Normal and substantial profits – A new yardstick for charitable purpose

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The Supreme Court’s landmark judgment in Ahmedabad Urban Development Authority laid down new law on claim of tax exemptions by charitable entities engaged in activities of General Public Utility (i.e., GPU) and deriving incidental business income. This judgment overruled the earlier “predominant object test” set by the Supreme Court in Surat Art Silk ruling for checking the eligibility for claiming exemption under section 11 of the Income-tax Act, 1961. The Supreme Court has analyzed section 2(15) of the Income-tax Act, 1961, and replaced the old test of a predominant object with a new test i.e., nominal vs. substantial profits. The Court essentially held that the GPU entity earning nominal profits will not be debarred from claiming exemption on its incidental business income. However, a GPU entity earning substantial profits can claim exemption only if the prescribed threshold (i.e., business receipts not exceeding 20% of the total receipts of such entity) is adhered to.
The authors through this podcast have analyzed the key findings of the judgment and the ramifications it may have on the GPU entities going forward.
Audio Source: An article published on the LKS website in December 2022
Normal and substantial profits – A new yardstick for charitable purpose | Lakshmikumaran & Sridharan Attorneys (lakshmisri.com)
Authors: Prachi Bhardwaj, Associate LKS) and Sanjhi Agarwal Associate (LKS)