Section 2(15) of Indian Income-tax Act defines charitable activities into seven broad categories
I. Relief of the poor,
II. Education,
III. Yoga,
IV. Medical relief
V. Preservation of environment ( including watersheds, forests, and wildlife),
VI. Preservation of monuments, places, objects of artistic and historic interest and
VII. Advancement of any other object of general public utility
At first, there were only four clauses, the fourth limb being Advancement of any other object of general public utility’. Preservation of environment, Preservation of monuments, places, objects of artistic and historic interest was added with effect from 1/4/2009 and Yoga was included in the Finance Act, 2016.
An entity with a charitable object of the above nature is eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of ‘charitable purpose’. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the ‘advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of –
(a) any activity in the nature of trade, commerce or business; or
(b) 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.
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This proviso to section 2(15) is not applicable for the first five limbs of section 2(15), i.e., relief of the poor, education, medical relief etc. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of commercial activities provided
(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.
This inserted proviso to section 2(15) is applicable only to entities whose purpose is ‘advancement of any other object of general public utility’ i.e. the seventh limb of the definition of ‘charitable purpose’ contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent, and frequency of the activity.
The rigor of this amendment has been reduced by the consecutive amendments made in 2010 by introducing a threshold limit of Rs 10 lacs and subsequently to Rs 25 lacs in 2011, to the effect that said restrictions shall apply if the trade/commerce/business activities are beyond the threshold limit.
2016 Finance Act, further relaxed this provision by removing the thresholds and stating that NGOs with objects as general public utility shall lose its charitable character if receipts from business activities exceed 20% of total receipts.
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