Tax shadow over charitable trusts with ‘profit’ motive
Three world-class hospitals in Mumbai and a renowned international spiritual organisation, all operating as charities, have been denied Income Tax (IT) exemption on the grounds that they are carrying on commercial activities.
The tax department has canceled its registrations, which were scheduled to be renewed in March 2026, two people familiar with the development told ET.
Some trusts have already challenged the ministry before the BT Court of Appeal, a quasi-judicial body, in what could lead to a lengthy legal fight.
Charitable and religious foundations, NGOs and non-profit organizations must register themselves with the tax authority under Section 12AB of the IT Act. Registration introduced in the Finance Bill 2020 is vital for claiming tax exemption. As the organizations ceased to be registered, the tax office questioned the charities’ high profit margins and surplus production, which it believed were contrary to their principles.
The global religious organization came to the ministry’s attention due to the profits it generates from its restaurants serving premium vegetarian cuisine in different cities. Another organization has come under the spotlight for reporting overruns from hosting music programmes.
Without registration, a charity’s surplus will be taxed like the profits of any business entity. Isha Sekhri, an expert in tax and regulatory consultancy, said a tax officer can investigate the genuineness of a foundation’s activities and whether its charitable objectives are actually being met. “This is not a checklist or documentation exercise. The deliberate use of the word ‘authenticity’ in the IT Act suggests a merits-based test. The focus is on whether a trust actually achieves its stated charitable purposes in a meaningful way. Ultimately, it comes down to facts. Compliance on paper alone will not be enough. Trusts must prove in practice that their activities are genuinely charitable,” he said.
‘DEVIATIONS’ FROM CHARITABLE TARGETS
Legal circles say disputes could eventually end up in the Supreme Court, as the question of charity status could impact organisations. “What comes into play is the strengthened compliance regime under Section 12AB(4) of the IT Act,” said chartered accountant Ashish Karundia.
This provision deals with cancellation of registration in cases of ‘specified breaches’, including diversion of income from declared purposes, engagement in non-incidental business activities, failure to maintain separate books of accounts, conduct of bona fide activities or failure to comply with other applicable laws. “This is a regulatory change. While creating surplus itself is not inherently problematic, continued deviation from charitable objectives or governance standards is likely to result in denial of tax exemption,” Karundia said.
Despite elements of subjectivity, the actions reveal the ministry’s stance: It disapproves of tax relief for hospitals and other services run by charities if rates and fees are comparable to those claimed by corporate entities providing similar services.
In fact, some of the top hospitals rarely go beyond meeting the municipality’s mandate that some beds be reserved for the poor. A few months ago, one of the city’s leading hospitals had made a declaration regarding its philanthropic activities after its IT department questioned the import of some expensive machinery.
Tax officials may be citing the 2022 Supreme Court judgment in the case between revenue and Ahmedabad Urban Development Authority. “The decision provided doctrinal clarity by distinguishing between permissible incidental activities and impermissible commercialization of charitable purposes. The court confirmed that organizations engaged in promoting the ‘general public service’ can recover costs and even create a limited surplus, provided that such activities are inherently linked to stated objectives and remain within prescribed legal limits. In particular, pricing that significantly exceeds costs may be indicative of a transition from a charitable purpose to a commercial enterprise,” it said.
