A number of trusts, societies and other organization avail exemption under Section 11 or Section 10(23C) by virtue of having income derived from property held under trust wholly for charitable or religious purposes, to the extent of the application of such income.
Section 2(15) of the Act defines the term ‘Charitable Purpose’, which includes
(i) Relief of the poor
(iii) Medical relief and
(iv) The advancement of any other object of general public utility.
‘Relief to the poor’ encompasses a wide range of ‘objects’ for the welfare of the economically and socially disadvantaged or needy. Therefore, includes within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmer, indigent artisans or senior citizen in need of aid. Entities who have these objects are eligible for exemption even if they incidentally carry on a commercial activity subject to conditions stipulated under Section 11(4A) or seventh proviso to Section 10(23C). This has been held by various courts in their interpretation of Section 2(15) as well as by various CBDT circulars. Similarly entities, whose object is education ‘or’ medical relief, are also eligible for exemption as charitable institution even if they incidentally carry on a commercial activity.
However, with the advent of a latest judgement of the Apex Court in the case of CIT Vs Gujarat Maritime Board reported in (2007) 295 ITR 561 (SC), whereby it was held that “when an object is to promote or protect the interest of a particular trade or industry that object becomes an object of public utility, but not so, if it seeks to promote the interest of those who conduct the said trade or industry”, issue arose in the legislative quartets regarding exemption to be given to all entities claiming to have done an advancement of an object of general public utility, which may lead to exemption to entities carrying on commercial activities. In this background, an exception to the forth limb of the meaning of the expression ‘charitable purpose’ in Section 2(15) was introduced by way of insertion of a proviso in the said section by bringing Amendment by Finance Act, 2008, w.e.f. 1.4.2009. The said 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, commence 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 legislative mind behind bringing the said amendment can be understood by reading the memorandum explaining the provision in the Finance Bill, 2008, under the head “Rationalisation and Simplification measures’ with a Sub head “streamlining the definition of charitable purpose” which is as follows :
“Section 2(15) 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 noted that a number of entities operating on commercial lines are claiming exemption on their income either under section 10(23) 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 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. With a view to limiting the scope of the phrase advancement of any other object of general public utility” shall not be a charitable purpose if it involves the carrying on of —-
(a) any activity in the nature of trade, commerce or business or,
(b) any activity of rendering of any service in relation to any trade, commerce or business, for a fee or cess or any other consideration, irrespective of the nature of use or application of the income from such activity, or the retention of such income, by the concerned entity.
This amendment will take effect from the 1st day of April, 2009 and will accordingly apply in relation to the assessment year 2009-10 and subsequent assessment years.”
Need for Circular
Though the Budget speech of the Finance Minister was silent on the issue, it was later on represented by various trade bodies having charitable objects that outright denial of exemption merely because of some incidental or ancillary activities or transaction being commercial in nature should be considered as totally unwarranted. We must take note of the following extract from the reply of the Finance Minister to the debate in the Lok Sabha on 29.04.2008 on Finance Bills, 2008.”Clause 3 of the Finance Bill, 2008 seeks to amend the definition of ‘charitable purpose’ so as to exclude 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 or use of application, or retention, of the income from such activity. The intention is to limit the benefit to entities which are engaged in activities such as relief of the poor, education, medical relief and any other genuine charitable purpose, and to deny it to purely commercial and business entities which wear the mask of a charity….. I once again assure the House that genuine charitable organization will not in any way be affected. The CBDT will, following the usual practice, issue explanatory circular containing guidelines for determining whether an entity is 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. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of commerce and similar organizations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as advancement of any other object of general public utility”.
In the wake of these developments the CBDT has come up with a circular No.11/2008, dt. 19.12.08, to clarify certain issues related to said amendment. The extract of the said circular relevant for our concern reads as under :-
“3. The newly inserted proviso to Section 2(15) will apply only to entities whose purpose is ‘advancement of any other object of general public utility’ i.e. the fourth limb of the definition of ‘charitable purpose’ contained in Section 2(15). Hence, such entities will not be eligible for exemption under Section 11 or under Section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.
3.1 There are industry and trade associations who claim exemption from tax U/s 11 on the ground that their objects are for charitable purpose as these are covered under ‘any other object of general public utility’. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not all under the purview of the proviso to Section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to Section 2(15).
3.2 . In the final analysis, however, whether the assessee has for its object ‘the advancement of any other object of general public utility’ is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of ‘general public utility’ will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessee’s who claim that their object is ‘charitable purpose’ within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.”
In order to scientifically analyse the above circular, one must first go into the legislative history of the phrase “charitable purpose”.In the Income Tax Act of 1922, though ‘any object of general public utility was included in the definition of ‘charitable purpose’, in the present ‘Income Tax Act, 1961 an exclusionary clause namely ‘not involving the carrying on of any activity for profit’ was inserted which qualify or govern the last head of charitable purpose. For the interpretation of the forth head of Section 2(15), in 1922 Act, where the restrictive words were absent, the hon’ble Apex Court held in the case of CIT Vs.Andhra Chamber of Commerce (1965) 55 ITR 722 (SC) that if the primary or dominant purpose of a trust or institution was charitable, any other object which by itself might not be charitable but which was merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity.
For the interpretation of forth head of Section 2(15), in 1961 Act, where the exclusionary clause or restrictive words were present the hon’ble Apex court in the land mark judgment of Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association (1979) 121 ITR 1 (SC), affirmed that the test of primary or dominant purpose of a trust or institution still holds goods, that the restrictive word qualify ‘object’ and not the advancement or accomplishment thereof and that the true meaning of the restrictive words was that when the purpose of a trust or institution was the advancement of an object of general public utility, it was that object of general public utility and not its accomplishment or carrying out which must not involve the carrying on of any activity for profit. There are a number of judicial pronouncements given by the Apex Court itself on the same lines such as in the case of CIT Vs. Bar Council of Maharashtra (1981) 130 ITR 28(SC), Indian Chamber of Commerce Vs. CIT (1975) 101 ITR 796 (SC), CIT Vs. Andhra Pradesh Road Transport Corporation (1986) 159 ITR 1(SC), Thiagaraj Chemities Vs. Addl. CIT (1997) 225 ITR 1010 (SC), East India Industries Madras (P) Ltd. Vs. CIT (1967) 65 ITR 611 (SC), Lok Shikshana Trust Vs CIT(1975) 101 ITR 234 (SC). With the backdrop of such landmark rulings given by the Supreme Body, such an amendment is in clear deviation from the law held by the courts and in total disregard to the same. The concept of “charitable purpose”, which had become a trite law by now, by various judicial pronouncements very elaborately explained, understood and reiterated, has actually been disturbed by bringing such an amendment.
Analysis of Circular
The implications arising from the circular are as follows:
(i)In cases of entities engaged in Relief of the Poor, education or medical relief, there is going to be no change at all, they would continue to be eligible for exemption as charitable institution even if they incidentally carry on a commercial activity subject to the conditions as prescribed in Section 11(4A) or seventh proviso to Section 10(23C), whichever is applicable.
(ii) Industries or trade associations having object for charitable purpose coming specifically under the forth limb of the definition of ‘charitable purpose’ under Section 2(15) has to qualify the test of ‘mutuality’ to avail the benefit of exemption. There will be no other way in which the exemption can be availed. In cases of mixed dealings the exemption will be limited only to the extent of dealing with members only and dealing with non members will be devoid of such exemption. If any business or trade activity an organization is bound to carry on in order to fulfill its obligation of charity, it is very difficult to foresee a scenario in which that incidental activity is limited to members of the organization as the charity may be for the non members too. Further, the concept of ‘mutuality’ itself is a contentions and lot of litigation has already gone and still going on.
(iii) Since no generalization is now possible in view of this amendment, the issue whether an entity is eligible for exemption or not will be decided on case to case basis and this will lead to an increase in cost in terms of time and money in litigation. Courts will have to once gain take view on the matters which have as of now been settled by the highest court in this country. This will amount to unsettling the settled position of law. Further, this will mean giving power to the department officials to deal with and decide such matters. This will also lead to certain absurd results like some activity being charitable upto 31st March, 2008, even, in the view of highest judicial authority and suddenly it becoming non charitable from 1st April, 2008.
(iv) There may be some genuine charitable trusts or organizations which have obligation of charitable nature and to fulfill those they have to earn some business income by legitimate activities, properly disclosed in the books of accounts and records, the income derived from these entities would not be eligible for exemption even if they are applied for charitable purposes.
In this view, it can be seen that the said circular pertaining to amendment to Section 10(15) may prove to be deterrent to some very genuine charitable work to be done in our nation. More so, no specific provision or no specific exclusion for Chamber of Commerce and other such organizations have been brought out in that circular, as was promised by the Finance Minister himself.