NEW DELHI: In a significant judgment, the Supreme Court has ruled that general public utility (GPU) cannot engage in any trade or commercial activity, if they want to claim income tax exemption meant for organisations undertaking charitable work.
At the same, the court declared the statutory corporations, boards, authorities, commissions, etc, working in the housing development, town planning, industrial development sectors involved in the advancement of objects of general public utility are entitled to be considered as charities in the that categories even though they may be involved or engaged in activities in the nature of trade, commerce or business for promoting public objects and also in the course of their pursuing their objects.
A bench of Chief Justice Uday Umesh Lalit and Justices S Ravindra Bhat and P S Narasimha accepted submission by the income tax department that often charities would be created merely to secure exemption from tax, while organisations would carry on large commercial activities and enjoy profits.
The tax authorities claimed this rampant abuse of the law by businesses claiming to be driven by charitable purposes had led Parliament to embed the exclusionary terms, depriving exemption if the institution otherwise fell under the GPU category charity, but undertook activities for profit.
In a previous judgement, the Supreme Court, while holding that our Constitution equated education with charity, last week, declared that institutions or trusts can claim benefits of tax exemptions only if they are ‘solely’ engaged in education and not in any other activity of profit. If the objective of such institutions appeared to be profit-oriented, they cannot get approval under Section 10(23C) of the Income Tax Act, the top court added.
Dealing with case of General Public Utility, the bench here said that carrying on any trade, commerce, or business acts as a bar or disqualification for such a category of charitable trust to claim tax-exempt status under the Income Tax Act.
“It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration (cess, or fee, or any other consideration),” Justice Bhat, who wrote the judgement on behalf of the bench, said.
The court took into record submissions of the revenue authorities that the law on tax exemption for charitable work was changed to “expressly forbid the tax exemption benefit if the entity was ‘involved’ in carrying on trade or business."
The top court's judgment has come on a batch of appeals by Assistant Commissioner of Income Tax (Exemptions) against Ahemdabad Urban Development Authority concerning the interpretation of a provision to Section 2(15) of the IT Act, which defined “charitable purpose" to include relief of the poor, education, medical relief, preservation of the environment and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.
With regard to government authorities or corporations, the court said the amount charged by a statutory corporation for achieving ‘public functions’ such as housing, industrial development, supply of water, sewage management, supply of foodgrains may resemble trade, commercial, or business activities.
“However, since their objects are essential for advancement of public purposes/functions (and are accordingly restrained by way of statutory provisions), such receipts are prima facie to be excluded from the mischief of business or commercial receipts. This is in line with the larger bench judgements of this court,” it said.
In every case, the assessing authorities would have to apply their minds and scrutinise the records to determine if, and to what extent, the consideration or amounts charged are significantly higher than the cost and a nominal mark-up, the court said.
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