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June 13, 2022

Allowance of Donations as an Expense for Income Tax Purposes

by CA Shivam Jaiswal in Income Tax

Allowance of Donations as an Expense for Income Tax Purposes

Assessee distributes money and property to Trusts, Societies, Religious or Charitable Societies/ Trusts, and Non-Governmental Organizations (NGO’s) that were established with the goals of • Religious or Charitable Societies/ Trusts and NGO’s.

  • Poor relief
  • Education
  • Medical assistance
  • Yoga
  • Environmental preservation (including watersheds, forests, and wildlife)
  • Preservation of Monuments, Places, or Objects of Artistic or Historic Interest
  • Promotion of any other objects of wide public use.

However, all donations are not deductible because the income tax legislation does not enable all deductions to be claimed as costs. As a result, in order to claim Donations as an expense. The expense must be necessary or justified by “commercial expediency” and must be ancillary to the business. It must be directly and intimately linked to the business, with a similarly directed and hinted link between the business and the expenditure.

Meaning of Commercial Expediency: The term “commercial expediency” refers to transactions or expenditures that are not mandated by law. However, it refers to the type of expenditure that a wise businessman makes for the purpose of doing business. Such expenses may not have been incurred as a result of a legal duty, but they are permitted as a business expense if they were incurred for commercial reasons.

The “commercial expediency” is determined by the businessman’s acumen, and the Revenue has no involvement in determining what is “commercial expediency.” The Revenue cannot put itself in the shoes of the assessee and judge whether a specific expenditure is required to be made based on the facts and circumstances of the case. There can’t be any pressure on the assessee to make the most money possible. The provisions of section 37(1) of the Act do not limit or prevent an assessee from incurring an expense that he believes and desires to incur for business purposes.

Expenditure may help the firm directly or indirectly in the form of improved sales, better profit, growth, goodwill, and so on. Various courts have decided that as long as the spending is “wholly and solely” for the purpose of business, the Assessing Officer cannot refuse the entire expenditure or a portion of it based on his own judgement. The Assessing Officer cannot call into question the reasonableness of the expenses by putting himself in the shoes of the businessman and assuming the assessee’s status or character, and it is up to the assessee to decide whether the expenses should be incurred in the course of his business or profession.

To encourage people to donate, the government also allows for income tax deductions under Section 80G for the amount which has been donated. The amount which has been donated by a person is allowed to be claimed as a deduction under Section 80G, at the time of filing his income tax return.

To promote the concept of charity towards the poor and the needy, the Indian government has been regularly encouraging people to donate and this donation can also be claimed as a deduction under Section 80G.There are several government organisations as well as NGO’s which work for the upliftment of the poor and you can make donations to these specified organisations which will in turn ensure that this money is used for the right purposes.

To encourage people to donate, the government also allows for income tax deductions under Section 80G for the amount which has been donated. The amount which has been donated by a person is allowed to be claimed as a deduction under Section 80G, at the time of filing his income tax return.This Deduction for Donation can be claimed by any taxpayer (whether Individual/ Partnership Firm/HUF /Company/ LLP etc) irrespective of whether he is earning income from salary or business. The deduction available under Section 80G is over and above the deduction of Rs. 1,50,000 allowed under Section 80C.

Conditions for claiming deduction for donation under section 80G

Donations made are eligible to be claimed as a deduction under Section 80G in all cases except in cases where the donation has been made in kind (eg: food, clothes, medicine etc). In order to claim this deduction, the donor is also required to furnish a proof of payment. A stamped receipt is issued by the recipient trust in this regard, details of which should be mentioned by the taxpayer while filing his Income Tax Return.The receipt should necessarily mention the following details

  • The name and address of the trust
  • The name of the donor
  • The amount donated (mentioned in words and figures)
  • The registration number of the trust, as given by the income tax department u/s 80G along with its validity
  • Maximum Limit for Deduction under Section 80G

In some cases, there is no maximum limit for the deduction which can be claimed for donations made under section 80G. However, in some cases deduction on donations under Section 80G is limited to 10% of the Adjusted Gross Total Income of the taxpayer.The adjusted gross total income of a taxpayer for the purpose of Section 80G is computed as follows-

 

Particulars    Amount
Gross Total Income                            xxx
( Less)  Long Term Capital Gains       xxx
(Less)  Short Term Capital Gains on Sale of Shares u/s 111A             xxx
(Less)  Deductions under Section 80C to Section 80U       xxx
(=)     Adjusted Gross Total Income          xxx
(Less)    Deduction under Section 80G*                    xxx
(=)          Total Taxable Income        xxx
       xxx

                                      

*Deduction under Section 80G is limited to a maximum of 10% of the Gross Total Income.

The balance income after deductions of donations would be taxable as per the income tax slabs of the taxpayer.Computation of whether deduction is allowed without any maximum limit or is limited to 10% of the adjusted gross total income depends on the type of institution to whom the amount has been donated. The donations to institutions which are eligible for deduction without any limit and donations to institutions which have a maximum limit for claiming deduction have been mentioned below.

Deductions which are allowed without any maximum limitThe following donations are allowed to be claimed as a deduction under section 80G. However, in some cases the full deduction is allowed of the amount donated whereas in some cases only 50% of the amount donated can be claimed as a deduction.

Donations eligible for Full Deduction

  • National Defence Fund set by the Central Govt.
  • Prime Minister’s National Relief Fund
  • Prime Minister’s Armenia Earthquake Relief Fund
  • National Foundation for Communal Harmony
  • University/ Education Institution of National eminence approved by the prescribed authority
  • Maharashtra Chief Minister’s Earthquake Relief Fund
  • Any Fund set-up by the State Govt of Gujarat, exclusively for providing relief to the victims of earthquake of Gujarat
  • Zila Saksharta Samiti constituted in any district
  • National Blood Transfusion Council or any State Blood Transfusion Council
  • Any fund set up by the state Govt to provide Medical Relief to the poor
  • Army Central Welfare Fund or Indian Naval Benevolent Fund or the Air Force Central Welfare Fund
  • National Illness assistance Fund
  • Andhra Pradesh Chief Minister’s Cyclone Relief Fund
  • Chief Minister Relief Fund or the Lieutenant Governor’s Relief Fund in respect of any State or Territory
  • National Sports Fund set up by the Central Govt
  • National Cultural Fund set up by the Central Govt
  • Fund for Technology Development and Application, set up by the Central Govt
  • National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities.

Donations eligible for 50% Deduction

  • Jawaharlal Nehru Memorial Fund
  • Prime Minister’s Drought Relief Fund
  • National Children’s Fund
  • Indira Gandhi Memorial Fund
  • Rajiv Gandhi Foundation

The following deductions are allowed subject to a maximum of 10% of the adjusted gross total income. For eg, If your Adjusted Total Income is Rs. 9,00,000 (computed as per method given above), you would be allowed a maximum deduction of only 10% i.e. Rs. 90,000 if donation is made to any of the following.

Donations eligible for Full Deduction

Donation to Government or any approved local authority, institution or association to be utilised for promoting family planning.Any sums paid by a company to Indian Olympic Association or to any other association notified by the Central Govt for the purpose of development of infrastructure for sports and games or for the sponsorship of sports and games.

Donations eligible for 50% Deduction

The following donations are allowed with 50% deduction subject to qualifying amount. Considering the same example as given above, if donation is made to any of the following, you can claim deduction for only donation upto Rs. 90,000. Moreover, the deduction allowed would only be 50% of 90,000 i.e. Rs. 45,000

  • Donation to Government or any approved local authority, institution or association to be utilised for any charitable purpose other than promoting family planning.
  • Donation to any authority constituted in India by or under any law for satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both.
  • To any corporation established by the Central or any State Govt for promoting the interests of the members of a minority community.
  • Any notified temple, mosque, gurdwara, church or other place notified by the Central Govt to be of historic, archaeological or artistic importance for renovation or repair of such place.
  • Budget 2012-13 also inserted another clause which stated that if the donation is made in cash the deduction allowed would be maximum Rs. 10,000.

Claiming deduction under Section 80G in Form 16

At the time of payment of salary to an employee, the employer has to deduct the TDS on the salary of the employee and then pay salary after the deduction of income tax. The amount deducted as TDS by the employer is reflected in the Form 16.For the purpose of computation of income tax, the deductions claimed by the employee under various sections of the income tax act have to be informed to the employer.  However, in case an employee is claiming deduction under section 80G, the benefit of this deduction can only be claimed through the employer in case the donation is made only to the funds whose names have been specified above (i.e. all funds deductions from which is allowed without any maximum limit)In case donation is made to funds which have a maximum limit of 10% of Gross Total Income, deductions in such cases cannot be claimed through the employer. Deductions for such donations can only be claimed at the time of filing of income tax returns.

Donations deducted by employer from Salary

Where an employee has paid a donation from his salary and the amount has been deducted from his salary by the employer himself, deduction under section 80G can still be claimed. In such cases, although the donation receipt is on the name of the employer, the employer would be required to issue a certificate mentioning that the contribution was made from the employee’s salary account.

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