Charitable trusts may lose 'double' tax break

The government is considering a proposal to disallow depreciation allowance that charitable organisations claim, following a recommendation by the income-tax (I-T) department.

Officials close to the development said the I-T department’s suggestion is to amend section 11, which specifies the manner in which income from charitable bodies is exempt from income tax.

The I-T department has said charitable organisations enjoy a double deduction by claiming tax breaks through both depreciation and capital expenditure write-offs.

These bodies are allowed to claim deduction of capital expenses, administrative expenses, repayment of loans, payment of taxes and donations to other trusts from the total income. In addition to capital expenditure, they also claim deduction from depreciation on assets.

The confusion has arisen because the government made earnings of charitable organisations from commercial ventures taxable in Budget 2008-09, a move that brought 40,000 to 45,000 trade bodies, commercial hospitals and educational institutions set up as trusts under the tax net in Mumbai alone.

Officials explained that the basic condition for charitable bodies to claim exemption is that the income should be derived from property held under a trust and the income should be applied to charitable or religious purposes in India.

In a case involving Escorts Ltd, the Supreme Court held that double deduction cannot be presumed unless specifically provided for by the law.

Since the law is clear that commercial earnings of trusts are taxable, then the same law cannot be different for an ordinary company and trust engaged in commercial ventures as far as deduction is concerned.

"Based on this, we have been disallowing depreciation in all returns filed with us since last year. An amendment will put an end to further disputes," said the official.

After the 2008-09 amendment, the term charitable purpose included relief to poor in terms of education, medical treatment and advancement of any object of general public utility.

However, the amendment has clarified that public utility does not include any activity in the nature of trade and commerce.