LAHORE: Tax authorities are allegedly not treating income from interest on bank deposits of welfare trusts as business income. Instead, they deal it as income from other sources, which is different from the true spirit of the law, said sources.

In case the dispute relates to determining whether its business income or income from other sources, the objectives, functions and memorandum of association or foundation documents should be considered before determining their income status, they said.

Furthermore, they added once the primary business and functions are verified, the business activities need to be assessed to see it in the perspective of the declared objects and functions.

According to the sources, the appellate forums have time and again declared that the interest from bank accounts was in fact business income as the welfare organisations with business nomenclature are usually involved in the business of investing their surplus income to generate income for welfare projects.

It may be noted that the income tax law exempts such income if being assessed as income from business. Most of the welfare trusts treat their interest from bank deposits as income from business to avail tax exemption, which otherwise is not permissible in case it is treated as income from other sources.

The tax authorities challenge the treatment of interest from bank deposits as income from business and take them as income from other sources to create tax liability against the trusts, which leads to lengthy litigations at the end of the day.

Most of such welfare trusts derive income from business activities for undertaking welfare projects. Fauji Foundation is one example of such welfare trusts, which essentially utilizes income earned from its investment for the collective benefit of the beneficiaries of the Foundation, said the sources, adding that it is the business of the Foundation to invest in business to generate income for the purposes of its welfare projects.

Such Foundations can invest in industrial undertakings or otherwise and any surplus income from these undertakings are utilized for the collective benefit. Therefore, interest from bank deposits of such Foundations is also surplus income used to carry out the objectives of the Foundation.

According to the sources, in most of the cases, such welfare trusts invest money to earn money for welfare projects, which should be duly considered so as to determine their objects, functions and their memorandums of association or foundation documents.

However, the tax department does not take into consideration their actual work, their tax returns and how they treat their income while determining the nature of their income.

Copyright Business Recorder, 2023