2006 (10) TMI 186 - AT - Income Tax

Applicability of the provisions of sections 11 and 12 - Objects of the society are wholly charitable in nature or not u/s 2(15) - derived income by way of tuition fee, admission fee, science laboratory fee, bus fee, breakage fee and hostel fee from the students - whether profits earned from the school constituted income from property held under trust - HELD THAT - We are of the considered view that relief of poor, education and medical relief are charitable activities per se and if any institution is carrying out any of these objects, then, such an institution will be pursing a charitable purpose. Thus, it follows that all objects mentioned in the memorandum of the assessee-society are charitable purposes. On perusal of the objects, it is seen that one object is for providing a school with nursery and kindergarten classes. This object relates to educational activities. We have already held that this is a charitable purpose. However, the activities are being run in the manner in which a commercial enterprise is being run, as is clear from the facts that the assessee has been earning profits from year to year and any loss in the subsidiary activities is also recouped from Children Welfare Fund . In our view, sub-section (4A) creates a dichotomy between the trust and a business activity which is incidental to attainment of the objects of the trust, and make profits from such activity exempt from tax if separate books of account are maintained. Needless to say that such profits ought to be in the public domain as pointed out in the case of Loka Shikshana 1975 (8) TMI 1 - SUPREME COURT . We may add that is a necessary ingredient for any activity to be termed as charitable purpose, as such purpose, by its inherent nature, excludes private gain from its ambit. Unfortunately, neither the Assessing Officer nor the learned CIT (Appeals) have examined this aspect of the matter. Therefore, the matter is restored to the file of the Assessing Officer to consider the issue whether separate books of account are maintained in respect of the schools run by the trust and thereafter examine whether provisions of section 11(4A) are applicable to the facts of the case. The net profit earned from these schools, and not gross receipts, will then be considered for exemption u/s 11(1)(a). It is a fact that the assessee has been running schools and such activities constitute charitable purpose . But running schools in a systematic manner and generating profits from year to year also constitute a business activity. The only saving grace in this case is that such an activity is incidental to attainment of the object No.5 of the society for the simple reason that running of schools is incidental to educational purpose. Thus, the case is covered u/s 11(4A). On the facts, it cannot be said that expenditure incurred in a commercial activity is entitled to exemption u/s 11(1)(a). Thus, the appeal of the revenue is treated as allowed only for statistical purposes with a direction that the Assessing Officer shall frame a fresh assessment after granting reasonable opportunity of being heard to the assessee on the issue of applicability of provisions of section 11(4A) of the Act and grant of exemption u/s 11(1)(a) from net profit of the schools in respect of amounts applied for charitable purposes, mentioned in the Memorandum.

Issues Involved:
1. Whether the objects of the assessee-society are wholly charitable in nature.
2. Whether the fees collected by the assessee from the students constitute income from property held under trust.
3. Applicability of section 11(4A) of the Income-tax Act, 1961 to the assessee's activities.
4. Whether the assessee is entitled to exemption under section 11(1)(a) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Whether the objects of the assessee-society are wholly charitable in nature:
The revenue argued that the assessee did not pursue its primary charitable objects (Nos. 1 to 4) but only the object of running a school (object No. 5), which was run in a commercial manner, generating profits year after year. The CIT(A) and the assessee countered that education is per se a charitable activity under section 2(15) of the Act. The Tribunal concluded that the relief of poor, education, and medical relief are charitable activities per se, and since the assessee was running a school, it was pursuing a charitable purpose. Therefore, all objects mentioned in the memorandum of the assessee-society were considered charitable purposes.

2. Whether the fees collected by the assessee from the students constitute income from property held under trust:
The revenue contended that the fees collected were not income derived from property held under trust, as defined under various sub-sections of section 11. The CIT(A) and the assessee argued that the word "property" has a wide import, and since the society was running the schools, the fees collected were income from property held under trust. The Tribunal agreed with the CIT(A) and the assessee, holding that the school constitutes property held under trust, and the fees collected are income derived from such property.

3. Applicability of section 11(4A) of the Income-tax Act, 1961 to the assessee's activities:
The Tribunal noted that section 11(4A) creates a dichotomy between a trust and a business activity incidental to the attainment of the trust's objectives. If separate books of account are maintained, the profits from such incidental business activities are exempt under section 11(1). The Tribunal found that the assessee's activities were run in a commercial manner, generating profits systematically. Therefore, the matter was remanded to the Assessing Officer to examine whether separate books of account were maintained for the schools and whether the provisions of section 11(4A) were applicable.

4. Whether the assessee is entitled to exemption under section 11(1)(a) of the Income-tax Act, 1961:
The revenue argued that the income was not derived from property held under trust, and thus, the expenditure could not be allowed under section 11(1)(a). The CIT(A) and the assessee contended that since the income was derived from property held under trust, the expenditure incurred should be deductible under section 11(1)(a). The Tribunal held that the net profit earned from the schools, and not the gross receipts, would be considered for exemption under section 11(1)(a), provided the conditions of section 11(4A) were met. The matter was remanded to the Assessing Officer for a fresh assessment on this issue.

Conclusion:
The Tribunal allowed the revenue's appeal for statistical purposes, directing the Assessing Officer to frame a fresh assessment after examining the applicability of section 11(4A) and considering the net profit from the schools for exemption under section 11(1)(a) in respect of amounts applied for charitable purposes.

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