2019 (1) TMI 92 - AT - Income Tax

Charitable activity - Entitlement to exemption u/s 11 and 12 denied - transport and hostel facilities surplus considered as business income of the assessee society - Held that - Respectfully following the decision of the coordinate bench in case of Krishna educational society vs. Additional Commissioner Of Income Tax 2017 (9) TMI 1030 - ITAT DELHI as held transport and hostel facilities surplus cannot be considered as business income of the assessee society which is mainly engaged in business activities and these activities are subservient to the main object of education of the trust. We allow the appeal of the assessee and hold that assessee is entitled to exemption under section 11 and 12 of the income tax act with respect to the hostel and transport facilities provided to the students of the educational society. In the result, the appeal of the assessee is allowed as per ground number three raised before us. As we have already held that assessee is entitled to exemption under section 11 and 12 of the act and is not carrying on the business activities when it receives the hostel fees and transportation facilities from the students of the educational Inst, therefore, we reverse the order of the learned commissioner of income tax appeals. Further it is not required to adjudicate on the enhancement made by the learned commissioner of income tax appeals as the basis of the enhancement itself has been negated by us. - Decided in favour of assessee

Issues Involved:
1. Issuance of Notice u/s 251(2) in the guise of Notice u/s 251(1).
2. Violation of provisions of sections 11, 12, and 13 of the I.T. Act.
3. Classification of Hostel and Transport facilities as commercial activities.
4. Maintenance of separate Books of Accounts for Hostel and Transport facilities.
5. Charitable nature of the trust and its activities.
6. Exemption u/s 11 of the I.T. Act.
7. Taxation under section 56(1) vs. section 11(4A).
8. Separation of educational institution and the Trust.
9. Applicability of sections 10(23C)(iv) and 10(23C)(vi) vs. sections 11 and 12.

Detailed Analysis:

1. Issuance of Notice u/s 251(2) in the guise of Notice u/s 251(1):
The assessee argued that the CIT(A) erred in law and on facts by issuing a Notice u/s 251(2) under the guise of Notice u/s 251(1), conferring powers of enhancement of income without considering the Explanation. The powers under Section 251 allow the CIT(A) to address issues raised in the Assessment Order and not to introduce new issues.

2. Violation of provisions of sections 11, 12, and 13 of the I.T. Act:
The CIT(A) was accused of failing to raise specific queries justifying the finding of violations of sections 11, 12, and 13. The appellant, a charitable society under section 2(15), had already been granted exemption under section 12A.

3. Classification of Hostel and Transport facilities as commercial activities:
The CIT(A) treated Hostel and Transport facilities as purely commercial activities, which the assessee contested, arguing these were integral parts of the primary educational activities and not commercial in nature.

4. Maintenance of separate Books of Accounts for Hostel and Transport facilities:
The CIT(A) alleged that the appellant failed to maintain separate Books of Accounts for Hostel and Vehicle running expenses. The appellant clarified that books of accounts were maintained, and surplus from both heads was declared in the Income & Expenditure Account.

5. Charitable nature of the trust and its activities:
The appellant argued that profits feeding a charitable purpose do not alter the charitable character of the trust, supported by the case Sole Trustee, Lok Shikshana Trust v. CIT, Mysore. The CIT(A) ignored this principle.

6. Exemption u/s 11 of the I.T. Act:
The CIT(A) denied exemption u/s 11, despite the appellant fulfilling all terms and conditions for the exemption. The appellant maintained that the transport and hostel facilities were integral to the trust's educational objectives.

7. Taxation under section 56(1) vs. section 11(4A):
The CIT(A) taxed the appellant’s income under section 56(1), while the appellant argued it should have been taxed under section 11(4A) if proper books of account were not maintained. The appellant contended that the facilities provided were integral to the trust's objectives and not incidental business.

8. Separation of educational institution and the Trust:
The CIT(A) separated the educational institution from the Trust, which the appellant argued was incorrect as both are part and parcel of each other. The provision of Transport and Hostel facilities was integral to the Trust's educational activities.

9. Applicability of sections 10(23C)(iv) and 10(23C)(vi) vs. sections 11 and 12:
The CIT(A) opined that the income of educational institutions should be dealt with under sections 10(23C)(iv) and 10(23C)(vi) and not under sections 11 and 12. The appellant, being a charitable society under section 2(15), argued it was entitled to exemption under section 12A.

Judgment Analysis:

The ITAT Delhi bench considered the appeals for both assessment years 2006-07 and 2007-08 together. The assessee, a charitable society, filed returns declaring nil income. The AO noted that the assessee provided hostel and transport facilities but did not maintain separate books of accounts, leading to the denial of exemption under section 11.

The CIT(A) confirmed the AO's assessment and further enhanced the income, treating the entire gross receipts as taxable under the head "income from other sources." The assessee contended that the hostel and transport facilities were integral to its educational activities and not separate business activities.

The ITAT referred to a similar case (Krishna Charitable Trust) where it was held that providing hostel and transport facilities to students and staff is not a business activity but subservient to the main educational objective. The ITAT concluded that the assessee was entitled to exemption under sections 11 and 12 for the hostel and transport facilities provided.

The ITAT reversed the CIT(A)'s order, allowing the assessee's appeal and holding that the hostel and transport facilities' surplus could not be considered business income. The ITAT also negated the basis for the enhancement made by the CIT(A), rendering further adjudication unnecessary.

Conclusion:
The appeals for both assessment years were allowed, affirming the assessee's entitlement to exemptions under sections 11 and 12, and rejecting the classification of hostel and transport facilities as commercial activities. The ITAT emphasized that these facilities were integral to the educational objectives of the charitable society.

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