Gautam Nayak

Chartered Accountant

BCAS Lecture Meeting

18th January 2012

Charitable Purpose – s.2(15) 6 limbs

relief of the poor

Education

medical relief

preservation of environment (including watersheds, forests & wildlife)

Preservation of monuments/places/objects of artistic/historic interest

Advancement of any other object of general utility

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Charitable Purpose – s.2(15) Advancement of any other object of general public utility

Amendment w.e.f. AY 2009-10

not charitable purpose if it involves carrying on of :

any activity in nature of trade, commerce or business, or

Any activity of rendering any service in relation to trade, commerce or business

for a cess/fee/any other consideration, irrespective of nature of use/ application/retention of income from such activity

Exception – if aggregate value of receipts from such activities is Rs.10 lakh (Rs.25 lakh wef AY 2012-13) or less in the previous year

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Charitable Purpose – s.2(15) Explanatory Memorandum

It has been noticed that a number of entities operating on commerciallines are claiming exemption on their income either under section10(23C) or section 11 of the Act on the ground that they are charitableinstitutions. This is based on the argument that they are engaged in the“advancement of an object of general public utility” as is included in thefourth limb of the current definition of “charitable purpose”. Such aclaim, when made in respect of an activity carried out on commerciallines, is contrary to the intention of the provision.

With a view to limiting the scope of the phrase “advancement of anyother object of general public utility”, it is proposed to amend section2(15) so as to provide that “the advancement of any other object ofgeneral public utility” shall not be a charitable purpose if it involves thecarrying on of ………….

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Charitable Purpose – s.2(15)Amendment to “Charitable Purpose” – FM’s Speech The intention is to limit the benefit to entities which are engaged in

activities such as relief of the poor, education, medical relief and any other genuine charitable purpose, and to deny it to purely commercial and business entities which wear the mask of a charity.

I once again assure the House that genuine charitable organisations will not in any way be affected.

The CBDT will, following the usual practice, issue an explanatory circular containing guidelines for determining whether an entity is carrying on 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.

Whether the purpose is a charitable purpose will depend on the totality of the facts of the case.

Ordinarily, Chambers of Commerce and similar organisations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as “advancement of any other object of general public utility.”

FM’s assurance vs. express language of section

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Charitable Purpose – s.2(15)Amendment – CBDT Circular No.11 of 2009 dated 19.11.2008 Where the purpose is relief of the poor, education or medical relief,

‘charitable purpose’ even if it incidentally involves the carrying on of commercial activities

Relief to poor includes relief to destitute, orphans/ the handicapped, disadvantaged women/ children, small & marginal farmers, indigent artisans/ senior citizens in need of aid

Eligible for exemption subject to s.11(4) & 11(4A)

Whether carrying on an activity in the nature of trade, commerce or business is question of fact to be decided based on the nature, scope, extent and frequency of the activity

If industry/trade associations have dealings only with their members, exempt on grounds of mutuality

If they have dealings with non-members, now governed by amended definition of charitable purpose

Each case would be decided on its own facts

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Charitable Purpose – s.2(15)Meaning of “Business” for purposes of s.2(15) Institute of Chartered Accountants of India v. DGIT(E) 202 Taxman 1 (Del) -

Utilisation of the funds or income earned, whether for charitable purpose or otherwise, is not relevant now in view of the first proviso and cannot be a determining factor for deciding whether assessee is covered by section 2(15)

A very broad and extended definition of the term 'business' is not intended forthe purpose of interpreting and applying the first proviso to section 2(15) to include any transaction for a fee or money. An activity would be considered 'business' if it is undertaken with a profit motive, but in some cases this may not be determinative. Normally, the profit motive test should be satisfied but in a given case activity may be regarded as business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles, and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business.

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Charitable Purpose – s.2(15) Amendment Impact Objects become partly charitable and partly non-charitable

Property held partly in trust for charitable or religious purposes

Section 11(1)(b) applicable

Trust exempt only if set up prior to 1962

Effectively such trusts (pre-1962) will get exemption for all income spent for other objects

Trusts set up after 1962 will lose exemption altogether in respect of entire income

S.10(23C)(iv) & (v) cases may also be affected

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Charitable Purpose – s.2(15)Some Impacted Objects of General Public Utility Promotion of literature, arts & culture

Promotion of trade & commerce

Furtherance of National Integration

Promotion of International Understanding

Promotion of Sports

Promotion of Handicrafts

Care & Protection of Animals & Birds (other than wildlife)

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Charitable Purpose – s.2(15)Impact - Chambers of Commerce/Trade Associations

Mutuality v. benefit of general public utility

Meaning of “in relation to trade, commerce or business”

All activities in relation to trade, commerce or business, even if not in the nature of trade, commerce or business

Subscription exempt

Income from specific services to members taxable u/s.28(iii) r.w.s. 2(24)(v) –whether holding of seminars amounts to specific services?

CIT v. Royal Western India Turf Club 24 ITR 551 (SC) - similar amenities given to members & non-members – fees charged to both – not exempt

CIT v. Calcutta Stock Exchange Association Ltd. 36 ITR 222 (SC)“The words ‘performing specific services’ [in section 10(6)] in our opinion, mean, in the context,‘ conferring particular benefits’ on the members. The word ‘services’ is a term of a very wide import, but in the context of Section 10 of the Act, its use excludes its theological or artistic usage. With reference to a trade, professional or similar association, the performing of specific services must mean conferring on its members some tangible benefit which otherwise would not be available to them as such, except for payment received by the association in respect of those services.”

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Charitable Purpose – s.2(15)Impact - Chambers of Commerce/Trade Associations……

Interest income – whether taxable?

Taxable

CIT v. Common Effluent Treatment Plant (Thane Belapur) Association 328 ITR 362 (Bom)

Sports Club of Gujarat Ltd. v. CIT 171 ITR 504 (Guj)

Madras Gymkhana Club v. Dy. CIT 328 ITR 348 (Mad)

CIT v. Bangalore Club 287 ITR 263 (Kar)

Amar Singh Club v. Union of India 184 Taxman 481 (J & K)

Devi Ahilya New Cloth Market Co. Ltd. v. CIT 222 CTR (MP) 583

Not Taxable

• Canara Bank Golden Jubilee Staff Welfare Fund v. Dy. CIT 308 ITR 202 (Kar)

DIT(E) v. All India Oriental Bank of Commerce Welfare Society 130 Taxman 575 (Del)

CIT v. Standing Conference of Public Enterprises 319 ITR 179 (Del)

Deficit from mutual activities can be set off up to 50% of business income/other income – s.44A

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Charitable Purpose – s.2(15) Fund Raising Activities – whether in nature of trade, commerce or

business?

Musical Concerts/Movie Shows

Publishing of Souvenirs

Art Auctions

Gaushalas selling milk and milk products

● Inmates residing in ashram preaching Gandhian philosophy, carrying on agriculture, running gaushala, publishing & selling books in Ashram, having conferences and having paid accommodation and boarding for visitors

• Sevagram Ashram Pratishthan v. CIT 129 TTJ (Nag) 506 - Object of the amended proviso to s. 2(15) is to create a barrier for those assessees who are engaged in business activities in the garb of charitable purpose and it is not meant for the assessees who are really engaged in charitable purpose

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Charitable Purpose – s.2(15) Hiring of auditorium/halls/wadis – mere letting not business

DIT(E) v. Sahu Jain Trust 2011-TIOL-204-HC-KOL-IT

Subharam Trust v. DIT (E) 126 ITD 33 (Bang) – land taken on lease from trustee, hall constructed and leased back to trustee

Dharamshalas – object of general public utility or religious?

Raghunath Das Parihar Dharmshala v. CIT 158 ITR 432 (Raj)

Shri Dhakad Samaj Dharamshala Bhawan Trust v. CIT 302 ITR 321 (MP) – merely because dharamshala is constructed at religious place, it cannot be said to be for religious purposes

Provision of food for poor brahmins is religious purpose – CIT v. Ahmedabad Rana Caste Association 88 ITR 354 (Guj), affirmed in 140 ITR 1 (SC)

Holding of exhibitions – whether charitable activity by itself?

Society for Small & Medium Enterprises v. DIT(E) 57 DTR (Del)(Trib) 154

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Charitable Purpose – s.2(15) Royalty for use of logo, books, co-branding

Printing & Publication of Books, purchase & sale of cassettes and VCDs

Educational activities – Prasanna Trust v. DIT(E) 36 SOT 135 (Bang)

Sale of handicrafts/greeting cards

Microfinance - whether charitable activity?

ADIT(E) v. Bharatha Swamukhi Samste 28 DTR (Bang)(Trib) 113

Disha India Micro Credit v. CIT 2011-TIOL-119-ITAT-DEL

Contrary - Janalakshmi Social Services v. DIT(E) 33 SOT 197 (Bang)

Holding of Seminars

Investment of Surplus funds not business activity

ITO v. Jesuit Conference of India 47 SOT 29 (Del)

Running of coaching classes – whether business

DIT(E) v. Institute of Chartered Accountants of India 202 Taxman 138 (Del)

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Charitable Purpose – s.2(15) Telecasting & Broadcasting

Sri Venkateswara Bhakti Channel v. ACIT 11 Taxmann.com 394 (Hyd) –production of religious feature films, serials, etc. for temple by s.25 co

CIT v. A.Y. Broadcast Foundation 11 Taxmann.com 240 (Ker) – production of television and radio programmes for telecasting & broadcasting through assessee’s own network or through hired network not object of general public utility

MARAA v. ITO(E) 4 ITR (Trib) 398 (Bang) – setting up community radio stations as per agreement with UNESCO – education of general public at large regarding community media and its potential is advancement of any other object of general public utility – fees received from UNESCO is towards reimbursement of cost incurred for training & educational activity for community members – not activity in nature of trade, commerce or business

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Charitable Purpose – s.2(15) Club having sports activities, restaurant and letting grounds and halls?

CIT v. Delhi Golf Club Ltd. 2011-TIOL-310-HC-DEL-IT – allowing golf course to be used by casual members or non-members on higher fee cannot be construed to be carrying on of commercial activities/business

Conduct of Research Projects

ICAI Accounting Research Foundation v. DGIT (E) 321 ITR 73 (Del) – imparting, spreading and promoting knowledge, learning, education, etc. in fields relating to profession of accountancy – services of carrying out research projects provided to various Govt. bodies – not business/commercial activity or in relation to trade, commerce or business

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Charitable Purpose – s.2(15)Gross Receipts less than Rs.25 lakh Gross Receipts from only specified activities

May be charitable in one year, not charitable in another

Trust following mercantile system – gross income or gross receipts?

Whether registration u/s.12AA can be refused on ground of activities falling within first proviso to s.2(15)?

Whether cancellation of registration u/s.12AA possible on ground of activity carried on in nature of business or in relation to business?

Cancellation possible u/s.12AA(3) only on following grounds

Activities are not genuine

Activities are not being carried out in accordance with the objects

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Charitable Purpose – s.2(15)Position on Loss of Exemption Direct Expenses incurred for Earning Income would be deductible from the Gross

Income

Establishment Expenses incurred would also be deductible

Income would be taxable at slab rates of tax (for trusts & societies), but at 30% for companies

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Education & Educational Institution Meaning of term “ education” – whether restricted to formal classroom

education for purposes of:

S.10(23C)

S.11 r.w.s. 2(15)

Process of training and developing knowledge, skill, mind and character of students by normal schooling - Sole Trustee, Loka Shikshana Trust v. CIT 101 ITR 234 (SC)

Meaning in s.10(22) narrower than in s.2(15) – Saurashtra Education Foundation v. CIT 273 ITR 139 (Guj) – affiliation to recognised university, board, essential for s.10(22), contrary view in CIT v. Doon Foundation 154 ITR 208 (Cal)

Objects of educating public in regard to safety, protection & health among industrial workers, to organise & conduct programmes, lectures, conferences & other activities for promoting free discussions on all matters & questions relating to safety measures, procedures & research, to conduct educational campaigns to arouse & maintain public opinion & interest of employers & workers & their support to safety and accident prevention – amounts to education - DIT(E) v. National Safety Council 305 ITR 257 (Bom)

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Education & Educational Institution Conduct of music classes and grant of certificates or grades issued by foreign

body - run like any school or educational institution in a systemic manner with regular classes, vacations, attendance requirements, enforcement of discipline, etc. – is educational institution - Delhi Music Society v. DGIT 2011-TIOL-862-HC-DEL-IT

Regulatory Body conducting examinations – whether educational institution

Institute of Chartered Accountants of India v. DGIT (E) 202 Taxman 1 (Del) -There is a clear distinction between coaching classes conducted by private coaching institutions and the courses and examinations which are held by the institute. A private coaching institute has no statutory or regulatory duty to perform. It cannot award degrees or enroll members as chartered accountants. These activities undertaken by the institute satisfy the requirement of the term 'education'.

CIT v. Association of Financial Planners 2011-TIOL-465-HC-DEL-IT –administering CFP certification in India, imparting training through approved Education Providers – amounts to educational institution

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Education & Educational Institution Whether mere fact of surplus would disentitle an educational institution

from exemption u/s.10(23C)?

So long as no person entitled to benefit of surplus and utilised for promotion of objects – Governing Body of Rangaraya Medical College 117 ITR 284 (AP)

the fact that a surplus may incidentally arise from the activities of the trust, after meeting the expenditure incurred for conducting educational activities would not disentitle the trust of the benefit of the provisions of section 10(23C) - Vanita Vishram Trust v. CIT 327 ITR 121 (Bom)

Merely because profits have resulted from the activity of imparting education that would not change the character of the institution existing solely for educational purpose - Pinegrove International Charitable Trust v. Union of India 327 ITR 73 (Punj. & Har.)

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Education & Educational Institution Society running schools & colleges

Whether Society itself is educational institution or each school and college? Aditanar Educational Institution 224 ITR 310 (SC)

How limit of gross receipts of Rs.1 crore in s.10(23C)(iiiad) to be viewed – qua society, or qua each school/college – Jat Education Society v. Dy. CIT 141 TTJ 316 (Del)

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Section 80G Approval Earlier approval granted for 3 years at a time

Amendment to s.80G(5)(vi) by Finance (No.2) Act 2009 w.e.f.1.10.2009 –the institution or fund is for the time being approved by the Commissioner in accordance with the rules made in this behalf ; and

Provided that any approval shall have effect for such assessment year or years, not exceeding five assessment years, as may be specified in the approval.

● Explanatory Memorandum to Finance (No.2) Bill 2009

Existing approvals expiring on or after 1st October, 2009 shall be deemed to have been extended in perpetuity unless specifically withdrawn

● CBDT Cir No 7 dated 27.10.2010

It appears that some doubts still prevail about the period of validity of approval under section 80G subsequent to October 1, 2009, especially in view of the fact that no corresponding change has been made in rule 11A(4). To remove any doubts in this regard, it is reiterated that any approval under section 80G(5) on or after October 1, 2009 would be a one time approval which would be valid till it is withdrawn.

● Babu Hargovind Dayal Trust v. ITAT 199 Taxman 138 (All)23

Income Voluntary Contributions to Corpus – Whether Income?

Term “Corpus” not defined in the Act Donation to Building Fund – whether corpus? Can Corpus donations be treated as income of the trust?

Amendment to s.2(24)(iia) wef 1.4.1989 - exemption u/s.11(1)(d)

Can corpus donations be received through offeratory boxes? Prabodhan Prakashan v. ADIT 50 ITD 135 (Bom)

Shri Digambar Jain Naya Mandir v. ADIT 70 ITD 121 (Cal)

Contrary view in Shree Mahadevi Tirath Sharda Ma Seva Sangh v. ITO 133 TTJ (UO) 157 (Chd)

Can amounts received from parents of students at time of/after admission be regarded as voluntary contributions to corpus? Dy.CIT v. Vellore Institute of Technology 12 Taxman.com 272 (Chenn)

Can corpus donations be applied on objects of the trust? Would it amount to application of income?

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Depreciation Allowable as per commercial concept of income

Applicability of rates as per Income Tax Rules

Allowability where: capital asset is investment

capital asset claimed as application of income – double deduction?

• Framjee Cawasjee Institute 109 CTR 463 (Bom)

• Institute of Banking Personnel Selection 264 ITR 110 (Bom)

• CIT v. Market Committee, Pipli 330 ITR 16 (P&H)

• CIT v. Tiny Tots Education Society 330 ITR 21 (P&H)

capital asset acquired out of or received as corpus donation

capital asset acquired out of accumulation

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Carry forward of Deficit No specific provision for carry forward of deficit No limitation u/s.11 that income should be applied for charitable purposes

only in year in which the income has arisen CBDT Circular No.100 of 24.1.1973 – repayment of loan eligible Expenditure incurred in an earlier year can be adjusted against the income

of a subsequent year CIT v. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj)

CIT v. Shri Plot Swetambar Murti Pujak Jain (1995) 211 ITR 293 (Guj)

CIT v. Matriseva Trust 242 ITR 20 (Mad)

CIT v. Institute of Banking Personnel Selection 264 ITR 110 (Bom)

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Accumulation u/s.11(2) Single form No.10 for multiple years v. Multiple Forms

M.P. Gandhi Trust v. ADIT 8 SOT 808 (Mum) – application to be made each year – general application for accumulation over a period of time not possible

Cotton Textiles Export Promotion Council v. ITO 20 SOT 187 (Mum) – notice for accumulation possible not only for current assessment year, but also for subsequent assessment years

Specific Purposes v. General Objects Objects is different from purposes - DIT (E) v. Trustees of Singhania Charitable

Trust 199 ITR 819 (Cal), CIT v. M. Ct. Muthiah Charitable Trust 245 ITR 400(Mad)

CIT v. Hotel & Restaurant Association 261 ITR 190 (Del), DIT(E) v. Daulat Ram Education Society 278 ITR 260, DIT(E) v. Eternal Science of Man’s Society 290 ITR 535 (Del), Bharat Kalyan Pratishthan v. DIT(E) 299 ITR 406 (Del), DIT v. Mitsui & Co Environmental Trust 303 ITR 111(Del), Bharat Krishak Samaj v. DDIT(E) 306 ITR 153 (Del)

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Accumulation u/s.11(2) Delay in filing form No.10

CBDT Circular No.273 dated 3.6.1980

Genuineness of trust not in doubt

Failure to give notice and invest due to oversight

No benefit to trustees/settlor by such failure

Investment of surplus before grant of extension of time

Accumulation necessary for carrying out objects of trust

CIT v. Nagpur Hotel Owners Association 247 ITR 201 (SC)

Can be filed before completion of assessment

Taxation of Unspent Amount

Year 6

Whether any further accumulation permissible?

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Capital Gains To be computed on commercial income basis – not as per s.48

Treated as application of income for charitable purposes and exempt if reinvested in capital asset

No time limit for reinvestment – investment to be seen at end of year

Even 15 day fixed deposit would qualify

CBDT Instruction No.883 dated 25.9.1975 – 6 months FDR

CIT v. Hindustan Welfare Trust 206 ITR 138 (Cal) – 60 days FDR

ADIT(E) v. Murugappa Chettiar Trust 303 ITR 360 (Mad) – even current account is deposit with scheduled bank - qualifies

Investment permissible in subsequent year as well – option under expln to s.11(1)

CIT v. East India Charitable Trust 206 ITR 152 (Cal)

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