Income Tax Dept warns public against cash dealings of Rs 2 lakh or more saying that the receiver of the amount will have to cough up an equal amount as penalty.

Application of income from borrowed funds or previous year’s accumulation not allowable

Exemption under section 11 is allowed to a trust if it applies income for charitable or

religious purposes or for its stated objects. Out of 100% of the income, 15% thereof is

automatically deemed to be applied for the objects of the trust. Hence, a trust is

required to apply 85% of its income every year to get exemption under Section 11 or

12. If 85% of income could not be applied for charitable or religious purposes either

because such income could not be received, wholly or partly, during that year or for

any other reason, the exemption can be claimed if trust furnishes a statement in Form

No. 10 before the due date of filing of return of income.

Further, if application is made out of borrowed funds then exemption under section

11 is allowed not at the time of application of such funds but at the time of repayment

of borrowed funds.

In light of the above provisions of the Income-tax Act, the new ITR 7 has specifically

excluded the following from the amount of application of income:

a) Application out of borrowed funds as same is allowed at the time of repayment of


b) Income which has been deemed to be applied in preceding years on filing of Form

No. 10

c) Previous Years accumulation of up to 15% of income.

A trust or institution cannot claim application of income if it has spent any amount

from above mentioned sources. Further, this is applicable for both revenue expense

and capital expense.

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