Does this budget makes NGOs feel good about it? …. Possible No?
The tax provisions are not seen as beneficial to the NGO community??
This article attempts to cover the following in the context of Micro finance activity/ Micro insurance activity / enterprises managed by NGOs:
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The term charitable purpose is amended from AY 1-4-2009 and its understanding.
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The impact would be far reaching that may affect the activities that NGO is currently doing.
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The transaction - till now
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The road ahead
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The reason for such an amendment
The amendment
The term charitable purpose is amended.
Section 2(15) is amended as
"Charitable purpose" includes relief of the poor, education, medical relief and the advancement of any other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on any activity in the 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, irrespective of the nature of use or application, or retention, of the income from such activity"
The impact of such amendment
The provisions clearly stipulates that exemption would not be provided in respect of the following
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" Advancement of general public utility" cannot have an activity of trade or commerce or business. It means that the institution could not carry out the activity directly.
Currently the NGOs carry out the activity of extending micro finance / micro insurance terming it as a advancement of general public utility. With the introduction of this amendment, the micro finance could be treated as a commercial activity and not in the advancement of general public utility.
The NGOs are also carrying out activities such as Manufacturing / buying the goods & selling products in the market. This activity would also come under such scrutiny. The exemption may be denied in those cases.
In effect the exemption may not be provided for such activities.
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Any activity of rendering any service in relation to any trade or commerce for a fee.
This includes providing the Micro finance activity under the partnership model. NGO forges partnership between the lender and the borrower. For this they are provided fee / commission for such services.
This includes providing of micro insurance activity wherein the NGO provides a linkage service between the insurer and the insured person.
This also includes such activities as market linkage projects wherein the NGOs link the buyer and seller and get a fee for their services.
All This would be considered as a service in relation to any trade, commerce or business. In effect, this kind of activity would not be a charitable purpose for the purpose of claiming exemption.
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Irrespective of the nature of use or application or retention of the income from such activity.
So far the NGOs / Trust are contesting that the activities of micro finance / micro insurance or the above mentioned activities are incidental to the attainment of the main objects and the surplus so generated from these activities are applied for the main objects and claimed exemptions.
With the introduction of these words " Irrespective of the nature of use or application or retention of the income from such activity", the taxman is making it clear that they are not worried about the way the money is spent and spending it for a charitable purpose cannot no longer be the reason for claiming the exemption. What is important is the mode through which the money's are derived instead of the mode for which the money's are spent.
The transactions – Till Now
The act is amended for the period starting from 1-4-2009 (AY). From this, we are to infer that the transaction till now shall be allowed. One may also see the appendix 1, wherein the SC judgment provides explanation for charitable purpose and provides exemption even for transactions that are commercial.
So a similar view may be applied for all transactions till 31-3-2008. In effect, the exemption for micro finance / micro insurance transaction / the activities discussed above could not be denied.
One may also note that the entity may be registered as a society / charitable trust / section 25 Companies. The tax provision makes no distinction and sees all these entity types as one category while applying this provision of the act in providing the exemptions.
The road ahead
Now the question is what is the road ahead?
One has to see if the micro finance / micro insurance could be construed as a "relief of the poor". If so, then it would be out of the purview of the term " Advancement of any other object of public utility" and denial of exemption (as discussed earlier) may not hold good in such cases.
It is sure that the taxman and the assesses are going to have a tough time.
The reason for such an amendment
This provision is brought to put an end to longstanding controversies that existed during the assessment proceedings. It is also a provision that is inserted to nullify the SC judgment in the case of Gujarat Maritime Board (2007). The gist of the case is appended for a clear understanding.
Appendix 1 – Supreme Court Judgment
Gujarat Maritime Board is a statutory Authority constituted under Section 3(2) of Gujarat Maritime Board Act, 1981. Before 13.11.2002, the Board was registered as "Local Authority" as defined under Section 3(31) of the General Clauses Act, 1897 which was a very wide definition. Prior to 2002, the Board was availing exemption as Local Authority under Section 10(20) of the Income Tax Act. Accordingly, prior to 2002 the income of the Board was not liable to income-tax under Section 10(20) of the Income-tax Act, 1961.
By Finance Act, 2002, an Explanation was added in Section 10(20) by which "Local Authority" was defined. It gave a restricted meaning to the word "Local Authority". The expression "Local Authority" was confined to panchayats, municipality, municipal committee, district board and cantonment board. Thus, Maritime Board did not come within the definition of the expression "Local Authority".
Under the circumstances, Gujarat Maritime Board made an application to the Commissioner for registering it (Board) as a "Charitable Institution" as defined under Section 2(15) of the Income-tax Act. Accordingly, they claimed exemption as Charitable Institution in respect of income derived from their property/business under Section 11 of the Act. This has been denied by the Department. And the matter has reached the Supreme Court.
The short controversy for the Supreme Court to decide is: whether the Maritime Board is entitled to the status of a Charitable Institution under Section 11 of the Act.
The Supreme Court observed that according to Section 2(15), the expression "Charitable Purpose" has been defined by way of an inclusive definition so as to include relief to the poor, education, medical relief and advancement of any other object of general public utility. In this case, the court is concerned with the interpretation of the expression "advancement of any other object of general public utility". Under Section 11(1) income from property held for charitable purposes is not includible and does not form part of total income. Section 11(1) has three sub-sections (a), (b) and (c).
In all the three sub-sections the words used are "income derived from property held under trust wholly for charitable purposes". Under Section 11(4) the expression "property held under trust" includes a business undertaking so held. In other words, income from business undertaking held for charitable purposes can fall under Section 11 subject to such income fulfilling the requisite conditions of that section.
One of the objections raised on behalf of the Department was that Gujarat Maritime Board is not entitled to the benefit of Section 11 of the Act as the said Board was not a trust under Public Trust Act and, therefore, it was not entitled to claim registration under Section 12A of the 1961 Act. The Department's case was that the Maritime Board was a statutory Authority. It was not a trust. Its business was not held under a trust. Its property was not held under trust. Therefore, the Board was not entitled to be registered as a Charitable Institution. It was the case of the Department that the Board was performing statutory functions. Development of minor ports in the state of Gujarat cannot be termed as the work undertaking for charitable purposes and in the circumstances the Commissioner rejected the Board's application under Section 12A of the 1961 Act.
The Supreme Court observed, "Even if the Board has ceased to be a "Local Authority", it is not precluded from claiming exemption under Section 11(1) of the 1961 Act. Therefore we have to read Section 11(1) in the light of the definition of the words "charitable purposes" as defined under Section 2(15) of the 1961 Act."
The Supreme Court referred to several decisions of the court and observed,
1. The expression, "any other object of generally public utility" is of the widest connotation.
2. The word "general" in the said expression means pertaining to a whole class. Therefore, advancement of any object of benefit to the public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose.
3. The said expression would prima facie include all objects which promote the welfare of the general public.
4. It cannot be said that a purpose would cease to be charitable even if public welfare is intended to be served.
5. If the primary purpose and the predominant object are to promote the welfare of the general public the purpose would be charitable purpose.
6. When an object is to promote or protect the interest of a particular trade or industry that objects becomes an object of public utility, but not so, if it seeks to promote the interest of those who conduct the said trade or industry.
7. If the primary or predominant object of an institution is charitable, any other object which might not be charitable but which is ancillary or incidental to the dominant purpose, would not prevent the Institution from being a valid charity.
In the case of Commissioner of Income-tax, A.P. v. Andhra Pradesh State Road Transport Corporation, the Supreme Court had held that since the Corporation was established for the purpose of providing efficient transport system, having no profit motive, though it earns income in the process, it is not liable to income-tax.
Applying the ratio, the Supreme Court found in the present case, Gujarat Maritime Board is established for the predominant purpose of development of minor ports within the State of Gujarat, the management and control of the Board is essentially with the State Government and there is no profit motive. The income earned by the Board is deployed for the development of minor ports in India. In the circumstances, the judgment of the Court in Andhra Pradesh State road Transport Corporation squarely applies to the facts of the present case.
Before concluding the Court also mentioned that under the scheme of Section 11(1) of the 1961 Act, the source of income must be held under trust or under other legal obligation. Applying the said test it is clear, that Gujarat Maritime Board is under legal obligation to apply the income which arises directly and substantially from the business held under trust for the development of minor port in the State of Gujarat. Therefore, they are entitled to be registered as "Charitable Trust" under Section 12A of the 1961 Act.
And so the Revenue appeal is dismissed.
K.V.SATHYAMURTHY, Tax Consultant
PLOT NO 1396, TNHB LAYOUT,
VELACHERY,CHECKPOST
PH:22440370, MOBILE 94444-15038
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