SC: Advancement of general public utility services would not be charitable if done for profit purpose

Assistant Commissioner of Income Tax vs Ahmedabad Urban Development Authority
Supreme Court of India: 2022 Live Law (SC) 865

THE SUPREME COURT 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.

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 water sheds, 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.

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.

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 tradecommerce 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 nominalabove cost, cannot be considered to be "trade, commerce, or business" or any services in relation thereto. It is only when the charges are markedly orany other consideration" towards "trade, commerce or business".

CONCLUSION

Scheme of exemptions under provisions of Section 11 to 13 has been provided to encourage and help non-profit organisations to take charitable and social welfare activities. The provisions of Section 2(15) of the Income Tax Act, 1961 defines "Charitable Purpose" and Section 2(15)(f) has been introduced by inserting –" (f) advancement of any other object of public utility". An organisation involved in promoting general public utility may earn revenue, which must be incidental to its activity and it not from any activity in promotion of trade or commerce. Suppose a charitable entity have properties as generally happen in case of temples etc., and let out its properties for rent for marriage or other occasions, the revenue generated not be treated as from trade or commerce. Some time various charitable organisations charged nominal amount from the public for utilisation of their services provided, these are not treated as revenue from profit and hence exempted. But those revenue generated by these organisations with intent to generate profit and profit will increase more than 20% of total receipt of the organisation then , that activity will be called as trade or commerce and not exempted under these provisions.

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