Tax shadow over charitable trusts with ‘profit’ motive

Three top-notch hospitals in Mumbai and a famous international spiritual organisation-all functioning as charitable trusts-have been denied Income tax (I-T) exemption on the grounds that they were carrying out commercial activities.

The tax office has cancelled their registrations, which came up for renewal in March 2026, two persons familiar with the development told ET.

In what could set off a long legal feud, some trusts have already challenged the department before the I-T Appellate Tribunal, a quasi-judicial institution.

Charitable and religious trusts, NGOs, and non-profit institutions must register themselves with the tax department under Section 12AB of the I-T Act. Introduced in the Finance Act 2020, the registration is vital for claiming tax exemption. As the organisations’ registrations reached expiry, the tax office questioned their high profit margins and the generation of surpluses, which it believes are against the tenets of charities.

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The global religious organisation drew the department’s attention for profits from its restaurants offering premium vegetarian cuisine in different cities. Another entity has come under the lens for reporting a surplus from hosting musical programmes.

Without registration, a charity’s surplus would be taxed like the profits of any business entity.A tax officer can inquire into the genuineness of a trust’s activities, whether its charitable objects are actually being met, said Isha Sekhri, who specialises in tax and regulatory advisory. “This is not a checklist or documentation exercise. The deliberate use of the word ‘genuineness’ in the I-T Act signals a substance-based test. The focus is on whether a trust is truly carrying out its stated charitable purposes in a meaningful way. Ultimately, it boils down to facts. Paper compliance alone will not suffice. Trusts must demonstrate that their activities are genuinely charitable in practice,” said Sekhri.

‘DEVIATIONs’ FROM CHARITABLE GOALS

Legal circles say the disputes could eventually reach the Supreme Court because a question mark on the charitable status can impact the organisations. “What comes into play is the reinforced compliance regime under Section 12AB(4) of the I-T Act,” said chartered accountant Ashish Karundia.

The provision relates to cancellation of registration in cases of ‘specified violations’, including diversion of income from declared objectives, engagement in non-incidental business activities, failure to maintain separate books of account, conduct of non-genuine activities, or non-compliance with other applicable laws. “It’s a regulatory shift. While surplus generation in itself is not inherently problematic, sustained deviation from charitable purposes or governance standards is likely to result in the denial of tax exemption,” said Karundia.

Despite elements of subjectivity, the actions bring out the department’s stance: it disapproves tax relief to hospitals and other services run by charities if the rates and fees are comparable to those charged by corporate entities offering similar services.

In fact, some of the top-tier hospitals rarely go beyond meeting the municipality rule of mandatory reservation of some beds for the poor. A few months ago, a leading hospital in the city gave a declaration of the charitable activities it would pursue after the I-T department questioned certain expensive machinery import.

Tax officials may be taking a leaf from the 2022 Supreme Court judgement in the case between the revenue and Ahmedabad Urban Development Authority. “The ruling provided doctrinal clarity by distinguishing between permissible incidental activities and the impermissible commercialisation of charitable objectives. The Court has affirmed that entities engaged in advancing ‘general public utility’ may recover costs and even generate a limited surplus, provided such activities are intrinsically connected to their stated objectives and remain within the prescribed statutory limits. Notably, pricing that significantly exceeds costs may indicate a transition from a charitable purpose to a commercial enterprise,” said Karundia.