Section 2(15) – Substitution of existing provisos with new proviso requiring satisfaction of two new conditions for qualifying as a “charitable purpose”

Issue/Justification

The proviso to Section 2(15) provides 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,-

  • such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
  • the aggregate receipts from such activity or activities, during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, for the
    previous year.

Probable hardship

a) The erstwhile section 2(15) provided for a monetary limit of Rs. 25 lakhs upto which the receipts as may be derived from the activities in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business may still be regarded as charitable purpose, in case of a trust whose object is advancement of any other object of general public utility. The amendment by the Finance Act, 2015 has replaced this monetary limit with a percentage of total receipts.

Unintentionally, it may adversely impact small charitable trusts and benefit charitable trusts having a higher turnover.

For example, a charitable trust having annual receipts of Rs.100 crores would be able to retain its charitable status if its business receipts are Rs.20 crores or less, whereas a charitable trust having total receipts of Rs.10 lakhs may lose its charitable status even if it has Rs.2.50 lakhs as receipts from activity in the nature of trade, commerce or business. The amended proviso may, therefore, result in unintended hardship to small charitable trusts engaged in genuine charitable activities.

b) Further, there appears to be an element of subjectivity in the first condition in the proposed proviso requiring such activity to be undertaken in the course of actual carrying out of such advancement of any other object of general public utility, which may give rise to unnecessary litigation. Therefore appropriate guidelines/clarification may be issued by way of a circular or otherwise to ensure clarity as to when an activity is not considered as being undertaken in the course of actual carrying out of such advancement of any other object of general public utility. This would provide the necessary guidance to the charitable trusts to ensure compliance with the said condition and also enable the Assessing Officers to examine judiciously whether the said condition has been satisfied  for grant of exemption.

In this context, it may also be noted that there is already a requirement in section 11(4A) that the business should be incidental to the attainment of the objects of the trust or institution and separate books of account should be maintained by such trust or institution in respect of such business. Therefore, there is no need for a similar condition in section 2(15).

Suggestion

It is suggested that:

The proviso also includes a monetary limit, say Rs 25 lakhs, in line with the erstwhile second proviso so that charitable trusts with lower turnover continue to get the benefit available to charitable trusts under the current law. The same may be given effect to by amending the condition given in (ii) as below:

“(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, or twenty-five lakh rupees, whichever is higher, for the previous year.”

(a) Since section 11(4A) already contains a similar condition for grant of exemption, the condition specified in clause (i) of the proviso to section 2(15) may be removed.

Further, appropriate guidelines/clarification may be issued in respect of clause (i) of the proviso to section 2(15) to enable trusts to comply with the condition requiring such activity to be undertaken in the course of actual carrying out of advancement of any other object of general public utility for claim of exemption.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax

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Category : Income Tax (27495)
Type : News (13633)
Tags : Budget (1956) ICAI (2602)

One response to “Charitable purpose- Substitute proviso to Section 2(15) with new proviso- ICAI”

  1. Moiz Daruwala says:

    The framing of proviso as per above wording will not serve the purpose, as the trust having a turnover of 20 lacs will be able to conduct business activity to the tune of entire 20 lacs(due to higher of two).

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