Can Trust or NGO Exempt in Income tax Carry on Business or Trade?
Under section 2(15) of Income Tax Act, which defines the ‘charitable purpose’, there are seven types of charitable institutions;
(iii) medical relief
(iv) Relief to poor
(vi) preservation of monuments
(viz) any other general public utility
The main object or purpose of any Trust / NGO / Charitable Organisation is to be of service without any profit objective. The above seven categories are expected to undertake activities without having profit motive as its main objective. If some ancillary objects are under-taken with commercial intent the charitable status will not be lost. The Hon’ble Apex Court held in the case of CIT v. Andhra Chamber of Commerce  55 ITR 722 that only the predominant object for which the organization was created is alone to be considered for the purpose for determining whether the nature of activities fall within the scope and ambit of ‘charity’. In CSTv. Sai Publication Fund 258 ITR 70 held that if the main activity is not business, then any transaction incidental or ancillary would not normally amount to “business”.
Can Trust also do Business? What are the Conditions?
In the case the case P.A. lnamdar v. State of Maharashtra AIR it was held that the term charitable did not imply that an organisation cannot have profit from its prima charitable activity. Supreme Court has opined that upto 6 to 15% of profit would not jeopardise the charitable character of an Institution.
Yes the Trust can also undertake trade or business activities which are incedential to main objectives of Trust
Following category can have incidental business activity without any financial limit
(iii) medical relief
(iv) Relief to poor
(vi) preservation of monuments
The seventh category Trusts / NGO i.e. for advancement of any other object of general public utility, can have incidental business activity upto 20% of gross receipt. If the seventh category NGOs have incidental business activity in excess of 20% of gross receipt then their charitable status will not be lost, but they will be treated as ‘non exempt entity’ for that particular assessment year under section 13(8). The primary activity of an NGO can also be in the nature of trade or business provided there is no profit intent. For instance educational institutions can run on commercial terms with very reasonable profits.
What Section 2(15) Says
“charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, 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 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, unless—
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; 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 year;
In recent case of ITAT-MUMBAI Acharya Jiyalal Vasant Sangeet Niketan Vs ITO 2021-TIOL-715-ITAT-MUM it was held that, where purpose of a trust or institution is relief of poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves carrying on of commercial activities
Fact of The case
The assessee is a charitable trust engaged in imparting education in the field of classical music and light music
based on the Gurukul Philosophy, where the student learns by virtually staying with the Guru. The institution was founded in 1932 by Acharya Jialal Vasant and has 84 years of rich heritage. The institution has a repute for providing
scientific training in Hindustani Classical Music and Light Music. The trust has a studio namely “Ajivasan Sounds” which is used for the purpose of training students in professional singing and also the same is made available to various
artists for the purpose of recording.
We find that the gross receipts are only Rs.16.72 lakhs which subsidize the fees for Rs.33.01 lakhs for 785 students which works out to Rs.4206/- per student per year. In the instant case, the maintenance of studio is intrinsic and in pursuance of the objects of the assessee which is education. It is well understood that teaching of Indian Classical Music is within the field of “education”. The activities of the studio are carried on in order to achieve the main object of the Trust and cannot be construed as business. As mentioned earlier, since the trust is engaged in education, the proviso to section 2(15) does not apply as clarified by CBDT Circular No. 11 dated 19.12.2008.
Circular No. 11 of 2008 dated 19.12.2008 issued by Central Board of Direct Taxes (CBDT) clarifies that the newly inserted proviso section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e. relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of commercial activities.
In the case of Sri Thyaga Brahma Gana Sabha (supra), the Hon’ble Madras High Court affirmed the order of the Tribunal in holding that letting out of building did not involve profit-earning activity even assuming it to be an activity. The trust deed is to be read as a whole. Similar are the facts in the instant case. Therefore, following the above decision of the Hon’ble Madras High Court, appeal prayers are allowed
Important points to note when Trust / NGO is doing Business
- A Trust or NGO registered under Income Tax Act can do Business if its mention as objective in Deed or MOA / AOA
- Separate books of accounts mean separate Bank Account, separate Trial Balance, separate Profit and Loss Account and separate Balance Sheet need to prepare for Business
- The activities of the Trust are carried on in order to achieve the main object of the Trust and cannot be construed as business ICAI Accounting Research Foundation 321 ITR 73 (Del) and Women’s India Trust 379 ITR 506 (Bom)
- The business objective should be mention in Trust deed as ancillary objective
- There should not be profit motive
- The profits and gain from business should be used for primary objective of Charitable activity
- Section 2(15) Proviso will be attracted only in case the nature of charitable activity is “any other general public utility”