Charitable Purpose Clarified
Income of a charitable trust is exempt according to the provisions of section 11, 12 and 13. The trust should be one established in accordance with law and its objects should fall within the definition of “charitable purposes”.
Section 2 (15) of the I.T. Act, 1961 defines “Charitable purpose” to include:-
1. Relief of the poor
3. Medical relief , and
4. Advancement of any other object of general public utility.
However, following words of Hon. Finance Minister P. Chidambaram in his Budget Speech dated 29/02/2008 created a lot of confusion for trustees/managers of charitable organizations & tax practitioners:
“ ‘Charitable purpose’ includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under “charitable purpose”. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be affected.”
Consequently, section 2 (15) was amended vide Finance Act, 2008 by adding a proviso that the ‘advancement of any other object of general public utility’ shall not be 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.
The major questions that were in the minds of trustees/managers of charitable organizations & tax practitioners was that whether a trust/institution carrying on aforesaid charitable activities and charging token fees would continue to get exemption or not? The primary objective of such trusts is not to earn income but they charge token fees just for the sake of charging some amount.
The confusion ended with release of much awaited CBDT Circular in this regard. The highlights of the Circular are as under:
· The first three limbs of section 2 (15), i.e. relief of poor, education & medical relief will constitute charitable purpose and shall be exempt from tax even if it incidentally involves carrying on of commercial activities. However, the exemption is subject to the conditions mentioned u/s 11(4A) or u/s 10(23C).
· The newly inserted proviso to section 2 (15) will apply only to fourth limb of the definition of ‘charitable purpose’ i.e. only to entities whose purpose is ‘advancement of any other object of general public utility’. Thus, if any of such entities carry on any commercial activity, they would not be eligible for exemption u/s 11 or u/s 10(23C).
· Whether any entity is carrying on any activity in the nature of trade, commerce or business or rendering any services in relation to that is a question of fact and it will be decided on the basis of nature, scope, extent and frequency of the activity. Therefore, each case would be decided on the basis of its own facts and cannot be generalized.
· Proviso to section 2 (15) would not apply to industry or trade associations who work on the basis of principle of mutuality wherein their activities are restricted to contributions from and participation of only their members. However, if these associations deal with any non-members, their incomes will no longer be exempt from tax.
· Through this Circular the department has well advised all such Assessees who carry on commercial activity of this type and claim their incomes as tax exempt, to avoid carrying on such activities.
· The F.M.’ s Budget Speech dated 29/02/2008
· CBDT Circular No. 11/2008 dated 19/12/2008
CA. APURVA N. MEHTA