2021 (4) TMI 113 - AT - Income Tax

Exemption u/s 11 - Educational activiity u/s 2(15) - CIT-A treated the income from recording studio as business income under section 11(4A) treating the income from recording studio as business income under section 11(4A) - HELD THAT - The assessee is a charitable trust engaged in imparting education in the field of classical music and light music based on the Gurukul Philosophy where the student learns by virtually staying with the Guru. The institution was founded in 1932 by Acharya Jialal Vasant and has 84 years of rich heritage. The institution has a repute for providing scientific training in Hindustani Classical Music and Light Music. The trust has a studio namely Ajivasan Sounds which is used for the purpose of training students in professional singing and also the same is made available to various artists for the purpose of recording. We find that the gross receipts are only 16.72 lakhs which subsidize the fees for 33.01 lakhs for 785 students which works out to 4206/- per student per year. In the instant case the maintenance of studio is intrinsic and in pursuance of the objects of the assessee which is education. It is well understood that teaching of Indian Classical Music is within the field of education . The activities of the studio are carried on in order to achieve the main object of the Trust and cannot be construed as business. As mentioned earlier since the trust is engaged in education the proviso to section 2(15) does not apply as clarified by CBDT Circular No. 11 dated 19.12.2008. As mentioned earlier in the case of Sri Thyaga Brahma Gana Sabha 1990 (6) TMI 27 - MADRAS HIGH COURT affirmed the order of the Tribunal in holding that letting out of building did not involve profit-earning activity even assuming it to be an activity. The trust deed is to be read as a whole. Similar are the facts in the instant case. Therefore following the above decision of the Hon ble Madras High Court we set aside the order of the Ld. CIT(A). Facts being identical our decision for the AY 2010-11 applies mutatis mutandis to AY 2012-13.

Summary

Issues Involved:
1. Denial of exemption under section 11 by treating income from recording studio as business income under section 11(4A).
2. Disallowance of expenditure incurred on the objects of the trust.
3. Applicability of the proviso to section 2(15) regarding the nature of the trust's activities as "educational."
4. Assessment of the percentage of receipts from the recording studio in relation to the total receipts.
5. Determination of whether the studio facility is integral to the trust's training activities and not a separate business.
6. Consideration of the surplus from the recording studio as incidental to the trust's main activities without a profit motive.
7. Compliance with section 11(4A) regarding the maintenance of separate books of accounts for incidental business activities.

Detailed Analysis:

1. Denial of Exemption under Section 11:
The primary issue was whether the income from the recording studio should be treated as business income under section 11(4A) of the Income Tax Act. The Assessing Officer (AO) observed that the studio activities were conducted with an intention to make profits, based on factors such as continuity, magnitude, quantum, and frequency of the activities. The AO concluded that the income from studio charges should be taxed as business income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this decision, noting that the studio charges constituted a significant portion (28.68%) of the total receipts and were conducted in an organized manner, indicating a profit motive.

2. Disallowance of Expenditure:
The AO disallowed the expenditure of ?5,00,151 incurred by the assessee towards "Ajivasan Sounds," deeming it non-allowable as it was related to the business activity of the studio. The CIT(A) confirmed this disallowance, agreeing with the AO's assessment.

3. Applicability of Proviso to Section 2(15):
The assessee argued that the trust's activities were "educational" and thus the proviso to section 2(15) did not apply. The trust maintained that the studio was used for hands-on training in music, which was integral to its educational objectives. The CIT(A) and AO, however, held that the studio activities were separate business activities and not incidental to the educational objectives of the trust.

4. Assessment of Percentage of Receipts:
The assessee contended that the percentage of receipts from the recording studio was only 10.10% of the total receipts, below the threshold to attract the proviso to section 2(15). However, the AO and CIT(A) calculated this percentage as 28.68%, leading to the conclusion that the studio activities were substantial and indicative of a business activity.

5. Integral Nature of Studio Facility:
The assessee claimed that the studio facility was an integral part of its training activities in music, and making it available for recording was incidental to its main objects. The AO and CIT(A) disagreed, viewing the studio activities as separate and profit-oriented.

6. Surplus from Recording Studio:
The assessee argued that any surplus from the recording studio was incidental to its main activities and lacked a profit motive. The CIT(A) and AO determined that the organized and continuous nature of the studio activities indicated a profit motive, justifying the treatment of the income as business income.

7. Compliance with Section 11(4A):
The AO and CIT(A) noted that the assessee did not maintain separate books of accounts for the studio activities, which is a requirement under section 11(4A) for incidental business activities. This non-compliance further supported the decision to treat the studio income as business income.

Final Judgment:
The Tribunal referred to the case of Sri Thyaga Brahma Gana Sabha, where it was held that letting out a hall for rent did not constitute a profit-earning activity. The Tribunal observed that the trust's studio activities were intrinsic to its educational objectives and not separate business activities. The gross receipts from the studio were used to subsidize student fees, supporting the trust's educational mission. Consequently, the Tribunal set aside the CIT(A)'s order and allowed the appeals, granting the exemption under section 11 and recognizing the studio activities as part of the trust's educational objectives.

Conclusion:
The Tribunal concluded that the trust's studio activities were integral to its educational mission and did not constitute a separate profit-oriented business. The appeals were allowed, and the exemption under section 11 was granted, with the proviso to section 2(15) deemed inapplicable.