By Noshir H. Dadrawala
Under Section 2 (15) of the Income Tax Act, ‘Charitable Purpose’ includes:
- relief of the poor
- medical relief and
- advancement of any other object of general public utility
The Finance Minister has sought to amend the last part of the above definition to provide that ‘advancement of any other object of general public utility’ will not be considered as ‘charitable purpose’ if it involves 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 any fee, cess or other consideration. If any such activity is carried on by a trust, fund or institution, then such an organization will not be entitled to any exemption under section 11 and its income will be chargeable to tax even if utilized for charity unless such trust is carrying on other charitable activities and the trust is created prior to 1st April, 1962.
The most important point to note here is that the proposed amendment will not affect organizations involved in activities such as relief of the poor, medical relief and education.
It is important to note here that the restriction on the activities of general public utility is only if:
- the activity involves carrying on of any activity for a fee/consideration or
- is in the nature of trade, commerce and business or
- of rendering any service in relation to trade, commerce or business.
Explaining the rationale behind this amendment, The Finance Minister in his budget speech had said, “Charitable purpose 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, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under “charitable purpose”. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be affected.”
It is also pertinent to note that the proposed amendment does not target all the activities falling under advancement of any other object of general public utility. Only those which are ‘commercial’ or ‘supporting commerce’ are affected. Thus research, livelihoods, child labour, environment, women’s rights, etc., are not covered as these are not in the nature of commerce, trade or industry.
Organizations involved in Relief of poor, medical relief and education may safely carry out income generating activities. Micro finance for the poor, hostels run by educational institutions or fees charged by medical institutions will not be deemed as business. However trade organizations and associations supporting commerce and industry will be affected by this amendment.
Also, rental income which is assessed under the head house property is not business income.
Section 11(4A) of the Income Tax Act which permits business which is incidental to charity has not been amended. Section 11(4) which treat a business undertaking as a property held under trust has also been left untouched. Hence, as assured by the Finance Minister, genuine charitable organizations are not likely to be affected in any manner.