Charitable and religious trusts on which Indian social welfare is based. From schools and hospitals to culture and social causes, these institutions play a critical role. The Income-tax Act exempts income earned on property owned by charitable trusts and institutions subject to certain conditions!
An example of a crucial statutory provision is Section 11(4A). [SPECIAL PROVISIONS RELATING TO INCOME OF CHARITABLE OR RELIGIOUS TRUST OR INSTITUTION FORMED FOR PUBLIC WELFARE. Assessment of income of trust or institution & certain persons. Rate of tax. Business income.] Because many trusts now operate small enterprises in order to achieve their charitable purposes, we need to know when the exemption operates & when tax takes over.
The Framework of Section 11
Before delving into Section 11(4A) let’s first understand Section 11 in entirety.
- Sub-section (1): Exempts income from property held in trust for certain charitable or religious purposes on terms there set out.
- Sub-section (2): Permits accumulation of income for the application in subsequent years.
- Sub-section (3): Are the conditions of exigibility to tax of the accumulated income.
- Sub-section (3A): Allows accumulated income to be applied for other purposes with sanction.
These are enabling provisions laying down the law for charitable institutions to be enjoying exemptions while being held accountable. Sub-section (4A) takes this as a base & makes it applicable to business income.
(4A) — The Heart of the Matter
For the purpose of s. 11(4A), no exemption will be available in respect of income from any business unless two conditions are fulfilled:
- The purpose of the trust or institution should be to achieve ends other than to engage in business activities.
- It shall keep separate books of account in relation to such business."
If these two conditions are satisfied, the business income of the trust is to be deemed as income eligible for exemption provided it is utilised for charitable or religious purposes of such trust.
Also Read: Exemption for Charitable and Religious Trusts
Why Was Section 11(4A) Introduced?
Until recently, well-off trusts could claim several types of exemptions even if they were engaging in extensive commercial activity. This blurred the line between bona fide charities & businesses masquerading as trusts.
In order to fill this gap, Section 11(4A) was introduced. It protects genuine trusts while ensuring business income is only exempt if it supports the charitable purpose.
For example:
- A hospital trust running a small pharmacy for patients.
- A trust that runs a student bookshop.
Both are incidental & directly further the charitable purpose. But if the same trusts launch large-scale unrelated businesses, they can lose their exemption.
The Role of Assessing Officer
The law empowers the Assessing Officer (AO). If there is doubt whether an activity is incidental to charity or not, the AO can:
- Examine accounts.
- Verify if proper books of account are maintained.
- Decide whether the exemption claim is justified.
Illustration – Usage of Section 11(4A)
Consider a trust that runs a hospital for the poor. Along with healthcare services, it operates a canteen serving food for patients and attendants.
Since the canteen is incidental to healthcare & separate accounts are maintained, such income is exempt under Section 11(4A).
But if the same trust opens a chain of restaurants, it would be taxable as it is unrelated to the charitable purpose.
Also Read: How Business Undertakings Held by Charitable Trusts Are Taxed
Linkage with Other Provisions
The Income-tax Act exempts income from property of charitable trusts but with conditions:
- Section 86 – Partnership income taxation.
- Section 10(46A) – Exemptions for certain institutions.
- Section 15H – Interest income disclosures.
- Sukanya Samriddhi Yojana Income Tax Section – Provides tax rebates for investments.
Reading Section 11(4A) with these shows how charitable institutions balance compliance with benefits."
Section 11(4A) vs. Scientific Research Expenditure
While trust business income faces strict rules, the Act also allows deductions for scientific research expenditure (including capital expenditure).
So the law provides both a stick (penalty on unrelated business) & a carrot (deductions for research).
Judicial Interpretation
- CIT vs. Thanthi Trust (SC): Publishing newspapers by a trust was deemed incidental to education, hence exempt.
- ICAI Accounting Research Foundation (Delhi HC): Business income directly related to charitable objects qualifies for exemption if accounts are properly maintained.
These cases confirm that genuinely incidental activities can qualify for exemption.
Also Read: Accumulated Income of Charitable Trusts and Its Tax Implications
Practical Tips for Charitable Institutions
- Ensure any ancillary business is narrowly related to the trust’s objects.
- Maintain separate books of account for each business.
- Avoid unrelated businesses or exemptions will be refused.
- Keep documentary evidence of how income furthers charity.
- Expect scrutiny by the AO, since taxable income falls within his domain.
Conclusion
Even where charitable trusts & institutions are engaged in business activities, Section 11(4A) of the Income Tax Act offers clarity. The law allows fundraising through incidental business, but the mission remains primary.
By complying with Section 11(4A), trusts can continue to enjoy exemptions while contributing to social welfare.
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