Charitably liberal

There is no exact line of demarcation between religion and charity. Section 11 of the Income-Tax Act, however, gives blanket exemption in respect of income from property held under trust meant wholly for charitable or religious purposes. If the statute had used the expression ‘and’ in place of ‘or’, much of confusion in the last five decades relating to taxation of charitable and religious institutions would not have arisen.
Whether the expression was used deliberately or by oversight could not be stated with definiteness. Partly charitable
Section 11(1)(b) says that property held by a trust established before the commencement of the I-T Act, 1961 meant partly for charitable or religious purposes is also eligible for exemption. By this it is implicit that a trust ‘partly’ meant for charitable/religious purposes could not get tax exemption if it was created after the enactment of the statute.
Section 11(1)(a) provides exemption to only wholly religious or wholly charitable institutions and it is explicit because, it was presumed so by the public at large.
In Calicut Islamic Cultural Society vs Assistant CIT (2009 28 SOT 148 Cochin), the tribunal decided a case where the trust had mixed both charitable and religious objects in one entity. The trust was established to develop and manage madrassas, mosques, etc., being religious in nature and also had the objective of running schools, hospitals, etc., being charitable in character. The assessing officer (AO) denied the exemption since the activities of charity and religion were mixed up in the trust. The CIT (Appeals) also approved the stand of the AO.
The taxpayer contended that expenditure on maintenance of mosques did not affect its dominant and multifarious activities and even if maintenance of mosque is taken as not charitable it is ancillary or incidental to the primary and dominant objects of the trust.
Also, it was contended that the expression ‘in part’ appearing in Section 11(1)(b) does not refer to an aliquot part and it should be understood to apply to cases enabling the trustees to utilise funds for non-charitable purposes.
The tribunal held that once the registration is granted by the Commissioner, the AO cannot probe the objects and purposes of the trust which fall in the exclusive domain and jurisdiction of the Commissioner by following the precedent in the Assistant CIT vs Surat City Gymkhana (2008 300 ITR 214 SC). The tribunal disapproved the act of the AO who had gone into investigating and probing the basic objects of the trust.
A precedent as regards eligibility for tax exemption in the case of partly religious and partly charitable trust could be found in Ghulam Mohidin Trust vs CIT (2001 248 ITR 587 J&K). In this case, the objectives of the trust were partly charitable and religious, and gave absolute discretion to the trustees to apply the income of the trust. No definite portion of income was allocated to charitable purposes. The court hence held that since the trust was partly charitable and partly religious — it was not eligible for tax exemption.
Distinction
While deciding Calicut Isalmic Cultural Society case, the tribunal distinguished the High Court decision and held that the benefits of the trust were open to all without restriction to particular religious faith or community.
Whereas in the Ghulam Mohidin Trust case absolute discretion was given to the trustees for application of income, and the trust was intended to promote science and technology and Muslim theology among Muslim intelligentsia.
By drawing this distinction, the tribunal held that a single entity having mixed both religious and charitable activities could still be eligible for tax exemption prescribed in Section 11.
Since the dividing line between charity and religion is so thin and is quite often blurred, the decision of the tribunal and its liberal interpretation opens a new area of controversy notwithstanding it is beneficial to taxpayers. The law makers have to take note of this novel interpretation while drafting or rewriting the legal provisions, to reduce streams of cases coming up for adjudication.