INDIAN TRUSTS-Sec-2(15) of Income Tax Act –Is it really boon for the Public Charitable Trusts?

The Charitable institutions play important supplementary role, apart from Govt of India/States social welfare depts., in uplifting the poor from poor economic conditions to and try to shield them from starvation. Such Charitable institutions undertake charitable activity in the form of relief of the poor, education, medical relief and advancement of any other object of general public utility. In order to encourage private sector/individual in this charitable field in the form of public charitable institutions, Govt of India allowed exemption from tax to the income of the said trusts according to sec. 11,12 and their sub-sections and 13 of Income tax Act, 1961. This helped to relieve burden of Govt to help the poor to great extent. The most important condition for a trust to be for public charitable purpose is that the beneficiary should be of general public and none of the objects of memo of association should benefit any private individuals and it should cater to all irrespective of caste, creed or religion.

The expression ‘Charitable purpose” is defined under sec.2(15) of the Act of Income Tax Act 1961 which includes:

  1. Relief of the poor.
  2. Education.
  3. Medical relief.
  4. Preservation of environment including water sheds, forest and wild life.
  5. Preservation of monuments or places of historic interests and
  6. the advancement of any other object of general public utility.

Sslno.1 to 6 are called as limbs to sec.2(15) which will be referred later. The definition of Charitable purposes has undergone number of changes which include two provisos and amendment of such proviso.

The Finance Act 2008 has substituted sect. 2(15) of the Act w.e.f. 1.4.2009 with first proviso. The first proviso to this Sec.2(15) states 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.”
Para 180 of Finance Act brought by Finance Minister Mr. Chidambaram specifies the following reason for bringing the first provision:
“”Charitable purposes” includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt as they should be. However some entities carrying on regular trade, comer or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim their purposes would also fall under “Charitable Purposes’. Obviously, this was not the intention of Parliament and hence I propose to amend the law to exclude the aforesaid cases. However Genuine charitable organizations will not in any way affected.”
The aforesaid provision is operative from 1.4.2009 onwards. In order to clarify the above, circular no. 11 of 2008 dt 19.11.2008 was issued by income tax dept wherein the implications of the amendment were given. “The newly inserted proviso to sec.2(15) will not apply in respect of the first three limbs of sec.2(15) i.e. relief of the poor, education, or medical relief. Any commercial activities in connection with these three activities will come under ‘Charitable activities”.

But Relief of the poor encompasses a wide range of objects for the welfare of economically and socially disadvantaged or needy. There it will include within its ambit such as

  • relief to destitute, orphans or the handicapped.
  • disdvantaged women or children
  • small and marginal farmers
  • indigent artisans or
  • senior citizens in need of help.

Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity subject however to conditions stipulated under sec.10(23C) or Sec.11(4A) which states that

  1. the business should be incidental to attainment of the objects of entities (trusts)
  2. Separate books of accounts should be maintained in respect of such business.

The above conditions are applicable to second and third limb also.

So this newly inserted proviso to sec.2(15) will apply only to entities whose purpose is “advancement of any other object of general public utility” i.e. Sixth limb of sec.2(15). Hence such entities will not be eligible for exemption under Sec.11 or Sec 10(23C) of the Act if they carry commercial activities.

In order to help the small trusts which rely on profit from small trade etc,, second proviso has been added to sec. 2(15) vide the Finance Act 2010 with retrospective effect from 1.4.2009.The second provisio to this Sec.2(15) states that “The first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is Rs.10 lakh rupees or less in previous year.”

At present, the litigation point is how to demarcate public charitable trust which runs profitable trade and fully uses the proceeds to public benefits. IncomeTax dept likes to keep them under sixth limb in order to increase revenues for govt and tax them when the trust is helping the public at large with subsidized food and medical treatment etc. Public Trusts want themselves to be classified under first limb and seek tax exemption for the profitable trade/commerce/business it carries to supplement its activities of charity. It is natural and fair if Subsidized food/medical treatment to general public taken under ‘poor category or needy category’ as it is impossible to identify poor among masses in any outlet. If the trust serves senior citizens, destitute, orphans with free food and subsidized food for the handicapped, disdvantaged women or children, small and marginal farmers ,indigent artisans, senior citizens apart from general public, then they should come under first limb and should not be taxed for the business activities it runs. State Govt themselves are bringing these types of canteen/eating places where subsidized food are served to general public. So deciphering ‘relief to poor’ with applicability point of view by tax dept will help many trusts to use the money saved for public. Mostly rich people will not go for subsidized food and it is needy people like middle and lower class people only prefers subsidized food and medicine. So it is better to interpret the rules for the objective they are formed. Covering these types of trusts under first limb of category will help Finance Minister to keep his words that genuine charitable organizations will not in any way affected. At least Public charitable trusts whose trust deed specifies to spend all income of trade/commerce for public and not to benefit any individual or firm or any entity should not be taxed under sixth limb but exempted under first limb. Corrective step will help avoid litigation as some trusts may move courts as the rules under 2(15) goes against the assurance of finance minister in Lok Sabha.

CR Venkataramani



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