Charitable Institutions Not Disqualified From Tax Exemption Merely For Collecting Service Charges: Punjab & Haryana HC

The Punjab and Haryana High Court has held that collecting service charges or generating a surplus does not, by itself, make the activities of a charitable institution commercial or disentitle it from income tax exemption under Section 11 of the Income Tax Act, 1961.

Authorities must examine whether charges collected for activities advancing an object of general public utility are on a cost basis, nominally above cost or significantly higher than the cost of providing the services, and whether the applicable monetary threshold is exceeded.

A Division Bench of Justice Deepak Sibal and Justice Sunish Bindlish observed that the relevant consideration is whether the charges collected by an institution are proportionate to the cost of providing services or are markedly or significantly above such cost.

The Court observed:

"The proviso does not say that an institution ceases to be charitable the moment it receives a fee; equally, the fact that a public utility is run on a self-sustaining basis does not by itself exclude the proviso. The answer lies in the basis and quantum of the charge, which is essentially a matter of factual determination on the record of the relevant year."

The case concerned Sukhmani Society for Citizen Services, Kapurthala, which operates Sukhmani/SUWIDHA Centres providing various government services, including birth and death certificates, ration cards, passports and other citizen services through a single-window system.

The Income Tax Department denied the Society exemption under Section 11 on the ground that it was collecting service charges over and above the statutory fees and generating surplus income. The authorities treated these activities as commercial in nature under Section 2(15) of the Act. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld the denial of exemption.

The High Court, however, found that the authorities had failed to examine whether the service charges collected by the Society were on a cost basis or significantly above the actual cost of operating the centres and providing individual services.

Relying on the Supreme Court's decision in Assistant Commissioner of Income Tax (Exemptions) v. Ahmedabad Urban Development Authority, the Court held that charging fees for activities advancing an object of general public utility would not, by itself, amount to carrying on business. Charges on a cost basis or nominally above cost would not attract the first proviso to Section 2(15). However, charges markedly or significantly above the cost incurred could attract the proviso, subject to the applicable monetary threshold for receipts from such activities.

For Assessment Year 2010-11, the applicable threshold under the second proviso to Section 2(15) was ₹10 lakh.

The Bench further observed that the existence of surplus income alone cannot establish a profit motive. The authorities must examine the actual nature of the activities and compare the charges collected with the cost incurred in providing the services. This examination must be undertaken separately for each assessment year.

The Court clarified that Section 12AA registration does not guarantee exemption under Section 11, which must be assessed separately for each year. It set aside the orders denying exemption and remanded the matter to the Assessing Officer, directing a fresh decision within three months after hearing the Society.

The court also directed that the penalty of ₹1,16,420 should not be enforced. If exemption is ultimately granted, the penalty will not survive and any amount recovered must be refunded in accordance with law.

For Appellant: Advocate Gaurav Dhall.

For Income Tax Department: Senior Standing Counsel Varun Issar, Advocate Pridhi Sandhu and Junior Standing Counsel Nikita Garg.