Deduction u/s 80G for Donation in Kind – Whether Provision Requires a Revisit?
CA. Kalapi C. Shah
The author is a member of the Institute of Chartered Accountants of India. He can be reached at kalapicshah@gmail.com.
Background of Section 80G
The term ‘donation’ has been defined by the Hon’ble Supreme Court in the case of E.T. Commissioner v. P.V.G. Raju AIR 1976 SC 140, 142 as: an act by which the owner of a thing voluntarily transfers the title and possession of the same from herself to another, without any consideration.
The benefit of deduction under section 80G is available to all types of assessees (Individual, HUF, Company, LLP and Partnership Firm) irrespective of their residential status. An assessee can claim deduction for donation of a sum of money to charitable institutions while computing the total income. The amount of deduction would differ depending upon the type of charitable institutions:
- 100% deduction without any limit
- 50% deduction without any limit
- 100% deduction with upper limit
- 50% deduction with upper limit
The upper limit in case of categories 3 and 4 will be restricted to 10% of the adjusted gross total income.
‘Money’ has not been defined under Income Tax Law. Section 2(75) of CGST Act, 2017 defines: “money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.
Judicial Precedents: Substance over Form vs. Strict Literal Interpretation
There had been a diverse set of views on whether donation in kind is permissible for deduction under section 80G or not.
1. View Permitting Donation in Kind (Substance Theory)
- CIT v. Associated Cement Co. Ltd. (1968) 68 ITR 478 (Bom)
- CIT v. Bangalore Woollen, Cotton and Silk Mills Co. Ltd. (1973) 91 ITR 166 (Mys)
- Saurashtra Cement & Chemical Industries Ltd. v. CIT (1980) 123 ITR 669 (Guj)
It was held that one must look at the substance of the transaction and the underlying purpose of the section. The courts felt that the contention of revenue permitting deduction only for donation in cash is too technical to which the courts could accede.
2. Contrary View (Strict Literal Meaning of ‘Sum’)
- CIT v. Amonbolu Rajiah (1979) 102 ITR 403 (AP)
- CIT v. Gopal Krishna Singhania (1980) 121 ITR 260 (All)
- CIT v. Smt. Dhirajben R. Amin (1983) 12 Taxman 75 (Guj)
The keywords are “any sum paid by the assessee……..as donations”. According to Chamber’s 20th Century dictionary, ‘sum’ means a quantity of money. It cannot include property or a thing. Plain reading requires a sum paid, not property having monetary value.
Reconciliation of Case Law: Rotary Kiln Case vs. Zilla Parishad School Building
In CIT v. Associated Cement Co. Ltd. (1968) 68 ITR 478 (Bom), the University of Bombay requested a rotary experimental kiln for chemical engineering experiments. The board of directors sanctioned ₹5,000 and later ₹1,600. The kiln was prepared at a cost of ₹6,600 in the company’s workshop and handed over. The Bombay High Court held:
In CIT v. Amonbolu Rajiah (1979) 102 ITR 403 (AP), Andhra Pradesh HC read down Bombay HC’s judgment, noting that the Bombay HC did not allow donation in kind per se, but held that in substance money was donated. In Amonbolu Rajiah, the assessee agreed to donate funds to construct a Zilla Parishad girls’ school building and advanced amounts directly to the contractor. It was held to be a donation of money and not in kind.
In Smt. Dhirajben R. Amin, the assessee donated shares to two charitable trusts. The Gujarat High Court held that donation of shares was a donation in kind and fell outside section 80G.
Supreme Court Affirmation: All three judgments (CIT v. Amonbolu Rajiah, CIT v. Gopal Krishna Singhania, and CIT v. Smt. Dhirajben R. Amin) were subsequently affirmed by the Supreme Court in H. H. Sri Rama Verma v. CIT (1991) 57 Taxman 149 (SC).
Legislative Bar: Insertion of Explanation 5 to Section 80G
Explanation 5 was inserted with effect from April 1, 1976: “For the removal of doubts, it is hereby declared that no deduction shall be allowed under this section in respect of any donation unless such donation is a sum of money”.
The Memorandum explaining the provisions clarified that deduction is available only in respect of ‘sums’ paid in cash, cheque, bank draft, etc., and not to donations in kind. Furthermore, Explanation 5 does not mandate that the payment should be made directly to the donee.
| Nature of Donation | Eligible for deduction u/s 80G |
|---|---|
| Donation in cash | Yes |
| Donation where substance of transaction is essentially a sum of money (e.g., Payment for Zilla Parishad Building as discussed in CIT v. Amonbolu Rajiah) | Yes |
| Donation in kind (e.g., Donation of shares, painting, buildings, clothes, etc.) | No |
Fixed Deposit – Whether a ‘Sum of Money’?
In Leena A. Sarabhai v. ITO [1986] 18 ITD 177 (AHD.) (TM), the assessee claimed 80G deduction for donation of fixed deposit receipt. While the Third Member held that donation of a fixed deposit will not be allowed as deduction under section 80G, the Accountant Member made an incisive remark:
Case Study: Comparative Tax Impact under Different Scenarios
Since deduction of donation in kind is not allowed to the donor, the charitable institute has lesser funds at its disposal to undertake charitable activities.
Scenario A: Deduction available under Section 80G is 100%
| Particulars | (i) Sell shares & donate sum of money | (ii) Donate shares under existing law (No 80G) | (iii) Donate shares (Presuming 80G allowed) |
|---|---|---|---|
| Sale Consideration (A) | ₹ 60,000,000 | – | ₹ 60,000,000 |
| Less: Cost of Acquisition | ₹ 5,000,000 | – | – |
| Capital Gain | ₹ 55,000,000 | – | – |
| Tax to be paid on Capital Gain @ 11.96% (B) | ₹ 6,578,000 | – | – |
| Amount available / Funds at disposal for charity (C) | ₹ 53,422,000 | ₹ 60,000,000 | ₹ 60,000,000 |
| Tax Benefit u/s 80G @ 35.88% [(D)=(C)*35.88%*100%] | ₹ 19,167,814 | – | ₹ 21,528,000 |
| Net Tax Benefit to assessee [E = (D) – (B)] | ₹ 12,589,814 | – | ₹ 21,528,000 |
| Effective % Tax Benefit [(E) / (A)] | 20.98% | 0% | 35.88% |
Scenario B: Deduction available under Section 80G is 50%
| Particulars | (i) Sell shares & donate sum of money | (ii) Donate shares under existing law (No 80G) | (iii) Donate shares (Presuming 80G allowed) |
|---|---|---|---|
| Sale Consideration (A) | ₹ 60,000,000 | – | ₹ 60,000,000 |
| Less: Cost of Acquisition | ₹ 5,000,000 | – | – |
| Capital Gain | ₹ 55,000,000 | – | – |
| Tax to be paid on Capital Gain @ 11.96% (B) | ₹ 6,578,000 | – | – |
| Amount available / Funds at disposal for charity (C) | ₹ 53,422,000 | ₹ 60,000,000 | ₹ 60,000,000 |
| Tax Benefit u/s 80G @ 35.88% [(D)=(C)*35.88%*50%] | ₹ 9,583,907 | – | ₹ 10,764,000 |
| Net Tax Benefit to assessee [E = (D) – (B)] | ₹ 3,005,907 | – | ₹ 10,764,000 |
| Effective % Tax Benefit [(E) / (A)] | 5% | 0% | 18% |
Key Takeaways from Comparison:
- Under option (i), assessee effectively enjoys only 21% (under 100% 80G) or 5% (under 50% 80G) tax benefit despite falling in the 35.88% bracket, because capital gains tax erodes the donation amount.
- Under option (ii), assessee gets 0% tax relief for philanthropy.
- Under option (iii), the charitable institution receives approx. 12% more funds (₹6.00 Cr vs ₹5.34 Cr) and donor receives the full intended tax relief (35.88% or 18%).
International Best Practices: USA, UK, and Canada
If we refer to the tax laws of other countries like USA, UK, Canada etc., all such countries allow deduction for donations in kind (subject to various conditions and valuation rules).
United States of America (USA)
Allows deduction for donation of: household goods, jewellery and gems, paintings, antiques and art, cars, boats, aircraft, inventory, patents, stocks, bonds, and real estate.
United Kingdom (UK)
Allows deduction for donation of shares or securities, and land or buildings, including transfers at concessional amounts.
Canada
Allows deduction for capital property (cottages, stocks, bonds, mutual fund trust units, lands, buildings, equipment) and personal-use property (drawings, paintings, sculptures, jewellery, rare manuscripts/books, stamps, coins).
Proposed Way Forward & India’s Capital Needs
India’s Social Financing Deficit:
According to a Brookings India report (July 2019), India faces an annual financing gap of $565 billion in meeting its Sustainable Development Goals (SDGs). Further, the British Council (2018) revealed that 57% of Indian social enterprises identified access to debt or equity as a barrier to growth and sustainability.
The government has already strengthened compliance frameworks for charitable entities across statutes:
- Mandatory Form CSR-01 with Ministry of Corporate Affairs for receiving CSR funds.
- Designated bank account for foreign contributions restricted to specified SBI branch at New Delhi.
- Renewal of registrations under sections 12AB, 10(23C)(vi), and 80G every five years.
- Mandatory filing of statement of donations received with the Income Tax Department (effective April 1, 2021).
Roadmap to Permit 80G Deduction for Securities Donations
The main hurdle historically cited was valuation difficulty. However, modern capital markets possess robust digital infrastructure via SEBI and NSDL:
- Shares are compulsorily held in Demat form with mandatory PAN linkages.
- NSDL guidelines mandate purpose code “93-Donation” in Delivery Instruction Slips (DIS) for off-market transfers.
- Unique International Securities Identification Number (ISIN) tracks all securities transparently.
Proposed Eligibility Conditions: (1) Listed on recognized stock exchange; (2) Long-term capital asset; (3) Demat transfer with purpose code 93; (4) Prescribed statement filed by donee institution with Income Tax authority.
Social Stock Exchange (SSE) & Conclusion:
The proposal of the Hon’ble Finance Minister to establish a Social Stock Exchange under SEBI provides an electronic fundraising platform for social enterprises to raise capital. In tandem with these capital market innovations, rationalizing Section 80G to permit deduction for donations in kind (beginning with listed securities) will unlock substantial philanthropic capital and ensure maximum funds are available to charitable institutions.