This article intends to deal with business activity by Trusts, NGOS and other organization more particularly engaged in General Public Unity (GPU) Activities.
The provisions under Income Tax Act 1961, for business activities carried on by Trusts, NGOS and other organization have gone through various changes either by amendment in Income Tax Laws or judicial pronouncements. This article specially envisages on two important land mark judgments pronounced by Hon. Supreme Court of India. (First in New Noble Education Society vs. C.I.T. which deals with tax exemption to educational activities u/s. 2(15) and 10(23)(c) of Income Tax Act, 1961) and other in case of Ahmadabad urban development authority which is dealing with charitable purposes as per S. 2(15) of Income Tax Act, 1961. In this judgments Hon. S.C. has visited various earlier judgments 8 and has streamlined the legal position.
It is acceptable proposition that under Trust merely doing business or providing services in relation there to for consideration cannot be considered as charitable objects. However along with other charitable object, the free services in connection to trade or business cannot be considered as business activity. But when charges are significantly above the cost in category of cess or fees or any other consideration toward trade, commerce or business same cannot be considered as charitable.
The 2(15) of the Income Tax Act defines the Charitable purpose as under :
“The charitable purpose includes relief of the poor, education [yoga] medical relief, [preservation of environment (including water. meds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,] and the advancement of any other 4object 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
(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”
So it’s clear that Trust carrying on all other objects, Except GPU under section 2(15) can carry on business activities without any financial limit If they are incidental to its objects. But the organization having object of Advancemnental of any other object of General Public Utility (GPU) can carry on business activity in the course of actual carrying out of such advancement of any other object of GPU or provide services in relation there to for consideration if receipt from such activities in relation there to does not exceed 20% (w.e.f. 01.04.2016) of total receipts of the previous year.
It may be noted that basic intent of any charity is to help needy and deserving people and therefore that entities who were engaged in commercial activities should not claims exemption on the ground that such activities were for advancement of general public utility in terms of the last limb of the definition of charitable purpose. In view of the above S 2(15) was amended vide Financial Act 2008 by adding a proviso which states that the advancement of any other object of GPU shall not be of Charitable purpose if it involves the carrying on
(a) Any activity in the nature of Trade, commerce or business or
(b) 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.
It may be noted that any Business activity that are not directly related to the primary objects are considered independent business activities such activity shall not be governed by S.11(4A) The Hon. S. Course in case of Ahmedabad urban Development Authority has held that business should be incidental to the objects. Further the supreme Court of India in the case of New Noble Education Society vs. C.C.T (2022) 143 Taxmann.com 276 held that a business can be said to be incidental to the attainment of the objective of the organization only where it must be related with the main activity/objective of the society. The Supreme Court decision has made a paradigm shift in the interpretative of the word “Incidental” overruling the earlier Supreme Court decision for case of Ass. CIT vs. Thanti Trust (2001) Taxman 126 in which it was held that the business where total income is utilized for purpose of achieving the objects of the trust should be considered as incidental to the attainment of the objects.
The Hon S.C. in case of M/s. New Noble Education Social has observed as under “
71. This reasoning equally applies especially in Section 11(4A) which speaks of profits incidental which specifies that exemption in relation to income or trust of an institution which are profits or means of business cannot be exempted ‘unless the business is incidental, trust or as the case may be institution and separate books of accounts are maintained by such trusts or institution in respect of such business’. Thus, the underlying objective of seventh proviso to Section 10(23C) and of Section 11(4A) are identical. These have to be read in the light of the main provision which spells out the conditions for exemption under Section 10(23C) – the same conditions would apply equally to the other sub-clauses of Section 10(23C) that deal with education, medical institution, hospitals etc.
The ruling in ACIT v. Ahmedabad Urban Development Authority [2022] 143 taxmann.com 278[2023] 291 Taxman 11 (SC) distinguished its own ruling in the case of Asstt. CIT v. Thanthi Trust [2001] 115 Taxman 126. It was pointed out that the Thanthi Trust carried on newspapers business which was held under trust. The Thanthi Trust (supra) ratio therefore, cannot be extended to cases where the trust carries on a business which is not held under trust and whose income is utilized to feed the charitable objects of the trust. This ruling has also overruled various other Supreme Court and High Court cases about the word “incidental” in the context of business activity. Therefore, the Supreme Court has made a paradigm shift in the interpretation of the word “incidental” It will no longer be permissible to treat a business to be incidental only because the income is applied for charitable purposes.
The Hon. S. C. has observed as under :
In view of the foregoing discussion and analysis, the following conclusions are recorded regarding the interpretation of the changed definition of “charitable purpose” (w.e.f. 01.04.2009), as well as the later amendments, and other related provisions of the IT Act.
A. General test under Section 2(15)
A.1. It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration (“cess, or fee, or any other consideration”);
A.2. However, in the course of achieving the object of general public utility, the concerned trust,
society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are connected (“actual carrying out…” inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and Assistant Commissioner Of Income Tax … vs Ahmedabad Urban Development Authority on 19 October, 2022. (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016);
A.3. Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”. In this regard, the Court has clarified through illustrations what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment.
A.4. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached. Similarly, the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), reaffirm this interpretation and bring uniformity across the statutory provisions.
CONCLUSION :
In view of the above utmost care is to be taken by GPU organization to carry out any business activities with essential strategic planning to leverage tax benefits for charitable purpose.
Author: CA Hasmukh Jobanputra (Partner) | H A Y and Associates, Chartered Accountants
