2019 (8) TMI 1199 - AT - Income Tax

Grant of registration u/s 12AA denied - hostel facility provided to the students by charging fees cannot be regarded as charitable activity in view of proviso to section 2(15) - HELD THAT - No finding has been recorded by the CIT(E) that the students of Shekhawati Public Senior Secondary School are provided accommodation and stay facility by the assessee society. There is nothing on record which helps determine the reasonability of hostel fees vis- vis similar facilities provided by any other service provider and in absence thereof, it would be difficult for us to examine the aforesaid contention so raised by the ld AR. During the course of hearing, in order to examine the rent payment made by the assessee society, the Bench has asked the ld AR to submit copies of rent agreement which has been entered into by the assessee society which has subsequently been placed on record and on perusal of the same, it is noted that three of these rent agreements have been entered into with related parties so defined in section 13(3) even as per the audit report for the financial year ended March 31, 2017 relevant to assessment year 2017-18. It needs to be examined whether the rent payment to related parties are commensurate with the area taken on rent and local market/locality conditions where such premises is situated. Such examination will help determine the intent behind setting up of hostel facilities as to whether the hostel facility has been set up as an charitable activity or the rental arrangement has been so structured by way of a cash extraction mechanism where the hostel fees so collected is paid by way of rental payments beyond the acceptable and commensurate amount vis- -vis area/premises taken on rent so as to benefit the related persons. Merely because there is nominal surplus at the end of the financial year is not determinative of the charitable nature of the activity, however, the whole financial structure which has been designed need to be examined to see the real intent behind such activities. Where the financial structure is so designed to benefit the trustees directly or indirectly through any such rental arrangements which are finally held to be unreasonable or not commensurate with the market conditions, it would be difficult to hold that the hostel facilities are not run with profit motive. However, we are leaving the matter open for the ld CIT(E) to examine taking into consideration the aforesaid discussion. CIT DR also pointed that in the fixed asset schedule of the financial statements for the year ended March 31, 2017, the assessee society has shown asset block of building with written down value of ₹ 43,45,512. It was submitted that on perusal thereof and the fact that there is also rental arrangements, it is not clear in respect of which all properties, the assessee is paying rent and which all properties/building are owned by the assessee society. We find that these are also matters which require to be examined as the same will again have a bearing on the overall financial structure which has been put in place by the assessee society which is an existing running society. Matter is set-aside to the file of the ld CIT(E) to examine the same afresh taking into consideration the aforesaid discussion - Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Rejection of the application for registration under section 12AA of the Income Tax Act, 1961.
2. Determination of whether providing hostel facilities by charging fees constitutes a charitable activity under section 2(15) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Rejection of the application for registration under section 12AA:
The assessee society appealed against the order of the CIT(Exemptions), Jaipur, dated 27.04.2018, which rejected the application for registration under section 12AA of the Income Tax Act, 1961. The CIT(E) held that the income derived from hostel fees and the expenditure incurred for running the hostel indicated a business activity rather than a charitable one. The CIT(E) emphasized that the predominant object of the assessee appeared to be business, not charity, as the hostel was run by charging fees, which could not be regarded as a charitable activity under section 2(15) of the Act.

2. Determination of whether providing hostel facilities by charging fees constitutes a charitable activity:
The assessee argued that the primary objective of the society was to provide hostel facilities to students without any profit motive, which should be considered a charitable activity. The society was registered under the Rajasthan Society Act, 1958, and the main object was to aid education by providing accommodation to students at reasonable rates. The assessee cited Circular No. 11/2008 by the CBDT, which clarified that genuine institutions carrying out activities for general public utility without profit motive would not be hit by the proviso to section 2(15) even if they charged fees for services rendered.

The assessee also referenced the ITAT Ahmedabad Bench's decision in the case of Shree Ahmedabad Lohana Vidyarthi Bhavan Vs. Income Tax Officer (Exemption), where it was held that providing hostel facilities is an essential component of an educational institution and should be considered as imparting education under section 2(15) of the Act. The decision emphasized that hostel facilities play a crucial role in the education and development of students, contributing to their overall educational experience.

Judgment Analysis:
The Tribunal examined the contentions and the financial statements of the assessee society. It noted that the entire income of the society was derived from hostel fees, and the expenses were related to running the hostel. The CIT(E) had not provided evidence to establish that the hostel fees were unreasonable or that the activities were conducted with a profit motive. The Tribunal highlighted the need to examine the reasonableness of the hostel fees and the rental arrangements, especially since some rent agreements were with related parties.

The Tribunal pointed out that the financial structure and the intent behind setting up hostel facilities needed thorough examination to determine if the activities were genuinely charitable or structured to benefit related parties. The Tribunal set aside the matter to the CIT(E) for a fresh examination, considering the detailed discussion on the financial structure and the nature of activities.

Conclusion:
The appeal was allowed for statistical purposes, and the matter was remanded to the CIT(E) for a fresh examination of the assessee's application for registration under section 12AA, taking into consideration the detailed analysis of the financial structure and the nature of the activities carried out by the assessee society. The Tribunal emphasized the need to determine the genuine intent behind the activities and whether they were conducted with a profit motive or as a charitable endeavor.