Income from a business carried on by the Trusts /Institutions [Section 11(4)]

Section 11(4) provides that a business undertaking held by a trust will be treated as a property held under a trust in the other words for the purpose of section 11. “Property held under trust” includes a business undertaking so held and where the income determined by the Assessing Officer exceeds the income as shown in the books of account of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes and thus, it will be liable to be taxed accordingly. In other words, if income shown in accounts of such business undertaking is less than income determined by Assessing Officer, then such excess will not be exempt.

Charitable trusts in our country are not supposed to carry on any business activity. However, there is no prohibition on a charitable trust from carrying on business. A charitable trust can be settled in relation to any property including a business undertaking. The income from such business shall also qualify for exemption provided the other conditions of sections 11 and 12 are fulfilled. In addition, any income of a charitable trust shall not qualify for tax exemption unless the business is incidental to the attainment of the objects of the trust and separate books of account are maintained in respect of such business. For instance, if a charitable trust is established for medical relief, then the manufacturing of medicines, the running of dispensary or a hospital, or a nursing home shall be considered to be a business incidental to the objective of the charitable trust.

Charitable trusts or institutions whose objective is “general public utility” are prohibited from indulging in trading activity. However, from assessment years 2009-10 to 2011-12, a charitable entity which falls in the category of “General Public Utility” shall fall outside the purview of Charitable Organization if it carries out any activity in the nature of trade, commerce or business or business for a cess or fee or any other consideration. Irrespective of the nature of use of retention of such income if the aggregate value of such receipts is more than Rs.10,00,000/- (from assessment years 2012-13 to 2015-16, 25,00,000/- and 20% of the total receipts of the trust or institutions from assessment year 2016-17).

The income of such business shall be determined in accordance with the provisions of the Act, i.e. sections 28 to 44DB. Where the income from such business as determined by the Assessing Officer is found to be in excess of the income shown in the accounts, then such excess shall be deemed to have been applied to non-charitable or non-religious purposes and such excess income shall not qualify for exemption. As per section 11(4) income of any business held in trust for charitable purpose shall be eligible for exemption.

Treatment of business income of a trust

Where a trust or an institution is also carrying on any business activity, the provisions of Section 11(1), (2), (3) & (3A) regarding exemption etc. shall not apply in respect of income earned from such business activity.

Business Income of a Trust

As per section 11(4), where “property held under trust” includes a business undertaking and the Income of the business is computed as per the accounts maintained—

(a) The Assessing Officer shall have power to determine the income of such business

(b) Any excess between the income as determined by the Assessing Officer and the income as per accounts shall be deemed as not applied for charitable or religious purposes

In other words, section 11(4) specifies that property held under trust includes a business undertaking so held. It also empowers the Assessing Officer to determine the income of such business undertaking as per the provisions of the Act. If the income determined by the Assessing Officer is in excess of the income as shown by the trust, the excess shall be deemed to be applied to purposes other than charitable or religious purposes.

 

Only income disclosed by accounts shall be eligible for exemption under section 11(1)

In case of business undertaking, ‘income’ will be the income as shown in the accounts of the undertaking under section 11(4), any income of the business undertaking determined by the Assessing Officer in excess of income shown in accounts will be deemed to have been applied for purposes other than charitable or religious and will be chargeable to tax under section 11(3). Only income disclosed by accounts shall be eligible for exemption under section 11(1), and permitted accumulation of 15% shall be calculated with reference to this income.

 

Section 11(4) is attracted only in a situation where :

(a)    “property held under trust” includes a "business undertaking".

(b)  Further, section 11(4) can be invoked only if income determined by Assessing Officer is in excess of income as shown in accounts of an undertaking i.e.; only if there any income which is hidden from the books of account.

      (c)    Any disallowance of expenditure is not hit by sub-section (4) of section 11.

Income of any other business which is not incidental to the attainment of the objectives of the trust or institution will not be exempt from tax. [CBDT Circular No. 642, dated 15.12.1992]

NOTE

Excess Business Income as assessed by the Assessing Officer under section 11(4) - AOP Rate applicable.

Assessee society engaged in printing, publication and distribution of school text books at subsidized rates or even free, generated profits out of these activities, it could not be concluded that assessee ceased to carry on charitable activity of education

Assessee society was exclusively engaged in printing, publication and distribution of textbooks to schools. Books were provided by assessee at subsidized rates or even free. Assessee claimed exemption under sections 11 and 12. Assessing Officer denied exemption. High Court by impugned order held that since activity of preparation and distribution of textbooks certainly contributed to process of training and development of mind and character of students, same was connected to education, therefore, Assessing Officer was unjustified in holding that activities of assessee fell under 4th limb of section 2(15), i.e. advancement of any other object of general public utility and that its activity were not solely for purpose of advancement of education. It further held that merely because assessee had generated profits out of activity of publishing and distribution of school textbooks, it could not be concluded that it ceased to carry on charitable activity of education. Special leave petition filed against impugned order was to be dismissed as withdrawn due to low tax effect. [In favour of assessee] (Related Assessment years : 2006-07 to 2009-10) - [Delhi Bureau of Text Books v. DIT (2020) 269 Taxman 559 : 114 taxmann.com 615 (SC)]

Carrying on business for and on behalf of charitable trust and applying profits of same for object of trust does not entitle said trust for exemption under section11(4) unless business is incidental to attainment of objects of trust

Business held in trust - Assessee was a registered charitable trust under section 12AA. It was running schools and a community hall. It claimed exemption under section 11. Assessing Officer rejected assessee's claim on ground that same was hit by provisions of section 2(15). Commissioner (Appeals) taking a view that activity of running community hall was incidental to attainment of main objectives of trust, allowed assessee's claim. Mere carrying on business for and on behalf of charitable trust and applying profits of same for object of trust does not entitle trust for exemption under section 11(4) unless business is incidental to attainment of objects of trust. Since, in instant case, there was no connection between activities relating to running of community hall with attainment of objects of assessee-trust of imparting education, impugned order passed by Commissioner (Appeals) was to be set aside and that of Assessing Officer was to be restored. [In favour of revenue] (Related Assessment year 2010-11) - [DCIT(E) v. Chennai Kammavar Trust (2017) 187 TTJ 674 : 166 ITD 196 : 154 DTR 312 : 81 taxmann.com 365 (ITAT Chennai)]

Even after disallowance of provision for gratuity income determined by Assessing Officer was not in excess of income as disclosed by assessee, Commissioner was unjustified in invoking section11(4)

Assessee-Charitable institution declared its income at nil claiming certain amount as provision for gratuity. Assessing Officer granted same. However, Commissioner holding that provision for gratuity was not an allowable expenditure invoked revisional power. It was noted that total income determined even after disallowance of provision for gratuity was nil. In assessee's case, issue in question is disallowance of provision for gratuity. The provision for gratuity has already disclosed in the books of account. Since disallowance of provision for gratuity did not result in a situation where income determined by Assessing Officer was in excess of income as shown in accounts of assessee, Commissioner was not justified in invoking section 11(4). Section 11(4) is attracted only in a situation where “property held under trust” includes a “business undertaking”. Further, section 11(4) can be invoked only if income determined by Assessing Officer is in excess of income as shown in accounts of an undertaking. Hence, the order passed by the Assessing Officer cannot be said to be prejudicial to the interest or the revenue. [In favour of assessee] (Related Assessment year : 2011-12) –[Malankara Orthodox Syrian Church Medical Mission Hospital v. Deputy Director of Income-tax, (Exemption), Kochi (2017) 80 taxmann.com 361 (ITAT Cochin)]

 

Objects of India International Centre are charitable in nature - Mere surplus from any activity which has been undertaken to achieve the dominant object does not imply that the same is run with profit motive. The intention has to be gathered from circumstances which compelled the carrying on the activity - Revision order was held to be not justified

Assessee-society was organising and facilitating study courses, conferences, seminars, lectures. It was also providing catering and accommodation facilities to members attending such events. Director (Exemption) concluded that major activities of assessee revolved around accommodation and catering facilities and these activities were not on no-profit/loss basis as there was continuous surplus being reflected in account for many previous years. He further noticed in bye-laws of society that various amenities were provided to only selected members of society and, thus, it was not operating on ‘principle of mutuality’. Therefore, he passed revisional order under section 263, setting aside assessment order. However, it was found from records that predominant activities of centre was not to earn income but to provide facilities for disseminating or exchanging knowledge as per object of society. For achieving its dominant object merely because incidental income was earned by assessee society by providing hostel and catering activities, it could not be said that assessee was doing trade or business as contemplated under proviso to section 2(15); therefore, impugned revisional proceedings deserved to be quashed. [In favour of assessee] (Related Assessment year : 2009-10) – [India International Centre v. Assistant Director of Income-tax (E) (2015) 154 ITD 220 : 57 taxmann.com 265 (ITAT Delhi)]

Business was commenced by trustees with aid and assistance of borrowings from sister concerns it could not be case of ‘property being held under trust’ but would only be a case of business being carried on or on behalf of trust - Exemption under section 11 was rightly denied

Business held in trust - Assessee-trust was created with objects of establishing and maintaining of schools, colleges and study circles, advancing education and research study on modern and ancient Indian thought, etc. After formation of trust, a business was commenced in name of trust for manufacture of katha. Assessee claimed exemption under section 11 in respect of its income and filed a return of income on that basis. Assessing Officer denied exemption. Katha business was commenced by trustees with aid and assistance of borrowings from sister concerns it could not be case of ‘property being held under trust’ within meaning of section 11(4) but would only be a case of business being carried on for and on behalf of trust. While considering question as to whether carrying on business in katha was incidental to attainment of objects of trust, application of income generated by business was not relevant and what was relevant was whether activity so inextricably connected or linked with objects of trust could be considered as incidental to those objectives; instance of charitable trust established for providing medical relief, running a nursing home in process or a trust for advancement of education, running a publishing house or a newspaper clarify position. Mere fact that whole or some part of income from katha business was ear-marked for application of charitable objects would not render business itself being considered as incidental to attainment of objects of trust. In view of above exemption under section 11 was rightly denied. [In favour of revenue] (Related Assessment years : 1992-93 to 1994-95, 2001-02 and 2005-06 to 2007-08) – [CIT v. Mehta Charitable Prajnalay Trust (2013) 357 ITR 560 : 255 CTR 232 : 214 Taxman 88 : (2012) 28 taxmann.com 73 (Del.)]

In order to invoke section 11(4) twin conditions are necessary to be fulfilled; first one is that Assessing Officer should give a conclusive finding that undertaking in question is a business undertaking and secondly, that excess income generated by said undertaking has not been utilized/applied for purposes of object of trust as defined under section 2(15)  

Assessee was a corporate body established under Gujarat Industrial Development Act, 1962. It was also registered under section 12AA. Main objects of assessee-corporation were to establish, develop and manage industrial estates at certain places selected by State Government. Locations so developed were to be made available to several industrial undertakings to establish their business enterprises. It was apparent from records that assessee was not authorized to dispose of plots situated within an industrial estate in open market. In view of fact that income generated on leasing out of plots/land had to be utilized only for listed objects of institution, there was no scope to invoke provisions of section 11(4) to assessee’s case. (Related Assessment year : 2006-07) – [Gujarat Industrial Development Corporation v. ACIT (2011) 138 TTJ 714 : 129 ITD 73 : (2010) 8 taxmann.com 210 (ITAT Ahmedabad)]

Letting of property is not a business activity

That the object of the assessee was education and the activities of the assessee in letting out properties and receiving lease rental was an activity carried on only to fulfill the object of the assessee. Hence, the income derived by letting out the properties could not be treated as business income of the assessee. [CIT v. Sri Rao Bahadur and Dharmaraja Educational Charity Trust (2008) 300 ITR 365 (Mad); CIT v. Jyoti Prabha Society (2009) 177 Taxmann 429 (Uttarakhand)]

 

Business carried on by assessee was not in course of actual accomplishment of primary object of trust, assessee would be hit by provision of section 13(1)(bb) and would not be entitled to benefit of section 11

Assessee was a public charitabletrust which was carrying on business of manufacturing safety matches. Main object of assessee-trust was to provide relief to poor by way of establishing and maintaining hospitals, schools, etc. Assessee-trust claimed exemption under section 11. Assessing Officer held that assessee was not entitled to exemption under section 11 on ground that case came within purview of section 13(1)(bb). Commissioner (Appeals) as well as Tribunal held that assessee-trust was entitled to exemption under section 11 as a charitable turst. Since in instant case, business carried on by assessee was not in course of actual accomplishment of primary object of trust, assessee would be hit by provision of section 13(1)(bb) and would not be entitled to benefit of section 11. [In favour of revenue] (Related Assessment years : 1981-82 to 1983-84) - [CIT v. P. Iyya Nadar Charitable Trust (2006) 284 ITR 404 : 204 CTR 77 : 156 Taxman 406 (Mad)]

 

In determining whether the trust is entitled to exemption under section 11, the nature or type of the sources of income of the trust is not relevant

In determining whether the trust is entitled to exemption under section 11, the nature or type of the sources of income of the trust is not relevant. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profitmaking or carrying out a charitable purpose. This involves, in each case an examination of not only the objects of the trust but also the manner in which the activities for advancing the charitable purpose are being carried on and the surrounding circumstances.

It was held that if the primary or dominant purpose of the institution is charitable and another which by itself, may not be charitable, but is merely ancillary or incidental to the primary or dominant object, it would not prevent the institution from validly being recognized as a charity. The test to be applied is, whether the object which is said to be non-charitable is the main or primary object of the trust or institution or it is ancillary or incidental to the dominant object which is charitable. [DIT v. Bharat Diamond Bourse (2003) 126 Taxman 365 (SC)]

There had not been any manipulation of account books or attempt to evade tax on part of assessee, provisions of sub-section (4) of section 11 were not applicable to instant cases

Assessee, a corporation, providing passenger transport in State of Andhra Pradesh claimed exemption under section 11 which was ultimately upheld by Supreme Court - Thereupon ITO computed income or assessee by invoking provisions of sub-section (4) of section 11. After disregarding various items of additions to income returned, took gross income from business and compared same with income shown in profit and loss account, allowing deductions therefrom towards payment of compensation made to private operators, contribution to gratuity fund etc. Subsequently Commissioner, exercising powers under section 263, directed ITO to withdraw aforesaid deductions and redetermine amounts of income chargeable to tax by applying provisions of section 11(4). In fresh assessment proceedings, though the ITO found no other deficiency in the claims laid by the assessee, yet he determined the income of the assessee by invoking the provisions of sub-section (4) of section11 and in doing so, he disregarded various items of additions to the income returned by the assessee which had the defect of increasing the income and took the gross income from business and compared the same with the income shown in the profit and loss account, of course, making certain deductions therefrom towards payment of compensation made to private operators which was added as capital, amounts written off not allowed in the assessment order, payment of fine disallowed in assessment order and contribution to gratuity fund. On appeals, the Commissioner (Appeals) upheld the assessments. In the meantime, the Commissioner, acting under section 263, directed the ITO to withdraw the aforesaid deductions and redetermine the income chargeable to tax by applying the provisions of section 11(4). On appeal:

Held : The instant cases did not call for the initiation of any action under section 11(4). The ITO had only tried to apply this provision to application/expenditure of income by the assessee, which did not conform to the provisions of law which aspect was amply taken care by sub-section(3) of section 11, which deals with any income not applied to charitable or religious purpose or where such income ceases to be accumulated or set apart for application to a charitable or religious purpose. On facts, not an iota of allegation had been made much less brought out to say that there had been any manipulation of account books or attempt to evade tax on the part of the assessee in the instant cases. Thus, the ITO made a wrong comparison by adding the items of additions to the income returned by the assessee. The orders of the Commissioner (Appeals) were accordingly quashed. Similarly, as A matter of fact, almost consequential action at part taken by the Commissioner under section 263 by directing the ITO to withdraw the aforesaid deductions did not concern to the mandate of section 11(4). Hence, the order of the Commissioner under section 263 was also quashed. Assessment years 1967-68 to 1969-70 – [A. P. State Road Transport Corporation (1989) 31 ITD 253 (ITAT Hyderabad)]

Words “not involving the carrying on any activity for profit” is applicable only in case the trust has the object of advancement of any other object of general public utility

Appellant was an association constituted under a licence granted under section 25 of Companies Act, 1956. Main objects of appellant association were ‘to give charity’ and ‘to promote education’. Incidental or ancillary objects entitled appellant to run chitties. High Court held that income derived by assessee from business of conducting kuries was not entitled to exemption under section 11. Main objects of appellant mentioned in memorandum could be reasonably identified with two heads, ‘relief of the poor’ and ‘education’ in definition of ‘charitable purpose’ in section 2(15) and said two heads remained unqualified by any statutory restriction. Power to run kurie business stems from provision to non chitties as mentioned in incidental objects of memorandum and, therefore, it had to be held that income from kurie business was intended to be applied only to charitable purpose of giving charity or promotion of education. Therefore, income of appellant from kurie business was entitled to exemption under section 11. (Related Assessment year : 1969-70) - [Dharmadeepti v. CIT (1978) 114 ITR 454 (SC)]