Entities involved in trade would cease to be a charitable institution: SC

This judgement could have wide ramifications as the charitable institutions involved in any trade or commerce in the name of said provision could come under its radar

Any entity or institution involved in any trade or commerce under the guise of ‘general public utility’ will cease to be a ‘charitable institution’ and therefore, cannot claim tax exemption under the Income-Tax (I-T) Act, the Supreme Court (SC) ruled on Wednesday.

Two key issues were heard by the apex court.

One, scope of the expression ‘general public utility’ (deals with benefit to a section of the public) for claiming tax exemption as ‘charitable institution’.

Two, scope of exemption to educational institutions claiming tax exemption as ‘charitable institution’.

The expression ‘charitable purpose’ has been defined under certain clauses which include relief to the poor, for education and medical relief, preservation of the environment (including watersheds, forests and wildlife), preservation of monuments, and the advancement of any other object of public utility. 

Many institutions doing trade/commerce used the ‘general public utility’ clause to gain exemption for profits on such trade/commerce since the meaning is ambiguous. The court has now clarified if any profit or margin is earned from such an activity, it shall cease to be a charitable activity.

This judgment could have wide-ranging ramifications since charitable institutions involved in any trade or commerce in the name of the said provision could come under its radar and would be denied the benefit of tax exemption under the I-T Act available to them.

In a second batch of appeals concerning educational institutions, the top court held that the object of such institutions must be “wholly, solely, and exclusively” for the purpose of education.

It has ruled that if educational institutions are making profits and run for such an expressed purpose, then the benefit under Section 10(23C) of the I-T Act will not be extended to such institutions. The said Section provides that the income earned by any university or educational institution existing solely for educational purposes and not for purposes of profit shall be exempt from tax.

“It is held that the requirement of the charitable institution, society or trust to ‘solely’ engage itself in education or educational activities, and not engage in any activity of profit means that such institutions cannot have objects which are unrelated to education. In other words, all objects of the society, trust, etc, must relate to imparting education or be in relation to educational activities,” the three-judges Bench said, while pronouncing the verdict.

The order further reads: “Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under Section 10(23C) of the I-T Act.”

SC in its remark said: “Our Constitution reflects a value which equates education with charity. That it is to be treated as neither business, trade nor commerce…. The interpretation of education being the ‘sole’ object of every trust or organisation which seeks to propagate it, through this decision, accords with the constitutional understanding and, what is more, maintains its pristine and unsullied nature.”

“In light of the foregoing discussion, the assessees’ appeals fail. It is, however, clarified that their claim for approval or registration would have to be considered in light of subsequent events, if any, disclosed in fresh applications made in that regard,” it clarified.

 “The recent judgment of the SC is about the interpretation of the words ‘general public utility’ in the definition of charitable purpose. This is a much-debated term, but the SC has put to rest all controversies wherein it has stated that if any mark-up is charged on the cost of such services, it shall lose the character of ‘charitable purpose’ and the institution would be subject to tax accordingly,” said Sandeep Sehgal, tax partner, AKM Global — a tax consultancy firm.

The rules so far
 

• Charitable institutions are not subject to any tax, provided they are involved in “charitable” work 
• One of the clauses, general public utility, defined as charitable purposes, has been in question 
• General public utility is not clearly defined in the tax laws and is open to interpretation 
• Many trusts, institutions use the clause to claim tax benefits