Uncharitable view of ‘charities'

T. N. Pandey | Updated on August 18, 2011

The CBEC’s circular needs an urgent re-look.

There is no special reason for the service tax authorities to say that “exemption under the I-T Act for charitable activities is of no relevance for tax purpose”.

The Service Tax law (being administered by Central Board of Excise & Customs (CBEC)) provides exemption for charities from Service Tax. The Finance Act, 1994, (as amended upto date), which provides for taxation of services, inter alia, by ‘clubs and associations', exempts these from tax for charities. ‘Clubs and Associations' have been defined in Section 65(25a) to mean — “any person or body of persons providing services, facilities or advantages, primarily to its members, for a subscription or any other amount, but does not include — “any person or body of persons engaged in any activity, having objectives, which are in the nature of public service, and are of a charitable, religious or political nature.”

Thus, persons or a body of persons, having objectives, which are in the nature of public service and are, inter alia, of a charitable nature, are exempted from service tax. The Act contains no definition of the word ‘charitable'. The word ‘charitable purpose' has been defined u/s 2(15) of the I-T Act, 1961, as: “Charitable purpose includes relief of the poor, education, medical relief, preservation of environment, including watersheds, forests and wildlife, and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility.”


Regretfully, CBEC has discarded the definition of charitable purpose under the I-T Act and has decided that clubs and associations, whose objects are of a charitable nature and which have been considered as ‘charitable bodies' under the I-T Act and exempted from income tax, will not be exempted from service tax merely on that basis. The authorities are proliferating litigation in this matter on the basis of their narrow view in Master Circular Ref. 07601 dated 23.08.07, which reads as under: “Exemption under the I-T Act on the ground of being a public charitable institution is of no consequence or relevance for service tax purposes. Levy of service tax is entirely governed by the provisions contained in the Finance Act, 1994, and the rules made thereunder.”

Narrow, misconceived

The view taken is, apparently, narrow and misconceived. There is no apparent reason why only dictionary meaning should be adopted for defining ‘charities'/‘charitable purpose'.

Courts have considered resort to dictionaries as unsatisfactory for interpretation of statutes and have mentioned other more rational ways to consider the meaning of the undefined words in a legislation.

The better way to consider undefined words is the rule of pari materia (i.e.) interpretation of a provision with reference to provision of another enactment when the two pertain to the same subject / matter (here taxation) or same class of persons or things or have the same object or purpose (see Board of Muslim Wakfs v. Radha Kishan, AIR 1979 SC 289 and Sanjiv g. Kundava v. CIT (1981) 127 ITR 354 (Kar) and also Balchandra Anant Rao Rakvi v. Ramchandra Tukaram (2001) 8 SCC 616).

Thus, in the absence of a statutory definition, it would be open to look for the meaning by reference to definitions in the sister legislation, and failing that, to adopt the meaning in common parlance.

Obviously, when a word is defined in a sister legislation (i.e.) I-T Act, 1961, there is no justification for discarding its meaning and taking a narrow view defeating the objective of the legislation.

There is no special reason for the service tax authorities to say that “exemption under the I-T Act… is of no consequence or relevance for service tax purpose”. The CBEC's circular needs an urgent re-look.

(The author is a former chairman of CBDT.)

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Published on August 14, 2011
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