The income of trusts and institutions created for charitable or religious purposes is exempt from income-tax subject to fulfilment of certain conditions as prescribed under Sections 11, 12, 12A, 12AA, 12AB and 13 of the IT Act. Section 13 contains the bar to this exemption and Sub-section (1)(d)(iii) states that any income from shares in a company, other than:

i.     Shares in a public sector company; and

ii.    Shares prescribed as a form or mode of investment under Clause (xii) of Sub-section (5) of Section 11;

will form part of the total income of the charitable institution for the relevant previous year and will not be treated as exempt.

In this background, a question that arises for consideration is whether receipt of donation in the form of shares and securities such debentures etc., would lead to revocation of the exemption status of the charitable institution.

The Delhi Bench of the Tribunal had the occasion to consider this proposition in the case of Sera Foundation v. Income-Tax Officer (Exemption), Trust Ward-I^[1]. Whilst answering the question in the negative, the Tribunal held that there is no restriction under the provisions of the IT Act, on acceptance of shares by a charitable institution. The only restriction is to be found in Section 13(1)(d) as per which the charitable trust is required to hold its investments in the modes as prescribed under Section 11(5). Moreover, Clause (iia) of the proviso to Section 13(1)(d)(iii) of the IT Act, entitles the charitable institution to hold shares for a maximum period of one year and thereafter, the shares/ securities, so held, have to be converted into one of the modes of investment as prescribed under Section 11(5) of the IT Act.

Therefore, charitable organisations are well within their rights to receive donations in the form of shares and securities. However, they must ensure that these shares/ securities are converted into a prescribed mode of investment^[2] within a period of one year from the end of the previous year in which such asset is acquired. In case the charitable institution continues to hold the shares/ securities beyond the stipulated period, i.e., in contravention of Section 11(5), income arising from such assets would be excluded from the purview of exemption granted under Section 11 of the IT Act^[3]. However, the contravention, would not, as such, lead to revocation of the exemption status of the charitable institution, in a wholesale manner^[4].

[1] [2012] 26 taxmann.com 126 (Delhi).

[2] As specified under Section 11(5) of the IT Act.

[3] Santokba Durlabhji Trust Fund v. Income-Tax Officer, Order dated November 05, 2011 in ITA No. 169/JP/2012 (Jaipur ITAT).

[4] Bai Dayambai Adamji Rangwala Charity Trust v. Asst Director of Income Tax, (1998) 66 ITD 59 (Mum-Trib).