Overview:

Social welfare of the countrymen is a huge responsibility on the Government of any country , however for developing countries like India ,welfare for populace have always been not enough. This gap is filed by welfare associations like charitable trusts supplementing the activities of the government in empowering the poor, providing education and other activities.

In order encourage such charitable public welfare activities, Tax exemptions have been granted under the provisions of the Income tax 1961 through section 11 , 12 and 13.

To ensure this exemptions are utilized only be eligible assesses, few conditions have been enacted being

1. Trust is to be for the public charitable purpose and

2. Beneficiary should be of general public and none of the objects of memo of association should benefit any private individuals and

3. It should cater the needs of the welfare irrespective of caste, creed or religion.

To avoid further ambiguity on which activity can be treated as charitable activity, Income tax Act, 1961 defines the same under sub section 15 of section 2. this article is aiming at throwing some light on the same.

1. Definition of “Charitable Purpose”Subsequent to Finance Act 2015 :

Section 2(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—

- such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

- 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;”

It may be added that the definition of “charitable purpose” remains an inclusive one and is not an exhaustive or exclusive one. In other words, purposes similar to those mentioned in the aforesaid definition could also constitute ‘charitable purpose’ under the Act. Courts have held that the expression ‘charitable purpose’ is sufficiently wide in scope to include a variety of activities. For instance, promotion of sports and games is a charitable purpose, as is promotion of trade and commerce, even when the beneficiaries are confined only to a particular line of trade or commodity.

1. History of the Term Charitable Purpose

The term “Charitable purpose” as laid down under 2(15) has undergone a series of changes over financial years by array of amendments. While limbs of charitable purposes from (i) to (v) have been fairly unchanged, understanding and interpretation of terms Relief of poor and others have always been the matter of litigation

One of the land mark development was laid in Finance act 2008, whereby if the trust’s main purpose is advancement of any object of general public utility, and also it carries out any trade or commerce or business for any consideration irrespective of the way or nature by which such considerations or fees are applied.

This created a lot of ambiguity on applicability of this provision towards other limbs and circular 11 of 2008 dated 18-Nov-2008 was issued whereby it was clarified that restriction on carrying on trade or commerce or business is in respect of relief of the poor, education, or medical relief.

This gave a major relief to trust claiming exemptions under Section 10(23C) or Section 11(4) and satisfying the conditions stipulated under respect sections with prime objects of relief to poor or education or medical reliefby making their activity’s to be treated as charitable purpose even if they incidentallycarry on a commercial activities.

This provision however impacted significantly smaller trusts, which were incidentally undertaking minor trade activities, in order to give relief to them, Government issued a second proviso to sec. 2(15) vide the Finance Act 2010 with retrospective effect from 1.4.2009, which read as under

“The first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is Rs.10 lakh rupees or less in previous year.“

This ensured that if receipts from trade activity are less than or equal to Rs. 10 lakhs then the same will be eligible to be classified as charitable purpose. This was a savior for smaller trust who are completed dependent on voluntary contributions. The above limit of Rs.10 lakh has been subsequently increased to Rs.25 lakh with effect from 01.04.2012.

In the same Finance Act 2012, Section 13(8) has been inserted retrospectively fromAY 2009-10 which provides that exemption under Section 11 or 12 shall not be allowed if limit specified under first proviso of Section 2(15) is exceeded i.e. if incidental trade activities are carried more than Rs.25 Lakh.

Although the same provisions of Section 13(8) has been enacted , it will not impact the trust from losing its registration but only will affect the exemption for the particular year.

The ITAT Bench in Ghatkopar Jolly Gymkhana vs. DIT(E) (TS-546-ITAT-2013(Mum)) has set aside the order of DIT , cancelling assessee's registration as charitable trust u/s 12A; Assessee not entitled to enjoy tax benefits as gross trade/ business receipts exceeded specified limit of Rs.10 lakhs as per second proviso to Sec. 2(15); Violation of the condition only impacts assessee's right to claim tax exemption for the relevant "previous year"; It does not impact trust's registration or ability to claim exemption for future years; Trust can carry out business activities without losing identity, but gross receipts limit of Rs. 10 lakhs should not exceed to avail tax exemptions; the ITAT has kept its Reliance on the co -ordinate bench ruling in Rajasthan Housing Board vs. CIT [[2012] 51 SOT 383 (JP)].

1. Amendment to the Term “Charitable Purpose” by Finance Act, 2015

 - Yoga has been provided as an activity of Charitable activity

The activity of Yoga has been under the question whether the same is charitable activity or the other? and further which limb of the charitable purpose definition can be applied for such?

Courts have taken a divergent stands while considering Yoga has chartiable activity but on the limb under which such categorization can be made.

- The Bombay High court in CIT v. Rajneesh Foundation [2006] 280 ITR 553 (Bom.), held that the Charitable trusts/ organization whose main object is propagation and teaching of Yoga will be classified under objects of general public utility.

- The ITAT Bench in Divya Yog Mandir Trust vs. JCIT (TS -459 –ITAT 2013(Del) has taken the stand that Yoga can be safely accepted as a system fit into the definition of ‘medical relief’; Rejecting the Revenue’s stand that yoga unlike other medical systems not a curative system for alleviating diseases, but only a spiritual system; The Bench has kept its reliance on Clinical Establishment act 2010, where yoga is recognized as a systemof medicine under clause (h) of section 2.

- The SC in the case of LokShikshana Trust had explained the meaning of the word ‘education’ inthe context of Sec 2(15) of the Act. As per this decision, the education is the process of trainingand developing the knowledge, skill, mind and character of students by schooling by way ofsystematic instruction, schooling or training.

While the classification made by ITAT of Delhi and SC in LokShikshana trust would be benefiting the trust the classification under Bombay High Court judgment would negating impact on the assesse as ,if total consideration from such activity is more than 25 Lakh then the trust will not be eligible for Exemption as the same will not for chartable purpose.

This amendment by introducing Yoga has one of the limbs of charitable purpose, has put an end to differential classification and facilitated the institutions registered u/s 12AA/propagating, teaching by holding camps, classes etc by making them eligible for exemption without fitting for the residual limb and thereby not restricting them to carry on any commercial activity or trade or commerce which is incidental to the objects of the trust.

- Amendment to Proviso to section 2(15)

The provisounder section 2(15) has been amended by which this the limit of Rs.25 Lakh has been replaced with percentage of gross receipts being 20%.

This implies that in place of consideration from trade or commerce is Rs.25 Lakhs, a proportional or comparative limit on the gross receipt has been provided to decide whether activities of the trust are charitable purpose or not.

This amendment comes with qualms and benefits, bigger trust whose objects are general public utility having incidental trade activity would be benefited if the total receipts from such trade activity is more than the Rs.25 Lakh but such receipts is lessor than 20% of the total receipts for the trust

To Illustrate, if the total receipts of the trust is 200 Lakh by way of donations and trade activities and the receipts from Trade or commerce is 30 Lakh , still the trust will be eligible for exemption and the activities will be treated as charitable purpose as the amount of receipts from trade is 30 lakh which is lessor than 20% (40 Lakh) of the total receipts

On the other hand for small trust , this amendment would be a qualm as even if the total trade activity is less than 25 Lakh but the same is more than 20% of the total receipts then the same would be falling under the ambit of this provision there by activities will be losing status of charitable purpose.

To illustrate, if the total receipts of the trust is 40 Lakh by way of donations and trade activities and the receipts from trade or commerce is 10 Lakh. Although the receipts from trade activity is lessor than 25 lakh, because its exceeds the limit of 20% of total receipts being 8 lakh , the activities of the trust will not eligible to qualify for charitable purpose.  

It is worthwhile to recall a discussion of the Supreme court in Court in Additional Commissioner of Income-tax, Gujarat v/s. Surat Art Silk Cloth Manufacturers Association, 121 ITR 1. In that case, while considering the expression “Activity for Profit” for the purposes of Section 2(15) of the Income-tax, 1961, the Supreme Court held that the test that must be applied is not “whether as a matter of fact an activity results in profit” but “whether the activity is carried on with the object of earning profit”.

In other words where the predominant object of the activity is charitable purposes and falls within the first three limbs of section 2(15) purposes and not to earn profit, whether it would lose its character, will have to be considered in the light of facts of each case.

It is not in dispute that the appellant trust was established for charitable purpose and not for purposes of profit if it was otherwise the Director of Exemptions would not have granted the registration under section 12AA

1. Final Precis

Prior to Finance Act 2015	Subsequent to Finance Act 2015	Impact
Yoga was not included as a chartable activity	Yoga has been included as a charitable activity	Yoga will be treated as charitable activity not under other limbs but under separate limb introduced
If the Charitable trust is instituted towards advancement of any object of general public utility, and also it carries out any trade or commerce or business for any consideration irrespective of the way or nature by which such considerations or fees are applied and such gross receipt is more than 25 Laks Then activities of the trust shall not be treated as charitable purpose	If the Charitable trust is instituted towards advancement of any object of general public utility, and also it carries out any trade or commerce or business for any consideration irrespective of the way or nature by which such considerations or fees are applied and receipts from such activity is more than   20% of the total receipts of the trust   Then activities of the trust shall not be treated as charitable purpose	Trust with receipts of more than 25 Lakh from trade or commerce will be eligible to qualify for charitable purpose provided the same is not more than 20% of the total receipts.   Trust with receipts less than or equal to 25 Lakh from trade or commerce will not be eligible for qualifying themselves for Charitable purpose if the same is more than 20% of the total receipts.