(2022) 449 ITR 1 (SC)
Restriction on commercial activities by NPOs pursuing general public utility objects; interpretations
A GPU charity may charge fees and generate surplus, but only where the activity is undertaken in the actual course of advancing its object and the receipts stay within the statutory quantitative ceiling. Charging a markedly higher-than-cost price indicates business.
When does a charity pursuing an object of general public utility cross into 'trade, commerce or business' and lose its exemption?
The Supreme Court heard a very large batch of appeals, grouped by the character of the assessee. The groups comprised statutory development authorities and improvement trusts constituted under state town planning legislation; statutory regulators such as bodies governing professions and certification; trade promotion councils and export promotion bodies; non-statutory organisations such as chambers of commerce; and private trusts running activities incidentally yielding receipts. Each had been denied exemption, or had it questioned, on the footing that its fee income or sale proceeds meant it was engaged in trade, commerce or business and so fell foul of the proviso to the definition of charitable purpose.
The appeals came from several High Courts which had reached divergent conclusions on the scope of the proviso introduced in 2008 and amended thereafter. The Court took the opportunity to restate the law comprehensively and to lay down tests applicable across the categories before it.
For the assessee
The bodies existed to discharge public functions or advance public objects, and any receipts were incidental to that purpose and applied back to it. Recovering cost, or even a modest margin required for viability, does not convert a public object into a trade. Statutory authorities in particular act under compulsion of statute and have no profit motive.
For the Revenue
The proviso is plain: where a GPU body carries on any activity in the nature of trade, commerce or business, or renders services in relation thereto for a fee, the purpose ceases to be charitable, irrespective of the application of income. The quantitative relaxation is the only concession, and once receipts cross it, exemption is lost for that year.
Chief Justice Chandrachud's judgment restated the law across the categories. The Court held that the proviso does not bar a GPU charity from receiving consideration; what matters is whether the activity is essentially charitable with cost recovery, or is in truth a business. The governing test has two limbs: the activity must be undertaken in the actual course of achieving the GPU object, and the receipts from it must not exceed the quantitative limit prescribed. On the categories, the Court held that statutory corporations, boards and authorities discharging essential public functions on a cost basis, without a profit motive and with their surpluses committed by statute to public purposes, are generally not carrying on business, even though they charge for services. Regulators performing statutory functions stand similarly. Trade promotion bodies and chambers rendering services for fees are, by contrast, within the proviso and must satisfy the quantitative limit, which is to be tested year by year rather than once and for all. The Court emphasised that charging significantly above cost is a strong indicator of business, and that the enquiry is fact-specific; it therefore remitted a number of matters for application of the tests it had laid down, and directed that its interpretation operate prospectively so as not to unsettle concluded assessments.
This is the leading authority on the commercial-activity restriction, which the IT Act 2025 now codifies in Section 346, with the interpretive provisions in Section 355. Any advice on whether a GPU organisation's receipts jeopardise its registration starts here. Note that the Court's year-by-year approach means annual monitoring of the receipts ratio is now a compliance necessity, not merely a planning point.