TAX-RATE DETERMINATION FOR CHARITABLE TRUSTS NOT CLAIMING SECTION 11 BENEFIT

 Whether Normal Slab Rates Apply or Maximum Marginal Rate (MMR) as AOP/BOI

Case: Vindhya Trust v. DCIT, ITAT Delhi (2025)

ITA Nos. 2121 & 2122/Del/2025 | Order dated 28 November 2025

 

1. Core Issue:-
Where a charitable trust does not avail exemption under section 11, and is therefore taxable like any other taxable entity, should its income be taxed at the normal slab rates applicable to an AOP, or at the Maximum Marginal Rate (MMR) by treating it as an AOP/BOI with “indeterminate shares”?

The AO/CPC had taxed the trust at a flat 30% MMR, with surcharge @ 37%, by invoking the AOP/BOI rule of “unknown member shares.”

The assessee argued that:
It is a charitable trust,
Its members do not have any beneficial share in its income,
It is not claiming section 11 relief,
Therefore, normal AOP slab rates (and lower surcharge) must apply.


2. Legal Framework

2.1 Section 167A & MMR Regime for AOPs

MMR applies only where:
The shares of members are indeterminate or unknown, and
Members are beneficially entitled to the income of the AOP.
If members are not entitled to any share, MMR is not attracted.

2.2 CBDT Circular No. 320 dated 11-01-1982:-key clarification by the CBDT:

Registered societies, trade associations, clubs, charitable or religious trusts where members/trustees are not entitled to any share in the income—shall NOT be taxed at MMR.

Such entities must be taxed at normal slab rates applicable to AOPs.

This circular remains binding on the Department.

 2.3 Structure of Charitable Trusts

Under trust law:
Trustees hold income in fiduciary capacity;
Members of a charitable trust do not have individual beneficial rights in its income;
The entire income is applied to impersonal, public objects.
Hence, the “member-share” logic of an AOP does not apply to charitable trusts.

 

3. ITAT Delhi’s Findings (Vindhya Trust)

3.1 CPC’s Adjustment under s.143(1) Unjustified

The CPC mechanically applied 30% MMR,
Without considering trust status, CBDT circular, or nature of the assessee.
No opportunity was granted—violating natural justice.

3.2 CIT(A)’s Approach Incorrect

CIT(A) treated the assessee like a typical AOP where shares had to be “determined or verified.”

 The ITAT held this approach as misdirected, because:
Charitable trusts do not distribute income to members.
Determinate share of members” is irrelevant in such cases.

3.3 CBDT Circular No. 320 is Fully Applicable

The Tribunal relied heavily on CBDT Circular 320, holding:
The assessee fits squarely within the categories mentioned (charitable trust with no member entitlement).
Therefore, MMR cannot be applied.

3.4 Tax to Be Levied at Normal Slab Rates:-The ITAT directed:
Apply normal slab rates for AOPs.
Apply surcharge as per slab-rate structure, not 37%.
Assessee’s entire appeal was allowed.

4. Precedents Relied Upon

The ITAT referred to contemporaneous rulings:
Rose Trust v. DCIT (2025)
Vindhya Trust (earlier year) – ITA 131/Del/2025
Both affirmed slab-rate taxation for trusts not claiming s.11.

5. Analytical Position of Law (Consolidated)

5.1 Charitable Trust ≠ Commercial AOP
Charitable trusts are non-profit entities and Do not distribute income to any member.Therefore, “member-share” test in s.167A cannot be applied.

5.2 Absence of Section 11 Claim Does Not Attract MMR
Once a trust chooses to forgo s.11, it becomes taxable like an AOP but not like an indeterminate-share AOP.

5.3 CBDT Circular 320 is Binding

The Circular explicitly removes charitable trusts from MMR applicability.

 5.4 CPC’s 143(1) Adjustment is Ultra Vires

Tax-rate determination involving legal interpretation cannot be adjusted under s.143(1). It is beyond the permitted scope of “arithmetical or apparent errors.

6. Final Conclusion

A charitable or religious trust not claiming section 11 is NOT automatically taxed at Maximum Marginal Rate.

Where the trustees or members do not have beneficial entitlement to the income, the trust must be assessed at normal slab rates applicable to AOPs, consistent with CBDT Circular No. 320.

ITAT Delhi (2025) confirmed this legal position and quashed the mechanical MMR levy by CPC.

Surcharge is also to be computed as per individual/AOP slab-based schedule, not at the punitive 37%

AI GENERATED PRECAUTIONS TO BE TAKEN BY PROFESSIONALS (FOR TRUSTS NOT CLAIMING SECTION 11)

1.         Ensure Correct Option in ITR

Select the appropriate status (Trust/AOP) and confirm that “Section 11 not claimed” is properly reflected to avoid automated MMR application.

2.         Clarify Beneficial Ownership in Deed

Trust deed should clearly state that trustees/members have no beneficial share in the income. This directly prevents MMR applicability under section 167A.

3.         Attach Explanation in Return Filing

Provide a note in ITR citing CBDT Circular No. 320 (11-01-1982) confirming that charitable trusts without member entitlements must be taxed at normal slab rates.

4.         Maintain Proper Documentation

Keep copies of trust deed, registration certificates, resolutions, and past assessments demonstrating tax treatment under slab rates.

5.         Check CPC Computation Carefully

CPC frequently applies MMR mechanically. Review intimation under section 143(1) to ensure:

– No wrongful 30% MMR applied

– No 37% surcharge

– Slab-based AOP rates correctly considered

6.         File Online Rectification (u/s 154) Promptly

In case of erroneous MMR application by CPC, file a rectification with supporting extracts citing Circular 320 and relevant ITAT rulings (Vindhya Trust, Rose Trust).

7.         Prepare for Possible Scrutiny Queries

AO may ask about “shares of members.” Clearly explain that charitable trusts do not distribute income to individuals; income is applied to public objects.

8.         Avoid Language Indicating “Members’ Benefit”

Any wording in trust deeds, minutes, or accounts suggesting personal benefit to trustees or members can trigger MMR concerns.

9.         Ensure Compliance with Other Trust Conditions

Even when not claiming section 11, maintain proper books under section 44AA, audit requirements under section 12A(1)(b) if earlier registered, and ensure no violation of trust objects.

10.       Preserve Case Law Support

Keep copies of relevant rulings (Vindhya Trust 2025, Rose Trust 2025) to substantiate slab-rate applicability during assessments or appeals.

11.       Substantiate Non-commercial Character

Maintain evidence that activities remain charitable and not profit-oriented to avoid reclassification as commercial AOP.

12.       Ensure Transparency in Application of Income

Proper disclosure of how income is applied to charitable objects strengthens the case against MMR applicability.