Analysis, Income Tax

Claiming deductions on donations: 4 questions and their answers

“Giving is not about making a donation.
It’s about making a difference.”

And, no act of kindness, no matter how small, is ever wasted. All your acts of kindness in the form of charity and donations come back to you in the form of a tax benefit provided by the Indian Government under section 80G of Income-tax Act. Thus, there is a need to study and understand the issues before availing such tax benefits by the donors.

Section 80G applies to donations made by individuals or partnership firms or HUFs or companies or LLPs to a trust, institution or fund, only if it is established in India for a charitable purpose subject to conditions prescribed under section 80G.

Let’s take a look at some of the most discussed issues on deductions on donations-

Are donation of cement bags to a public charitable trust a donation made ‘in kind’, hence not covered under the scope of s. 80G?

Short answer: No.

Saurashtra Cement & Chemical Industries Ltd. vs. Commissioner Of Income Tax (Cited 111+ times)

Gujarat HC, decided on 31st January, 1979

Reasoning: The Court observed that while considering the eligibility of donation u/s. 80G, one has to look into the ‘substance of the transaction’. The interpretation of s. 80G must not be too technical so as to exclude donations made in kind but virtually being a money transaction. If the substance of the transaction is a money transaction, then s. 80G applies.

In the present case, the assessee-company had donated cement bags to a public charitable institution. The Court observed while the intent was to make a money transaction, in actual practice since the assessee were manufacturing cement, it had made the transaction in the form of cement bags. The substance of the transaction was held as a money transaction, hence, deductions were granted.

Interestingly, Allahabad HC in Commissioner of Income Tax vs. Sohan Lal Singhania offered a different view stating that the Income Tax Act provides for assessment of tax on the income derived by an assessee and the income relates to the amount of money earned or received by the assessee and therefore, for purposes of claiming deduction under s. 80G(2)(a), the donation must be a sum of money paid by the assessee. The donation of shares of a company does not amount to payment of any amount and hence not eligible for deduction u/s. 80G.

Whether donations made to employees of a specific educational institution qualify as a ‘general public utility’ for the purpose of allowing deductions under s. 80G?

Short answer: Yes.

Hiralal Bhagwati vs. Commissioner of Income Tax (Cited 82+ times)

Gujarat HC, decided on 18th April, 2000

Reasoning: The Court observed two major points-

  • The object beneficial to a ‘section of the public’ qualifies as an object for ‘general public utility’.
  • When an institution or trust is registered by the CIT read with s. 12A read with rule 17A of the Income Tax Act, deductions cannot be disallowed on the ground that the object is not for the benefit of the public at large.

Expanding on the first point, the Court noted that to serve as a charitable purpose, it is not necessary that the object must be to serve the whole mankind or all persons living in a country. In the end, the students will benefit by the activities of the institutes run with the aid of the beneficiaries of the trust. As long as the purpose is to serve the community or section of the community which is identifiable and distinguishable, benefits u/s. 80G are attracted.

To know more about what qualifies as a ‘section of the public’, see Ahmedabad Rana Caste Association vs. Commissioner Of Income Tax where the Supreme Court considered the question whether donations made to the Rana caste in Ahmedabad was for the benefit of body of private individuals or for section of the community.

Whether inclusion of any object clauses for religious purposes in the trust deed preclude the donor from claiming benefits of s. 80G?

Short answer: Yes.

Upper Ganges Sugar Mills Ltd. vs. Commissioner of Income Tax (Cited 43+ times)

Supreme Court, decided on 4th August, 1997

Reasoning: The Court, in interpreting Explanation 3 of s. 80G, came to the conclusion that the question to be answered is not whether the whole or substantially the whole charitable purpose is of religious nature but whether any object of the institution or trust is wholly or substantially wholly of religious nature. In other words, even if any one object is of religious nature, then the donation and trust fall outside the scope of s. 80G.

Whether actual assessment of trust with respect to fulfilment of requirements under ss. 11, 12 and 12AA has no effect on benefits granted to donors under s. 80G?

Short answer: Yes.

N. N. Desai Charitable Trust vs. Commissioner Of Income Tax (Cited 65+ times)

Gujarat HC, decided on 5th May, 1999

Reasoning: The scope of enquiry into the registration under s. 80G should be limited to sub-clauses (i) to (v) of sub-section (5) and does not entail the actual assessment of the trust. The Court, while interpreting the phrase “where the institution or fund derives any income, such income would not be liable to inclusion in its total income” from sub-clause (i), noted that the question to answer should not be whether because of certain transgressions prescribed in s. 11 or s. 13, the trust is not actually held eligible for exemption under s. 11 and s. 12. When the conditions set out in rule 11AA and sections 80G(5)(i)-(v) are satisfied, the trust is eligible for registration u/s. 80G(5)(vi) irrespective of the defaults made under s. 11 or s. 13.

(Written by Ankit Sinha, Product Manager @ Riverus)

Also read: Deductions for Co-operative Societies: 5 questions and their answers

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