INCOME TAX ACT, 1961

Section 2(15) Section 11

Exemption under section 11 - Charitable purpose - Assessee's charitable trusts/institutions/ statutory corporations, carrying out activities of 'advancement of any other object of general public utility - Whether purpose of assessee's can be held to be 'charitable purpose' to claim tax exemption under section 11

Assessee-AUDA, taken as lead matter, was established by law enacted by the Gujarat Legislature and was treated as 'local authority' under section 10(20) of the IT Act, as it existed till 2003. Thereafter it was treated charitable institution engaged in activities involved in the advancement of public utility till the amendment of 2008. Section 2(15) was amended by Finance Act, 2008 with effect from 1-4-2009 deleting the expression 'not involving the carrying on of any activity for profit'. Thus, the resulting section 2(15) reads as follows: 'charitable purpose' includes relief of the poor, education, medical relief and the advancement of any object of general public utility. By the new definition, the benefit of exclusion from total income is taken away where in accomplishing a charitable purpose the institution engages itself in activities for profit. The main grievance of assessee. AUDA is that it being a genuine charitable organisation which generated income for its sustenance cannot be denied the benefit of tax exemption under section 11(1) of the IT Act as the residual purpose included by the definition is 'advancement of any other object of general public utility'. On the contrary, Director General of IT/CIT in various States/Revenue have appealed against the decisions of various High Courts, which have held that the carrying on of any trade, commerce, or business, is not a per se bar or disqualification for a GPU category charitable trust to claim to be such, precluding its tax-exempt status under the IT Act.Held: A charitable trust loses tax exemption if certain provisions are not complied with, and if its activities do not fall under section 10 of the Act. Such trusts also have to apply their income to the charitable objects within a specified period, maintain proper audited accounts, and invest or utilise funds in a manner so that no benefit is derived by the settlor, trustees, their relatives, or other persons. Section 11(1) relates to application of income towards the objects of the trust and exempts income of trusts with objects wholly charitable or religious, or parts of income which relate to such objects. Section 11(1A) provides for exemption of capital gains derived by trusts. Sections 11(4) and 11(4A) relate to business income of charitable trusts. Section 11(4) applies to cases where the business undertaking itself is the property held by a trust. Thus, where the property held in trust, or where property settled by the donor or trust creator in favour of the trustees itself is a business undertaking, then the income from such an undertaking is covered by section 11(4). Section 11(4A) operates differently. It is applicable to cases where the trust carries on a business. Section 11(4A) states that when a trust carries on a business, unless the business is incidental or ancillary to the attainments of the objectives of the trust, it would be disentitled to an exemption under section 11(1). It imposes a further condition that separate books of account need to be maintained in such cases. Section 11(1) confers an exemption from tax only where the property itself is held under a trust or other legal obligation. Section 11(1) of the Act exempts income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India. The Act does not comprehensively define 'property held under trust'. Section 11(4) however, provides that for the purposes of section 11, the words 'property held under trust' 'includes business undertaking so held'. Under section 11(4), it is only the business which is held under the trust that would enjoy exemption in respect of its income under section 11(1). Thus, if a business undertaking is held under trust for a charitable purpose, the income from it would be entitled to exemption under section 11(1) of the Act. To summarise on the legal position on this - if a property is held under trust, and such property is a business, the case would fall under section 11(4) and not under section 11(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the business is not held under trust. There is a difference between a property or business held under trust and a business carried on by or on behalf of the trust. Pure charity (in the present case, the GPU charity), in the sense that the performance of an activity without any consideration is not envisioned under the Act. If one keeps this in mind, what section 2(15) emphasizes is that so long as a GPU's charity's object involves activities which also generates profit (incidental, or in other words, while actually carrying out the objectives of GPU, if some profit is generated), it can be granted exemption provided the quantitative limit (of not exceeding 20%) under second proviso to section 2(15) for receipts from such profits, is adhered to.

Followed:Asstt. CIT v. Surat Art Silk Cloth Manufacturers' Association (1980) 2 SCC 31 : 1980 TaxPub(DT) 848 (SC).

REFERRED : Sole Trustee, Lok Shikshana Trust v. CIT (1976) 1 SCC 254 : 1975 TaxPub(DT) 344 (SC), Indian Chamber of Commerce v. CIT (1976) 1 SCC 324 (SC) : 1975 TaxPub(DT) 347 (SC) and Asstt. CIT v. Thanthi Trust (2001) 2 SCC 707 (SC) : (2001) 1 SCR 727 (SC) : 2001 TaxPub(DT) 1078 (SC).

FAVOUR : In assessee's favour.

A.Y. :

INCOME TAX ACT, 1961

Section 2(15)

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