When Charity Meets Commerce: Taxation of Community-Based Charitable Trusts Under the Income Tax Act, 1961

 

Introduction

In India, charity often walks hand in hand with enterprise. A hospital that maintains a pharmacy, a goashala that sells milk and cow dung, or an association of differently-abled persons that sells their handcrafted paintings – all of them are charitable in purpose, but commercial in appearance.

Add to that the community-based charitable trusts – such as Agarwal Samaj, Maheshwari Mandal, or Gujarati Panchayat – which maintain halls and lawns used for marriages, religious functions, or community gatherings, often charging some rent or service fee.

The big tax question is:

When does such an activity – even though carried out by a charitable trust – turn into a “business” under the Income Tax Act?

And if it does,

What happens to the exemption under Sections 10(23C), 11, 12, and 13?

This article aims to provide a comprehensive, authoritative guide for tax professionals, trustees, and assessing officers alike – uniting legal principles, statutory provisions, judicial interpretations, and practical insights.

1.  The Legal Framework – Sections that Shape the Law

The taxation of charitable trusts is governed mainly by Sections 2(15), 10(23C), 11, 12, and 13 of the Income Tax Act, 1961.

1.1 Section 2(15): Meaning of “Charitable Purpose”

Section 2(15) defines “charitable purpose” to include:

•  Relief of the poor

•  Education

•  Medical relief, and

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

However, the proviso to Section 2(15) restricts GPU trusts: if their activities involve any trade, commerce, or business for consideration, the trust may lose its charitable status – unless such activity is carried out in the course of actual charitable objectives and within prescribed limits.

1.2 Sections 10(23C) and 11 – The Twin Exemptions

Both sections offer exemptions, but under slightly different conditions.

•  Section 10(23C)covers specific institutions (educational, medical, etc.) approved by prescribed authorities.

•  Section 11applies more broadly to “property held under trust wholly for charitable or religious purposes.”

To qualify under Section 11:

1.  The trust must be registered under Section 12A / 12AB.

2.  85%of its income must be applied to charitable purposes in India.

3.  Investments must comply with Section 11(5).

1.3 Section 11(4) and 11(4A): Business Undertakings Held Under Trust

Section 11(4) recognizes that a business can itself be a property held under trust.
Section 11(4A) provides a crucial condition:

Business income of a trust is exempt only if
(a) the business is incidental to the attainment of the trust’s objectives, and
(b) separate books of account are maintained for such business.

1.4 Section 13(1)(b): The Caste and Community Restriction

Perhaps the most decisive clause for community trusts:

A charitable trust or institution established for the benefit of a particular religious community or caste shall not be eligible for exemption under Section 11 or 12.

Exceptions exist for trusts meant for SC/ST, backward classes, women, and children. But trusts exclusively for specific communities (e.g., Agrawal, Maheshwari, Jain, etc.) fall under scrutiny.

2.  When Commerce Hides Inside Charity

Modern charitable institutions frequently perform purchase-and-sale activities in the ordinary course of pursuing their objects. The law and courts have gradually evolved principles to determine when these are charitable and when they become commercial.

2.1 Example 1: Hospital Pharmacy Selling Medicines

•  Legal View:If the pharmacy is an integral part of patient care, its receipts are incidental to medical relief – the dominant object remains charitable.

•  Judicial View:Courts and Tribunals (e.g., Jaslok Hospital, Bhatia General Hospital) have consistently held that hospital pharmacy income, when linked to treatment, does not constitute a separate business.

•  Caution:If the pharmacy operates like an independent retail outlet (open to the public, profit-oriented), it can be treated as a business activity.

2.2 Example 2: Goashala Selling Milk or Cow Dung

•  If sales are incidental– meant to sustain cows, maintain shelters, and continue charitable operations – they are treated as part of charitable activity.

•  If conducted as a commercial dairy– producing and marketing milk on a large scale – it may be classified as business.

2.3 Example 3: Association of Handicapped Persons Selling Crafts

•  Selling paintings or crafts made by differently-abled persons as part of rehabilitation or vocational training is charitable, not business.

•  But setting up an independent art gallery for profit would fall within commercial activity.

2.4 Example 4: Patient Fees Collected by Charitable Hospitals

•  Fees collected from patients are treated as application of income for charitable purposesif they are used for hospital maintenance or for providing concessional/free treatment.

•  However, if a hospital functions purely on commercial lines, profits are distributed or siphoned, and there is no charitable application, the exemption can be denied.

3.  The Community Trust Dilemma: Halls, Lawns, and Rent

Now let’s consider the Agrawal Samaj-type trust – established for the welfare of a specific community, owning a hall and lawn that it lets out for functions. It also collects electricity, cleaning, utensil, and bichayat charges.

The issues:

1.  Are these receipts “business income”?

2.  Will the exemption under Section 11 survive?

3.  Does Section 13(1)(b) bar such a trust entirely?

Let’s unpack each.

3.1 Whether Hall Rentals Amount to Business

It depends on how the activity is carried out.

Situation	Tax Implication
Hall rented occasionally to members/non-members for cultural or social events, and income used for community welfare.	Treated as incidental to charitable purpose – exempt under Section 11.
Hall run commercially, advertised to general public, charged at market rates with substantial profit.	Treated as business – taxable unless shown incidental with separate books under s.11(4A).
Hall rented only to a specific caste/community, not open to public.	Risks total exemption denial under s.13(1)(b).

3.2 The Caste-Based Limitation (Section 13(1)(b))

The Income Tax Department’s own booklet on charitable trusts clearly says:

“Income of a charitable trust established for the benefit of a particular religious community or caste (other than SC/ST, backward classes, women, and children) is not eligible for exemption.”

That means an Agrawal Samaj Trust, if restricted only to Agrawals, may not enjoy exemption – even if it applies its income for welfare within the community.

However, courts have held exceptions:

•  In Ahmedabad Rana Caste Association (1971), the Supreme Court observed that if a trust serves a section of the publiclarge enough to constitute a public purpose, it may still qualify as charitable.

•  The ITAT Punein Mukund Bhavan Trust (2023) granted registration to a community trust created before 1961, noting that Section 13(1)(b) did not apply retrospectively.

Hence:
Older trusts and those with genuinely public-facing objectives have better protection.

3.3 Ancillary Charges – Electricity, Cleaning, Utensils

If these are charged only on a cost-recovery basis, they are part of the rental arrangement and not taxable separately. But if they include profit elements, or are operated through contractors, they may strengthen the “commercial” inference.

4.  Section 11(2): The 15% Rule and How to Compute It

Section 11(2) allows a charitable trust to accumulate up to 15% of its income without immediate application.

The base for this 15% is “income of the trust” – which includes all receipts that qualify under Section 11.

So:

•  If hall rentals, pharmacy sales, or milk sales are accepted as incidental to charitable purposes, they must be included while calculating 15%.

•  If such receipts are treated as business income (taxable), they will be excluded from that base.

5.  The Compliance Compass: How to Stay Safe

Area	Compliance Tip
Trust Deed	Broaden scope to “community and general welfare” rather than limiting to a specific caste.
Registration	Keep 12AB registration active; update when objects change.
Books of Account	Maintain separate ledgers for hall rentals or pharmacy operations.
Cost Policy	Fix charges to cover costs, not profit.
Beneficiary Base	Allow non-members to use the facilities – strengthens the “public utility” case.
Application of Income	Use surplus for education, relief, or social welfare.
Audit & Returns	File ITR-7 and Form 10B on time.
Transparency	Keep invoices, receipts, and utilization records ready for scrutiny.

6.  Judicial Insights Worth Citing

•  Ahmedabad Rana Caste Association v. CIT (SC, 1971)– Community trusts can still be charitable if beneficiaries form a “section of the public.”

•  Mukund Bhavan Trust (ITAT Pune, 2023)– Pre-1961 community trusts not hit by s.13(1)(b).

•  Jaslok Hospital & Bhatia General Hospital (ITAT)– Pharmacy receipts integral to hospital objects.

•  Departmental Booklet (CBDT)– Explicit restriction for caste-based trusts.

7.  The Practical Reality

In most cases, the intention of the trustees and application of income decide the tax fate.
When a trust’s activities are genuinely aimed at public welfare and any receipts are ploughed back into charitable use, courts lean towards granting exemption.

But where trustees operate the trust like a business, or restrict benefits to their own community, the Income Tax Department rightly steps in.

8.  Author’s Note – The Guiding Principle

“The Income Tax Act does not tax charity; it taxes commerce disguised as charity.”

Charity and commerce are not enemies – they simply need to stay in their lanes.
A trust may run a pharmacy, sell milk, or rent a hall – but as long as these activities serve the charitable purpose and not profit, the exemption survives.

The safest route is transparency, documentation, and inclusiveness.
Let charity stay charitable – in letter, spirit, and tax returns.

Conclusion

Community-based trusts occupy a unique place in India’s social fabric. They blend tradition with service, faith with philanthropy. Yet, the Income Tax Act demands clarity:

•  Purpose must be charitable,

•  Activities must be incidental, and

•  Benefits must not be restrictedto a closed group.

If trustees understand and comply with these principles, the law stands by them – not against them.