The ever-changing law of charity

The law of charity is evolving all the time. The terms ‘charity' and ‘charitable purpose' have to be construed in their legal and technical sense which is different from their popular meaning. . The English law of charity has grown around the Statute of Elizabeth. Its preamble contained a sketchy list of charitable objects:

“The relief of aged, impotent and poor people; the maintenance of sick and maimed soldiers and mariners; the maintenance of schools of learning, free schools and scholars in universities; the repair of bridges, ports, havens, causeways, churches, sea-banks and highways; the education and preferment of orphans; the relief, stock or maintenance of houses of correction; the marriage of poor maids; the supportation, aid and help of young tradesman, handicrafts men, and persons decayed; the relief or redemption of prisoners or captives; the aid or ease of any poor inhabitants concerning payment of taxes; the setting out of solders”.

Indian Tax law broadly approves the purposes mentioned in the above Statute of Elizabeth. The definition in 2(15) of charitable purpose, in the Indian law is influenced by the classification given by Lord Macnaghten: relief of poverty, advancement of education, advancement of religion and trust for other purposes beneficial to the community. The Indian law brought in the term ‘the advancement of any other object of general public utility'. This is an inclusive definition and not exhaustive.

No private gain

The legislative history of the definition of charitable purpose was traced by the Supreme Court in the Surat Art Silk's case 121 ITR (1). The definition clause includes any other object of general public utility. The idea is to exclude the object of private gain. The manner of utilisation will also have to be examined.

The law chooses to forbid charities from carrying on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to such trade, commerce or business for cess or fee or any other consideration, irrespective of the nature of use or application or retention of the income from such activity. This restriction in respect of charities maintained for the advancement of any other object of general public utility came in for criticism. The government responded by inserting a Proviso ruling out the denial of exemption in such cases if the aggregate value of the receipts from the activities referred to therein was Rs 10 lakh or less/year. This was done w.e.f April 1, 2009. Finance Bill 2011 enhances the limit from Rs10 lakh to Rs 25 lakh with effect from Assessment year 2012-13.

The amendment tries to save small charities which collect income by way of cess or fees for services rendered. Exemption is conferred under the new Clause (46) inserted in Section 10 for Government companies, Boards and Trusts with the object of general public utility but the commercial transactions, if they are notified. This exemption is for institutions like Port Trusts and will come into effect from June 1, 2011. The same is also true of institutions falling under Sec 10(23C).

The DTC Provision

The Direct Taxes Code does not use the term ‘charitable trusts'. Instead, the DTC refers to the same as non-profit organisations. The definition in Section 2(15) of the Income Tax Act, 1961 is carried into Section 103 of the DTC. Can we expect that the amendments made by Finance Act, 2009 and Finance Bill 2011 will also figure in the Direct Tax Code?

The way the definition is being tinkered with can jeopardise even the right of registration and recognition for donation under Section 80(g) if any part of the income becomes taxable because of the alterations made. The Finance Minister had assured Parliament that genuine charitable organisations will not in any way be affected. Fixing monetary limits for levy of fess and cess may eliminate discretion, but will also adversely affect genuine charities.

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

COMMENT NOW