Exemptions under "Charitable Purpose" as applicable to charities under General Public Utility category

Cause Title : Assistant Commissioner Of Income Tax (Exemptions) vs Ahmedabad Urban Development Authority, Civil Appeal No. 21762 Of 2017, Supreme Court Of India

Date of Judgment/Order : 19/10/2022

Corum : Uday Umesh Lalit; Cji., S. Ravindra Bhat; J., Pamidighantam Sri Narasimha; J.

Citied: 

1. Commissioner of Income Tax vs P. Krishna Warriar, (1964) 8 SCR 36
2. Assistant Commissioner vs Surat Art Silk Cloth Manufacturers’ Association, (1980) 2 SCC 31
3. Bhuwalka Steel Indus. Ltd. & Ors. vs Bombay Iron and Steel Labour Bd. & Ors., 2009 (16) SCR 618
4. Assistant Commissioner of Income Tax vs Thanthi Trust, (2001) 2 SCC 707, (1980) 2 SCC 31
5. Indian Chamber of Commerce vs CIT, (1976) 1 SCC 324

Background

The primary question before the Supreme Court was the correct interpretation of the proviso to Section 2(15) of the IT Act introduced by amendment w.e.f. 01.04.2009 which defines “charitable purpose”. The IT Act visualized three kinds of charitable purposes: medical relief, education, and relief for the poor – which are described hereafter as “per se purposes”. To this list, Parliament has by amendments, added other categories, such as preservation of environment (including watersheds, forests, and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and yoga. The last – or the residual purpose included by the definition - is “advancement of any other object of general public utility” (hereafter referred to as “GPU category”), which is the subject of interpretation in the present case.

The Director General of Income Tax for exemptions, Commissioner of Income Tax (“CIT”) in various states, and other officials of the Income tax department (hereafter compendiously referred to as “the revenue”) have appealed the decisions of various High Courts, which have held that the carrying on of any trade, commerce, or business, is not a per se bar or disqualification for a GPU category charitable trust to claim to be such, precluding its tax-exempt status under the IT Act.

Judgment

Section 2(15)  reads as follows:

(15) "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;

Though the entire section was discussed, the primary issue before court was taxation of general public utility (GPU) category charities, under the IT Act.

Careful analysis of the proviso to Section 2(15), reveal that the prohibition applies in a four-fold manner-

(a) The bar to engaging in trade, commerce or business,

(b) The bar to providing any service in relation to trade, commerce or business,

(c) wherein “for a fee, cess or any other consideration” is the controlling phrase for both

(a) and (b) (which are collectively referred to as “prohibited activities” for brevity)

(d) irrespective of the application of the income derived from such ‘prohibited activities’.

The necessary implication which arises is that income (received as fee, cess, or any other consideration) derived from such ‘prohibited activities’ is necessarily motivated by profit. The ordinary meaning of fee or consideration would be synonymous with something of value, usually in monetary terms. However, the use of the expression “cess” facially lends a different colour to all the three expressions.

The expression "cess", therefore, implies a tax or impost levied for some special purpose, which may be levied as an increment to an existing tax. The term “fee”, to some extent, has a similar meaning. In The Commissioner of Income Tax, Lucknow v. U.P. Forest Corporation this court, after considering other previous decisions, held that exaction, through process of law, of amounts may be called “fee” but broadly are taxes.

The term “consideration” however is broader. The plain meaning is a monetary payment, for something obtained, in the form of goods, or services. 

What Parliament intended – through the amendments in question was to proscribe, involvement or engagement of GPU charities, from any form (“in the nature of”) of activities that were trade, business or commerce, or engage or involve in providing services in relation to trade, business or commerce- for a fee, cess or other consideration. The inclusion of the term “in the nature of” was by design, to clarify beyond doubt, that not only business, trade or commerce, but all activities in the nature of, or resembling them, were proscribed. Likewise, service in relation to such activities, i.e., services relating, or pertaining to, such proscribed activities, too were forbidden.

The reference to fee or cess, is in the opinion of the court, only to emphasize that even a statutory consideration, for a service to business, trade or commerce, would take the activity outside the definition of a GPU charity. The sense in which the expressions “cess, fee or other consideration” are used, is that if any amount, is received for trading, or business or commercial activity, or any services to such activity, then, notwithstanding their nomenclature (as fee or cess, i.e. that they are fixed under a law) the GPU charity cannot claim tax exempt status.

The prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by GPU charities. The conditions are:

(a) That such activities in the nature of trade, commerce, business or service (in relation to trade, commerce or business for consideration) should be in the course of “actual carrying on” of the GPU object, and

(b) The quantum of receipts from such activities should be exceed 20% of the total receipts.

(c) Both parts of the proviso: (i) and (ii) (to Section 2 (15)) have to be read conjunctively- given the conscious use of “or” connecting the two of them. This means that if a charitable trust carries on any activity in the nature of business, trade or commerce, in the actual course of fulfilling its objectives, the income from such business, should not exceed the limit defined in sub-clause (ii) to the proviso.

Distinction between business held under Trust [Section 11(4)] and Trust carrying on business [Section 11(4A)]

Section 11(4) applies to cases where the business undertaking itself is the property held by a trust. Thus, where the property held in trust, or where property settled by the donor or trust creator in favour of the trustees itself is a business undertaking, then the income from such an undertaking is covered by Section 11(4). Section 11(4A) operates differently. It is applicable to cases where the trust carries on a business. Section 11(4A) states that when a trust carries on a business, unless the business is incidental or ancillary to the attainments of the objectives of the trust, it would be disentitled to an exemption under Section 11(1). It imposes a further condition that separate books of accounts need to be maintained in such cases.

Section 11(1) confers an exemption from tax only where the property itself is held under a trust or other legal obligation. It does not apply to cases where a trust or legal obligation is not created on any property, but only the income derived from any particular property or source is set apart and charged for a charitable or religious purpose. Similarly, when a business itself has been set aside for the objects of the trust, then such business is held under trust and will fall under sub-section (4). However, where the profits of a business of a trust are applied for charitable purposes, then such business and trust will be governed by sub-section (4A).

Section 11(1) of the Act exempts income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India. The Act does not comprehensively define "property held under trust". Section 11(4) however, provides that for the purposes of Section 11, the words "property held under trust" "includes a business undertaking so held".

Therefore, to summarise on the legal position on this - if a property is held under trust, and such property is a business, the case would fall under Section 11(4) and not under Section 11(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the business is not held under trust. There is a difference between a property or business held under trust and a business carried on by or on behalf of the trust. This distinction was recognized in Surat Art Silk (supra), which observed that if a business undertaking is held under trust for a charitable purpose, the income from it would be entitled to exemption under Section 11(1) of the Act.

It seems that the test applied in J.K. Trust (supra) that for a business, to be considered as property held under trust, it should have been either acquired with the help of the fund originally settled upon trust or the original fund settled upon trust must have a proximate connection with the later acquisition or carrying on of the business by the trustees.

What has to be examined, therefore, is whether the business itself is held under trust or is carried on by and on behalf of the trust. 

What then is the interpretation of the expression “incidental” profits, from “business” being “incidental to the attainment of the objectives” of the GPU charity (which occurs in Section 11(4A))?

If one understands the definition in the light of the above enunciation, the sequitur is that the reference to “income being profits and gains of business” with a further reference to its being incidental to the objects of the Trust, cannot and does not mean proceeds of activities incidental to the main object, incidental objects or income derived from incidental activities. The proper way of reading reference to the term “incidental” in Section 11(4A) is to interpret it in the light of the sub-clause (i) of proviso to Section 2(15), i.e., that the activity in the nature of business, trade, commerce or service in relation to such activities should be conducted actually in the course of achieving the GPU object, and the income, profit or surplus or gains can then, be logically incidental. The amendment of 2016, inserting sub clause (i) to proviso to Section 2(15) was therefore clarificatory.

Therefore, pure charity in the sense that the performance of an activity without any consideration is not envisioned under the Act. If one keeps this in mind, what Section 2(15) emphasizes is that so long as a GPU’s charity’s object involves activities which also generates profits (incidental, or in other words, while actually carrying out the objectives of GPU, if some profit is generated), it can be granted exemption provided the quantitative limit (of not exceeding 20%) under second proviso to Section 2(15) for receipts from such profits, is adhered to.

Yet another manner of looking at the definition together with Sections 10(23) and 11 is that for achieving a general public utility object, if the charity involves itself in activities, that entail charging amounts only at cost or marginal mark up over cost, and also derive some profit, the prohibition against carrying on business or service relating to business is not attracted - if the quantum of such profits do not exceed 20% of its overall receipts.

It may be useful to conclude this section on interpretation with some illustrations. The example of Gandhi Peace Foundation disseminating Mahatma Gandhi’s philosophy (in Surat Art Silk) through museums and exhibitions and publishing his works, for nominal cost, ipso facto is not business. Likewise, providing access to low-cost hostels to weaker segments of society, where the fee or charges recovered cover the costs (including administrative expenditure) plus nominal mark up; or renting marriage halls for low amounts, again with a fee meant to cover costs; or blood bank services, again with fee to cover costs, are not activities in the nature of business. Yet, when the entity concerned charges substantial amounts- over and above the cost it incurs for doing the same work, or work which is part of its object (i.e., publishing an expensive coffee table book on Gandhi, or in the case of the marriage hall, charging significant amounts from those who can afford to pay, by providing extra services, far above the cost-plus nominal markup) such activities are in the nature of trade, commerce, business or service in relation to them. In such case, the receipts from such latter kind of activities where higher amounts are charged, should not exceed the limit indicated by proviso (ii) to Section 2(15).

Summation of conclusions

The following conclusions are recorded regarding the interpretation of the changed definition of “charitable purpose” (w.e.f. 01.04.2009), as well as the later amendments, and other related provisions of the IT Act.

A. General test under Section 2(15)

A.1. It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration (“cess, or fee, or any other consideration”);

A.2. However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are connected (“actual carrying out...” inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016);

A.3. Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”. In this regard, the Court has clarified through illustrations what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment.