisations out of the accumulated funds. This amendment can have far-reaching practical implications. The new amendment puts restriction on donations to other charities only out of accumulated funds. In other words, funds once accumulated under section 11(2) can only be applied for charitable purposes directly by the concerned organisation and any inter-organisational transfer would not be possible.

DONATION OUT OF CURRENT INCOME IS NOT BANNED

03 However inter-organisational donations are possible from current year’s income, but the newly amended provision will certainly create hurdles for organisations, which were used as conduct for channel rising funds to other organisations. The new Explanation inserted by the Finance Act, 2002, to section 11(2) has debarred organisations from applying its accumulated or set-apart income by way of payment or credit to other such organisations. Now, payments or credits out of accumulated funds to any other organisation would not be treated as application for charitable or religious purpose. There is no apparent bar on payment or credit to such other organisations out of previous year’s income subject to the provisions of section 11(1).
Inter-charity donations

04 In the light of the above, funds once accumulated are no longer available for credit or payment to any other Charitable Organisation, though such transfer may still be possible out of the current year’s income under section 11. CBDT has also issued a clarificatory circular no. 8, dt. 27.08.2002.

05 In the light of the aforesaid and the amendments by virtue of Finance Act, 2002, donations to other Charitable Organisation are still possible but only out of the current years income. Once the funds are accumulated then it will not be permissible to make inter-trust donation and treat them as application.

AMENDMENT IN FINANCE ACT, 2003

06 The Finance Act, 2003 has inserted another proviso to sub-section (3A) of section 11 which provides that inter-charity donation out of accumulated funds will be permissible in case of dissolution of a Charitable Organisation. This amendment has been made to reduce the hardship of Charitable Organisations on the brink of dissolution.

TAX PLANNING THROUGH DEEMED APPLICATION

07 In the light of what is discussed in this chapter, the amended provisions with regard to inter-charity donations will cause hardship to those organisations which act as a mother NGO to many small charitable organisations and funds through various foreign and domestic sources are routed through them. Many donors prefer to fund through one mother NGO which subsequently distributes the funds to smaller NGOs. After the amendment made in 2002 there is an apprehension in the fraternity of Charitable Organisations, that it may become difficult to disburse funds received towards the end of the year. And since accumulated income is not available for inter-charity donations, the funds could neither be applied nor could be donated to other charities.

08 For instance if a Charitable Organisation receives funds in the month of March - which is required to be distributed to other charitable Organisations - and is unable to make inter-charity donations within the year of receipt, then it has to accumulate the same. Once the income is accumulated under section 11(2) then it is not permissible to make inter-charity donations.

09 Under the above mentioned circumstances, a Charitable Organisation may exercise the option available under Explanation to section 11. The Explanation to the section 11 refers to two situations where the income applied falls short of 85% and still can be deemed to have been applied in the previous yeother reason. Under the second situation, the assessee may exercise its option by applying in writing before the expiry of the time allowed under section 139(1) for filing of return. After exercise of the option, the income will be deemed to have been applied in the previous year even though it is spent in the succeeding or the year of receipt.

10 Inter-charity donations being valid application of income, there is no reason why option under Explanation 2 to section 11(1) could not be applied and the income be actually spent/disbursed in the succeeding year. But the reasons have to be genuine, the organisation must have valid reasons for not being able to apply the income as inter-charity donations.

OVERALL SUMMARY

11 To sum up the discussions :

i) Donation to another charity with similar objects is considered as an application of income for charitable or religious purposes.

ii) CBDT Instruction No.1132 (1978), has clarified that if the donee organisation does not utilise in the year of receipt, then the exemption to donor will not be affected.

iii) The Assessing Officer should be satisfied that the donation is a bonafide initiative and would be used by the donee for charitable purposes only. In other words, unqualified benefit to the donor is not available.

iv) High Courts have held that even inter-charity donations towards corpus is a valid application. But this contention may require re-consideration.

v) After 01.04.2002, inter-charity donation out of accumulated funds is not possible except in the case of dissolution of the donor organisation.

vi) Organisations receiving funds towards the end of the year can still make inter-charity donations by applying the option under Explanation to section 11.