M/S. NIGHTINGALE EDUCATION SOCIETY,NOIDA vs. JCIT, NOIDA

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ITA 3323/DEL/2015Status: DisposedITAT Delhi10 November 2015AY 2010-114 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that running a hostel, including a mess for in-house students, is an incidental and integral activity essential for the running of a nursing college. The Tribunal noted that the revenue authorities did not controvert the facts that the college has mainly girl students and that AICTE norms necessitate maintaining a hostel for their safety. The Tribunal found that the AO's conclusion of business activity was solely based on the generation of a surplus. The Tribunal reasoned that since the activity is incidental and interconnected to the main object, the question of maintaining separate books of accounts does not arise. Furthermore, the Tribunal observed that the AO was able to ascertain the revenues and expenses related to the hostel and mess, demonstrating that the object of maintaining separate books (to ascertain financial results) was achieved. Therefore, the Tribunal vacated the orders of the AO and CIT(A) to the extent they taxed the income from hostel and mess activities. No issue was expressly left undecided.

What were the facts?

The assessee, Nightingale Education Society, is registered under Section 12AA of the Income Tax Act, 1961, and runs a nursing college. For AY 2010-11, it filed a Nil income return. The Assessing Officer (AO) selected the case for scrutiny and issued multiple notices. The AO treated the surplus generated from running a hostel and mess as business income, disallowing hostel expenses as application of income. The AO held that the society violated Section 13(1)(bb) and Section 11(4A) by not maintaining separate books of accounts for the hostel/mess activity. The assessee appealed to the CIT(A), who upheld the AO's order. The assessee then filed an appeal before the ITAT.

What were the issues?

1. Whether the activity of running a hostel and mess by the assessee society is to be treated as business income, thereby violating the provisions of Section 11(4A) of the Income Tax Act, 1961? Assessee's Contention: The assessee argued that running the hostel and mess is a composite and inseparable activity from its main object of education, essential for providing a safe and secure environment for its nursing students, particularly girls, as per AICTE norms. They contended that separate books of accounts are not mandatory if the entire surplus is used for charitable objects and that the hostel is not for outsiders. Revenue's Contention: The revenue authorities, including the AO and CIT(A), held that the hostel and mess activity generated a surplus and was therefore business income. They further contended that the assessee violated Section 11(4A) by failing to maintain separate books of accounts for this activity, leading to the denial of exemption under Section 11.

Which sections of the Income-tax Act were involved?

Section 12AA,Section 11(4A),Section 11,Section 13(1)(bb),Section 143(2),Section 142(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI BENCH ‘SMC-2’, NEW DELHI

Before: SHRI J. SUDHAKAR REDDY

For Appellant: Shri Sidharth Jain, FCA

This is an appeal filed by the Assessee directed against the order dated 12.2.2015 of the Ld.Commissioner of Income Tax (Appeals)-I, Noida pertaining to the Assessment Year (A.Y.) 2010-11.

2.

Facts in brief:- The Assessing Officer has brought out the facts of the case from page 1 to 3 of his order which is extracted for ready reference. “This is a case of society which was Registrar of Society, U.P. vide registration no.377/2003-04 on 14.7.2003. The society has been granting registration u/s 12AA of the Income Tax Act, 1961 (the Act) by the then Ld.CIT, Ghaziabad vide order no. C.No.57(32)/Registration/Gzb/2003-04/3471 dt. 20.11.2003. In this case return of income was filed on 30.09.2010 declaring Nil income. The case was selected under scrutiny through CASS and statutory notice u/s 143(2) dated 13.09.2011 was. issued and properly served upon the assessee within stipulated time as per law. On change of incumbent another notices u/s I43(2) and 142(1) along with detailed questionnaire dated 0l.06.20l2 dated 01.06.2012 were issued fixing the date for compliance on 08.06.2012. Again on change of incumbent another notices u/s 143(2) dated 07.11.2012 was issued to the assessee fixing the date for compliance on 20.11.2012. In compliance these notices Shri Mukesh Jain, FCA/Authorized Representation of the assessee attended the proceedings from time to time and furnished

~ 2 ~ necessary details/explanation as called. The books of accounts produced, have been test checked. The case was discussed with him. 3.) Assessment of surplus of mess/Hostel as business income u/s 114(A) of the Act and disallowance of Hostel expenses as application. Perusal of record shows that the assessee is running hostel and received Rs. 71,87,825/- on account of hostel mess. No separate books of accounts have been maintained. The assessee has claimed that activity of running hostel not a . business because it is utilized for charitable purpose and it is as per requirement of ACITE norms and hostel is not an isolated unit, it is inclusive of the main object of the society i.e education. In this regard it is to submit that unfortunately certain condition has been fixed for maintaining hostel to certain extent by AICTE but nowhere condition of generating surplus has been mentioned. Had it not been business the assessee could have reimbursed its surplus to the beneficiaries or the members of the hostel, else could have reduced the cost of subsequent year to the fees charged from per student, it is further to point out that the charge of fees per student is also comparable with market price which ranges between Rs. 3,000/- to 4,000/- per student. During the course of assessment assessee has submitted us reply which is perused and found that assessee has relied upon the claim of exemption on the Hostel receipt on following two scores. i) Hostel, transportation is a composite activity of the main object of the society it is non-separable and cannot be treated as business; ii) The maintenance of separate books of accounts is not mandatory and it is not required as the whole surplus of organization is used or attainment of object of the society i.e. education; iii) The society is running a nursing college and students are mainly girls to prove them safe and secure environment hostel is must for the institute; iv) Hostel is not meant for outsiders.”

3.

For the various reasons given in his order the A.O. held that, the activity of running of hostel and transportation are business activities. He rejected the claim of the assessee that these activities are incidental to its main objective of education and that, running of a hostel and mess is mandatory as per the regulations.

~ 3 ~ 3.1. He was of the view that the assessee violated S.13(1)(bb) of the Act. He further held that the assessee has not maintained separate books of accounts as required under the statute and hence exemption u/s 11 of the Act is to be denied.

4.

Aggrieved the assessee carried the matter in appeal. The First Appellate Authority extracted the order of the A.O. from page 2 to page 17 of his appellate order. There after he reproduced the grounds as well as the written submissions of the assessee from page 17 to page 25 of the order. Thereafter at page 26 he concluded that the income from the hostel/mess activity, is business income and as the assessee society has failed to maintain separate books of accounts for this activity, there is violation of provisions of S.11 (4A) of the Act. Thus he held that the income from hostel and mess activities are liable to be taxed for violations of S.11(4A) of the Act.

5.

Aggrieved the assessee is in appeal before me.

6.

After hearing rival contentions I find that the assessee is running a nursing college, and the students are mainly girls. It was also submitted that the All India Counsel for Technical Education has laid down rules that such nursing colleges should maintain hostel for providing the students a safe and secured environment. These facts are not controverted by the revenue authorities. The only ground on which the AO has come to a conclusion that the running of the hostel is business, was the fact that certain surplus was generated in this activity.

7.

In my considered view, running of a hostel, which included a mess for the inhouse students, is an incidental activity, essential for running a nursing college. Thus it is not a separate business activity as held by the revenue authorities. It is not only incidental, but it is also integral and interconnected to running a nursing college. Hence the question of maintaining separate books of accounts does not arise. Thus the order of the AO to the extent confirmed by the First Appellate Authority is hereby vacated.

~ 4 ~ 7.1. Even otherwise the AO was able to arrive at the revenues and expenses connected and relatable to the activity of running hostels and mess by the assessee. He had brought the surplus to tax by separately computed the income from these activities. This demonstrates that the claim of the Revenue that no separate books of accounts are maintained is to be dismissed for the reason that, the object of maintenance of separate books of accounts is only for the purpose of ascertaining the financial results of that particular activity. And this object is achieved, the question of holding that there is violation of S.11(4A) of the Act does not arise.

8.

In the result assessee’s appeal is allowed.

Order pronounced in the Open Court on 10th November,2015.

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