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

The Supreme Court has pronounced a significant judgment on the scope of exemption for "charitable purposes" under Section 2(15) of the Income Tax Act 1961 in relation to statutory authorities and professional bodies.

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".

The scope of this proviso was the subject matter of the case(Assistant Commissioner of Income Tax vs Ahmedabad Urban Development Authority and connected cases).

Deciding a batch of appeals, a bench comprising Chief Justice of India Lalit, Justice S Ravindra Bhat and Justice PS Narasimha made the following conclusions in relation to statutory authorities and professional bodies.

Authorities, corporations, or bodies established by statute

The amounts or any money whatsoever charged by a statutory corporation, board or any other body set up by the state government or central governments, for achieving what are essentially 'public functions/services' (such as housing, industrial development, supply of water, sewage management, supply of food grain, development and town planning, etc.) may resemble trade, commercial, or business activities. However, since their objects are essential for advancement of public purposes/functions (and are accordingly restrained by way of statutory provisions), such receipts are prima facie to be excluded from the mischief of business or commercial receipts.  

However, at the same time, in every case, the assessing authorities would have to apply their minds and scrutinize the records, to determine if, and to what extent, the consideration or amounts charged are significantly higher than the cost and a nominal mark-up. If such is the case, then the receipts would indicate that the activities are in fact in the nature of "trade, commerce or business" and as a result, would have to comply with the quantified limit (as amended from time to time) in the proviso to Section 2(15) of the IT Act.

In clause (b) of Section 10(46) of the IT Act, "commercial" has the same meaning as "trade, commerce, business" in Section 2(15) of the IT Act.

Therefore, sums charged by such notified body, authority, Board, Trust or Commission (by whatever name called) will require similar consideration – i.e., whether it is at cost with a nominal mark-up or significantly higher, to determine if it falls within the mischief of "commercial activity". However, in the case of such notified bodies, there is no quantified limit in Section 10(46). Therefore, the Central Government would have to decide on a case-by-case basis whether and to what extent, exemption can be awarded to bodies that are notified under Section 10(46).

Professional bodies

One among the appeals related to the Institute of Chartered Accountants of India (ICIA). The revenue department disputed the tax exemption to ICAI. However, ICAI contended that its activities are not profit oriented and submitted that the fees collected from the students are utilized on various infrastructure development and other capital expenditure items.

Settling the issue in favour of the ICAI, the bench observed :

"A singular characteristic of ICAI and other statutory bodies which can be said to regulate specific functions and professions (including the profession of Cost and Work Accountants, and Company Secretary, etc.) is the powers conferred upon them by the statutes to prescribe standards and enforce them through disciplinary sanctions. Therefore,it is held that bodies which regulate professions and are created by or understatutes which are enjoined to prescribe compulsory courses to be undergone before the individuals concerned is entitled to claim entry into the profession or vocation, and also continuously monitor the conduct of its members do not ipsofacto carry on activities in the nature of trade, commerce or business, or services in relation thereto"

The bench further held :

"The income and receipts of statutory regulatory bodies which are for instance, tasked with exclusive duties of prescribing curriculum, disciplining professionals and prescribing standards of professional conduct, are prima facie not business or commercial receipts. However, this is subject to the caveat that if the assessing authorities discern that certain kinds of activities carried out by such regulatory body involved charging of fees that are significantly higher than the cost incurred (with a nominal mark-up) or providing other facilities or services such as admission forms, coaching classes, registration processing fees, etc., at markedly higher prices, those would constitute commercial or business receipts.

In that event, the overall quantitative limit prescribed in the proviso to Section 2(15) (as amended from time to time) has to be complied with, if the regulatory body is to be considered as one with 'charitable purpose' eligible for exemption under the IT Act.

Like statutory authorities which regulate professions, statutory bodies which certify products (such as seeds) based on standards for qualification, etc. will also be treated similarly". 

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

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