What Constitutes “Charitable Purpose” Under Section 2(15)– Judicial Trends and Misinterpretations

Statutory Definition

Section 2(15) of the Income Tax Act, 1961, defines “charitable purpose” as including:

• Relief of the poor
• Education
• Yoga
• Medical relief
• Preservation of environment (including watersheds, forests, and wildlife)
• Preservation of monuments or places or objects of artistic or historic interest
• Advancement of any other object of general public utility

However, two provisos limit this definition:

• First Proviso (Finance Act, 2008): Excludes activities involving trade, commerce, or business, or services related to such activities, unless they are undertaken in the course of advancing general public utility and separate books of account are maintained.
• Second Proviso (Finance Act, 2010): Limits receipts from such activities to 20% of the total receipts of the trust or institution in the previous year.

These provisos aim to prevent misuse of tax exemptions by organizations engaging in commercial activities under the guise of charity

Historical Context and Amendments

The definition of “charitable purpose” has evolved to address concerns about tax evasion. Before 2008, the definition was broader, allowing organizations to engage in commercial activities if their primary object was charitable. The 2008 amendment introduced the first proviso to exclude trade or business activities unless incidental, while the 2010 amendment tightened this further by setting a 20% receipt threshold, replacing the earlier Rs. 25 lakh limit.

Judicial Interpretations

Judicial interpretations have shaped the application of Section 2(15), balancing public benefit with the prevention of commercial misuse. Key cases include:

• Sole Trustee Loka Shikshana Trust vs. CIT (1975) 101 ITR 234 (SC): The Supreme Court held that activities like printing and publishing books for educational purposes are incidental to education and thus charitable. However, profit making without restrictions disqualified the trust from exemption, emphasizing that charitable activities must prioritize public benefit over private gain (Indian Kanoon).
• Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1 (SC): The Court clarified that an object is charitable only if it benefits the community as a whole, not a specific class, ruling that promoting the art silk industry was not charitable (Indian Kanoon).
• CIT vs. Andhra Chamber of Commerce (1965) 55 ITR 722 (SC): The Court held that promoting commerce and industry benefits a specific class, not the general public, and thus is not charitable (Indian Kanoon).
• DIT (E) vs. Gujarat Cricket Association (2019): The Gujarat High Court ruled that surplus from charitable activities does not disqualify an organization if reinvested in charitable purposes, and dealings with commercial entities like BCCI do not affect charitable status (ITAT Online).
• Punjab Cricket Association vs. ACIT (2019): The ITAT Chandigarh held that revenue generation through IPL activities was a primary commercial motive, disqualifying charitable status (ITAT Online).

Analysis of Judicial Trends

Courts have generally adopted a broad interpretation of “charitable purpose,” allowing activities that benefit the public at large. However, they scrutinize activities resembling trade or business, especially post-2008 amendments. The distinction between incidental and primary commercial activities is critical, with cases like Gujarat Cricket Association allowing incidental surpluses if reinvested, while Punjab Cricket Association denied exemptions for primary commercial motives.

Misinterpretations and Controversies

• Incidental vs. Primary Activities: Courts differ on what constitutes “incidental” activities. For instance, Loka Shikshana Trust allowed book publishing as incidental to education, while Vatika Foundation (2014) 363 ITR 505 (Del) rejected township development as commercial.
• General Public Utility: The scope of “general public utility” is debated, with some courts excluding activities benefiting specific groups, while others include activities like milk supply (Jaipur Dairy).
• Proviso Application: The application of the 20% threshold is contentious, with uncertainty over whether it applies only to general public utility or all charitable purposes.

Practical Implications for NGOs

• Maintaining separate books for commercial activities.
• Ensuring receipts from such activities do not exceed 20% of total receipts.
• Documenting the public benefit of their activities to withstand scrutiny.