A division bench of the Kerala High Court has held that the sub-contracts received by the assessee-trust from either State Govts or intermediaries to supply food to poor does not amount to any ‘charitable activity’ and therefore, the tax benefits under the provisions of the Income Tax Act, would not be available.
The assessee, a charitable Trust participated in Social Welfare Schemes of various State Governments and thus carries on work of distribution of food in various Schools. The assessee’s work is also involved in other States and not in the State of Kerala.
The assessee claimed that such State Governments identify charitable institutions for the purpose of implementing Welfare Schemes and spends the money for the Scheme of distribution of food to various schools. The assessee is said to have carried out the work on such entrustment made by another charitable institution, one M/s Naandi Foundation. The amounts paid by M/s Naandi Foundation to the assessee were also subjected to tax deduction at source.
The Revenue found the above activity as not charitable in nature and cancelled the registration under Section 12AA of the Income Tax Act.
The bench comprising Justices K Vinod Chandran and Ashok Menon noted that the specific case of the assessee is that it implements welfare schemes of other State Governments, with the funds supplied by the State Governments through another Trust, as per a contract awarded for the implementation.
“Definitely, there cannot be any requirement that charitable activities should be from self-generated funds because charitable institutions rely on donations, endowments and other contributions from philanthropic people and institutions to carry out such work. However, when a particular institution, as in the above case, is involved in the implementation of welfare schemes of the Government, we cannot find any charity in that. The mere assertion that there is no profit motive will not suffice especially when for implementing the schemes the assessee takes money from the State Government or the intermediary. The further contention that surplus is applied in the deficit of other program is a perfect ground for claiming business expenditure, but not to get a registration as a charitable institution,” the bench said.
“The sub-contract of the assessee cannot be considered to be a charitable activity, especially since the supply of food is with the funds of the State Government, received by the assessee as contract amounts. The activity of the assessee confined to such sub-contracts cannot be deemed to be a charitable activity and hence the Trust is not entitled to registration under Section 12AA,” the bench added.
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