Uniform relaxation to charitable Trust with reference to business activity up to Rs. Ten lakh is not proper

[C.A. DEV KUMAR KOTHARI]

The Finance Bill 2010 - vide clause 3 (a) provide inter alia as follows (with highlights provide by author)

3. In section 2 of the Income-tax Act,-

(a) in clause (15), after the proviso, the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2009, namely:-

"Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year;";

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Analysis  from the memorandum explaining proposals:

"charitable purpose" has been defined in section 2(15) which, among others, includes "the advancement of any other object of general public utility". However, "the advancement of any other object of general public utility" is not a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or 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.

At present there is absolute restriction on receipts of commercial nature. The amendment is proposed because the absolute restriction on any receipt of commercial nature may create hardship to the organizations which receive sundry considerations from such activities.

Therefore, proposal has been made to amend section 2(15) to provide that "the advancement of any other object of general public utility" shall continue to be a "charitable purpose" if the total receipts from any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business do not exceed Rs.10 lakhs in the previous year.

This amendment is proposed to take effect retrospectively from 1st April, 2009 and will, accordingly, apply in relation to the assessment year 2009-10 and subsequent years.

Comments from author

With effect from Assessment Year 2009-10 Section 2(15) of the Income-Tax  Act was amended including inter alia to provide that  'the advancement of any other objectives of general public utility'  will not be considered as a 'charitable purpose', if it involves the carrying on of any activity in the nature of the trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or any other consideration, irrespective of the nature of use or application , or retention of the income from such activity.

As the restriction took effect from 01.04.2009 therefore, present relaxation proposed is proposed to give retrospective effect from the same date.

As per proposed relaxation the nature of charitable activity will not be adversely affected if in the course of any other objective of general public utility, total receipts from any activity in the nature of trade, commerce or business or activity of rendering any service in relation to any trade, commerce or business do not exceed Rs.10 Lacs in a year. 

A uniform relaxation is not proper:

A uniform relaxation to all eligible institutions is not proper. Many institutions are very old, established and large in size, whereas many are new and have small operations. The volume of activity in nature of trade, commerce etc. will depend on size of total operations, number of members, number of institutions and branches of the registered charitable institution.  Allowing flat relaxation up to absolute sum of Rs. Ten lakh is therefore not justified and will not serve purpose of the relaxation. Charitable institutions also need financial support for future plans and growth. Request and suggestion:

It is requested and suggested to the honorable Finance Minsiter that relaxation can be provided up to one-third of total receipts Rs. ten lakh rupees whichever is higher. Thus if the gross receipts from such business activities does not exceed  one-third of total receipts of the organization or Rs. Ten lakh whichever is higher, then the institution should not be adversely affected. It also appears that relaxation is to be with reference to actual receipts (and not accruals as per method of accounting), this can also be clarified. Thus the proposed clause can be re-drafted as follows:      

"Provided further that the first proviso shall not apply if the aggregate value of the actual receipts from the activities referred to therein (that is business receipts) does not exceed one third of total actual receipts of the registered charitable institutions or  ten lakh rupees whichever is higher during the previous year;"