Explained: Proviso to Sec 2(15) of Income Tax Act,1961

Let us discuss proviso to section 2(15)

Friends, today we will be discussing about proviso to Sec 2(15) of Income Tax Act,1961.

Section 2(15) deals with definition of charitable purpose. Last limb in the definition is advancement of any other object of general public utility.

Many a times, it happens that trusts do not get covered in express clauses like relief of poor, education, etc., so they try to get exemption under this last residual limb. Just to ensure that only genuine trust gets registered under this last limb, proviso to Sec 2(15) was introduced.

Wordings of Proviso to Sec 2(15) as amended by Finance Act, 2015

“Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of 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, unless¹

—(i)  such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility²; and

-(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year³”

Let us breakdown this legal jargon:

In the above wordings, you would notice 3 superscripts - 1, 2, and 3, over unless, utility and year.

Section 2(15) doesn't have them. I have marked them help in breakdown of the section.

Superscript # 1 (marked over unless)

In general, general public utility (GPU) is a charitable activity.

GPU will remain to be charitable until the charitable institution carries out some business under GPU.

That is if an institution registered under GPU clause carries out some business then it will lose its charitable nature.

But this not the end. Business GPU still has a chance to remain charitable. And that is possible if GPU business satisfies two conditions.

These two conditions are covered in superscript 2 and 3.

Superscript # 2 (marked over utility)

First condition to be satisfied

=>Commercial activity is related to advancement of object of general public utility.

For instance, FICCI runs a cafeteria for its members, guests etc. Even if FICCI charges some nominal amount for the fooding at cafeteria, it will constitute a commercial activity. But running the cafeteria is incidental to main object of FICCI which is to promote healthy interface between government and business community. So condition # 1 satisfied.

Super script # 3 (marked over year)

Second condition to be satisfied

=>Aggregate receipts from such incidental commercial activity shall not exceed 20% of total receipts.

In our example, cafeteria revenue shall not be more than 20% of total revenue earned by FICCI during the previous year. Kindly note that term used is revenue and not net profit. So what has to be checked is turnover of the FICCI and of the cafeteria to ensure that limit of 20% is not breached.

The reason behind this 20% limit is to stop people from running business under trust.

Basically, some people ran some incidental business like that of cafeteria on 100% commercial basis under the garb of GPU. And as GPU hasn't to pay taxes, so they paid no tax.

#But what if, incidental activity revenue crosses the limit of 20% of total revenue. Will the benefit of Sec 11&12 not be available? Will registration u/s 12AA deemed to be cancelled?

Answer to these have been given in a recent judgement of Bombay HC in the case of Khar Gymkhana Club. Read the summary of the judgement along with full text in this article.