Advancement of GPU cannot be interpreted as ‘Charitable Purposes’ If Done as Business, No Income Tax Exemption: Supreme Court [Read Judgment]

The Supreme Court of India, observed that “Charitable Purposes” under Section 2(15) of the Income Tax Act, 1961 does not include advancement of General Public Utility(GPU) done as business and held that no income tax exemption can be claimed on the same.

The 3 Judge Division Bench led by Chief Justice of India Uday Umesh Lalit and comprising Justice S Ravindra Bhat and Justice P S Narasimha, heard the appeals of Revenue against Ahmedabad Urban Development Authority and Others.

In this significant ruling, it was clarified that, “an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration.” It was also pointed out that, the assessee can engage in incidental trade or business or provide services for consideration and generation of profits in the course of carrying out the General Public Utility or GPU and Incidental activities as such resulting in receipts generated can be exempted from income tax.

The receipts from such businesses, activities or services in relation to said GPUs shall not be more than 20% of the total receipts of previous year, as per the clarification provided in the judgment.

It was explained that, “Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental.”

It was also observed that, the requirement in Section 11(4A) of the Income Tax Act, 1961; maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached.

Similarly, the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) of the Income Tax Act,1961; (all w.e.f. 01.04.2009), was said to reaffirm this interpretation and bring uniformity across the statutory provisions, according to the observations of the Bench.

It was also added by the Apex Court that if the quantum of such profits do not exceed 20% of overall receipts, the prohibition against carrying on of business or service related to business for achieving a General Public Utility object by the charity shall not be attracted, even though a marginal markup over cost or some profit is derived.

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