TMI Blog2006 (10) TMI 186X X X X Extracts X X X X X X X X Extracts X X X X ..... have already held that this is a charitable purpose. However, the activities are being run in the manner in which a commercial enterprise is being run, as is clear from the facts that the assessee has been earning profits from year to year and any loss in the subsidiary activities is also recouped from Children Welfare Fund . In our view, sub-section (4A) creates a dichotomy between the trust and a business activity which is incidental to attainment of the objects of the trust, and make profits from such activity exempt from tax if separate books of account are maintained. Needless to say that such profits ought to be in the public domain as pointed out in the case of Loka Shikshana [ 1975 (8) TMI 1 - SUPREME COURT] . We may add that is a necessary ingredient for any activity to be termed as charitable purpose, as such purpose, by its inherent nature, excludes private gain from its ambit. Unfortunately, neither the Assessing Officer nor the learned CIT (Appeals) have examined this aspect of the matter. Therefore, the matter is restored to the file of the Assessing Officer to consider the issue whether separate books of account are maintained in respect of the schools run by the tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was deemed to have been applied for such purposes. Therefore, the total income was computed at nil The assessee was required to substantiate the claim of exemption made by it under section 11. It was explained that the assessee-society is an educational institution, to whom provisions of sections 11 and 12 are applicable. It had also applied for approval under section 10(23C)(vi) of the Act, and its application is pending for disposal. The receipts from all the schools run by the assessee aggregated to Rs. 272.49 lakhs, which is shown as income. Expenditure by way of salary to teachers etc. was claimed as application of income. The Assessing Officer examined the case with reference to applicability of the provisions of sections 11 and 12. It was pointed out that the assessee derived income by way of tuition fee, admission fee, science laboratory fee, bus fee, breakage fee and hostel fee from the students. The ITO was of the view that these receipts were not income derived from property held under trust for charitable or religious purposes. Such income could be either income derived from the property, voluntary contributions received with a direction that they shall form part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form on page 10 of his order, which is reproduced below for the sake of ready reference:- Sl. No. Year ending Gross receipts As per I E a/c Net profit % of profit 1. 31-3-1997 Rs.1,38,65,833 10,71,150 7.72% 2. 31-3-1998 Rs.1,68,08,170 26,58,180 15.81% 3. 31-3-1999 Rs.1,68,90,371 25,19,310 14.91% 4. 31-3-2000 Rs.2,08,47,119 18,87,898 9.05% 5. 31-3-2001 Rs.2,71,63,172 42,96,740 15.81% On the basis of the data in the aforesaid table, it was pointed out that the assessee has been earning substantial profits year after year and such profits are not incidental to carrying on the educational activities, but the activities were intentionally so arranged that they invariably generated surplus profits in a systematic manner. 2.2 The Assessing Officer also examined the object clauses of the society which, inter alia, included what was stated to be various noble and pious objects, namely, rehabilitation centre for physically handicapped persons, orphanage for the children of leprosy patients, school for deaf and dumb children etc. However, the society chose to start nursery and kindergarten school, listed as 5th object. With profit earned from this school, it extended its net work instead of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of any other object. The word education stands alone and constitutes charitable purpose by itself. In other words, the residuary clause was to be read separately and the ingredients of that clause regarding general public utility could not be read in the word education . Thereafter, he referred to the distinction between private profit and public profit and it was pointed out that if surplus generated from educational activity was not to be used for any private purpose but was to be used for advancing the cause of education, then, the society will be existing for the charitable purpose. In particular, the decision in the case of Children Book Trust rendered under section 115 of the Delhi Municipal Act was distinguished, as the definitions under that Act and under the Income-tax Act, 1961 were different. The Hon'ble Supreme Court had also pointed out in that case that the rulings under the Income tax Act may not be of great help because the definition under Income-tax Act includes the relief of poor, education, medical relief, and the advancement of any other object of general public utility. The words advancement of any other object of general public utility are not found u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case was that the assessee had not undertaken any of the five objects mentioned in its memorandum. Sixth object was residuary in nature, permitting the assessee-society to carry out such other activity as may assist in the work of any of the first five objects. 4.2 Coming to the legal issues, he referred to the decision of Hon'ble Madras High Court in the case of S.B. Adityan v. First ITO [1964] 52 ITR 453. One of the questions before the Hon'ble Court was whether exemption under section 4(3)(i) of the 1922 Act was to be decided on the basis of the terms of the trust deed or the ITO had power to enquire into true nature and objects of the trust. The Hon'ble Court pointed out that the ITO was not bound to confine himself to the terms of the trust deed. He could very well take other factors also into consideration and determine the true character of the trust and the income therefrom. He was also entitled to ask the assessee to produce further evidence relating to the aforesaid matter and then decide whether the trust was entitled to get exemption under section 4(3)(i) of that Act. The case of the learned D.R. was that the Assessing Officer was competent to examine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociation Ltd v. CIT[1977] 107 ITR 108, in which it was, inter alia, pointed out that mere entertainment cannot be called to be charitable purpose. It was further pointed out that promotion of intercourse amongst members of an organization also cannot be considered to be a charitable purpose. Thus, where some of the objects of the trust were charitable and some non-charitable, and the trustees in their discretion could apply any amount of income to any object, then, the trust must fail for the purpose of claiming exemption under section 4(3)(i) of 1922 Act. The case of the learned DR was that the assessee has pursued only one object and, therefore, the case of the assessee must fail for exemption under section 11. We may state here that the decision of the Hon'ble Court in that case was quite different from its exposition made by the learned DR. The decision of the Hon'ble Court is that in case of a partly charitable trust, in a situation where the trustees have discretion to apply the income to any object, the assessee will not be entitled to exemption under section 11. Reason is quite obvious that the assessee could apply the whole of the income for a non-charitable purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the ratio of the decision of this case is not applicable to the facts of the case. 4.6 The learned DR also relied on the decision of Hon'ble Supreme Court in the case of Dharmaposhanam Co. v. CIT [1978] 114 ITR 463. The question in that case was whether for the purpose of granting exemption under section 11(1)(a), all objects had to be seen, or only the objects pursued by the assessee had to be examined. The Hon'ble Court found that some of the objects were charitable in nature while others were not charitable in nature. It was open to the assessee to apply its income to any of the objects. On these facts, it was held that the claim of exemption fails. As pointed out earlier, section 11(1)(a), as it exists now, deals only with such trusts which are wholly charitable or religious in nature. 4.7 The learned D.R. also relied on the decision of Hon'ble Delhi High Court in the case of CIT v. All India Hindu Mahasabha [1983] 140 ITR 748. The Hon'ble Court pointed out that for the purpose of exemption from tax as a charitable organization, what is to be seen is the dominant object and purpose for which it was established. It does not matter as to what was the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of that case were that the trust was constituted with the objects of conducting mass marriages, feeding poor, yoga classes, relief to poor sick destitutes and promoting physical psychological and spiritual health etc. The assessee constructed a building. It applied for registration under section 12A, which was denied on the ground that the assessee was carrying out commercial activity by hiring it as a marriage hall. Nothing was done to further other objects, except that a meagre sum was spent on yoga classes and feeding the poor people. The decision was upheld on the ground that it was not established that the trust was pursuing wholly charitable activities. 5. The learned counsel of the assessee opened his arguments by pointing out that in this case the Assessing Officer held that the assessee is not entitled to exemption under section 11 of the Act. He fairly conceded that his application for approval under section 10(23C)(vi) is pending before the prescribed authority. It was pointed out that the finding of the Assessing Officer, regarding non-availability of exemption under section 11 of the Act, was reversed by the learned CIT (Appeals). In this connection, it was point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used in section 2(15) in the sense in which systematic instruction, schooling or training is imparted to the youth for preparing them for the work of life. The word has not been used in the wider sense which may lead to the conclusion that reading of newspaper, travelling etc. also constitute educational activities. It was further pointed out that the words not involving the carrying on of any activity for profit were added at the end of the definition as given under the 1922 Act. After adding these words, advancement of any other object of general public utility would not be considered to be charitable purpose unless it is shown that the above purpose does not involve carrying on of any activity for profit. Thus, the effect of change in the definition is that in order to bring the case within the fourth category of charitable purpose, it would be necessary to show that - (i) the purpose of the trust is advancement of any other object of general public utility, and (ii) the above purpose does not involve the carrying on of any activity for profit. It was also pointed out that on the facts of that case, it was not necessary for the decision of the case to go into the question as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivity). The case of the learned counsel was that the assessee-society was carrying out educational activity, which was primarily the duty of the State and, therefore, the aforesaid decision was squarely applicable to the facts of this case. 5.5 He also referred to the decision of Hon'ble Delhi High Court in the case of CIT v. Lagan Kala Upvan [2003] 259 ITR 489, a decision given under section 10(22) of the Act. In that case it was recorded as a matter of fact by the learned CIT(A) that the assessee had been running educational institution for the past 25 years without any profit motive. Loans were given to certain persons in earlier years and in those years exemption under section 10(22) was not denied. The claim of depreciation in respect of certain assets did not show per se that the activities were carried out with a profit motive, leading to disentitlement of exemption under section 10(22). In these circumstances, it was held that the Assessing Officer was not justified in taking a different view only in respect of the assessment for assessment year 1993-94, when such exemption was consistently allowed to the assessee right from assessment year 1970-71. Thus, it was argue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haritable purpose as it is applicable to the year under consideration. It read that charitable purpose includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. Before proceeding further, it may be pointed out that the words not involving the carrying on of any activity of profit , finding place in the section at the end of the words objects of general public utility , were omitted by the Finance Act, 1983, with effect from 1-4-1984. Therefore, the cases relied upon under the old definition will not come to the aid of the revenue. This definition does not make a distinction between institutions carrying on any activity for profit or non-profit institutions. It is further seen that punctuation, and the word and are used after medical relief and, therefore, the words relief of poor , education, medical relief stand on different footing than the words advancement of any other object of general public utility . The Hon'ble Supreme Court has pointed out that private profit motive is manifestly excluded by the words general public utility , but these words qualify only the words advancement of any other object . Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(a), if separate books of account have been maintained. It is not the case of the assessee that it is running a business, which feeds its charitable objects. Its case is that the running of the school by itself means that the society is carrying on a charitable activity. Therefore, even if the school is run in a manner a business is run, we tend to agree with the learned counsel that the school will constitute a property held under trust. This leaves us with the question whether various collections made by the assessee in the school from income derived from property held under trust, or only the surplus is such income? In other words, the question now is whether the expenditure incurred by the assessee on running the school qualifies for exemption under section 11(1)(a) or only the net surplus derived from the school? 7.5 The case of the learned DR was that since the income is not derived from the property held under the trust, the expenditure could not have been allowed under the aforesaid clause. On the other hand the case of the learned counsel was that since the income was derived from property held under trust, the expenditure incurred will have to be deducted under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Unfortunately, neither the Assessing Officer nor the learned CIT (Appeals) have examined this aspect of the matter. Therefore, the matter is restored to the file of the Assessing Officer to consider the issue whether separate books of account are maintained in respect of the schools run by the trust and thereafter examine whether provisions of section 11(4A) are applicable to the facts of the case. The net profit earned from these schools, and not gross receipts, will then be considered for exemption under section 11(1)(a). 8. There were also minor issues raised by the learned D.R. regarding expulsion of the earlier members, which according to him, showed the real intent and purpose of the present members of the society. We are unable to persuade ourselves to agree with the learned DR for the reason that the question to be seen is whether the objects are charitable and the income is applied for charitable purposes. The exemption under section 11 does not depend upon the fact whether the trust was run by one set of people or the other set of people. What is to be seen is whether the objects are charitable in nature and the income is applied for the objects of the trust. This view ..... X X X X Extracts X X X X X X X X Extracts X X X X
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