By Pinky Shah, Sonalee Godbole, Gaurang Gandhi, Chartered Accountants
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14 Definition of ‘Charitable purpose’
u/s.2(15) of the Income-tax Act, 1961 — Circular No. 11/2008, dated 19-12-2008.
S. 2(15) of the Income-tax Act, 1961 (‘Act’) defines
‘charitable purpose’ to include the following :
(i) Relief of the poor
(ii) Education
(iii) Medical relief, and
(iv) The advancement of any other object of general public
utility.
An entity with a charitable object of the above nature was
eligible for exemption from tax u/s.11 or alternatively u/s.10(23C) of the Act.
However, it was seen that a number of entities who were engaged in commercial
activities were also claiming exemption on the ground that such activities were
for the advancement of objects of general public utility in terms of the fourth
limb of the definition of ‘charitable purpose’. Therefore, S. 2(15) was amended
vide the Finance Act, 2008 by adding a proviso which states that the
‘advancement of any other object of general public utility shall not be a
charitable purpose if it involves the carrying on of :
(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’.
2. The following implications arise from this amendment :
2.1 The newly inserted proviso to S. 2(15) will not apply in
respect of the first three limbs of S. 2(15), i.e., relief of the poor,
education or medical relief. Consequently, where the purpose of a trust or
institution is relief of the poor, education or medical relief, it will
constitute ‘charitable purpose’ even if it incidentally involves the carrying on
of commercial activities.
2.2. ‘Relief of the poor’ encompasses a wide range of objects
for the welfare of the economically and socially disadvantaged or needy. It
will, therefore, include within its ambit purposes such as relief to destitute,
orphans or the handicapped, disadvantaged women or children, small and marginal
farmers, indigent artisans or senior citizens in need of aid. Entities who have
these objects will continue to be eligible for exemption even if they
incidentally carry on a commercial activity, subject, however, to the conditions
stipulated u/s.11(4A) or the seventh proviso to S. 10(23C), which are that
(i) the business should be incidental to the attainment of
the objectives of the entity,
and
(ii) separate books of account should be maintained in
respect of such business.
Similarly, entities whose object is ‘education’ or ‘medical
relief’ would also continue to be eligible for exemption as charitable
institutions even if they incidentally carry on a commercial activity, subject
to the conditions mentioned above.
3. The newly inserted proviso to S. 2(15) will apply only to
entities whose purpose is ‘advancement of any other object of general public
utility’ i.e., the fourth limb of the definition of ‘charitable purpose’
contained in S. 2(15). Hence, such entities will not be eligible for exemption
u/s.11 or u/s.10(23C) of the Act if they carry on commercial activities. Whether
such an entity is carrying on an activity in the nature of trade, commerce or
business is a question of fact which will be decided based on the nature, scope,
extent and frequency of the activity.
3.1 There are industry and trade associations who claim
exemption from tax u/s.11 on the ground that their objects are for charitable
purpose, as these are covered under ‘any other object of general public
utility’. Under the principle of mutuality, if trading takes place between
persons who are associated together and contribute to a common fund for the
financing of some venture or object and in this respect have no dealings or
relations with any outside body, then any surplus returned to the persons
forming such association is not chargeable to tax. In such cases, there must be
complete identity between the contributors and the participants.
Therefore, where industry or trade associations claim both to
be charitable institutions as well as mutual organisations and their activities
are restricted to contributions from and participation of only their members,
these would not fall under the purview of the proviso to S. 2(15), owing to the
principle of mutuality. However, if such organisations have dealings with
non-members, their claim to be charitable organisations would now be governed by
the additional conditions stipulated in the proviso to S. 2(15).
3.2 In the final analysis, however, whether the assessee has
for its object ‘the advancement of any other object of general public utility’
is a question of fact. If such assessee is engaged in any activity in the nature
of trade, commerce or business or renders any service in relation to trade,
commerce or business, it would not be entitled to claim that its object is
charitable purpose. In such a case, the object of ‘general public utility’ will
be only a mask or a device to hide the true purpose which is trade, commerce or
business or the rendering of any service in relation to trade, commerce or
business. Each case would, therefore, be decided on its own facts and no
generalisation is possible. Assessees, who claim that their object is
‘charitable purpose’ within the meaning of S. 2(15), would be well advised to
eschew any activity which is in the nature of trade, commerce or business or the
rendering of any service in relation to any trade, commerce or business.
