DAYA NAND PUSHPA DEVI CHARITABLE TRUST,GHAZIABAD vs. ADDL. CIT, GHAZIABAD

IN THE INCOME TAX APPELLATE TRIBUNAL NEW DELHI BENCH : SMC-II, NEW DELHI

BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER

ITA No.4238/DEL/2015 Assessment year : 2010-11

Daya Nand Pushpa Devi Vs. The Additional Commissioner of Charitable Trust, Income Tax, NH-24, Delhi Hapur Bye Pass, Range 1, Qazipura More, Ghaziabad. Ghaziabad. PAN: AAATD 2572Q APPELLANT RESPONDENT

Appellant by : Shri Akhilesh Kumar, Advocate Respondent by : Shri S.K. Jain, Sr. DR

Date of hearing : 15.09.2016 Date of Pronouncement : 21.09.2016

O R D E R This appeal is preferred by the assessee against the order dated 02.03.2015 of the CIT(Appeals), Muzaffarnagar inter alia on the following grounds:-

“1. Because, the order of learned lower authority is bad in law and against the facts and circumstances of the case and hence is unsustainable. 2. Because, the learned commissioner of income tax (appeals) grossly erred in upholding, that 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) but is a separate business activity in terms of section 11(4A), by wrongly

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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 law about the first three limbs of section 2(15) even after 01.04.09. 4. Because, without prejudice to above but only as an alternative, the learned lower authority failed to appreciate that assessee had maintained sufficient separate accounts and Id. AO himself calculated separate surplus in said activity on the basis of said accounts hence order upholding rejection of exemption u/s 11-12 even after invoking 11 (4A) for said activities is illegal as admittedly more than 85% of income is utilized for charitable purposes. 5. Because, the learned lower authority has further erred in upholding the disallowance of Rs. 3488089/- out of total exp. incurred Rs. 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 absurd results beside example of third party is neither reliable nor confronted to assessee etc. hence disallowances are sustained without any application of mind. Therefore, it is prayed that finding of lower authorities holding hostel facility as separate business activity etc. may kindly be quashed and disallowances and computation of taxable surplus of Rs. 34,88,089/- may kindly be held illegal and prayed to be quashed. However, without prejudice to above and only as an alternative and without 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.”

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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 College in the name & style of

“Harsharan Dass Dental College” at Ghaziabad. A certificate of registration

u/s. 12A was also granted to it. The AO has also observed that the

assessee is providing hostel facilities to students against the hostel fees

which was included in the fee receipt and the corresponding expenses was

also exclusively shown in Income & Expenditure Account for providing

hostel facilities to students. Besides treating the hostel fees charged per

student at higher side in comparison 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.

CIT(Appeals) with the submission that the activities for running hostel is

also one of the object and it has maintained separate accounts of Income &

Expenditure of such activities and showed a deficit of Rs.68,198 from such

activity, as the assessee has shown gross income of Rs.66,20,000 and

expenditure of Rs.66,88,198 resulting into a loss of Rs.68,198.

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(i) Running of hostel activities is not incidental to the activities of imparting education. (ii) Even if it is assumed that it is incidental to the main activities, the benefit cannot be given as no separate books of accounts are maintained by the assessee.

“ The word education has not been defined in the' Act. However, the appellant has argued that his case is covered 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

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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:” The AO has written in detail as to how the income of the appellant from transport business is not covered under 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 instruction which a person has received. The word education has not been used in that wide and extended sense according to which every acquisition of further knowledge constitutes education. According to this wide and extended sense, travelling is education because as a result of travelling you acquire fresh knowledge. Likewise, if you use newspaper and magazines, see pictures, visit art galleries, museums and zoos, you thereby add to your knowledge. Again when you grow up and have dealings with other people 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 of life. All this in a way is education in the great school of life. But that is not the sense in which the word education is used in clause (15) of section 2. What education connotes in that clause is the process of training

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and developing the knowledge, skill, mind and character of students by normal schooling.” The Hon'ble Court has further held that the difficult question however still remains. What is the meaning of charitable purpose which is only indicated but not defined by section 2(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 activity, any possible benefit to the person who does the charitable act is merely incidental or even accidental and immaterial. From the above judgment of the Hon'ble Supreme Court it is clear that running of hostel can't be termed as education. The order of the Hon'ble Supreme Court is the law of the land and binding on all the authorities. Respectfully following the judgment of the Hon'ble Supreme Court it is held that the activity of the appellant is not covered under the term education. 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. The appellant has also not submitted any argument against the findings of the AO that the surplus fees were not reimbursed to the students. If the purpose was charity the appellant should have refunded the money to the students which have not been done. In fact, the AO has demonstrated very successfully the profit element involved in running hostel activity. The profit motive is clear from the fees charged which is as per market rate.

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chargeable to tax. It is strange to assume that the same activity will be exempted in the hands of the appellant only because it is running an educational institute and no outsider is being admitted into hostel. The fees charged are the same and the facilities provided are also comparable. There is no provision in the Income Tax Act which exempts this income. 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 activity is a separate source of revenue for the appellant. 4. If it is incidental whether separate books of accounts are maintained as provided in section 11(4A) of the I.T. Act. Even if for argument sake it is assumed that the activity of running of hostel is incidental to the main activity of the society/ trust, then also the appellant is not entitled for exemption u/s11(4A) of the I.T. Act because it has not maintained separate books of accounts as provided in section 11(4A). The AO has invoked the 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 trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or is of a kind notified by the Central Government in this behalf in the Official Gazette ; or (b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries

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of the institution, and separate books of account are maintained by the trust or institution in respect of such 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 or institution will be charged to tax on such profits & gains at the rates of tax applicable in the case of individuals, association of persons, body of individuals etc. 74. At present, all categories of income derived by charitable or religious trusts, institutions and funds, which are notified by the Central Government "under section 10(23C)(iv) and (v) of the Income-tax Act are exempt from income-tax. In conformity with the proposal to tax profits and gins of business in the case of 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 1984-85 and subsequent years. " The above explanatory note clearly explains the intention of the legislature to tax business profits of religious or charitable trusts. Prior to 01.04.1992 even for a very small activity of business or profession the trusts became exigible to tax wholly i.e. they lost exemption in respect of all activities including charitable. Now with effect from 01-04-92 only business and professional receipts have lost exemption and charitable receipts

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are still outside the 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 trust or institution in respect of such business.] This provision was brought by amending the existing provision of section 11(4A) by Finance Act 1991 with effect from 01-04-1992. The explanatory notes on the provisions relating to direct taxes have been explained by Circular No.629 dated 19-12-1999. The relevant para of the explanatory note is reproduced as under.- "15.8 In order to bring exemption of charitable or religious trust in line with the corresponding provisions in section 10(23C) (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 incidental to the attainment of the objective of the trust will be taxable. Further if the business activity is incidental then the appellant is required to maintain separate 'books of accounts. Therefore, there are two condition to be simultaneously fulfilled if the business profit of a trust has to get the benefit of section 11 (4A). First the business has to be incidental to the main object and second separate books are maintained. In the present case, the appellant has not disputed the fact that 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.

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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 appellant in the entire submission has not controverted to this finding of the Assessing Officer. The Hon'ble Chennai High Court in the case of Director of Income-tax(Exemption), Madras vs. Willington Charitable Trust [2010] 330 ITR 24(MAD) have replied in favour of Revenue the following question of law. "(1) When section 11 (1) read with section 11 (4) of the Income-tax Act exempts income from the business undertaking of the Trust to the extent it is applied for charitable or religious purpose, 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 that it is mandatory and a condition precedent for the assessee to maintain the same while seeking exemption. ..............” From the above it is clear that the appellant was required to maintain separate books of account for his transport business which he has not done and therefore, the AO was fully justified in denying the exemption u/s 11 (4A) of the Act to the appellant. It is not the case of the AO that the appellant is not engaged in imparting education through its various courses. The AO 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.

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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 previous year of the trust or institution if "the business is incidental to the attainment of the objective of the trust or, as the case may be, institution" and separate books of account are maintained in respect of such business. " Therefore there is no doubt that the law as laid down by the Hon'ble Supreme Court squarely covers the facts of the appellant's case and since he has not maintained separate books of account exemption. u/s 11(4A) has been rightly denied. In the 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 other persons in the market. The Hon'ble High Court has also observed that exemption under section 11(4A) will only be available if the business is incidental to the object of the trust/society and separate books are maintained. In the present case no separate books have been maintained. The institute of chartered accountant is responsible for laying guidelines for audit and accounting. They have given an independent opinion. The Act itself is very, clear on maintaining separate book of account 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

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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 11 (4) of the Act specifically speaks about the power of the Assessing Officer to deal with a property held in trust. The condition stipulated under section'11 (4A) of the Act that the assessee should maintain separate books of account for the business income has been introduced with a specific purpose and object behind it. The reason for introducing such a condition is to make sure that the assessee shall not claim and get exemption for the business income which is not used for charitable 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 eligibility of the assessee to seek exemption under section 11 of the Act. The appellant has relied on various judgments which are discussed as follows: - 1. CIT Lucknow vs. Lucknow Development Authority (2013)(38 taxmann.com 246)(Ald)- In this case the AO assessed the entire income of the authority as business income which is not the case of the appellant. The case of LDA was covered under the head advancement of any other object of General Public Utility. The Hon'ble Court has held in para 18 of 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 analyzing this aspect in the matter of CIT

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vs. LDA. Since, the facts are different this case also doesn't help the appellant. 2. PHD chamber of commerce and industry vs. DIT Delhi (2013) - This case has also been discussed in detail in earlier paras of this order and does not help the appellant. Similarly, the other case laws on which the appellant has relied are not applicable to the instant case. The appellant's main argument is that even if an institute which is carrying out educational activity 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 the fourth limbs i.e. object of any public utility. The concession granted in 11 (4A) is restricted to the business which is incidental to the attainment of the objective of the trust and separate books are maintained. In view of the above, the argument of the appellant fails.”

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Expenditure account, there was a deficit of Rs.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 assessee trust is

registered u/s. 12A of the Act. It was also stated that the assessee has

taken the profit in the accounts in respect of hostel activities, therefore it

cannot be said that separate books of accounts are not maintained. He

also placed reliance upon the judgment of the Hon’ble Orissa High Court in the case of CIT v. Silicon Institute of Technology (2015) 370 ITR 567

(Orissa) wherein it was held that spending the amount received by

assessee by way of collection of tuition fees or collection 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 object of providing education, namely, the

object of the society. Further, reliance was also placed upon the judgment of Hon’ble Supreme Court in the case of ACIT v. Thanthi Trust, 247 ITR

785 (SC) in which it was held that a business whose income is utilised by

the trust or the institution for the purpose of achieving the objectives of the

trust or the institution is, surely, a business which is incidental to the

attainment of the objectives of the trust. In support of his contention that if

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the assessee 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)

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documents placed on record, I find that running of hostel activities is one of

the objects of the assessee trust and it is also seen that where the

educational institutions are set up, the assessee society or trust provides

hostels for the students against the particular hostel fees. In the instant

case, the hostel fees were charged @ Rs.4,500 to Rs.5,000 per month per

student. During the course of hearing, it was explained that against this

hostel fees, the assessee trust is providing all facilities including boarding &

lodging to all the students. Therefore, this amount charged as 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 case of ACIT v. Thanthi Trust, 247 ITR

785 (SC) the Hon’ble Apex Court has held that a business whose income is

utilised by the trust or the institution for the purpose of achieving the

objectives of the trust or the institution is, surely, a business which is

incidental to the attainment of the objectives of the trust.

who get admission in the educational institution, therefore the hostel

activites can only be termed to be incidental to the main activity of

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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 separate books of accounts with respect to hostel activities, the answer was in the negative.

“(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 trust or institution in respect of such business.”

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he denied the benefit of exemption u/s. 11 of the Act with respect to hostel activities. Even during the course of hearing, these findings of CIT(Appeals) was not controverted and I am, therefore, of the view that in the absence of separate books of accounts, the assessee is not entitled for benefit of exemption u/s. 11 of the Act with respect to hostel activities and in light of these facts, if 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, I do not find any infirmity in the order of CIT(Appeals) and accordingly I confirm the same.

Pronounced in the open court on this 21st day of September 2016.

Sd/- (SUNIL KUMAR YADAV ) Judicial Member New Delhi, Dated, the 21st September, 2016. /D S/

Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, New Delhi.

Assistant Registrar, ITAT, New Delhi.