The Hindu Business Line : Charities — not for trade, commerce or business please!

The Income-Tax Act grants exemption to the income from property held under trust or any other legal obligation for religious or charitable purposes, subject to certain conditions laid down under the Act. The object is to encourage the role of philanthropy in relieving distress and in helping to meet the economic, social, cultural and religious needs of society.

The trusts and the donors to the trusts got the exemptions for tax. The question of taxing the trusts arose only when they applied the income for non-charitable purposes or ceased to accumulate the income for charitable purposes. The charitable trusts sometimes were utilised as a device for evasion or avoidance of income-tax in many ways.

These abuses resulted in basic changes being introduced by the provisions of Sections 11 to 13 of the I-T Act so as to grant exemption only to so much of the income of the trust as was actually applied for charitable or religious purposes in India.

The definition

The term ‘charitable purpose’ has been defined under Section 2(15) of the I-T Act to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. In the definition of ‘charitable purpose’ the words ‘not involving the carrying on of any activity for profit’, which did not find a place in the 1922 Act, continued to be on the statute book till they were deleted by the Finance Act 1983 with effect from April 1, 1984.

The Supreme Court, in the ACIT vs Thanthi Trust (247 ITR 785) case, has observed that after the introduction of Section 13(1)(bb) from April 1, 1977, exemption would not be available for a business held as a part of the corpus of the trust unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution.

However, with effect from assessment year 1992-93, if a business is held under trust, it will have to fulfil the conditions laid down in Section 11(4A). This section provides that any income of a trust being profits and gains of business will not be exempt unless the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained by such trust in respect of such business.

Case laws

What constitutes general public utility has been a matter of a considerable debate. The mere fact that the activities of the trust yield profit will not alter the charitable character of the trust but where profit making is the predominant object of the activity, the trust would lose exemption as a charitable trust.

The Privy Council in the All India Spinners’ Association vs CIT 12 ITR 482 case and the Supreme Court in the CIT vs Indian Sugar Mills (97 ITR 486) has held that ‘any object of general public utility’ would exclude the object of private gain such as an industrial undertaking for commercial profit, even though the said undertaking may sub-serve general public utility.

The Supreme Court, in the ACIT vs Surat Art Silk Cloth Manufacturers’ Association (121 ITR 1) case, has approved the principle that where the primary and dominant purpose of the Association was to promote and protect the textile industry, the activities were for the general public and not for the personal benefit of its members and any incidental benefit to its members would not mitigate against its charitable character.

The Supreme Court, in the CIT vs Andhra Chamber of Commerce (55 ITR 722) case, observed that if the primary object of a body — for example, a chamber of commerce — is to promote trade and industry, the fact that the business community would incidentally benefit or share in the general economic prosperity would not render the purpose any the less an object of general public utility.

Interestingly, the Supreme Court, in ACIT vs Thanthi Trust (supra), also observed that where the business of the trust was the running of a newspapers and that business did not directly accomplish, wholly or in part, the objects of the trust viz. relief of the poor and education, the income of the trust was not exempt.

From the judicial pronouncements, it emerges that the words ‘any other object of general public utility’ is of widest connotation. The word ‘general’ in the said expression means pertaining to a whole class. Therefore, advancement of any object of benefit to the public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose. The said expression would prima facie include all objects which promote the welfare of the general public.

Having seen the background and the principles laid down by various judicial pronouncements, let us discuss the amendments sought to be made by Finance Bill, 2008 and its implications on the income of charitable trusts.

The proposed amendments

The Finance Bill, 2008 proposes to remove the exemption available to a business feeding the advancement of any other object of general public utility by providing that that charitable purpose shall not include 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 use or application or retention of the income from any such activity.

The Memorandum explaining the provisions of Finance Bill, 2008 explains the reasons for the proposed amendment. It has been stated that a number of entities operating on commercial lines are claiming exemption on their income either under Section 10(23C) or Section 11 of the I-T Act on the ground that they are charitable institutions. These assessees claim that they are engaged in the advancement of an object of general public utility. Such a claim in respect of activity carried on commercial basis is contrary to the intention of the provision.

Implications

It appears that the amendment was to overcome the Supreme Court decision in the Gujarat Maritime Board (295 ITR 561) case.

The proposed amendment would invite a lot of litigation since what constitutes activities in the nature of trade, commerce or business may be of a considerable debate. An activity which in the opinion of the trust does not involve trade, commerce etc., may involve trade, commerce etc., in the opinion of revenue authorities.

There is also a risk of trusts losing entire exemption where they have charitable activities such as relief of poor, education, medical relief and also business activities involving earning of profits. Such trusts may have to contend that the exemption shall be denied only in respect of the portion of activities which are business in nature for advancing the object of general public utility and not the entire activities of the trust. However, the position may not be accepted by the revenue authorities.

The amendment sought to be made would not affect trusts carrying out activities solely of the nature of relief of the poor, education, medical relief and does not have any activities which are aimed at advancement of any other object of general public utility.

It is not clear as how far these restrictions will be effective and how it will stand the test of appeal in future. Certainly, these amendments will involve a lot of litigations and the trusts have to manage their affairs with utmost care.

(The author is with Deloitte Haskins & Sells.)

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