Fate of “Charitable Activities” cases u/s 2(15) in Income Tax post the Supreme Court’s judgement in the case of Ahmedabad Urban Development Authority

[Vivek Jalan]

The Supreme Court in the case of ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS) VERSUS AHMEDABAD URBAN DEVELOPMENT AUTHORITY - 2022 (10) TMI 948 - SUPREME COURT , held as follows in Para 253 & 254-

A. An assessee advancing general public utility (GPU) cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration.

B. However, in the course of achieving the object of GPU, the entity, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (1) the activities of trade, commerce or business are connected and (2) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, now 20% of total receipts of the previous year, w.e.f. 01.04.2016

C. The charging of any amount towards consideration for such an activity (advancing GPU), which is on cost-basis or nominally above cost, cannot be considered to be "trade, commerce, or business" or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of "cess, or fee, or any other consideration" towards "trade, commerce or business".

D. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached.

E. In every case, the assessing authorities would have to apply their minds and scrutinize 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. If such is the case, then the receipts would indicate that the activities are in fact in the nature of "trade, commerce or business" and as a result, would have to comply with the quantified limit

Hence, the entities claiming exemption have to prove the following –

A. That there is no standalone activity in the nature of on trade, commerce or business. If that be so, then separate books of accounts be maintained and the profits be offered for tax.

B. However, in the course of advancing the object of GPU, the entity can carry on ‘connected’ activities in the nature of trade, commerce or business. But, the receipts from these activities should not be more than 20% of the total receipts. The consideration for such connected activities should also be on cost-basis or nominally above cost. How much above cost is not mentioned. But it is a fact that 15% accumulation is officially allowed by The income tax Act and possibly that could be a benchmark.

In one of the first few orders after the said judgement of The Hon’ble Supreme Court, the ITAT Ahmedabad in the case of THE ACIT (EXEMPTIONS) , CIRCLE-1 VERSUS GUJARAT INDUSTRIAL DEVELOPMENT CORPORATION AND GUJARAT INDUSTRIAL DEVELOPMENT CORPORATION VERSUS THE DCIT, (EXEMPTIONS) , CIRCLE-1, AHMEDABAD - 2023 (7) TMI 734 - ITAT AHMEDABAD has held in favour of the assessee. However, the said decision was only due to the fact that the decision of High Court was rendered prior to passing of impugned order and as the matter was already on remanded back to the AO to decide as per the High Court’s Order in favour of the assessee. Hence it was considered that there was no reason for the AO to compute income ignoring provisions of Section 11 and 12 of the Act.

Again, in the case of IMPROVEMENT TRUST VERSUS THE ACIT, EXEMPTION CIRCLE, CHANDIGARH - 2023 (5) TMI 1217 - ITAT CHANDIGARH it was held that the objects / activities of the trust were to bring about improvement in the town of Sangrur by providing streets, housing facilities, development of parks, development of roads and other infrastructures, providing drinking water, etc. However, for carrying out all this activity, the Assessee has to incur expenditure on advertisement, quoting tenders in newspapers for sale of land to the general public, and quoting tenders for civil contract works, and all these activities had to be done for fulfilling the main objects, which are charitable in nature. To get the funds for the same, plots were developed and sold at a profit. Hence, it was held that the schemes were driven by public requirements and not as a commercial venture per se, and which schemes are incidental to the main and pre-dominant object of the trust.

A lot of water still would be flowing under the bridge. However, this can be seen as a start of sorts.