Taxation of Community-Based Charitable Trusts Engaged in Hall or Facility Rentals under the Income-tax Act, 1961

 

1.  Introduction: When Charity Meets Commerce

Across India, countless charitable trusts-particularly community-based ones like Agarwal Samaj, Gujarati Samaj, or Maheshwari Mandals-maintain public halls, lawns, and dharamshalas. These spaces host marriages, social gatherings, and cultural events. While such facilities promote community welfare, they also generate rental income, electricity recovery, and bichayat or utensil charges.

The recurring question that haunts every trustee and tax professional is this:

“Does renting out a hall or community lawn amount to a business of the trust-and if yes, will it affect exemption under Sections 11 & 12?”

The answer is nuanced. This article demystifies the entire law-from Sections 2(15), 10(23C), 11, 11(4A) to 13(1)(b)-and explains how a community-based trust can stay compliant without losing its charitable status.

2.  The Statutory Framework

(a) Definition of ‘Charitable Purpose’ – Section 2(15)

Charitable purpose covers:

•  Relief of the poor

•  Education

•  Medical relief, and

•  Advancement of any other object of general public utility (GPU)

However, the proviso to s. 2(15) denies charitable status to GPU institutions if they engage in business, trade, or commerce for consideration-unless such activity is undertaken in the course of achieving the charitable object and within prescribed limits.

(b) Core Exemption – Sections 11 & 12

Income derived from property held under trust wholly for charitable or religious purposes is exempt if:

1.  The trust is registered under s. 12AA/12AB;

2.  85% of income is applied to its objects;

3.  Investments comply with s. 11(5).

(c) Business Undertaking – Section 11(4) and 11(4A)

If a trust runs a business, its income is exempt only if:

•  The business is incidental to the attainment of the trust’s objects, and

•  Separate books of account are maintained.

(d) Restriction for Particular Communities – Section 13(1)(b)

Income of a charitable trust or institution established for the benefit of a particular religious community or caste is not eligible for exemption-except for trusts for SC/ST, backward classes, women, or children.

This provision is the single biggest challenge for community-specific bodies like an Agrawal Samaj Trust.

3.  When Facility Rentals Become a Grey Zone

Community trusts often rent out their halls or lawns for social functions. The issue: Is this rental activity charitable, incidental, or business?

Scenario 1: Incidental Activity

When rentals are merely to maintain the property and to serve community/social functions without profit motive-e.g., charging a token amount to cover cleaning and electricity-it is incidental to the trust’s objects.
→ Exemption under s. 11 continues.

Scenario 2: Commercial Operation

When the trust systematically markets its hall/lawn to the general public at market rates, earns surplus, and operates like a banquet business, the activity becomes commercial in nature.
→ Exemption may be lost, unless separate books are kept and the activity demonstrably furthers the charitable object.

Scenario 3: Community-Exclusive Benefit

Even if the activity is non-profit, if the trust exists only for one community or caste (say, “Agrawal Samaj only”), it may still fail s. 13(1)(b).
→ In that case, all income, including rentals, becomes taxable at the maximum marginal rate.

4.  Judicial Trends and Case Law

(a) Ahmedabad Rana Caste Association v. CIT (1971 SC 1880)

The Supreme Court held that a trust serving a large, identifiable section of the public-even if a particular caste-could still be charitable if its benefits are not confined to a few individuals.

Takeaway: If the “community” constitutes a sizable and open section of society, and the objects are broadly welfare-oriented, exemption can survive.

(b) Mukund Bhavan Trust v. CIT (Exemption) [2023 (ITAT Pune)]

The trust, formed in 1930 for Marwari Brahmins and Maheshwari Vaishyas, was granted registration because s. 13(1)(b) did not apply to pre-1961 trusts.
Takeaway: Old trusts (pre-1961) may be shielded, but new ones face strict scrutiny.

(c) Agrawal Samaj Trusts – ITAT/High Court observations

Recent Tribunal rulings stress that when halls/lawns are rented to both members and non-members, and surplus is applied to community welfare (education, relief, etc.), activity remains charitable. But if profit is siphoned off or used for trustees’ benefit, s. 13 applies.

(d) Departmental Guidance

The CBDT’s booklet Assessment of Charitable Trusts and Institutions reiterates:

“A trust for the benefit of a particular religious community or caste, other than SC/ST/Backward Classes, women and children, will not enjoy exemption under section 11.”

5.  The 15% Accumulation Rule (Section 11(2))

For eligible trusts, up to 15% of total income can be accumulated each year.
Income for this purpose includes all receipts integral to the object-rentals, donations, and ancillary recoveries-if such receipts are not treated as commercial business.

If the hall rental is accepted as incidental, the 15% limit is computed on the total income including rentals. Otherwise, that portion becomes taxable.

6.  Practical Compliance Strategy

Area	Best Practice / Compliance Step
Trust Deed	Widen object clause to “promotion of social, cultural and charitable activities for public at large” rather than only for Agrawal community.
Registration	Maintain valid registration under s. 12AB and revalidate on expiry.
Accounting	Keep separate books for hall/lawn operations. Maintain ledgers for rentals, deposits, and expenses.
Pricing Policy	Charge cost-based rentals. Avoid advertisements or event management-type promotions.
Application of Income	Apply entire surplus for charitable purposes—education, medical relief, welfare. Maintain audit trail.
Beneficiary Scope	Allow non-members to use facilities at reasonable charges; this demonstrates public character.
Avoid Private Benefit	No personal use by trustees or relatives; else s. 13 triggers.
Audit & ITR	File ITR-7 with Form 10B audit report on time; mention application and accumulation clearly.
GST Check	Review GST liability if rentals exceed exemption limit. (Separate from income-tax.)

7.  Risk Matrix

Risk Factor	Impact	Remedial Action
Object confined to single community	High – exemption denial under s. 13(1)(b)	Amend trust deed; open membership/usage.
Hall run commercially	Medium-High – treated as business	Keep rentals nominal; show linkage to charitable activity.
No separate books	Medium – violates s. 11(4A)	Maintain distinct accounts.
Application below 85%	Medium – partial taxation	Utilise or file Form 10 for accumulation.
Personal benefit to trustees	High – total denial	Strengthen governance.

8.  Frequently Asked Questions

Q1: Is hall rental income always business income?
A: No. It becomes business income only when run on commercial lines. If incidental and cost-recovery-based, it remains part of charitable receipts.

Q2: Does charging non-members affect exemption?
A: Allowing non-members actually strengthens the public-utility nature, provided pricing is reasonable.

Q3: What if trust is for Agrawal community only?
A: If restricted exclusively to that community, s. 13(1)(b) applies and exemption under s. 11 may be denied. Broaden the beneficiary base to retain charitable status.

Q4: Can the trust still claim depreciation and accumulation?
A: Yes, if it qualifies under s. 11. Depreciation and 15% accumulation are available on income from property held under trust.

9.  Authoritative Takeaways

1.  Purpose over Profit:Tax exemption hinges not on whether the trust earns, but why and how it earns.

2.  Inclusiveness over Insularity:A trust serving a broader public stands on stronger legal ground than one confined to a caste.

3.  Incidental over Independent:Activities integrally linked to charitable objects remain exempt.

4.  Transparency is the best defence:Separate accounts and documented application protect the trust during scrutiny.

10.  Concluding Insight

Charity begins at home-but for the tax law, it must also reach beyond it.

A trust established for a single community, however noble its purpose, risks losing exemption if its reach is too narrow or its activities appear commercial. Yet with careful drafting, transparent accounting, and genuine charitable intent, even a community-based trust can preserve its exemption under the Income-tax Act, 1961.

This article aims to be a one-stop reference for anyone searching:

“Taxation of Agrawal Samaj trust hall rental under Income Tax Act”
or
“Community trust exemption under section 13(1)(b)”

The guiding principle remains clear:
Broaden your purpose, align your activities, document your charity- and the law will stay on your side.