2019 (7) TMI 1448 - HC - Income Tax

Court affirms charitable nature despite management fees under Income Tax Act

The High Court upheld the ITAT's decision, ruling that charging management fees did not alter the charitable nature of the Assessee's activities under ... Charitable activity u/s 2(15) - exemption u/s 11 - whether activity of the Assessee did not cease to be a ‘charitable activity’ for the purposes of Section 2(15) because the Assessee charged a ‘management fee’ for defraying its administrative expenses? - HELD THAT:- In the impugned order the ITAT has noticed that the Assessee is a company registered under Section 25 of the Companies Act. It gives 85% of the donation received by it to the Government of India for HIV Aids and only 15% of its total donation is given to other societies for awareness and treatment of poor HIV Patients. The entire amount spent by the Assessee is through societies and trusts. It also runs its own project for the welfare of HIV and AIDS patients. In the above circumstances it has been held that merely because the Assessee charges management fees to defray the administrative costs it would not make its essential activity a business activity. The Court is unable to find any legal infirmity in the impugned order of the ITAT. No substantial question of law arises. Issues:1. Interpretation of Section 2(15) of the Income Tax Act, 1961 regarding 'charitable activity' and 'management fee'.Analysis:The High Court of Delhi heard an appeal filed by the Revenue against the ITAT's order for the Assessment Year 2010-11. The main issue raised was whether the ITAT was correct in holding that the Assessee's activity did not cease to be a 'charitable activity' under Section 2(15) of the Income Tax Act, 1961, despite charging a 'management fee' for administrative expenses. The ITAT noted that the Assessee, a company registered under Section 25 of the Companies Act, allocated 85% of donations to the Government of India for HIV Aids and 15% to other societies for HIV patient treatment. The Assessee's expenses were incurred through societies and trusts, and it also had projects for HIV and AIDS patient welfare. The ITAT concluded that charging management fees did not change the essential charitable nature of the Assessee's activities.The High Court upheld the ITAT's decision, finding no legal flaw in its order. It stated that no substantial question of law arose from the case, leading to the dismissal of the appeal by the Revenue. The judgment emphasizes that the mere charging of management fees by the Assessee to cover administrative costs did not transform its core charitable activities into business activities. The Court's ruling affirms the interpretation of Section 2(15) in the context of charitable activities and the permissible expenses related to such activities, providing clarity on the tax treatment of organizations engaged in charitable work while recovering administrative costs through fees.