QUESTIONS & ANSWERS
Circulars on charities — whether beneficial?
Promised Circular is on hand. Does it resolve the apprehensions of many public institutions with the object of general public utility losing the benefit of exemption?
Board Circular cannot go beyond the law. But an effort has been made to justify the expectation raised by the assurance of the Finance Minister, while piloting the Finance Bill in Paragraph 2.2 of Circular No.11 of 2008 dated December 19, 2008 (2009) 308 ITR (St.) 5, which reads as under:
“2.2. Relief of the poor encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitutes, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, and indigent artisans or senior citizens in need of aid. Entities which have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under Sec. 11(4A) or the seventh proviso to Sec. 10(23C) which are that (i) the business should be incidental to the attainment of the objectives of the entity, and (ii) separate books of account should be maintained in respect of such business.
Similarly, entities whose object is “education” or “medical relief” would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity, subject to the conditions mentioned above.” (emphasis supplied)
Relief of the poor has thus far been understood as confined to those trusts and institutions engaged in such activities like poor feeding or any activity offering direct assistance to the poor. But the Circular would treat even activities relating to the welfare of the economically and socially disadvantaged or needy as poor so that activities such as relief to destitutes, orphans or the handicapped, or disadvantaged women or children or even small and marginal farmers and indigent artisans or senior citizens in need of aid as in the case of subsidised old age homes, as covered by the object of “relief of the poor”.
These objects were thus far recognised mainly under the fourth clause defining charitable purpose covering objects of general public utility. The Circular should, therefore, help the institutions now recognised as covering such activities to be understood as relief of the poor. To this extent, the Circular is welcome, since such institutions need not lose exemption as long as their fee-charged activities treated by revenue as business are incidental to its objects and separate books of accounts are maintained for such activities.
The Circular also points out that apart from the first object of “relief of poverty”, those engaged in the second and third object being education and medical relief can have commercial activity, subject to the condition that such activity should be incidental with separate accounts for the same.
What would be the position of industry and trade associations?
Paragraph 3.1 of the Circular No. 11 of 2008 dated December 19, 2008, reiterates the explanation given by the Finance Minister in Parliament that they need not lose exemption, because they are even otherwise entitled to exemption on the principle of mutuality on the assumption that they would be dealing only with their members. Principle of mutuality will help those with only income by way of subscription from members. But a trade association may have interest from banks, which are not members or have income from certification. Sec. 44A provides for levy of tax on income from specific services rendered to the members requiring such receipts to be taxed under the head “income from business” so that in the absence of eligibility under Sec. 11, there is no escape from liability even for receipts from members.
Though interest income has been found to be exempt as mere investments on the basis of the rationale of the decision in CIT v Cawnpore Club Ltd. (2004) 140 Taxman 378 (SC), there are a number of decisions pending at various stages in appeal where this has not been recognised.
The fact that mutuality principle exempts subscriptions from members is hardly a consolation as it has always been so, while they lose the exemption on receipts hitherto exempt on any activity understood as commercial under the fourth clause relating to general public utility. Paragraph 3.1 of the Circular dealing with such associations itself fairly warns that organisations dealing with non-members for claiming exemption will not hereafter be eligible, even if their commercial activity was incidental to the charity relating to an object of general public utility.
S. RAJARATNAM
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