Supreme Court interprets the scope of ”general public utility” for claiming tax exemption for charitable institutions

This Tax Alert summarizes a three-judge bench Supreme Court (SC) ruling, dated 19 October 2022, in a batch of appeals with Ahmedabad Urban Development Authority^[1]  as the lead case (Taxpayers). The issues adjudicated by the SC are related to determining the scope of the phrase “general public utility” (GPU) in the definition of “charitable purposes” and rejection of claim for tax exemption as charitable institutions under the Income Tax Laws (ITL), primarily on the grounds that the institutions were carrying on trade, commerce or business for consideration, which does not qualify as GPU under the provisions of the ITL as amended by Finance Act (FA), 2008 read with subsequent amendments. 

Before the SC, while most of the entities and activities involved in the appeal qualified as GPUs within the meaning of the term “charitable purposes”, debate surrounded the meaning of “fee cess or other consideration” and its impact on construing whether the activity answers to the description of “trade, commerce or business”. 

The SC held that where “fee, cess or other consideration” is statutorily fixed or where it represents recoupment of cost or cost with nominal mark up, the activity may not be construed as “trade, commerce or business” and will be excluded from the mischief of commercial activity under the amended provision. If, however, “fee, cess or other consideration” charged is substantially higher over cost, it is tainted with “trade, commerce or business” and will qualify for tax exemption only if receipts are within the quantitative limit prescribed by the amended provision.

By applying the above principles and examining the overall facts and purpose of the Taxpayers from varied fields/industries (e.g., statutory bodies, trade promotion bodies, private trusts, sports associations etc.) in the appeal, the SC adjudicated on the claim of tax exemption in each case. 

 [1] TS-814-SC-2022