THE FINE ARTS SOCIETY,MUMBAI vs. DY DIRECTOR OF INCOME TAX (EXEMPTIONS) - 1(2), MUMBAI

2. The first common issue in these two appeals of assessee is as regards to the order of CIT(A) confirming the action of the AO in holding that the assessee is not entitled to exemption under section 11 of the Act and further pursued activity in the music school did not constitute education. As issue is same in both A.Ys. 2011-12 & 2012-13, we will take up the grounds from AY 2011-12. For this assessee has raised the following six grounds: - “1. On the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in confirming the Assessing Officers stand in holding that the Appellant is not entitled to exemption under Sec. 11 of the Income Tax Act, 1961.

2. On the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred in confirming the Assessing Officer's stand that that giving the hall on rent is the main activity of the Appellant, on the basis that the main income and expenditure of Appellant related to this activity.

3. On the facts and in the circumstances of the case, the Ld. ClT(Appeal) erred in confirming the Assessing Officer's stand that the pursuit of activity in the Music School did not constitute 'Education'.

4. On the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in confirming the Assessing Officer's stand that the pursuit of the activity in Performing Arts did not constitute Education'.

5. On the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in confirming the Assessing Officer's stand in not following the principles laid down by the Hon'ble Supreme Court in re. Commissioner of Income Tax vs. Thanthi Trust (247 ITR 785) for the purpose of understanding the definition of the term incidental to the attainment of the objectives of the Trust or the institution".

4. In view of the above, the AO observed that the assessee having mixed object of which some are covered under charitable purposes and others are in the nature of commercial. Finally, the AO discussed the following: - “1. The object of the assessee is commercial.

3. The charitable activity of the assessee are very little.

4. The major portion of its expenses are also related to its commercial activity.

5. The trustees of the assessee have been granted power to spend the money of the trust on the objects of the trust which also includes commercial activities."

5. The AO relied on the decision of Hon’ble Delhi High Court in the case of Yogiraj Charity Trust vs. CIT (1976) 103 ITR 777(SC), wherein Hon’ble Delhi High Court has held that if the objects are mixed and assessee is engaged in both the activities, the exemption under section 11 of the Act cannot be claimed. Aggrieved against the findings of AO, the assessee preferred the appeal before CIT(A).

6. The CIT(A) after considering the submissions of the assessee, confirmed the action of AO by holding that the assessee is not engaged in purely educational activity but the education is merely byproduct. He observed in Para 6 as under: - “i. Appellant submitted that it is engaged in educational activity for which number of music conference including international conferences were organized. However, during the course of appellate proceedings no details having any such conferences / international conferences were filed. It was stated that the exposition of fine arts by talented and 7'nownec artists spreads awareness and knowledge of our culture amongst the community at large. In this regard, reliance is placed on the judgment of Hon’ble Supreme Court in the case of Sole Trustees Lok Shikshan Trust vs. CIT 101 ITR 234 wherein it was held that wore education connotes the process of training and developing the knowledge, skill, mind and character of students by normal schooling and the use of the said word in section 2(15) is not in the wide and extensive sense to consider every acquisition of further knowledge as "education Similar observations were made by Hon’ble Patna High" Court p the case of Bihar Institute of Mining and Mine Surveying vs. CIT 208 ITR 608. Further in the case of CIT vs Sorabji Nusserwanji Parekh 201 ITR 939, Hon’ble Gujarat High Court ted that the element of imparting education to the students or element of normal schooling where there are teachers and taught, must be present so as to fall within the meaning of "education” ii Reliance in this regard was placed by the appellant on the judgment of Sri Thyaga Brahma Gana Sabha (supra). However, on perusal of this judgment it is noted that the order in this case was passed on 14.6.1990 and hence it has not considered proviso to section 2(15) of Income Tax Act 1961 which was brought on the statute with erect from assessment year 2009-10. Also it is noted that the Hon'ble High Court in this case in para 12 have observed that in such cases it is to be considered as to whether education is the real fundamental purpose or it is merely a byproduct, if this test is applied to the facts of the appellant's case. 51% receipts being from rental income proves education to be merely a byproduct only. Further it is noted that in this case a very meager amount of rental income was there and also the trust was running into persistent losses. As against this, the appellant has earned profit during the year and rental income is more than 51% of total receipts. Thus the facts of the two cases being distinguishable, the ratio does not apply to the facts of the appellant's case. iii The appellant has also relied upon the judgment in case of Delhi Music Society (Supra). However, it is noted that the facts of two cases are distinguishable. In the case before Hon’ble Delhi High Court, the issue related to t1e provisions of section 10(23C)(vi). Further Facts as mentioned in para 11 and 12 of the order were that the school worked for all seven days a week and remains closed only on national and public holidays, that the school is divided into four terms of three months each, that the petitioner was acing run like any school or educational institution in a systematic manner with the regular classes, vacations, attendance requirements, enforcement of discipline and so on. As against this, in the Case of the appellant no such facts have been brought on record and its main activity is to let out the hell, from which 51% of the total income Is received. Also 16% of the income is from rent on account of letting out a portion of premises to the bank. Thus the main activity in the assessee's case is to let out its property and not to spread knowledge and hence ratio of these judgment is not applirll5ië to the assessee's case. iv. The appellant has also relied upon the judgment in case of Dawoodi Bohra Jarnat (supra) However, on perusal of this judgment it is noted that the issue in this case related to the registration u/s. 12AA and the question before the Hon'ble Bombay High Court was whether the objects were both religious and charitable. Thus, the facts of the case are distinguishable. Further, the appellant las relied upon the judgment of Hon'ble Supreme Court in the case of Thiagarajar Charities 225 ITR 1010. Again on perusal of this judgment it is noted that in this case the object clause was misinterpreted and accordingly it was held that no business was carried out. Thus, the facts of this case are also distinguishable. v. The appellant submitted that the giving the hall on rent is not the object of the appellant and hence provision of section 2(15) is not applicable. In this regard, it is mentioned that the Assessing Officer in para 'B on page 17 of his order has discussed in detail the object clauses and mentioned as to how they include commercial activity and fall under advancement of any other object of general public utility'. It has dearly been demonstrated that the objects are mixed, out of which some are covered under "commercial' in nature. However, the main activity i.e. more than 51% is by way of letting out hall on rental basis for commercial activities. Further, on page 21 the Assessing Officer has referred to the p6wers of board of trustees wherein it has been highlighted that they have discretionary powers to spend the trust fund on various activities. For example, in clause 4.19, the Board of Trustees shall frame such rules and regulations as may be necessary for letting out on hire, the buildings and other immovable properties. They are also empowered to spend the money of the trust of objects of trust which includes commercial activity. In view of these facts the provisions of proviso to section 2(15) is squarely applicable to the appellant's case vi. The appellant also relied upon the Judgment in the case of Delhi High Court in India Trade Promotion Organization (supra). In the said judgment the Hon'ble Court has held that if a dominant and prime objective of the institution which claims to have been established for the charitable purposes is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its objects as charitable purposes. Here it would be relevant to mention that the Hon'ble Court has Clearly stated that the dominant object is to be looked into. From the discussion made by the Assessing Officer with reference to each object it is very clear that each object includes commercial activity. Further, this is also corroborated by the fact that 51% of the income is from letting out of the hail, which again proves its main activity as business which is profit making. Thus even applying this ratio of Hon'ble Delhi High Court, proviso to section 2(15) is directly applicable to the facts of the appellant’s case. vii. The appellant has relied upon the judgment in the case of Delhi High Court, in the case of Institute of Chartered Accountants of India. On perusal of this Judgment it is noted that the Hon'ble Court have in unambiguous terms observed that the object of introducing first proviso to section 2(15) is to exclude organizations which are carrying on regular business from the scope of 'charitable purpose". The appellant is engaged in the regular business of letting Out of its property from year to year and hence as per findings of Hon'ble Delhi High Court in this case also, the appellant is hit by proviso to section 2(15).

viii. The appellant argued that its activity of giving the hail on rent has been going on since long and was accepted by the department allowing the benefit of section in this regard, it is mentioned that in this case a legal issue regarding applicability of proviso to section 2(15) has arisen. It has been held by Hon'ble courts that where legal issue arises the principle of resjudicata does not apply in the case of Oswal Agro Mill (313 ITR 24), the Hon'ble Supreme Court has held that where question of law is involved, the rule of consistency will not prevail. Similar observations were made by Hon'ble apex court in 313 ITR 363; 307 ITR 338; 300 ITR 336. Further, in the case of British Paints (188 ITR 44), the Hon'ble Supreme Court has held that there cannot be estoppel against the law. Similar view was held in the cases of Luchi Ram Puranmal [177 CTR 640 (MP)]; Foss Electric 263 ITR 125] and Distributors of Baroda [118 ITR 243]. The Hon’ble Delhi High Court in CWT vs. Meattles (p) Ltd. 156 ITR 569 has held that the revenue authorities cannot be stopped from taking a view of statutory provisions in the later year In another case or CIT Vs Seshasayee Industries Ld. (Mad) 242 ITR 691, it was further held that the fact that its claim was not questioned in earlier years does not entitle the assessee to contend that the law should not be applied during the current A.Y. and in the case of Ace Investments (P) Ltd Vs. CIT (Mad) 244 ITR 166 'it was held that facts can be reconsidered in later year and record different finding - Finding for earlier year not conclusive.' Contention of the appellant is therefore not acceptable. ix. In view of above discussion grounds of appeal numbers 1 to 4 are dismissed.”

Aggrieved, now assessee is in appeal before Tribunal.

9. On the other hand, the learned Sr. Departmental Representative, took us through the Assessment Order and the order of CIT(A). He argued that the claim of assessee that it is engaged in educational activity is not proved by any evidence like no details having in conference/ international conference on music were held. The learned Sr. Departmental Representative, also argued that the main activity of the assessee Trust can be identified from the gross receipts and out of which 51% receipts is by way of letting out of building on rental basis for commercial activities. According to him, once the assessee trust earns income for commercial purposes i.e. letting out and earning of rental income and that also substantial part i.e. 51% of gross receipts, it cannot be held that it is engaged in charitable activity or educational activity. The learned Sr. Departmental Representative heavily relied on the findings of CIT(A) that education may be byproduct in the preset case but assessee’s 51% receipts being from rental income proves that education is merely a byproduct and there is very less activity of education. He heavily relied on the assessment order and the order of CIT(A).

Sr. Nature of Course Affiliation Examination conducted No. 1. Hindustani Vocal Akhil Bharatiya Examinations conducted at Harmonium and Gandharva premise of the Fine Arts Society. Tabla Mahavdyalaya, Students have to appear for both Miraj practical and written examinations. Certificates to successful candidates issued by Akhil Bharatiya Gandharva Mahavidyalaya, Miraj 2 Course in Kathak Akhil Bharatiya Examinations conducted at Dance Gandharva premise of the Fine Arts Society. Mahavdyalaya, Students have to appear for both Miraj practical and written examinations. Certificates to successful candidates issued by Akhil Bharatiya Gandharva Mahavidyalaya, Miraj.

3. Bharat Natyam Nalanda Dance 7 Year Course – Exams conducted Research Centre, and certificates issued to Juhu successful students by Nalanda Research Centre, Juhu.

“Section 12AA of the Income-tax Act, 1961, lays down the procedure for registration in relation to the conditions for applicability of sections 11 and 12 as provided in section 12A . Therefore, once the procedure is complete as pro-vided in sub-section (1) of section 12AA and a certificate is issued granting registration to the trust or institution the certificate is a document evidencing satisfaction about : (i) the genuineness of the activities of the trust or institution, and (ii) about the objects of the trust or institution. Section 12A stipulates that the provisions of sections 11 and 12 shall not apply in relation to income of a trust or an institution unless the conditions stipulated therein are fulfilled. Thus, granting of registration under section 12AA denotes that the conditions laid down in section 12A stand fulfilled. The effect of such a certi-ficate of registration under section 12AA , therefore, cannot be ignored or wished away by the Assessing Officer by adopting a stand that the trust or institution is not fulfilling the conditions for applicability of sections 11 and 12 .”

We find that the main objection of the departmental authorities was that the SH was rented out most of the time and that it was a commercial activity. In our opinion, act of letting out of hall cannot be and should not be considered in isolation. Eligibility or otherwise of benefit u/s. 11 of the Act cannot depend solely on one factor. What has to be seen is as to whether the trust is incurring the expenditure for the objects and purposes for which it was established. We find that the issue of letting out of a hall by a charitable institute was deliberated upon by the Hon’ble Madras High Court in the case of Madras Stock Exchange Ltd(supra) and Women’s India Trust (supra).We would like to reproduce the relevant portion of the judgment of the Hon’ble Bombay High Court in the case of Women’s India Trust and it reads as under:

“The assessee-trust formed to carry out the object of education and development of natural talents of people having special skills, more particularly women. It trained them to earn while learning. It educated them in the field of catering, stitching, toy making, etc. While giving them training, it used material bought from the open market. This was essential for carrying out the assessee’s object. In the process, some finished product such as pickles, jam, etc., were produced and which the assessee sold through shops, exhibitions and personal contacts. The motive of the assessee was not the generation of profit but to provide training to needy women in order to equip or train them in these fields and make them self-confident and self-reliant. There was nursing training, which was also being managed and administered by the assessee. The details of income and expenditure showed that the assessee had received donations of Rs. 36,88,634 and nursing school fees of Rs. 4,46,088. The assessee pointed out that this nursing training provided at the centre of the assessee at Panvel was free of cost. The charge was levied for the mess but accommodation and other facilities were free of cost and apart from community development programmes, which were undertaken to educate rural women, they were taught various skills and made aware of how to live honourably. The Tribunal found that this was not an activity which would fall within the proviso to section 2(15) . The Tribunal referred to two letters addressed by the trustees of the assessee-trust clarifying that in the past, such activities had been found to be incidental to the objects of the trust. Secondly, the donation received during the year had been utilised in the assessment year 2009-10 for achieving the object of the trust. However, the bank interest received was continued and, then, there was a deficit. It was in these circumstances that the argument was canvassed that the fees collected for training women were only to meet the cost of expenses for providing them food items. Their accommodation and other facilities were free of cost. The Tribunal found that the trust may be set up for advancement of any other object of general public utility but that would not cease to be charitable purposes because the activities in which the trust was involved could not be termed as carrying on of trade, commerce or business, that the activity undertaken did not partake of the character of trade, commerce or business nor of rendering of any service in relation thereto but was only to teach or impart skills and to instill confidence that the produced goods or articles were sold. To that extent also deficit had occurred. The Tribunal took a view that occasional sales or the trust’s own fund generation were for furthering the objects but not indicative of trade, commerce or business. The proviso did not apply. …… considering the fact that the trust had been set up and was functional for the past several decades and it had not deviated or departed from any of its stated objects and purpose, utilisation of the income, if at all generated, did not indicate the carrying on of any trade, commerce or business. The Tribunal’s view was to be upheld. It was a possible view and could not be termed perverse. The view was taken on an overall consideration and bearing in mind the functions and activities of the trust. In such circumstances, it was not vitiated by any error of law apparent on the face of the record.”

6.1.We also find that the assessee had suffered loss in the various activities, carried out by it, to the tune of Rs.32 lakhs(app.)except for eye care department and interest on investment (Pg.50,52, 56-57 of the PB).A perusal of Pg.s 82-84 reveal that expenditure incurred by it during the year under appeal pertained to overall administration and activities. In other words the said expenditure would have to be incurred even if the SH was not let out.SH was rented out when it was not required by the assessee for its own purpose. Here, one important factor to be remembered is that the it could continue to carry out various charitable activities and could achieve the objects at concessional rates due to income received by it from letting out of SH.

6.2.It is also a fact that the departmental authorities have, in the past, admitted that activities carried out by it were of charitable nature. No new fact has been brought on record to prove that during the year some different incidents had taken place as compared to the earlier year to change the nature of the activities. The letting out of SH, during the period when it was not required by the trust,was not considered a commercial activity in the earlier years. It is true that principles of res judicata are not applicable to the income tax proceedings. But, at the same time it is also true that principles of consistency have to be followed while deciding the tax matters. In the case of International tractors Ltd., the Hon’ble Delhi High Court(397 ITR 696)has held that deductions allowed in the earlier assessment years should not be withdrawn unless the circumstances have changed. The Hon’ble Allahabad High Court in the matter of Zazsons export Ltd.(397 ITR 400) has held as under:

In order to maintain consistency, a view, which had been accepted in an earlier order ought not to be disturbed unless there was any material to justify the Department to take a different view of the matter.”

While deciding the appeal, the Hon’ble Court had taken note of the proceedings of the earlier AY.s. As the rule of consistency has not followed without bringing distinguishing features of the year under appeal, as compared to the facts of the earlier years, so, in our opinion the order of the FAA cannot be endorsed on this count.

6.3.We also find that one of the object of the assessee was to impart training in music and that training of music has been considered education by the Hon’ble Court. In that regard we would like to rely upon the cases of Delhi Music Society (supra) Jeevan Vidya Mission (supra) and hold that imparting training of music was an educational activity.

6.4.Finally,we would like to address the argument of the FAA about applicability of proviso to section 2(15)of the Act. We find that the AO as well as the FAA has empasised the fact that the provisions of the proviso to the section 2(15)the assessee was not entitled to claim the benefit of section 11 of the Act. We would like to reproduce the proviso and it reads as under:

(15) “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 object of general public utility shall not be a charitable purpose, if it involves 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, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.

If we consider the various activities carried out by the assessee, as evident from the various pages of the PB, it is clear that it was incurring expenditure in the fields of education and medical relief. Therefore, in our opinion, the assessee cannot be denied the benefit of section 11.Here, we would like to refer to the case of Ahmedabad Urban Development Authority (396 ITR 323)of the Hon’ble Gujarat High Court wherein the court has held as under:

“The introduction of the proviso to section 2(15) of the Income-tax Act, 1961, by virtue of the Finance Act, 2008 was directed to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity with the object of a general public utility. It is not designed to hit at those institutions, which had the advancement of the objects of general public utility at their hearts and were charity institutions. The expressions trade, commerce and business as occurring in the first proviso to section 2(15) must be read in the context of the intent and purport of section 2(15) of the Act and cannot be interpreted to mean any activity which is carried on in an organised manner. The purport of the first proviso to section 2(15) of the Act is not to exclude entities which are essentially for charitable purposes but are conducting some activities for a consideration or a fee. The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity.

Considering the above, we hold that the assessee is running music school and providing medical services and it is utilising SH for augmenting its funds. In these circumstances in our opinion, it cannot be held that the it is carrying out business activities and the charitable activities are by product, as alleged by the departmental authorities. What has to seen in such cases is a holistic view of the things and not a narrower view. We would like to refer to the matter of Institute of Chartered Accountants of India(358 ITR 91),wherein the Hon’ble Delhi High Court has held as under:

“A plain reading of section 2(15) of the Income-tax Act, 1961, indicates that the expression “charitable purpose” has been divided into six categories, namely, (i) relief to poor, (ii) education, (iii) medical relief, (iv) preservation of environment including watersheds (forest and wildlife), (v) preservation of monuments and places or objects of artistic or historical importance, and (vi) advancement of any other object of general public utility. The first proviso to section 2(15) of the Act carves out an exception which excludes advancement of any other object of general public utility from the scope of charitable purpose to the extent that it involves carrying on any activity in the nature of trade, commerce, or business or any activity of rendering certain services in relation to any trade, commerce, or business, for a cess or fee or any other consideration is irrespective of the nature of the use or obligation, or retention of the income from such activity. The expressions “trade”, “commerce” and “business”, as occurring in the first proviso to section 2(15) of the Act, must be read in the context of the intent and purport of section 2(15) of the Act and cannot be interpreted to mean any activity which is carried on in an organised manner. The purpose and the dominant object for which an institution carried on its activities is material to determine whether the same is business or not. The purport of the first proviso to section 2(15) of the Act is not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee. The object of introducing the first proviso is to exclude organisations which are carrying on regular business from the scope of “charitable purpose”. The expression “business”, “trade” or “commerce” as used in the first proviso must, thus, be interpreted restrictively and where the dominant object of an organisation is charitable any incidental activity for furtherance of the object would not fall within the expression “business”, “trade” or “commerce”.

In light of the above discussion, we decide the first ground of appeal in favour of the assessee.”

8. On the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in confirming the disallowance of expenditure on establishment and administration relating to Music School and Performing Arts, aggregating to Rs.58.58.630/- in computing the income of the Appellant.

Order pronounced in the open court on 04-07-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 04-07-2018 kao kI ga[- .