'Accumulation of Income' by Charitable or Religious Trust [Section 11(2)]

Where 85 % of the income is not applied to charitable or religious purposes , the charitable trust or institution may accumulate or set apart either the whole or part of its income for future application for such purposes.

Such income so accumulated, or set apart, is not included in the total income of the trust in the year of receipt of income.

For this purpose, such trust has to inform the concerned Assessing Officer the purpose and period (which in no case can exceed 5 years) for which the income is accumulated or set apart. This information has to be given electronically in Form No. 10. The benefit of accumulation is not available if Form No. 10 is not uploaded before the due date of filing return of income specified under section 139(1) for the fund or institution.
Further, the money so set apart or accumulated should be in the modes specified in section 11(5) .
The benefit of accumulation is not available if return of income is not furnished before the due date of filing return of income under section 139(1).

CONSEQUENCES OF DEFAULT of Section 11(2)-

If in any year, the income which is accumulated for the specified purpose (or purposes) of the trust, is applied to purposes other than charitable or religious purposes or ceases to be accumulated for application for such purposes, it will become chargeable to tax as the income of that year.

If in any year, the accumulations cease to remain invested in securities specified in section 11(5) then also the income so accumulated will become chargeable to tax as the income of that year.
If the accumulations are not utilised for the specified purposes during the period of accumulation or in the year immediately following the expiry of that period, then the accumulations to the extent they are not so utilised, will become chargeable to tax as income of the previous year immediately following the expiry of that period.
Payment to other trusts and institutions out of income from property held under trust in the year of receipt of such income is treated as application of income. However, any payment out of accumulated income to other trust/institution (not being payment in the year in which trust claiming exemption is dissolved) shall not be treated as application of income and will be taxed in the year in which such payment or credit is made out of accumulated income.
Sometimes failure to apply the income so accumulated or set apart in the specified manner may arise due to circumstances beyond the control of trustees. In such a case, the Assessing Officer may, on the receipt of an application from the person in receipt of the income, allow such income to be applied for such other charitable/ religious purposes in India as are in conformity with the objects of the trust/institution.

(B). Accumulation of income in excess of 15% of the income earned [Section 11(2) and Rule 17]

As already mentioned, assessee is allowed to accumulate upto 15% of the income earned during the year for application for charitable or religious purposes in India in future. If the assessee wants to accumulate or set apart the income in addition to 15% of the income, he can do so if certain conditions are satisfied. In this case, the amount accumulated in excess of 15% shall be deemed to have been applied for charitable or religious purposes in India during the previous year itself.

Section 11(2) further liberalises and enlarges the exemption given under section 11(1)(a). A combined reading of both the provisions would clearly show that section 11(2), while enlarging the scope of exemption, removes the restriction imposed by section 11(1)(a) but it does not take away any the exemption allowed by section 11(1)(a).

Conditions to be satisfied

Exemption under section 11(2) shall be allowed subject to the following conditions being satisfied:

such person furnishes a statement in Form No. 10 electronically either under digital signature or electronic verification code to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years;
the money so accumulated or set apart is invested or deposited in the forms or modes specified in section 11(5);
the statement referred to in clause (a) is furnished on or before the due date specified under section 139(1) for furnishing the return of income for the previous year.

Provided that in computing the period of five years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.

(C). Consequences if such Accumulated Income in excess of 15% is not Applied / Invested in the prescribed manner [Section 11(3)]:

Where the income of the trust referred to in section 11(2)—

is applied for purposes other than charitable or religious purposes, or ceases to be accumulated or set apart for application thereto, or
ceases to remain invested or deposited in any mode mentioned under section 11(5) above, or
is not utilized for the purpose for which it is so accumulated or set apart during the period specified (not exceeding 5 years) or in the year immediately following thereof.
is credited or paid to any trust or institution registered under section 12AA or any institution or trust referred to in section 10(23C)(iv), (v), (vi) or (via),

such income shall be deemed to be the income,—

in case of (a) of the previous year in which it is so applied for other purpose or ceases to be accumulated or set apart, or
in case (b) of the previous year in which it ceases to remain so invested or deposited, or
in case of (c) of the previous year immediately following the expiry of period specified therein, or
in case of (d) of the previous year in which it is paid or credited.

(D). Circumstances where the Accumulated Income in excess of 15% can be utilized for a purpose other than that for which it was Accumulated [Section 11(3A)]:

Where the income invested/deposited in approved modes cannot be applied for the purposes for which it was accumulated or set apart, due to circumstances beyond the control of the assessee, such assessee can make an application to the Assessing Officer specifying such other purpose for which he wants to utilize such accumulated income. Such other purposes should also be in conformity to the objects of the trust. The Assessing Officer in this case, may allow the application of such income to such other purposes. On such an application being allowed by the Assessing Officer, the funds may be accumulated and/or applied for the purposes newly specified and the provisions regarding withdrawal of exemption will be applicable on the basis that new purposes were the ones that had been specified in the notice for accumulation given under section 11(2).