Tax implication on Donation received in Kind being Capital Assets in Charitable Trust

[PRIYAM KHAMBHATA]

Respected Sir

A Charitable Trust is registered u/s. 12AB and also Approval u/s. 80G of the Income tax Act, 1961. It has received donation in kinds being capital assets of Rs. 10,00,000/- during the year 2025-26 and passed following accounting entry in Books of Accounts :

Capital Assets Dr.10,00,000

To Donation in Kind (Revenue) Cr.10,00,000

Would we claiming application of incomes as capital assets addition of Rs.10,00,000 though donation in kind, due to the facts that charitable trust has not actual make payments.

Please guide me

[YAGAY and SUN]

In the given facts, the trust is registered under section 12AB of the Income-tax Act, 1961 and holds valid approval under section 80G. The issue concerns whether receipt of a capital asset by way of donation in kind, duly recorded as income and simultaneously capitalized, can be treated as "application of income" under section 11(1)(a).

It is a settled legal position that "income" of a charitable trust includes voluntary contributions, whether in cash or in kind, unless specifically exempt under section 11(1)(d) (i.e., corpus donations with specific direction). Where a donation in kind is not corpus-specific, its value is treated as income for the year. Correspondingly, utilization of such income for acquisition of capital assets is regarded as application of income for charitable purposes.

Judicial precedents have consistently held that application need not necessarily involve cash outflow. What is relevant is the deployment of income towards charitable objects. Even where an asset is directly received and recognized both as income and as a capital asset, the substance reflects application, since the asset stands appropriated for charitable use. Courts have emphasized substance over form, recognizing capital expenditure as valid application irrespective of the mode of acquisition.

Further, the accounting entry passed by the trust appropriately reflects income recognition and capitalization. Once the value of the asset is credited to income and the same is simultaneously reflected as capital expenditure, it satisfies the test of application under section 11. The absence of actual cash payment does not disentitle the claim, provided the asset is held and used for the charitable objects of the trust.

Accordingly, the trust can validly claim Rs. 10,00,000 as application of income, subject to the condition that the donation is not towards corpus and the asset is deployed for charitable purposes.

AI Summary

Application of income in kind for charitable trusts may cover capital assets received as non-corpus donations.
A charitable trust registered under section 12AB and approved under section 80G may treat a non-corpus donation in kind received as a capital asset as income, and its appropriation for charitable use may be regarded as application of income under section 11(1)(a). Actual cash outflow is not necessary if the asset is deployed for the trust's charitable objects.