Charitable Trusts- Section 2(15) Of Income Tax Act, 1961

Charitable Trusts- Section 2(15) Of Income Tax Act, 1961 - CA Dinesh Shah & CA Shreya Doshi

In this writeup, an attempt has been made to understand the implications of introduction of proviso to Section 2(15) for charitable trusts. There have been lots of cases wherein several judicial authorities have expressed their views with respect to introduction of this proviso. The following paragraphs will discuss Section 2(15) in detail alongwith applicable case laws and circulars.

1. For the sake of convenience and easy reference, definition of charitable purpose u/s section 2(15) of Income Tax Act, 1961 is reproduced as under:-

"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) aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;”

1.1 On perusal of the above definition, it can be understood that proviso to Section 2(15) is applicable to the last charitable object i.e. advancement of any other object of general public utility. The last limb of charitable purpose u/s 2(15) is advancement of any other general public utility. It covers all objects that promote the welfare of the general public as this is a residuary clause i.e. those objects that do not fall under any other head of income would fall under this category. This clause emphasizes on general public utilities intended to serve public at large. If the objects or purpose leans towards benefit of public but is not regarded as charitable in the other objects mentioned in the definition of charitable purpose then it is covered here.

1.2 This proviso to section 2(15) is not applicable to other objects like 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. So, we can conclude that an activity in the nature of business is carried on alongwith these objects then this proviso of section 2(15) is not applicable and it will be considered in the nature of charitable objects only.

2. Let us understand the circumstances in which explanation to Section 2(15) was introduced. For this we will have to study some relevant part of judgement in case of CIT(E) Vs Gujarat Maritime Board (2008) 166 Taxmann 58 (SC) reproduced as under:-

Para 8 - “Gujarat Maritime Board has been constituted, inter alia, for purposes of development and maintenance of minor ports. Under the said Act the Maritime Board also renders services like stevedoring, transport of goods, storage, shipping, etc. It is also in-charge of upkeepment of jetties, wharfs, roads, lights, etc. However, the main object of the said Act is development of minor ports in the State of Gujarat, the income, accruing to the Maritime Board, including reserves and surplus are also required to be deployed and credited to a separate fund to be utilised for development of minor ports within the State.”

Para 11- “Under section 11(1), income from property held for charitable purposes is not includible and does not form part of total income. Section 11(1) has three clauses (a), (b) and (c). In all the three sub-sections the words used are 'income derived from property held under trust wholly for charitable purpose'. Under section 11(4) the expression 'property held under trust' includes a business undertaking so held. In other words, income from business undertaking held for charitable purposes can fall under section 11 subject to such income fulfilling the requisite conditions of that section.

Para 14- “If the primary purpose and the predominant objects are to promote the welfare of the general public the purpose would be charitable purpose. When an object is to promote or protect the interest of a particular trade or industry that object becomes an object of public utility, but not so, if it seeks to promote the interest of those who conduct the said trade or industry—CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC). If the primary or predominant object of an institution is charitable, any other object which might not be charitable but which is ancillary or incidental to the dominant purpose, would not prevent the institution from being a valid charity— Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 (SC).

Para 16- “Applying the ratio of the said judgment in the case of Andhra Pradesh State Road Transport Corpn. (supra), we find that, in the present case, Gujarat Maritime Board is established for the predominant purpose of development of minor ports within the State of Gujarat, the management and control of the Board is essentially with the State Government and there is no profit motive, as indicated by the provisions of sections 73, 74 and 75 of the 1981 Act. The income earned by the Board is deployed for the development of minor ports in India. In the circumstances, in our view the judgment of this Court in Andhra Pradesh State Road Transport Corpn.'s case (supra) squarely applies to the facts of the present case.

Para 17 - “Before concluding we may mention that under the scheme of section 11(1) of the 1961 Act, the source of income must be held under trust or under other legal obligation. Applying the said test it is clear, that Gujarat Maritime Board is under legal obligation to apply the income which arises directly and substantially from the business held under trust for the development of minor port in the State of Gujarat. Therefore, they are entitled to be registered as 'Charitable Trust' under section 12A of the 1961 Act.”

2.1 Memorandum explaining the amendments of Section 2(15)

As we know the brief background for amendments are given in memorandum of the budget, we herewith reproduce the memorandum to Finance Act, 2008 explaining the amendment in Se. 2(15) -

Sec. 2(15) of the Act defines ‘Charitable Purpose’ to include relief of the poor, education, medical relief and the advancement of any other objects of general public utility. It has been noticed that a number of entities operating on commercial lines are claiming exemption on their income either under section 10 (23C) or section 11 of the Act on ground that they are charitable institutions. This is based on the argument that they are engaged in the advancement of an object of general public utility as is included in the fourth limb of the current definition of “Charitable Purpose” such a claim, when made in respect of an activity carrying out on Commercial lines is contrary to the intention of the provision.

2.2 Circular no. 11 / 2008 dated 19-12-2008 explains in detail reasons for introduction of Section 2(15)

The proviso to Section 2(15) is added only to tax such type of commercial business activity in connection with advancement of objects of general public utility. Circular no. 11/ 2008 explains the logic of introduction of proviso to Section 2(15) as under.

The circular is reproduced as under:-

1. Section 2(15) of the Income-tax Act, 1961 ('Act') defines "charitable purpose" to include the following:—

(i)Relief of the poor

(ii)Education

(iii)Medical relief, and

(iv)The advancement of any other object of general public utility An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of 'charitable purpose'. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the 'advancement of any other object of general public utility' shall not be a 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.

2. The following implications arise from this amendment.

2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute 'charitable purpose' even if it incidentally involves the carrying on of commercial activities.

2.2 'Relief of the poor' encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that :—

(i)the business should be incidental to the attainment of the objectives of the entity, and

(ii)separate books of account should be maintained in respect of such business. Similarly, entities whose object is 'education' or 'medical relief' would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.

3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is 'advancement of any other object of general public utility' i.e., the fourth limb of the definition of 'charitable purpose' contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.

3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility'. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(15).

3.2 In the final analysis, however, whether the assessee has for its object 'the advancement of any other object of general public utility' is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is 'charitable purpose' within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.

2.3 Whether the 1st proviso will apply while carrying on any activities which results in surplus (which the Income Tax Department alleges as business)?

When business is carried on as an auxilliary(incidental) objects for attainment of main objects of the trust then first proviso to Section 2(15) will not apply. In such cases, Section 11(4A) of IT Act, 1961 will apply. The following case laws will support the contentions discussed above:-

i) India Trade Promotion Organization Vs DGIT(E) [2015] 53 taxmann.com 404 (Delhi)

Expression 'charitable purpose', as defined in section 2(15) cannot be construed literally and in absolute terms and it has to take colour and be considered in context of section 10(23C)(iv), thus, if dominant and prime objective of institution, was not desire to earn profits but, object of promoting trade and commerce not for itself, but for nation, it was clearly a charitable purpose.

Important findings:

• The petitioner was engaged in socially and economically desirable activities relating to the promotion of Indian trade and that the activities of the petitioner fell within the ambit of the expression the advancement of any other object of general public utility as appearing in section 2(15). The dominant and main object of the petitioner was to organise trade fairs/exhibitions in order to promote trade commerce and business not only within India, but internationally. This was done through the organisation of trade fairs, including the annual International Trade Fair and other exhibitions. Approval for exemption under section 10(23C)(iv) had been granted to the petitioner for assessment year 2007-08 onwards.

• During the assessment proceedings for assessment year 2009-10, a proposal was moved for considering the case of petitioner for withdrawal of exemption on ground that the main object of the petitioner being advancement of objects of general public utility, the first proviso to section 2(15), introduced with effect from 1-4-2009 was applicable.

• On writ the petitioner sought quashing of the first proviso to section 2(15) as amended by the Finance Act, 2008, on the ground that it was arbitrary and unreasonable and had no rational nexus with object sought to be achieved and was thus violative of article 14 of the Constitution of India. The petitioner also sought quashing of the order whereby exemption earlier granted under section 10(23C)(iv) had been withdrawn.

• Prior to the introduction of the proviso to section 2(15), the DGIT(E) had, in fact, granted such an exemption on 1-5-2008. But, subsequently, from assessment year 2009-10 onwards, by virtue of the order dated 23-2-2012, the exemption earlier granted was withdrawn. The said withdrawal of exemption was confirmed by the impugned order dated 23-1-2013 passed under section 154 by the respondent.

• It is an admitted position that had the proviso not been introduced by virtue of the Finance Act, 2008 with effect from 1-4-2009, the petitioner would have been recognized as a charity and would have been recognized as an institution established for the charitable purpose of advancement of an object of general public utility.

• Merely because the petitioner derives rental income, income out of sale of tickets and sale of publications or income out of leasing out food and beverages outlets in the exhibition grounds, does not, in any way, affect the nature of the petitioner as a charitable institution if it otherwise qualifies for such a character.[Para 46]

• To put it plainly, if an institution established for charitable purposes did not receive an income at all, then what would be the need for taking any benefit under section 10(23C)(iv).

It is apparent that merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. It is also important to note that we must examine as to what is the dominant activity of the institution in question. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. It is clear from the facts of the present case that the driving force is not the desire to earn profits but, the object of promoting trade and commerce not for itself, but for the nation - both within India and outside India. Clearly, this is a charitable purpose, which has as its motive the advancement of an object of general public utility to which the exception carved out in the first proviso to section 2(15) would not apply. This is so, because, if a literal interpretation were to be given to the said proviso, then it would risk being hit by Article 14 (the equality clause enshrined in Article 14 of the Constitution). It is well-settled that the courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down.

• While considering circular No.11 of 2008 issued by the CBDT, to which a reference has been made earlier in this judgment, the Division Bench held that it was evident from the said circular that the new proviso to section 2(15) was 'applicable to assessee's, who are engaged in commercial activities, i.e., carrying on business, trade or commerce, in the garb of 'public utilities' to avoid tax liability as it was noticed that the object 'general public utility' was sometimes used as a mask or device to hide the true purpose, which was 'trade, commerce or business'

Para 58- “Thus, the expression 'charitable purpose', as defined in section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of section 10(23C)(iv). It is also clear that if the literal interpretation is given to the proviso to section 2(15), then the proviso would be at risk of running fowl of the principle of equality enshrined in article 14 of the Constitution of India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to section 2(15) would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes.

Para 59- “Thus, while the Constitutional validity of the proviso to section 2(15) is upheld, it has to be read down in the manner indicated as above. As a consequence, the impugned order dated 23-1-2013 is set aside and a mandamus is issued to the respondent to grant approval to the petitioner under section 10(23C)(iv). The writ petition stands allowed as above

ii) GS 1 Vs DGIT(E) [2013] 38 taxmann.com 364 (Delhi HC)

Charging a nominal fees by assessee-society from beneficiaries to use coding system and to avail advantages and benefits therein was neither reflective of business aptitude nor indicative of profit oriented intent and thus assessee could not be denied registration under section 10(23C)(iv) on ground that activity of assessee was in nature of trade, commerce or business.

Facts: The petitioner society was registered as a charitable society under the residuary clause of section 2(15). The Income-tax department had granted exemption to the petitioner under section 12A. The petitioner has acquired intellectual property rights qua bar coding system from GSI Global Officer, Belgium and permits use of these intellectual property rights by third parties under licence agreements for initial registration fee of Rs. 20,000 and subsequent annual registration fee of Rs. 4000. GSI, Belgium has been granted legal status of International 'Not-for-profit' association under the Belgium tax law and was, therefore, not liable to pay corporation tax. The petitioner claimed exemption under section 10(23C)(iv). However, the Director General (Exemption) denied approval of same on ground that no charitable activity was involved in permitting use of intellectual property right for consideration and same was in nature of trade, commerce or business and that petitioner was not maintaining separate books of account for the business/commercial activity, i.e., licencing bar coding system, and did not intend to do so in future.

Important findings: 

Para 22- “A small contribution by way of fee that the beneficiary pays would not convert charitable activity into business, commerce or trade in the absence of contrary evidence. Quantum of fee charged, economic status of the beneficiaries who pay, commercial value of benefits in comparison to the fee, purpose and object behind the fee etc. are several factors which will decide the seminal question, is it business?

Para 24-The petitioner does not cater to the lowest or marginalized section of the society, but Government, public sector and private sector manufacturers and traders. The petitioner does not cater to the lowest or marginalized section of the society, but Government, public sector and private sector manufacturers and traders. Charging a nominal fee to use the coding system and to avail the advantages and benefits therein is neither reflective of business aptitude nor indicative of profit oriented intent.

Para 25- The intention behind the entire activity is philanthropic and not to recoup or reimburse in monetary terms what is given to the beneficiaries. Element of give and take is missing, but decisive element of bequeathing in present. In the absence of 'profit motive' and charity being the primary and sole purpose behind the activities of the petitioner is perspicuously discernible and perceptible.

Para 30– “As noted above, the petitioner is not carrying on any independent, separate or incidental activity, which can be classified as business to feed and promote charitable activities. When the petitioner is maintaining the books of account with regard to their receipts/income as well as the expenses incurred for their entire activity then how it can be held that separate books of account have not been maintained for 'business' activities. The 'business' activities are intrinsically woven into and part of the charitable activity undertaken. The 'business' activity is not feeding charitable activities. In any case, when it is held that the petitioner is not carrying on any business, trade or commerce, question of requirement of separate books of account for the business, trade or commerce is redundant.

iii) DIT(E) Vs Shree Nashik Panchvati Panjrapur (2017) 397 ITR 501

Facts - The assessee-trust was over 130 years old and was granted certificate of Registration under section 12A. The object of the trust was to run inter alia others a Panjrapole, i.e., protection of cow and oxen. It also used to sell milk procured from the cows to the general public at nominal rate. In view of the amendment to section 2(15) by the Finance Act, 2008, a show cause notice was issued to the assessee by the DIT (E) on the ground that the activities carried out by the assessee of selling milk was in the nature of trade, commerce or business and thus, not entitled to registration under section 12A. The assessee submitted that selling milk was incidental to panjrapole activity and in any case did not involve any trade, commerce or business, so as to be hit by newly added proviso to section 2(15).

Important findings

Para 15 – “It is found impugned order of the Tribunal has recorded a finding of fact that the dominant function of the respondent Trust is to provide an asylum to old, maimed, sick and stray cows. Further, only 25 per cent of the cows being looked after yield milk and if the milk is not procured, it would be detrimental to the health of the cows. Therefore, the milk which is obtained and sold by the respondentassessee is an activity incidental to its primary/principal activity of providing asylum to old, maimed, sick and disabled cows. In the present facts, the activity of milking the cows and selling the milk is almost compelled upon the trust, in the process of giving asylum to the cows. The activity to be considered in the nature of trade, commerce or business would in most cases have to be carried out on a regular basis with a view to earn the profit. The presence of the profit intent (even if it does not fructify) would normally be a sine qua non for the activity to be considered as trade, commerce or business. Therefore, in the present facts, it is not as though the keeping of the cows and milking them was with a view to carry out activity in the nature of trade, commerce or business to earn profits. Admittedly, in the present facts, the dominant activity carried out by the respondent assessee's trust for over 130 years is to take care of old, sick and disabled cows. In these circumstances, an incidental activity of selling milk which may result in receipt of money, by itself would not make it trade, commerce or business nor an activity in the nature of trade, commerce or business to be hit by the proviso to section 2(15).

iv) DIT(E) Vs Sabarmati Ashram Gaushala Trust [2014] 44 taxmann.com 141 (Gujarat HC)

Facts- The assessee-trust was created with object to breed the cattle and to improve the quality of the cows and oxen. It was denied benefit of section 11 by the Assessing Officer on ground that considerable income was generated by the assessee from the activity of milk production and sale and therefore, trust could not be considered as one created for charitable purposes; it was directly hit by the proviso to section 2(15).

Important findings

Para 8 – “The statutory provisions, as explained in the speech of Finance Minister and the CBDT Circular, provide that the activity of a trust would be excluded from the term ' charitable purpose' if it is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business for a cess, fee and/or any other consideration. It is not aimed at excluding the genuine charitable trusts of general public utility but is aimed at excluding activities in the nature of trade, commerce or business which are masked as ' charitable purpose'.

Para 9 & 10 - “The law does not expect the trust to dispose of its produce at any consideration less than the market value. If there is any surplus generated at the end of the year, that by itself would not be the sole consideration for judging whether any activity is trade, commerce or business particularly if generating 'surplus' is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charitable nature.

Para 11- “The objects of the trust clearly establish that the same was for general public utility and were for charitable purposes. The main objectives of the trust are to breed the cattle and endeavour to improve the quality of the cows and oxen in view of the need of good oxen as India is prominent agricultural country; to produce and sale the cow milk; to hold and cultivate agricultural lands; to keep grazing lands for cattle keeping and breeding; to rehabilitate and assist Rabaris and Bharwads; etc.

Para 12- “All these were the objects of the general public utility and would squarely fall under section 2 (15). Profit making was neither the aim nor object of the Trust. It was not the principal activity. Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, would not render the activity in the nature of trade, commerce or business. As clarified by the CBDT in its Circular No. 11/2008 dated 19-12-2008 the proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of 'public utility'.

Para 14 – “Thus the Tribunal had not committed any error in directing the Assessing Officer to provide exemption under section 11 and holding that the proviso to section 2(15) was not applicable to the facts and circumstances of the case. Tax Appeal is therefore dismissed

v) DIT (E) Vs Council for Leather Exports (2015) 62 taxmann.com 183

The main objects of the assessee are to support, protect, maintain, increase and promote export leather articles and products and bye-products of leather industry. The council for leather exports is an autonomous non-profit company registered under Indian Companies Act entrusted with export promotion activities and development of Indian leather industry. CLE is apex body of 2,400 members rapidly growing Indian leather industry. CLE's activities are multiple and directed towards assisting its members in extending their global reach thereby increasing their exports.

AO’s contention

The Assessing Officer was of the view that the assessee is not doing any multiple activities of any nature, i.e., relief to poor, medical aid/relief and education. The activities of the assessee are not falling under the limb of any other objects of general public utility for the reason that activities of the assessee are only for registered members and not for general public. The activities of the assessee are purely on commercial lines. The Assessing Officer held that activities of the assessee are in the nature of trade, commerce or business and therefore applying proviso to section 2(15) of the Act, the assessee was denied exemption under section 10(23C) of the Act.

Conclusion - If the dominant and prime object of the institution which claims to have been established for charitable purposes, is profit making whether its activities are directly in the nature of trade, commerce or business or indirectly in rendering of any service in relation to its any trade, commerce or business, then the assessee would not be able to claim its object to be charitable purposes. On the other hand, where the institution is not driven primarily by a desire or motive to earn profits but to do charity through advancement of object of general public utility, the institution can be regarded as an institution established for charitable purposes. In the case on hand, we do not find it is established that the dominant and prime object of the assessee is profit making. The assessee is doing charity through advancement of object of general public utility, therefore, it is an institution established for charitable purposes.

Cases referred - India Trade Promotion Organization v. DGIT (Exemptions) [2015] 371 ITR 333/229 Taxman 347/53 taxmann.com 404 (Delhi) and Southern India Chamber of Commerce & Industry v. Joint CIT [IT Appeal Nos. 2733 and 2734/Mad./2014]

vi) Rajasthan Gau Seva Sangh Vs CIT(E) [2020] 116 taxmann.com 6

Where assessee trust was engaged in providing asylum/shelter to cows and maintaining gaushalas and famine relief centres to provide proper treatment and fodder to needy stray cows, merely because assessee earned certain revenue from sale of milk, milk product, cattle feed etc., it could not be said that activities of assessee were not charitable so as to cancel its registration under section 12A.

Important findings

Para 2.6 – “Thus there are two situations under which registration granted u/s 12AA/12A can be cancelled either the activities of the trust/institutions are not genuine or the activities are not being carried out in accordance with the objects of the trust/institution. In the case in hand, there is no allegation that the activities of the assessee trust are not genuine but the ld. CIT(E) has observed that the activities of the assessee trust are not being carried out in accordance with the objects of the trust. It is pertinent to note that once the objects of the assessee trust are found to be charitable in nature then in order to hold that the activities are not being carried out in accordance with the object the same must not be in the nature of achieving or attainment of the purpose and objects of the trust. There is no dispute that the main dominant functions of the assessee trust is to provide an asylum/shelter to old sick, maimed, and stray cows. The assessee is maintaining 11 Gaushalas and14 Famine Relief Centres particularly for providing the shelter to the cows. It is also not in dispute that for last more than 45 years the assessee has been providing asylum/shelter to the cows and maintaining these Gaushalas as well as Famine Relief Centres with the object to provide proper treatment and fodder to the needy stray cows. Apart from maintaining Gaushalas and Famine Relief Centres, the assessee trust is also carrying out various activities of providing research and training centres for development of medical treatment and use of cow products in the medicine. The assessee is also imparting education and other training necessary for animal husbandry and particular rearing the cows by milkmen. The department has not disputed the fact that entire receipt/income earned by the assessee from various activities are applied in the attainment of its main and dominant objects of maintaining the Gaushalas and Famine Relief Centres. Even the activities of purchase and sale of milk, ghee and cattle feed is done through another society namely Jaipur Gau Samvardhan Samiti. The sole object & purpose of purchase and sell of the milk, milk products and cattle feed is to provide the financial help to the persons in occupation of animal husbandry and particularly selling of milk. Thus the proviso inserted in section 2(15) was considered by the Hon'ble Bombay High Court and held the expression Trade, Commerce and Business as provided in first proviso to section 2(15) must be read in the context of intent and purport of section 2(15) of the Act and cannot be interpreted to mean any activity which is carried on in an organized manner, even as per intent of the legislature and as per Finance Bill, 2008 whereby the said proviso to section 2(15) was inserted, is found to be not to bring the incidental activity for furtherance of the object within the expression business, trade or commerce. It is pertinent to note that when the assessee is maintaining various Gaushalas then production of milk is bound to happen and dealing in purchase and sale of milk & milk products as well as cattle feed is nothing but the activity in furtherance of the objects of the assessee trust. The ld.DR of the assessee relied on the decision of ITAT Bangalore Bench in the case of Sri Vidyaranya Sewa Sangh (supra) wherein the Tribunal has specifically noted that the assessee society is not carrying out any activity since 2001. Therefore, the genuineness of the activity itself was not even in existence. Hence, the said decision cannot be applied in the present case where there is no dispute about the activities being carried out by the assessee trust and it has maintained 11 Gaushalas and 14 Famine Relief Centres which is the main and pre-dominant object of the assessee trust. Hence, the impugned order passed by the ld. CIT(E) is based on the presumption of incorrect facts that the activities of the assessee trust are not in accordance with the object of the assessee trust. The ld. CIT(E) has even not taken into consideration the fact that the assessee is maintaining various Gaushalas and Famine Relief Centres and also carrying out various activities of imparting education and training. The assessee trust is also engaged in the activities of research and development of medicines by the use of cow products. Therefore, the findings of the ld. CIT(E) is contrary to the undisputed facts regarding the objects of the assessee trust and the activities of the trust are being carried out for attainment of main objects of the trust. Hence in view of the above facts and circumstances of the case, the impugned order of the ld. CIT(E) is set aside and grant of registration u/s 12A is restored. Thus the appeal of the assessee is allowed.

vii) Credai Bengal Vs ITO [2019] 110 taxmann.com 113 (Kolkata - Trib.)

Where assessee's activities of holding fairs, exhibitions and conferences were incidental or ancillary to attainment of assessee's main object of promotion of construction industry and surplus, if any, was to be transferred to its infrastructure fund, there was no violation of section 2(15)

Section 2(15), read with section 11, of the Income-tax Act, 1961 - Charitable purpose (Objects of general public utility) - Assessment year 2012-13 - Assessee was engaged in promotion of commerce and industry relating to construction in general and building construction in particular - In order to fulfil its main objective, assessee organised certain incidental or ancillary activities, namely, organising fairs, exhibitions and several other inter connected activities - Persons taking part in such fairs and making contributions were primarily members of appellant-institution and participating non-members were also not strangers but they were important stakeholders closely connected with real estate development industry - Even though appellant realized surplus from organising fairs and exhibitions, same was to be transferred to infrastructure fund of assessee and, thus, it was corpus in nature - Whether on facts assessee's activity of holding trade fairs, exhibitions and conferences was not in nature of trade, commerce or business and, therefore, there was no violation of section 2(15) - Held, yes - Whether, therefore, assessee was entitled to benefit of section 11 - Held, yes [Paras 10 and 11] [In favour of assessee]

Conclusion: Proviso to section 2(15) will be applicable only to the last limb of Section 2(15) as per circular no. 11/2008 and several case laws like DIT Vs Ahmedabad Management Association [2014] 47 taxmann.com 162 (Gujarat).

3. CONSEQUENCES IF PROVISO TO SECTION 2(15) IS ATTRACTED

Let’s assume a worst case scenario when an Assessing Officer does not agree to your contention that the trust is carrying on charitable activities other than advancement of any other object of general public utility. So, as per Section 13(8), the Assessing Officer will tax the alleged business income at Maximum Marginal Rate without giving any benefit of application of income u/s 11 / 12. However, if the assessee has received income other than income from alleged business like general donation or interest income, the assessee is allowed application of income u/s 11 / 12 to the extent of such income. In other words, even though the alleged business income will not be allowed for application of income u/s 11 / 12; other incomes earned by the trust will be eligible for application of income u/s 11/ 12 and registration of trust u/s 12AB cannot be cancelled.

Section 13(7) has been reproduced for the sake of convenience- “Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in the said previous year.

As per Section 13(8) if the trust receives anonymous donations then such donations will be taxed as per Section 115BBC and benefit of section 11 / 12 will not be available on such income. Section 13(8) has been reproduced for the sake of convenience- “Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof, any anonymous donation referred to in section 115BBC on which tax is payable in accordance with the provisions of that section.

So, on similar lines, one can draw support from Section 13(8) and seek benefit of Section 11 / 12 for income other than alleged business income. Support can be drawn from different judgements which have got similar matters. The same have listed hereunder:-

i) DIT Vs Sheth Mafatlal Gagalbhai Foundation 2001 249 ITR 533 Bom

The maximum marginal rate of tax will apply only to the dividend income from shares in Mafatlal Industries Limited and not to the entire income. Therefore, income other than dividend income shall be taxed at the normal rate of taxation under the Act.

ii) CIT Vs Fr. Mullers Charitable Institutions [2014] 44 taxmann.com 275 (Karnataka)/ [2014] 227 Taxman 369 (SC)

In case of a charitable trust, it is only income from investment or deposit which has been made in violation of section 11(5) that is liable to be taxed and that violation under section 13(1)(d) does not tantamount to denial of exemption under section 11 on total income of assessee-trust. SLP filed by the Department was dismissed by the Supreme Court.

iii) Commissioner of Income-tax (Exemptions), Pune Vs Audyogik Shikshan Mandal [2019] 101 taxmann.com 247 (Bombay)

Where funds of assessee-trust were utilized for purchase of car in name of its trustee, there was violation of section 13(2)(b), read with section 13(3); however, denial of exemption under section 11 should be limited only to amount which was diverted in violation of section 13(2)(b)

iv) Maharashtra Academy of Engineering & Educational Research Vs DCIT [2017] 88 taxmann.com 864 (Pune - Trib.)

Section 13 of the Income-tax Act, 1961 - Charitable or religious trust - Denial of exemption (Income used for benefit of specified persons [sub-section (1)(c)]) - Assessment year 1999-2000 - Whenever there is violation of provisions of section 13(1)(c) or 13(1)(d), exemption cannot be withdrawn for entire income and income which is subject-matter of violation only can be brought to tax [Partly in favour of assessee]

v) Income-tax Officer Vs Swami Omkarnanda Saraswati Charitable Trust [2017] 86 taxmann.com 37 (Delhi - Trib.)

Section 2(15), read with sections 11 and 13, of the Income-tax Act, 1961 - Charitable purpose (Education) - Assessment year 2010-11 - Assessee-trust was running an educational institution for conducting professional courses - Assessee trust had primarily purchased property for its objects and used them for its object but some part of those properties which were not in use, were rented out to banks, post office or insurance companies - Funds realized from rental income were part of funds of trust and to be utilised for purposes of object of trust - Whether rental income received by trust was not hit by proviso to section 2(15) - Held, yes - Whether merely because tenants were carrying out business in those premises it could not be used against assessee that assessee was also not carrying on charitable activities but business - Held, yes [Para 14][In favour of assessee]

Section 11, read with section 13 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under (Quantum of disallowance) - Assessment year 2010-11 - Whether denial of exemption under section 11 should be limited to amount which was diverted in violation of section 13- Held, yes [Para 19][In favour of assessee]

4. ACTIVITIES CARRIED ON NOT FOR PROFITS

When objects of the assessee are charitable in nature and it has not carried on any activity with the object of making profit then the proviso to se. 2(15) does not arise and accordingly exemption under section 11 claimed by the assessee could not be denied. There are certain bodies established by the Central & State Acts to implement certain policies and in such cases proviso to section 2(15) is not applicable. This is supported by the following cases:-

i) CIT V/s Lucknow Development Authority (2013) 219 Taxman 162

ii) CIT V/s Gujarat Industrial Development Corp. Ltd Tax Pub DT 1934 Gujarat HC

iii) CIT V/s Gujarat Industrial Development Corp. Ltd (2018) Tax Pub (DT) 6440

iv) Greater Noida Industrial Development Authority Vs CIT(E) (2016) 47 CCH 095 (Delhi)

v) The Institute of Chartered Accountants of India V/s DGIT (Exemption) (2013) 358 ITR 91 (Delhi HC)

vi) CIT V/s Mumbai Metropolitan Regional Development Authorities (2020) 115 Taxmann.com 71 Bombay

Where no findings had been recorded by director that activities of assessee trust were not genuine or that activities were not being and were carried out in accordance with objects of Trust, cancellation of registration granted to assessee trust on grounds that it was directly hit by proviso to se. 2(15) was not justified.

vii) Goa Industries Development Corp V/s CIT (2020) 116 Taxmann.com 42

Power of cancellation of registration can be exercised by Commissioner, where Commissioner is satisfied that activities of trust or institution are not genuine or are not being carried out in accordance with objects of trust or institution and this process has to be initiated strictly in accordance with provisions under section 12AA(3).

viii) CIT (E) Delhi V/s Delhi Bureau of Text books (2020) 114 Taxmann.com 615 (SC)

SLP dismissed as withdrawn due to low tax effect against High Court ruling that where assessee society engaged in printing, publication and distribution of school text books at subsidized rates or even free, generated profits out of these activities, it could not be concluded that assessee ceased to carry on charitable activity of education.

viii) Orissa Olympic Association V/s CIT(E) Hyderabad (2020) 77 ITR (T) 407 / 180 ITD 692

Registration granted to an association under section 12AA is required to be continued till nature of its activities change, registration cannot be cancelled on mere fact that assessee trust earned commercial lease rent exceeding Rs. 25 Lakhs.

Circular referred- Circular No. 21 of 16 dated 27/05/2016

Case Referred- Dahisar sports Foundation V/s ITO (E) (2017) 167 ITD 710

Circular No. 21/2016 F No. 197/17/2016

Section 12AA of IT Act 1961- Charitable or Religious Trust Registration procedure – clarification on cancellation of registration and or section 12AA in certain circumstances.

vi) Gujarat Safety Council V/s ITO Vadodara

(2020) 113 Taxmann.com 234 (A) /(2020) 180 ITD 711 (Ahmedabad Tribunal)

In view of changing time and widening horizon of knowledge and rapid change in method of teaching, multifaceted activities in form of handbook/literature published together with activities like holding conferences on industrial safety programmes, public talks, seminars, workshops, etc. on ongoing basis to inculcate industrial safety measures would also be bracketed in league of 'educational activities'

5. WHEN THE PREDOMINANT OBJECT IS CHARITY, CAN SURPLUS FROM INCIDENTAL ACTIVITY PRECLUDE EXEMPTION?

If incidental surplus is earned while carrying out charitable objects which are predominant then proviso to Section 2(15) shall not apply. This is supported by ITO (E) Vs Data Security Council of India 156 TR (A) 562 Delhi Tribunal and various other judicial pronouncements.

6. RELEVANT CASE LAWS IN RELATION TO SECTION 2(15) ARE SUMMARISED AS UNDER:-

i) PCIT Vs Fertilizer Association of India (2020) 114 taxmann.com 83(SC)

Section 2(15) of the Income-tax Act, 1961 - Charitable purpose (Objects of general public utility) - Assessment years 2010-11 and 2011-12 - High Court by impugned order held that mere charging of fee from members or nonmembers for rendering services like training, conducting seminars would not ipso-facto lead to denial of exemption under section 11 when dominant object of assessee remained charitable and aforesaid activities were only incidental to main activity of assessee - Whether special leave petition filed against impugned order was to be dismissed due to low tax effect - Held, yes [In favour of assessee]

ii) AVM Charities Vs ITO(E) [2019] 103 taxmann.com 345 (Chennai - Trib.)

First proviso to section 2(15) applies to an assessee engaged in advancement of general public utility other than relief to the poor, education, medical relief, preservation of environment and preservation of monuments. As already mentioned, assessee's charitable activities were directly or indirectly in the nature of relief to the poor or education or medical relief. It was not an organization which was pursuing an activity of general public utility, different from education, medical relief or relief to the poor. First proviso to section 2(15) is attracted only where an assessee carries on activities which was of general public utility other than those mentioned specifically in the definition of charitable purpose given in section 2(15).

iii) Advertising Agencies Association of India Vs ACIT

[2019] 104 taxmann.com 218 (Mumbai - Trib.)

Where assessee trade association of advertising agencies organised 'Fest' every year for advancement of its objects specified in Charter of Trust, it would fall within ambit of section 2(15) and interest received on deposit of surplus generated from Fest in fixed deposit and savings account was entitled to exemption under section 11

iv) CIT Vs Paramount Charity Trust (2018) 97 taxmann.com 134 (Gujarat)

The objects in the original trust deed were sufficiently wide and cover range of charitable activities relatable to education, medical aid and help to poor in times of calamities. The existing objects would have enabled the Trust to support the diagnostic center as long as it was done for charitable purpose. The amended objects clarify that such center would be run on no charge, or at any rate on no profit basis. It is difficult to see how the Commissioner thought such center would be a commercial venture.

SLP filed by Department in Supreme Court was dismissed [2019] 103 taxmann.com 419 (SC).

v) DIT Vs Ahmedabad Management Association [2014] 47 taxmann.com 162 (Gujarat)

Section 2(15), read with section 11, of the Income-tax Act, 1961 - Charitable purpose - (Proviso to section 2(15)) - Assessment year 2009-10 - Whether newly inserted proviso to section 2(15) will apply to entities whose purpose is advancement of any other object of general public utility and, hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) if they carry on commercial activities but said proviso will not apply in respect of activities in nature of relief to poor, education or medical relief - Held, yes - Assessee-association undertook multifaceted activities comprising of conducting various continuing education diploma and Certificate Programmes, Management Development Programmes, Public Talks, Seminars, Workshops and Conferences - It claimed exemption under section 11 - Assessing Officer held that, considering nature of courses offered, their duration and resultant surplus, activity of assessee was not educational but fell within scope of newly inserted proviso to section 2(15) and denied exemption - Whether since activities of assessee would fall within realm of education which is 'charitable' as per section 2(15), assessee would be entitled to exemption under section 11 - Held, yes [Para 5.7] [In favour of assessee]

vi) CIT Vs Sai Publication Fund (2002) 258 ITR 70 (SC)

Section 3, read with sections 2(5A) and 2(11), of the Bombay Sales Tax Act, 1959 - Incidence of Tax - Whether if main activity is not business, then any transaction incidental or ancillary would not normally amount to 'business' unless an independent intention to carry on 'business' in incidental or ancillary activity is established - Held, yes - Sole object of assessee-trust was to spread message of Saibaba of Shirdi - Books, literatures, etc., containing messages of Saibaba were published and distributed by trust to devotees at cost price - Whether activity of publishing and selling literatures was merely incidental or ancillary to main object which being devoid of any profit motive would not amount to 'business' and it could not be said that assessee-trust carried on business of selling and supplying goods so as to fall within meaning of 'dealer' under section 2(11) - Held, yes - Whether, as a result, assessee-trust would not be liable to pay sales tax - Held, yes

vii) DIT(E) Vs North Indian Association [2017] 79 taxmann.com 410 (Bombay)

Section 2(15), read with section 12AA, of the Income-tax Act, 1961 - Charitable purpose (Objects of general public utility) - Assessment year 2009- 10 - Director (Exemption) cancelled registration under section 12AA(3) earlier granted to assessee on ground that assessee was carrying on activity in nature of trade, commerce or business and income earned by assessee was in excess of Rs. 10 lakhs, thereby attracting second proviso to section 2(15) and, therefore, trust was not genuine Trust - Whether merely because income of assessee trust during relevant year exceeded prescribed limit provided under second proviso to section 2(15), that by itself, would not warrant cancellation of registration of trust under section 12AA(3) - Held, yes [Paras 5,8 and 9][In favour of assessee]

viii) Saraswat Hit Wardhak Vs ITO (2020) 77 ITR (Trib) (SN) 89 Mumbai ITR 77 (Page 6) 10-02-2020

Charitable Purpose: Exemption Status Individual – does not mean a single human being beneficial- a group of individuals does not mean that liabilities is of Association of persons – Assessee to be treated as on individual IT Act 1961 Sec. 11.

Case Referred- DIT (Exemption) V/s Shardaben Bhagubhai Mafatlal Public Charitable Trust (2001) 247 ITR 1

ix) CIT (E) V/s Association of Third-party administration(2020) 114 Taxmann.com 534 (Delhi)

Where assessee-association of third party administrators (ATPA) was engaged in primary aim and objective to organise and arrange all licensed third party administrators (TPAs) to be members of trust for mutual betterment of TPA business, merely because certain benefits accrued to TPA members and certain objects of trust were for advancement of business of TPA, it would not ipso facto render trust to be non-charitable.

x) Indian HIV/ AIDS Alliance V/s CIT (E) New Delhi (2019) 102 Taxmann.com 134 (Delhi Tribunal) / (2019) 175 ITD Delhi Tribunal

Activities in firm of medical relief for patients and creating awareness but HIV and AIDS for purpose of its eradication are charitable activities falling into category of medical relief under section 2(15)

xi) CIT (E) Kanakia Art Foundation (2019) 108 Taxmann.com 43 Bombay / (2019) 265 Taxman 281 Bombay

One of objects of assessee mentioned that with help of literary persons of different aptitudes or classes, plays written in different languages, could be converted into dramas or episodes or TV plays said activity could not be regarded as commercial in nature and then assessee’s application for registration under section 12AA was to be allowed

Ref- Kanakia Art Foundation V/s Dy CIT (2015) 59 Taxmann.com 468 (Mumbai Tribunal)

xii) CIT V/s Pratham Institute for Literacy Education & Vocational Training (2019) 108 Taxmann.com 313(SC)/ (2019) 265 Taxman 546 (SC)

Where High Court upheld Tribunal's order allowing assessee's claim for registration under secton 12AA by taking a view that primary object of assessee trust was to conduct work in area of research, studies, training, education, health etc. only for charitable purpose within meaning of section 2(15), SLP filed against said order was to be dismissed.

xiii) India International Centre Vs ADIT [2015] 57 taxmann.com 265 (Delhi - Trib.)

It was found from records that predominant activities of centre was not to earn income but to provide facilities for disseminating or exchanging knowledge as per object of society - Whether for achieving its dominant object merely because incidental income was earned by assessee society by providing hostel and catering activities, it could not be said that assessee was doing trade or business as contemplated under proviso to section 2(15); therefore, impugned revisional proceedings deserved to be quashed - Held, yes

xiv) DIT Vs Willingdon Charitable Trust [2007] 107 ITD 493 (Chennai)/[2007] 106 TTJ 1121 (Chennai)

Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under - Assessment years 1995-96 to 1998-99 and 2000-01 - Assessee was a registered trust established as a club with main object to encourage and maintain social interconnection between Europeans and Indians for promotion of sports for purpose of entertainment and amusement, as well as for educational, instructive and such other purposes - Assessee also acquired certain property under its name - Activities of club became ineffective due to significant political and social changes - However, subsequently, a new organization was created as a charitable trust for proper utilization and exploitation of property for fulfilment of object of erstwhile club and for promoting other objects - Property of erstwhile club was transferred to a new trust and assessee built a commercial complex and two auditoriums on acquired property and was receiving rental income from same - Assessee was also running ladies hostel in complex - Assessee claimed exemption under section 11 in respect of income received from rent, donation and amenities - Whether since aims and objects of trust showed that assessee could construct any buildings for purpose of trust and, moreover, income from rent, donation and amenities was used towards attainment of main objects of trust, it could be said that trust properties were held for charitable purposes and said activity of assessee should be considered as incidental to attainment of objects of trust - Held, yes - Whether therefore, assessee would be entitled to exemption under section 11 - Held, yes

xv) CIT Vs Sri Thyaga Brahma Gana Sabha (Regd.) [1990] 52 Taxman 395 (Madras HC)

Section 11, read with section 2(15), of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under - Assessment year 1973-74 - Assessee-society was owner of a hall and derived rental income from letting out same - Said hall was let out whenever it was not used by assessee - Whether in view of fact that object of assessee was not to earn profit by letting out hall and profit earned in past 25 years was very meagre and negligible, assessee was entitled to exemption under section 11 read with section 2(15), in respect of such rental income - Held, yes

xvi) DIT Vs. Bharat Diamond Bourse [2003] 126 Taxman 365 (SC)

Section 2(15), read with section 11, of the Income-tax Act, 1961 - Charitable Purposes - Assessment years 1989-90 and 1990-91 - Whether where primary or dominant purpose of 'institution' is charitable and other objects which, by themselves, may not be charitable, but are merely ancillary or incidental to primary or dominant object, same would not prevent 'institution' from validly being recognized as a charity - Held, yes -

Whether where principal object of establishment of assessee-bourse was to facilitate diamond trade so that maximum revenue could be earned by way of foreign exchange and also to make diamond trade more competitive at international level, it was to be held that assessee a diamond bourse was an institute established for charitable purpose - Held, yes

xvii) Mahatma Gandhi Charitable Society V/s CIT (2013) 142 ITD 565 Cochin Tribunal

The Tribunal held that the cancellation of registration can take place only under the circumstances as envisaged in Section 12AA(3) i.e. when the activity of the trust are not genuine or are not being carried out in accordance with the objects of the trust or exemption will not be available where the limit as provided in proviso is crossed. The Tribunal is of the considered opinion that the subsequent amendment to section 2(15) of the Act by introducing proviso fixing the monetary limit in respect of Public Utility Services cannot be a reason to cancel the registration. (This was also held in the case of Tamil Nadu Cricket Association V/s DIT Exemption (2014) 360 ITR 633 Madras HC)

xviii) ITO Kolkata V/s Indian Leather Products Association (2016) 156 ITD 392 (Kolkata Tribunal)

Where assessee association was formed with an object to promote leather trade, in view of fact that assessee's receipt of rent from nonmembers by allowing them to keep their stalls in trade fairs organised by assessee was negligible in comparison to total trade receipts, assessee's case could not be said to be covered under proviso to section 2(15)

xix) Saurashtra Education Foundation V/s CIT (2005) 273 ITR 139 (Gujarat HC)

Mere printing and Publication of books in India does not amount to spending money for the purpose of education. However, first proviso to Section 2(15) cannot be a ground to cancel the Registration granted under Section 12A / 12AA.

CONCLUSION

We have thoroughly discussed section 2(15) and the proviso added w.e.f. 01.04.2009 added by the Finance Act, 2008 as explained by circular no. 11/2008. It appears that the main purpose of insertion of explanation to section 2(15) is to supersede the decision of CIT(E) Vs. Gujarat Maritime Board (2008) 166 Taxman 58 (SC). According to Income Tax Department, an object of general public utility is treated as charitable object as it benefits the large population. If an activity is carried out on commercial principles only then it cannot be considered as a charitable purpose. Charitable purposes include relief of poverty, medical relief and or education i.e. where trust spends money for the welfare of poor and needy persons. If the object of the trust is to fulfill any charitable purpose as mentioned in section 2(15) except for advancement of object of general public utilities, proviso to Section 2(15) will not be attracted. For carrying out the charitable activities of trust, if the trust owns assets like building, auditorium, etc (trust assets allowed to be held by trust as per Section 11) and occasionally those are given on rent to supplement finance for the main objects of the trust then such activities will not lead to application of proviso to section 2(15).

The proviso to section 2(15) has resulted in lot of litigation. Many institutions created by the Central act or State act, formed to carry out statutory obligation i.e. not for profit functions, sometimes generate some surplus and have faced lot of litigation.

After perusal of section 13(7) and 13(8) and considering various case laws one can conclude that if at all the income of certain activities of trust are treated as business activity then at the maximum, the trust can be denied the benefit of section 11 / 12 to the extent such alleged business income. In such situations, registration granted under section 12AB (or section 12A/ 12AA before amendment) cannot be cancelled as they are carrying on genuine charitable activities and they have not departed from the objects. Also, it is to be noted that such trusts have not violated any laws and hence registration u/s 12AB (or section 12A/ 12AA before amendment) cannot be questioned. These charitable trusts have done a wonderful humanitarian work during this Covid 19 period by providing food, medical and other economic relief to poor and needy, temporary workers, people living in slums, etc. Hence, taking into consideration these facts, the authorities must treat them leniently and proviso to Section 2(15) be removed or diluted so as to allow these organisations to carry out their activities fearlessly. Why should majority of the trusts suffer because of few trusts which misuse such provisions? Once the charitable activities and application of funds is fairly established proviso to Section 2(15) must be diluted. The broader purpose of the trusts should be considered and accordingly those organisations must be provided certain relaxations in Income Tax Act like reduction in frequency of scrutiny, exemption should be allowed even if returns and forms like 10, 10B, 9 are filed under S.139(4), etc.

KUTCH GURJARI

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