2021 (11) TMI 876 - AT - Income Tax

Exemption u/s 11 - activity of renting out the hostel facilities to the students - HELD THAT - There was no change in the aims and objects of the trust. Accordingly in view of the above, we hold that the assessee was entitled to claim exemption under section 11 of the Act with respect to its activity of renting out the hostel facilities to the students being in the nature of education. Once the activity of the assessee has been held as educational in nature, then the proviso to section 2(15) shall not be applicable. The proviso restricts the exemption to the trust if it s activities falls in the last limb i.e. advancement of any other object of general public utility. In other words, the restrictions imposed under the proviso to section 2(15) of the Act cannot be made applicable in the case on hand as the assessee is engaged in the activity of education. See circular issued by the CBDT bearing no. 11 of 2008 dated 9 December 2008. We also draw support and guidance from the judgement of Hon ble Mumbai ITAT in case of All India Federation of Tax Practitioners case. 2021 (5) TMI 1002 - ITAT MUMBAI Whether the income generated by the assessee from renting out the hall can be classified as educational activity in the manner provided under section 2(15) of the Act? - The activity of renting out the hall cannot be categorized as educational activity but the status of the assessee will not change being a charitable organization. It is for the reason that this activity is the ancillary activity which is supporting the assessee to achieve its goals of primary activities. Furthermore, there is no prohibition under the Act that the assessee being a charitable organization cannot carry on the business which is incidental to the attainment of the objective of the trust. Rather subsection (4A) to section 11 of the Act, authorizes the educational institution to carry on the business which is incidental to the attainment of the main objective of the trust. In this connection, we draw support and guidance from the judgement of Hon ble Delhi High Court in case of DGIT (Exemption) vs. ICAI reported 2013 (7) TMI 205 - DELHI HIGH COURT Deduction claimed by the assessee being corpus fund under the provisions of section 11(1)(d) - Deduction was denied by the authorities below on the reasoning that the assessee is not engaged in the educational activity and therefore no benefit can be extended under the provisions of section 11(1)(d) of the Act. However, we find that the tribunal has already held that the activity of the assessee is in the nature of educational activity vide paragraph No. 22-23 of this order. For detailed discussion, please refer the relevant paragraph. Accordingly, we hold that the assessee is eligible for deduction under the provisions of section 11(1)(d) of the Act.

Issues Involved:
1. Validity of the assessment framed under section 143(3) read with section 147 of the Income Tax Act.
2. Denial of exemption under Section 11 of the Income Tax Act.
3. Classification of net receipts as business income.
4. Application of proviso to section 2(15) of the Income Tax Act.
5. Denial of exemption claimed under section 11(1)(d) of the Income Tax Act.
6. Charging of excess interest under sections 234A, 234B, and 234C of the Income Tax Act.
7. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Comprehensive, Issue-wise Detailed Analysis:

1. Validity of the Assessment:
The assessee challenged the validity of the assessment framed under section 143(3) read with section 147 of the Act. However, the AR did not advance any argument on this technical issue during the hearing. Consequently, the issue was dismissed as not pressed.

2. Denial of Exemption under Section 11:
The assessee, a public charitable trust registered under section 12A and 80G of the Act, was engaged in providing basic and necessary facilities to students, including a hostel. The AO denied the exemption under Section 11, treating the net receipts of ?3,10,343/- as business income. The AO argued that the activities of the trust, such as renting out hostel facilities and a hall, were commercial in nature. The CIT(A) confirmed the AO's decision.

3. Classification of Net Receipts as Business Income:
The AO observed that the trust's activities were in the nature of trade, commerce, and business, and therefore, the income should be taxed. The AO noted that the trust did not provide documentary evidence to prove its charitable activities or the use of donations for charitable purposes. The AO also pointed out that the trust did not furnish details of persons to whom the hall was let out, avoiding enquiries into whether the rent was charged commercially.

4. Application of Proviso to Section 2(15):
The AO argued that the trust's activities could be categorized as "advancement of any other object of general public utility" but were commercial in nature, thus falling under the proviso to section 2(15). The AO denied the exemption under Section 11, treating the surplus income as taxable. However, the tribunal held that the activity of providing hostel facilities to students is educational in nature, and thus, the proviso to section 2(15) does not apply.

5. Denial of Exemption Claimed under Section 11(1)(d):
The AO disallowed the corpus donation of ?32,68,165/-, treating it as taxable income instead of exempt under section 11(1)(d). The CIT(A) confirmed the AO's decision. However, the tribunal held that the assessee is entitled to the exemption under section 11(1)(d) as the activity of providing hostel facilities is educational in nature.

6. Charging of Excess Interest:
The assessee contested the charging of excess interest under sections 234A, 234B, and 234C, claiming no such interest was required. The tribunal did not specifically address this issue in the judgment.

7. Initiation of Penalty Proceedings:
The assessee challenged the initiation of penalty proceedings under section 271(1)(c), arguing that no default was committed. The tribunal did not specifically address this issue in the judgment.

Conclusion:
The tribunal allowed the appeals for both assessment years 2014-15 and 2015-16, holding that the activity of providing hostel facilities to students is educational in nature and thus exempt under Section 11. The tribunal directed the AO to delete the additions made and allowed the exemptions claimed by the assessee. The issues of excess interest and penalty proceedings were not specifically adjudicated.

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