Supreme Court ruled that charitable organizations whose activities make ‘profits’ cannot claim tax exemption
Last month, the Supreme Court pronounced a landmark judgement after hearing two key issues relating to charitable organizations (a) scope of the expression “general public utility” and (b) scope of exemption to educational institutions claiming tax exemption as charitable institutions.
The word charitable purpose is defined in Section 2(15) of Income Tax Act which includes among other “advancement of any other object of public utility”. It was noted that many organizations doing trade/commerce used this residuary clause of Section 2(15) to gain exemptions for profits from such trade/commerce since the meaning was ambiguous. The Supreme Court clarified that if profit or margin is earned from such trade/commerce activity, it will not be considered as charitable.
On educational institutions, the Supreme Court clarified that the object of such institutions must be “wholly solely, and exclusively” for the purpose of education. In case where activities of such institutions are profit oriented, the benefits of Section 10(23C) would not be extended to such institutions.
The above judgements means that institutions with general public utility as their object which is the residuary object under Section 2(15) and educational institutions approved under Section 10(23C) ensure that income from activities cover cost/marginal cost and does not generate profit to be considered charitable under the law.