The other protagonist in the brewing court tussle involves Iskcon — one of the largest trusts known for its 'Hare Krishna Movement' — whose earnings from 'Govinda', a popular vegetarian restaurant chain, has come under the Income-Tax Department's glare.
For the taxman, Govinda is a pure commercial activity, but for Iskcon, inculcating vegetarian food habits is nothing but charity that should be free from taxation. Moreover, a major portion of Govinda's income is donated to charity, which publishes brochures and booklets for the promotion of vegetarianism.
But the tax office thinks otherwise. According to the I-T Department, the restaurant's activities and source of income clearly fall under the definition of "business".
Last year, the Appellate Tribunal, a quasi-judicial authority, had dismissed the stand taken by the department, which then approached the high court to argue its point. A tax professional familiar with the case said the hearing for admission of the department's plea is expected to come up "any time now".
"If the court admits the petition, it will be a landmark case. All the more because the definition of 'charitable purpose' has been widened from the start of assessment year 2009-10," said Arvind Dalal, a senior chartered accountant and an authority on trust matters. Indeed, the language of the law is such that many other establishments that are not religious or charity trusts have caught the tax department's attention. For instance, a posh club in Mumbai's Bandra suburb and a leading chamber of commerce have received tax scrutiny notices.
They will have to explain why they should not be taxed on their collection of huge fees and earnings from services provided to members.
According to an official of one of the chambers that has received a tax notice, earnings of an industry association are out of issuance of certificate of origins to its members, which is a statutory activity and, therefore, should not be taxed. Cases like these would also eventually come up in tribunals and boil over to courts.
But many feel that the tax department may be slowly walking into a touchy territory with its interpretation of the law and subsequent decision to make tax demands on activities of religious trusts. "There are trusts which are essentially religious in nature but have earnings which are not pure anonymous donations.
One can ponder how will tax authorities view the earnings of a temple trust that has sizeable income from selling hairs of devotees who have their heads tonsured... One has to wait to find out how far the department will go given the public sentiment and sensitivity around religion," said Anup Shah, partner at Mumbai based chartered accountancy firm Pravin P Shah & Company.
How has the law changed?
Charitable trust, till recently, included activities like relief to the poor, education, medical relief and the 'advancement of any other object of general public utility'. In a circular dated December 19, 2008, the fourth limb of the definition was tweaked to say an activity would cease to be a charity — and, therefore, has to pay tax — if it carried on any activity "in the nature of trade, commerce or business", or "any activity of rendering any service in relation to any trade commerce or business" for a cess, or fee, or any other consideration. While the particular dispute with Iskcon pertains to financial year 2007-08, the income of the trust-run vegetarian restaurant in subsequent years may be taken up by the department.
There are other cases that will also test the tax department's contention on matters related to charitable trusts. ET, in its edition dated November 11, 2012, had reported that the I-T Department told Shiv Mandir Devsttan Panch Committee Sanstan — a temple trust in Nagpur — that it carried out 'religious activities' and spent money for maintenance of temples; here, the tax authority argued that anyone making a donation will enjoy a tax deduction — in other words, the person's taxable income would be lower — only if the institution receiving the donation is into 'charitable activities', and was not working for the benefit of any particular religious community or caste.
In fact, other than certain simple structures, many trusts will find themselves having to deal with the tax department, feels Dalal. "For example, an activity like an endowment trust using its interest income to give out scholarship to needy students will be exempted is a fairly straight forward case and will be spared on tax. But, not all trusts....the problem is that in the process some genuine charitable activities may also attract the tax department's attention," he said. There will be grey areas and tax officers have the powers to decide whether an activity is business.
The government has made it adequately clear that whether an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided "based on the nature, scope, extent and frequency of the activity".