Cap on tax benefit to charities

A charitable institution is entitled to set apart 25 per cent of the total income for charitable purposes even if it is not spent in the assessment year. It is an option permitted in the Income Tax Act but the limit should be observed. The Supreme Court stated that both the commissioner of appeals and the Andhra Pradesh High Court erred while allowing a larger percentage in the case, CIT vs G RGovindarajulu. The total income was Rs.99 lakh out of which Rs.47 lakh was spent on charity and Rs.32 lakh was set to be spent for charitable purposes in the following year. The assessee claimed that it was therefore entitled to have deduction of the entire amount and its tax liability was nil. The assessment officer did not agree stating that no option for the purpose was exercised before filing the returns and it was not done in a valid manner. Though the appellate authority and the high court accepted that contention, the Supreme Court pointed out that Rs.32 lakh was more than 25 per cent of the income and therefore the assessment should be recomputed. The authorities were ordered to do so.

Business Standard, New Delhi, 19 October 2015