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

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 rented vacant buildings during decreased enrollment to cover fixed expenses. CIT(E) argued rental income wasn't from educational activity, making AO's exemption order erroneous. ITAT held buildings were constructed from educational funds, rental was for society's educational objectives, and AO correctly relied on jurisdictional HC precedent in Sahu Jain Trust. Since SC's restrictive New Noble Educational Society judgment applied only from 19/10/2022 onwards, earlier favorable interpretation remained valid. AO's assessment order restored, revision quashed in assessee's favor.

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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 Judgment
The 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 Income
The 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 Officer
The 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 Order
The 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.

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