Letting Out Property and Ancillary Receipts Not ‘Business’ per se: Exemption Upheld under Section 11

By | May 5, 2026
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Letting Out Property and Ancillary Receipts Not ‘Business’ per se: Exemption Upheld under Section 11

Facts

  • The Profile: The assessee is a charitable trust registered under Section 12A, carrying out activities in line with its stated objects.

  • The Revenue Stream: During AY 2014-15 and 2015-16, the trust derived income from letting out community halls, royalty, flour mill operations, and interest income.

  • The Dispute: The Assessing Officer (AO) classified the trust’s objects under the residual category of “Advancement of Any Other Object of General Public Utility” (GPU).

  • The Addition: Invoking the proviso to Section 2(15) and Section 13(8), the AO argued that the trust was engaged in activities in the nature of trade, commerce, or business. Consequently, he denied the exemption under Section 11, treating the receipts as commercial income.

  • Assessee’s Defense: The trust contended that the activities were incidental to its main charitable objects and that all income was applied solely for charitable purposes.

Decision

  • Final Verdict: The Court/Tribunal ruled in favour of the assessee, restoring the exemption under Section 11.

  • Ratio Decidendi:

    • Contextual Analysis: The character of an activity (such as letting out property) must be viewed in the context of the trust’s objects, not in isolation. Generating income from trust-held property does not ipso facto make it a business.

    • Validity of Investment: Since the law recognizes investment in immovable property as a valid deployment of charitable funds, the resulting rental income cannot be recharacterized as a commercial activity.

    • Nature of Receipts: The primary source of income being rent and interest reinforces the claim that the funds are “income from property held under trust” rather than from an independent business venture.

    • Lack of Adverse Findings: The AO failed to prove that the activities were non-genuine or that the income was not applied to the trust’s objects. In the absence of a “profit motive” or evidence of systematic commercial operations, the restrictive proviso to Section 2(15) is not triggered.

Key Takeaways

  • Rental Income Protection: Charitable trusts (GPU category) can safely derive rental income from letting out their properties (halls, grounds, etc.) without fearing a total loss of exemption, provided the property is held under the trust deed.

  • Incidental Activities: Ancillary activities (like the flour mill in this case) that are integrated into the trust’s ecosystem to serve its objects are generally protected from being labeled as “trade” if there is no underlying profit motive.

  • Section 13(8) Caution: Section 13(8) is a “switch” that turns off Section 11/12 exemptions if the commercial receipts exceed the prescribed threshold. However, this ruling clarifies that the threshold only matters if the activity is first proven to be a business.

  • Transition to 2025 Act: Under Section 335 and Section 351 of the Income-tax Act, 2025, the principles of “application of income” and the definition of GPU remain critical. Taxpayers should ensure that their Trust Deeds explicitly authorize these “facilitative” income-generating activities to maintain a strong legal footing.

IN THE ITAT MUMBAI BENCH ‘SMC’
Vanita Samaj
v.
Income-tax Officer (Exemption)*
Pawan Singh, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member
IT Appeal Nos. 7794 and 7795 (Mum) of 2025
[Assessment years 2014-15 and 2015-16]
APRIL  7, 2026
Anil Sathe, Ld. AR for the Applicant. Vivek Singh, Ld. DR for the Respondent.
ORDER
Makarand Vasant Mahadeokar, Accountant Member.- These two appeals are filed by the assessee against separate orders passed by the learned Addl./JCIT – 2 from the office of Commissioner of Income Tax (Appeals) [hereinafter referred to as “CIT(A)”]under section 250 of the Income-tax Act, 1961[hereinafter referred to as “the Act”] for A.Ys. 2014-15 and 2015-16, arising out of the assessment orders passed by the Assessing Officer under section 143(3) of the Act. Since common issues are involved in both the appeals, they were heard together and are being disposed of by way of this consolidated order for the sake of convenience.
2. The details of the orders under challenge are as under:
Assessment Year Assessment Order (u/s 143(3)) CIT(A) Order (u/s 250)
2014-15 19.11.2016 12.09.2025
2015-16 27.12.2017 12.09.2025

 

Facts of the Case
3. The assessee is a trust registered under the Bombay Public Trust Act and also registered under section 12A of the Act. The registration had earlier been cancelled by the DIT(E), Mumbai; however, the same was restored by the Hon’ble Tribunal vide order dated 26.02.2014.
4. For the years under consideration, the assessee filed its return of income declaring Nil income after claiming exemption under section 11 of the Act. The case was selected for scrutiny and assessment was completed under section 143(3) of the Act. During the course of assessment proceedings, the Assessing Officer examined the nature of activities carried on by the assessee and the claim of exemption under section 11.
5. The Assessing Officer observed that the assessee had generated substantial receipts from activities such as letting out of hall, royalty from decorators, operation of flour mill and other similar activities. According to the Assessing Officer, such activities were in the nature of trade, commerce or business carried out on a regular and organised basis.
6. Before the Assessing Officer, the assessee submitted that it is a charitable trust engaged in activities for public welfare and that the receipts generated were incidental to its objects. It was contended that the activities carried out were not in the nature of business but were undertaken to support the charitable objectives of the trust. The assessee further contended that it had duly applied its income towards charitable purposes and was therefore entitled to exemption under section 11. It was also submitted that the provisions of section 2(15) were not attracted as there was no profit motive and the activities were not carried out in a commercial manner. However, the Assessing Officer was not satisfied with the explanation furnished and proceeded to deny the exemption.
7. The Assessing Officer held that the assessee falls within the category of —advancement of any other object of general public utility” and that the proviso to section 2(15) of the Act was attracted inasmuch as the assessee was engaged in commercial activities for consideration. Consequently, by invoking section 13(8), the Assessing Officer denied exemption under section 11 of the Act.
8. Having denied exemption under section 11, the Assessing Officer proceeded to compute the income of the assessee under normal provisions as detailed below:
Particulars A.Y. 2014-15 (Rs.) A.Y. 2015-16 (Rs.)
Rent income as per computation (-) 1,37,031/- 43,12,998/-
Income from Other Sources
Bank interest 34,26,685/- 36,47,663/-
Life Membership fee 1,80,000/- 2,00,500/-
Corpus 11,50,000/- 6,47,000/-
Specific object 10,555/- 25,000/-
Donation 9,700/- 14,745/-
Other income / net income 2,21,679/- 7,17,920/-
Other surplus 6,90,513/- 6,23,818/-
Total (Income from other sources) 56,89,132/- 58,76,646/-
Gross Total Income 55,52,101/- 1,01,89,644/-
Less: Expenses on administration
Depreciation 9,01,561/- —
Salary — 16,54,362/-
Establishment 9,47,986/- 15,68,291/-
Audit fee 84,270/- 84,270/-
Water tax — 1,17,425/-
Repairs & Maintenance — 18,42,595/-
Miscellaneous expenses 2,38,865/- —
Total expenses 12,22,696/- 52,66,943/-
Total Income 43,29,405/- 49,22,701/-
Rounded off 43,29,410/- 49,22,700/-

 

9. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). During the appellate proceedings, the learned CIT(A) granted multiple opportunities of being heard to the assessee. The assessee reiterated its submissions that it is a charitable trust and that the activities carried out are incidental to its objects.
10. The learned CIT(A), after considering the assessment order, submissions of the assessee and the material on record, recorded that the assessee had earned substantial receipts from activities such as hall rent, decorator charges, flour mill operations and other receipts, which were continuous and systematic in nature. The learned CIT(A) held that the assessee falls within the category of —advancement of any other object of general public utility” and that once such an entity carries on activities in the nature of trade, commerce or business for a consideration, the proviso to section 2(15) is attracted. It was further observed that the activities of the assessee were not incidental but constituted independent commercial operations generating significant revenue. The learned CIT(A) held that the element of profitmaking was evident and that the activities lacked the necessary element of altruism. Accordingly, the learned CIT(A) upheld the action of the Assessing Officer in invoking the proviso to section 2(15) and section 13(8), and consequently denying exemption under section 11.The learned CIT(A) further held that once exemption under section 11 is denied, the claims under sections 11(1)(a), 11(1)(d) and 11(2) automatically fail. The disallowance of expenditure incurred towards objects of the trust was also upheld. Thus, the appeals of the assessee were dismissed.
11. Aggrieved by the orders of the learned CIT(A), the assessee is in appeal before us and has raised the following grounds:
In ITA 7794/MUM/2025for A.Y. 2014-15
1. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO denying exemption u/s 11 of the Act to the appellant applying the proviso to section 2(15) and section 13(8) of the Act.
2. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO denying claim of the appellant that income to the extent of Rs. 1,00,894/- is exempt u/s 11(1)(a) of the Act.
3. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO denying claim of the appellant that income to the extent of Rs. 13,40,555/- is exempt u/s 11(1)(d) of the Act.
4. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO disallowing the following expenses as deduction in computing the total income of the appellant:
i. Addition to Fixed Assets of Rs.1,36,000/-
ii. Salaries of Rs.15,31,190/-
iii. Water Tax of Rs.1,41,775/-
iv. Repairs & Maintenance of Rs.6,97,701/-
v. Expenses on Objects of the trust of Rs.16,86,627/-“
5. The appellant previously to add alter or amend any of the grounds of appeal prior to or at the time of hearing.”
In ITA 7795/MUM/2025 for A.Y. 2015-16
1. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO denying exemption u/s 11 of the Act to the appellant applying the proviso to section 2(15) and section 13(8) of the Act.
2. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO denying claim of the appellant that income to the extent of Rs. 6,07,530/- is exempt u/s 11(1)(a) of the Act.
3. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO denying claim of the appellant that income to the extent of Rs. 8,72,500/- is exempt u/s 11(1)(d) of the Act.
4. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO denying claim of the appellant that income to the extent of Rs. 23,20,308/- is exempt u/s 11(2) of Act.
5. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO disallowing expenses on objects of the appellant of Rs.11,22,863/-.
6. The learned Commissioner of Income Tax (Appeals) erred in confirming the order of the learned AO charging tax on total income at flat rate of 30 percent.
7. The appellant previously to add alter or amend any of the grounds of appeal prior to or at the time of hearing.
12. During the course of hearing before us, the learned Authorised Representative(AR) reiterated the factual background of the case and submitted that a perusal of the income components clearly demonstrates that the activities characterized by the Assessing Officer as being in the nature of trade, commerce or business do not, in fact, generate substantial income. The learned AR contended that such alleged commercial activities either result in losses or yield only insignificant revenue, and therefore cannot be regarded as activities carried out with a profit motive or in the nature of business.
13. Inviting specific reference to the Income Expenditure Account, the learned AR submitted that the predominant source of income of the assessee is rental income derived from immovable property owned by the trust. It was further submitted that the said property constitutes a valid mode of investment under section 11(5)(x) of the Act and is held as property under trust. Accordingly, it was contended that the major income of the assessee is derived from property held under trust and not from any independent commercial activity. The learned AR emphasised that such income cannot be brought within the ambit of the proviso to section 2(15) of the Act.
14. The learned AR also invited our attention to the findings recorded by the Assessing Officer in para 4.21 to 4.23 of the assessment order, wherein the Assessing Officer has treated the activities of the assessee as commercial in nature. It was submitted that the Assessing Officer has proceeded on a generalised understanding of the term —business” and has failed to appreciate the actual composition of income.
15. It was thus contended that the provisions of proviso to section 2(15) have been wrongly invoked and the denial of exemption under section 11 is unsustainable on facts as well as in law.
16. The learned AR further placed reliance on the decision of the Co-ordinate Bench of the Tribunal in the case of Bombay Presidency Golf Club Ltd. v. ITO (Exemptions) (Mumbai) , wherein the issue relating to applicability of the proviso to section 2(15) in respect of interest income earned on deposits made in compliance with section 11(5) was considered. The learned AR submitted that the Co-ordinate Bench, after detailed consideration, held that the act of depositing surplus funds in scheduled banks in accordance with section 11(5) and earning interest thereon does not constitute an activity in the nature of trade, commerce or business and, therefore, the proviso to section 2(15) is not attracted.
17. The learned AR also submitted that the aforesaid decision of the Co-ordinate Bench has been affirmed by the Hon’ble Bombay High Court in the case of CIT (Exemptions) v. Bombay Presidency Gold Club Ltd. (Bombay), wherein the Hon’ble High Court upheld the view of the Tribunal and held that where the dominant object of the assessee is charitable and there is no element of trade, commerce or business, the proviso to section 2(15) would not be attracted.
18. The learned AR further placed reliance on the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case in ITA Nos. 2252 & 2253/Mum/2017 and ITA No. 727/Mum/2019 for assessment years 2012-13, 2011-12 and 2009-10.The learned AR submitted that in the aforesaid decision, the Co-ordinate Bench had examined an identical issue relating to denial of exemption under section 11 by invoking the proviso to section 2(15) of the Act. It was submitted that the Co-ordinate Bench, after considering the facts and the manner in which the Assessing Officer had proceeded, found that the lower authorities had not properly examined the application of income and had focused only on the source of receipts. The learned AR further submitted that even in the earlier years, including the years which were the subject matter of adjudication before the Coordinate Bench in assessee’s own case, the Assessing Officer has not doubted the genuineness of the expenditure incurred by the assessee on its activities. It was contended that there is no finding recorded by the Assessing Officer to the effect that the expenditure claimed by the assessee is not incurred for the objects of the trust or that the activities of the assessee are not carried out in furtherance of its stated objects. The learned AR emphasised that the Assessing Officer has also not recorded any adverse observation to the effect that the assessee has not carried out any charitable activities during the year. It was submitted that in the absence of any such finding, the denial of exemption under section 11 merely on the basis of characterization of certain receipts as commercial in nature is unsustainable.
19. It was thus contended that once the application of income towards the objects of the trust is not disputed and the activities of the assessee are not found to be non-genuine, the provisions of section 11 cannot be denied by invoking the proviso to section 2(15) without proper examination of the overall factual matrix.
20. The learned Departmental Representative, on the other hand, strongly relied upon the orders of the Assessing Officer as well as the learned CIT(A).
21. We have carefully considered the rival submissions, perused the orders of the lower authorities and the material placed on record. The issue arising for our consideration is whether the assessee is entitled to exemption under section 11 of the Act, or whether the same has been rightly denied by invoking the proviso to section 2(15) of the Act.
22. The Assessing Officer has denied exemption primarily on the ground that the activities carried out by the assessee are in the nature of trade, commerce or business, and therefore fall within the mischief of the proviso to section 2(15) of the Act.
23. It is a settled position of law that the proviso to section 2(15) applies only where the activity in the nature of advancement of any other object of general public utility is carried out in the nature of trade, commerce or business or involves rendering of service in relation thereto for a consideration. The dominant purpose test continues to hold the field, and the nature of activity has to be examined in the overall factual matrix.
24. In the present case, we find that the Assessing Officer has proceeded primarily on the basis of the nature of receipts, without examining the true character of the activities in the context of the objects of the trust and without appreciating the application of income.
25. The Assessing Officer has concluded that the assessee is engaged in commercial activities mainly on account of receipts from letting out of halls, royalty and other incidental income. However, from the material placed on record, it is evident that the major source of income of the assessee is rental income derived from immovable property owned by the trust, the said property constitutes property held under trust and is a permitted mode of investment under section 11(5)(x) of the Act and the incidental receipts, such as royalty and other surplus, are either ancillary to the main object or insignificant in comparison to the overall receipts.
26. In our considered view, merely because income is generated from letting out property or allied activities such as flour mill, the same cannot ipso facto be regarded as an activity in the nature of trade, commerce or business. The character of the activity has to be seen in the context of the objects of the trust and not in isolation. The learned AR has rightly contended that the investment in immovable property is specifically permitted under section 11(5)(x) of the Act. Once the legislature itself recognizes investment in immovable property as a valid mode of deployment of funds of a charitable trust, the income arising therefrom, in the nature of rent, cannot be treated as commercial activity per se. Thus, the primary source of income being rent from property held under trust along with interest income reinforces the claim of the assessee that the receipts are in the nature of income from property held under trust and not from any independent business activity.
27. A crucial aspect which has been overlooked by the Assessing Officer is the application of income by the assessee. From the Income and Expenditure Account placed on record, it is evident that more than 85% of the income has been applied towards the objects of the trust. There is no adverse finding recorded either by the Assessing Officer or by the learned CIT(A) to suggest that the expenditure incurred is not genuine or not in furtherance of the objects of the trust. In our view, the application of income is a vital test for determining the charitable nature of the activities. The Assessing Officer has failed to examine this aspect and has instead proceeded solely on the basis of the nature of receipts. Such an approach is contrary to the scheme of section 11 read with section 2(15).
28. We find merit in the contention of the assessee that the issue is squarely covered by judicial precedents. In the case relied upon by the learned AR, the Co-ordinate Bench in assessee’s own case has categorically held that the applicability of the proviso to section 2(15) cannot be determined merely on the basis of receipts, and that the application of income and the overall activities of the assessee are required to be examined. The Coordinate Bench, in that case, restored the matter to the file of the Assessing Officer with the following observation:
“The Assessing Officer has not verified and examined the aspect of application of income. the application of income generated by the assessee from these activities is relevant to decide whether first proviso to section 2(15) would be applicable.”
29. Further, the Hon’ble jurisdictional High Court in the case of Bombay Presidency Golf Club Ltd. has upheld the principle that income earned from deployment of funds in permitted modes under section 11(5) cannot be regarded as business income so as to attract the proviso to section 2(15).
30. It is an undisputed position on record that the predominant source of income of the assessee is rental income derived from immovable property held under trust and interest income, which is a permissible mode of investment under section 11(5) of the Act. Further, there is no finding recorded by the Assessing Officer that the activities carried out by the assessee are not genuine or are not in furtherance of its stated objects. Equally, the application of income towards charitable purposes has not been disputed, and from the Income and Expenditure Account it is evident that more than 85% of the income has been applied for the objects of the trust. The Assessing Officer has proceeded merely on the basis of the nature and quantum of receipts without examining the dominant purpose of the assessee or the application of income. Such an approach is contrary to the settled legal position governing the interpretation of section 2(15) and section 11 of the Act.
31. In our considered opinion, the receipts from letting out of property and other incidental activities, in the facts of the present case, cannot be regarded as activities in the nature of trade, commerce or business so as to attract the proviso to section 2(15) of the Act. The predominant object of the assessee continues to remain charitable, and the conditions prescribed under section 11 stand duly satisfied.
32. Accordingly, we hold that the assessee is entitled to exemption under section 11 of the Act. The additions made by the Assessing Officer and sustained by the learned CIT(A) are directed to be deleted.
33. In the result, the appeals of the assessee are allowed.