Income Tax

January 2024

Public Charities and Expenditure outside India- I-T and FCRA perspectives

Since past few years, the Voluntary Sector in India has been going through labyrinth of regulatory changes more particularly under the Income-tax Act, 1961 (I-T Act) and Foreign Contribution (Regulation) Act, 2010 (“FCRA 2010”). One of the issues discussed is whether a public charity can incur expenditure on its objects in foreign currency, both out of domestic income and foreign contribution and if Yes, whether such expenditure can be claimed as application of income under the I-T Act and would also be compliant with FCRA 2010 where such expenditure is paid out of foreign contribution. Both are analysed hereunder. 

              (I) Expenditure in foreign exchange and claim for application of income and exemption under S. 11/12 of the Income-tax Act,1961 (the Act)

1. The issue on hand is whether tax exemption u/s 11/12 of the Act is available where income is spent outside India for the benefit of a charitable purpose situated/having a situs in India. Putting it differently, whether the eligibility of exemption is qua actual spending/application in India for a charitable purpose in India or it would suffice if the income is spent/applied outside India provided its so spent in connection with a charitable purpose situated in India.

2. Relevant extracts of S. 11(1)(a) and (c) are reproduced herein below for ready ref.:

               “(1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-

“(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property

 (c) income derived from property held under trust—

created on or after the 1st day of April 1952, for a charitable purpose that tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and 

for charitable or religious purposes, created before the 1st day of April 1952, to the extent to which such income is applied to such purposes outside India

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income…”

3. In the following cases, the ITAT / courts have held that income spent outside India for  / attributable to charitable purposes situated in India / for the purposes of charitable activities in India is a valid application of income in India and the benefit of exemption u/s 11/12 cannot ve denied.

i. CIT(E) vs. Ohio University Christ College (Kar HC) (408 ITR 352) (2018)

ii. Gem & Jewellery Export Promotion Council v. Sixth Income-tax Officer (Mumbai ITAT) (68 ITD 95) (1999) (para 33 of the order reproduced herein below)

"33. A bare reading of the sub-s. 11(1)(a) does not leave us in doubt that the requirement under s. 11 is for the application of income for purposes in India and it does not restrict the application of income within the territory of India. The charitable purpose for which the income should be applied for claiming exemption under s. 11(1)(a) should be in India. In this case, it is not disputed that the Trade Delegation had been sent abroad for the benefit of the entire trade in India. The exports are made from India and the purpose for sending the Delegation was to increase the possibilities of exports out of India. We accordingly hold that since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been incurred out of India does not disqualify the expenditure from exemption under s. 11(1)(a).

iii. Jamsetji Tata Trust v. Joint Director of Income-tax (Exemption) Range-II (2014) (Mumbai ITAT) (44 447) (FACTS-III)

iv. NASSCOM v. DDIT in 130 TTJ 377 (Delhi ITAT) (130 TTJ 377) (2010) (Para 11 reproduced herein below)

We have considered the rival submissions. A perusal of the provisions of s. 11(1)(a) of the Act clearly shows that the words used are "Is applied to such purpose in India". The words are not "is applied in India". The fact that the legislature has put the words "to such purpose" between 'Is applied' and 'in India' shows that the application of income need not be in India, but the application should result and should be for the purpose of charitable and religious purpose in India. Undisputedly, the assessee is registered under s. 12A as a charitable institution. It is also not disputed that the activities of the assessee are charitable. It is also not the case of the Revenue that the expenditure incurred by the assessee in Hanover, Germany has not resulted in the benefit being derived in India. In these circumstances, it cannot be said that the expenditure incurred by the assessee in Hanover, Germany, which resulted in and which was for the purpose of attaining the charitable object in India, is not application of income. This view is also supported by the decision of a Co-ordinate Bench of this Tribunal in the case of Gem & Jewellery Export Promotion Council.”

(v) CEO Clubs India v. DIT (Exemption) (Mum ITAT) (2012) (25 217)

All decisions referred to above are attached herewith.

4. We also state that Delhi HC, on specific facts of the case in DIT(E) vs. Nasscom (345 ITR 362), held that since the application of income was outside India, such expenditure was not eligible to be considered for exemption of income as an application of income for charitable purposes in India. Similar is the ruling of Delhi ITAT in India Brand Equity Foundation v. ACIT (E) (2012) (23 323). In both these rulings, the assessee charity had held event (fair, conference, exhibition, etc.) outside India for which the expenditure were incurred in forex.

5. Basis above, where the public charity can spend/apply its income outside India wholly and exclusively for the purposes of charitable activities/objects situated in India, such expenditure in foreign exchange shall qualify as valid application of income for such charitable purpose(s) in India u/s 11(1)(a) of the Act and the benefit of tax exemption shall be available to it. There is otherwise no limit or quantum restriction prescribed for payment/incurrence of expenditure in forex under the Act. 

6. Once the benefit of expenditure, incurred/paid whether in India or outside India, is directly attributable to or in connection with the benefit of charitable activities of the public charity in India, such application should be treated as eligible for exemption u/s 11/12.

7. Whilst on this, it is important to note that the forex expenditure by a public charity, created after on or after April 1, 1952, shall not be incurred / income shall not be applied outside India for a charitable purpose which tends to promote international welfare in which India is interested. If the said expenditure for a charitable purpose which tends to promote international welfare in which India is interested in forex is proposed to be incurred by the public charity, the provisions of S. 11(1)(c) of the Act requiring specific or general approval of CBDT for incurring such expenditure outside India shall be complied with. If so approved by the specific or general approval of CBDT, the provision of taxability of such expenditure u/s 115BBI of the Act shall not apply. 

(II)       Expenditure in foreign exchange and FCRA, 2010 and FCRR, 2011

1. S. 8 of FCRA 2010 reads as follows.

Every person, who is registered and granted a certificate or given prior permission under this Act and receives any foreign contribution,—

(a) shall utilize such contribution for the purposes for which the contribution has been received:

Provided that any foreign contribution or any income arising out of it shall not be used for speculative business:

Provided further that the Central Government shall, by rules, specify the activities or business which shall be construed as speculative business for the purpose of this section;

(a) shall not defray as far as possible such sum, not exceeding 1[twenty per cent.] of such contribution, received in a financial year, to meet administrative expense:

Provided that administrative expenses exceeding 1[twenty per cent.] of such contribution may be defrayed with prior approval of the Central Government.”

2. Rule 5 of FCRR 2011 lists nature of administrative expenditure referred to in S. 8 of FCRA 2010.

3. Further, S. 12(4)(vi) of FCRA 2010 prescribes, among many other conditions, the following condition for grant of registration as follows.

“the person making application is not likely to use the foreign contribution for personal gains or divert it for undesirable purposes;”

4. Question (xv) of Clause 8 of Form FC-4 (annual FCRA return) reads as follows:

 “Whether the Association has utilized any foreign contribution outside India?- Yes/No

*Note: Wherever the answer of the above question is in ‘yes’, brief details must be provided.”

 Most of the questions in Clause 8 of Form FC-4 are such that the affirmative answer to most of the questions may result in being treated as contravention of the provisions of FCRA 2010 / FCRR 2011 by the Ministry of Home Affairs and the public charity may face adverse consequences under the said Act / Rules. 

 5. Needless to say that the Foreign Contribution (FC) shall be utilized for the purpose(s):

- For which it is received; and

- For which the person/association has been granted registration / prior permission (having definite cultural, economic, educational, religious, or social programme

8. S. 7 of FCRA 2010 prohibits transfer of FC by the registered association to any other person.

9. FAQ on FCRA issued by MHA do not have any specific guidance on the subject matter of this note.

10. Basis above, if FC is used outside India for the purpose for which it is received (MOU / Grant document permitting the same) and also in connection with project / charitable purpose situated in India and the said utilisation is otherwise compliant with S. 8 of FCRA 2010 read with Rule 5 of FCRR 2011, one may take a view that utilisation of foreign contribution outside India is not expressly prohibited by FCRA 2010 and FCRR 2011. One may also note that FCRA 2010/ FCRR, 2011, per se, is silent about utilisation of FC outside India for carrying out charitable activities outside India. 

11 However, in view of question (xv) of Clause 8 of Form FC-4, utilisation of FC outside India shall be reported by the reporting public charity in Form FC-4.

12. Further relevant extract of the FCRA charter issued by MHA for Associations who have been granted Prior Permission or Registration under FCRA is reproduced herein below.

 “An association granted prior permission or registration is required to carry out the activities, for which foreign contribution is received, in India only and the amount should not be utilised for purposes other than for which it is received.”