Tax Thoughts

Uncharitable Damage to Charitable Institutions

Mr. Arvind Datar (Senior Advocate)
Mar 13, 2017

The most devastating blow to literally hundreds of charitable organizations has been the amendment to section 2(15) of the Income-tax Act, 1961 made by the Finance Act, 2008.   The mortal blow was dealt by the addition of the first proviso which reads as follows:-

“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 manner 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;

Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is [twenty five lakh rupee] or less in the previous year.”

No doubt, the blow has been slightly softened by the second proviso, which now spares institutions whose receipts are not more than Rs.25 lakhs per annum.   The consequence is that any charitable institution or NGO of even moderate significance remains seriously affected by this senseless amendment.

It is well-known that many charitable institutions carry on activities to generate revenues that support the main charitable activity.   For example: a charitable trust in Chennai has a hall and also a lodging area where there are a dozen rooms.  One of the function of this trust is to provide accommodation at very low rates to persons coming to Chennai for medical treatment.  The trust charges barely Rs.300/- per day from persons coming for medical treatment.   Typically, a small child may have an eye operation and may have to stay back for ten days after the surgery for a further examination to ensure that the surgery has been successful.  Unable to go back to their village, such children and their parents stay in these rooms for ten days. However, the hall is given on rent for small functions and the income from this hall subsidizes the renting of rooms at an extremely low rate.

Similarly, another trust may run a school and have an auditorium which is also rented out.   The rent from the auditorium is used to subsidize the education of 25% of the students who must be admitted free of cost under the Right to Education Act, 2009.   By the application of the proviso, the activities of both these trusts will not be charitable merely because they are carrying on an activity for a fee or other consideration.

It is unbelievable that such an amendment could have been made. There is no logic in stating that a trust will cease to be for charitable purposes merely because it carries on activities or run services that generate revenue to support the charitable activity. The vicious nature of the amendment is further amplified by the last 16 words which state that it makes no difference even if receipts of the charitable trust are applied for charitable purposes.

There are detailed provisions in the Income-tax Act, 1961 that prescribe the manner in which the income of a charitable institution has to be applied and the surplus if any has to be accumulated.   Thus, if a trust earns revenue through some activities that enable the trust to be a self-financing institution and the said trust ensures that all the monies are spent strictly in accordance with the provisions of the Income-tax Act, 1961, there should be no ground to treat the trust as not being one for charitable purpose.

The amendment to section 2(15) also impacts institutions which are covered by section 10(23C) of the Income-tax Act, 1961.

The result is that if any trust receives any revenue apart from donations, it will lose its status of being for charitable purposes.  Mercifully, the Delhi High Court has given a restricted interpretation to these provisions. See also, Institute of Chartered Accountants of India v DGIT (Exemptions) 347 ITR 99; Institute of Chartered Accountants of India v DGIT 358 ITR 91; Bureau of Indian Standards v DGIT 358 ITR 78. But other assessees in other States have not been so lucky.     In India Trade Promotion Organization v. DGIT 371 ITR 333 (Del), the Delhi High Court observed that this amendment is liable to be struck down but only read it down.   

The amendment to section 2(15) has caused enormous damage to several charitable institutions. It has been the basis on which, in hundreds of cases, proceedings have been initiated against charitable trusts and funds that ought to have been deployed for genuine charitable activities are now used for paying income tax.

At a time, when the Central and State Governments are unable to provide basic services in several spheres, hundreds of NGOs were doing an exemplary job in partially meeting the needs of the poor and helpless.

The best course of action would be to amend the proviso and make it clear that so long as the funds are applied for the objects of the charitable institutions in accordance with the provisions of the Income-tax Act, 1961, it will not be denied the benefits applicable to such institutions. 


(*The writer is a Senior Advocate of the Madras High Court)

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