Section 2(15) of the Income-tax Act, 1961: Evolution, Judicial Exegesis and Contemporary Challenges

Section 2(15) of the Income-tax Act, 1961: Evolution, Judicial Exegesis and Contemporary Challenges

1. Introduction

Section 2(15) of the Income-tax Act, 1961 (“the Act”) defines the expression “charitable purpose.” Although merely definitional, the provision functions as the intellectual fulcrum of India’s regime of tax exemption for trusts, institutions and other entities engaged in public welfare. The legislative text, its subsequent amendments, and an extensive corpus of judicial decisions collectively delineate the boundaries between genuine charity and impermissible commerciality. The present article examines the statutory evolution of s. 2(15), analyses seminal judgments—from CIT v. Andhra Chamber of Commerce[2] to CIT v. Gujarat Maritime Board[5]—and evaluates contemporary issues engendered by the post-2008 provisos.

2. Legislative Trajectory of Section 2(15)

2.1 Original Text (1961–2008)

The original definition mirrored its predecessor under the 1922 Act, encompassing: (i) relief of the poor, (ii) education, (iii) medical relief, and (iv) “the advancement of any other object of general public utility not involving the carrying on of any activity for profit.” Importantly, the final limb incorporated an anti-commercial caveat, later interpreted through the “dominant purpose test.”

2.2 Finance Act 2008: The First Proviso

Concerned that numerous entities were exploiting the fourth limb while operating on commercial lines, Parliament inserted the first proviso whereby advancement of general public utility would cease to be charitable if it “involves the carrying on of any activity in the nature of trade, commerce or business… for a cess or fee or any other consideration”[7].

2.3 Subsequent Amendments

  • Finance Act 2015 introduced a quantitative test: receipts from such activities must not exceed 20 % of total receipts (now 20 % as amended in 2022) for the entity to retain charitable character.
  • Additional heads—yoga, preservation of environment, monuments, etc.—were codified, reflecting an expansive social vision[14].

3. Jurisprudential Development

3.1 Pre-1961 Common-Law Foundations

Early High Court jurisprudence—e.g., CIT v. Bar Council, Madras[11]—foreshadowed later themes by treating professional bodies as charitable where income was deployed for educational or public-interest purposes.

3.2 The Dominant Purpose Doctrine

CIT v. Andhra Chamber of Commerce[2] and Addl. CIT v. Surat Art Silk Cloth Manufacturers’ Association[3] crystallised the principle that incidental profit does not vitiate charity if the “dominant object” remains of general public utility. The Supreme Court rejected a literalist reading of the words “not involving the carrying on of any activity for profit,” holding that the statutory focus is on purpose, not method.

3.3 Institutional Bodies and Professional Regulators

In CIT v. Bar Council of Maharashtra[4], a statutory regulator was deemed charitable because its regulatory, disciplinary and educational functions advanced legal profession in the public interest. The judgment also clarified that simultaneous eligibility under s. 10(23A) does not foreclose relief under s. 11.

3.4 Statutory Authorities Providing Infrastructure: Gujarat Maritime Board

The 2007 decision in CIT v. Gujarat Maritime Board[5] is pivotal. After restriction of “local authority” in s. 10(20), the Board sought registration under s. 12A. The Court, relying on earlier jurisprudence, affirmed that development of minor ports constitutes an object of general public utility and that absence of profit motive—fortified by statutory obligation to reinvest surplus—entitled the Board to exemption under s. 11.

3.5 Associations of Traders and Clubs

High Courts have grappled with trade associations that charge fees for services (Indian Chamber of Commerce[12]; Ernakulam District Cement Dealers’ Association[14]). While some entities succeeded under the dominant purpose test, others failed where commerciality eclipsed public utility.

3.6 Post-2008 Proviso Litigation

The insertion of the 2008 proviso shifted the analytical lens from dominant purpose to the nature and scale of commercial activities. Cases such as Bihar State Text Book Publishing Corporation[6] and U.P. Awas Evam Vikas Parishad[24] illustrate this transition. Courts now scrutinise:

  • Whether the activity is intrinsically linked to the charitable object;
  • Whether receipts exceed the statutory threshold;
  • Whether separate books are maintained (s. 11(4A)).

4. Critical Analysis of Key Doctrines

4.1 Purpose v. Activity v. Receipts

The jurisprudence reveals three overlapping tests:

  1. Purpose-oriented (dominant purpose doctrine).
  2. Activity-oriented (2008 proviso focuses on “activity in the nature of trade, commerce or business”).
  3. Receipts-oriented (post-2015 quantitative limits).

The coexistence of these tests generates normative tension. A trust may satisfy the dominant purpose test yet fail the receipts test, leading to partial denial of exemption. Judicial pronouncements increasingly balance these vectors, applying a conjunctive approach.

4.2 Statutory Authorities and Compulsory Charges

Gujarat Maritime Board underscores that statutory bodies performing sovereign or infrastructural functions are unlikely to be tainted by commerciality, even though they collect fees. The Court distinguished between compulsory levies for public services and profit-oriented commerce.

4.3 Mutuality and Charity

Decisions such as Surat City Gymkhana[9] confirm that the doctrine of mutuality can coexist with charity; however, exemption under s. 11 is not automatic. Registration under s. 12A is a jurisdictional prerequisite, yet does not immunise subsequent assessments from scrutiny.

4.4 Inter-relationship with Other Provisions

  • Section 11(4A) demands separate books for business undertakings incidental to charity.
  • Section 13(1)(c) denies exemption where income enures to private benefit, reinforcing public-interest orientation.
  • Section 10(23C) offers parallel exemptions; harmony with s. 2(15) is essential to prevent arbitrage.

5. Contemporary Challenges

5.1 Quantitative Thresholds and Administrative Burden

The 20 % cap (earlier ₹10 lakh) compels large public utility institutions to segment activities or risk taxation. Critics argue this undermines economies of scale and disincentivises sustainable revenue models, especially for entities engaged in infrastructure or housing.

5.2 Regulatory Convergence with Goods and Services Tax (GST)

GST exemptions for charitable activities borrow concepts from s. 2(15), but definitional misalignment creates compliance complexity. Harmonisation is desirable.

5.3 Digital Economy and New Service Models

Charities increasingly leverage e-commerce platforms for fund-raising and program delivery. The line between incidental business and core charitable activity blurs, necessitating statutory clarification.

6. Conclusion

Section 2(15) has metamorphosed from a liberal, purpose-centric provision into a nuanced regime balancing public welfare with anti-tax-avoidance imperatives. The Supreme Court’s jurisprudence—anchored in the dominant purpose doctrine—continues to inform interpretation, yet legislative amendments have superimposed quantitative and activity-based filters. Going forward, coherent integration of these tests, coupled with administrative clarity, is essential to safeguard bona fide charities while curbing misuse.

Footnotes

  1. Income-tax Act, 1961, s. 2(15).
  2. Commissioner of Income-tax, Madras v. Andhra Chamber of Commerce, AIR 1965 SC 1281.
  3. Additional CIT v. Surat Art Silk Cloth Manufacturers’ Association, (1980) 2 SCC 31.
  4. CIT v. Bar Council of Maharashtra, (1981) 3 SCC 308.
  5. CIT v. Gujarat Maritime Board, (2007) 14 SCC 704.
  6. Bihar State Text Book Publishing Corporation v. CIT, Patna HC, 2011.
  7. CBDT Circular No. 11/2008, dated 19-12-2008.
  8. Finance Act 2015, s. 2, inserting second proviso to s. 2(15).
  9. Assistant CIT v. Surat City Gymkhana, (2008) 14 SCC 169.
  10. Dharmadeepti v. CIT, (1978) 3 SCC 499.
  11. CIT v. Bar Council, Madras, 1942 SCC OnLine Mad 361.
  12. CIT v. Indian Chamber of Commerce, 1970 SCC OnLine Cal 107.
  13. CIT v. Ernakulam District Cement Dealers Association, 2001 SCC OnLine Ker 591.
  14. Finance Act 2015 & Finance Act 2022 amendments inserting yoga and revising thresholds.
  15. Astt. CIT (Exemption) v. U.P. Awas Evam Vikas Parishad, ITAT Lucknow, 2022.