2021 (7) TMI 124 - HC - Income Tax

Exemption u/s 11 - whether the hostel activity of the trust which is imparting dental education in the institution established by it is a business activity incidental to the attainment of its objectives or it is an activity which is an integral and inseparable part of the main activity(education) carried on by the assessee? - HELD THAT - In the facts of the present case it can be safely concluded that the surplus, if any, generated out of the activity of maintaining halls and residents for the students being an integral part of the main object of education, was liable to be treated as income from the property held by the trust wholly for charitable purposes and was, therefore, deductible from the total income of the trust (person in receipt of the income) by granting exemption under Section 11. Any interpretation or meaning given to the word business in the literal parlance cannot be read into the Income Tax Act as the word business has been defined in the Act itself. The Court has to read the statute namely the Income Tax Act to find out as to whether the activity of the assessee in maintaining the hostel would be exempted under Section 11(1) of the Act and whether the provisions of Section 11(4A) would be attracted in the facts and circumstances of the case. Having held that the activity of running the hostel is not a separate business activity and surplus income from the hostel fee cannot be treated as profit and gains of a separate business or commercial activity of the trust, it is held that the exemption under Section 11(1) of the Act cannot be disallowed to the assessee. - Decided in favour of the assessee.

Issues Involved:
1. Whether the hostel activity of a charitable institution engaged in imparting education can be considered "business" under Section 11(4A) of the Income Tax Act.
2. Whether the income generated from the hostel activity can be treated as business income, attracting the pre-conditions of Section 11(4A) for exemption under Section 11(1) of the Act.
3. Whether the trust is required to maintain separate books of accounts for the hostel activity under Section 11(4A).

Detailed Analysis:

1. Definition of "Business" and "Charitable Purposes":
The court examined the definitions under the Income Tax Act, where "business" includes any trade, commerce, or manufacture, and "charitable purposes" include "education" without any restrictions. The court emphasized that the term "education" in Section 2(15) is broad and encompasses all levels and types of education, making the trust's activities charitable.

2. Application of Section 11(4A):
Section 11(4A) stipulates that income from business activities of a trust is exempt only if:
- The business is incidental to the attainment of the trust's objectives.
- Separate books of accounts are maintained for such business.

The court clarified that Section 11(4A) presupposes a business venture independent of the main activity but incidental to the trust's objectives. The court referred to the Supreme Court's judgment in Assistant Commissioner of Income Tax vs. Thanthi Trust, which noted that the substituted Section 11(4A) allows trusts to engage in business activities to support their charitable objectives, provided the income is used for these objectives.

3. Integral vs. Incidental Activities:
The court applied the "dominant purpose" test to determine whether the hostel activity is an integral part of the trust's educational activities or a separate business. The court concluded that the hostel activity is integral and inseparable from the trust's educational activities, mandated by the Dental Council of India's requirement for residential facilities. The hostel and mess facilities are provided only to students of the educational institution, making it an essential part of the trust's educational purpose.

4. Comparison with Other Institutions:
The court rejected the revenue's comparison of the hostel fees with those of other institutions, stating that such comparisons are irrelevant to the dominant purpose test. The fees charged depend on the facilities provided, and the court found no evidence that the hostel activity was carried out with a profit motive.

5. Case Law References:
The court referred to several judgments to support its conclusions:
- Indian Institute of Technology vs. State of U.P.: Running visitor hostels for temporary accommodation of research scholars was considered an integral part of the institution's academic activities, not a business.
- Swadeshi Cotton Mills vs. Sales Tax Officer: The dining hall service at Aligarh Muslim University was deemed an integral part of the educational activity, not a commercial business.
- Mahatma Gandhi Kashi Vidyapeeth vs. State of U.P.: The court held that incidental activities related to the main non-commercial activity do not constitute business unless there is an independent intention to conduct business.

6. Revenue's Argument on Profit Motive:
The court dismissed the revenue's argument that education is an occupation and thus a business, emphasizing that the Income Tax Act's definition of "business" must be strictly interpreted. The court relied on principles from Commissioner of Sales Tax vs. Modi Sugar Mills Ltd. and Commissioner of Income Tax vs. Shahzada Nand & Sons, which state that taxing statutes must be interpreted based on their clear language without assumptions or implications.

Conclusion:
The court concluded that the hostel activity is not a separate business but an integral part of the trust's educational activities. Therefore, the income from the hostel fees should not be treated as business income, and the trust is not required to maintain separate books of accounts for the hostel activity under Section 11(4A). The court set aside the assessment order and remitted the matter back to the Assessing Officer for fresh examination, treating the hostel fee income as part of the charitable activity of education.

Judgment:
The appeal was allowed, and the assessment order dated 12.03.2013, along with the affirming orders by the CIT(A) and the Tribunal, were set aside. The matter was remitted back to the Assessing Officer for re-examination in light of the court's observations.

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