The Hindu Business Line : An uncharitable deal for charities

Charitable trusts have been incurring the wrath of the Government in the past several years. Budget 2007 sought to levy tax an anonymous contributions to charities which were not engaged in religious activities.

A Parliamentary standing committee on finance considered this measure as uncharitable. Entities engaged in philanthropic activities, such as propagating yoga, providing succour to victims of natural disasters, and running old-age homes and orphanages, have been affected by this amendment.

Definition amended

Budget 2008 goes a step further. It amends the very definition of ‘charitable purpose.’ Section 2 (15) defines a ‘charitable purpose’ as including relief of the poor, education, medical relief and the advancement of any other object of general public utility.

The Supreme Court interpreted this clause in CIT vs Gujarat Maritime Board (295 ITR 516). A statutory authority formed for the purpose of development of minor ports was considered eligible for exemption on its receipts since the activity involved the fourth object of advancement of general public utility.

A public trust running a newspaper is exempt. Trust formed for promoting cottage industry, chambers of commerce, running of charities or dharmashalas, conducting a professional association, trusts engaged in promoting scientific research or in promotion of sports, etc., will all fall in the category of public utilities carrying on charities involving activity for profit though the earning of profit may not be the dominant purpose of the trust. All this is set to change.

In Para 180 of the 2008 Budget Speech, the Finance Minister observed:

“Some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under ‘charitable purpose’. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organisations will not in anyway be affected.”

New proviso

Finance Bill, 2008 inserts a proviso under Section 2(15) of the Income-Tax Act, 1961.

It is now laid down 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 income from such activity.

The Memorandum explains that several entities operating on commercial lines claim exemption either under Section 10(23C) or Section 11 of the Act arguing that they are engaged in the advancement of an object of general public utility included in the fourth limb of the definition of charitable purpose.

Such a claim, when made in respect of an activity carried out on commercial lines, is contrary to the intention of the provision. The idea behind the amendment is to limit the scope of the phrase “advancement of any other object of general public utility.”

The amendment has sent shockwaves among the innumerable public trusts engaged in multifarious activities.

It is no longer open for trusts to take the argument that the primary purpose and the predominant object sought to promote welfare of the general public. Rulings of the Supreme Court on chambers of commerce cases are now sought to be annulled.

Manifold ramifications

Educational institutions and hospitals often supplied books or carry on trade in drugs and there is every possibility that such trusts will also be affected. Interestingly, Section 11 (4A) permits a trust to carry on a business which is incidental to the attainment of its objectives. This Section has not been amended.

The ramifications of the amendment to Section 2(15) can be manifold. It can impact Section 80(G) which helps the donor to claim rebate on donations. Public trusts engaged in the promotion of public welfare are now faced with the threat of losing recognition.

Having brought in a comprehensive amendment of the very definition of charitable purpose, the Central Board of Direct Taxes (CBDT) has promised to come out with the Circular enabling chambers of commerce to claim exemption.

Why not be charitable to other public bodies also, known to be engaged in charitable activities through activity for profit with a bar on utilisation of profits for non-charitable objects?

Sports bodies, professional institutions, entities engaged in lending a helping hand to the disadvantaged sections of society will all be affected by this amendment.

A better course would have been to amend the Sections 11, 12 and 13 instead of amending the basic definition of charitable purpose.

These Sections lay down stringent regulations to enable charitable trusts to claim exemption.

Further amendment of these Sections could have tightened the noose. Instead, a blanket withdrawal by a far-reaching amendment of the definition of charitable purpose can result in the closing down of many genuine charitable trusts.

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