The Hindu Business Line : Tax benefits for ‘charitable’ trade bodies under scanner

New Delhi, Dec. 25 Trade and industry associations enjoying income tax exemptions on the ground that their activities are meant for “charitable purposes” run the risk of losing such tax benefits.

Their dealings with any non-members for activities in the nature of trade, commerce or business would now be an important test in determining the merit of their claim to be charitable organisations, according to a latest CBDT circular.

However, trade and industry associations claiming to be both charitable institutions as well as mutual organisations have little cause for worry. Owing to the principle of mutuality, they would not lose their tax exemptions so long as their activities are restricted to contributions from and participation of only their members, the CBDT has said.

Principle of mutuality

Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association was not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants.

The Central Board of Direct Taxes (CBDT) circular has sought to explain the implications of the Union Budget 2008-09 amendment to the definition of “charitable purpose” under the income-tax law.

The law was amended to specify that the “advancement of any other object of general public utility” would not be a charitable purpose if it involved carrying on any activity in the nature of trade, commerce or business for a cess or a fee or any other consideration.

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