Summary
In a large batch of revenue and assessee appeals, the Supreme Court construed the proviso to Section 2(15) of the Income Tax Act, 1961, added from 1 April 2009, for charities advancing 'any other object of general public utility'. The predominant-object test of Surat Art Silk no longer governs. Such a body may not carry on trade, commerce or business, or services in relation to them, for any fee, cess or consideration, unless the activity is part of actually carrying out its object and the receipts stay within the statutory limit (Rs 10 lakh, then Rs 25 lakh, now 20% of total receipts). Charges at cost or with a nominal mark-up are not business receipts. Statutory development authorities, ICAI, seed certifiers, ERNET and NIXI succeeded; GS1 India failed; Tribune Trust failed on the limit; AEPC and the cricket associations were remitted.
Issues
- What is the correct interpretation of the proviso to Section 2(15) of the Income Tax Act, 1961 (as amended from 2009 to 2015) for charities in the 'general public utility' category, and does the predominant-object test of Surat Art Silk survive?
- Whether fees, charges and other receipts of statutory development authorities, housing boards, regulators and other public bodies are receipts from trade, commerce or business.
- How Section 11(4A), Section 10(23C) and Section 10(46) are to be read with the amended Section 2(15).
- Whether the individual assessees (development authorities, ICAI, seed agencies, AEPC, ERNET, NIXI, GS1 India, state cricket associations, Tribune Trust and others) were entitled to be treated as charities.
Provisions considered
- Section 2(15) and its provisos (as amended by Finance Acts 2008 to 2015), Income Tax Act, 1961A general public utility charity cannot engage in trade, commerce or business or related services for consideration, except in the actual course of carrying out its object and within the quantitative limit of receipts; use or application of the income is irrelevant. (¶¶ 138, 142, 150, 151, 153, 167, 253)
- Section 11(4A), Income Tax Act, 1961Read harmoniously with Section 2(15): business must be carried on in the actual course of achieving the object so that the gains are incidental; separate books enable the quantitative limit to be verified. (¶¶ 155, 160, 165, 168, 253)
- Sections 10(23C), 13(8) and 143(3) provisos, Income Tax Act, 1961The seventh and seventeenth provisos to Section 10(23C), Section 13(8) and the third proviso to Section 143(3) reinforce the same conditions. (¶¶ 169, 174, 175)
- Section 10(46), Income Tax Act, 1961'Commercial activity' bears the same meaning as trade, commerce or business in Section 2(15); there is no quantitative limit, and denial under Section 10(46) does not bar a claim as a charity. (¶¶ 180, 181, 182, 189, 253)
- Section 119 (CBDT circulars), Income Tax Act, 1961Circulars bind tax authorities when consistent with the statute but do not bind courts and carry only persuasive value in interpretation. (¶¶ 120, 123)
- Article 289, Constitution of IndiaRelied on through NDMC: sale or lease of government property is not trade or business; profit motive is the determinative element. (¶¶ 140, 141)
Held
- The 2008 to 2015 amendments to Section 2(15) mark a paradigm change: the predominant-object test of Surat Art Silk and the notion that profits from incidental business could feed the charity are no longer good law for general public utility charities. (¶¶ 138, 153, 167)
- Such a charity may carry on trade, commerce or business, or related services, for consideration only if the activity is undertaken in the actual course of carrying out its object and the receipts do not exceed Rs 10 lakh (from 2009), Rs 25 lakh (from 2012) or 20% of total receipts (from 2016); the application or ploughing back of the income is irrelevant. (¶¶ 150, 151, 153, 167, 253)
- Charges at cost or with a nominal mark-up are not trade, commerce or business; only amounts markedly above cost fall within the proviso. (¶¶ 170, 171, 172, 173, 253)
- Statutory bodies performing public functions such as housing, town planning, industrial development, water and sewerage are general public utility charities; statutorily regulated charges, rents and interest are prima facie not business receipts, but assessing officers must check yearly whether charges significantly exceed cost. (¶¶ 144, 177, 186, 190, 253)
- Statutory regulators such as ICAI and seed certification agencies do not ipso facto carry on business, subject to scrutiny of fees charged markedly above cost. (¶¶ 195, 196, 197, 199, 253)
- Trade promotion bodies advance general public utility, but paid courses, rental of fair space and consultancy are services in relation to business and must satisfy the proviso; ERNET and NIXI charge nominal fees and are charities; GS1 India's bar-coding services for business at significant fees disqualify it. (¶¶ 202, 205, 208, 211, 217, 253)
- Media-rights revenue routed through BCCI to state cricket associations could not be accepted at face value as capital subsidy and requires fresh examination; the Tribune Trust's advertisement income is business receipt exceeding the limit; sports promotion is not 'education'. (¶¶ 225, 235, 238, 245, 253)
Result
Appeals disposed of. Revenue appeals against improvement trusts, development authorities, housing boards, industrial development bodies, Gujarat Maritime Board, ICAI, the Rajasthan seed agency, ERNET and NIXI failed; ICAI's and the Andhra Pradesh seed agency's appeals allowed; revenue appeals against GS1 India allowed; AEPC and cricket association matters remitted to the assessing authorities; Tribune Trust's appeal dismissed; revenue appeal against Shri Balaji Samaj Vikas Samiti dismissed for low tax effect.