Exemption of Income from Property under Trust for Charitable/Religious Purposes
The Income Tax Act 1961 (the Act) via section 11 and subject to certain conditions therein, exempts from tax, 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 the Trust/Institution concerned in receipt of such income is registered under the relevant provisions of the Act.
Business Undertaking and Practical Necessity
Furthermore, sub-section (4) and (4A) to section 11, recognise that the “property held under trust” may include a ‘business undertaking’, and exempt income of a charitable/religious trust or institution, being profits and gains of business, provided the concerned business is ‘incidental to the attainment of the objectives’ (Business Connection) of the trust/institution (as the case may be) and separate books of account are maintained in respect of such business.
The definition of ‘charitable purpose’ under section 2(15) of the Act along with the above mentioned provisions of the Act is legislative acknowledgment of a practical necessity, that of financial support through business or commercial activities to achieve or pursue charitable/religious objects of the entity concerned, where such activities are sub-servient to such charitable/religious objects or pursuits.
Denial of Exemption
Pursuit of such business or commercial activities may lead to a situation where such exemption from Income Tax under the Act is denied on the grounds that the charitable/religious entity concerned is engaged solely or principally in the relevant business or commercial activity, and the same is not relatable to any charitable/religious object(s) mentioned in the constitutional/founding documents of the said entity, such as a Trust Deed and/or the same is not ‘incidental’ to the attainment of the declared charitable/religious objects therein.
Legal interpretation of the above mentioned provisions of the Act and their factual application to the concerned entity’s activities and/or constitutional documents, by the concerned Revenue authority cannot be predicted with any measure of certainty. However, it would be prudent for such entities to plan, align or amend their activities and/or documents to ensure compliance with the latest judicial interpretations on the subject and any change in the relevant legislation itself.
The following should also be worth examining to pre-empt potential grounds for denial of exemption from income tax under the Act –
- The nature, type and extent of business activities being pursued
- Actual or planned use of any revenue/profits generated and/or contributions made therefrom
- Manner of preparation of books of account of the business and charitable entity, and the classification of relevant items therein
- Contents of the constitutional/founding documents of the charitable entity and ‘charitable objects’ to be pursued thereunder
- Legal understanding of the exact ‘charitable purpose(s)’ or religious objects being or to be pursued, their scope as judicially interpreted and various compliance necessities under the Act