Finance Bill 2011 Increased uniform relaxation to charitable Trust with reference to business activity up to Rs. Twenty five lakh is not proper relaxation of one third of receipts or Rs. twenty five lakh is suggested.

[C.A. DEV KUMAR KOTHARI]

Finance Bill 2011

 Increased uniform relaxation to charitable Trust with reference to business activity up to Rs. Twenty five lakh is not proper relaxation of one third of receipts or Rs. twenty five lakh is suggested. 

CA Dev Kumar Kothari.

Last budget introduced new proviso:

Finance Act 2010 provided for relaxation by insertion of a proviso to S.2(15)  with effect from the 1st day of April, 2009 which read as follows:

3. In section 2 of the Income-tax Act,—

(a) in clause (15), after the proviso, the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2009, namely:—

“Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year;”;

At that time author had expressed that uniform limit of Rs. ten lakh for all such institutions is not proper and the amount of Rs. ten lakh is also very nominal.

Finance Bill 2011:

Vide clause 3 of the Finance Bill 2011, it is proposed to substitute the word ten lakh by Rs. twenty five lakh w.e.f. 01.04.2012. The said clause reads as follows:

3. In section 2 of the Income-tax Act, in clause (15), in the second proviso, for the words "ten lakh rupees", the words "twenty-five lakh rupees" shall be substituted with effect from the 1st day of April, 2012.

From Memorandum Explaining proposals:

Definition of “charitable purpose”

For the purposes of the Income-tax Act, “charitable purpose” has been defined in section 2(15) which, among others, includes “the advancement of any other object of general public utility”. However, “the advancement of any other object of general public utility” is not 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 and receipts from such activities is ten lakh rupees or more in the previous year.

It is proposed to amend section 2(15) to enhance the current monetary limit in respect of receipts from such activities from ten lakhs rupees to twenty-five lakhs rupees.

This amendment is proposed to take effect from 1st April, 2012 and will, accordingly, apply in relation to the assessment year 2012-13 and subsequent years.  [Clause 3]

Comment about proposal in Finance Bill 2011:

 We find that through the Finance bill 2011 it is simply proposed to raise the monitory limit. For finding out real purpose and object we need to look at the Memorandum Explaining proposal in Finance Bill 2010 also as that was the first year to insert the proviso.

Analysis  from the memorandum explaining proposals in the Finance Bill 2010:

 “charitable purpose” has been defined in section 2(15) which, among others, includes “the advancement of any other object of general public utility”. However, “the advancement of any other object of general public utility” is not 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.

 At present there is absolute restriction on receipts of commercial nature. The amendment is proposed because the absolute restriction on any receipt of commercial nature may create hardship to the organizations which receive sundry considerations from such activities.

Therefore, proposal has been made to amend section 2(15) to provide that “the advancement of any other object of general public utility” shall continue to be a “charitable purpose” if the total receipts from 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 do not exceed Rs.10 lakhs in the previous year.

 This amendment is proposed to take effect retrospectively from 1st April, 2009 and will, accordingly, apply in relation to the assessment year 2009-10 and subsequent years.

Comments from author on S.2 (15) AS AMENDED FROM ay 2009-10

With effect from Assessment Year 2009-10 Section 2(15) of the Income-Tax  Act was amended including inter alia to provide that  ‘the advancement of any other objectives of general public utility’  will not be considered as a ‘charitable purpose’, if it involves the carrying on of any activity in the nature of the trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or any other consideration, irrespective of the nature of use or application , or retention of the income from such activity.

As the restriction took effect from 01.04.2009 therefore, the relaxation proposed in Finance Bill 2010 was to give retrospective effect from the same date.

After the insertion of the second proviso w.e.f. 01.04.2009 the nature of charitable activity is not adversely affected if in the course of any other objective of general public utility, total receipts from any activity in the nature of trade, commerce or business or activity of rendering any service in relation to any trade, commerce or business do not exceed Rs.10 Lacs in a year. 

Now in the Finance bill 2011 this limit is raised to Rs. twenty five lakh.

A uniform relaxation is not proper:

Apparently it appears that raising limit to Rs. twenty five lakh is a substantial relief.  However a uniform relaxation to all eligible institutions is not proper. Many institutions are very old, established and large in size, whereas many are new and have small operations. The volume of activity in nature of trade, commerce etc. will depend on size of total operations, number of members, number of institutions and branches of the registered charitable institution. Allowing flat relaxation up to absolute sum of Rs. Ten lakh is therefore not justified and will not serve purpose of the relaxation. Charitable institutions also need financial support for future plans and growth.

Request and suggestion:

It is requested and suggested to the honorable Finance Minsiter that relaxation can be provided up to one-third of total receipts or Rs. twenty five lakh rupees whichever is higher. Thus if the gross receipts from such business activities does not exceed  one-third  of total receipts of the organization or Rs. twenty five lakh whichever is higher, then the institution should not be adversely affected. It also appears that relaxation is to be with reference to actual receipts (and not accruals as per method of accounting), this can also be clarified. Thus the entire proviso can be re-drafted and substituted as follows:      

“Provided further that the first proviso shall not apply if the aggregate value of the actual receipts from

the activities referred to therein (that is business receipts) does not exceed  one third  of total actual  receipts of the registered charitable institutions or  twenty five  lakh rupees whichever is higher during the previous year;”

Charitable activities in interest of public must be given incentive:

Charitable and philanthropic institutions must be given incentive as they help the government in public service. In a way such institutions reduces burden of government in many essential and important activities like medical and educational facilities.

There may be some business activity, however, main purpose of such institutions is charitable, and income from business activity is also applied for charitable purposes.

Sometimes it is noticed that officials of such institutions take undue advantages, for that reason the institution should not be penalized. Where there is power, there is likely to be some misuses of power. Even in government departments and government run public facility the public feeling is that only about 15-20% of funds reaches to real cause for public and intended beneficiaries. In case of charitable institutions, a real application of about 65% is considered as properly administered charity. Therefore, the good work done (say 65% real spent for charitable purposes) should be given credit and there should not be denial of benefit to such institutions even if there is some commercial profit which is also kept apart for charity,