Income Tax 2025

Appearance

Restriction on commercial activities by registered non-profit organisation, carrying out advancement of any other object of general public utility. ​

346 ​

No registered non-profit organisation, carrying out advancement of any other object of general public utility, shall carry out any commercial activity unless,—

  • (a) such commercial activity is undertaken in the course of actual carrying out of advancement of any object of the general public utility;
  • (b) the aggregate receipts from such commercial activity or activities do not exceed 20% of the total receipts of such registered non-profit organisation of the relevant tax year; and
  • (c) separate books of account are maintained by such registered non-profit organisation for such activities.
Explanation

Section Summary: ​

Section 346 of the new income tax law imposes restrictions on registered non-profit organizations (NPOs) that are involved in the advancement of any object of general public utility. The section limits their ability to engage in commercial activities unless specific conditions are met. This is aimed at ensuring that NPOs primarily focus on their charitable or public utility objectives rather than commercial pursuits.

Key Changes: ​

  1. New Restrictions on Commercial Activities: Previously, NPOs could engage in commercial activities more freely, provided they used the profits for their charitable objectives. The new law introduces stricter conditions under which such activities are permitted.
  2. 20% Threshold: A new cap is introduced, limiting the aggregate receipts from commercial activities to 20% of the total receipts of the NPO in a given tax year.
  3. Separate Books of Account: NPOs must now maintain separate books of account for their commercial activities, which was not explicitly mandated earlier.

Practical Implications: ​

  1. For NPOs: NPOs involved in general public utility activities must now carefully monitor their commercial activities to ensure they do not exceed the 20% threshold of total receipts. They must also maintain separate accounting records for these activities.
  2. Compliance Burden: The requirement to maintain separate books of account increases the administrative burden on NPOs, especially smaller ones with limited resources.
  3. Risk of Losing Tax Exemptions: If an NPO fails to comply with these conditions, it risks losing its tax-exempt status under Section 12A or 12AA of the Income Tax Act.

Critical Concepts: ​

  1. Object of General Public Utility: This refers to activities that benefit the public at large, such as education, healthcare, or environmental conservation. It does not include activities that benefit a specific group or individuals.
  2. Commercial Activity: Any activity undertaken with the intent to generate revenue, such as selling goods or services, is considered commercial. However, if such activity is incidental to the NPO’s primary objectives, it may still qualify under the conditions outlined.
  3. Aggregate Receipts: This refers to the total income generated from all commercial activities combined, not just individual activities.

Compliance Steps: ​

  1. Monitor Receipts: NPOs must track their total receipts and ensure that receipts from commercial activities do not exceed 20% of the total.
  2. Maintain Separate Books: NPOs must establish and maintain separate accounting records for all commercial activities.
  3. Review Activities: Regularly review the nature of activities to ensure they align with the organization’s primary objectives and comply with the conditions outlined in Section 346.

Examples: ​

  1. Scenario 1: An NPO focused on environmental conservation organizes a paid workshop on sustainable living. The fees collected from the workshop are considered commercial activity. If the total receipts from such workshops and other commercial activities exceed 20% of the NPO’s total receipts, the NPO must either reduce its commercial activities or risk non-compliance.
  2. Scenario 2: A healthcare NPO runs a diagnostic lab to support its charitable hospital. The lab generates revenue, but since it is directly related to the NPO’s primary objective and the receipts are within the 20% limit, it complies with Section 346.

By adhering to these conditions, NPOs can continue to engage in limited commercial activities without jeopardizing their tax-exempt status.