On 19th October 2022, the Supreme Court of India, in Civil Appeal No. 21762 OF 2017, in the case of Assistant Commissioner of Income Tax (Exemptions) Vs. Ahmedabad Urban Development Authority ruled on the applicability of tax exemption to charitable trusts and institutions engaged in revenue generating/ commercial/ business activities. These commercial/business activities are in the sixth category of “charitable purpose” under section 2(15) of the Income Tax Act 1961 viz “advancement of any other object of general public utility (GPU).”
Section 2(15) of the Income Tax 1961
Section 2(15) of the Income-tax Act defines charitable purpose for the purpose of the Act. Accordingly, Charitable purposes includes:
The Income Tax Act 1961 lays down under Section 2(15) that “the advancement of any other object of general public utility shall not be considered as 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:
a) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
b) 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.
Prior Jurisprudence
The meaning of the expression “advancement of any other object of general public utility” was interpreted by the Court in the case of CIT v. Andhra Chamber of Commerce [(1965) 1 SCR 565]. The court considered previous decisions in the cases - Re: Trustees of the Tribune (supra) and All India Spinners Association of Mirzapur v. CIT [(1944) 12 ITR 482]. The Court specifically focussed in the case of Andhra Chamber of Commerce, and mentioned that ‘GPU’ objects included all objects promoting general public welfare, including taking steps to oppose or urge legislation affecting trade, commerce, etc.
Interpretation of Section 2(15) (vi) of the Income Tax 1961 by the Supreme Court
The Supreme Court has observed that the true test is to ask for answers to the following questions:
(a) Is the object of the assessee (trust, society or section 8 company) one of general public utility?
(b) Does the advancement of the object involve activities bringing in moneys?
(c) If so, are such activities undertaken:
i. for profit or
ii. Without profit?
Even if (a) and (b) are answered affirmatively, if (c)(I) is answered affirmatively, the claim for exemption collapses.
The Court discussed that the activity's nature (profitable or non-profitable) could be determined based on the fundamental nature of the activity. People ordinarily carrying it out for gain and the Constitution of the organisation having an inbuilt prescription against making a profit are the two other ways of testing. The Court held that “It is a weak test to check if there is any profit from the practice venture. The mere fact that a service is rendered is not an answer to charge someone because all income, whether directly or indirectly, is derived by rendering some service or another."
Clarification by the Court
The Court clarified that an assessee advancing ‘general public utility’ cannot exclusively engage in any trade, commerce or provide service for any consideration (fees/cess/any other reference). However, to achieve the object of ‘general public utility, the trust/society or any other organisation can carry trade/business or provide services for any consideration when the following conditions are met:
i. trade, commerce or business activities are connected (“actual carrying out…”) to the achievement of its objects of GPU; and
ii. the receipt from such business or commercial activity or service about it does not exceed the quantified limit, as amended over the years (Rs. 10,00,000 w.e.f. 01.04.2009; then Rs. 25,00,000 w.e.f. 01.04.2012; and now twenty per cent of total receipts of the previous year, w.e.f. 01.04.2016)
Analysis
If a liberal interpretation is given to this judgement, we can gauge that if any fee is charged on a cost-basis or nominally above cost towards advancing ‘general public utility activity’, such income cannot be considered as income from "trade, commerce, or business." This is because “a cess or fee" may not come under the twenty per cent cap. Only when the charges are significantly above the cost incurred by the assessee would they fall within the mischief of "cess, or fee, or any other consideration" towards "trade, commerce or business".
The Supreme Court has clarified that neither the judgement precludes any statutory/non-statutory assessees (that advances objects of general public utility) from claiming exemption, nor the taxing authorities deny exemption in the future if the receipts of the relevant year don’t exceed the quantitative limit.
