TMI Blog2019 (8) TMI 1199X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial year ended March 31, 2017 relevant to assessment year 2017-18. It needs to be examined whether the rent payment to related parties are commensurate with the area taken on rent and local market/locality conditions where such premises is situated. Such examination will help determine the intent behind setting up of hostel facilities as to whether the hostel facility has been set up as an charitable activity or the rental arrangement has been so structured by way of a cash extraction mechanism where the hostel fees so collected is paid by way of rental payments beyond the acceptable and commensurate amount vis- -vis area/premises taken on rent so as to benefit the related persons. Merely because there is nominal surplus at the end of the financial year is not determinative of the charitable nature of the activity, however, the whole financial structure which has been designed need to be examined to see the real intent behind such activities. Where the financial structure is so designed to benefit the trustees directly or indirectly through any such rental arrangements which are finally held to be unreasonable or not commensurate with the market conditions, it woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide letter dt. 26.10.2017 and 08.01.2016 required the assessee to file certain details/information/clarification and in response to same, assessee filed reply vide letter dt. 26.12.2017 and 22.01.2018. 3. It was submitted that the Ld. CIT(E), however, rejected the application of assessee by holding that from the accounts for FY 2015-16 to 2017-18, it can be noted that whole of the income of the assessee is coming from hostel fees. This income is being spent for running of hostel only. Running of hostel by charging fees cannot be regarded as charitable activity. As the predominant object of the assessee is business, it cannot be treated as charitable institution. Merely stating that activities are not done with profit motive does not absolve the assessee from predominant activity test. The concept of charity is that primarily the activities should be charitable. If activities itself are commercial then no added words can help the assessee. Hence, the applicant cannot be held as charitable within the meaning of section 2(15) of the IT Act, 1961. 4. The ld. AR submitted that from the object clause of samiti, it can be noted that the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de, commerce or business. Therefore, the genuine institutions who carries out the activity of general public utility for the general welfare of public at large without any profit motive would not be hit by the proviso to section 2(15) even when it charges fees or consideration for the services rendered by it. 7. It was further submitted that this very issue has come up for consideration before the ITAT Ahmedabad Bench in case of Shree Ahmedabad Lohana Vidyarthi Bhavan Vs. Income Tax Officer (Exemption) 172 ITD 11 where the AO held that running a hostel by charging fees from the students does not fall within the ambit of charitable purpose u/s 2(15) of the Act. The ITAT after examining the facts and also the law held that providing hostel facility is one of the essential components of an educational institution and is to be considered as imparting education. The relevant para 6 of the order is reproduced as under:- 6. Short question required to be adjudicated by the Tribunal is, whether providing hostel facility to the students by appellant-trust is to be considered as imparting education within the meaning of section 2(15) of the Act or it would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titutions like IITs, Medical Colleges provide compulsory stay in the hostel. Thus, how the AO can segregate this component from the concept of education provided in the main provision of section 2(15) ? If it is accepted that hostel is just an essential part of educational institution, then all that discussions made by the AO would be irrelevant. The simple reason is that assessee-trust came into existence in the year 1947. It has been providing hostel facilities for more than 60 years. It has always been treated as a charitable institution. In the assessment year 2010-11 a scrutiny assessment was made. Its status of charitable institution was accepted even after introduction of section 2(15) in the statute book. Not only it has been treated as charitable institution by giving registration under section 12AA of the Act, but under section 80G(5) it has again been recognized as charitable institution . In view of above, it was submitted that the Ld. CIT(E) be directed to grant registration u/s 12AA of the IT Act to assessee trust. 8. The ld CIT DR was heard who has supported the order of the ld CIT(E) and our reference was dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business feeding charity is not relevant after the insertion of the proviso to Section 2(15). To be a charitable institution, the predominant activity should be charitable. In the case of the applicant, there is only one activity i.e. running of hostel after charging fees. The samiti cannot be regarded as charitable institution. 13. Based on above discussion, it is clear that the activities of the applicant samiti are not charitable in nature as it is predominantly carrying out business on commercial basis. The applicant cannot be held as charitable within the meaning of Sec. 2(15) of the Income-tax Act, 1961. Based on above, I am satisfied that the applicant sansthan is not fit for registration and, therefore, registration u/s 12AA is rejected. 9. We have heard the rival contentions and perused the material available on record. The assessee society is not a newly registered society, it is an existing running society and therefore, at the time of examination of its application for seeking registration under section 12AA of the Act, the ld CIT(E) is well within his jurisdiction to examine the genuineness and the intent behind the actual activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the audit report for the financial year ended March 31, 2017 relevant to assessment year 2017-18. It needs to be examined whether the rent payment to related parties are commensurate with the area taken on rent and local market/locality conditions where such premises is situated. Such examination will help determine the intent behind setting up of hostel facilities as to whether the hostel facility has been set up as an charitable activity or the rental arrangement has been so structured by way of a cash extraction mechanism where the hostel fees so collected is paid by way of rental payments beyond the acceptable and commensurate amount vis- -vis area/premises taken on rent so as to benefit the related persons. Therefore, merely because there is nominal surplus at the end of the financial year is not determinative of the charitable nature of the activity, however, the whole financial structure which has been designed need to be examined to see the real intent behind such activities. Where the financial structure is so designed to benefit the trustees directly or indirectly through any such rental arrangements which are finally held to be unreasonable or no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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