Beware of Most Dangerous Tax Amendment For Charitable Society !

One charitable society having more than twelve various activities like schools, charitable clinics, naturopathy centres, creches, old age homes, pension for widows, library, Masala Centre where various spices are prepared by poor ladies. Spices prepared by these ladies are sold over the counter which results in some income to the society. Besides sometimes a hall in building of the society is also given on rent to some commercial organisation for sale purposes.Pl confirm whether in light of the latest amendments in the Income tax Act, the activities like sale of spices and rent receipt will be liable for taxation ?

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Before , I answer your specific question, it is important to clarify the position of taxation of charitable entities post Finance Act 2008 , because the govt has brought in an amendment which has far reaching consequences on the charitable entities of the country.

The income of an entity whose object is charitable are allowed exemption u/s 11 or 10(23C) of the I T Act. The definition of Charitable Purpose is given in section 2(15) to include following

1. Relief of the poor
2. Education
3. Medical relief
4. The advancement of any other object of general public utility.

The government vide Finance Act 2008has tried to fill up the loop hole in the last limb of the definition of “charitable purpose” i.e a provisio has been insterted to state that “advancement of any other object of general public utility” shall not be charitable purpose if it involves the carrying of –

• Any activity in the nature of trade ,commerce or business
• 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 nature of use or application or retention of the income from such activity.
What it means?
It means that the amendment is not affecting any entity with charitable purpose- relief of the poor, education or medical relief- even if the activity can be said to be business activity.
However, amendment will affect only if the entity has objectives “advance of any other object of general public utility” i.e 4th objective.
Answer to your specific query
The last para of the CBDT circular NO 11/2008 issued on the new proviso to Section 2(15) states as under

3. The newly inserted proviso to section 2(15) will apply only toentities whose purpose is advancement of any other object of general public utility i.e. the fourth 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.

3.1. There are industry and trade associations who claim exemption from tax u/s 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants.

Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members,their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2 (15).

3.2. In the final analysis, however, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is charitable purpose within the meaning of Section 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 your case, prima facie it seems that all the activities of your society are the first three prescribed under the definition of “charitable purpose” so no part of your income , prima facie , is taxable .
However , as the CBDT circular suggests , one must find the fact of the case and then decide ,if the objectives are the first three -relief of pooror medicalor education- then whatever you do , even business activity for the purpose of the those objectives , the income will not be taxed.
From the circular itself, it appears that the said amendment has been brought to check the practice of evasion of tax by industry and other business association on income generated out of business activity conducted with all and sundry and then claiming that the income out of such activity is exempt as the activity is for the benefit of society.