Charitable organisations and evolving uncertainties of tax exemption

Facts

To understand the concept better, let us take an example, say ABC Association which is a trade association registered under section 8 of the Companies Act, 2013 and section 12AB of the Income-tax Act, 1961 (\"the Act\"). ABC conducts activities for the promotion of the interest of its members, such as advocacy of industry concerns to regulatory authorities, organizing networking conferences bi-annually, maintaining industrial data, publishing journals with topical subjects. In turn, it collects membership and journal subscription fees. While organizing the conference, the association collects payment from its members and other industrial stakeholders for participation, stall charges, sponsorship, and advertisement, sometimes resulting in a significant surplus which is, in turn, used to promote the Association\'s main objectives.

Legal framework

On a coherent reading of section 2(15) with sections 10, 11, and 13(8) of the Act, it transpires that the eligibility of exemption of the Association depends on whether its activities during the year were for \"charitable purposes\" squarely covered by the above definition. Hence, it is imperative to analyse the legal framework governing the concept of \"charitable purpose\" for income tax purposes.

Section 2(15) reads as follows:

\"\"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) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;\"

Emphasis supplied.

On a careful reading of section 2(15), it is clear that organizations carrying out the first six categories of charitable activities can have incidental business activities without any financial limit. However, the seventh category for \'advancement of any other object of GPU\' can have business activity only up to 20% of gross receipts; that too while advancing the primary objective. This limit was imposed by an amendment through the Finance Act 2012 as Rs. 25 lakhs, changed later by the Finance Act 2015 to 20% of the gross receipts. If the seventh category of activity is any business activity (even if incidental) in excess of such threshold, then their charitable status will not be lost as per judicial precedence, but they will be treated as \'non-exempt entity\' for that particular assessment year under section 13(8) of the Act.

Issue at hand

In light of the above background, the concern is whether the income received during the conference constitutes an activity in the nature of trade, commerce, or business, or in relation thereto for the purpose of section 2(15)?

Legislative intent of the amendment to section 2(15)

To interpret the provisions of the amended section constructively, it is imperative to understand the intent behind the amendment. The explanatory Circular No. 11 of 2008 issued in the context of proviso to section 2(15) provides that this provision is enacted to weed out masked entities or for-profit organizations working in the garb of charitable institutions. The Hon\'ble Finance Minister\'s Budget Speech of 2008 states as follows:

\"180...some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under \"charitable purpose\". Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organisations will not in any way be affected.\"

Further, the Hon\'ble Finance Minister replied to the Debate in the Lok Sabha on the Finance Bill 2008 as follows:

\"...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.\"

Emphasis supplied.

From the above, it is clearly discernible that the intention of the Parliament was to identify and restrict the business activity undertaken by masked commercial organizations while advancing the primary objectives.

Possible contentions

Charitable does not mean \"no profit/ surplus\" | Profit v/s. profit motive

It may be noted that there are judicial pronouncements that the principal or dominant activity of a tax-exempt charitable institution can also be undertaken on commercial lines, though without profit intent and to such extent, it shall still be called \"charitable\" and \"not commercial.\"

The Hon\'ble Supreme Court judgement in the case of T.M.A. Pai Foundation vs. State of Karnataka (2002) 8 SCC 481 and in the case of P.A. Inamdar vs. State of Maharashtra (2005) SCC 537, laid down the principles of understanding charitable activity, the ratio of which holds good even after the amendment of section 2(15) in 2008. It was emphatically clarified that the term \"charitable\" did not imply that an organization cannot have profit from its primary charitable activity. In these cases, the Hon\'ble Supreme Court followed its own ruling in the case of Islamic Academy of Education vs. State of Karnataka on 14th August 2003, WP (Civil) 350 of 1993 where it was held that an educational institution could have reasonable surplus up to 6% to 15% every year without affecting its charitable character.

If income from the conference constitutes more than 20% of gross receipts, the moot question is whether the activities in relation thereto, is \"in the nature of trade, commerce or business\" in the first place. This is a question of fact which will be decided based on the nature, scope, extent, and frequency of the activity. In other words, if it can be inferred that conducting INC is a charitable and not business activity, per se, in the facts of the Association; the financial limit capsulated in the proviso to section 2(15) should not apply.

Whether organizing the conference as stated above is \"trade, commerce or business\"?

At the outset, let us do a threadbare analysis of what is the meaning of each of these terms to examine how they match with the scope of activities involved in organising the conference as stated above. The three words \"trade\", \"commerce\" or \"business\" have been interpreted by the Supreme Court and other courts in various decisions.

• \"Trade\", as per the Webster\'s New Twentieth Century Dictionary, means amongst others, \"a means of earning one\'s living, occupation or work\". In Black\'s Law Dictionary, trade means a business which a person has learnt or he carries on for procuring subsistence or profit; occupation or employment, etc.
• The word \"trade\" was elucidated in State of Punjab v. Bajaj Electricals Ltd. [1968] 2 SCR 536. It has been opined: -
  \"The question whether trade is carried on by a person at a given place must be determined on a consideration of all the circumstances...In the present case, the respondent has no shop or office within the State of Punjab. The respondent supplies goods within the State pursuant to orders received and accepted at New Delhi, and also receives price for the goods within the State. But these are ancillary activities and do not in our judgment amount to carrying on trade within the State of Punjab.\"
  The SC in Khoday Distilleries Ltd. v. State of Karnataka [1995] 1 SCC 574 was of the opinion:-
  \"\'Trade\' in its primary meaning is the exchange of goods for goods or goods for money and in a secondary meaning it is any business carried on with a view to profit, whether manual or mercantile, as distinguished from the liberal arts, or learned professions and from agriculture...\"
• The meaning of \"commerce\" as given by the Concise Oxford Dictionary is \"exchange of merchandise, especially on large scale\". In ordinary parlance, trade, and commerce carry with them the idea of purchase and sale with a view to make profit. If a person buys goods with a view to sell them for profit, it is an ordinary case of trade. If the transactions are on a large scale, it is called commerce. For the first proviso to section 2(15), trade is sufficient, therefore this aspect is not required to be examined in detail.
• Section 2(13) of the Act defines the term \'Business\' as a broad term which encompasses trade, commerce and other activities.
  In Black Law\'s dictionary, 6th Edition, the word \'business\' has been defined as under:
  
  • \"Employment, occupation, profession or commercial activity engaged in for gain or livelihood. Activity or enterprise for gain, benefit, advantage or livelihood...\"
• According to Sampath Iyengar\'s Law of Income-tax (9th edition), a business activity has the following four essential characteristics:
  
  • continuous and systematic [Director of Supplies & Disposal v. Member, Board of Revenue [1967] 20 STC 398 (SC), State of Gujarat v. Raipur Mfg. Co. [1967] 19 STC 1 (SC), Customs and Excise Commissioner v. Lord Fisher [1981] S.T.C. 238]
  • capable of producing profit [CIT v. Lahore Electric Supply Co. Ltd. [1966] 60 ITR 1 (SC), State of AP v. H. Abdul Bakhi & Bros. [1964] 15 STC 664, Mrs. Sarojini Rajah v. CIT [1969] 71 ITR 504 (Mad.), Bharat Development (P.) Ltd v. CIT 133 ITR 470 (Delhi)], Eclat Construction (P.) Ltd. v. CIT [1988] 172 ITR 84 (Pat.), CIT v. M.P. Bazaz [1993] 200 ITR 131 (Orissa) and CIT v. (R.M.) Meenakshisundaram [1995] 212 ITR 220 (Mad)]
  • brought about by a transaction between two or more persons.
  • has an element of reciprocity.

Economic activity v/s. profit motive

It thus transpires that the term \"profit motive\" is relevant but not the sole consideration to be kept in mind; and principle of \"economic activity\" has gained acceptability especially under indirect tax laws where the taxable event occurs because of the \"economic activity\" involved and not necessarily accrual of income.

It may also be appropriate here to refer the decision of the House of Lords in Town Investments Ltd. v. Department of the Environment [1977] 1 All ER 813 where the term \"business\" was held to include Government activities collecting rent (not necessarily for profit).

Having said so, it may be pertinent to draw attention to the case of the Institute of Chartered Accountants in England and Wales v. Customs and Excise Commissioners [1999] 1 W.L.R. 701, the House of Lords examined the question whether the aforesaid institute was carrying on an economic activity by issuing licenses and certificates under three enactments for a fee. It was observed that any regulatory activity carried out under a statutory power for the purpose of protecting the public by supervising and maintaining the standard of practitioners, fall on the other side of the line from economic activities.

Thus, it is important whether the collection of revenue is in discharge of commercial or statutory functions by the organization.

Incidental or ancillary activities draw colour from the main and dominant activities?

In CST v. Sai Publication Fund [2002] 122 ITR 437, the Supreme Court interpreted the word \"business\" under section 2(5A) of the Bombay Sales Tax Act, 1959 as under:-

\"..if the main activity of a person is not trade, commerce etc., ordinarily incidental or ancillary activity may not come within the meaning of \"business\". ...Publication for the purpose of spreading message is incidental to the main activity which the Trust does not carry on as business... Chagla, C.J. pointed out that it was not merely the act of selling or buying etc. that constituted a person a \"dealer\" but the \"object\" of the person who carried on the activities was important... One of the cases concerned Aligarh Muslim University... It was held,...the activity of serving food in the dining hall was a minor part of the overall activity of the University... Likewise, in the State of T.N. v. Cement Research Institute of India it was held...that though the cement manufactured as a result of research was sold, it could not be considered to be a trading activity within section 2(d) of the Tamil Nadu General Sales Tax Act, 1959...\"

In the case of the Institute of Chartered Accountants of India vs DGIT (Exemptions) [2011] 13 taxmann.com 175, it was held by the Hon\'ble Delhi High Court that:

\"An activity would be considered \"business\" if it is undertaken with a profit motive, but in some cases this may not be determinative... 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... The courses of the institute, per se, it does appears, cannot be equated to a private coaching institute.\"

In ICAI vs DGIT (Exemption) [2013] 35 taxmann.com 140 while considering whether the activities of ICAI fell within the proviso of amended section 2(15), the Delhi High Court (after considering the SC decision in Sai Publication Fund supra) held that if the dominant activity of the assessee was not business, then any incidental or ancillary activity would also not fall within the definition of business.

It has been held by the Hon\'ble High court of Delhi in the case of ICAI Accounting Research Foundation v/s. DGIT (Exemptions) [2009] 183 Taxman 462 (Delhi) that any collection of remuneration from projects or funds for fostering research; cannot be singled out as an independent commercial activity if the overall purpose served is charitable in nature, even after the amended section 2(15) of the Act was introduced.

Impact of the recent Supreme Court judgement in [2022] 143 taxmann.com 278 (SC) in the Ahmedabad Urban Development Authority

Having said the above, it may be pertinent to refer to the recent SC ruling, mentioned in the beginning of this article, where it adjudicated the scope of GPU in the definition of \"charitable purposes\". The SC rejected the claim for tax exemption as charitable institutions stating that they were carrying on trade, commerce or business for consideration even if intrinsically linked to or a part of charity\'s objects. Consequently, the test of the charity being driven by a predominant object, as laid down by the SC in Asstt. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1, is no longer good law after the 2008 amendment and that the \"ploughing\" back of business income to \"feed\" charity is an irrelevant factor in light of the amended provisions.

The SC generalized and held that if the bodies involved in trade promotion provide additional services such as courses meant to skill personnel, providing private rental spaces in fairs or trade shows, consulting services etc., against service fees, then the income or receipts from such activities would be considered as \"in relation to\" business or commercial in nature and may be governed by the prescribed threshold limit under the Income tax laws.

Conclusion

It may not be fair to generalize the outcome of the SC decision in the Ahmedabad case; and the facts of each case including the object, main and dominant activity of the organization; consistency and regularity of transactions should be examined to infer whether the activity undertaken is in fact \"business\" or not in the first place. Considering the recent SC pronouncement, chances of litigation cannot be ruled out.

Food for thought: Constitutional validity of the amendment to section 2(15)

Without prejudice to the above, it is worth examining the constitutional validity of the amendment to section 2(15). In Shri Ram Krishna Dalmia vs. Justice S.R. Tendolkar AIR 1958 SC 538, the SC stated that generally the burden is upon someone who challenges a constitutional amendment to prove that there is a clear violation. However, in case of discrimination in favour or against any class, one cannot presume that there must be some undisclosed and unknown reasons for subjecting individuals or corporations to hostile or discriminating legislation.

Causing tax prejudice to a broader section of society (while targeting a few) vis-a-vis others without intelligible differentia, may be considered hostile, discriminatory and violative of Article 14 of the Constitution for the genuinely aggrieved [Mediwell Hospital & Health Care (P.) Ltd. vs. Union of India [1997] 1 SCC 759].

Thus, the amendment to section 2(15) to deprive even genuine charitable organisations falling in the seventh limb of section 2(15) from doing even incidental commercial activities beyond a financial limit; while allowing even masked entities falling in the other limbs to do so without any financial limit, can be challenged as violative of Article 14 of the Constitution of India.

The CBDT may clarify how the policy and object of the legislation will work vis-à-vis those to whom it will apply and those who will be left out. The principles laid down by the SC judgement in the Ahmedabad case may also not be in complete sync with the intention of the Parliament while bringing these amendments in 2008.