2018 (7) TMI 1084 - AT - Income Tax

Eligibility to section 11 - Registration under section 12AA - Held that - If the main activity of the assessee i.e. providing hostel facilities to the students fall within the ambit of expression education employed in the main provision of section 2(15) then generation of surplus would be immaterial because ultimately is to be ascertained whether surplus is being used for the purpose of fulfilling all the objects of the trust or not. If the surplus is being applied on the objects of the trust or being accumulated as provided in the scheme, then nothing is to be taxable. AO has unnecessarily created an artificial distinction. The assessee is not admitting other persons in the building. It is providing facility only to the students, and there are lots of rules and regulations, bye-laws for admitting students, according to their merits in education. Thus, taking into account overall facts and circumstances, we are of the view that the assessee is entitled for benefit of sections 11 and 12. If the assessee is entitled for benefit of sections 11 and 12, then the amount spent from the corpus fund for construction of building is also to be looked into with that angle. We set aside both the orders of the Revenue authorities and restore this issue to the file of the AO. AO shall re-determine taxable income of the assessee and after providing benefit under sections 11 and 12. Appeal of the assessee is allowed for statistical purpose.

Issues:
1. Interpretation of section 2(15) of the Income Tax Act regarding charitable purpose.
2. Classification of activities of an assessee trust as trade, commerce, or business.
3. Taxability of surplus over expenditure and denial of deduction as application of income.
4. Disallowance of exemption under sections 11 and 12 of the Income Tax Act.
5. Consideration of providing hostel facility as imparting education or advancement of general public utility.

Analysis:
1. The Tribunal analyzed whether providing hostel facilities by the appellant trust falls under the definition of "charitable purpose" as per section 2(15) of the Income Tax Act. The AO claimed that the activities were not educational but related to trade, commerce, or business. However, the Tribunal highlighted the essential role of hostels in education, emphasizing that hostels contribute significantly to the educational and character development of students. The Tribunal concluded that the activities of the trust, including providing hostel facilities, align with the charitable purpose of education and upheld the trust's entitlement to benefits under sections 11 and 12 of the Act.

2. The Tribunal addressed the classification of the trust's activities as trade, commerce, or business. The AO argued that the trust's surplus indicated commercial activities. However, the Tribunal noted that the surplus generated was minimal compared to the overall expenses and the trust's long-standing charitable nature. The Tribunal emphasized that the primary activity of providing hostel facilities to students was within the scope of education, not commercial ventures. Consequently, the Tribunal set aside the AO's classification and restored the issue to be re-evaluated considering the trust's entitlement to tax benefits under sections 11 and 12.

3. The Tribunal examined the taxability of surplus over expenditure and the denial of deduction as application of income. The AO treated the surplus as income and disallowed capital expenditure. However, the Tribunal found that the surplus was not indicative of commercial activities but rather aligned with the trust's charitable objectives. The Tribunal emphasized the importance of surplus utilization for fulfilling the trust's objectives and directed the AO to re-determine the taxable income considering the trust's eligibility for benefits under sections 11 and 12.

4. The Tribunal addressed the disallowance of exemption under sections 11 and 12 of the Income Tax Act. The AO had denied the exemption based on the trust's activities being perceived as trade or commerce. However, the Tribunal disagreed with this classification, emphasizing the trust's historical charitable nature and compliance with registration requirements under sections 12AA and 80G(5). The Tribunal concluded that the trust was entitled to benefits under sections 11 and 12, overturning the AO's decision and directing a reassessment by the AO.

5. The Tribunal deliberated on whether providing hostel facilities constituted imparting education or advancement of general public utility. The AO contended that hostel facilities did not align with educational purposes. However, the Tribunal highlighted the integral role of hostels in education, emphasizing that hostels contribute significantly to students' educational and personal development. The Tribunal concluded that the trust's provision of hostel facilities was in line with educational objectives, qualifying for benefits under sections 11 and 12. The Tribunal allowed the appeal for statistical purposes, emphasizing the trust's eligibility for tax benefits under the Income Tax Act.

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