The treatment of business income for a charitable or religious trust under the Income Tax Act, 1961 is governed primarily by Sections 11(4) and 11(4A). Here’s a structured breakdown to help you navigate the nuances:
Section 11(4): Business Held as Property Under Trust
This applies when the business undertaking itself is held under trust.
- Income from such business is eligible for exemption, provided:
- The business is genuinely held as trust property.
- The income is applied for charitable or religious purposes.
- Assessing Officer’s Power:
- If the AO finds that the actual income exceeds the disclosed income, the excess is deemed not to have been applied for charitable purposes and is taxable.
📌 Example: A trust owns and operates a printing press as part of its trust property. If the AO determines that actual profits are ₹20 lakh but books show only ₹15 lakh, the ₹5 lakh excess is taxable.
Section 11(4A): Incidental Business Activities
This applies when the trust carries on a business that is incidental to its objectives.
- Exemption is allowed only if:
- The business is incidental to the attainment of the trust’s objectives.
- Separate books of account are maintained for such business.
📌 Example: A trust promoting education runs a small bookstore on campus. If it maintains separate books and uses profits for educational purposes, the income is exempt under Section 11(4A).
What’s Not Exempt:
- If the business is not incidental to the trust’s objectives, or
- If separate books are not maintained, then the income is taxable under normal provisions.
Tax Treatment of Business Income
| SCENARIO | EXEMPTION AVAILABLE? | CONDITIONS REQUIRED |
| Business is held as property under trust (Sec 11(4)) | Yes | Income applied for charitable/religious purposes; AO can recompute income |
| Business is incidental to objectives (Sec 11(4A)) | Yes | Incidental + Separate books maintained |
| Business not incidental or no separate books | No | Income taxable at normal rates |
| Receipts from business > 20% of total receipts (General Utility) | No | Exemption lost for that year |
Compliance Requirements
- Registration: Trust must be registered under Section 12A/12AB to claim exemption.
- Audit: If income exceeds the basic exemption limit, accounts must be audited by a Chartered Accountant.
- Application of Income: At least 85% of the income (including business income) must be applied for charitable or religious purposes in India.
- Investment: Accumulated income must be invested in modes specified under Section 11(5).
Important Points
- Anonymous Donations: Taxed at 30% if exceeding specified limits, even if received by a trust with business income.
- Non-Compliance: If conditions are violated (e.g., business is not incidental, or receipts exceed 20%), the exemption is denied and the income is taxed as per normal slabs.
- Separate Books: Mandatory for business activities to maintain separate books to avail exemption
