INTRODUCTION

01 There is a certain amount of confusion with regard to business and profit oriented activities of a Voluntary Organisation. Business activities may be undertaken as long as they are incidental to the main objects of the organisation, provided the profit generated are not otherwise distributed.

CHARITABLE PURPOSE

02 Section 2(15) of the Income Tax Act defines the term charitable purpose as under :

The expression “Charitable Purpose” includes the following :

          - Relief of the poor
          - Education
          - Medical Relief
          - The advancement of any other object of general public utility.

03 It may be noted that this definition was amended in 1984 and the word “Not involving the carrying on of any activity for profit” was deleted. This was a clearcut indication of allowing profit oriented activities as a part of Charitable Purpose.

04 In the Finance Act 2008, the definition has been 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 of any activity in the nature of trade, commerce or business or any activity of rendering any services in relation to any trade commerce or business, for a fee or cess or any other consideration, irrespective of the nature of use or application or the retention, of the income from such activity.”

05 Similarly Section 11(4A) was inserted to categorically allow profit oriented business activity as long as they were incidental to the attainment of the objectives.

OTHER ASPECTS

06 Sometimes a business undertaking may itself be held by a Voluntary Organisation, or a Trust for charitable purposes. For example, an NGO receives as donation, the rights of distribution of a film and the profit is to be utilised for charitable purposes. In such a case though the business activity is not incidental to the attainment of the objects of the organisation still the profits would be exempted from tax.

07 Existence of profit need not necessarily be deemed as business activity. A Voluntary Organisation can have activities which generate profit without engaging in business. For instance income from letting out Hall, Dharmasala’s and other infrastructure are not considered as business activities.

08 It may so happen that the business is partially considered to be for the attainment of the obejcts of the Voluntary Organisation. Under such circumstances only such proportion of profit which relates to the attainment of the object will be exempted. It has been clarified vide CBDT circular, that on organisation is not debarred from doing business which are not incidental to the attainment of the objectives, but income from such business will not be exempted. It is not advisable to engage in business activities only for the sake of profits without having any relevance with the objects of the organisation.

09 The Finance Act, 2008 w.e.f. 1-4-2009 has amended the definition of 'charitable purpose' under section 2(15) which may have far reaching ramifications, for voluntary organisations.

Sec. 2(15) of the Income Tax Act, 1961 provides the definition of charitable purpose. This section was amended in the Finance Act, 2008 by the Government of India. As the amended Sec.2(15) has great implication on the business activities carried out by an organisation, FMSF has brought out an e-communique, "Standards & NORMS" on this aspect and the link of which is http://fmsfindia.org/fmsf/pdf/st-norms.pdf

In December, 2008 the Central Board of Direct Taxes (CBDT) had brought out a Circular dated 19.12.2008 and the provisions of this Circular were included and a subsequent e-communique issue no. 6 was brought. The link of which is http://fmsfindia.org/fmsf/pdf/2009/s&n-ls-v1-i6.pdf

10 The Finance Bill 2009 has sought to bring a change in the definition of ‘Charitable Purpose’ defined under section 2(15) to include three new limbs which include:

- Preservation of environment (including watersheds, forests and wildlife)
- Preservation of monuments or places or objects of artistic interest
- Preservation of monuments or places or objects of historic interest

For further details please log on to our Website www.fmsfindia.org and look for e-communique Vol 2; for Issue 2 of Standards & NORMS. Standards & NORMS is an initiative by FMSF to support NGOs on Governance, Accounting and Regulations.