M/S. GYAN SAGAR SOCIETY,INDORE vs. THE DCIT CIRCLE 1(1), INDORE

आयकर अपील�य अ�धकरण, इंदौर �यायपीठ, इंदौर IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER

ITA No.643/Ind/2014 Assessment Year: 2010-11 Gyan Sagar Society, Deputy Commissioner of C/o Mahesh Thahirani, Vs. Income Tax-Circle 1(1), L, Triveni Colony, Indore Indore (Appellant) (Respondent ) PAN No.AKGPJ5075N Revenue by Shri K.G. Goyal, Sr. DR Assessee by Shri Morish Goyal & N.D. Patwa, Advocates Date of Hearing 17.7.2018 Date of 26.7.2018 Pronouncement

O R D E R PER MANISH BORAD, AM.

This appeal filed by the assessee pertaining to the A.Y. 2010-

11 is directed against the order of ld. Commissioner of Income-tax

(Appeals)-I, Indore dated 12.06.2014 which is arising out of the

order u/s 143(3) of the Income Tax Act dated 18.03.2013 passed by

DCIT-1(1), Indore.

the assessee is a society registered under the MP Society Act, 1973

established for carrying out education activities for the benefit of

public at large with non profit motive. As per Memorandum and

rules and regulation of the society the income of the society will be

utilized for the advancement and establishment of school, colleges

etc and not distributable to the members of the society. The society

is running schools in the name of Gyan Sagar Academy, Dewas and

Gyan Sagar School, Ujjain and also running Ashoka Hostel, Indore.

Application for registration u/s 12AA of the Act was first filed on

23.09.2002 and the same was rejected on 31.03.2003. Thereafter

on appeal by the assessee, Tribunal vide order dated 10.3.2006

remanded the matter to the file of Ld.CIT(A) for fresh consideration.

However till date no further proceedings have been carried out by

the Ld.CIT(A). In the meantime out of abandon caution the

assessee filed second application u/s 12AA of the Act on 28.302013

with the same objects as were mentioned in the previous

application. On 24.9.2013 CIT(Exemptions) granted the registration

u/s 12AA of the Act with effect from 1.4.2012. For the year under appeal the assessee filed return of income on 14.10.2010 declaring

NIL income. Statutory notices u/s 143(2) and 142(1) of the Act

were served upon the assessee and the case was selected for

scrutiny. The Ld.A.O while examining the records observed that the

assessee has shown the gross receipt of Rs.11,15,616/- from

running hostel in the name of Ashoka Hostel but the occupants do

not belong to the school run by the society. Even though it was

pleaded by the assessee during the proceedings that the object of

running hostel was to provide accommodation facility to the needy

and poor students and very nominal amount were charged without

any profit but the Ld.A.O was not convinced with the submissions

and came to a conclusion that running of Ashoka Hostel is a

commercial activity and the assessee falls in proviso (1) to section

2(15) of the Act and therefore the assessee’s activities cannot be

considered as charitable in nature and hence the assessee was

denied the exemption u/s 11 of the Act and income assessed at Rs.

27,98,574/-.

failed to succeed as Ld.CIT(A) confirmed the view taken by the

Ld.A.O observing as follows;

“4. I have seen the assessment order, the grounds of appeal and submissions of appellant. 5. The appellant society came into existence in May, 2000. It started two schools namely Gyan Sagar Academy at Ujjain in July;2002 and at Dewas in July’2003. It also started a hostel in name of Ashoka Hostel at Indore. 6. The Society applied for registration u/s 12A of I.T. Act on 23.09.2002 which was rejected by Ld.CIT, Indore on vide order dt. 31.03.2003. Appellant filed appeal against the aforesaid order before the ITAT Indore Bench and Hon'ble’ble members, ITAT, Indore has set-aside the order of Ld.CIT, vide their order dated 10.3.2006, with a direction to decide the application of the assessee denovo, after giving due opportunity to the assessee. According to appellant this set-aside order is not yet decided by Ld.CIT & hence the same may be treated as deemed granting of exemption u/s 12-A of I.T. Act. 7. But as per the facts of this case, as the application of appellant u/s 12-A of I.T. Act was rejected by Ld.CIT, Indore through a written order, in such a case a deemed approval of application u/s 12A of I.T. Act is not possible, unless the Ld. CIT, Indore passes de-novo order in favour of appellant. 8. Even appellant held the same view, as having not got any approval u/s 12A of I.T. Act, appellant filed an application in Form 56D on 27.03.2009 in the office of Commissioner of Income Tax, 4 Indore for seeking recognition u/s 10(23)(VI) of the I.T. Act, as an educational institution. This application was rejected by CCIT, Indore vide a detailed order dated 26.03.2009, which is reproduced by Assessing Officer in body of assessment order at page no.11 to 15, in which even rejection of application made u/s 12-A was also duly considered. 9. Now let us come to merits of the case. As the Assessing Officer has very correctly pointed out, though getting registered u/s 12A of I.T. Act is an essential condition for getting exemption u/s 11 of I.T. Act, but getting registered alone is not sufficient, till appellant satisfies the Assessing Officer that all the activities carried out by it in a particular year are charitable in nature and not commercial. As held in the order for rejection of application u/s 10(23c) (VI) of I.T. Act, though schools are run by appellant for imparting education, but fees charged shows that they are run as commercial ventures and not run for poor and needy. 10. But the main objection raised by Assessing Officer in present case is that the Ashoka Hostel at Indore is run by appellant on commercial lines and such hostel is not in any way connected to schools at Dewas or Ujjain,as the persons residing there are not students of such schools. The hostel is run on commercial lines as it charges a fees of Rs.1,100/- per month from each occupant and it is not given free or at lesser fees to any persons from poor strata. Hostel activity is included as a separate and independent activity enshrined in “clause F” of Memorandum of Association and it is not in any way linked to clause A of promotion of education. The claim of appellant that it a mere rental income, is also devoid of truth, as such hostels for students & working women not only provide rented premises, but they are accompanied with provision of beds, study table, cleaning, provision for food and breakfast etc. Hence such hostels are a pure business/commercial venture, which are hit by the proviso to section 2(15) of the I.T. Act, since the aggregate value of receipts from such activity was Rs.11,15,616/- i.e. exceeded Rs.10 lakhs. As per Section 2(15) which is explained at length in CBDT Circular No.11/2008 dated 19.12.2008, as appellant is carrying out a commercial activity of running a hostel hence it would not be eligible for exemption u/s 11 of the I.T. Act. 11.Hence disallowance of claim of exemption of Rs.27,98,570/- u/s 11 of I.T. Act is hereby confirmed,. In this regard reliance is placed on the decision in cases of Improvement Trust (2014) 62 SOT 121 (Amritsar Tribunal). Decision in case of Young Women’s Christian Association of Madras (2014) 62 SOT 65 (Chennai Tribunal) is exactly on same facts, wherein since appellant was running a working women’s hostel for business purpose only, denying exemption of income by applying proviso to section 2(15) to the assessee’s case was upheld by the tribunal because running of hostel could not be regarded as business incidental to carrying on of main objective of assessee trust.”

Tribunal raising following grounds of appeal.

in holding that assessee was not entitled to the deduction of

Rs.2798570 under section 11 of the Income Tax Act.

in holding renting of property to the students as commercial

activities.

in holding the applicability of proviso to section 2(15) of the

Income Tax Act.

submissions submitted that the first application for exemption u/s

12AA of the Act dated 28.3.2002 which was remanded by the

Hon'ble Tribunal to Ld.CIT for fresh consideration has still not been

disposed off. Same objects were mentioned in the second

application dated 28.3.2013 and registration u/s 12AA was granted

w.e.f. 1.04.2012. As objects remains the same and registration u/s

12AA w.e.f. 1.4.2012 has been granted, then the same should be

applied for earlier years also. He made reference to CBDT Circular-1 dated 21.1.2015 and also referred to following judgments

mentioned in synopsis.

(a) SNDP Yogam (2016) 68 taxmann.com 152 (Cochin)

(b) Punjab Education Society (2018) 168 ITD 109 (Asr.)

(c) St. Jude Convent Schools (2017) 164 ITD 594 (Asr.)

(d) CIT vs Society for Promotion of Education, Allahabad (2017)

67 taxmann.com 264 (Supreme Court) and (e ) CIT Vs Sahitya

Sadawart Samiti Jaipur (2017) 88 taxmann.com 703 (Raj).

he submitted that the quantum of income from hostel is very less in

comparison to the revenue received by the society from running

school at Dewas and Ujjain. The fees charged from the students is

very nominal at Rs.1,100/- per month. This hostel is helpful to the

students coming from villages near by to Indore and provide them

facility to stay at Indore so that just for lack of proper stay and food

facility, their education is not hindered. The hostel is not running

on commercial basis and it is working for the attainment of main

object of providing education. Reliance were placed on various 8 judgments viz (a) Hoshiarpur Improvement Trust 61 taxmann.com

162 (Asr.) (b) CIT Vs Lucknow Development Authority 38

taxmann.com 246 (All.), (c) Rajasthan Cricket Association 79

taxmann.com 464 (Jaipur) and (d) DCIT vs Tamil Nadu Cricket

Association 88 taxmann.com 705 (Chennai). He further added that

the main activity of the society is of running school and as the

activity of running hostel is a very small scale and in case the

Hon'ble Tribunal do not consider the activity of running hostel as

against to the main object then at least deduction u/s 11 of the Act

should be given to the income from running school and only the

amount of income relating to running of hostel may be disallowed.

On the other hand Ld. Departmental Representative supported the

order of lower authorities.

The assessee is aggrieved with the findings of Ld.CIT(A) confirming

the action of Ld.A.O making addition of Rs.27,98,570/- thereby

denying the benefit of Section 11 of the Act which provides

exemption to the income of the society earned from running for

charitable activities. We find that the issues can be divide in two parts namely (1) whether the assessee is a charitable society eligible

for deduction u/s 11 of the Act (2) Whether deduction u/s 11 of the

Act is available for the income earned from running hostel on

chargeable basis.

eligible for deduction u/s 11 of the Act. We find that the

application of the assessee u/s 12AA of the Act dated 23.02.2002

was rejected on 31.3.2003 was remanded back by Tribunal on

10.10.2006 for fresh consideration to Ld.CIT. As accepted by both

the parties that till date the Ld.CIT has not carried out any set

aside proceedings in order to comply to the order of the Tribunal

dated 10.03.2006. We also find that the assessee in his second

application u/s 12AA of the Act dated 28.3.2013 mentioned the

same objects for getting registration u/s 12AA of the Act and was

successful to get registration w.e.f. 1.4.2012 by order of Ld.CIT

dated 24.9.2013. The Ld. Departmental Representative could not

controvert this fact mentioned by the Ld. Counsel for the assessee

that the objects of the society mentioned in the first application

dated 23.09.2002 remains the same as mentioned in the second application dated 28.3.2013. The assessee has been granted

registration from 1.4.2012 and in the given case the Ld.CIT has

failed to initiate any proceedings after the direction of Tribunal

dated 10.6.2006 and in these given facts the assessee should be

deemed to be considered as registered u/s 12AA from 23.9.2002 i.e.

date of first application u/s 12AA of the Act. We are therefore of the

considered view that the assessee is eligible for exemption u/s 11 of

the Act being society running for the object to provide education

and registration u/s 12AA of the Act.

of the Act on the income earned from running hostel for needy

students coming to Indore for getting education. Even though it is

pleaded that very nominal amount has been charged to the

students but the fact remains that the hostel is not connected to

the school run by the society. It is accepted by the Ld. Counsel for

the assessee that the students living in hostel are not from the

school run by the society. Even though the magnitude of revenue

from running hostel is lower in comparison to total revenue but still

the ingredient of commercial nature is reflected. Now the question before us is “whether the assessee should totally be denied the

benefit of section 11 or only the proportionate amount of income

relating to running of hostel should be excluded from the total

exemption available to the society u/s 11 of the Act”.

of Income Tax V/s Bharat Diamond Bourse order dated 16.12.2002

(2003) 179 CTR (Supreme Court) 225 dealt with almost identical

issue that “if the dominant object of the assessee is charitable and

another object which is ancillary or incidental may not be

charitable in nature then whether the society should be treated as charitable or not?”. The relevant quote by Hon'ble Apex Court

reads as under;

“13. The decision of the Constitutional Bench in Additional Commissioner of Income Tax, Gujarat, Ahmedabad v. Surat Art Silk Cloth Manufacturer’s Association, Surat really clines the issue. The assessee in Surat Art Silk case was an association established to promote commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yard Art Silk Cloth, Silk Cloth and Cotton Cloth. Its objects, as evidenced from the memorandum of association, included inter alia, carrying on business in Art Silk Yarn, Raw Silk, Cotton Yard Art Silk Cloth, Silk Cloth and Cotton Cloth belonging to and on behalf of its members as well as buying and selling and dealing in all kinds of cloth and yarn belonging to and on behalf of this members. The Constitutional Bench of this Court held that, if there are several objects of the institution, some of which are charitable and some non charitable and the trustees or the managers in their discretion may apply the income of the institution of those objects, the trust or institution would not be liable to be regarded as charitable and no part of its income would be exempted from tax. Where the main or primary objects are distributive, each and every one of the object must be charitable in order that the trust be held as a valid charity. But, if the primary or dominant purpose of the institution is charitable and another which, by itself, may not be charitable, but is merely ancillary or incidental to the primary or dominant object, it would not prevent the institution from validly being recognised as a charity. The test to be applied is, whether the object which is said to be non- charitable is the main or primary object of the trust or institution or it is ancillary or incidental to the dominant object which is charitable. Reiterating its earlier view in CIT v Andhra Chamber of Commerce (1965) 55 ITR 772) the Supreme Court said in Surat Art Silk case (supra) that if the primary purpose is advancement of objects for general public utility, the institution would remain charitable, even if an incidental non-charitable object for achieving that purpose was contemplated. In the case of Andhra Chamber of Commerce (supra) it was held that a Chamber of Commerce did not cease to be charitable merely because the members of the chamber were incidentally benefited in carrying out its main charitable purpose. This court approvingly followed the ratio in the case of Commissioner of Inland Revenue v Yorkshire Agricultural Society (1928) 1 KB 611 and Institution of Civil Engineers v Commissioner of Civil Revenue (1932) 1 KB 149 for reaching the conclusion that merely because some facilities incidentally arose to the members of a society or institution in the course of carrying out its main charitable purpose, that by itself would not prevent the institution from being a charity.”

case of the assessee in the instant appeal we find that the main

object of the society is of promotion of science, education, literature

or fine arts and promotion of social welfare and imparting of

knowledge etc. This object is a dominant object proved from the

fact that during the year total revenue earned by the assessee

society is Rs.2,23,69,987/- out of which Rs.2,12,03,926/- is from

the fees received from the schools running at Dewas and Ujjain and

around 5% of the total revenue relates to the receipt from hostel for

students at Indore. Even if we look at the figures of the income,

then out of the net income of Rs.27,99,574/- only Rs.1,43,762/- is

attributed to income from hostel and remaining amount of

Rs.26,55,812/- pertains to the income from running schools. It is

nowhere doubted by the revenue authorities that the assessee is successfully imparting education to students, running the school

at Dewas and Ujjain and dominant activity of the society remains

that of doing educational activities by running the school. As far as

ancillary activities of running hostel is concerned even though a

very nominal amount has been charged from the students we hold

it to be a commercial activity being hit by proviso 1 to Section 2(15)

of the Act and restrict the assessee from getting the benefit of

Section 11 of the Act only for the amount of income earned from

running school at Dewas and Ujjain at Rs.26,55,812/-. We

therefore direct the Assessing Officer to grant the benefit u/s 11 of

the Act to the assessee for the income earned from Gyan Sagar

Academy, Dewas and Gyan Sagar School, Ujjain and sustain

addition for the income of Rs.1,43,762/- earned from running of

hostel.

The order pronounced in the open Court on 26.7.2018.

Sd/- Sd/-

( KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER �दनांक /Dated : 26 July, 2018

/Dev

Copy to: The Appellant/Respondent/CIT concerned/CIT(A) concerned/ DR, ITAT, Indore/Guard file. By order Private Secretary/DDO, Indore