A major departure of the proposed draft of the Direct Taxes Code from that of the Income TaxAct, 1961, is with regard to religious institution. The existing Income Tax Act describes both charitable and religious purposes as two mutually exclusive objects and so organisations with charitable purposes are different from that for religious purposes. For example, the headline of Section 11 of the Act reads: “Income from properties held for charitable or religious purposes.” In other words an organisation may be religious without being charitable, as such. Such mutual exclusiveness has been hit by the wordings of the draft of the Direct Taxes Code as available on public domain.
Section 90(3) of the Direct Taxes Code draft uses the word “non-profit organisation, being a public religious trust or institution.” The same expression has been used in the Seventh Schedule (insertion number 39). In other words, now every religious trust or institution shall primarily be a non-profit organisation, as defined in the Code. The expression “non-profit organisation” in the code has been used in the same meaning as the expression “trust for charitable purposes” [e.g. Section 12(1) or Section 13 (1) (d)] of the existing Income Tax Act.
Thus, under the proposed Code, for an organisation to be religious it should first be charitable. Obviously every religious organisation seeking tax benefit must be ‘charitable’ and ‘non-profit’in nature in the literal sense. But the problem with any statute is that words are not merely used strictly in their literal meaning. Words that are defined have their own specific meaning that may or may not be in accordance with their literal meanings.
Similar is the case with the Direct Taxes Code. Both the expressions “non-profit organisation” and “non-profit organisation, being a public religious trust or institution” have been defined therein. Now, as discussed above, the former organisation encompasses the latter. Hence, for a religious institution to get tax benefit all the qualifications described in these two definitions must be in existence.
Non-profit organisation has been defined in Section 314 (169) under Chapter XVI. The definition reads: “non-profit organisation means an organisation, by whatever name called,including a trust, if—(i) it is not established for the benefit of any particular caste or religious community; (ii) it does not provide any benefit for the members of any particular caste or religious community; (iii) it is established for the benefit of the general public or for the benefit of the Scheduled Castes, the Scheduled Tribes, backward classes, women or children; (iv) it is established for carrying on charitable activities; (v) it is not established for the benefit of any of its members; (vi) it actually carries on the charitable activities during the financial year; (vii) the actual beneficiaries of its activities are the general public, the Scheduled Castes, the Scheduled Tribes, backward classes, or women or children; and (viii) it is registered as such under Section 98.”
A noteworthy feature of the draft code is that application for registration under Section 98 shall be filed before the concerned Commissioner of Income Tax Act by a “non-profit organisation” and no mention of the other type namely “non-profit organisation, being a public religious trust or institution” has been mentioned in Section 98. It is understandable because the Direct Taxes Code treats the latter merely as an offshoot of the former.
The concerned Commissioner of Income Tax may deny application for registration of a religious entity under Section 98 of the Codeon the ground that it is established for the benefit of any particular caste or religious community or it provides any benefit for the members of any particular caste or religious community or it is not established for the benefit of the general public. These may be enough grounds for denial. Similarly, an assessing officer may deny tax benefits to existing religious institutions formed under the Income Tax Act on any or many of these grounds.
The existing Income Tax Act has not defined religious activity while charitable purpose is defined. The Direct Tax Code has gone one step ahead and qualified religious institutions. The Seventh Schedule of the Code describes persons, entity or funds not liable to income tax. Insertion 39 of the Schedule describes that tax benefit to any non-profit organisation, being a public religious trust or institution will be available, if—(a) it is registered under Section 98 of this Code; (b) it is registered under a State Act, if any; (c) it applies its income wholly for public religious purposes; (d) it is established for the benefit of the general public; (e) it maintains books of account and obtains an audit report from an accountant if its gross receipts in any financial year exceed five lakh rupees; (f) its funds or assets are invested or held, at any time during the financial year in the modes specified in Section 95; and (g) its funds or assets are not used or applied or deemed to have been used or applied, directly or indirectly, for the benefit of any interested person.
The stated objective of Direct Taxes Code is to simplify the cumbersome provisions of the existing Income Tax Act and ease out problems being faced by the assesses so that tax compliance may become smooth and blemish-free. The provisions that make compliance complicated and are potential sources of disputes should be done away with. These are irritants. The object should not be to deny benefits already available. The mentioned fallacy in the proposed draft of the Code should be addressed before it is tabled in the Parliament for discussion. It can simply be done by maintaining the exclusiveness between charitable and religious institutions as available in the existing tax law. Denying tax benefits to genuine religious activity should not be intended.