Difficulties being Faced by Charitable Organisations on account of the first proviso of s.2(15)

We wish to draw your attention to the harassment and difficulties being caused to genuine charitable organisations in Mumbai on account of the farfetched interpretation being adopted by assessing officers on the provisions of the first proviso to section 2(15).

Various charitable organisations running educational institutions and carrying on various other forms of charity, including relief of poverty, have been denied the exemption under section 11 by assessing officers, on the ground that the first proviso to section 2(15) applies to them. This is notwithstanding the fact that the CBDT has clarified vide its circular number 11 of 2008 dated 19.12.2008, that the first proviso to section 2(15) does not apply to the first 3 limbs of the definition of “charitable purpose” under section 2(15), and only applies to the last limb, advancement of any other object of general public utility.

We would like to draw your attention to the fact that this is likely to lead to substantial litigation, locking up of money intended for charitable purposes in payment of taxes pending disposal of appeals, resulting in the ultimate beneficiaries of such charities losing out on the benefits that they would otherwise have got from such charitable organisations. A significant impact is already being felt on the charitable activities being carried out, with many trusts having decided to scale down their activities, due to their funds being locked up in tax litigation.

In fact, earlier also, the definition of “charitable purpose” included the words “not involving the carrying on of any activity for profit” from 1961 till 1983.  At that time as well, there had been substantial litigation on this aspect, including various decisions of the Supreme Court and many high courts. It was with the purpose of putting an end to this litigation that these words were omitted by the Finance Act, 1983 with effect from 1st April 1984. Reintroducing such provisions in the form of the first proviso to section 2(15) has again revived this litigation, which surely cannot be the intention behind this amendment.

It is submitted that the business carried on by a charitable trust could be of 3 kinds –
(a) where the business itself is the main object of the trust,
(b) where the business is incidental to the attainment of the objects of the trust, and
(c) where the business is in no way connected to the objects of the trust, but is a property held upon trust.

In businesses of type (a) above, if carrying on of the business itself is the main object, the trust would not be regarded as charitable, as held by the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust 101 ITR 234, as the charitable purpose itself would be merely a sham. This was the position even prior to the insertion of the first proviso to section 2(15).

In businesses of type (b) above, the provisions of section 11(4A) would apply, and the trust was entitled to exemption of such income if separate books of accounts were maintained, prior to the insertion of the first proviso to section 2(15). This position continues for trusts engaged in activities other than that of the advancement of any other object of general public utility, and it is only trusts engaged in this residuary object of advancement of any other object of general public utility, which should lose the benefit of exemption after the insertion of the first proviso to section 2(15).

In businesses of type (c) above, the provisions of section 11(4) read with section 11(4A) applied prior to the insertion of the first proviso to section 2(15). Even after the amendment, such businesses continue to enjoy the benefit of exemption where the objects of the trust are not those of advancement of any other object of general public utility.

The purpose of the amendment was to ensure that trusts do not carry on business in the garb of charity. However, the amendment made by insertion of the first proviso to section 2(15) is unfortunately being interpreted by assessing officers as a blanket prohibition on carrying on of businesses by all charitable trusts. Again, assessing officers are treating all types of activities as business, including activities of mere letting of premises, conduct of educational courses, etc. This results in denial of exemption to a large number of genuine charitable organisations, which certainly does not seem to have been the intention behind the amendment.

It is therefore strongly suggested that the following amendments be carried out:

1. Both the provisos to section 2(15) be deleted;

2. Section 11(4) be amended to provide that “property held under trust” shall not include a business undertaking so held; and

3. Section 11(4A) be amended by inserting a proviso to that subsection to the effect that a business shall not be regarded as incidental to the attainment of the objectives of the trust merely on account of the fact that the income from such business feeds the charitable purposes.

These amendments will ensure that in all cases where business carried on by a trust is unrelated to its objects, the business income would be subjected to tax, and the trust would not lose exemption in respect of its other income which is actually utilised for its charitable purposes. As mentioned earlier, where the main object itself is the carrying on of a business, in any case, the trust would not be entitled to exemption, as the object would not be regarded as charitable, in light of the Supreme Court decision in Loka Shikshana Trust.

This amendment will also ensure that genuine charitable trusts do not suffer the harassment of efforts to treat charitable activity carried on by such trusts as business activity, and will not be denied exemptions on that ground.

We trust you will make efforts to implement our suggestions at the earliest, so as to enable charitable trusts to focus on their charitable activities, rather than on tax litigation.

Thanking you,

Yours faithfully