Quest

Opinion : Business Activity, Profit and a Charitable Trust

Firoze B. Andhyarujina, Sr. Advocate

Facts

  1. The Querist is a Public Charitable Trust. It is registered under the Bombay Public Trusts Act as well as under the Income-tax Act and has been granted registration under section 12A of the Income-tax Act, 1961 (“the Act”).
     

  2. The Trust has sanatorium, guest house and dharamshalas. Rooms of which are given out on rent at the concessional rate. Since, some of the sanatoriums are situated in hill stations, many sick and old people take advantage of it.
     

  3. The Querist also is connected with certain religious temples and therefore arranges transportation of pilgrimage to particular religious designation for which the charges are nominal transportation charges. People from all over India as well as from abroad more particularly from Asian countries take advantage of the facilities given by the Querist.
     

  4. The main objects are :

  1. for transportation of pilgrims to a particular pilgrimage for which the pilgrims are charged nominal transportation charges;
     

  2. sanatorium, rest houses and dharamshalas where rooms are let out on rent / hire at a concessional rate for poor, needy, sick and pilgrims;
     

  3. for propagation of religion or philosophy, publication of books, materials and literature are sold at a price.

    The other objects are not relevant for the purpose of this opinion.

Issues

          The basic question is whether the objects which give rise to a business activity whether the profit which results therefrom could be said to be an activity to earn profit? Another issue is whether collection of rent / hire charges would amount to a business activity? Whether transportation charges realised from pilgrims amongst to business activities and whether the Querist by carrying out such activities would lose exemption under sections 11 to 13 of the Act?

Analysis

          The basic issue for my consideration is that when the Querist hires rooms at concessional rates or provides transportation to pilgrims or publishes books and materials and sends them at a nominal profit, whether such activity would partake the character of “business” and whether by doing so, the Trust would lose the exemption.
It must be pointed out in the first place that in Addl. CIT vs. Surat Art Silk Cloth Mfg. Assn. – (1980) 121 ITR (SC) that it is sufficient to take into consideration “the dominant and primary object of the Trust”, to decide whether it is for charitable purposes or not, for the purpose of granting exemption under sections 11 to 13 of the Act.

          My analysis with reference to case laws is as follows:

  1. CIT vs. Andhra Pradesh State Road Transport Corpn – (1986) 159 ITR 1 (SC). The Supreme Court laid down the test viz., that the predominant object of undertaking the activity is (a) whether to earn profit or income; or (b) to carry out for charitable purpose or for the compliance of the main objects. The Supreme Court concluded that if the predominant object is for charitable purpose and not to earn profit, and if in the process of carrying on the activity, merely because some profit has arisen would not make the Trust loose the character of charity.
     

  2. Addl. Director of IT (Exemptions) vs. Shilpam – (1998) 230 ITR 126 (Cal.). This is an authority for the proposition that section 11(4A) permits benefits of exemption, even if some profit is earned and business is carried out. In this case, before the Calcutta High Court, the Trust published and sold books. It was held that sale of books of charitable organization resulting in profit would not be a ground to lose exemption.
     

  3. Aditanar Educational Institution vs. Addl. CIT – (1997) 224 ITR 310 (SC) where the Supreme Court laid down that intention is to be gathered from the Trust Deed to achieve the main object of the Trust.
     

  4. Thiagaraja Charities vs. Addl. CIT – (1997) 225 ITR 1010 (SC). This is a three Members Judgment of the Supreme Court where the term “business” came up for consideration in the context of sections 11 to 13. The Supreme Court held that business is only a “means of achieving the object of the Trust, profits from business agents for charity, then the Trust would be entitled to the benefits of section 11. If business was a “medium” through which the objects are accomplish, the benefit of exemption should be made available – Observations at page 1025.
     

  5. Asst. CIT vs. Thanthi Trust – (2001) 247 ITR 785 (SC). In this case, newspaper was held under the Trust. Business is primary for the purpose of existence of the Trust. It was incidental requirement for attainment of the object of the Trust. The Supreme Court held that the activity of the business can be carried on and the Trust has fulfilled public religious purpose and entitled to section 11(4A) benefit.
     

  6. Indo American Society vs. Asstt. Director of IT (Exemption) – (2005) 278 ITR 49 (Mumbai – Tribunal). In this case, education was imparted to all sections of the public including poor and elite. Education was for public good. The society charged fee to meet cost of conducting educational programme. In this case, the Tribunal held that it cannot be construed as the business of the society. It was pointed out by the Tribunal that there was nothing to establish that society conducted educational programme only with a view to earn profit. Thus the society is entitled to exempt on under sections 11 & 11(4A).
     

  7. CIT vs. Janakiammal Ayyandar Trust – (2005) 227 ITR 274 (Mad), where the Court held that the business should be incidental to the attainment of objects. A business whose income is utilized by the Trust for achieving its objects is business which is incidental to the attainment of objective and hence entitled to exemption.
     

  8. Reference is invited to the decision of the Madras High Court in CIT vs. Samyuktha Gowda Sarswatha Sabha – (2000) 245 ITR 242 (Mad.) (supra) where Kalyana Mandapam were set up and given on rent, even though it was not one of the objects of the Trust, yet the Court held that the income earned cannot constitute business income and the activity and income is for the objects of the Trust.
     

  9. In CIT vs. Sangit Kala Mandir Trust – (1987) 166 ITR 217 (Cal.), it was held that organizing cultural events and literary programmes to raise funds would not amount to the assessee carrying on activities for profits. The Court held that the primary and dominant objects of the Trust were all objects of general public utility and the power to run business was held to be incidental and ancillary to the carrying on of such objects.
     

  10. In Ganga Prasad Verma Memorial Society vs. CIT – (1982) 134 ITR 421 (All.). Their Lordships of the Allahabad High Court held that receiving rent from building and interest on fixed deposits, does not amount to carrying on of an activity for profit within the meeting of Section 2(15) of the Act.
     

  11. In Mahakoshal Shaheed Smarak Trust vs. CIT – (1983) 140 ITR 795 (MP), Their Lordships of Madhya Pradesh High Court also held that where the rental income derived by a Charitable Trust went to feed the objects of general public utility, the activity of letting out properties could not be said to be an act involving the carrying on of any activity for profit within the meaning of section 2(15) of the Act.
     

  12. In CIT vs. Ganeshram Laxminarayan Goyal – (1983) 33 CTR (MP) 20, Their Lordships again upheld the claim of exemption made by the Trust under section 11 of the Act, when it was found that its object was to construct dharamshala for the use and residence of the traveling public free of any charge and also to let out certain shops of the dharamshala Building in order that from the income of those shops, the Dharmasala be run and the building thereof maintained properly.

Per Contra

  1. The effect of section 13(1)(bb) of the Act, is that the exemption under section 11 will not be available to a Trust that carries on any business unless the business is carried on “in the course of the actual carrying out in the primary purpose of the Trust”. The business must, therefore, be carried on in the course of the actual accomplishment of relief of the poor, education or medical relief.
     

  2. In CIT vs. P. Iyya Nadar Charitable Trust – (2006) 284 ITR 404 (Mad.), the assessee was a charitable trust established for giving benefits to schools and hospitals. The Trustees were allowed to exploit the trademark “Camel” a very known brand of safety matches. The manufacturing unit and the match factory was settled in favour of the Trust. The assessee claimed exemption in respect of income from business. The Madras High Court held that the business held by the Trust as part of the corpus did not directly accomplish any objects of the Trust nor it could be said that the business was in actual accomplishment of its object.

In view of the above discussion of case laws, my answers to the questions raised by the Querist are as follows :

  1. Renting rooms in sanitariums, rest house and dharamshalas at concessional rate to the poor, needy, sick and pilgrims is only part of the object of the Querist.
     

  2. Transporting pilgrims for which nominal charges are collected or publication of books which are sold for a price are only activities for the purpose of fulfilling the objects of the Trust.
     

  3. The fact that some profit results therefrom would not make the Trust lose its exemption. The activity carried out by the Trust is for accomplishment of the predominant and primary objects and it is not intended for making any profits, however, if incidentally some profits arise that would not make the Trust lose its exemption.

Generally

I would like to draw attention of the Querist to the provisions of the Foreign Contribution Regulation Act, 1976 (“FCRA”).

  1. Donations are received from foreign countries and even from foreigners and non-resident Indian. In such circumstances, it is advisable to have the Trust registered under the FCRA.
     

  2. Receiving foreign contribution as envisaged in section 2(c) would cover donations and in section 2(e), it would amount to “foreign source” where the amounts given by “citizens of a foreign country or territory” is also included.
     

  3. Section 6 provides that no association which is religious can receive foreign contribution without seeking prior permission or getting registration from the Central Government.
     

  4. Associations registered under FCRA and those granted prior permission are required to submit audited FC-3 returns to Ministry of Home Affairs within four months of close of the financial year. A certificate from Chartered Accountants is required that the accounts of the Association have been maintained as has been prescribed by FCRA.
     

  5. Application for grant of registration to accept foreign contribution are required to be made in prescribed Form FC-8. Once registration is granted, the Association may receive foreign contribution
     

  6. Application for grant of prior permission can be submitted in prescribed Form FC-1A.
     

  7. It is also provided that for Religious Association, the permissible activity could include celebrations of religious functions / festivals, construction / repair / maintenance of place of worship, maintenance of priests / preachers, education and publication and distribution of religious books/literatures.
     

  8. The Central Government has power for monitoring of foreign contributions received and utilized. There are also penal provisions for violation. Hence, it would be advisable for all charitable trusts / institutions / societies / associations if they are receiving foreign contribution from any foreign source or even an individual or non-resident, they should be registered under the FCRA.