INTRODUCTION
Income Tax Act, 1961 defines charitable purpose as activities including providing relief to the poor promoting education and yoga, providing medical reliefs, preservation of environment and historical monuments and advancement of any other object of general public utility (GPU)[1]. According to the proviso to section 2(15) of the IT Act, such advancement of the object of GPU would not be considered charitable if an institution is engaged in “trade, commerce, or business”, or provides any service relating to trade, commerce, or business for which a cess, fee, or other consideration is received. However, if such activity is carried out in the course of carrying out such advancement of any other GPU object, and the aggregate receipts from such activity during the previous year do not exceed 20% of the institution’s total receipts for the relevant period, such activity is considered charitable activity. The charitable institutions since long have argued that charging of nominal consideration during the course of their activities to fulfil their purpose should not be seen as commercial activity in the nature of ‘trade, commerce or business’. The Indian Revenue Authorities (“IRA”), on the other hand, contended that the provision’s reference to the phrase “trade, commerce, or business” reiterates that there should be no profit motive and that the GPU should not engage in any commercial activity.
As the provision is not very clearly worded and does not provide precise definition of what is ‘in the course of carrying out such advancement’ the courts have been asked to set the law clear. The Supreme Court in October 2022 in the case of Assistant Commissioner of Income Tax v. Ahmedabad Urban Development Authority[2] has settled the law. The issue in the case was the definition of ‘General Public Utility (GPU)’ in Section 2(15) of the Income-tax Act, 1961, and when that object of ‘General Public Utility (GPU)’ is converted into ‘trade, commerce, or business’ in order to attract the limits set out in the said Section for being covered as a charitable purpose.
History of the Clause
Clause (15) [ Section 4(3) of the 1922 Act]: The definition of the 1922 legislation and the 1961 act were nearly identical. In 1922 Act it mentioned four set of activities (i) relief of the poor (ii) education (iii) medical relief and (iv) advancement of any other object of general public utility. The sole change in the 1961 act was addition of the words “not involving carrying on any activity of profit” and they suggested that an organisation engaged in profitable activity would not be charitable. When the requirements in Section 11(4) were met, the Finance Act of 1983’s amendment to Section 11 allowed charitable organisations’ business revenues and gains to be exempt. Eventually, the words “not involving the carrying on any activity of profit” were removed.
Finance Act of 2008 replaced the previous definition in section 2 (15) and added the first proviso to state that the advancement of any other object of general public utility will cease to be a “charitable purpose” if it involves any “trade Commerce or business”. The proviso was quite vaguely worded and suggested that even the smallest amount of commercial activity would disqualify the entire organisation as charitable. Indeed, number of Charitable Trusts rendering yeoman services were negatively affected.
Since April 1, 2009, preservation of the environment and preservation of monuments, places, and objects of historical or artistic interest have been included in the definition, and since April 1, 2016, yoga has been added, indicating that these are no longer considered to be in the category of “general public utility.” There are now 6 specific categories and the 7th category refers to “advancement of any other object of public utility”.
The finance minister stated that the Chambers of Commerce and other similar organisations would not be impacted by this amendment. He also mentioned in his budget speech from 2008 that the CBDT would issue guidelines to determine whether an entity is caring on any activity in the nature of trade, commerce, or business. No such guidelines, however, were issued and the department issued notice of organizations who were forced to file writs in various high courts for appropriate orders. Even today the draconian proviso is being made applicable to Charitable trusts without having regard to their objects. The charitable Organization have incurred the cost of litigation and await relief either at the tribunal or the High Court.
The first and second provisions have been substituted by the finance act 2015. Earlier it provided that if activities of any trust or institution is of the nature of advancement of any other object of general public utility and it involves carrying any activity in nature of trade commerce or business but the aggregate value of receipts from such commercial activities does not exceed 25 lakhs in the previous year the purpose of such trust shall be Deemed as charitable despite it deriving consideration from such activities. Thus, an entity pursuing advancement of the object of general public utility could be treated as a charitable institution in one year and not in the other year depending on the aggregate value of Receipts. This has been substituted by a new proviso under which conditions have been relaxed to state that the exemption will be available if the commercial activity is undertaken during actual carrying out of advancement of any other object of general public utility and receipt from those commercial activities is not in excess of 20% of the total receipts of the institution during the previous year. The board has also clarified that registration under section 12AA (now s, 12 AB) is not required to be cancelled just because Deductions are in excess of the stipulated amount.
A straightforward interpretation of the proviso reveals that it only applies to the residual category of “general public utility,” and not to the first six categories. Therefore, institutions and organisations that provide medical assistance, poverty relief, education, etc cannot be denied the benefits of ss. 11 to 13A and 80G only because they engage in a profitable operation. For instance, the proviso will not apply if a wildlife conservation organisation organises tours of wildlife or sells books to raise awareness. These activities would fall under “protection of wildlife”. In contrast, the department holds that this proviso applies to every organisation that engages in even the smallest amount of commercial activity. This is absolutely at odds with how the section is written and with the explanatory circular that the CBDT released.
The Delhi High Court, which had to decide whether actions carried out for the purpose of imparting education amounted to business within the meaning of this section, extensively explored the scope of these revisions. In a later ruling, the Delhi High Court confirmed the proviso’s constitutional legality but interpreted it down to limit its applicability to situations where the trust or institution’s primary goal is profit-making[3].
On interpretation of the proviso, keeping in mind the intention of the Legislature with which it was introduced, the Gujarat High Court has held that merely because the trust is carrying out activities for the purpose of achieving the object of the trust certain incidental surpluses are generated will not render the activity in the nature of trade commerce or business[4]. The legal term “trade commerce or business” in proviso mean activity undertaken with a view to make or earn profit[5]. The purport of the proviso is not to exclude entities which are essentially for charitable purposes but are conducting some activities for a consideration or a fee. Occasional sales and fund generating activity for furthering the object will not be indicative that the trust is in trade commerce or business[6]. A trust which has the power to carry out activity of business without profit motive whose objective is education or relief of the poor will not be denied the benefit of exemption because of the proviso[7].
Assistant Commissioner Of Income Tax (Exemptions) v. Ahmedabad Urban Development Authority [2022].
A large number of assesses covering statutory corporations, authorities, or bodies (such as the Gujarat Housing Board, the Karnataka Water Supply and Drainage Board, and so on), statutory regulatory bodies (such as the Institute of Chartered Accountants of India – ICAI), trade promotion bodies, councils, and so on (such as the Rajasthan State Seed and Organic Production Certification Agency, the Andhra Pradesh State Seed Certification Agency, and so on), non-statutory bodies (such as ERNET, GSI etc. ), Cricket associations like ( Gujarat State Cricket Association etc.) were involved in the decision.
The judgement is 149 pages long and analyses the full evolution of law, including different modifications made over the years, as well as jurisprudence, including a vast number of previous Supreme Court and High Court rulings.
The Supreme Court was asked to decide what was the correct interpretation of the proviso to Section 2(15) of the Act as it applied to such GPU institutions. Various High Courts have interpreted the proviso to hold that when the action carried out does not entail any ‘profiteering motivation,’ the activity cannot be deemed to be commercial, and thus the proviso to section 2(15) of the Act shall not be relevant[8]. On the other hand, several High Courts have ruled that although certain actions are of the character of GPU, the accumulation of a sizable profit without any justification or evidence that it was done to advance GPU interests would not be considered a charitable purpose as defined by section 2(15) of the Act read with the proviso thereto. If the prices demanded by such GPU entities are much more than cost, it can be inferred that the activity in question is a commercial one. If such services carry a nominal markup or are priced over cost, they would be considered commercial activities, and the current restriction that the total receipts cannot exceed 20% of the gross receipts would then apply. In the event that these go beyond the aforementioned restrictions, the GPU institution will not be regarded as engaging in exempt charity activity[9].
Supreme Court Ruling
According to the Supreme Court’s past rulings, it is acceptable for a GPU institution to engage in a commercial activity that generates accidental profits if those gains are used to further the institution’s primary philanthropic goal. This is known as “feeding back.” The proviso to section 2(15) of the Act was added by the legislature in order to accommodate a paradigm shift. The first change is that a GPU category taxpayer is no longer permitted to engage in any commercial activity for any payment (including a statutory fee etc.). As a result, the Supreme Court’s earlier decisions that outlined the need that the charity be motivated by a predominant object are no longer valid and the test is no longer the law.
Second, the legislature partially lifts the ban by allowing GPU institutions to carry out certain activities on business activity during the actual execution of the GPU activities within the established parameters.
(ii) Connotation of the term ‘trade, commerce, or business’
The Supreme Court has acknowledged that the Act’s prohibitions do not include “pure charity” (defined as performing an act without receiving anything in return).
In general, “trade, commerce, or business” cannot be defined as the charge of any amount toward consideration for such a GPU activity that is on a cost-basis or nominally over cost (and so reaping nominal profit / surplus). The Supreme Court added that the limits outlined in the proviso to section 2(15) of the Act will apply if the charges are noticeably or significantly higher than the cost incurred. If so, the charges would constitute an unfair “cess, fee, or any other consideration” toward “trade, commerce, or business.” As a result, the revenue was instructed to determine the aforementioned fact from the taxpayer’s records on an annual basis.
(iii) Interpretation of the term ‘incidental’ appearing under section 11(4A) of the Act
According to Section 11(4A) of the Act, charitable trusts’ business profits and gains may be excluded provided they are incidental to achieving their objectives and separate books of accounts are kept.
The Supreme Court held that the proper way to interpret the term ‘incidental’ as referred to in section 11(4A) of the Act is to interpret it in light of clause I of the proviso to section 2(15) of the Act, i.e., that the activity in the nature of business, trade, commerce, or service in relation to such activities should be conducted actually in the course of achieving the GPU object, and the income, profit, surplus, or gains can then be logical. Only when the action of business, trade, or commerce is inherently conducted to achieve the GPU purpose can it be considered incidental.
(iv) Application of the aforesaid principles to the following categories of taxpayer.
Authorities, corporations, or bodies established by statute:
The Supreme Court stated that recovery of charges or fees as per the rates specified by the Act itself, cannot be regarded as “fee, cess, or other consideration”. Furthermore, because such actions are necessary for the development of public goals / functions, they are prima facie to be excluded from the category of ‘commercial activity’.
Statutory Regulators:
The Supreme Court observed that such regulators undertake statutory tasks in the greater public interest and hence do not engage in commercial operations by definition. The income and receipts of statutory regulating bodies, for example, which are burdened with the exclusive functions of prescribing curriculum, disciplining professionals, and prescribing standards of professional conduct, are not commercial receipts at first glance.
Bodies Promoting Trade:
Trade promotion bodies established solely for the purpose of advocating for, coordinating, and aiding trading organisations can be said to be involved in the advancement of general public utility objects. However, where additional services such as training courses, private renting areas at fairs or trade exhibits, consulting services, and so on are provided, the income or receipts from such activities are commercial in nature, and thus the proviso to Section 2(15) of the Act applies.
Non- Statutory Bodies:
Non-statutory bodies performing public functions are engaged in vital public purposes, and if the compensation charged by them for the purposes given is nominal, the activity may not be commercial in nature.
Cricket Associations of State:
The Supreme Court dismissed the sports associations’ assertion that “sports promotion” constitutes “education,” ruling that such activities would fall under the GPU category. It was discovered that state cricket associations operate on business lines, with such associations owning physical and other infrastructure, maintaining it, arranging for permanent manpower, having well-organized supply chains to cater to the various matches they host, earning media rights, broadcasting rights sponsorship fees, and so on. As a result, the Supreme Court directed the revenue to establish the pattern of revenue and expenses, as well as the scope of sports promotion activities, and the cases were remanded for further consideration. As a result, the Supreme Court directed the revenue to establish the pattern of revenue and expenses, as well as the scope of sports promotion activities, and the cases were remanded for further consideration.
Conclusion
The Supreme Court has endeavoured to clear the confusion regarding the applicability of section 2(15). The ruling establishes the rule that charitable organisations promoting “general public utility” are not permitted to engage in trade, commerce, or business unless it is done so in the purpose of actually carrying out the GPU. Additionally, if the taxpayer charges significant sums beyond the cost for GPU-related operations, those activities would be regarded as “trade, commerce, or business” and subject to the legal limitations.
[1] Sec 2(15) Income Tax Act, 1961
[3] India Trade Promotion Organization v. DGIT 371 ITR 333
[4] DIT (Exemption) v. Sabarmati Ashram Gaushala Trust 362 ITR 539
[5] GSI India v. DGIT 360 ITR 138
[6] DIT V. Women’s India Trust 379 ITR 506
[7] Hamdard Laboratories India v. ADIT 379 ITR 393
[8] Ahmedabad Urban Development Authority v. CIT 781 ITR 397
[9] Punjab & Haryana High Court in Tribune Trust v. CIT [2016] 76
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