|Section 2(15) of Income-tax Act, 1961 which defines “Charitable Purpose”, has a provisos which say.
“Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.”
“Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty-five lakh rupees or less in the year.” Limit of "twenty-five lakh rupees" is applicable from assessment year 2010-13.
Now it is an admitted fact, that most of the old Charitable Trusts who have been enjoying all the benefits are having places like Dharamshala-inns-guest houses at Pilgrims Places like Badrikeshwar, etc. and allow the Yatris to occupy these places during the course of their journey at very nominal charges to meet the expenses.
Similarly there are Marriage Halls – Wadis – Community Halls available for marriages and other social and religious places which are given to middle class families at nominal charges for performing marriages and for the accommodation of guests – coming to city for marriage. Further several drama halls are also owned by Trusts.
Now the query is –
Say the total receipt during and financial year exceeds the minimum prescribed limit, then what shall be consequences under the following circumstances:–
1) Whether sections 80G-12-12A facilities available at present shall be cancelled.
2) If total receipts from the above activities is less than the expenses incurred on the Maintenance of Dharmashala, etc., then what shall be position of Income Tax liability
3) If there is clear profit in the above income and the surplus is utilized for the other Objects of the Trust like granting scholarship – distribution of books to poor students OR financial aid to widow, etc. then ‘Whether surplus from this activity is liable to tax and if so what rate?’
|On these points, the Central Board Direct Taxes vide Circular No. 11/2008 dated December 11, 2008 has clarified as under:
“1) Section 2(15) of the Income-tax Act, 1961 (‘Act’) defines "Charitable purpose” to include the following:-
i) Relief of the poor
iii) Medical relief, and
iv) The advancement of any other object of general public utility.
An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10 (23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of ‘charitable purpose’.
Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the ‘advancement of any other objects of general public utility’ shall not be a charitable purpose if it involves the carrying on of –
a) any activity in the nature of trade, commerce or business ; or
b) any activity of rendering any service in relation to any trade, commerce or business;
for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity.
2) The following implications arise from the amendment.
2.1) The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education of medical relief.
Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of commercial activities.
2.2) 'Relief of the poor' encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that :-
i) the business should be incidental to the attainment of the objectives of the entity and,
ii) separate books of account should be maintained in respect of such business.
Similarly, entities whose objects is ‘education’ or medical relief would also continue to be eligible for exemption as charitable even if they incidentally carry on a commercial activity subject to the conditions mentioned above.
3) The newly inserted proviso to section 2(15) will apply only to entities whose purpose is ‘advancement of any other object of general public utility’ i.e., the fourth limb of the definition of ‘charitable purpose’ contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.
3.1) There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility’. Under the principal of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in proviso to section 2(15).
3.2) In the final analysis, however, whether the assessee has for its object ‘the advancement of any other object of general public utility’ is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of ‘general public utility’ that will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assesses, who claim that their objects is ‘ charitable purpose’ within the meaning of section 2(15), would be well advised to eschew any activity which is in nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce, or business.”
Thus from the aforesaid circular it is clear that, if a trust or institution carries on any commercial activity which is incidental to the first three limbs of section 2(15) i.e. relief of the poor, education or medical relief and complies with the conditions mentioned under section 11 or seventh proviso to section 10 (23C), then such trust or institution will not lose the exemption under section 11.
Even if the trust or institution carries on business or any other activity for a cess or fee or any other consideration, and aggregate value of the receipts from such activities is less than the account prescribed under second proviso to section 2(15) for ‘advancement of any other object of general public utility’ would not also lose the exemption under section 11 or section 10 (23C) of the Act.
However if aggregate value of the receipts from such activities exceeds the prescribed limit mentioned in second proviso to section 2(15), then, the trust or institution would lose the exemption under section 10 (23) or section 11 of the Act and in consequence will not be entitled to claim the benefit under section 80 G of the Income-tax Act, 1961. Further, such trust or institution would require fresh registration under section 12 AA of the Act, in the subsequent year.
Further, excess of expenditure over Income would be allowed to set off in subsequent year as application of income on the basis of following judgments :
i) Gonrindu Naicker Estate vs. ADIT [248 ITR 368 (Mad.)]
ii) CIT vs. Matriseva Trust [242 ITR 20 (Mad.)]
iii) CIT vs. Shri Plot Swetambar Murti Pujak Jain Mandal [ 211 ITR 293 (Guj.)]
iv) CIT vs. Maharana of Mewar Charitable Foundation [164 ITR 439 (Raj.)]
|CA. H. N. Motiwalla
|10(23), 11, 12, 12A, 2(15), 80G
|charitable purpose, general public utility, Objects of the Trust
Opinion Of Eminent Legal Luminaries On Controversial Issues
Whether Surplus From This Activity Is Liable to tax In Case of Charitable Trust?
Credit: Several of the queries and answers are reproduced with permission from the AIFTP Journal. We thank AIFTP for generously allowing us to host their research material.
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