"charitable organisations" in the budget 2008-09 can breathe easy now.
To clear the air on the issue, the Central Board of Direct Taxes has issued a detailed circular defining what constitutes charitable.
Industry bodies claim exemption from income tax under Section 11 on the ground that their objects are for charitable purpose as they are covered under 'any other object of general public utility'. "Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such associations is not chargeable to tax," the circular said. But, there would have be complete identity between contributors and participants.
If industry or trade associations claim both to be charitable institutions as well as mutual organsiation and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the new provision on charitable organisations owing to principle of mutuality. However, if such organisations have dealings with non-members, their claim to be charitable organsiation would no be governed by the additional conditions stipulated in the new provision.
To ensure that only genuine charity is able to get tax benefits, the government had modified the definition of charitable by adding a new provision. The Income Tax recognises "charitable purpose" to cover acitivities related to relief of poor, education, medical relief and advancement of any other object of general public utility. Since, the last activity "advance ment of any other object of general public utility" had made the definition very open ended, the government amended it saying if the charitable purpose involved any other activity in 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, it will not be charitable.
Relief of poor will cover wide range of objects for the welfare of the economically and socially disadvantaged or needy and will include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women, children, small and marginal farmers, indigent artisans or senior citizens in need of aid."Entities who have these objects will continue to be eligible for exemptions even if they incidentally carry on a commercial acitivity, subject to conditions-- the business should be incidental to the attainment of the objectives of the entity and separate books of accounts are maintained for each business.
However, if the taxpayer is engaged in any activity in the nature of trade, commerce or business or service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose." In such a case, the object of 'general public utility ' will be only a mask or a devise to hide the true purpose which is trade, commerce or business and each case would be decided on its own facts, the circular said.
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