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Income Tax Appellate Tribunal, DELHI ‘A’ BENCH,
Before: SHRI B.P. JAIN, & SHRI SUDHANSHU SRIVASTAVA
ORDER PER B.P. JAIN, ACCOUNTANT MEMBER,
This appeal filed by the Revenue and cross objection filed by the assessee arise from the order of the CITA(E)- 40, New Delhi vide order dated 28/05/2015 for A.Y 2012-13.
The Revenue has raised the following grounds of appeal: “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the exemption u/s 11 disregarding the facts of the case :
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring that commercial activities of the assessee which are squarely covered under the last limb of proviso to section 2(15) of the Act, as the assessee is providing hostel services by letting out A/C rooms and by providing other facilities and luxuries to the visitors. Thus, the benefit of section 11 & 12 are not allowable to the assessee;
2. On the facts and in the circumstances of the cases and in law, the Ld. CIT(A) has erred in ignoring the fact that though the objects of the assessee may seem to be charitable but activities carried out by the society which yielded income to the society are commercial in nature;
3. The Appellant craves leave to add, to alter or amend any ground of appeal raised above at the time of bearing.”
The assessee has raised the following sole ground of appeal in its cross objection : “That the action of the Assessing Officer in holding that the activities of the assessee are commercial and not charitable is arbitrary, erroneous and improper and must be expunged.”
The brief facts of the case are are that the Association registered under the Societies Registration Act, 1860 and also u/s 12AA(1) of the Income Tax Act 1961(‘the Act’) in July 1974 with number DLI(C)(i- 219)/74-75 has basic objectives as promotion of spiritual, intellectual, physical and social interest of people especially youth within the territorial jurisdiction of the Association, irrespective of their caste, colour and creed. The Association is authorized to cooperate and/or to associate with any other association or body of persons having similar objects. The jurisdiction of the Association is stated to be in the National Capital Territory of Delhi and such other portions of the National Capital Region except those areas under the territorial jurisdiction of any other YMCA affiliated to the National Council of YMCAs of India. The income and property of the Association was required to be applied solely towards the objects of the Association and no portion thereof could be paid directly or indirectly by way of dividend, bonus or otherwise.
During the year the Association was stated to be engaged in the activities of the community development, running of special schools and providing home training programmes. The Association also had refugee assistance programme, rural development centres, Education and Health and also provided hostel services.
The Assessing Officer on an analysis of the objects of the Association found that the Association was promoting Christianity which could be inferred on a perusal of the Memorandum of Association which also was so stated in the official Website. The Assessing Officer found that the programmes had a Christian emphasis and the aim was to create awareness of the wonderful teachings of the Holy Bible to the children belonging to a cross-section of the Association. Several other programmes in this direction were also identified. The Assessing Officer concluded that the assessee was hit by Section 13(1)(b) of the Act as the assessee was claiming to be a charitable organization while it was promoting religion. The benefits proposed by the Association of providing relief to the poor and medical relief and education were constrained by virtue of the objects of the Association. Relying upon the decisions in Mohidin Trust V. CIT (2001) 248 ITR 587 (J&K) and CIT v. Palghat Shadi Mahal Trust (2002) 254 ITR 222 (SC) the Assessing Officer found that the activities of the Association were not genuine.
The Assessing Officer further analyzed the MOA and found it was not functioning independently in respect of the disposal of property which contained several restrictions. That showed that the properties of this Association were held and controlled by someone else indirectly which was in clear violation of Section 13(1)(d) of the Act.
Adverting to the income and expenditure account, the Assessing Officer found that the fees from Educational courses, Schools and training was in a sum of Rs.8,88,21,922/-. The sub-heads under medical relief, education and relief to the poor were as under:-
Sub-heads Income Health Clinic for rural and urban poor 30,190 Education for rural and urban poor 5,22,62,004 Rural Uplift & agriculture promotion 1,59,234 Camping for students and youth 35,59,378 Miscellaneous income 2,21,400
The Assessing Officer further observed the following sub-heads in respect of hostel services income:-
Sub-heads Income Accommodation (TDS – Rs.3,30,805/-) 3,85,02,760 Food and Beverages (TDS - Rs. 2660/-) 2,46,06,480 Other Income 8,08,243 Membership fees 4,96,975
On the basis of this material, the Assessing Officer inferred that the activities of the Association were mixed and TDS had been deducted in respect of the same. The Assessing Officer noticed that the expenditure had been claimed under the following sub-heads:-
Sub-heads Income Operation/Programme & Educational expenses 3,74,21,986 Medical Relief, Education and Relief of poor 7,90,69,451 expenses Allied Educational and Awareness expenses 1,12,38,711 Hostel Service Expenses & Personal Expenses 2,36,41,618 Administrative and other expenses 4,19,59,268
In this way there was a surplus of Rs. 2,82,57,209/-. The Assessing Officer also found that the Association was continuously generating surplus from its activities and transferred it to the reserve for adjustments as under:-
Financial Increase in Reserve & Surplus as per year Surplus (Rs) Income & Expenditure A/c (Rs) 2007-08 3,50,08,635 4,19,60,385 2008-09 5,23,31,643 4,70,24,150 2009-10 3,58,82,809 3,43,35,808 2010-11 2,95,76,209 2,82,57,209
The Assessing Officer thereafter referred to the provision of hostel services. He found that the assessee had submitted audit report u/s 44AB in form 3CA/3CD which clearly showed that the assessee was involved in running the services and was, therefore, indulging in business activity. The assessee had incurred liability for service tax for rendering such services which had been paid by it. The Association had also paid luxury tax and VAT. Also for AY 2009-10 the Association had paid advance tax which showed that the Association was aware of its business activity and the tax liability arising there-from. The Assessing Officer noticed that the assessee was also serving beverages in the hostel and that other facilities provided by the assessee showed that the rooms were arranged in such a manner as to maximize the profit. He reasoned that any hostel being run for charity would not distinguish between any two visitors and would not allot different rooms for them. The assessee had categorized rooms in the form of Deluxe, Standard and Common Bath. Rooms were fitted with A/Cs.
Other facilities were also available. These rooms were Luxurious and the assessee had paid luxury tax on them. Apart from the above, the assessee had also provided six different types of halls for conferences like Auditorium, conference room etc which were also let-out to the corporates for seminars, reception, cultural show etc. The assessee has also provided facilities like Laptop, Chairs, Flowers, LCD and other auxiliary services on rental basis. The rates not only varied with the space/facility but also depended on the time of the day during which the space was booked in order to maximize the profit out of the activity of providing space for conference facility.
Thereafter, the Assessing Officer found that under the head ‘Education’ there were only four recognized courses as under:-
(i) Post Graduate Diploma courses in Marketing; (ii) Post Graduate Diploma course in sales management; (iii) Diploma in Hospital Administration; (iv) Learning centre for BBA of Punjab Technical University!
The other courses as run by the Association were not recognized. The Assessing Officer further found that on some educational courses, TDS had been deducted which showed that they were in the nature of commercial training/coaching. The Assessing Officer further observed that the Association had itself claimed fees for sports and music coaching/training. Obviously such fees were for coaching and training which should not have been permitted as fees for education. Adverting to the decisions of the apex court in Lok Shikshan Trust vs. CIT, (1975)101 ITR 234 the Assessing Officer observed that the word ‘education’ meant only formal education. In this context the Assessing Officer further relied upon the decision in CIT vs. National Institute of Aeronautical Engineering Educational Association (Uttrakhand) (2009) 315 ITR 428 and Rajah Sir Annamalai Chettiar Foundation vs. DIT(E) 10 ITR (Trib) 424 (Chennai.)
Thereafter, the Assessing Officer observed that the assessee had also shown income under the heads ‘Medical relief and education’ and ‘relief of rural & urban poor’ whereas according to him in the normal circumstances there should be no fees charged from the poor and there could be no income from relief of the poor.
Further, the Assessing Officer found that the assessee had shown income under head ‘Allied Educational and Awareness Income’ and TDS had been deducted on the income of the assessee. That was because the assessee had given its premises on lease and was charging rent on commercial lines since none of the tenants were doing charitable activity. In the background of these facts the Assessing Officer issued a show cause notice to the assessee to explain as to why the receipts of hostels and other activities should not be hit by the proviso of section 2(15) of the Act. The assessee had explained that it was working for the relief of the poor, education, medical relief and that the hostel services providing lodging & boarding facilities to the tourists at reasonable costs was within the purview of the charitable objects. The assessee cited the decision in Sevagram Ashram Prastisthan vs. CIT (2010) 129 TTJ 506 in support of its contention.
The Assessing Officer considered the reply and found that the hostel services were run as ‘home away from home’ for domestic and international members and delegates and activity members for the past numbers of years. The official website of New Delhi YMCA http:/newdelhiymca.in stated that it meets the needs and demands of the tourists from abroad and those in transit from many parts of India who came to this metropolis on business, excursions, holidays, sightseeing or for interviews, seminars or conferences.
The Assessing Officer obtained the list of members of the Association for the AY 2010-11 which included 489 members. Apart from the members, the Assessing Officer found that the Association had solicited many foreign and domestic tourists at its premises. In this way the Assessing Officer concluded that the Association was running a full-fledged hostel in the heart of the capital city of India at Jantar Mantar, Connaught Place, New Delhi in the guise of ‘Hostel Services’. At no point of time the Association had proved that the infrastructure including the land and building were bought from the funds of the members. There was no common identity between the participators and the contributors. There was thus no principle of mutuality in running the hostel services.
On the basis of all such material detailed here-before, the Assessing Officer adverted to the first proviso to Section 2(15) of the Act and reasoned that the proviso applied if the entity was engaged in advancement of ‘any other object of general public utility’. It postulated that such entity was not ‘charitable’ if it was involved in the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. The second part viz, any activity of rendering any service in relation to any trade, commerce or business obviously is intended to expand the scope of the proviso by including services which were rendered in relation to any trade, commerce or business. The proviso further stipulated that the activity must be for a cess or fees or any other consideration. The last part, according to the Assessing Officer, stated that the proviso would apply even if the cess, fee or any other consideration was applied for charitable activity/purpose. The proviso had to be given its full effect. The Assessing Officer reasoned that even if cess, fees or any other consideration was used or utilized for charitable purpose the proviso under the bar would continue to apply. The Assessing Officer argued that an entity would not be regarded as established charitable purpose/activity under the last limb if cess, fees or consideration was received for carrying on any activity in the nature of trade, commerce or business even if the consideration/money used was in furtherance of charitable activities. The Assessing Officer held that in view of the first proviso the ratio of the decision that the application of money/profit was relevant for determining whether or not a person was carrying on charitable activity was no longer relevant. Even if the profit earned was used for charitable purposes out of the fee, cess or consideration charged by a person for carrying on any activity in the nature of trade, commerce or business or any activity in addition to trade, commerce or business it would still be covered under the proviso and the bar/prohibition would apply. On a perusal of the sequence of amendments to the Act, the Assessing Officer noted that it emerged that a charitable trust with the general object of public utility was required to eschew any activity which was in the nature of trade, commerce or business or rendering of any service in relation to any trade, commerce or business to remain charitable and to continue the registration u/s 12A of the Act. The effect of the amendment was that a Trust having the objects of advancement of any other object of general public utility the end use of business for charitable purpose had no relevance. Earlier such use was permitted provided the conditions of Section 11(4A) of the Act were complied with. The phrase used in Section 2(15) is “irrespective or the nature of use or application, or retention of the income from such activity” and so the aspect of application towards charity was no longer relevant.
The Assessing Officer further noted that another aspect which emerged was that the new definition used the word in common parlance ‘business’ without taking the help of section 2(13) of the Act which was self-contained. The Trust or institution did not remain charitable due to the application of the first proviso on account of commercial receipts which would not be entitled to the benefit of exemption in respect of income for that previous year for which proviso to section 2(15) of the Act was applied. In this regard the Assessing Officer cited section 13(8) of the Act. Relying upon the decisions in A. Pillai & Sons vs. CIT (1961) 41 ITR 636, State of Gujarat vs. Raipur Manufacturing Co. (2008) 19 STC 1 (SC) and CIT vs. Bhikamchand Jankila (1981) 232 ITR 554 (MP) the Assessing Officer concluded that the activities of the Association including hostel services, the unrecognized educational courses, Allied Educational and Awareness programmes and the miscellaneous income etc. had characteristics as mentioned in the cited cases and, therefore, the activities of the assessee were commercial in nature. The Association was thus not working wholly and solely for the purposes of education to keep the Society out of the mischief of the proviso of Section 2(15) of the Act. The medical relief to the poor claimed by the assessee was substantially funded by UNHCR. The assessee had not given complete bifurcation of expenditure from grant received from UNHCR and so the assessee could not take the plea that the hostel services and other commercial activities were incidental to them. The end use of surplus was of no consequence after the amendment to section 2(15) of the Act. Obviously some of the objects fell under the last limb of Section 2(15) of the Act and the assessee was hit by the proviso as the assessee was generating income from commercial activities. The activities of even semi-government organizations charging fees for rendering services were held as activities of commercial in nature by the Hon’ble Andhra Pradesh High Court in WP(C) No. 32640 of 2011 vide order dated 17.12.2012 in AP State Seed Certification Agency vs. CCIT-III, Hyderabad.
As per the figures given by the Association itself, it was evident that the Association had earned approximately Rs. 9.05 crores from educational services (including running of unrecognized courses) Rs. 7.14 crores from hostel services and rest Rs. 1.1 crores from allied educational and awareness programme which showed that the assessee was generated income out of its activity thus proving beyond doubt commerciality in its activity. The Assessing Officer thereafter cited the decision in Society for Small & Medium Exporters vs. DIT(E) (2011) 57 DTR 154 (Del) (2011) 11 Taxman.com 169 (Del)/(2011) 139 TTJ 218 (Del) and averred that the Delhi Tribunal held that the DIT was right in refusing the registration to the assessee even though the objects of the Association may have been charity but the activities carried out by the Association were commercial in nature. The decision relied upon by the Association in Sevagram Ashram Prastisthan vc. CIT (supra) was no help to the assessee since the hostel services were provided on commercial lines comparable to that of 3 Star hotel. The major activities of the Society fell under the last limb of section 2(15) of the Act and were thus hit by section 13(8) of the Act. In that background the services generated was required to be taxed at the maximum marginal rate. With other observations such as these the Assessing Officer subjected a sum of Rs.3,93,68,577/- to tax at the maximum marginal rate.
When the issue reached by way of an appeal to the CIT(A)-40, New Delhi the CIT(A) following orders of the preceding years, held as under:-
“I have considered the order of the AO and the submissions of the assessee and I find considerable merit in the submissions of the assessee that the assessee is a charitable non-profit organization and mere receipt of fees and rents, etc. cannot be said that the assessee is involved in any trade, commerce or business.” Recently the Hon’ble Delhi High Court in the case of India Trade Promotion Organization vs. DGIT(E) 53 Taxman.com 404 (Delhi) 2015 (order dated 22/01/2015) has upheld the constitution validity of the proviso of section 2(15) which was under challenge being discriminatory in view of the Article 14 (Equality before law) of the Constitution of India but the Hon’ble High Court has read down the strict and literal interpretation of the proviso of Section 2(15) and has held that mere receipt of fee or charge cannot be said that the assessee is involved in any trade, commerce or business and has accordingly allowed the relief to the ITPO case vide Para 58 and 59 of the order.
After considering all the facts and circumstances of the case, I am of the view that the assessee is a charitable and non-profit organization and I do not find any of the activities of the assessee that the assessee is involved in any trade, commerce or business to attract the mischief of the proviso of section 2(15) and accordingly following the earlier year’s orders on the principle of precedence and consistency the AO is directed to allow the exemption to the assessee u/s 11(1) with all the consequential benefits”.
In the hearing before us the Ld. Senior DR vehemently supported the order of assessment and pointed out that the Assessing Officer had correctly applied the relevant provisions of the Act in terms of the facts of the case which showed that the hostel was run with 3 star facilities on commercial lines. Ld. Sr. DR also pointed out that many unrecognized courses were run by the Association on commercial lines.
Consequently there was huge generation of surplus year-after-year. All that proved beyond doubt that the activities of the Association were commercial and not charitable. The Ld. Senior DR quoted extensively from the assessment order to demonstrate that the Assessing Officer has correctly brought to tax the surplus for taxation at the maximum marginal rate as provided in law. Ld. Senior DR pointed out that the computation of income for the year had been made by the Assessing Officer in terms of proviso attached to Section 2(15) of the Act. Ld. Senior DR directed that it made little difference in such circumstances to the aspect of redeployment of surplus on the avowed objectives. Such act, according to him, would not fetch the exemption for charity as pressed on behalf of the Association. Ld. Sr. DR pointed out that in the face of the violation of Section 13(1)(b) and (13)(1)(d) of the Act the tempt of charity was rightly deuced by the Assessing Officer.
Per contra the Ld. Sr. Counsel for assessee submitted that it was a ritual every year with the Department to cull the activities of the Association as commercial and non-charitable and raise heavy demands thereafter. Such action, as taken in assessment of this year, has been taken in many years in the past also which have all been reversed in appeal. Adverting to the Written Submission filed before the CIT(A), the Ld. Counsel pointed out that similar objections taken by the Department in the assessment years 1989-90, 1990-91, 1991-92 and 1993-94 have been reversed in appeal by the Tribunal. Copies of the orders passed by the Tribunal for those years holding the activities of the Association as charitable and non-commercial were filed in the additional Paper Book. The Ld. Counsel also filed assessment order for AY 1997-98 where the Assessing Officer himself had held the Association to be charitable in nature. Income for that year had been computed by the Assessing Officer in terms of provisions of Section 11 of the Act. That assessment had attained finality. The Ld. Counsel emphasized that there was no change in the objectives of the Association at any time. He pointed out that the hostel facility was intimately connected with the educational activity of the Association. Ld. Counsel further stated that the Act did not prescribe the criteria of the educational course to be an approved course for fetching the benefit of charity u/s 11 of the Act. The proviso to section 2(15) of the Act as introduced was applicable only to the fourth limb of charity i.e any other object of general public utility. That the Ld. Counsel submitted stood clarified through a Board Circular. The provision of hostel facilities was intimately and inextricably connected with the educational activity. Hostel facilities as provided were neither lavish nor prodigal as made out by the Department. Ld. Counsel emphasized that the nominal income as derived from the letting out of idle facilities of the halls and rooms for raising funds for charity could not be a ground to brand the activities of the Association as commercial. Ld. Counsel further pointed out that the mere payment of luxury tax and other taxes by the Association for the Hostel and other facilities run by it would not tantamount to the conversion of charitable objectives into a commercial objective. Ld. Counsel denied carrying out any religious programmes with the objective of promoting Christianity. Ld. Counsel submitted that the objectives were purely secular and the benefit of the pursuit of charity was conferred on one and all irrespective of caste, colour or creed. He submitted that whatever surplus had been earned year after year had been regularly applied solely for the promotion of the charitable objectives of the Association. As to the hold of outsiders over the disposal of assets by the Association, the same was prescribed since inception of the Association. Such restrictions were entirely devised to safeguard the assets and properties of the Association. There was no breach of Section 13(1)(d) of the Act for all investments were held in prescribed terms of securities and no trustee of the Association had ever hold over any asset or property of the Association. The decision of the apex court in Thiagarajar Charities vs. Addl CIT (1997) 225 ITR 1010 (SC) was cited in support of the argument that so long as the surplus was deployed in promoting charity there was no aberration. Ld. Counsel also relied upon the Delhi High Court decision in India Trade Promotion Organization vs. DGIT(E) (2015) 371 ITR 333 for explaining the meaning of the term charity as defined in Section 2(15) of the Act.
We have considered rival contentions and have gone through the impugned order, the Paper Book and also the case laws which have been cited before us. We are of the view that the order of the CIT(A) is flawless and so the assessee has to succeed in this case. That is because the assessee Association, which is registered as a charitable entity u/s 12A of the Act, has carried out its activities in terms of the objectives as approved by the Department at the time of securing Section 12A registration. Nothing is brought on record by the Assessing Officer to indicate that there has since been any change in the objectives or the Rules and Regulations of the Association or that the activities as undertaken during the year are not in conformity with the registration conditionalities. The Association has been held as a charitable entity in the past. The Assessing Officer has not brought any specific material on record to indicate any violation of either Section 13(1)(b) or section 13(1)(d) of the Act. It is true that the Association is running several educational courses some of which are recognized while some are not recognized. As to the unrecognized courses, we notice that there is nothing in the Act which prohibits the carrying on of any such course so long as it is educational. Charitable entities can rent out their idle premises to raise funds for charity. No objection can be taken to that action. As to the hostel facilities, the same as urged on behalf of the assessee is aligned to the objective of the Association to provide education. Nothing has been brought on record by the Assessing Officer to show that the hostel facilities are de hors the educational activities of the Association and are for commercial purpose. That being the case the provision of hostel facilities cannot in the facts of this case, be held to fall under the 4th limb of charity viz any other object of general public utility. So long as hostel facility is aligned to education, no plausible objection can be raised as to the charitable nature of the activities. The amendment as made to the definition of charity by insertion of the proviso by the Finance Act, 2010 is thus of no consequence to the facts in the subject case.
We notice that in the past similar objections have been taken in assessment by the respective Assessing Officers. In AY 1989-90 the Tribunal in the assessee’s own case dismissed the departmental ground of appeal where it was alleged that the CIT(A) had erred in holding that the assessee was entitled to benefit u/s 11(1) of the Act read with Section 2(15) of the Act. In the AY 1990-91 the departmental appeal was again dismissed by the Tribunal where the ground raised was that the CIT(A) had erred in allowing the benefit of Section 11 of the Act by holding that the activities of the Society were charitable though the Assessing Officer had rightly applied the provisions of Section 11(4)(A) of the Act by holding the same as business activity. In AY 1993-94 once again the departmental appeal was dismissed by the Tribunal where the point in issue was that the CIT(A) erred in allowing the benefit u/s 11 of the Act by holding that the activities of the Society were chargeable(sic) although the Assessing Officer had rightly applied the provisions of Section 11(4)(A) of the Act by holding the same as business activity. It seems that the CIT(A)’s first appeal order in AY 1992-93 became final where it was held by the CIT(A) that the Appellant was entitled to exemption u/s 11of the Act and the provisions of Section 11(4)(A) of the Act were not applicable to the case. There-after in AY 1997-98 the Assessing Officer himself in the assessment order dated 11.01.2000 conferred charitable status to the assessee by applying Section 11 of the Act. While fees may be charged and there may even to be a surplus out of charitable activities, the principle that so long as the surplus funds are redeployed in charitable activities no objection can be taken as to the charitable pursuits is inexceptionable. This has been so held by the apex court in Thiagarajar Charities vs. Addl CIT (1997) 225 ITR 1010 (SC).
27. Further the Hon’ble Delhi High Court has ruled that the expression charitable purpose as defined in Section 2(15) of the Act could not be construed literally and in absolute terms. The expression would take its colour and had to be considered in the context of Section 10(23C)(iv) of the Act. The court held that if in terms of the dominant and primary objectives of the Institution there was no desire to gain profits and the object was to promote trade and commerce not for itself but for the nation was to be construed as a charitable purpose. Thus, on a careful consideration of the entirety of the facts and the material on record and based on the history of the case and the existing precedents on this point, we have no hesitation in holding that the CIT(A) has rightly decided the issue in favour of the assessee Association by directing relief u/s 11 read with Section 12AA of the Act. Resultantly the appeal filed by the Department is dismissed.
As to the cross objection filed by the Assessee-Association no separate submissions were made. Consequently, the Departmental Appeal having been dismissed the cross objection stands disposed off pro-tanto.
In the result, the appeal of the Revenue as well as the cross objection of the assessee are dismissed.
The order is pronounced in the open court on 20.11.2017.