Common public understanding of the taxation law states that charitable trusts have been exempted from taxes in India. But this is not absolute and to truly understand the actual taxation of charitable trust, it is important to carefully read the provisions of the Income Tax Act, 1961 and the rules thereunder related to the taxation of trusts. However, provisions and rules relating to the taxation of trust are not free from different interpretations and complications. Let’s see some of the complications around the taxation for charitable organisations.
There are various types of trusts and associations incorporated in India that have been exempted from tax. For instance, statutory bodies like the Institute of Chartered Accountants of India and housing development boards such as Noida Authorities, BCCI etc. are some of the institutions that are exempted from tax. However, the activities of all these institutions are different from each other.
Further, there have been various litigations and different judgements on which activities of the trust should be treated as charitable activities and which ones as commercial. Also, the tax exemption for educational institutions has been ambiguous because the provisions of Section 10(23C) of the Income Tax Act, 1961 provides tax exemption to only those institutions that are ‘solely’ for educational purpose.
So, how is the tax exemption for charitable organisations determined? The Supreme Court has settled the confusion revolving around these issues and laid down detailed guidelines on tax exemptions for charitable organisations. What was the Supreme Court ruling on charitable organisations and how will it impact taxes on charitable trust?
CASE-I: M/s New Noble Educational Society vs. The Chief Commissioner of Income Tax
Facts of the Case
M/s New Noble Educational Society claimed exemption under Section 10(23C) of the Income Tax Act, 1961 which was denied by the tax authorities. The question that arises here is whether the institution should exist ‘solely’ for the purpose of education or it can have income from other sources also. Further, how tax exemption will be determined?
As per Section 10(23C) (vi), income from any university or other educational institution that exists solely for educational purposes and not for the purpose of profit should not be included in the taxable income. The word ‘solely’ is of prime importance in this regard. The following were the observations and judgement of the Supreme Court for educational institutions:
After the above ruling, the educational institutions had to satisfy the trust income tax authorities that they existed solely for the purpose of education and there was no other business activity undertaken.
Facts of the Case
Apart from the specified activities, the definition of charitable purpose also includes the advancement of any other object of general public utility. Receipts from such activities are also eligible for exemption under the trust income tax law. However, what should be considered under this provision is not specifically clear. The Supreme Court settled the law pertaining to such objects in the case of ACIT (Exemptions) vs. Ahmedabad Urban Development Authority (AUDA).
The tax officers denied the exemption claimed by the assessee and imposed a penalty of Rs. 101.24 crores. The assessee succeeded in the High Court following which, the matter rested before the Supreme Court. This case concerns a large number of statutory corporations, bodies and authorities like the Gujarat Housing Board, the Institute of Chartered Accountants of India, Karnataka Water Supply and Drainage etc.
The Supreme Court ruled the following judgement to settle this case:
The above guidelines and ruling makes it pretty clear and removes the ambiguity surrounding the tax exemptions for charitable organisations. The above judgements bring a lot of clarity to the exemptions for charitable organisations. However, the trust income tax authorities may aggressively apply the above judgements for their assessments to ensure that the conduct of charitable organisations is in line with the Supreme Court judgement for claiming the exemption. If you need any assistance in relation to the taxation of charitable trust, feel free to contact the ASC Group.
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