The Hindu Business Line : A profit-making entity can have `charitable purpose' too

If the object of the institution falls within the definition of charitable purposes under the I-T Act and the institution is genuinely carrying out such work, the Commissioner of Income-Tax must register the institution.

Can an institution be a statutory body or can a corporate entity seek the status of charitable institutions and apply for registration under Section 12-AA of the Income-Tax Act, 1961? Or is this provision applicable only to a charitable or religious trust or society under the Societies Registration Act? This interesting question has been answered by the Gujarat High Court in the case of a statutory body which was set up with the object of developing and maintaining ports.

In C.I.T. v. Gujarat Maritime Board (289 I.T.R. 139), the assessee, a statutory body created by the Gujarat Maritime Board Act, 1981, was engaged in the activities of development and maintenance of ports in Gujarat.

The Commissioner refused registration of the assessee under Section 12-A of the Income-tax Act, 1961, on the ground that the assessee could not be considered a lawful trust within the meaning of the term "trust" used under Sections 11, 12 and 13 as it was created as a local authority within the meaning of "person" for the purpose of the Act.

The Tribunal held that there was no mention of either trust or institution in the definition of "person" in Section 2(31) and merely because within the definition of "person" it was termed a local authority, it would not be a bar to its registration and that the assessee was an institution within the meaning of Section 12-AA(1).

The Tribunal held that the assessee had made the application on November 13, 2002, and since the Commissioner was not satisfied with the reasons for the delay in filing the application, the assessee would be entitled to registration from April 1, 2002 and not for the earlier period.

Although the Commissioner had refused registration on the ground that the assessee had not given any technical details, such as name and address of the original founder/author/settler of the trust property, the Tribunal held that it was not a case of creation of trust by an individual and thus there was no specific name of any founder or settler of the trust.

The Tribunal held that Section 12-A did not make any distinction between trusts and institutions created by private individuals or by the Government.

Irrelevant consideration

The Gujarat High Court held that it is an irrelevant consideration for registration of the institution under Section 12-A. In fact, had the GMTB Act, 1981, provided that income of the port authority would be exempt from charge of income-tax, there would have been no necessity for the assessee to apply under section 12-A for registration because then it would not have been required to claim exemption under sections 11, 12 and 13 of the Act.

Since the GMTB Act has no provision about the exemption of income of the port authority, the assessee is required to claim exemption under the provisions of the Income-Tax Act.

Whether part of the income is exempt or not is irrelevant for the registration of the institution. This issue is relevant only when the assessment of a particular assessment year is made by the Assessing Officer. For registration of the institution, the Commissioner of Income-Tax has to satisfy himself about the objectives of the institution and genuineness of its activities and not about the nature of its income.

If the object of the institution falls within the definition of charitable purposes under Section 2(15) of the Act and the institution is genuinely carrying out such work, the Commissioner of Income-Tax must register the institution. Therefore, the moot question is whether the object of the assessee institution is charitable or not.

`Charitable purpose'

Section 2(15) defines the term `charitable purpose'. From the definition it is evident that advancement of any object of general public utility is also considered a charitable purpose. The definition was modified by the Finance Act, 1983, with effect from April 1, 1984.

Before the amendment, the purpose, that is, advancement of any other object of general public utility was qualified by the words `not involving the carrying on of any activity for profit.' However, the Finance Act, 1983, omitted these words. Therefore, if an activity for the advancement of an object of general public utility is carried out with a profit motive, it may still fall within the definition of `charitable purpose' under Section 2(15).

The Legislature, by an amendment under Section 11(4-A), provided that the exemption under Section 11 would not be available in relation to any income of a trust or an institution being profit and gains of business unless the business is incidental to the attainment of the object of the trust.

Incidental or not?

The question whether an assessee has income from business or not and, if there is business income, whether it is incidental to the attainment of the object of the trust or not, is to be decided by the Assessing Officer during assessment of each year.

However, so far as the registration of a trust is concerned, the Commissioner of Income-tax has to examine whether the object of the assessee falls within the definition of `charitable purpose' under Section 2(15).

The object of the assessee institution under discussion here is to maintain and develop the ports in Gujarat. Maintenance and development of ports is necessary for transport of goods and persons by sea.

With the globalisation of trade and industry, the transport of goods from one country to other, which is mostly by sea, has become essential. Therefore, the development and maintenance of ports is certainly the object of general public utility.

In taking this view, the Court derived support from the decision of the Supreme Court in the case of C.I.T. v. A. P. State Road Transport Corporation (159 I.T.R. 1). It is also not in dispute that the assessee institution is genuinely engaged in the activities of development and maintenance of ports in Gujarat.

Therefore, the Gujarat High Court held that the assessee fulfilled both the conditions of Section 12-AA that are necessary for the registration of the institution. The Commissioner of Income-Tax was directed to register the trust with effect from April 1, 2002.

(The author, a Mumbai-based advocate specialising in tax law, can be contacted at ranina@bom2.vsnl.net.in)

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