Charitable Institutions Cannot Engage In Trade, Commerce or Business

Nikhil Mogha

28 Feb, 2023

The Supreme Court, in a landmark judgement of Assistant Commissioner of Income-tax (Exemptions) v. Ahmedabad Urban Development Authority, deals with the conditions and the entitlement of charitable institutions to claim an exemption under Income Tax Act 1961. The court, while dealing with the issue of charitable institutions engaged in the activity of advancing an object of General Public utility (GPU) service and claiming an exemption under Section 11 of the act, held that an assessee or charitable institutions could not engage in the activity of trade, commerce or business or provide service in exchange for any consideration unless such commercial activity directly relates to the main object of GPU. The court further interprets the definition of charity purposes for claiming tax exemption.

Facts of the Case

The assessee (Ahmedabad Urban Development Authority or AUDA) is an urban development authority established by the state government under Section 22 of the Gujarat Town Planning and Urban Development Act, 1976. The assessee is responsible for preparing development plans, town planning schemes, carrying out surveys, guiding local authorities, controlling & developing activities in urban areas, acquiring, hold or disposing of property, enter into any agreements or contracts.

Previously, the assessee claimed exemption under Section 10(20A) of the IT act; however, with an amendment in the finance act 2002, the said section was withdrawn by the government. The assessee filed a return for the assessment year 2009-2010 by declaring total income as zero after claiming deduction under Section 11 r/w Section 2(15) of the IT act. The Assessing officer scrutinised the assessee’s case and held that the assessee is not eligible for deduction under Section 11 of the IT act as the activities of the assessee cannot be held as “charitable purposes” under Section 2(15) of the act.

The assessee, aggrieved by the order of AO, filed an appeal before CIT (A), which also upheld the views of the assessing officer and dismissed the appeal. Being aggrieved by order of CIT, the assessee filed an appeal before ITAT. The said appeal was also dismissed by ITAT, which held that the assessee could not claim a deduction under Section 11 of the Act. Being aggrieved by order of the ITAT, the assessee filed an appeal in the Gujarat High Court. It was held by the court that provisions of Section 2(15) of the Income Tax act should not apply to the assessee as the activities of the AUDA is a general public utility, and therefore the assessee cannot claim an exemption under Section 11 of the act. Being aggrieved by the order of the high court, the CIT prefer an appeal before the Supreme Court.

Issues of the case

• Whether the assessee is covered under Section 2(15) of the object, and if so, were they involved in advancing any activity of general public utility?
• Whether an assessee advancing general utility service can engage in trade, commerce or business for any consideration and claim exemption under Section 11 of the act?

Observations of the court

The court interpreted section 2(15) by using a general test and applied this test to various institutions while claiming exemption under the IT act.

General test under Section 2(15)

The court stated that an assessee advancing general public utility services could not engage in trade, business or commerce in exchange for any consideration such as fees or cess. However, the charitable institutions (trusts, society or any other organisation), in the course of achieving their object of the general public utility, can engage in trade, business or commerce provided that:

• The activities of trade, commerce or business directly relate to the fulfilment of its object of general public utility.
• The receipt from such business or commercial activity does not exceed 20% of the total receipts of the previous year.

It is therefore held that only the charges significantly above the cost are covered under the mischief of “fee or cess” in relation to the trade, commerce or business. Henceforth, Section 11(4A), if interpreted harmoniously with Section 2(15), states that the activity of trade, commerce or business of a charitable institutions shall be conducted in achieving the object of GPU. Therefore, the income or surplus generated must be incidental to the said objective. While dealing with tax exemption, the court states that if the quantified limit under Section 2 (15) exceeds, charitable institutions cannot claim exemption.

Authorities, Corporations, or bodies established under Statute

The court held that any amount charged by the statutory body set up by the state or central government for achieving the object of public services might resemble the activity in the nature of trade, commercial or business activities. Since the objects are prima facie in the advancement of public purposes, therefore these receipts are liable to be excluded from the mischief of business receipts.

However, at the same time, the assessing office must apply its mind and assess the records to determine to what extent the consideration are significantly higher than the cost or the nominal break up. If such cost is higher, it indicates that the activities are in the nature of trade, commerce or business. As a result, it must comply with the quantifiable limit under Section 2(15). It is pertinent to mention that in the case of notified bodies, there is no quantified limit under Section 10(46); therefore, the central government has to decide on a case-to-case basis to what extent the exemption can be claimed.

Statutory Regulators

It is presumed that the income and receipts of the statutory regulators are engaged in the activity of prescribing curriculum, prescribing standards of professional conduct and disciplining professionals. However, this presumption may be rebutted if the assessing authorities find out that the charges are significantly higher than the cost or nominal value. If the regulatory authority provides other facilities such as coaching classes, registration processing fees, and admission forms, then that will constitute business receipts and the regulatory body must comply with the quantifiable limit under Section 2(15) to claim exemption.

Trade Promotion Bodies

The trade promotion bodies engaged in coordinating and assisting trade organisations are involved in advancing the objects of general public utility. However, if such bodies provided additional services, including courses meant to skill personnel, consulting services, provide private rental spaces in fares or trades shows, the income generated from the activities shall be of a business nature. As a result, the promotion body must comply with the quantifiable limit under Section 2(15) to claim the exemption.

Non Statutory Bodies

The court states that non-statutory bodies performing functions of ERNET^[1] and NIXI are engaged in public purposes, and the fees charged by them are nominal. However, the claims of the non-statutory bodies shall have to be ascertained yearly, and the assessing authority must discern whether the fees charged are nominal. Therefore, it is held that although GS1 India is involved in the advancement of GPU, its services are utilised for trade purposes wherein there are chances of high receipts. Henceforth in such a situation, the claim for exemption cannot succeed under Section 2 (15) of the act.

Private Trusts

The court states that the assessee (Tribune trust, one of the parties in the batch of petitions), despite advancing General public utility services, cannot claim an exemption under Section 2 (15) as the income received from advertisements is considered for business or commercial receipts. Henceforth the charitable institutions must adhere to the quantifiable limit under Section 2(15) to claim exemption.

Decision of the Court

The court holds that it does not preclude any charitable institutions or assessee advancing the objects of general public utility from claiming exemption under Section 2(15). It further does not bar the tax authorities from denying any exemption to charitable institutions. Moreover, the assessing office must on yearly basis, ascertain the assessee’s activities and determine whether the nature of activity amounts to trade, commerce or business. If it is found that they are in the nature of any trade, commerce or business, then it shall be examined whether the quantifiable limit under Section 2(15) is not breached.

Conclusion

The supreme court, through various cases, interprets the laws and rules of the country. Similarly, the court, in this case, by disposing of the various cases, held that charitable institutions advancing the object of the general public utility could not engage in the activity of trade, commerce or business. If such activity is the nature of trade, commerce or business, then for claiming exemption, it must comply with the quantifiable limit under Section 2(15) of the act. The court, through this judgement, has interpreted the prescribed quantifiable limit and defines eligible charitable institutions advancing general public utility.

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