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2016 (10) TMI 968 - ITAT DELHI

2016 (10) TMI 968 - ITAT DELHI - TMI - Eligibility of exemption u/s 11-12 - whether the 'hostel facility' of the school provided exclusively to students of the dental college is not an integral part of "education" u/s 2(15) ? - maintain separate books of accounts for claiming exemption with respect to profits/income over expenditure earned from such activitiesHeld that:- CIT(Appeals) has given a categorical finding that no separate books of accounts for hostel activities were undertaken. Having .....

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any depreciation with respect to hostel activities are already allowed while calculating the income/other expenditure from the main activities of the assessee, the same may be disallowed in accordance with law. Therefore, no infirmity in the order of CIT(Appeals) and accordingly confirmed - Decided against assessee - ITA No. 4238/DEL/2015 - Dated:- 21-9-2016 - Shri Sunil Kumar Yadav, Judicial Member Appellant by : Shri Akhilesh Kumar, Advocate Respondent by : Shri S.K. Jain, Sr. DR ORDER This ap .....

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t of "education" u/s 2(15) but is a separate business activity in terms of section 11(4A), by wrongly placing reliance on irrelevant material findings on the issue are perverse and against the settled law. 3. Because, above finding of the learned lower authority is against the principle of consistency in as much as that since the inception the said activity is considered as part of 'education' and benefit u/s 11/12 is allowed with 100% similar facts and without any change in la .....

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for charitable purposes. 5. Because, the learned lower authority has further erred in upholding the disallowance of ₹ 3488089/- out of total exp. incurred ₹ 6688198/- against the hostel activity and the finding that assessee could not substantiate his claim is wrong . 6. Because, in addition to above, the learned lower authority failed to appreciate the basic facts like accounts are accepted, there is no material against the assessee, past history and AO's computation is giving a .....

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thout dilution to above prayer, it is also prayed that computation of surplus is wrong and declared surplus may kindly be accepted and exemption on such may kindly be allowed. 2. Though various grounds are raised, but they all relate to disallowance of exemption u/s. 11 of the Income-tax Act, 1961 [ the Act ] with respect of the activities for running hostel in the campus. While denying the benefit of exemption u/s. 11 of the Act, the AO has observed that the assessee trust is running a Dental C .....

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omparison with market price, the AO has also observed that the assessee has not maintained separate accounts for the hostel activities. He accordingly invoked the provisions of section 11(4A) and disallowed the exemption claimed with respect to the profit earned from hostel activities. Besides, he also disallowed the depreciation claimed with respect to hostels. 3. Aggrieved, the assessee preferred an appeal before the CIT(Appeals) with the submission that the activities for running hostel is al .....

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unning of educational institution. He further held that incidental activities cannot be run as full-fledged commercial activities. The CIT(A) further held that even if it is assumed that the activity of running of hostel is incidental to the main activity of society/trust, then also the appellant is not entitled to exemption us/. 11(4A) of the Act because it has not maintained separate books of accounts as provided u/s. 11(4A) of the Act. The CIT(Appeals) finally confirmed the disallowance on tw .....

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d by the definition of charitable purpose in section 2(15) of the I. T. Act. For clarity it is important to reproduce section 2(15) of the I.T. Act. "Charitable purpose includes relief of the poor, education, medical relief [Preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,] and the advancement of any other object of general public utility: Provided that the advancement of any other o .....

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nder the head education. Education as mentioned in section 2(15) has been defined and elaborated by the Hon'ble Supreme Court in their decision in the case of Trustees Lokshikshan Trust vs. CIT. The relevant Paras of the order are reproduced as under:- "The sense in which the word education has been used in section 2(15) in the systematic instruction schooling or training given to the young is preparation for the work of life. It also connotes the whole course of scholaristic instructio .....

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ple some of whom are not straight, you learn by experience and thus add to the knowledge of ways of the world. If you are not careful your wallet is liable to be stolen or you are liable to be cheated by some unscrupulous person. The thief who removes your wallet and the swindler who cheats you teach you a lesson and in the process make you wiser though poorer. If you visit a night club, you get acquainted with and add to your knowledge about some of the not much revealed realities and mysteries .....

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(15) of the Act? It seems to me that a common concept of element of charity is shared by each of the four different categories of charity. It is true that charity does not necessarily exclude carrying on an activity which leads profit provided that profit has to be used up for what is recognized as charity. The very concept of charity denotes altruistic thought and action. Its object must necessarily be to benefit others rather than oneself. Its essence is selflessness. In a truly charitable act .....

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ducation. However, the appellant could not elaborate as to how it is covered under education when the hostel business can be run without any educational institute and an educational institute can run without providing hostel facility. Further, since the fee charged from the students is on commercial basis and not on charitable basis the appellant is engaged in a commercial activity which can not be termed as education. There is no case where hostels were provided free of cost to poor children. T .....

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on whether it is a charitable activity, made any other hints of section 2(15). A close perusal of language of section 2(15) clearly establishes that hostel business is not charity as provided in section 2(15) of the IT Act. As per section 2(15) charity includes:- (i) Relief of the poor. Running of hostel for the students of the school is not relief to poor. . (ii) Education- It has already been discussed in earlier paras that it is not education. (iii) Medical relief- Definitely not. (iv) Preser .....

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whether the same is incidental to-running the educational institute. 1. The dictionary meaning of the word 'incidental' is happening as a minor accompaniment to something else. If we see the meaning of incidental, it is clear that in order to fall under an incidental business the same has to be minor and not full fledged business. The business of running hostel for students is not an incidental activity of the appellant. As has been discussed in earlier Paras hostel can run without an ed .....

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Both the activities i.e. education and hostel are independent of each other. . In fact, the appellant is not charging as per market rate but has charged more from the students which shows the commercial motive of the appellant and not the charitable one as claimed by the appellant. This activity of hostel is an independent activity and can't be termed as incidental to running of educational institution. The incidental activity can not be run as a full fledged commercial activity. This activ .....

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he provisions of section 11(4A) of the I.T. Act. Before proceeding further it is important to trace the history of section of 11 (4 A) of the I.T. Act. This provision was brought for the first time by finance Act, 1983 w.e.f. 1984. Section 11(4A) was inserted by finance Act, 1983 was as follows:- (4A) Sub-section (1) or sub-section 2 or sub-section (3) or sub-section (3A) shall not apply in relation to any income, being profits and gains of business, unless- (a) the business is carried on by a t .....

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ch business. The explanatory note to the finance bill explains the intent of the legislature in the following form:- 73. Under another amendment it is proposed to provide that exemption from income tax will not be available to any religious or charitable trust or institution in respect of any profit & gains of business. In other words, irrespective of whether any business is carried on by such a trust or institution or the business undertaking itself is held in trust in either case the trust .....

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all charitable or religious trusts and institutions, it is proposed to provide that the exemption under section 10(23C) (iv) and (v) of the Income-tax Act will not apply even in retention to profits and gains of business in the case of such notified trusts and institutions. 75. The aforesaid amendments regarding taxation of business profits or religious or charitable trusts and institutions will take effect from 1st April, 1984, and will accordingly, apply in relation to the-assessment year 198 .....

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tax net. The amended section 11(4A) which was brought by finance Act, 1991 w.e.f. 1.04.1992 is as under: - Section 11(4A) of the Act says- (4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such .....

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) (iv) or (v) sub-section (4A) of section 11 has been amended to permit trust and institutions to carry out business activities if the business activities are incidental to the attainment of its objective. The charitable or religious trust will no longer lose complete exemption from income tax. However, the profit & gains from such business activity will be subjected to tax." A close perusal of the above amendment leaves no doubt that profit from business activity which is not incidenta .....

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it has not maintained separate books of account. Therefore, it has not complied with the condition laid down in sub-section (4A) of section 11 of the Act. The appellant's other argument is that it is an educational institution and since the running of hostel is an integral part of education activity, it was not required to maintain separate books of account has no force. In fact the AO has brought on record that the hostel fees charged from the students was as per the market rate. The appell .....

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se, can section 11 (4A) of the Income-tax Act can be construed to have been incorporated for the very same purpose or to be construed restricting the scope of section 11 (4) of the Income-tax Act ............ " In the above case the Hon'ble High Court at para 12.1 has held as follows:- "12.1 Insofar as the compliance of the maintenance of separate books of account as required under section 11 (4A) of the Act is concerned, a reading of the above said provisions would make it clear t .....

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has restricted his discussions to the running of hostel business. The AO has established in no uncertain terms that the appellant was running hostel with a commercial motive. In fact the relevant paras of the judgement in the case of ACIT vs. Thanthi Trust (2001) 247 ITR 785 is, reproduced as under.- "The substituted sub-section (4A) states that the income derived from a business held under trust wholly for charitable or religious purposes shall not be included in the total income of the pr .....

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case of PHD chamber of commerce and industry the Hon'ble Supreme Court has granted leave on SLP filed by the department DIT v/s PHD chamber of commerce and industry (2014) 51 Taxmann.com 380(SC). The appellant has also admitted that in PHD chamber of commerce there have been business without a motivation as to profits. This is not the case of the appellant. The A.O. has categorically brought on record the profit motive, by comparing the activity of running a hostel of the appellant with othe .....

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which the institute has only confirmed. In the case of DIT(exemption) Madras wellington charitable trust. the Hon'ble High Court has held as under- Insofar as compliance of the maintenance of separate books of account as require under section 11 (4A) of the Act is concerned, a reading of the above said provisions would make it clear that it is mandatory and a condition precedent for the assessee to maintain the same while seeking exemption. The Hon'ble judges have also observed - Section .....

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purposes. Therefore, such a condition is mandatory. In other words, a failure to comply with the condition would make the assessee concerned from claiming exemption. Such a compliance on behalf of the assessee while seeking exemption also consequently mandates, the Assessing Officer to verify the accounts under different heads with its break-ups of figures by applying his mind while doing a thorough verification. In the case on hand, we find that all the authorities have mainly dealt with eligib .....

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their order that "the object of the authority is to provide shelter to the homeless people,' therefore, there is no objectionable material to treat these institutions as non-charitable ". The appellant is not appreciating the fact that the exemption on account of running of education has not been denied by the AO. The AO has only denied exemption u/s 11 to the activity of transportation and sports for which separate fee has been charged. The Hon'ble High Court was not analyzin .....

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ity is indulging into commercial venture will not be hit by sec.11(4A) of the IT Act. The argument is 11( 4A) is to be read with other objects of public utility. Unfortunately, I am not in argument with the above proposition. The language of sec.11(4A) is very clearly it stats with the word that sub section 1 or 2 or 3(A) of section 11 will not apply in relation to any income of a trust or an institute being profits and gains of business. It doesn't put a restriction that it is applicable to .....

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port thereof, he invited our attention to the objective of the trust which is available at page nos. 18 to 20 of the compilation. It was further contended that during the impugned assessment year, the assessee did not earn any profit from the hostel activities, rather in the Income & Expenditure account, there was a deficit of ₹ 68,198. It was further contended that if it not charitable activities, it would be incidental to the main activities of imparting education, for which the asse .....

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ection of hostel fees for building necessary infrastructure for imparting the education in various fields which is the charitable purpose for which the trust was established was entitled for exemption u/s. 11 of the Act. Further, he also placed reliance upon the judgment of the Hon ble Karnataka High Court in the case of CIT v. Karnataka Lingayat Society (Kar) in ITA No.5004/2012, in which providing hostel to students/staff working for the society was held to be incidental to the achieve the obj .....

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ssessee did not carry any business activity for earning profit, it was entitled for exemption u/s. 11 of the Act, further reliance was also placed upon the following judgments:- (i) DIT v. Lala Lajpatrai Memorial Trust [2016] 383 ITR 345 (Bom) (ii) PHD Chamber of Commerce & Ind. V. DIT, [2013] 357 ITR 296 (Del) (iii) DIT v. Apparel Export Promotion Council [2000] 244 ITR 736 (Del) (iv) CIT v. Bridaranyak Mandal (Trust) [2009] 319 ITR 363 (All) 7. The ld. DR, on the other hand, has contended .....

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efit of exemption in respect of hostel activity. It was further contended that once the benefit of exemption is denied relating to hostel activity, the corresponding depreciation on hostel building cannot be allowed to the assessee. The hostel activity can only be considered to be separate business activity in accordance with law. 8. Having carefully examined the orders of authorities below and documents placed on record, I find that running of hostel activities is one of the objects of the asse .....

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s hostel fees cannot be called to be exorbitant in comparison to the prevailing market rates. I have also examined the judgments referred to by the assessee and I find that hostel activity is certainly activity incidental to the main activity of imparting education. In the case of CIT v. Karnataka Lingayat Society (Kar) in ITA No.5004/2012, the Hon ble High Court has held that providing hostel to the students/staff is incidental to the achieve the object namely the object of the society. In the .....

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ncidental to the main activity of imparting education. Then the question arises, whether the assessee is required to maintain separate books of accounts of hostel activities. In this regard, a specific query was raised by the lower authorities with regard to maintenance of separate books of accounts with respect to hostel activities and the assessee could not produce separate books of accounts. Even during the course of hearing, a specific question was raised whether the assessee has maintained .....

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