Section 11 of the Income-tax Act 1961 provides for exclusion of income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of [fifteen] per cent of the income from such property;
Section 2(15) of the Income-tax Act 1961 defines charitable purposes as under:-
2(15) ‘charitable purpose’ includes relief of the poor, education, medical relief, preservation of environment (including water heads, forests and wildlife) and preservations of monuments or places of or objects of artistic or historical interest and the advancement of any other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of 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 the nature of use or application, or retention, of the income from such activity;”
Provided further that first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty five lakh rupees or less in the previous year
The present definition in section 2(15) was substituted by Finance Act 2008 with effect from 1-4-2009 and first proviso was added to state that the “advancement of any other object of general public utility” will cease to be a “charitable purposes” if it involves any trade commerce or business .Preservation of environment and preservation of monuments or places of historical or artistic interest have also be added to the definition implying that these are now taken out of the category of general public utility
Second proviso to section 2(15) added by Finance Act 2010 with effect from 1-4-2009 provides an exception to the application of first proviso if the turnover from the activity of trade, commerce or business does not exceed
Rs. 10 lakh in the previous year. The limit of Rs. 10 Lakh was increased to
Rs. 25 Lakh by the Finance Act 2011 with effect from 1-4-2012.
The Finance Minister in his Budget speech of 2008 had stated that the CBDT would issue guide lines to determine whether an entity is carrying on any activity in the nature of trade commerce or business and that Chamber of commerce and similar organisations would not be affected by the amendment. However no such guide lines were issued. Department has issued notices to several organizations resulting in unwarranted litigation.
Delhi High Court in the case of Institute of Chartered Accountants of India and Another v. Director General of Income-tax (Exemptions) and Others. [2012] 347 ITR 99 (Del.) held that
The first proviso to section 2(15) introduced with effect from April 1, 2009 applies only if an institution is engaged in advancement of any other object of general public utility and postulates that such an institute is not “charitable” if it is involved in carrying on 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.
It further held that the proviso is inapplicable for the entities engaged in the activities of (i) relief of the poor; (ii) education; (iii) medical relief; (iv) preservation of environment (including watersheds, forests and wildlife); (v) preservation of monuments or places or objects of artistic or historical importance
The constitutional validly of proviso to section 2(15) of the Income-tax Act 1961 was challenged in the Delhi High in the case of India Trade Promotion Organization vs. UOI (www.itatonline.org) The High Court vide judgment Dated January 22, 2015 Held that If the definition of “charitable purpose “in section 2(15) and section 10(23C) (iv) is construed literally, it is violative of the principles of equality & unconstitutional.
In order to uphold the Constitutional validity of the proviso to section 2(15) it was held that the proviso shall have to be read down;
I quote from the judgement “The expression “charitable purpose”, as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso would be at risk of running foul of the principle of equality enshrined in Article 14 of the Constitution India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a ‘charitable purpose’. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes (Info Parks Kerala v. Deputy Commissioner of Income-tax (2010) 329 ITR 404 (Ker) and Andhra Pradesh State Seed Certification Agency v. Chief Commissioner of Income-tax-III, Hyderabad 256 CTR 380 (AP) dissented from) Finance Bill, 2015 proposes to amend section 2(15) as under:-
In section 2 of the Income-tax Act, with effect from the 1st day of April, 2016, —
(a)
(b) in clause (15),—
(i) after the word “education,”, the word “yoga,” shall be inserted;
(ii) for the first and the second provisos, the following proviso shall be substituted, namely:—
“Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of 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 the nature of use or application, or retention, of the income from such activity, unless —
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;”;
As is evident the Bill Proposes to include Yoga in the definition of Charitable purposes for purposes of section 11. The proposed amendment in clause (15) of section 2 of the Income-tax Act 1961 further provides that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of 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 the nature of use or application, or retention, of the income from such activity, unless–– (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year
In my humble view the proposed amendment in the proviso to section 2(15) is likely to benefit non -profit organisations having substantial receipts but will adversely affect non-profit organisations of small magnitude
Examples – As per the proposed amendment a non-profit organisation with annual receipt of 500 Crs out of which 100 Crs may be from activities in the nature of trade, commerce or business will not lose the status of a Public charitable trust as receipts from the activities in the nature of trade commerce or business of the organisation do not exceed 20 % of the annual receipts of the previous year.
On the other hand a non-profit organisation with gross annual receipts of
Rs. 5 lakh will lose the status of the Public charitable trust if the receipts from the activities in the nature of trade commerce or business exceed 1 lakh in the previous year
Technically a non-profit organisation with petty receipt of Rs. 100 from an activity which may fall in the nature of trade commerce or business will also lose the status of public charitable trust if it does not have any other receipt in the previous year.
This, in my humble view, may not be the intention of the proposed legislation. Finance Minister may consider the consequence of the proposed amendment before pressing it for approval of the parliament
Suggestion: The limit of Rs. 25 lakh under the existing law may simply be enhanced to
Rs. 50 lakh or so Or Limit of Rs. 50 lakh (or any figure) or 20% of the receipts of the previous year whichever is higher “may be incorporated”
ITAT Bar Association/Bombay chartered Accountants Society may take up the matter with the Finance Minister.
Manzoor Ahmed Bakhshi
Advocate