Charitable purpose - Definition / Legal Terminology - Income Tax

As per Clause (15) of section 2 of the Income-tax Act, 1961 - 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; In the Law Lexicon, the Encyclopedic Law Dictionary by P. Ramanatha Aiyer, the discussion has been made with the help of certain decisions and dictionaries, with regard to charitable, charitable object, charitable purpose, charity and charitable trust of public nature, relevant parts of which are reproduced hereunder: Charitable . Having the character or purpose of a charity. The word charitable , in a legal sense, includes every gift for a general public use, to be applied consistent with existing laws , for benefit of an indefinite number of persons, and designed to benefit them from an educational, religious, moral, physical or social standpoint. This term is synonymous with beneficent , benevolent , and eleemosynary . (Black) Connected with an object of charity, of the nature of charity [S.49, Indian Evidence Act and S.92(1), C.P.C.] Charitable purpose . In Charitable Endowments Act Charitable purpose includes relief of the poor, education, medical relief, and advancement of any other object of general public utility, but does not include a purpose which related exclusively to religious teaching or worship. Act VI of 1890 (Charitable Endowments), S. 2. Per MUKERJI, J. The expression charitable purposes in Act XXI of 1860 should be understood in a wide sense. If relief wants of occasioned by lack of pecuniary means is charity, adoption of preventive measures to ward off pecuniary wants is also charity. 51 CLJ 272 = AIR 1930 Cal 397. CHARITABLE PURPOSES, technically, and in the eye of a Court of justice, has a meaning so extensive as to include everything which is expressly described as a charitable use in 43 Eliz. c. 4, S. 1, or is within what has been called the equity of the statute, but there is perhaps not one person in a thousand who knows what is the technical and legal meaning of the word charity . Per Lord CAIRNS in Dolan v. Macdermott, (1868) 3 Ch App 678. This term has the legal technical meaning given it by English law. Commissioners of Income Tax v. Pemsel, (1891), App Cas 532; and see Cunnack v. Edwards, (1896) 2 Ch 679 (CA). [In the Income Tax Act, 1842 (5 6 Vic. c. 35), sch. A, S. 61] Charitable purposes in S. 4 of the Income-tax Act would include relief of the poor, education, medical relief and the advancement of any other object of general public utility . Trusts for the benefit of the inhabitants of a particular locality are regarded as charitable, but trusts for the benefit of a particular political party or for the advancement of particular political purposes or opinions are not regarded as charitable. A gift for such purposes as a particular individual or individuals may consider to be charitable is not a good charitable purpose although a gift for such charitable purposes as the managing committee of a trust may think fit would be good, because the committee would be bound to keep within the ambit of charity, and if they go beyond the legal boundary, they can be controlled by the Court. 43 Bom LR 1027 = 1942 Bom 61. The definition includes relief of the poor. Relief of the poor by itself would not be a charitable object unless it involved an object of general public utility. Relief for the poor relations of the settlor or donor will not be a charitable purpose within the definition. Trustees of Gordhandas Govindram Family Charity Trust v. Commissioner of Income Tax, AIR 1952 Bom 346. [S. 4(3)(i) Income Tax Act 1992] Charitable purpose' the dominant purpose of a State Bar Council is to ensure quality service of competent lawyers to the litigating public, a spread legal literacy, promote law reforms and provide legal assistance to the poor, such purpose is the advancement of the object of general public utility and it will be a charitable purpose. C.I.T. Bombay v. Bar Council of Maharashtra, AIR 1981 SC 1462, 1467. [Income Tax Act (43 of 1961), Ss. 2(15) and 11.] The Black s Law Dictionary, Ninth Edition defines charitable , charitable purpose , and charitable trust thus: Charitable - Dedicated to a general public purpose, usu. for the benefit of needy people who cannot pay for benefits received. Charitable purpose The purpose for which an organization must be formed so that it qualifies as a charitable organization under the Internal Revenue Code Also termed charitable use. Charitable trust A trust created to benefit a specific charity, specified charities, or the general public rather than a private individual or entity. Charitable trusts are often eligible for favorable tax treatment. If the trust s terms do not specify a charity or a particular charitable purpose, a court may select a charity. Also termed public trust; charitable use. In Webster s New World Dictionary , the expressions of charitable and charity are defined thus: Charitable 1. Kind and generous in giving money or other help to those in need. 2. of or for charity. 3. kindly in judging others; lenient. [UNION OF INDIA VERSUS MOOL CHAND KHAIRATI RAM TRUST- 2018 (7) TMI 2318 - SUPREME COURT] ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS) VERSUS AHMEDABAD URBAN DEVELOPMENT AUTHORITY- 2022 (10) TMI 948 - SUPREME COURT Analysis and reasoning - ..........Thus, was born the predominant object test, of an organization, to determine whether it was essentially charitable, or for profit . If the predominant object was not for profit, but advancement of general public utility, that some profits were earned, would not debar it from claiming to be an organization with a charitable purpose. However, if the predominant object was such that profit making was enwrapped or intertwined with it, the organization or trust could not be called charitable. Crucially, the court emphasized that the manner of carrying on of the activity in question, was determinative: the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. Interpretation of Section 2(15), the definition clause The importance of terms expressly defined in a statute is that they are internal and binding aids to interpretation. The prefacing to any definition of the phrase unless the context otherwise requires merely signifies that in case there is anything expressly to the contrary, in any specific provision(s) in the body of the Act, a different meaning can be attributed. However, to discern the purport of a provision, the term, as defined has to prevail, whenever the expression is used in the statute. This rule is subject to the exception that when a contrary intention is plain, in particular instances, that meaning is to be given. Therefore, in the light of the previous discussion, this court would interpret the true meaning of charitable purpose after its amendment in 2008, taking into consideration the subsequent changes. Summation of interpretation of Section 2(15) ............The paradigm change achieved by Section 2(15) after its amendment in 2008 and as it stands today, is that firstly a GPU charity cannot engage in any activity in the nature of trade, commerce, business or any service in relation to such activities for any consideration (including a statutory fee etc.). This is emphasized in the negative language employed by the main part of Section 2(15). Therefore, the idea of a predominant object among several other objects, is discarded. The prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by GPU charities. The conditions are: (a) That such activities in the nature of trade, commerce, business or service (in relation to trade, commerce or business for consideration) should be in the course of actual carrying on of the GPU object, and (b) The quantum of receipts from such activities should be exceed 20% of the total receipts. (c) Both parts of the proviso: (i) and (ii) (to Section 2 (15)) have to be read conjunctively-given the conscious use of or connecting the two of them. This means that if a charitable trust carries on any activity in the nature of business, trade or commerce, in the actual course of fulfilling its objectives, the income from such business, should not exceed the limit defined in sub-clause (ii) to the proviso. A. General test under Section 2(15) A.4. 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.e.f. 01.04.2009), reaffirm this interpretation and bring uniformity across the statutory provisions. B. Authorities, corporations, or bodies established by statute .............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). C. Statutory regulators C.1. 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. C.2. 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. D. Trade promotion bodies 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. E. Non-statutory bodies E.1.................. non-statutory bodies performing public functions, such as ERNET and NIXI are engaged in important public purposes. The materials on record show that fees or consideration charged by them for the purposes provided are nominal. In the circumstances, it is held that the said two assessees are driven by charitable purposes. However, the claims of such non-statutory organisations performing public functions, will have to be ascertained on a yearly basis, and the tax authorities must discern from the records, whether the fees charged are nominally above the cost, or have been increased to much higher levels. F. Sports associations So far as the state cricket associations are concerned (Saurashtra, Gujarat, Rajasthan, Baroda, and Rajkot), this Court is of the opinion that the matter requires further scrutiny. G. Private Trusts So far as the appeal by assessee-Tribune Trust is concerned, it has been held that despite advancing general public utility, the Trust cannot benefit from exemption offered to entities covered by Section 2(15) as the records reveal that income received from advertisements, constituted business or commercial receipts. Consequently, the limit prescribed in the proviso to Section 2(15) has to be adhered to for the Trust s claim of being as a charity eligible for exemption, to succeed.