Advancement Of General Public Utility Won't Be "Charitable Purpose" For Income Tax Exemption If It Is Done As Business : Supreme Court

In a significant judgment, the Supreme Court has held that entities created with the object of advancing general public utility cannot seek exemption under the Income Tax Act 1961 under the head "charitable purposes" if they are engaging in any trade, business, commerce or providing any service for any consideration.

However, in the course of carrying out the general public utility, the assessee can engage in incidental trade or business or provide services for consideration and can generate profits. If the receipts generated out of such incidental activities are within the quantified limits, the trusts are entitled to seek income tax exemption.

A bench comprising Chief Justice of India Lalit, Justice S Ravindra Bhat and Justice PS Narasimha interpreted the ambit of Section 2(15) of the Income Tax Act 1961, which defines "charitable purpose" in this case (Assistant Commissioner of Income Tax vs Ahmedabad Urban Development Authority and connected cases).

With effect from 01.04.2009, after the Finance Act 2009, a proviso was added to the section to state : "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.

Conclusions of the judgment

The following are the important conclusions from the judgment :

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");

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);

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". 

Illustrations 

The Court provided some illustrations in paragraph 173 to explain this point as follows :

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).

The bench further explained that "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"(Para 171).

The Court added "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"(Para 172).

Section 11(4A) to be interpreted harmoniously with Section 2(15)

Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached. Similarly, the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), reaffirm this interpretation and bring uniformity across the statutory provisions. 

Trade promotion bodies

The Court held that bodies involved in trade promotion (such as AEPC), or set up with the objects of purely advocating for, coordinating and assisting trading organisations, can be said to be involved in advancement of objects of general public utility. However, if such organisations provide additional services such as courses meant to skill personnel, providing private rental spaces in fairs or trade shows, consulting services, etc. then income or receipts from such activities, would be business or commercial in nature. In that event, the claim for tax exemption would have to be again subjected to the rigors of the proviso to Section 2(15) of the IT Act.

Statutory Authorities, Professional Bodies Like ICAI Entitled To Income Tax Exemption If Amounts Charged By Them Are Nominal To Cover Costs : Supreme Court

Case Title : Assistant Commissioner of Income Tax vs Ahmedabad Urban Development Authority and connected cases

Citation : 2022 LiveLaw (SC) 865

Income Tax Act 1961 - Tax exemption for charitable purposes -Section 2(15)- An assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration-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  the activities of trade, commerce or business are connected to the achievement of its objects of GPU; and the receipts do not exceed the quantified limit-Para 253

Income Tax Act 1961 - Tax exemption for charitable purposes -Section 2(15)-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(Para 172).

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