Taxes have been aptly described as a collection of social fees by a public authority under law. The Government authorities appropriate this social fee for the progress and development of our society and to aid marginalized populations. The main function of a modern welfare state is to provide avenues for the growth and development of all citizens and national interests. The imposition of this social fee has been exempted for several non-government organizations that engage in social and charitable endeavors to give back to society.
While dedicated charitable organizations play a vital role in bolstering social welfare, concerns arise about the potential abuse of their tax-exempt status. Exemption from social fees with an intention to ease their financial burden and enable greater social impact can sometimes tempt certain entities to mask profit-making under the veil of charity. Further, legitimate charitable organizations may also require income-generating activities to fulfill their mission besides grants/donations. Recognizing this, the law allows for controlled profit-making activities within certain limits, ensuring organizations retain their charitable character while securing resources for their noble pursuits.
In India, the aim of Sports Associations has always been to promote the spirit of sports among the youth to increase participation in the sport and also increase the visibility of our country on the international stage. Sports acts as an effective way to build national identity and pride along with promising avenues for revenue generation. By scouting talent and giving deserving youth a chance to hone their skills, Sports Associations provide opportunities for people from marginalized sections, a chance at a better life. Since the promotion of sports has now assumed an important role in social welfare, the Income Tax Act provides tax benefits to Sports Associations who fulfill certain conditions.
Section 2(15) of the Income Tax Act defines charitable purpose to include objects of general public utility (GPU). While this term may seem very broad and ambiguous, clarification from the Income Tax authorities suggests that it includes the promotion and development of sports as well. The general premise behind this inclusion is to promote and develop the sport, as well as to nurture deserving talent. Having said so, the Sports Associations for promoting the respective sport are organizing and broadcasting live events of games that have a general public appeal and also are a great source of income. This prompts the obvious question of whether such activities even though are for the development of sport and are held to be “commercial”, would they escape taxation? The provision as mentioned earlier provides that entities under the GPU category may carry out such commercial activities only if they are done to promote the GPU and the aggregate receipts from such activity do not exceed 20% of the total receipts of the entity during the previous year.
The Supreme Court in the case of ACIT v Ahmedabad Urban Development Authority (2022) discussed the rationality and eligibility to claim tax exemption status under GPU in meticulous detail for various corporations, statutory bodies, and cricket associations. More specifically the discussion surrounding cricket associations effectively puts forth the controversy surrounding the profit-making activities of Sports Associations and how that affects their charitable status. Considering the ties between the state associations and BCCI, the Supreme Court did mention that the activities of the cricket associations are based more on business lines. The ecosystem that has been created for the game of cricket in India, from owning stadiums to regulating participation in the game along with the auction of broadcasting and media rights has been structured along business considerations. The Court also held that the promotion of the game could not be considered education as the word education used in the context of section 2(15) was not with regard to the general education of life and instead involved the systematic instruction of schooling or training given and thus did not include sporting activities. The Supreme Court opined that the matter with regard to tax exemption status for cricket associations needs to be examined afresh by the tax authorities in light of the above principles.
This judgment has brought forth further scrutiny for Sports Associations involved in the development of sports in India. The language of the Act makes it very clear that commercial activities will be allowed up to a defined limit but what happens in cases wherein the entity exceeds the said limit? Are they to be taxed for only that part of income that is in excess or they are to lose their charitable status and pay taxes as normal entities? Breaching the said limit would not result in the cancellation of the grant of registration as a charitable institution but would expose the institution to taxation on the income computed as per section 13(10) of the Act. Overall, all Sports Associations need to assess their stance on the claim of tax exemption considering the activities being undertaken and see whether claiming to be charitable is feasible or if paying taxes as a normal commercial entity would be more beneficial.