“You don’t pay taxes–they take taxes.”- Chris Rock

This article aims to highlight the meaning of ‘Purpose of charitable activity’ in the context of surplus arising from the activity during the period. Whether surplus defeats the purpose of charitable activity??

What is purpose of charitable activity/Charitable Purpose ??

Background-The term charitable purpose is defined under section 2(15) of the Income Tax Act, 1961.  For ready reference extract of provisions of Section 2(15) is enumerated below:

“2(15). Definition of Charitable purpose;

Charitable purpose includes relief of the poor, education, {yoga,} medical relief, {preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,} and the advancement of any other object 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; and

(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;}

Next question that arises is what is the meaning of expression “activity for profit” ?

Every trust or institution must have a purpose for which it is established and every purpose for its accomplishment must involve the carrying on of an activity. The activity however, be for profit in order to attract the exclusionary clause and the question therefore, is when can an activity be said to be for the profit? The answer to the question obviously depends on the correct connotation of the preposition “for”. This preposition has many shades of meaning but when used with the active participle of a verb it means “for the purpose of” and connotes the end with reference to which something is done. It is not therefore enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit. Profit-making must be the end to which the activity must be directed or in other words, the predominant object of the activity must be making a profit. Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit. But where, on the other hand, an activity is carried on with the predominant object of earning profit, it would be an activity for profit, though it may be carried on in advancement of the charitable purpose of the trust or institution. Where an activity is carried on as a matter of advancement of the charitable purpose or for the purpose of carrying out the charitable purpose, it would not be incorrect to say as a matter of plain reading of the text that charitable purpose involves carrying on of such activity, but the predominant object of such activity must be to subserve the charitable purpose and not to earn profit. The charitable purpose should not be submerged by profit making motive; the latter should not masquerade under guise of the former.

Furthermore, the purpose of the trust, as pointed out by the Honourable Justice (Pathak,J.) in Dharmadeepti v. CIT [(1978) 3 SCC 499 : 1978 SCC (Tax) 193] states that: It must be “essentially charitable in nature” and it must not be a cover for carrying on an activity which has profit making as its predominant object. This interpretation of the exclusionary clause in Section 2 clause (15) derives considerable support from the speech made by the Finance Minister while introducing that provision. The Finance Minister explained the reason for introducing this exclusionary clause in the following words:

“The definition of ‘charitable purpose’ in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefits provided by them namely, the newspaper industry which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words ‘not involving the carrying on of any activity for profit’ should be added to the definition.”

Conclusion: From the above discussion it is apparent that the Intention of the trust must be charitable for claiming exemption u/s 10 and for registration u/s 12AA of the Income Tax Act, 1961. Surplus doesn’t defeat the purpose of charitable institutions or trust.  Object of trust must be for non-profit making.  Object is an essential ingredient for satisfying the intention for activity.  Assessing officer must emphasize on the object of the Institution/ Trust for providing registration u/s 12AA/12AB of the Income Tax Act, 1961 and not on the surplus of the Institution/Trust.

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Disclaimer: The views expressed herein above are solely the author’s personal views/opinion. This is an informational article and should not be considered as a legal opinion. The possibility of any errors and omissions in the   article cannot be ruled out.

AUTHORED BY-

  1. CA Bhavya Shah
  2. CA Ankesh Patni

Author 1 is a practicing member of ICAI with L.L.B. qualification. (cabhavyashah01@gmail.com)

Author 2 is a practicing member of ICAI. (ankeshjp@gmail.com)

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