TAX FORUM: QUESTIONS & ANSWERS
Circulars on charities cannot go beyond law
Even if the Circular is implemented in the true spirit, only some of the institutions may not be affected but not most others.
Can the Circular be taken as honouring the statement of the Finance Minister that all genuine organisations will not be affected by the amendment?
There are a number of objects, some of which are even recognised by Article 51A of the Constitution as part of Fundamental Duties, such as promotion of harmony between different citizens transcending religious, linguistic, regional and sectional diversities, preservation of the heritage and composite culture, protection and improvement of industrial environment, developing of scientific temper, humanity and spirit of reform, protection of public property and promotion of non-violence. These are all objects of general public utility. So are those engaged in the promotion of employment, safe driving, animal welfare, sports, widow marriage, fine arts such as music, research, community services, maintenance of public halls and parks, promotion of language and literature and many other such objects rendering yeoman service for the public charging some fee incidental to their activity to augment their resources from persons who can afford to pay for the services rendered by them.
Automobile associations for example ensure safe driving, while charging fees for some services rendered by them by way of road information or getting driving licences for members. Though promoting music is a recognised purpose, collections for performance of popular artistes would risk exemption. Those trusts and institutions engaged in the promotion of fine arts and literature may bring out publications at a price. Such public associations, which would lose exemption, are numerous. Revenue gain from such association may be minimal, but they will deprive resources for deserving institutions.
What is worse is that the tax is not limited to income from such activity. There will be total loss of exemption for such institutions, including income from investments made out of donations, because amendment had been placed wrongly in the definition of charitable purpose and not under Sec. 13, which already prescribes conditions for exemption for business income under Sec. 13(1)(d)(iii) and earlier under Sec. 13(1)(bb). Any amendment to the former section or restoration of the latter so as to target only commercial profits was what was required even in the light of the objective of withdrawal of relief on “commercial” profits relating to objects of general public utility.
Another unexplained offshoot is that such institutions, which earn small profit would lose exemption under Sec. 80G as well so as to deplete the only other or the main source of income. The advice given in the Circular from these damaging consequences is that such institutions should give up such “commercial” activity.
In the result, the Circular has not kept up the promise that genuine institutions will not be affected. But then, what else could Circular do to undo the damage done by the amendment? Circular cannot go beyond the law.
What is the advice you would give for such institutions affected by the amendment withdrawing relief for those covered by the fourth object with commercial activities?
The Circular, no doubt, tries to interpret relief of the poor liberally so that some of the institutions relating to rural development or orphanages or old age homes may not be vulnerable, if some charges are levied for incidental service. Similarly, educational and medical institutions may not be vulnerable, even if some incidental activity is understood as commercial activity by revenue. But then, such a liberal interpretation was not given in the past. Even for promotion of handicraft now conceded, the assessee for example in Victoria Technical Institute v Addtl.CIT (1991) 188 ITR 57 (SC) had to go to the Supreme Court, which came to the assessee’s rescue reversing the decision of the High Court not on the ground that the assessee was engaged in relief of poverty but on the ground that promotion of handicraft satisfies the fourth condition of general public utility. Even objects such as education has been understood too narrowly so as to deny exemption even for public sector undertakings engaged in publication of school text books or an institution not imparting formal education as for tutorial colleges and training for chartered accountant’s course. Even if the Circular is implemented in the true spirit, only some of the institutions may not be affected but not most others.
Even if the objective is to tax income from such activities in the case of such institutions engaged in the objects of general public utility, the proper course was to shift the amendment to Sec. 13 so that they may not altogether lose exemption even on their investment income or right to recognition of deductions in contribution of their patrons under Sec. 80G. This change needs attention of the Government at the time of formation of the next Finance Bill or Amendment Bill.
Meanwhile, the advice at the end of the Circular itself is worth notice. It is in following words:
“Assessees, who claim that their object is “charitable purpose” within the meaning of Sec. 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.”
In other words, the advice is to stop all fund-raising activities, which smack of business as in cases where charges are levied for some incidental service or consideration is received incidentally for parting with goods. The next best course for them is to delink such activity and transfer such activity to another trust or institution, which can pay tax, but still the main trust can save tax on income from investments and non-controversially on their income from non-corpus donations.
S. RAJARATNAM
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