clarifying activities that are termed as charitable and be eligible for income tax benefits.According to the circular, industry associations generating income from membership fees will not come under the tax net.
”Under the principle of mutuality, if the trading takes place between people who are associated with each other and contribute to a common fund for the financing of some venture, any surplus returned to members is not taxable,” the circular said.
To ensure that only genuine charitable bodies are able to get tax benefits, the government had modified the definition of a charitable body by adding a new provision. The income tax department recognised a "charitable purpose" as an organisation that covered activities related to the relief of poor, education, medical relief and the 'advancement of any other object of general public utility'.
Since the last definition made the definition very open ended, the government amended it by adding: “If the charitable purpose involves 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 considered a charitable body.”
The amendment had led to a huge hue and cry with many organisations, such as key industry chambers representing the government.
To clear the air on the issue, the CBDT has now issued a detailed circular defining what is a charitable body.Industry bodies claim exemption from income tax under Section 11 on grounds that their objects are for a charitable purpose as they are covered under 'any other object of general public utility'.
If industry or trade associations claim to be charitable institutions as well as mutual organisations and their activities are restricted to contributions from and participation of only their members, they would not fall under the purview of the new provision on charitable organisations owing to the principle of mutuality.
However, if such organisations have dealings with non-members, they will incur tax.