Denial of exemption under Sections 11 & 12 without cancellation of registration
Existing provision
Definition of Section 2(15):
(15)"charitable purpose" includes relief of the poor, education, medical relief, [preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,] and the advancement of any other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be 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:]
[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;]
*Words "twenty-five lakh rupees" shall be substituted for "ten lakh rupees" by the Finance Act, 2011, w.e.f. 1-4-2012.
Insertion of new provision by Finance Bill, 2012
Section 13 – A new clause 13(8) proposed to be inserted retrospectively w.e.f. 1-4-2009 namely:
"Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in the said previous year."
Impact of the insertion
Charitable organizations covered in the definition of Sec. 2(15) of the Act can avail the benefit of exemption under sections 11 and 12 of the Act.
The definition of Sec. 2(15) includes advancement of any object of general public utility but it does not include 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 its application. However, it excludes cases where the aggregate value of receipts from the said commercial activities is below Rs. 25 lacs in the previous year. It implies that charitable organizations established for the purpose of general public utility and earning receipts from commercial activities upto Rs. 25 lacs can avail of the benefit of exemption u/s 11.
Earlier, the 'charitable' character of such trusts was dependent on the quantum of commercial receipts i.e. they could be charitable in the previous year in which fees from activities in the nature of trade, commerce or business was below the prescribed limit and the trusts would not be 'charitable' in the next year when its aggregate receipts from commercial activities crossed the prescribed limit. The effect was that the nature of the trust would change depending on the value of its receipts from trade, commerce or business. In extreme circumstances, it could also lead to the cancellation of registration or withdrawal of approval of the trust thereby denying the benefit for all subsequent years.
In order to keep intact the nature of organization u/s 2(15) as charitable even if it exceeded the threshold of fee or consideration from activities of a commercial nature, an insertion under Section 13 has been made to deny exemption u/s 11 to such trust or institution for that specific previous year and not alter the charitable nature of the assessee. Thus, the incomes of the trust or institution would not be eligible for the benefit of Sec. 11 for that particular year.
In a nutshell, the benefit of exemption is denied if the proviso to Sec. 2(15) becomes applicable in the previous year due to insertion of this clause in the Act. The denial of exemption is attracted even if there is no cancellation of registration/ withdrawal of approval/ rescinding of notification governing the trust.
Similar proviso has been inserted for trust or institutions referred u/s 10(23C)(iv) or 10(23C)(v) and hence their incomes would not enjoy exemptions if they fall under the first proviso of Sec. 2(15) for a particular previous year.
Existing provision
Definition of Section 2(15):
(15)"charitable purpose" includes relief of the poor, education, medical relief, [preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,] and the advancement of any other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be 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:]
[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;]
*Words "twenty-five lakh rupees" shall be substituted for "ten lakh rupees" by the Finance Act, 2011, w.e.f. 1-4-2012.
Insertion of new provision by Finance Bill, 2012
Section 13 – A new clause 13(8) proposed to be inserted retrospectively w.e.f. 1-4-2009 namely:
"Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in the said previous year."
Impact of the insertion
Charitable organizations covered in the definition of Sec. 2(15) of the Act can avail the benefit of exemption under sections 11 and 12 of the Act.
The definition of Sec. 2(15) includes advancement of any object of general public utility but it does not include 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 its application. However, it excludes cases where the aggregate value of receipts from the said commercial activities is below Rs. 25 lacs in the previous year. It implies that charitable organizations established for the purpose of general public utility and earning receipts from commercial activities upto Rs. 25 lacs can avail of the benefit of exemption u/s 11.
Earlier, the 'charitable' character of such trusts was dependent on the quantum of commercial receipts i.e. they could be charitable in the previous year in which fees from activities in the nature of trade, commerce or business was below the prescribed limit and the trusts would not be 'charitable' in the next year when its aggregate receipts from commercial activities crossed the prescribed limit. The effect was that the nature of the trust would change depending on the value of its receipts from trade, commerce or business. In extreme circumstances, it could also lead to the cancellation of registration or withdrawal of approval of the trust thereby denying the benefit for all subsequent years.
In order to keep intact the nature of organization u/s 2(15) as charitable even if it exceeded the threshold of fee or consideration from activities of a commercial nature, an insertion under Section 13 has been made to deny exemption u/s 11 to such trust or institution for that specific previous year and not alter the charitable nature of the assessee. Thus, the incomes of the trust or institution would not be eligible for the benefit of Sec. 11 for that particular year.
In a nutshell, the benefit of exemption is denied if the proviso to Sec. 2(15) becomes applicable in the previous year due to insertion of this clause in the Act. The denial of exemption is attracted even if there is no cancellation of registration/ withdrawal of approval/ rescinding of notification governing the trust.
Similar proviso has been inserted for trust or institutions referred u/s 10(23C)(iv) or 10(23C)(v) and hence their incomes would not enjoy exemptions if they fall under the first proviso of Sec. 2(15) for a particular previous year.
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