Section 341: application of income

Introduction

Qualifying application generally means eligible amounts paid for the organisation's registered charitable or religious purposes in India during the tax year. The section then adds special timing rules for corpus replenishment, loan repayment and deemed application, while blocking specified double-counting claims.

Key takeaways

What counts as application of income

Sub-section (1): the following sums are allowed as application of income:

• Any sum (other than a donation to another registered non-profit organisation) applied for a charitable or religious purpose in India for which the organisation is registered, paid during the tax year, subject to Sections 35(b)(i) and 36(4) to (7)
• 85% of the sum paid by way of donation made to any other registered non-profit organisation

Corpus withdrawals and loan repayments also count

Sub-section (2): application of income under sub-section (1) also includes:

• An amount invested or deposited back into the corpus during the tax year, if such investment/deposit is made within 5 years from the end of the tax year the original application from the corpus was made, and that original application (made after 31 March 2021) did not violate any provision of this Part or the corresponding Income-tax Act, 1961 provision
• An amount repaid during the tax year towards a loan or borrowing, if such repayment is within 5 years from the end of the tax year the application from the loan/borrowing was made, and that original application (made after 31 March 2021) did not violate any provision of this Part or the corresponding Income-tax Act, 1961 provision

What does not count as application of income

Sub-section (3): the following claims are not allowed as application of income under sub-sections (1) and (2):

• Depreciation or other allowance on an asset whose acquisition has already been claimed as application of income (in the same or any other tax year, under this Part or the corresponding 1961 Act provision)
• A claim of set-off, deduction or allowance of any excess application from a preceding year
• Any sum paid as a corpus donation to another registered non-profit organisation

Applications from corpus, loans or accumulated funds don't count separately

Sub-section (4): an application from corpus, loan or borrowing, accumulated income, specified income or deemed accumulated income is not itself considered application for the purposes of sub-sections (1) and (2) - this prevents double counting.

Deemed application - the shortfall option

Sub-section (5): where the regular income applied towards charitable or religious purposes in India in a tax year is less than 85% of regular income, the shortfall (or any part of it) may, at the organisation's option, be treated as deemed application.

Sub-section (6): any deemed application under sub-section (5) must actually be applied for the organisation's objects in India - during the tax year the income is received, or the immediately succeeding tax year, if the shortfall is because income was not yet received; or in the tax year immediately succeeding the tax year the income was derived, for any other reason.

Sub-section (7): the option under sub-section (5) must be exercised on or before the due date under Section 263(1) for filing the return of income, in the prescribed form and manner.

Sub-section (8): application of income under sub-section (1) includes deemed application under sub-section (5).

Capital gains reinvestment treated as application

Sub-section (9): where a capital asset held wholly for charitable or religious purposes is transferred, and the net consideration (or part of it) is used to acquire another capital asset to be held for the same purpose, the capital gain is deemed as application of income - the whole gain if the whole net consideration is reinvested, or a proportionate amount if only part is reinvested.

A similar proportionate rule (using the "appropriate fraction") applies where the asset was held only partly for charitable or religious purposes.

Sub-section (10) defines "appropriate fraction" (the fraction of income from the transferred asset that was applicable to charitable/religious purposes immediately before transfer), "cost of transferred asset" (aggregate cost of acquisition and improvement) and "net consideration" (full value of consideration received, less transfer expenses) for this purpose.

Step-by-step flow for working out application of income under Section 341

1. 1

   What sums were paid during the tax year for the charitable or religious purposes in India for which it is registered?

   These count under Section 341(1)(a), with Section 35(b)(i) and Section 36(4) to (7) applying to them. Donations to other registered non-profit organisations count at only 85% of the sum paid (Section 341(1)(b)). Section 341(2) adds certain re-investments into corpus and loan repayments within five years.

2. 2

   Remove claims that are not allowed

   Under Section 341(3), exclude depreciation on an asset whose purchase was already treated as application, set-off of excess application of earlier years, and corpus donations to other registered non-profit organisations. Under Section 341(4), application out of corpus, loans or borrowings, accumulated income, specified income or deemed accumulated income does not count.

3. 3

   Is the application less than 85% of regular income?

   • No: Section 341(5) is not needed for the year.
   • Yes: Go to the next step.
4. 4

   Does the organisation opt to treat the shortfall (or part of it) as deemed application?

   The option must be exercised on or before the due date under Section 263(1) for the return of that year, in the form and manner prescribed (Section 341(7)).

   • Yes: Go to the next step.
   • No: The shortfall is not treated as deemed application under Section 341(5).
5. 5

   Apply the deemed amount in time

   Under Section 341(6), if the shortfall is because income was not received, apply it in the year of receipt or the next year; for any other reason, in the year immediately following. If it is not applied in time, Section 337 (Sl. No. 13) treats it as specified income.

Practical checklist

Frequently asked questions