NEW DEFINITION OF CHARITY AND ITS IMPLICATIONS

Section 2(15) is now amended (wef 1-4-2008, for A.Y. 2009-10) so as to exclude from the charitable purposes, those activities which are for advance-ment of any object of general public utility provided these involve carrying out business or professional activities notwithstanding that the income from such activities are retained/ used for the purposes of the trust.

The decision to amend the law finds its reason from the decision in case of Road transportation corporations, where the court held that profits made by these public carriers / transportation companies ( say Maharashtra State Corporations / A.P. State Road Corporations ), as the business activities are by a public trust, are tax exempt. Some of the port trusts have also been claiming tax exemptions and Apex court upheld in one case up held its claim in CIT vs. Gujarat Maritime Board (295ITR 561) and in one case IT tribunal also upheld the claim of the trust body as decided in “Mormugao Port Trust vs. CIT (109ITD 303).

Judicial bodies interpreting law in such liberal manner prompted the Legislature to make such amendment in sec 2(15).

Now the amended definition of Charitable purposes run like follows:

(2(15) of Income Tax act1961)

“Charitable purpose includes relief of the poor, education, medical relief, or 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 purposes, if it involves 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.]”

[ ] added fromm 1-4-2008

Position up to 31-3-2008

Section 11(4): Trust property includes a business undertaking. So, since enactment of IT act1961, the law recognised undertaking of business activities, by trust. However, wef 1-4-1984, the act provided a stipulating clause by inserting Sec11(4A) where by it has bound the trust that in order to claim tax exemption for the business profits, it is essential for the trust to satisfy following two conditions:

1. The business activity should be incidental to the attainment of the objects of the trust.

2. Secondly, the books and accounts should be maintained separately for such business.

Presently this position still exists, except that the business activities are not allowed for the other objects of public utility. I feel that what this section has been seemingly missed out was that it failed to stop business houses from carrying out their businesses under the legal frame work of a public trust. To disallow tax exemption status for business profits of a trust, the assessing authorities are to prove that the business activities are not incidental to the trust, which is a difficult task and full of litigations. Secondly, the present provision does not prevent business houses/companies to accumulate properties business under the garb of a trust. Say for example, a business group floats a Section 25 company with share capital and accumulates a lot of properties and income yielding assets over the years with out payment of income tax, into its fold and then transfers the entire share holding of this Sec25company to a new group. Thereby there is an opportunity to make capital gains at the cost of exchequer, by paying 20% long term capital gains, instead of tax on regular income @30% every year. In this manner, a business person may be happy to run its business through a public charity and let the income accumulated, and enjoy its holding power with out becoming its dejure owner.

The law has therefore sought to stop such practice by putting a restrictive clause by amending sec 2(15) of IT act ending the carrying on of business activities for the objects of general public utility.

However, a trust is still allowed to carry on the business activities incidental to its objects so far as the objects relate to Relief to the poor, education and medical relief.

Difficult situation in present position

However, the present amended proviso is proving to be difficult for those genuine organizations which are charging small amount of fees/ cess/ charges for its services and these amounts are more in the nature of reimbursements of costs. Under the amended section, all their activities shall become non-charitable.

-trusts / NGO carrying on activities of providing legal assistance to NGOs’ engaged in human rights, advocacy of women rights, rehabilitation of slum-dwellers etc.  Whether these organizations continue to enjoy tax exemption status in case these organizations decide to charge nominal amount of fees/ cess etc. is a big question. As some of the beneficiaries may not exactly be from poor families, the chances of their activities classified under relief to the poor may fail.

Unknowingly law has forced these organizations to survive on public donations and taken away the spirit of fighting these malaises with unity and strength.

-Having said the above, it is also to be noted that an activity is prohibited to be carried out by an NGO/ trust when it carries out objects of general public utility(i.e fourth limb of definition of sec2(15), say in case an art gallery being operated as a NGO promoting the art and culture makes an art auction, it becomes  non-charitable, with in the present tax provisions but if the same activity is being carried out (say by way of holding an art auction), by a hospital, this activity becomes a charitable activity, provided the trust hospital proves that this activity is incidental to its objects. This is discriminatory approach and needs a clarification from the IT department.

Tax implication of such NGOs/ charities in the present context:

1. Presently IT law does not allow deriving income from property held under trust partly for charitable or religious purposes (the property should be held wholly for charitable/ religious purposes). Taking this into consideration, the NGO/ trust may not be able to defend themselves by paying income tax on the business income from such business activities (in case IT department holds that by charging fees/ cess etc. though nominal in amount, these trusts amount to carrying on non-charitable activities) and claiming tax exemption for the balance income say public donations, business activities carried on for relief to the poor etc. It may be suggested that a suitable clause may be inserted on the lines of sec164 (2) wherein the profits of a business carried on in violation of conditions of Sec11(4A) being carried on, is taxed at normal rates if taxes / marginal rates of taxes, depending on the conditions. 

The position is different for those trusts who are holding properties partly for charitable purposes before introduction of Income Tax act1961 when the trusts could have properties partly for charitable/religious purposes and partly for private purposes.

2. After the amendment of Sec2(15), NGOs’ who are genuine and charge small amount of fees/ cess/ charges from its beneficiaries are unsure of what action may be initiated by IT department in their cases. Whether these NGO/ trusts may have to pay tax u/s 164(2) of IT act1961 or stand the chance of losing tax exemption status u/s 12A, is bothering these bodies and a clarification/ amendment to remedy such situation is being expected.

3. It may be noted that presently Section 164(2) provides taxation for that part of income which is from property held wholly for charitable purposes OR arise u/s 2(24)(iia) OR u/s 11(4) of IT act1961, to the extent these are not exempt u/s 11/13 of IT act1961. This means taxation of income in the nature of donations/ property income which could not be applied to the extent of 85% or could not be accumulated or such accumulated income which could not be fully applied after the end of accumulation period.

A suitable amendment should be incorporated to tax such income which are found to be from non-charitable purposes after the amendment of sec2(15).

4. Even CBDT circular issued in month of December2008 exempting Chamber of commerce from the amended version of Sec2(15) is a discretionary approach and does not convey any respite to other genuine organizations.

5. After the amendment of definition of charitable purposes wef 1-4-2009, the law has, believing it to be unknowingly, damaged the interest of genuine NGOs. Let us try to look back to the history of sec 2(15) and Sec11. Prior to 1-4-1984, the last limb of section 2(15) used to read as “ …..and advancement of any other object of general public utility, not involving carrying on of an activity for profit”. This limb was added so as to discourage business organizations from carrying out profit making activities. However, later during the course of time, it was realised that such restriction on NGO/ trust of on not carrying on of any business activities shut various ways of raising moneys resources by genuine trusts and even barred then from charging nominal amounts from the beneficiaries. This position was reversed by inserting this additional limb and also introducing Sec11 (4A), making presence of two conditions as said above. Why the law did not re-introduce such limb again and rather made the present amendment.

Illustration-1

The above Trust maintains separate sets of books of accounts of all the 5 activities wherein separate income & expenditure accounts and balance sheets are prepared and for the purpose of Income tax all the statements are consolidated at the end of the year. Under the above circumstances,

(1)        Whether the tax effect will come only in item no. 5 as above showing net surplus of Rs.200000 ( 600000 - 400000) or on total surplus of Rs.550000/- ( 3150000 - 2600000)?

(2)        Or whether income under items 1, 2, 3 & 4 will be computed under section 11 of the I. T. Act and income under item 5 will be taxed separately? 

(3)        How best way to compute income u/s 11 of the Act in all the above 5 items.

(4)       If under the above cases under the activities of items 1, 2 and 3 trust earns income

by way of

(a)        hiring auditorium hall or furniture & utensils.

(b)       sale of items prepared by the beneficiaries.

(c)        publication of souvenir / bulletin. 

Whether the surplus of income of such activities will be taxable separately? If so, what is the basis?

Likely responses:

1.      Once a trust is found to be carrying out any non-charitable purpose(s), all its income shall become taxable including those for the purposes for education/ medical relief/ relief to the poor. In such case, the trust shall have to pay income tax as per Sec164 at the marginal rate of tax on its entire income amounting to Rs.550000/-. Secondly the trust stand chance to lose its charitable status u/s 12A of IT act1961.

2.      Taxing the income of Rs.200000/- arising in (5) separately shall not be acceptable to IT deptt. In the present context though the author feels strongly that this may not be intention of the legislature.

3.      The trust can earn income from any of the activities as mentioned in para (4), when it is carrying out relief to the poor, education or medical relief provided it is proved that these activities are incidental to the attainment of its objects.

Illustration-2

The Trust is for the object of advancement of any other object of general public utility.

Total income during the year is as under:

                                                                                                                        (all figures in Rs.)

            Under the above circumstances:

(1)        Whether the tax will be levied on Net Surplus of Rs.950000/- (3350000-2400000)

(2)        Whether the grants and donations of Rs.1400000/- will be excluded as grants and donations do not form part of trade, commerce or business nor come within the purview of fees or cess or any other consideration or does such grants and donation come under purview of “any other consideration”?

(3)    If in above case other income includes membership fees and other dues received from members, will it have to pay tax only on that part of income received from members or on surplus of income,

(4)        Out of many activities of the organisation if any one activity includes nature of trade, commerce or business will be organisation loose exemption u/s 11 of I.T. Act as a whole? Will the organisation has to pay income tax on whole of the surplus of income or only on surplus of income out of any such activities involving trade commerce or business?

(5)        Does ' fees ' include membership fees or subscription fees paid by the members of the Trust / Association to establish their right & privilege to take part in the management of the Trust / Association and includes in the nature of trade, commerce or business?

(6)        Whether sale of milk, khatar or dead bodies of cattles in case of Panjarapoles / Gaushalas and rent of halls, furniture etc. in case of Mahajans and Samaj will be included in nature of trade, commerce or business? If so whether profit on that part will be taxable or total income including donations and grants will be taxable?

Likely response:

1.      Once a trust is found to be carrying out any non-charitable purpose(s), all its income shall become taxable including those for the purposes for education/ medical relief/ relief to the poor. In such case, the trust shall have to pay income tax as per Sec164 at the marginal rate of tax on its entire income amounting to Rs.950000/-. Secondly the trust stand chance to lose its charitable status u/s 12A of IT act1961.