Understanding of Charitable Institution & Charitable Purpose
In this article, we will try to understand the concept of Charitable Purpose. We have tried to cover different possibilities in the form of guidelines, case laws, and other relative topics.
With the intention of giving our readers an enhanced yet simple matter, we have introduced a few guidelines covering different instances, which are also in the form of case law Judgments, wherein it is very well thought to learn what is a charitable Institution and how does the same should satisfy the very important condition of being constituted for charitable purposes.
We have framed the study work revolving around Charitable Trust and broken the subject matter into two articles stipulating different aspects of charitable trust or Institutions.
In the shades of knowledge, we should always try to touch the roots and in our topic, the root comes from Section 2(15).
It is important to throw lights on Section 2(15) of Income Tax Act which states that “where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves carrying on of commercial activities”.
• Going in line with Section 2(15) one crucial statement is worth discussing at this moment. i.e., what do we understand by the statement ‘The Limbs of Charitable Purpose are not Mutually exclusive.’?
The limbs of Section 2(15) of the Income Tax Act, 1961 are not mutually exclusive. Sometimes it may overlap with other limbs also.
• Let’s try to answer the above.
Suppose if the purpose of a charity institution is meant to be serving more than one area i.e., the charity institution provides education to poor children as well as serves the purpose of spreading one’s religious preaching using the same education platform. In this, the very purpose of the charitable institution of providing education cannot be challenged or the title would not be taken away just by claiming that it is covered by the religious act too.
Hence in the same example of the trust providing free education to the poor ones and that education is also leaned towards spreading Islamic study or preaching in Arabic, the trust’s solo motive of being formed for the charitable purpose, cannot erase away by removing the purpose of charity and thereby claiming that it comes under religious parameter or so. In such cases, mere the intention of giving it for free education serves the purpose of charity despite the fact that it is coming simultaneously under the roofs of spreading of one’s religion. Thus its proves that the limbs of the term charitable purpose is not mutually exclusive and can be overlapping.
• Another critical issue to be discussed before moving further is Whether following the mercantile system of accounting will determine the income.
• Unless there is real accruing on the part of the Income of the Charitable Trust, mere following a mercantile system of accounting will not determine the receipts as Income
– The same has been decided by the Apex Court in the case of Godhara Electic Co. Ltd. v/s. CIT (1997) 91 ITR 351 (SC).
-Let’s get a brief idea what actually we meant by the above. Charitable trusts run on the income which is derived from donations and such donations are exempt income for the trust if the trust is working with the mere intention of charity. At this point if we are going to receive a donation, then we cannot just book it as income and claim it as a deduction, unless received in monetary terms. In other words, mere following the mercantile system we are not allowed any exemption of income and for the same purpose of claiming the exemption under the relevant section of Income, the trust must have real accruing or real receipt of the income. Once accrued or received then the trust is supposed to make an entry too, in their books of accounts.
Hence from the above, we can say that if the trust is merely making a book entry of an income, our trust authority of India or the Income tax department is not going blindly give an exemption.<br
Hence from the above, we can say that if the trust is merely making a book entry of an income, our trust authority of India or the Income tax department is not going blindly give an exemption.
Hence Which are the case laws that have become guidelines and have really clarified us on whether or not any activity is covered under charitable purpose or not?
• Numeral cases have occurred in the court of law, hearing which clarifying judgments had been passed which will really give us a clear picture of under the term ‘Charitable Institution’, which is then followed by making the picture more clear by explanations attached with the cases which will guide us through the meaning of the term ‘purpose’ or ‘intention’ with which the charity had been formed. Such judgments passed became referrals for future comparative cases and these are case laws. Some of these are noted as follows; We have tried to put forth the guidelines in each of the following case laws and referral is mentioned, for which if anyone is interested in details, can be browsed easily.
• One of the Guidelines states that if it’s a coaching center charging full-fledged fees against the services rendered in relation to education to the students, then it cannot come under the title of Charitable Institution because it is not serving any charitable purpose rather the coaching center is involved in commerce or business and will not be allowed any such exemption as provided to the charitable trusts.
The same judgment was passed in the case: DIT v/s. Kuttukaran Foundation (2012) 51 SOT 175 (Cochin). which states that by
“Mere conducting of coaching for preparing students to attend examinations conducted by the open university or by other university or distance education cannot be treated as a charitable activity.“
• Other such Guideline states that if an assessee has constituted a trust taking care of sick animals irrespective of charging the fees or not, the same would come under the title Charitable Institution and the intent of treating sick animals would be considered as Charitable Purpose and thereby all the benefits and exemptions of a charitable trust would be applicable on such trust.
The same judgment is passed in the case: Snekalaya for animals v/s ITO (2012) 52 SOT 352 (Chennai)., which states that
“Where assessee trust is formed with the object of taking care of sick animals, it is charitable activity”.
• One of the important guidelines states that Preservation of the environment is surely a charitable activity and the same goes in alignment of the activities which are performed to develop a park and thereby maintain it.
The same Judgment had been passed in the case law: New Saibaba Nagar Welfare Association v/s DIT (2012) 53 SOT 495 (Mum). which states
“Activity of maintenance and development of park would certainly fall within words ‘preservation of environment’ under section 2(15)”.
• One such guideline also states that where the assessee is formed for the production of television and radio programs for the purpose of telecasting and broadcasting, such activities cannot be held as charitable purpose and the same is backed by the case: CIT v/s A.Y. Broadcast Foundation (2012) 21 taxmann.com 533 (Ker.)
• One very important guideline set up by the case law Judgment is:
“Object of setting up memorials to perpetuate the memory of national war heroes and charitable in nature” and the same is stated in the case – Yodha Samarak Samiti v/s CIT (2012) 138 ITD 512 (Chd.)
• To understand the guideline stating that setting up memorials to perpetuate the memory of national war heroes constitutes to be of charitable nature, we take up this matter one step further by encountering one other such question:
• What are the parameters of ‘Charitable purpose’ for the above guideline?
• Our Law relating to charity clearly states that one must observe the fine underlines of the intentions of carrying a purpose under the roofs of Charity. The same happened in the case law of Sole Trustee, Loka Shikshana Trust v C.I.T, Mysore (1975) 101 ITR 234 SC. In this case, the court observed that a statute of Elizabeth I, which “ was not directed so much to the definition of charity of abuses which had grown up in the administration of trust of a charitable nature”
Thus, a purpose was considered, in the eye of the law, to be charitable also if it came with the letter or the spirit and intendment of the preamble of the statute of Elizabeth.
In other words, we can simply say that if a trust erects our brave soldiers who are killed in defending our country, then such activity would come under charity by referring to the above case law where the spirit and intention or intendment of the preamble of the statute is considered and it is very well serving the charitable purpose.