The Hindu Business Line : Charlatan charities

A hospital can charge the maximum going rate from both its inpatients and outpatients and yet make the grade as a charity exempt from payment of income-tax.

Ditto for an educational institution. Small wonder then that bulk of the educational institutions and hospitals in the country are constituted as public charitable trusts.

Neither the Income-tax Act, 1961 nor its predecessor the 1922 Act has ever frowned on profits — eleemosynary element is not essential to beget tax exemption, ruled the Privy Council in The Trustees of the Tribune (1939 7 ITR 415). This may sound like an oxymoron because the term ‘eleemosynary’ in synonymous with charity.

What was meant was a trust publishing a newspaper would make the grade for tax exemption despite charging a price from the buyers.

It therefore boils down to this — one need not be charitable at the point of source but one needs to be charitable at the point of application.

Charitable purpose

What matters is the profit earned should be applied for altruistic or charitable purposes within the prescribed period. And this is what morphs our charities into Robinhoods — charge from the rich or not-so-rich, but apply your profits for helping the poor or for other prescribed altruistic purposes. Cynics however have it that this is what encourages people in India to make a living out of charity!

The mushrooming growth of educational institutions and hospitals constituted as public charitable trusts bear testimony to the rather benign tax regime obtaining for application of income for charitable purposes.

Repayment of loans taken to fulfil a charitable purpose is an application of income for charitable purpose as much as advancement of a loan for a similar purpose is. Even interest-bearing loans given to students by an educational trust is application of income for charitable purposes.

No distinction is made between capital and revenue expenditure while considering whether income has been properly applied. So much so, palatial buildings and swanky cars all pass muster. Courts have been very helpful in interpreting the term ‘application’ in contradistinction to the term ‘spent’.

So much so, even if a book entry is passed in favour of the donees with the amount given for charitable purpose still remaining outstanding, it will make the grade for exemption — CIT vs Trustees of HEH the Nizam’s charitable trust (1981 131 ITR 497 AP). Donations to other charitable trusts make the grade as well. The point is, in such a permissive regime Robinhoods of both genuine and charlatan varieties can thrive.

The permissive regime naturally beckoned everyone to charitable causes or what passes for charitable causes, especially under the umbrella “the advancement of any other object of general public utility” category figuring in the definition of charitable purpose given in Section 2(15).

Tightening the norms

Newspapers, chambers of commerce and even ports clambered onto the bandwagon. The Finance Act, 2008 therefore has quite rightly made things difficult for this category by ruling out tax exemption if the so-called charitable purpose involves 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 a fee or cess or any other consideration irrespective of the nature of use or application of such income.

Having tightened the screws on the omnibus category, perhaps it could be the turn of educational institutions and hospitals to come for greater rigorous scrutiny the next year though one wishes that charlatan charities of all hues were simultaneously tarred with the same brush at the same time.

(The author is Delhi-based chartered accountant. blfeedback@thehindu.co.in)