Dear Friends,
As you are aware subject to the provisions of Sections 60 to 63 , the income of a religious or charitable trust or institution , to the extent specified in the Act, is exempt from tax when certain prescribed conditions are fulfilled. The income fulfilling these conditions are even not included while calculating the total income of the trust/institution. [Section 11]
For claiming exemptions there should be a valid trust or there is a legal obligation, under hitch the income derived from the property held under such trust or legal obligation, is to be applied for religious or charitable purposes. If there is no trust nor any legal obligation , the income will not be exempt even if the whole of such income is applied to charitable or religious purposes. A mere creation of a trust for income is not sufficient, there must be a trust of the property out of which the income is revived before one can consider any exemption under Section 11.
SECTION 2(15) OF THE IT ACT,1961 Defines "Charitable Purpose" as;
The expression "charitable purpose" has been defined under Section 2(15) of the Act to include:
(a) relief of the poor;
(b) education;
(c) medical relief;
(d) preservation of environment (including water sheds, forests and wild life);
(e) preservation of monuments or places or objects of artistic or historic interest and ;
(f) the advancement of any other object of public utility.
The definition of "Charitable Purpose" includes "any other object of general public utility". Since this expression has not been defined in the Act,1961 any where.
In CIT Vs. Gujarat Maritime Board(2007) 295 ITR 561
The Supreme Court observed that the Gujarat Maritime Board was established for the predominant purpose of development of minor ports within the state of Gujarat, the management and control the Board was essentially with the State Government 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 ports in State of Gujarat. Therefore the Apex Court held that the assessee was entitled to be registered as "Charitable Trust"under Section 12A of the IT Act,1961.
After above decision various business entities claimed exemptions under provisions of Sections 10(23C) or Section 11 on the basis that they are Charitable Institutions. Their claim was based on the contention that they are engaged in the "Advancement of an object of general public utility"as it is included in the provisions of Section 2(15) of the IT Act,1961,while defining Charitable Purpose.
In CIT Vs. Madras Stock Exchange Ltd.(1981) 130 ITR 184
It was held that such a claim in respect of an activity carried out on commercial basis, goes against the basic intention of the provisions of Sections 10(23C) and 11 of the IT Act,1961. Since there were many decisions rendered in the past supporting the view that if unconnected business is held under a trust for promoting the object of "general public utility"and if profits are used for promotion such objects , the income thereof shall be exempt.
ADVANCEMENT OF ANY OBJECT OF GENERAL PUBLIC UTILITY WOULD NOT BE A CHARITABLE PURPOSE
In order to limit the ambit of the phrase "advancement of any other object of general public utility", section 2915) provides that "the advancement of any other object of general public utility"would 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 of any service in relation to any trade, commerce or business for fee or cess or any other consideration, irrespective of the nature of use or application of the income from such activity, or the retention of such come, by the concerned entity.
Thus "Advancement of any other object of General Public Utility", would not be a "Charitable Purpose", if it involves carrying on of any service in relation to any trade, commerce, or business or any other activity of rendering of any service in relation to any trade, commerce or business , for a fee or cess or any other consideration , irrespective of nature of use or application of the income from such activity or the retention of such income , by the concerned entity unless;
- Such activity 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 such activity or activities , during the previous year, does not exceed 20% of the total receipts of thee trust of institution undertaking such activity or activities, for the previous year.
"Advancement of any other object of general public utility"would continue to be "Charitable Purpose",only if the total receipt from 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 does not exceed 20% of the total receipts of the trust in the previous year and such activity is undertaken in the course of actual carrying out of such advancement of any other object of General Public Utility.
CIRCULAR NO. 11/2008 dated 19/12/2008- Exemption under Section 11 in case of an assessee claiming both to be Charitable Institution as well as Mutual Organisation
The provisions of 2(15) will apply only to entities whose purpose I advancement of any other object of general public utility i.e. the last 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) , 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.
There are industries and trade associations who claim exemption from tax under Section 11 on the ground that their objects are for Charitable Purpose as they are covered under "any other object of general public utility". Under principle 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 wit any outside body , then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must b complete identity between the contributors and the participants.
Therefore, where industry or trade association claim to be both charitable institution as well as mutual organisation and their activities are restricted to contribution from and participation of only their members, these would not fall within the purview of the proviso to Section 2(15) owing to principal of mutuality. However , if such organisations have dealing with non-members , their claim to be Charitable Organisation would be governed by the additional conditions stipulated in the proviso to Section 2(15).
Newly inserted proviso to Section 2(15) of Income tax Act
As per the inserted new 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 or 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.
'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 object is 'education' or 'medical relief' would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.
Applicability of newly inserted proviso to Section 2(15)
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.
There are industry and trade associations who claim exemption from tax u/s 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility'.
PLEASE NOTE THAT
If such assessee is engaged in any activity in the nature trade, commerce or business or renders any service in relation to trade, commerce or business , it would. Ot be entitled to claim that its object is charitable. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of services. Each case should be decided on its separate facts and circumstances and there will be no generalisation of crietaria in this regards.
CIRCULAR NO. 395 dated 24/09/1984
Promotion of sports and games is considered to be a charitable purpose within the meaning of Section 2(15). Therefore , a association or institution engaged in the promotion of games and sports can claim exemption under Section 11 even if it is not approved under Section 10(23C).
A trust will be treated as a Charitable Trust under Section 2(15) even if its object involve the carrying on of an activity for profit. Such a trust will not be denied exemption under Section 11 on the ground that its objects are non-charitable.
To serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind or all persons in a particular country or state. It is sufficient if the intention to benefit a section of the public, as distinguished from a specified individual, is present. However, the section of the community sought to be benefited must be sufficiently defined and identifiable by some common quality of a public or impersonal nature.
An institution set up with the object of promoting trade or commerce is a charitable institution as it promotes common good through enhancement of business. However, an institution which merely regulates or enhances the business of its members, is not a charitable institution[ subject to compliance of CIRCULAR NO. 11/2008 dated 19/12/2008].
Thus, where the proprietors of hotels formed an association for obtaining articles on permit for supplying them to members and protecting their business interest, the association was held not to be a charitable one for the purpose of the Act,1961.
- Thiagarar Charities Vs. Additional CIT (1997) 225 ITR 1010- observed that "Cottage Industry is associated with the idea of a small , simple enterprise or industry in which employees work in their own houses or in a small place, gathered together for the purpose, using their own equipment’s and is usually found in rural areas or so carried on, by the poorer section of the society. In substance , the activity of Rural Reconstruction and Upliftment of masses through Cottage Industry is to afford relief to the poor and consequently, it is a charitable purpose.
- The welfare of industrial workers with a stipulation that the workers of settlor of trust have preference over others would also constitute "Charitable Purpose", within the meaning of Section 2(15).
- The Patna High Court has, in CIT Vs. Tata Steel Charitable Trust (1993)203 ITR 764 , observed that exemption under section 11(1) can be availed only if the following conditions are satisfied;
- The trust is created for Charitable Purposes; and
- No part of income of the trust ensures or has been used or applied directly or indirectly for the benefit of any person referred to in section 13(3) of the IT Act,1961.
The list of persons contained in section 13(3) does not include employees of the settlor of the trust. Section 13(13)(d) , which includes any relative of the author, can have no application because "relative "means a person connected by birth or marriage with the another person. A person having relationship pursuant to a contract like that of an employer and an employee cannot be said to be relative.
High Court concluded that it was immaterial that any employee of the settlor of the trust had acquired any benefit out of the income of the trust as a ordinary member of the community. Therefore , the application of part of the income of the trust for the benefit of the employees of the settlor cannot disentitled the trust from claiming exemption under section 11 of the IT Act,1961.
CONCLUSION
For welfare of general public it is necessary to provide relief to trust or institutions engaged in Charitable Purposes. The provisions of Sections 10(23C) and 11 of the IT Act,1961 provides exemptions on fulfilment of specified conditions. The definition of Charitable Purpose has been given under section 2(15) ,which includes "Advancement of any other object for general public utility"and no where in the Act, its definition has been given. Entities involved in business ,trade or commerce are also claiming exemption of their income by taking advantage of "any other object of general public utility". Their claims are against the objective of provisions of Sections 10(23C) and 11 of the Act,1961. The Government has amended the section 10(23C) by inserting a provision ,which provides that 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.There are industry and trade associations who claim exemption from tax u/s 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility'.
The exemption claimed by these companies ,industry or trade unions will be considered separately on the basis of nature of trade ,commerce or business , circumstances and the frequency of carrying on charitable activities and their turnover.
DISCLAIMER: The above article is only for information and knowledge of readers. The views expressed here are the personal views of the author and same should not be taken as professional advice. In case of necessity do consult with professionals for more clarity and understanding on subject matter.
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