2024 (1) TMI 967 - AT - Income Tax

Educational trust's rental income from vacant buildings qualifies for section 10(23C)(vi) exemption despite enrollment drop

Durgapur Society of Management Science Versus Income Tax Officer, Circle-2, Exempt, Kolkata

ITAT Kolkata quashed CIT(E)'s revision order u/s 263 regarding trust's rental income exemption u/s 10(23C)(vi). Educational society with 1500 students ... Revision u/s 263 - assessment of trust - CIT(E), noticed that the rental income earned during the year is not from carrying out educational activity and only the income which is earned from carrying out educational activity is eligible for exemption u/s 10(23C)(vi) and since the ld. AO has not examined this aspect, the order of the AO is erroneous and prejudicial to the interest of the revenue - HELD THAT:- We notice that buildings constructed by the assessee are from the funds generated by carrying out educational activities and other capital receipts received from time to time given towards the corpus for construction of buildings for imparting education. There are nearly 1500 students and 400 staffs on the payroll of the assessee society. During the year under consideration there was decrease in the flow of students and some part of the buildings remained vacant, however, the fixed expenditure were being incurred regularly. It is claimed by the assessee that to cover up such expenditure, the need was felt to give the building on rent and to earn some revenue and with this intention, the buildings were given on rent. This exercise by the assessee society was for the object of the society and to carry out the activity of education at the institutions. It has been submitted that all these details have been submitted before the AO and also reliance was placed on various judgements including that of DIT(Exemption) vs. Sahu Jain Trust [2011 (3) TMI 1355 - CALCUTTA HIGH COURT] as well as the judgment of Madras Stock Exchange Ltd. [1976 (4) TMI 47 - MADRAS HIGH COURT] and since two views were possible on the issue in challenge of which one was in favour of the assessee, the ld. Assessing Officer adopted the same considering the judgement of the Hon’ble Jurisdictional High Court and allowed the benefit of Section 10(23C)(vi) As decided in New Noble Educational Society [2022 (10) TMI 855 - SUPREME COURT] held that if an educational institution has earned income from letting out of properties and utilisation of infrastructure for conducting training programs and seminars such income cannot be considered as income earned incidental to education and, therefore, would be out of the ambit of Section 10(23C)(vi) of the Act. However, held that the judgement will operate from 19/10/2022 and onwards. Thus it brings us to the conclusion that prior to the judgement of the Hon’ble Apex Court in the case of New Noble Educational Society (supra), the ratio laid down by the Hon’ble Jurisdictional High Court in the case of DIT(Exemption) vs. Sahu Jain Trust (supra), will apply with full force in favour of the assessee and, therefore, even if some rental income was earned with the intention of applying it for charitable purpose and educational activity, the ld. Assessing Officer was justified in accepting the claim of the assessee treating the gross receipts having been earned from carrying out educational activity. Thus, we are of the considered view that the order of the ld. Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue. Accordingly, the impugned order u/s 263 of the Act passed by the ld. CIT(E) is quashed and that of the ld. Assessing Officer u/s 143(3) is restored. Decided in favour of assessee. Issues Involved:1. Whether the Principal Commissioner of Income Tax (Exemption) [PCIT(E)] erred in setting aside the assessment order based on the judgment of the Supreme Court in the case of New Noble Educational Society.2. Whether the rent received from the building constituted income from business or income from house property.3. Whether the Assessing Officer (AO) made sufficient inquiry regarding the applicability of the 7th proviso to section 10(23C)(vi).4. Whether the order of the AO was erroneous and prejudicial to the interests of the revenue.Summary of Judgment:Issue 1: Applicability of Supreme Court JudgmentThe assessee argued that the PCIT(E) erred in setting aside the assessment order based on the Supreme Court's judgment in the case of New Noble Educational Society, which should be applied prospectively from October 19, 2022. The Tribunal agreed, noting that the Supreme Court's judgment should operate prospectively and thus, the previous rulings, particularly the jurisdictional High Court's decision in DIT (Exemption) vs. Sahu Jain Trust, would apply in favor of the assessee.Issue 2: Nature of Rental IncomeThe PCIT(E) held that the rent received from the building constituted income from business, not incidental to the attainment of the educational objectives of the society, and therefore, separate books of accounts should have been maintained. The assessee contended that the rental income was used to meet the institution's expenses and should be considered as income from house property. The Tribunal found that the rental income was applied for charitable purposes and educational activities, thus supporting the assessee's claim.Issue 3: Inquiry by Assessing OfficerThe PCIT(E) argued that the AO did not verify whether the rental income fell under 'business income' and whether separate books of accounts were maintained. The Tribunal observed that the AO had considered the jurisdictional High Court's ruling and allowed the exemption under section 10(23C)(vi) after examining the relevant details, implying that the AO's inquiry was adequate.Issue 4: Erroneous and Prejudicial OrderThe PCIT(E) deemed the AO's order erroneous and prejudicial to the interests of the revenue for not making sufficient inquiries. However, the Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the revenue, as it was based on the prevailing legal interpretations before the Supreme Court's judgment in New Noble Educational Society.Conclusion:The Tribunal quashed the order passed by the PCIT(E) under section 263 of the Income Tax Act and restored the AO's order under section 143(3) dated February 3, 2021. The appeal of the assessee was allowed.