The Hindu Business Line : A narrow view on charity

The CBEC has, through its two circulars of 2006 and 2007, given a narrow interpretation of the term ‘charitable’ and has directed its officers to apply this definition in the implementation of service tax.

Will charity reach the needy?

T. N. Pandey

Clubs and associations have been liable to service tax w.e.f. June 16, 2005. Section 65(105)(zzze) of the Finance Act, 1994 defines taxable service for club and association to mean any service provided or to be provided to members by any club or association in relation to provision of services, facilities or advantages for subscription or any other amount.

As per Section 65(2a), any person or body of persons whose objectives are of a charitable nature are not liable to service tax.

Not defined

There is no definition of ‘charitable purpose’ in the service tax legislation. However, this term has been interpreted in the context of many enactments, more particularly in the context of the Income-Tax Act, 1961 (I-T Act), where it has been defined to include relief to the poor, education, medical relief and any other objects of general public utility.

Charitable purpose has been held by courts to include various activities such as those carried on by chambers of commerce, trade and industry associations for protection and promotion of trade, business or commerce, Bar Councils for regulation of legal profession, the ICAI, games and sports associations, maintenance of dharmashalas for the convenience of passengers, providing of benefits to Scheduled Castes and Scheduled Tribes, diffusion of knowledge clubs, association for promotion of cottage and village industries and a host of other such activities.

Receipt of fees from members for carrying on of business activities held in trust, which is incidental to the main objects of such bodies, and application of such receipts/profits to the objects of such institutions have not been found to be a hindrance to such institutions being treated as ‘charitable’.

CEBC circulars

However, the Central Board of Excise and Customs (CBEC) has, , through its two circulars of 2006 and 2007, given a narrow interpretation of the term ‘charitable’ and has directed its officers to apply this definition in the implementation of service tax provisions on a case-to-case basis.

The main aspects of the two circulars are:

Exemption under the I-T Act is of no consequence to the levy of service tax;

The officers should keep in mind the definition of ‘charity’ and ‘charitable’ as given in Black’s Law Dictionary, where emphasis is on giving benefit to the needy that is, those who cannot pay for the benefit received.

Such a narrow interpretation of the concept of charity/charitable, when there is no definition of these in service tax law by executive instruction, is not legally tenable because CBEC’s circulars are not binding on courts and assessees.

In the garb of giving executive instructions, the CBEC cannot legislate.

Dictionary meaning

Courts have held that in the absence of any definition in the law concerned, for understanding the meanings of various words, reference to other statutes in pari materia, that is, statutes forming part of the same system, is permissible. The I-T and service tax laws are certainly pari materia. Dictionary meanings cannot be a safe guide for interpreting the words in a statute. In CIT vs Budhiraja & Co (AIR 1976 SC 1111), the Supreme Court has said: “A statute cannot always be construed with dictionary in one hand and statute in another”. Hence, court decisions, expounding the meaning of words in construing statutes in pari materia, are a proper guide for interpretation — not dictionaries.

CBEC officers are insisting on payment of service tax by, inter alia, chambers of commerce, trade and industry associations, etc., on the basis of the two circulars.

There is no ground to discard decisions based on the I-T Act and insist on payment of service tax. It is, prima facie, inappropriate for one wing of the Finance Ministry to say that such bodies are charitable and for the other to say that they are not. Such an approach would lead to extensive litigation. Hence, the CBEC must review its circulars urgently.

(The author is a former Chief Commissioner of Income-Tax.)