JULY 01, 2009

Amend Income Tax law on charity

By Punit Jain, Advocate, Supreme Court of India

INCOME tax law of charity has undergone several amendments. Each year, there are one or more amendments in the provisions relating to this chapter. Still some grossly unjust provisions have persisted on the statute book.  This article throws light on one such provision.

In a charity, there are two parties: One is charity giver, and the other is charity taker. All the provisions in the Act are meant for charity giver and the whole laws  are silent regarding the interest of charity taker.

When a service is rendered by a charitable society, the society may charge for the service and there may be three situations:

Situation one is an obvious case of charity. Situation two may also be termed as charity. But questions arises regarding situation three as to whether it can be termed as charity? Regarding this third situation, even a school boy (He is possibly the worst sufferer of such provisions, as would be clear from the following discussions.) would instantly tell that it is not a charity. Still all income tax authorities have unanimously taken a view that it is also a charity if the profits are used for future charity. Herein lies the crux of the issue.

Charitable institutions have somehow convinced the legislator, all tax authorities and appellate authorities that they would continue to be charitable even if they charge for the services more than the cost; so long as they do not use the profit for themselves and spend the same for charitable purposes in future. One may find many schools registered as a charitable institution charging hefty fees and still claiming status of charitable institution on the plea that the profits would be utilized for the development of institution itself.

The question that arises in this situation are:

Whether an institution earning good profit for itself can be said to be a charitable institution?

Whether beneficiaries of such institution can say that they have got some charitable benefit when they are paying more than the cost?

Answer to both the questions would be negative. In other words, neither the institution can be called a charitable institution, nor the beneficiaries can be said to have received benefits of charity.

Very recently one assessing officer took cognizance of this situation in the case of a school which was earning good profit and still claiming charity. The AO held that if fee charged is more than the cost of service, there cannot be any charity and Honouble HC of Uttarakhand has upheld this view. CBDT then woke up and issued instructions to its officers all over the country to deny exemption to all such institutions. All such cases would now go in lengthy litigation involving a number of entities resulting in uncertainty for a number of years.

It is better that in addition to such instructions, a clarificatory amendment in the definition of charity be brought with retrospective effect on this point providing that rendering services at a price higher than the cost would not constitute charity. Then only, it can be said that the law has taken care of beneficiaries of the charity.