As you are aware that provisions of Section 2(15) define "the Charitable Purpose" under Income Tax Act, 1961 as;
SECTION 2(15) OF THE INCOME TAX ACT, 1961
The expression "charitable purpose" has been defined under Section 2(15) of the Income Tax Act 1961 to include:
(a) relief of the poor,
(b) education,
(c) medical relief,
(d) preservation of environment (including watersheds, forests and wild life)
(e) preservation of monuments or places or objects of artistic or historic interest and
(f) advancement of any other object of public utility
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, unless-
(i) Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(ii) The aggregate receipt from such activity or activities during the previous year, do not exceed twenty percent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.
(iii) From the above definition, the question arises as to what is an object of "general public activity" This expression has not been defined anywhere in the Act.
The Supreme Court has observed in the of CIT vs. Gujarat Maritimes Board (2007) 295 ITR 561 that the Gujarat Maritime Board was established for the predominate purpose of development of minor ports within the State of Gujarat and there was no profit motive. The Assessee, Gujarat Maritime Board, was under a legal obligation to apply its income which was directly and substantially from the business held under trust for the development of minor ports in Gujarat.
Therefore, Supreme Court held that the asessee was entitled to be registered as "charitable trust" under section 12A of the Act. Therefore, in effect, "advancement of any other object of general public utility" would continue to be a "charitable purpose", if the activity in the nature of trade, commerce, or business is undertaken in the course of actual carrying out of such advancement of any other object of general public utility and the aggregate receipts from any activity in the nature of trade, commerce or business, or any activity of rendering service in relation to any trade, commerce or business does not exceed 20% of the total receipts of the trust or institution undertaking such activities, for the previous year.
The Finance Act, 2008 has inserted a provision in the definition of "Charitable Purpose" under Section 2(15). Which was subsequently amended by the Finance Acts, 2010 ,2011 2015. After these amendments "Advancement of any other object of general public utility" shall not be considered as "Charitable Purpose", if to 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.
These restrictions however not applicable if total receipts from any activity in the nature of trade, commerce or business, or any activity of rendering of any service in relation to trade, commerce or business for cess or fee does not exceed the limits given below;
- For AY 2009-10 to 2011-12 - Rs. 10.00 lakhs during relevant previous year.
- For AY 2012-13 to 2015-16 - Rs. 25.00 lakhs during relevant previous year.
- For AY 2016-17 onwards - 20% of the total receipts of the relevant previous year the entity.
GENERAL TEST UNDER SECTION 2(15)
(i) It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration ("cess, or fee, or any other consideration");
(ii) However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that
(a) the activities of trade, commerce or business are connected ("actual carrying out…" inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and
(b) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016);
(iii) Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be "trade, commerce, or business" or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of "cess, or fee, or any other consideration" towards "trade, commerce or business". In this regard, the Court has clarified through illustrations what kind of services or goods provided on cost or nominal basiswould normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment.
(iv) Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached. Similarly, the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), reaffirm this interpretation and bring uniformity across the statutory provisions.
PLEASE NOTE THAT:
The CBDT has clarified that above restrictions do not apply in respect of below mentioned Charitable Purposes;
SECTION 2(15) OF THE INCOME TAX ACT, 1961
The expression "charitable purpose" has been defined under Section 2(15) of the Income Tax Act 1961 to include:
(a) relief of the poor,
(b) education,
(c) medical relief,
(d) preservation of environment (including watersheds, forests and wildlife)
(e) preservation of monuments or places or objects of artistic or historic interest.
In case of above-mentioned purposes, eventhough there involve some commercial activities due to which receipts exceed the limited provided in above provisions, then also these activities are considered as "Charitable Purposes".
LET’S DISCUSS- Relief of poor; - encompasses a wide range of objects for the welfare of economically and socially disadvantaged or needy. Therefore, it includes within its ambit purposes such as relief to destitute, orphans or handicapped, disadvantaged women, children, small and marginal farmers, beggars, indigent artists, and senior citizens in need of aid. The entities who have these objects are eligible for exemption even if they incidentally carrying on commercial activity even if receipt from such activities exceeds the limits given in above table.
However, the conditions stipulated under section 11(4) or Section 10(23C) should be satisfied. These conditions are;
1. The business should be incidental to the attainment of objectives of the entity, and
2. Separate books of account should be maintained in respect of such business.
PLEASE NOTE THAT
The same rule is applicable to those entities whose object is "Education" or "Yoga" or "Medical Relief" or "Preservation of environment" and "Preservation of Monuments or Places or object of artistic or historical interest", will continue to be eligible for exemption as charitable institution even if they incidentally carry on commercial activity and even if receipts from commercial activities exceed the limits given in the table mentioned above.
However, the conditions stipulated under section 11(4) or Section 10(23C) should be satisfied. These conditions are;
1. The business should be incidental to attainment of objectives of the entity, and
2. Separate books of account should be maintained in respect of such business.
ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY; Cannot be carried on Commercial Basis
The proviso of inserted in Section 2(15) by Finance Act,2008 further modified by Finance Acts ,2010, 2011 and 2015 applies to entities whose purpose is "Advancement of any other object of general public utility", i.e., Section 2(15)(f) of the definition of "Charitable Purpose". Hence such entities are not eligible for claiming exemption under Section 11, if they carry on any activity of trade, commerce or business or rendering service in the course of trade, commerce or business for a cess or fee and such receipts exceed the threshold mentioned in the table given above.
PLEASE NOTE THAT:
There are industry and trade associations who claim exemption u/s. 11 on the ground that their object is for charitable purpose as these covered under Section 2(15)(f) i.e.,"Advancement of any other object of general public utility". Under principle of Mutuality, if trading takes place between persons who are associated together, contribute to a common fund for the financing of some venture or object and this respect have no dealings or relations with any outside body, then surplus returned to person forming such association is not chargeable to tax. In such cases there must be complete identity between the contributors and the participants.
Thus "where industry or trade association claim both to be charitable institutions as well as mutual organisation and their activities are restricted to contributions from and participants of only their members, these would not fall under the preview of inserted proviso to the Section 2(15) owing to Principal of Mutuality.
If an entity is dealing with outsiders also then their eligibility will be considered on the basis of proviso inserted u/s. 2(15) and table given above. They will not allow claiming exemption if receipts from trade, commerce or business exceed 20% of the total receipts of the entity during the relevant previous year.
CONCLUSION
From above it is clear that is an 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 (whose total receipts is more than the limit given in the above table), not entitled to claim that its object is charitable purpose. In this case the object of "General Public Utility" will be only will be considered as a mask or a device by the entity to hide the main purpose of trade, commerce or business behind the Charitable Purpose.
Assistant Commissioner of Income Tax vs Ahmedabad Urban Development Authority -Supreme Court of India: 2022 Live Law (SC) 865
THE SUPREME COURT, IN THIS CASE, HELD THAT entities created with the object of advancing general public utility cannot seek exemption under the Income Tax Act 1961 under the head "charitable purposes" if they are engaging in any trade, business, commerce or providing any service for any consideration. However, in the course of carrying out the general public utility, the assessee can engage in incidental trade or business or provide services for consideration and can generate profits. If the receipts generated out of such incidental activities are within the quantified limits, the trusts are entitled to seek Income Tax Exemption.
THE FOLLOWING ARE THE IMPORTANT CONCLUSIONS FROM THE JUDGMENT
An assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration ("cess, or fee, or any other consideration");
However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade commerce or business or provide services in relation thereto for consideration;
Provided that
(i) the activities of trade, commerce or business are connected ("actual carrying out…" inserted w.e.f. 01.04.2016) to the achievement of its objects of General Public Utility; and
(ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016);
Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominal above cost, cannot be considered to be "trade, commerce, or business" or any services in relation thereto. It is only when the charges are markedly or any other consideration" towards "trade, commerce or business".
DISCLAIMER: The article presented here is only for sharing information and knowledge with the readers. The views are personal and in case of necessity do consult with tax professionals for more understanding and clarity on subject matter.
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