TO ANOTHER CHARITABLE ORGANISATION IS APPLICATION
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.
TO OTHER CHARITABLE INSTITUTIONS AFTER 1-4-2002
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.
OUT OF CURRENT INCOME IS NOT BANNED
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).
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.
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.
IN FINANCE ACT, 2003
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.
PLANNING THROUGH DEEMED APPLICATION
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.
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.
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.
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.
sum up the discussions :
Donation to another charity with similar objects is considered
as an application of income for charitable or religious purposes.
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.
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.
High Courts have held that even inter-charity donations towards
corpus is a valid application. But this contention may require
After 01.04.2002, inter-charity donation out of accumulated
funds is not possible except in the case of dissolution of
the donor organisation.
Organisations receiving funds towards the end of the year
can still make inter-charity donations by applying the option
under Explanation to section 11.