QUESTION: We have not been filing tax audit report for charitable institutions providing education or medical relief charging fees from those who can afford them, even where the aggregate receipts exceed Rs. 40- 60 lakh, since in our view, Sec. 44AB would have no application in such cases. We find that is also the personal view of the columnist in Business Line dated August 29, 2010. We would like to confirm this position of law especially since a doubt has been raised.
ANSWER: Sec. 44AB prescribing tax audit report falls under Chapter IV-D dealing with computation of profits and gains of business or profession. The fact that some charge is levied or differential rates are charged depending upon the means of the beneficiaries does not dilute the philanthropic activity of public trusts and institutions, even when there is cross-subsidisation of such services.
Levy of charge from affluent or affordable patients even where it is at market rate does not vitiate the charitable character of the activity for others as long as the activity is not prompted by profit motive. It was so decided by the Supreme Court under an analogous enactment in P. C. Raja Ratnam Institution v Municipal Corporation of Delhi (1980) 181 ITR 354 (SC) and in the case of a hospital for income-tax purposes in CIT v Pulickal Medical Foundation (P) Ltd. (1995) 211 ITR 587 (Ker) and Breach Candy Hospital Trust v Chief CIT (2010) 322 ITR 246 (Bom) . Hence what is charged during the course of a philanthropic activity does not necessarily mean that such activity constitutes business.
In fact, even business, where it is incidental to the objects of poor relief, education and medical relief is not impermissible as specifically provided under Sec. 11(4A) of the Act.
Even in such a case, where business is inferable, but is exempt, the need for computation of income from business, so as to require tax audit report under Sec. 44AB, would not arise, because it is settled law that the income of a charitable institution is not required to be computed head-wise according to the provisions of the statute. What is exempt is income ascertained under ordinary principles of accounting as was pointed out in a number of decisions of the High Courts and by the decisions of the Supreme Court in Addl. CIT v A.L.N. Rao Charitable Trust (1995) 216 ITR 697 (SC) and CIT v Programme for Community Organisation (2001) 248 ITR 1 (SC) . Board Circular No.5P dated June 19, 1968, has also conceded this position of law, when it pointed out that it is only the total income specifically defined under Sec. 2(45) of the Act is required to be computed “in the manner laid down by this Act”, while the word “income”, under Sec. 2(24) for purposes of Sec. 11 does not so require. It, therefore, follows that even where there is business income, but is exempt, there is no need for any apprehension in not having filed tax audit report in the case of trusts and institutions eligible for exemption.
