The Finance Act, 2008 had amended the definition of charitable purpose contained in section 2(15), by adding a proviso to the effect that advancement of an object of general public utility would not be a charitable purpose, if it involved 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.
This amendment impacted many large and small trusts, resulting in the possible loss of exemption altogether for such trusts. The proviso to section 2(15) is now being sought to be amended with retrospective effect from assessment year 2009-10 by insertion of a second proviso to that section, to the effect that the first proviso would not apply if the aggregate value of the receipts from the activities referred to in the first proviso is Rs. 10 lakhs or less in the previous year.
This amendment will benefit small trusts which have been carrying on such activities in the nature of trade, commerce or business or of rendering services in relation to trade, commerce or business, where the volume of such activities is not very significant. Such trusts having aggregate receipts up to Rs. 10 lakhs in a particular previous year from such activities would continue to enjoy the benefit of exemption as charitable trusts. It is important to note that it is not the gross receipts of the trust which is to be considered, but only the gross receipts from the activities in the nature of trade, commerce or business, or of rendering services in relation to trade, commerce or business.
One should also note that it is not the net income from such activities which is to be considered, but the gross receipts. The proviso uses the term ‘aggregate value of receipts’ and not just “gross receipts”. Would it be possible for the tax authorities to contend that though the actual receipts are less than Rs. 10 lakhs, the “aggregate value of receipts” is higher? One thing is clear is that the “value of receipts” is quite different from the “value of services”. It cannot be contended that the receipts ought to have been higher than that actually received. At best, there could be disputes in relation to valuation of receipts in kind from such activities. Where the entire receipts are in cash, there cannot be a dispute as to the valuation of such receipts.
Can a trust which is following the mercantile system of accounting contend that, for the purpose of the exemption, it is not the gross sales or turnover under the mercantile system which is to be considered, but the actual receipts on a cash basis? Given the language of the proviso, which does not use the term “total sales, turnover or gross receipts” as contained in section 44AB, this does seem possible.
There would however be certain other practical difficulties in the application of this proviso. Trusts which have income from such activities may be regarded as charitable in one year in which their receipts from such activities is less than Rs.10 lakhs, may lose the exemption in the subsequent year if the receipts from such activities exceed Rs.10 lakhs, and may once again get the benefit of the exemption in the 3rd year if the receipts are again below Rs.10 lakhs. The same object may be charitable in some years, and not charitable in others.
Since it is the gross receipts of the previous year which is to be considered, a trust would not know until the end of the year as to whether it is entitled to the benefit of the exemption or not, if it’s gross receipts from such activities are in the vicinity of Rs. 10 lakhs.
It may therefore not be able to pay advance tax on its income, if it ultimately loses the benefit of exemption for that year. Similarly, donors may not get the benefit of deduction under section 80G, if the trust ultimately loses exemption for the year. This would be realised only after the end of the year or after the gross receipts for the year from such activities exceed the limit.
What is the position as regards registration under section 12AA? Would that continue or would it be cancelled in a year in which the trust loses the benefit of exemption by virtue of not meeting the criteria laid down in the definition of charitable purpose? Section 12AA(3) provides for a cancellation of registration only where the activities of the trust are not genuine or where the activities are not being carried out in accordance with the objects of the trust. In a case where the trust loses exemption by virtue of the aggregate value of receipts from such activities exceeding the limit, it cannot be said that its activities are not genuine, and therefore there cannot be a cancellation of registration on this ground.
So far, courts have taken the view that it is the Commissioner who is to determine whether the objects are charitable or not, and not the Assessing Officer. Registration under section 12AA is intended to be a one-time process. It would be practically impossible for the Commissioner to monitor each year whether the object of the trust is charitable or not, depending upon the receipts of the trust from such activities. The registration cannot be linked to an exemption, which may or may not be available each year. Therefore, registration under section 12AA should normally be granted in all cases without having regard to the aggregate value of receipts from such activities. Whether the exemption is available and the trust meets the requirements of the definition of ‘charitable purpose’ is an issue which can be examined each year only by the Assessing Officer.
This amendment is intended to have retrospective effect from assessment year 2009-10. What is the position of trusts which had applied for registration under section 12AA in the financial year 2008-09 when they were set up, but were refused registration on the ground that they carried on activities which were in the nature of trade, commerce or business or of rendering service in relation to trade, commerce or business? Subsequent to the amendment, such trusts can once again apply for registration under section 12AA. However, the Commissioner currently does not have the power to grant registration with retrospective effect, and such registration would only take effect from the year in which the application is made. Therefore, in order to give full benefit of the retrospective amendment, it would be essential to grant such a power to the Commissioner or to provide that in such cases, the registration would be effective from the year in which the rejected application was made by the trust.
This is the second retrospective amendment to the proviso to section 2(15). This shows that the insertion of the proviso was not properly thought through and badly drafted. Considering the difficulties caused to many trusts, it may be advisable that both the provisos to section 2(15) be deleted, and an amendment made only to section 11(4A) to bring out the true intention of taxing those trusts carrying on business in the guise of charitable activities.
The second amendment is a consequence of the decision of the Pune bench of the Tribunal in the case of Bharati Vidyapeeth vs. ITO 119 TTJ (Pune) 261. In that case, the Tribunal had held that the power of the Commissioner under section 12AA(3) to cancel registration was only restricted to trusts which were registered under section 12AA, and not to trusts which were registered under section 12A (prior to insertion of section 12AA). The ratio of this case is now being overcome by providing in section 12AA(3) that, with effect from 1st June, 2010, the Commissioner would have the power to cancel registration of trusts which were registered under section 12A as well. This amendment, in a sense, rectifies a drafting error.
