Trust Net Income Taxed Not Gross 2026 ITAT Ruling Section 11

What Happened?

The Hyderabad Income Tax Appellate Tribunal (ITAT) has issued an important ruling that protects the interests of trust assessees. The tribunal held that even when a trust cannot claim exemption under Section 11 of the Income Tax Act 2025, only the net income (gross receipts minus allowable deductions) can be taxed—not the entire gross receipts. This judgment was delivered in July 2026 and has immediate implications for trusts under assessment in AY 2025-26 and AY 2026-27.

The case was remanded back to the Assessing Officer (AO) to recalculate the taxable income on this basis, meaning the trust will get relief from the inflated tax demand that included gross receipts as income.

Background & Legal Context

Section 11 of Income Tax Act 2025 – Religious & Charitable Exemption:

Under Section 11 of the Income Tax Act 2025, income derived from property held in trust wholly for religious or charitable purposes is exempt from tax, subject to certain conditions. However, this exemption is not automatic—the trust must satisfy multiple conditions:

• The trust deed must clearly state the purpose is religious or charitable
• The trust must not have violated the terms in the previous year
• The income must be applied for the stated purpose
• At least 85% of income must be spent on the charitable purpose in the year itself (or accumulated for future use within a specified period)

When Section 11 Exemption Fails:

If a trust fails to meet even one condition, it loses the Section 11 exemption entirely. In such cases, the question arises: should the entire gross receipts be taxed, or only the net income after deducting expenses?

The Income Tax Act 2025 (similar to the 1961 Act) under Section 28 onwards provides that income from other sources should be computed by deducting the expenses incurred to earn that income. The Hyderabad ITAT has now clarified that this principle applies even to trusts that lose Section 11 exemption.

The ITAT Ruling Explained

The tribunal reasoned as follows:

• First principle: No income tax law permits taxing gross receipts without allowable deductions. This would be arbitrary and against the principles of income taxation.
• Second principle: Even if a trust does not qualify under Section 11, it is still a taxable person under the Income Tax Act. As a taxable person, it is entitled to deduct legitimate expenses incurred to earn that income.
• Third principle: The AO cannot simply ignore expenses and levy tax on gross receipts as a punishment for losing Section 11 exemption. The absence of exemption does not mean absence of deductions.
• Fourth principle: Section 28 onwards of the IT Act 2025 apply to all income of all persons unless specifically excluded. Trusts are not excluded from this basic principle.

The practical impact: If a trust earns ₹100 lakhs in donations but spends ₹60 lakhs on administrative expenses, staff salaries, and other operating costs, only ₹40 lakhs is taxable income—even if the trust loses Section 11 exemption.

What Does This Mean for You?

If You Are a Trustee or Run a Trust:

• Relief from Inflated Tax Demands: If your trust was assessed by the AO on gross receipts (treating them as 100% taxable), this ruling gives you grounds to file an appeal or revision. You can now claim deductions for all legitimate expenses incurred in managing the trust and generating that income.
• Maintain Proper Records: The ruling emphasizes the importance of maintaining clear records of all expenses. You must have supporting documents (bills, invoices, salary slips, bank statements) for every expense you claim.
• Types of Deductible Expenses: The following expenses should now be allowed even if Section 11 exemption is lost:
  • Staff salaries and benefits
  • Rent for office/property
  • Utilities (electricity, water, internet)
  • Administrative expenses
  • Professional fees (auditor, CA, lawyer)
  • Insurance and maintenance
  • Travel and conveyance
  • Medical expenses (if healthcare trust)
  • Depreciation on assets used by the trust
• Applicable to AY 2025-26 and Onwards: This ruling can be cited in all pending assessments and appeals. If you have already paid tax on gross receipts in previous years, you may consider filing a revision petition under Section 264 of IT Act 2025 or pursuing remedies available under law.

For Tax Officers & Assessing Authorities:

• The ruling clarifies that even after rejecting Section 11 exemption, the AO must allow deductions under Section 28 onwards
• Gross receipts cannot be equated with taxable income
• The burden is on the AO to properly compute net income with deductions

What Should You Do Now?

Immediate Action Items:

1. Review Your Last 3-5 Tax Assessments: If your trust was taxed on gross receipts or with minimal deductions after losing Section 11 exemption, you have grounds for relief.
2. Compile Expense Documentation: Gather all bills, invoices, bank statements, and salary records for expenses claimed in those years.
3. File a Revision Petition (Section 264, IT Act 2025): If the assessment order is final, file a revision petition with the CIT citing this ITAT judgment. The CIT can revise the order if it is erroneous and prejudicial to the interest of the revenue (or in this case, the assessee).
4. Cite This Judgment in Appeals: If your appeal is pending before the ITAT, immediately file a supplementary memo citing this Hyderabad ITAT judgment.
5. Keep Detailed Expense Records Going Forward: From AY 2025-26 onwards, maintain separate records of:
   • Expenses directly related to earning income (donations, grants, fundraising)
   • Expenses incurred in administration and operations
   • Capital expenses (to be depreciated)
6. File Accurate ITR: In your ITR, clearly show gross receipts and deduct each category of expense separately. This creates a clear audit trail and reduces chances of dispute.
7. Seek Expert Review: If your trust has complex income sources or significant expenses, get a professional CA to review your trust accounting and tax position.

Key Takeaways

• Game-Changer for Trusts: This July 2026 ITAT ruling clarifies that net income—not gross receipts—is taxable for trusts, even without Section 11 exemption. This is a significant protection for trust assessees.
• Deductions Are Rights, Not Favors: The loss of Section 11 exemption does not strip a trust of its right to claim deductions under Section 28 onwards of the IT Act 2025. These are fundamental principles of income taxation applicable to all persons.
• Documentation is Critical: To benefit from this ruling, you must maintain detailed, organized records of all expenses. Without proof, the deduction cannot be claimed.
• Applicable to AY 2025-26 and Beyond: This ruling applies to current assessments and can be cited in pending appeals and revision petitions for earlier years.
• Consult Before Acting: Every trust situation is unique. Before filing any appeal or revision petition, consult with a tax professional to assess your specific situation and likely recovery amount.

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