1. INTRODUCTION:

CHARITY and BUSINESS have important place in the Income-tax Act. Income earned from business attracts tax and the income applied for charity entitles exemption from tax. The two are different and independent terms and one excludes the other. Therefore, many a times the question would be whether an activity is charitable activity or business. The question is bit complex and difficult to answer. The answer is to be found on the basis of the facts in each case.

The position is same when it comes to section 11 of the Income-tax Act, 1961. Section 11 provides for exemption from tax for income derived for charitable purposes. Section 11 provides that income derived from property held under trust wholly for charitable purposes shall not be included in the total income of the previous year of the person in receipt of the income to the extent to which such income is applied to such purposes in India. Thus, the income of charitable trust, society or institutions existing wholly for charitable purposes is exempt u/s. 11 of the Act. The source of income is not material but the application of income for charitable purposes is the criteria. In fact, the source of income could be business. It is well established that a business undertaking can constitute a “property held under trust” for the purposes of section 11. Therefore, what is material to understand is the term “charitable purpose”.

2. CHARITABLE PURPOSE: S. 2(15):

2.1 Definition:

The term “charitable purpose” is defined in section 2(15) of the Income-tax Act, 1961. As on date the definition reads as under:

“(15) “charitable purpose” includes relief of the poor, education, yoga, 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 :

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.”

The definition is inclusive and not exhaustive. The word used is “includes” and the word “means” is not used. The definition divides the term “charitable purpose” into seven limbs covering six specific purposes/objects and the last residuary or general purpose/object viz., “the advancement of any other object of general public utility”. In each of such cases the first question would be whether the activity is a charitable activity or business. If the activity is a charitable activity then the income will be eligible for exemption. If the activity amounts to business then there will be no exemption and the income will be chargeable to tax.

The proviso is not applicable to the first six limbs. However, in the case of the last limb i.e., “the advancement of any other object of general public utility” the proviso provides certain conditions for the purpose of exemption. The proviso provides that in the case of the last limb i.e., “the advancement of any other object of general public utility” if the activity involves the carrying on of any activity in the nature of trade, commerce or business etc., then such object of general public utility shall not be a charitable purpose. This means, in respect of the first six limbs even if the activity involves the carrying on of any activity in the nature of trade, commerce or business etc., then such sch activity can still be treated as a charitable purpose. This is because the proviso is not applicable in such cases.

The proviso also provides an exception to the application of the proviso. It is provided that if the following two conditions are satisfied then the proviso will not be applicable. The two conditions are:

“i) Such business activity/activities should be incidental or ancillary to the main charitable activity; and

ii) The aggregate receipts from such activity/activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution.”

As per the existing proviso, a charitable trust or organization will continue to be charitable even if the ancillary or incidental object/activity is not charitable but constituted business but subject to a technical/arithmetical condition to be determined every year. Every year the assessee has to compare the receipts from such ancillary/incidental object/activity with the total receipts. If in a year, the receipts from such ancillary/incidental object/activity are less than or equal to 20% of the total receipts then the assessee will be treated as a charitable organization in that year and will be granted exemption u/s. 11 of the Act. If in another year, the receipts from such ancillary/incidental object/activity are more than 20% of the total receipts then the assessee will be treated as a non-charitable organization in that year and will be denied exemption u/s. 11 of the Act. Such a definition of charitable and non-charitable organization is clearly arbitrary and cannot be sustained in law. That portion of the proviso is expected to be quashed or read down to give a rational and reasonable meaning.

2.2 General Public Utility:

General Public Utility is a very wide term. It includes objects for benefit of the public or section of the public as distinguished from benefit to an individual or a group of individuals. The object may not be to benefit the whole mankind or all persons of a particular country or State. However, the burden of proof or the onus is on the assessee to prove that the objects are of charitable nature.

In the case of Bar Council of Maharashtra v. CIT [1980] 126 ITR 27(Bom) the Bombay High Court held as under:

“’General’ means pertaining to a whole class. ‘Public’ means the body of people at large including any class of the public and ‘utility’ means usefulness. Therefore, the advancement of any object beneficial to the public or a section of the public as distinguished from an individual or group of individuals would be a charitable purpose.”

Even if the object or purpose of an institution is not regarded as charitable in its popular signification, it may still be included in the expression charitable purpose if it advances an object of general public utility. However, the object must necessary be to benefit others than one self. One must look at the primary or dominant purpose of the Charitable Institution. Thus, an eleemosynary element is not essential along with the element of providing something for nothing or for less. It need not be present for General Public Utility. However, private gain objects would still be excluded.

The expression “objects of general public utility” refers to objects which promote the welfare of the general public and not the individual interest of some persons or private profit and private gain [CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC); Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)]. An object of general public utility would, however, exclude the object of private gain, such as an undertaking for commercial profit, though it would subserve the general public utility. Further, the concept of “general” pertains to a whole class. “Public” means the body of people at large, including any class of the public and “utility” means usefulness.

General Public Utility is in itself the residuary head where all charitable institutions, not covered under the first six heads, reside.

2.3 History as regards meaning of “Charitable Purpose”:

In order to understand the effect of the proviso it is advisable to go into history of the term ‘Charitable purpose’.

In Indian Income-tax Act, 1922 the term “charitable purpose” was defined in section 4(3) as under:

“’Charitable purpose’ includes relief of the poor, education, medical relief and the advancement of any other object of general public utility.”

In the Income-tax Act, 1961 the term “charitable purpose” was first defined in section 2(15) as under:

“‘Charitable purpose’ includes relief to the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit.”

In the definition the last ten words, viz., ‘not involving the carrying on of any activity for profit’ were added on the recommendation of the Select Committee. The Finance Minister while introducing the Bill of 1961 stated as under :

“The definition of ‘charitable purpose’ in the clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefits provided by them: for example, the news industry, which while running the concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the select committee felt that the words “not involving the carrying on of any activity for profit” would be added to the definition”

The addition of these words, viz., “not involving the carrying on of any activity for profit” gave rise to controversy with regard to the scope of the term “charitable purpose”. The Courts had to decide whether addition of these words would make the activities, which had given rise to profit as non-charitable? In that case exemption would not be available to such charitable institution. There were two views. One view was that the Parliament by introducing these words had not only curtailed the scope of the fourth head of the charity, viz., ‘advancement of any other object of general public utility’, but had also left little room for the taxpayers to maneuver the diversion of their business profits to charity. The other view was comparatively liberal in approach and had been accepted as a reasonable view. This second view was upheld by the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC). Subsequently, this view has been consistently followed by Courts. The Supreme Court was considering section 2(15) of the 1961 Act. The Supreme Court held as under:

“i) Where the main or primary objects are distributive, each and every one of the objects must be charitable in order that the trust or institution may be upheld as a valid charity. But if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity.

ii) The test which has now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. “If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity.” The restrictive condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object.

iii) If the purpose is charitable in reality, the mode adopted must be one which is directed to carrying out the charitable purpose. It would include a business engaged in for carrying out the charitable purpose of the trust or institution. The carrying on of such a business does not detract from the purpose which permeates it, the end result of the business activity being the effectuation of the charitable purpose.

iv) The real question whether a trust is created or an institution is established for a charitable purpose falls to be determined by reference to the real purpose of the trust or the institution and not by the circumstance that the income derived can be measured by standards usually applicable to a commercial activity. The quantum of income is no test in itself. It may be the result of an activity permissible under a truly charitable purpose for a profitable activity in working out the charitable purpose is not excluded.

v) The dominant or primary purpose of the assessee was to promote commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth and cotton cloth as set out in clause (a) and the objects specified in clauses (b) to (e) were merely powers incidental to the carrying out of that dominant and primary purpose;

vi) The dominant or primary purpose of the promotion of commerce and trade in art silk, etc., was an object of public utility not involving the carrying on of any activity for profit within the meaning of s. 2(15); and that the assessee was entitled to exemption u/s. 11(1)(a).”

After this decision of the Hon’ble Supreme Court in the case of Surat Art Silk Cloth Manufacturers Association, the definition of “charitable purpose” was amended vide Finance Act, 1983 w.e.f. 01/04/1984 and the words “not involving the carrying on of any activity for profit” were deleted. The aforesaid deletion was not done with a view to include in the definition even the activities, which are carried on for profit and, thus, make profits exempt from tax but the law laid down by the Supreme Court continued to apply.

3. PROVISO TO S. 2(15):

3.1 The proviso applies to only the last limb i.e. “the advancement of any other object of general public utility”. The applicability of the proviso has to be determined every year.

The proviso to section 2(15) was first introduced by the Finance Act, 2008 w.e.f. 01/04/2009 i.e., A. Y. 2009-10. The proviso read as under:

“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;”

The Memorandum explaining the provisions of the Finance Bill, 2008 proposing the amendments to section 2(15) of the Act stated as under:-

“Streamlining the definition of “charitable purpose”

It has been noticed that a number of entities operating on commercial lines are claiming exemptions on their income either under section 10(23C) or section 11 of the Act on the ground that they are charitable institutions. This is based on the argument that they are engaged in the “advancement of an object of general public utility” as is included in the fourth limb of current definition of “charitable purpose”. Such a claim, when made in respect of an activity carried out on commercial lines, is contrary to the intention of the provision. With a view to limiting the scope of the phrase “advancement of any other object of general public utility”, it is proposed to amend section 2(15)”

The CBDT vide Circular No. 11/2008, dated 19-12-2008 had explained the amendment as under:-

“5. Streamlining the definition of “charitable purpose”:

5.1 Sub-section (15) of section 2 of the Act defines “charitable purpose” to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility. It has been noticed that a number of entities operating on commercial lines are claiming exemption on their income either under sub-section (23C) of section 10 or section 11 of the Act on the ground that they are charitable institutions. This is based on the argument that they are engaged in the “advancement of an object of general public utility” as is included in the fourth limb of the current definition of “charitable purpose”. Such a claim, when made in respect of an activity carried out on commercial lines, is contrary to the intention of the provision.

5.2 With a view to limiting the scope of the phrase “advancement of any other object of general public utility”, sub-section (15) of section 2 has been amended to provide 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.

The Finance Minister while piloting the Finance Bill, 2008 had also stated as under in the Parliament:-

“Charitable purpose” includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under “charitable purpose”. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organisations will not in any way be affected.”

3.2 Insertion of second proviso:

3.2.1 Second proviso was inserted by the Finance Act, 2010 w.e.f. 01/04/2009 to give some relief. The second proviso read as under:

“Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year.”

The Memorandum explaining the provisions stated as under:

“The absolute restriction on any receipt of commercial nature may create hardship to the organizations which receive sundry considerations from such activities. It is, therefore, proposed to amend section 2(15) to provide that “the advancement of any other object of general public utility” shall continue to be a “charitable purpose” if the total receipts from 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 do not exceed ` 10 lakhs in the previous year.”

CBDT Circular No.1/2011 dated 06/04/2011 had explained the amendment as under:

“The absolute restriction on any receipt of commercial nature may create hardship to the organizations which receive sundry considerations from such activities. Therefore, section 2(15) has been amended to provide that “the advancement of any other object of general public utility” shall continue to be a “charitable purpose” if the total receipts from 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 do not exceed Rs.10 lakhs in the previous year.”

3.2.2 The figure of rupees ten lakhs was increased to rupees twenty-five lakhs by the Finance Act, 2011 w.e.f. 01/04/2012.

The Memorandum explaining the provisions sated as under:

“For the purposes of the Income-tax Act, “charitable purpose” has been defined in section 2(15) which, among others, includes “the advancement of any other object of general public utility”. However, “the advancement of any other object of general public utility” is not 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 and receipts from such activities is ten lakh rupees or more in the previous year.

It is proposed to amend section 2(15) to enhance the current monetary limit in respect of receipts from such activities from ten lakhs rupees to twenty-five lakhs rupees.”

Circular No. 2/2012 dated 22/05/2012 had explained the amendment as under:

“Second proviso to section 2(15) of the Act has been amended to provide that the specified monetary limit in respect of receipts from such activities shall be 25 lakh rupees instead of 10 lakh rupees.”

3.3 Replacement of proviso by the Finance Act, 2015:

The Finance Act, 2015 replaced the two provisos by the proviso as existing w.e.f. 01/04/2016. The newly inserted proviso reads as under:

“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.”

The Memorandum explaining the provisions sated as under:

Rationalisation of definition of charitable purpose in the Income-tax Act:

The primary condition for grant of exemption to a trust or institution u/s. 11 of the Act is that the income derived from property held under trust should be applied for charitable purposes in India. ‘Charitable purpose’ is defined in section 2(15) of the Act. The section, inter alia, provides that 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 ……… However, this restriction shall not apply if the aggregate value of the receipts from the activities referred above is twenty five lakh rupees or less in the previous year.

The institutions which, as part of genuine charitable activities, undertake activities like publishing books or holding program on yoga or other programs as part of actual carrying out of the objects which are of charitable nature are being put to hardship due to first and second proviso to section 2(15).

In so far as the advancement of any other object of general public utility is concerned, there is a need to ensure appropriate balance being drawn between the object of preventing business activity in the garb of charity and at the same time protecting the activities undertaken by the genuine organization as part of actual carrying out of the primary purpose of the trust or institution.

It is, therefore, proposed to amend the definition of charitable purpose to provide that the advancement of…………….., 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 percent. of the total receipts, of the trust or institution undertaking such activity or activities, for the previous year.”

CBDT Circular No. 19/2015, Dated 27-11-2015 explained the amendment as under:

4. Rationalisation of definition of charitable purpose in the Income-tax Act

4.1 Section 11 of the Income-tax Act deals with exemption to charitable trusts and institutions. The primary condition for grant of exemption to a trust or institution under the said section is that the income derived from property held under trust should be applied for charitable purposes in India. ‘Charitable purpose’ is defined in section 2(15) of the Act. The first proviso to clause (15) of section 2, inter alia, provides that ……… . However, as per the second proviso, this restriction shall not apply if the aggregate value of the receipts from the activities referred above is twenty five lakh rupees or less in the previous year.

4.2 The institutions which, as part of genuine charitable activities, undertake activities like publishing books or holding program on yoga or other programs as part of actual carrying out of the objects which are of charitable nature were being put to hardship due to first and second proviso to section 2(15).

4.3 The activity of Yoga has been …… .

4.4 In order to ensure appropriate balance between the object of preventing business activity in the garb of charity and at the same time protecting the activities undertaken by the genuine organization as part of actual carrying out of the primary purpose of the trust or institution, the definition of ‘charitable purpose’ in the Income-tax Act has been amended to provide that the advancement of ….., 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.”

3.4 It is seen from the above that the Government and the CBDT has consistently maintained that the proviso is intended only to prevent business activity in the garb of charity and at the same time protecting the activities undertaken by the genuine organization as part of actual carrying out of the primary purpose of the trust and that the genuine charitable organisations will not in any way be affected. That means the proviso is not to apply to genuine charitable organisations.

3.5 Constitutional validity:

India Trade Promotion Organization V. DGIT (Exemption); [2015] 371 ITR 333 (Del):

The constitutional validity of the newly introduced proviso in section 2(15) was considered by the Delhi High Court in this case. The High Court upheld the constitutional validity of the provision and for that purpose read down the provision. The assessee in this case was a trade association. The income received by the assessee was from the letting out of space, sale of publications, sale of tickets and leasing out food and beverages outlets in the Pragati Maidan. The dominant and the main object of the assessee was to organise trade fairs and exhibitions in order to promote trade, commerce and business not only within India but internationally. This is done through the organisation of trade fairs, including the annual international trade fair and other exhibitions. It was for this purpose that the space was let out to various entities during the fairs and exhibitions. The assessee was granted approval for exemption u/s. 10(23C)(iv) of the Income-tax Act, 1961 for the A. Y. 2007-08 onwards. However, consequent to insertion of the proviso in section 2(15) the exemption was withdrawn.

The assessee filed writ petition for quashing the order and also the first proviso in section 2(15). The Delhi High Court allowed the writ petition and held as under:

“i) “Charitable purpose”, as defined in section 2(15) of the Income-tax Act, 1961, is an inclusive definition. A proviso was inserted in section 2(15) by the Finance Act, 2008 with effect from April 1, 2009. The proviso has two parts. The first part has reference to the carrying on of any activity in the nature of trade, commerce or business. The second part has reference to any activity of rendering any service “in relation to” any trade, commerce or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee or any other consideration, irrespective of the nature or use or application or retention of the income from such activities. In other words, if, by virtue of a cess or fee or any other consideration, income is generated by any of the two sets of activities, the nature of use of such income or application or retention of such income is irrelevant for the purposes of construing the activities as charitable or otherwise. If an activity in the nature of trade, commerce or business is carried on and it generates income, the fact that such income is applied for charitable purposes, would not make any difference and the activity would none the less not be regarded as being carried on for a charitable purpose.

ii) By virtue of section 25 of the Companies Act, 1956, a company with charitable purposes is enjoined to plough back its income in furtherance of its object and the declaration of dividends is prohibited. If a literal interpretation is to be given to the proviso, then it may be concluded that this fact would have no bearing on determining the nature of the activity carried on. But, in deciding whether any activity is in the nature of trade, commerce or business, it has to be examined whether there is an element of profit making or not. Similarly, while considering whether any activity is one of rendering any service in relation to any trade, commerce or business, the element of profit making is also very important.

iii) The expression “charitable purpose” is not to be construed in a vacuum but in the specific context of section 10(23C)(iv) which specifically deals with income received by any person on behalf of, inter alia, an institution established for charitable purposes. Therefore, the meaning of the expression “charitable purposes” has to be examined in the context of section 10(23C)(iv).

iv) The expression has a reference to income. Because it is only when such an institution has an income that the question of not including that income in its total income would arise. Therefore, merely because an institution, which otherwise is established for a charitable purpose, receives income that would not make it any less a charitable institution. Whether that institution, which is established for charitable purposes, will get the exemption u/s. 10(23C)(iv) would have to be determined by the prescribed authority having regard to the objects of the institution and its importance throughout India or throughout any State or States. If a meaning were given to the expression “charitable purpose” so as to suggest that in case an institution, having an objective of advancement of general public utility, derives an income, it would be falling within the exception carved out in the first proviso to section 2(15) then there would be no institution whatsoever which would qualify for the exemption u/s. 10(23C)(iv). The provision would be rendered redundant. The intention behind introducing the proviso to section 2(15) could certainly not have been to render the provisions of section 10(23C)(iv) redundant.

v) With this in mind, it is to be seen as to what is meant by the expressions “trade”, “commerce” or “business”. The primary meaning of the word “trade” is the exchange of goods for goods or goods for money. The word “business” is of indefinite import and in a taxing statute, it is used in the sense of an occupation, or profession which occupies time, attention or labour of a person and is clearly associated with the object of making profit.

vi) Section 2(15) is only a definition clause. The expression “charitable purpose” in section 2(15) has to be seen in the context of section 10(23C)(iv). When the expression “charitable purpose”, as defined in section 2(15) is read in the context of section 10(23C)(iv) the strict and literal interpretation has not to be given to the expression “charitable purpose”. The introduction of the proviso to section 2(15) was directed to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity with the object of a general public utility. It was not designed to hit at those institutions, which had the advancement of the objects of general public utility at heart and were charity institutions. The attempt was to remove the masks from the entities, which were purely trade, commerce or business entities, and to expose their true identities. The object was not to hurt genuine charitable organisations. And, this was also the assurance given by the Finance Minister while introducing the Finance Bill, 2008.

vii) Courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down. In order to save the Constitutional validity of the proviso, the proviso would have to be read down and interpreted in the context of section 10(23C)(iv) because the context requires such an interpretation. The correct interpretation of the proviso to section 2(15) 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.

viii) It was clear from the facts of the case that profit making was not the driving force or objective of the assessee. It was registered u/s. 25 of the Companies Act, 1956 , which specifically applies to entities which intend to apply their profits, if any, or other income in promoting their objects and prohibits the payment of any dividend to its members. This made it clear that any income generated by the assessee did not find its way into the pockets of any individuals or entities. It was to be utilised fully for the purposes of the objects of the assessee. Prior to the amendment being introduced with effect from April 1, 2009, the assessee had been recognised as an institution established for charitable purpose and this had been done having regard to the objects of the institution and its importance throughout India. The assessee was entitled to approval u/s. 10(23C)(iv).”

3.6 Effect of the Proviso to section 2(15):

3.6.1 Section 13(8):

A new provision, i.e. section 13(8) was inserted by the Finance Act, 2012 w.e.f. 01/04/2009. It read as under:

“S. 13(8): Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in the said previous year.”

Thus, when the proviso is applicable, the exemption u/s. 11 will not be available and when the proviso is not applicable, the exemption u/s. 11 will be available. Accordingly, where the predominant or main object/activity is charitable and there are no ancillary or incidental objects/activities or the ancillary and incidental objects/activities are charitable the proviso will not be applicable and the income will be eligible for exemption. However, where the predominant or main object/activity is charitable but the ancillary/incidental objects/activities are not charitable and are in the nature of business the applicability of the proviso will have to be tested every year in terms of the turnover limit prescribed in the proviso.

3.6.2 Till the insertion of the proviso the matter was simple. Whether the object/activity of a trust/institution is charitable activity or business was determined on the basis of the predominant or main object/activity. If the predominant or main object/activity constituted business then the income was chargeable to tax and exemption will not be available. If the predominant or main object/activity is charitable then the income will be eligible for exemption and the nature of the incidental or ancillary object/activity was not separately determined. In such a case, the incidental or ancillary object/activity was also presumed to be charitable.

The proviso now requires the determination of the nature of the incidental or ancillary object/activity separately as to whether business or charitable. If it is charitable then the proviso will not be applicable and the assessee will be entitled to exemption. If it is business then the applicability of the proviso will have to be tested every year in terms of the turnover limit prescribed in the proviso. Thus, now the test for “business v. charity” will have to be applied to both the predominant object as well as the ancillary/incidental object.

3.6.3 The proviso has given rise to many new controversies. This has led to many unintended litigations causing unintended hardship to many genuine charitable organisations.

The question that will still remain to be answered is where the genuineness of the charitable organization and the charitable activity is clear whether the exemption will be denied merely on the technical ground of arithmetical working. The Government and the CBDT has consistently maintained that the proviso is intended only to preventing business activity in the garb of charity and at the same time protecting the activities undertaken by the genuine organization as part of actual carrying out of the primary purpose of the trust and also assured that the genuine charitable organisations will not in any way be affected.

In India Trade Promotion Organization v. DGIT (Exemption); [2015] 371 ITR 333 (Del) the Hon’ble Delhi High Court, while considering the constitutional validity of the proviso read down the proviso and one of the reasons for that was the above referred assurance by the Government and the CBDT. The relevant portion of the judgment reads as under:

“The introduction of the proviso to section 2(15) was directed to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity with the object of a general public utility. It was not designed to hit at those institutions, which had the advancement of the objects of general public utility at heart and were charity institutions. The attempt was to remove the masks from the entities, which were purely trade, commerce or business entities, and to expose their true identities. The object was not to hurt genuine charitable organisations. And, this was also the assurance given by the Finance Minister while introducing the Finance Bill, 2008.”

3.6.4 Thus, this is a case of purposive interpretation. Thus, it becomes the duty of the authorities and the courts to protect the genuine charitable organisations and to refrain from denying exemption to genuine charitable organisations under the garb of applying the proviso.

4. BUSINESS V. CHARITABLE ACTIVITY:

4.1 Section 2(13) of the Act defines the term “business” as under:

“‘business’ includes any trade, commerce or manufacture or any adventure or a concern in the nature of trade, commerce or manufacture.”

The term “business” has come up for consideration before the Courts in a large number of cases. In substance the view of the Courts is that it is an activity carried on in a systematic manner with a view to earn profit. Accordingly, in order to hold whether the activity is in the nature of trade, commerce or business, there should be profit motive. Whether such an activity is in the nature of trade, commerce or business is a question of fact, which has to be decided based on the nature, scope, extent and frequency of the activity. Hence, on considering the activities of a charitable institution if it can be said that same are in the nature of business, it has to be denied exemption, otherwise not.

Broad principle evolved on the basis of various decisions is that the cases where profit making is the object should be distinguished from cases where, though the objects of the trust are wholly charitable, yet some profit making activities are undertaken either in the course of or for the purpose of achieving some objects of general public utility. In the later type of cases, despite the undertaking of profit making activities, the object will continue to be charitable. It has to be seen, whether the dominant object of the activity of the trust is profit making or carrying out a charitable purpose? Object clause alone would not be conclusive. In the case of companies registered u/s. 25 of the Companies Act, 1956, the scope of the profit is eliminated by section 25 itself.

Where the association or institution has liberty to distribute dividends and grant other benefit to shareholders, it would not be a charitable institution. The mere fact that no dividends were distributed could not make any difference. Where there is provision for distribution of assets among the members at the time of dissolution, it would not be a charitable institution. Right of the Assessing Officer to examine the trust deed and also activities of a trust to ensure that activities are of charitable nature have always being recognized as exemption is available only to income relating to charitable activities. Business profit is undisputedly chargeable to tax. The controversy had always been based on the facts whether activities are of charitable nature or of business nature?

4.2 Asstt. CIT v. Thanthi Trust; [2001] 247 ITR 785 (SC); [2001] 115 Taxman 126 (SC):

In this case, the respondent was a newspaper press which used all its business income for charitable purpose. The Supreme Court held as under:

“i) A public charitable trust may hold a business as part of its corpus. It may carry on a business which it does not hold as part of its corpus.

ii) Though the activity of the newspaper was not incidental to the object of the trust, yet the press was held by them as a property of the trust. The fact that entire income accruing out of activities of the press was utilized for charitable purpose was the ground on which exemption was granted.

iii) It not being disputed that the income of the newspaper business had been employed to achieve its objectives of education and relief to the poor, that the trust was entitled to exemption from tax for those assessment years as the business of the trust was incidental to the attainment of the objectives of the trust, namely, the objectives of education and relief of the poor.”

4.3 Thus, in the above matter, the case was held to be fit for exemption. Thus, the Court categorically held that any business or trading activity carried on by any organization in furtherance of charitable purpose and which is incidental or in the course of the normal functioning of the trust is entitled for exemption. This position of law was maintained and followed in subsequent judgments as well and is still being followed.

4.4 As observed above, with the insertion of the proviso, now the test for “business v. charity” will have to be applied to both the predominant object as well as the ancillary/incidental object.

5 JUDGMENTS:

5.1 ICAI of India V. DGIT (Exemption); [2012] 347 ITR 99 (Del): Dated 19/09/2011: A. Ys.: 2006-07 to 2009-10:

The Institute of Chartered Accountants of India was denied exemption u/s. 10(23C)(vi) for the A. Ys. 2006-07 onwards on the grounds that (i) the Institute was holding coaching classes and, therefore, was not an educational institution as per the interpretation placed on the word “education” used in section 2(15) ; (ii) the Institute was covered under the last limb of charitable purpose, i.e., advancement of any other object of general public utility. In view of the amendment made in section 2(15) of the Act with effect from April 1, 2009, for the A. Y. 2009-10 onwards, the Institute was not entitled to exemption as it was an institution which conducted an activity in the nature of business and also charges fee or consideration. It was earning a huge profits in a systematic and organized manner and, therefore, it was not an institute existing for charitable purposes under the last limb of section 2(15) of the Act.

The Delhi High Court allowed the writ petition filed by the petitioner against the order and held as under:

“i) The most material and relevant words in the proviso to section 2(15) are “trade, business or commerce”. The word “business” is a broad term and it encompasses trade, commerce and other activities. A business activity has four essential characteristics. Firstly, a business must be a continuous and systematic exercise of activity. The second essential characteristic is profit motive or capacity of producing profit. Thirdly, the essential characteristic is that a business transaction must be between two persons. Business is not a unilateral act. It is brought about by a transaction between two or more persons. And, lastly, the business activity usually involves a twin activity. There is usually an element of reciprocity involved in a business transaction. A very broad and extended definition of the term “business” is not intended for the purpose of interpreting and applying the first proviso to section 2(15) of the Act to include any transaction for a fee or money. An activity would be considered “business” if it is undertaken with a profit motive, but in some cases this may not be determinative. Normally, the profit motive test should be satisfied but in a given case activity may be regarded as business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognised business principles, and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business.

ii) The fundamental or dominant function of the Institute was to exercise overall control and regulate the activities of the members/enrolled chartered accountants. A very narrow view had been taken that the Institute was holding coaching classes and that this amounted to business. The Institute had framed the Chartered Accountants Regulations, 1988, and the Regulations provided for training of students, their examination, award of degrees and membership of the Institute. There was a clear distinction between coaching classes conducted by private coaching institutions and the courses and examinations which were held by the Institute.

iii) The question whether the Institute carried on business had not been examined with proper perspective. The order denying the exemption was not valid.”

5.2 ICAI of India Vs DGIT (Exempion); [2013] 358 ITR 91 (Del): Dated 04/07/2013: A. Ys. 2006-07 to 2011-12:

For the A. Ys. 2006-07 to 2011-12, the petitioner was denied exemption u/s. 10(23C)(vi) of the Income-tax Act, 1961 on the ground that the petitioner was holding coaching classes for preparing students for the examinations being conducted by the petitioner and was charging fees for the same. The Assessing Officer concluded that the activity undertaken by the petitioner of providing coaching to students amounted to carrying on business and income from the same was liable to be treated as business income. The Assessing Officer also denied exemption to the petitioner u/s. 11 of the Act.

The Delhi High Court allowed the writ petition filed by the petitioner and held as under:

“i) The expressions “trade”, “commerce” and “business”, as occurring in the first proviso to section 2(15) of the Act, must be read in the context of the intent and purport of section 2(15) of the Act and cannot be interpreted to mean any activity which is carried on in an organised manner. The purpose and the dominant object for which an institution carried on its activities is material to determine whether the same is business or not. The purport of the first proviso to section 2(15) of the Act is not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee.

ii) The object of introducing the first proviso is to exclude organisations which are carrying on regular business from the scope of “charitable purpose”. The expression “business”, “trade” or “commerce” as used in the first proviso must, thus, be interpreted restrictively and where the dominant object of an organisation is charitable any incidental activity for furtherance of the object would not fall within the expression “business”, “trade” or “commerce”.

iii) After going through the provisions of the Chartered Accountants Act and the Regulations framed therein as well as various activities carried on by the Institute, it was clear that the Institute did not carry on any business, trade or commerce. The activity of imparting education in the field of accountancy and conducting courses both at pre-qualification as well as post-qualification level were activities in furtherance of the objects for which the Institute had been constituted.

iv) Activities of providing coaching classes or undertaking campus placement interviews for a fee were in relation to the main object of the Institute which cannot be held to be trade, business or commerce. Accordingly, even though fees were charged by the Institute for providing coaching classes and for holding interviews with respect to campus placement, the activities cannot be stated to be rendering service in relation to any trade, commerce or business as such activities are undertaken by the Institute in furtherance of its main object which as held earlier are not trade, commerce or business.

v) The Institute was entitled to exemption u/s. 11.”

5.3 ICAI Accounting Research Foundation V. DGIT (Exemption); [2010] 321 ITR 73 (Del): Dated 28/08/2009:

The petitioner, the ICAI Accounting Research Foundation was incorporated as a company registered u/s. 25 of the Companies Act, 1956 for imparting, spreading and promoting knowledge, learning education and understanding in the various fields relating to the profession of accountancy. The Foundation was registered u/s. 12A read with section 12AA(i) of the Income-tax Act, 1961 from the date of its incorporation. The Foundation provided research and consultancy services to various Government bodies; payments were made by these Government bodies and were accounted for by the Foundation under the head “Research contributions”. The payments so received were then used for making the payment to researchers/consultants hired by the petitioner to carry out the research work. The Foundation also received monies from Infosys Technologies Limited in the form of Infosys Fellowship Fund for grant of fellowship to deserving candidates under the Fellowship programme of the foundation in affiliation with Guru Gobind Singh Indraprastha University. The Foundation made an application to the Director-General of Income-tax (Exemptions) for exemption from Income-tax u/s. 10(23C)(iv) of the Act but the latter rejected the application on the ground that during the financial years 2003-04, 2004-05, 2005-06 and 2006-07, the Foundation had mainly done contract work, for which it had received certain payments; that these activities were basically the jobs done for third parties, for consideration received; that the Foundation was providing professional services on a regular basis, which was a commercial activity, not a “charitable activity”.

The Delhi High Court allowed the writ petition filed by the Foundation and held as under:

“i) The Foundation was entitled to exemption u/s. 10(23C)(iv) of the Act.

ii) The projects were research projects which were given to the Foundation having regard to its expertise in this field. Therefore, these activities per se would not bring the Foundation out of the ambit of section 2(15) of the Act. The activities amounted to “advancement of an object of general public utility” in the definition of charitable purpose in section 2(15) of the Act. Charging of amounts from the Government bodies for undertaking these research projects would not make the activity “commercial”. The projects were undertaken at the instance of the Government of India or the State Governments for improving the accounting and budgetary systems in these local bodies. The expertise of the Foundation in carrying out research in this field was sought to be utilized. Therefore, it could not constitute business/commercial activity. Merely because some remuneration was taken by the Foundation for undertaking these projects that would not alter the character of these projects, which remained research and consultancy work. Most of the amount received qua these projects was spent on the project and the surplus, if any, is used for advancement of the objectives for which the Foundation was established.

iii) The projects undertaken on behalf of these local bodies were not a regular activity of the Foundation. The primary activity remained research in accounting related fields. Even these projects which were taken up on behalf of those local bodies fit in the description of “research projects” which could be termed ancillary activity only.

iv) The amended definition of “charitable purpose” would not alter this position. Merely on undertaking those three research projects at the instance of the Government/local bodies the essential character of the Foundation could not be converted into the one which carries on trade, commerce or business or activity of rendering any service in relation to trade, commerce or business.

v) The Foundation had constituted an expert committee for selection of candidates for the Infosys Fellowship Research Programme. Candidates were selected to conduct research, who are assigned research projects. The essential character of the fellowship would not alter merely because of a distant possibility of a fellow leaving in the middle of the programme or finishing his research early.

vi) The status of a deemed company u/s. 25 of the Companies Act granted by the Government itself was the recognition of the fact that the Foundation was essentially established for the purpose of education and/or for advancement of any other project of general public utility.”

5.4 CIT (Exemption) V. United Way of Baroda; [2020] 423 ITR 596 (Guj): Date of order 25/02/2020: A. Y. 2014-15:

The assessee is a charitable institution registered u/s. 12A of the Income-tax Act, 1961. For the A. Y. 2014-15 the assessee filed its return of income declaring total income as nil after claiming exemption u/s. 11 of the Act. The Assessing Officer assessed the total income at ` 4,53,97,808. The Assessing Officer found that the assessee had received total income of ` 5,48,04,054 which included ` 4,37,61,637 as income received from organising the event of Garba during the Navratri festival. According to the Assessing Officer, the assessee sold passes and gave food stalls on rent, etc., which constitutes 79.85 per cent. of its total income. The assessee, during the year, had declared the gross receipts of ` 5,27,40,432 and showed surplus of ` 26,27,243. The assessee thereby claimed ` 4,42,59,665 as the income from charitable purpose. The Assessing Officer held that the activities of the assessee as per the amended provision of section 2(15) of the Act could not be said to be advancement of any other object of general public utility and, therefore, the assessee was not eligible to claim the benefit u/ss. 11 and 12 respectively of the Act, more particularly, in view of section 13(8) of the Act.

The Commissioner of Income-tax (Appeals), allowed the appeal of the assessee taking the view that the activities of the assessee could be termed as charitable in nature and the assessee would be eligible for the benefit u/ss. 11 and 12 respectively of the Act. The Tribunal concurred with the findings of the Commissioner (Appeals) and dismissed the appeal filed by the Revenue.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) Once the activity of the assessee falls within the ambit of trade, commerce or business, it no longer remains a charitable activity and the assessee is not entitled to claim any exemption u/ss. 11 and 12 of the Income-tax Act, 1961. The expression “trade”, “commerce” and “business” as occurring in the first proviso to section 2(15) must be read in the context of the intent and purport of section 2(15) and cannot be interpreted to mean any activity which is carried on in an organised manner. The purpose and the dominant object for which an institution carries on its activities is material to determine whether or not it is business.

ii) The object of introducing the first proviso is to exclude organisations which carry on regular business from the scope of “charitable purpose”. An activity would be considered “business” if it is undertaken with a profit motive, but in some cases, this may not be determinative. Normally, the profit motive test should be satisfied, but in a given case the activity may be regarded as a business even when the profit motive cannot be established. In such cases, there should be evidence and material to show that the activity has continued on sound and recognised business principles and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business.

iii) The main object of the assessee could not be said to be organising the event of Garba. The assessee had been supporting 120 non-Government organisations. The assessee was into health and human services for the purpose of improving the quality of life in society. All its objects were charitable. The activities like organising the event of Garba including the sale of tickets and issue of passes, etc., cannot be termed as business. The two authorities had taken the view that the profit making was not the driving force or the objective of the assessee. The assessee was entitled to exemption u/ss. 11 and 12.”

5.5 CIT(Exemption) V. India Habitat Centre; [2020] 424 ITR 325 (Del); [2020] 114 taxmann.com 84 (Delhi): Date of order 27/11/2019: A. Y. 2012-13:

The assessee was a society registered u/s. 12 of the Income-tax Act, 1961 and was granted approval u/s. 80G(5)(vi). The primary aim and objective of the assessee according to its memorandum of association, inter alia, was to promote the habitat concept. For the A. Y. 2012-13 the assessee filed a return in the status of trust and declared nil income. The Assessing Officer held that the activities of the assessee were hybrid in nature, partly covered by the provisions of section 11 read with section 2(15) and partly by the principle of mutuality and accordingly passed an order u/s. 143(3). He held that since the assessee did not maintain separate books of account, its income could not be bifurcated under the principle of mutuality or otherwise. The entire surplus in the income and expenditure account was treated as taxable income of the assessee.

The Commissioner (Appeals) allowed the appeal of the assessee relying upon the judgment of the court in the assessee’s own case for the A. Ys. 1988-89 to 2006-07. The Tribunal held that there was no material change in the fundamental facts for several years and the income of the assessee was to be computed u/ss. 11, 12 and 13 and dismissed the appeal filed by the Department.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) There was no ground to disentitle the assessee to the benefits of section 2(15). The Commissioner (Appeals) had found on the facts that the activities of the assessee fell within the meaning of the definition of “charitable activities” as provided u/s. 2(15). Applying the test of profit motive, it was held that the surpluses generated by the assessee were not being appropriated by any individual or group of individuals.

ii) Merely because the assessee charged for certain goods and services, it did not render such activities commercial activities and the Assessing Officer having accepted that the assessee promoted public interest as provided in the proviso to section 2(15) there could not be any doubt that the assessee should be regarded as charitable organisation and given the full benefit of exemption provided to such organisations under the Act.

iii) Since the assessee had not generated any surpluses from anyone, whether members or non-members, it was not correct to say that the assessee has claimed relief partly as charitable organisation and partly as mutual association. The principle of mutuality became superfluous in view of the fact that the activities were held to be charitable.

iv) Applying the principle of consistency, the Commissioner (Appeals) had held that there was no fundamental change in the nature of the activities of the assessee for the period prior to the A. Y. 2008-09 and subsequent years. The Tribunal had confirmed the findings of the Commissioner (Appeals). Though the principles of res judicata were not applicable to Income-tax proceedings, the fact was that there was no dispute with respect to the consistency in the nature of the activities of the assessee. All the authorities had held that the assessee was a charitable institution and this consistent finding of fact entitled the assessee to computation of its income u/ss. 11, 12 and 13.

v) It was imperative for the Department to establish that there was an element of profit motive in the activities of the assessee, to deny the benefit. If any surpluses had been generated on account of some of the activities of the assessee, it would not ipso facto be determinative of the fact that there was an element of profit motive. No error had been pointed out by the Department with respect to such finding of fact which would disentitle the assessee the benefit u/s. 2(15).”

5.6 CIT V. Naroda Enviro Projects Ltd.; (2019) 419 ITR 482 (Guj): Date of order 29/07/2019: A. Ys. 2009-10:

The assessee-company was incorporated on October 19, 1995, and later in point of time, converted into a company limited by shares incorporated u/s. 25 of the Companies Act, 1956. The assessee-company was engaged in the activity of preservation of environment by providing pollution control treatment for disposal of the liquid and solid industrial waste. The assessee-company was registered u/s. 12AA of the Income-tax Act, 1961 as a charitable institution. For the A. Y. 2009-10, the assessee had filed its return of income declaring total income(loss) of ` 258 along with the auditor’s report u/s. 12A(b) of the Act in Form 10B claiming exemption u/s. 11 of the Act. The Assessing Officer took the view that the assessee-company is not entitled to seek exemption u/s. 11 and held as under:

“(i) The assessee is carrying on business activity under the pretext of charitable activity. The incidental profit cannot be for all the years and not to the extent reflected in table given in the order.

(ii) The objects specified in the memorandum of association are important but the same have to be considered with reference to the real practice adopted for running the activity, i.e., whether it is charitable or for the purpose of making profit. The object included in definition of ‘charitable purpose’ as defined in section 2(15) should be evidenced by Charity; otherwise even environment consultant will also claim exemption u/s. 11 being a trust or a company u/s. 25.

(iii) The action is carried out for the benefit of members to discharge their onus of treatment of chemicals, etc. with substantial charge with intention to earn profit under the shelter of section 25 of Companies Act.

(iv) Hence it is held that the assessee is rendering service of pollution control as per the norms laid down by the Gujarat State Pollution Control Board or any other authority responsible for the regulation of pollution in relation to any trade, commerce or business carried out by the industries located in the industrial area of Naroda, Vatva and Odhav for a uniform cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income of such activity. Since the aggregate value of receipts are more than ` 10,00,000 both the proviso to section 2(15) are applicable to the assessee-company and it is not entitled for exemption.”

The Commissioner (Appeals) and the Tribunal held that taking an overall view, the dominant objects of the assessee were charitable as the dominant object was not only preservation of the environment, but one of general public utility and, therefore, the assessee was entitled to seek exemption u/s. 11 of the Act.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The assessee was a company engaged in the activity of preservation of the environment by providing pollution control treatment for disposal of liquid and solid industrial waste. The benefit accrued to the members of the company. The members were none other than the owners of the polluting industries. These members were obliged in law to maintain the parameters as prescribed by the Gujarat Pollution Control Board and in law for the purpose of discharge of their trade effluents, in other words, discharge of solid and liquid waste. If they did not do so, they would be liable to be prosecuted and their units would also be liable to be closed.

ii) However, this, by itself, was not sufficient to take the view that the company had not been set up for a charitable purpose. The birth of this company also needed to be looked into closely. The fact that the members of the assessee-company were benefited was merely incidental to the carrying out of the main or primary purpose and if the primary purpose was charitable, the fact that the members of the assessee benefitted would not militate against its charitable character nor would it make the purpose any less charitable.

iii) Prior to the introduction of the proviso to section 2(15) of the Act, the assessee-company was granted registration u/s. 12A of the Act. From this, it was clear that prior to the introduction of the proviso to section 2(15) of the Act, the authority, upon due consideration of all the relevant aspects, had arrived at the satisfaction that the assessee-company was established for charitable purposes. The company continued to be recognised as a charitable institution. The certificate issued u/s. 12A, after due inquiry, was still in force.

iv) The driving force was not the desire to earn profit, but the object was to promote, aid, foster and engage in the area of environment protection, abatement of pollution of various kinds such as water, air, solid, noise, vehicular, etc., without limiting its scope. In short, the main object was preservation and protection of the environment.

v) The Commissioner (Appeals) and the Appellate Tribunal had concurrently held that taking an overall view, the dominant objects of the assessee were charitable as the dominant object was not only preservation of the environment, but one of general public utility and, therefore, the assessee was entitled to seek exemption under section 11 of the Act. The Tribunal was the last fact finding body. As a principle, this court should not disturb the findings of fact in an appeal under section 260A of the Act unless the findings of fact are perverse.”

5.7 CIT V. National Internet Exchange of India; (2019) 417 ITR 436 (Del): Date of order 09/01/2018: A. Y. 2009-10:

The assessee was granted registration u/s. 12A of the Income-tax Act, 1961 from the A. Y. 2004-05. The assessee was engaged in general public utility services. The assessee was the only nationally designated entity entitled to allocate domain names to its applicants who sought it in India. It was also an affiliate national body of the Internet Corporation for assigned names and numbers and authorized to assign “.in” registration and domain names according to the Central Governments letter dated 20/11/2004. It provided basic services by way of domain name registration, for which, it charged subscription fee on annual basis and also collected connectivity charges. For the A. Y. 2009-10, the Assessing Officer was of the opinion that the subscription fee and the fee charged by the assessee towards various services provided by it were in the nature of commercial activity and fell outside the charitable objects for which it was established and denied exemption u/s. 11 of the Act.

The Commissioner (Appeals) held that the assessee had been incorporated without any profit motive, that the nature of services provided by the assessee were of general public utility and that the services provided were towards membership and connectivity charges which were only incidental to the main objects of the assessee. The Tribunal confirmed the order of the Commissioner (Appeals).

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The assessee had been incorporated without any profit motive. The services provided by the assessee were of general public utility and were towards membership and connectivity charges and were incidental to its main objects. The assessee (though not a statutory body) carried on regulatory work.

ii) Both the appellate authorities had concluded that the assessee’s objects were charitable and that it provided basic services by way of domain name registration, for which, it charged subscription fee on an annual basis and also collected connectivity charges. No question of law arose.”

6. CONCLUSION:

A literal meaning of the proviso can lead to denying exemption to a genuine charitable organisation for purely technical or arithmetical reasons. In India Trade Promotion Organization v. DGIT (Exemption); [2015] 371 ITR 333 (Del) the Hon’ble Delhi High Court, while considering the constitutional validity of the proviso read down the proviso and held that “even after insertion of the proviso 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.” The Court also referred to the assurance given by the Government and the CBDT that a genuine charitable organization will not be denied exemption. This principle has consistently been followed by Courts (see above judgments) and genuine charitable organization have been allowed exemption. The authorities in the department also should follow this principle.

All these judgments were dealing with the proviso to section 2(15) as existing prior to replacement of the proviso by the Finance Act, 2015 wherein there is a substantial change in the structure of the proviso. This, in my view should not make any difference as regards grant of exemption to genuine charitable trusts. The Government has not indicated any intention to deny exemption to genuine charitable trusts by this change in the proviso. In fact, the Government assurance that the genuine charitable trust will not be affected continues. The Memorandum and the CBDT circular clarify that the change is brought to give relief and get rid of the hardship caused due to the then existing proviso. Thus, the principles laid down by the Courts will continue to apply even after this change in the proviso.

As per the existing proviso, a charitable trust or organization will continue to be charitable even if the ancillary or incidental object/activity is not charitable but constituted business but subject to a technical/arithmetical condition to be determined every year. Every year the assessee has to compare the receipts from such ancillary/incidental object/activity with the total receipts. If in a year, the receipts from such ancillary/incidental object/activity are less than or equal to 20% of the total receipts then the assessee will be treated as a charitable organization in that year and will be granted exemption u/s. 11 of the Act. If in another year, the receipts from such ancillary/incidental object/activity are more than 20% of the total receipts then the assessee will be treated as a non-charitable organization in that year and will be denied exemption u/s. 11 of the Act. Such a definition of charitable and non-charitable organization is clearly arbitrary and can not be sustained in law. That portion of the proviso is expected to be quashed or read down to give a rational and reasonable meaning.

Further in case of genuine charitable trust/organization the Courts have consistently held that the ancillary and incidental objects/activities should also be treated as charitable. Thus, such ancillary and incidental objects/activities cannot be treated as business and accordingly, the proviso should not be applicable in case of genuine charitable trust/organization.

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