2025 (3) TMI 80 - AT - Income Tax

Educational trust loses tax exemption under section 10(23C)(vi) for commercial hostel operations exceeding cost limits

Deputy Commissioner of Income-tax, Circle-2, Exemption, Ahmedabad Versus Shree Vallabh Seva Kendra

The ITAT Ahmedabad reversed the CIT(A)'s decision allowing exemption under section 10(23C)(vi) to an educational trust. While the CIT(A) held that hostel ... Denial of Exemption u/s 10(23C)(vi) - as per revenue Trust was not existing solely for educational purposes, and it was engaged in carrying on activities other than the main object of providing education - CIT(A) allowed claim - HELD THAT:- CIT(A) held that the main criteria for eligibility u/s 10(23C)(vi) was that the institution is existing solely for educational purposes and not for purpose of profit and also gave a finding that providing hostel facility is an integral part of the main object and surplus generated from hostel facility of Rs. 6.21 crores is being ploughed back towards the main object of imparting education. This is where we feel that the Ld. CIT(A) erred on appreciation of the facts. CIT(A) relied on the orders in the case of Shree Shanskar Tirth Educational and Charitable Trust [2022 (5) TMI 1152 - ITAT RAJKOT] wherein it was held that exemption u/s 10(23C) could not be denied merely because object clause of trust deed of assessee also contained objects other than educational activities. CIT(A) relied on the order of Shree Ahmedabad Lohana Vidyarthi Bhavan [2018 (7) TMI 1084 - ITAT AHMEDABAD] wherein it was held that where providing hostel facility to students is an essential component of education institution and also an aid for attaining educational object, said activity would fall under purview of ‘education’ as provided u/s 2(15) of the Act. Hon’ble Supreme Court of India in the case of Ahmedabad Urban Development Authority [2022 (11) TMI 255 - SUPREME COURT] held that a charitable organisation cannot be engaged in any trade, commerce or business, or provide services in relation thereto for any consideration unless such commercial activity is incidental to the main object of GPU and is also within the monetary threshold of up to 20% of its total receipts, as prescribed under section 2(15) of the IT Act. To ascertain whether an activity would constitute “trade, commerce or business”, the Hon’ble Apex Court clarified that it would depend on the cost at which the services are availed and the price at which they are provided by the institution to its beneficiaries. Based on the facts of the case, we hold that :- (a) Providing education is a charitable activity. (b) Providing hostel facility to the students of the school providing education is a charitable activity. The provision of hostels to the students in an integrated manner is a charitable activity. (c) Running hostels for students separately on a commercial basis is a business activity. The Hon’ble Apex Court held that where 'fee, cess or other consideration' is statutorily fixed or where it represents recoupment of cost or cost with nominal mark up, the activity may not be construed as 'trade, commerce or business' and will be excluded from the mischief of commercial activity under the amended provision. If, however, 'fee, cess or other consideration' charged is substantially higher over cost, it is considered as 'trade, commerce or business' and will qualify for tax exemption only if receipts are within the quantitative limit prescribed by the amended provision. The observations and ratio thereof of the Hon’ble Apex Court are squarely applicable to the facts of the instant case and hence, we hereby affirm the order of the AO and decline to support the order of the Ld. CIT(A). Appeal of the Revenue is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the exemption under Section 10(23C)(vi) of the Income-tax Act, 1961, can be granted to the Assessee Trust for the entire income, given the nature of its activities, particularly the operation of hostels for children not enrolled in its educational institution.2. Whether the activities of the Assessee Trust, including providing hostel facilities to non-students, align with the statutory requirement of existing solely for educational purposes and not for profit.ISSUE-WISE DETAILED ANALYSISIssue 1: Exemption under Section 10(23C)(vi)Relevant legal framework and precedents: Section 10(23C)(vi) of the Income-tax Act provides for exemption to institutions existing solely for educational purposes and not for profit. The interpretation of this provision has been addressed in various judicial pronouncements, including Surat Art Silk Cloth Mfg. Association vs. CIT and other cases cited in the judgment.Court's interpretation and reasoning: The Tribunal examined whether the Assessee Trust's activities were conducted solely for educational purposes. It was noted that the Trust operated hostels for students who were not enrolled in its educational programs, which raised questions about the nature of its activities.Key evidence and findings: The Tribunal found that the Trust charged hostel fees that were higher than the minimum wage rates in Gujarat, indicating a commercial nature to the hostel operations. The Trust's income from hostel fees was substantial, amounting to Rs. 13.23 crores, compared to Rs. 1.84 crores from educational fees.Application of law to facts: The Tribunal applied the legal framework to the facts, concluding that the operation of hostels for non-students constituted a separate business activity, not incidental to the educational purpose.Treatment of competing arguments: The Trust argued that its activities, including hostel operations, were charitable and aligned with educational purposes. However, the Tribunal found that the fees charged and the nature of the hostel operations indicated a commercial intent, not consistent with the statutory requirement for exemption.Conclusions: The Tribunal concluded that the Trust's activities did not meet the criteria for exemption under Section 10(23C)(vi) as they were not solely for educational purposes.Issue 2: Nature of Activities and Profit MotiveRelevant legal framework and precedents: The legal framework under Section 2(15) of the Act defines 'charitable purpose' and includes provisions regarding activities in the nature of trade, commerce, or business.Court's interpretation and reasoning: The Tribunal considered whether the Trust's activities, particularly the operation of hostels, were incidental to its educational purpose or constituted a separate business activity.Key evidence and findings: The Tribunal found that the hostel operations were conducted separately from the educational activities and involved significant income generation, suggesting a profit motive.Application of law to facts: The Tribunal applied the provisions of Section 2(15) and related judicial interpretations to determine that the hostel operations were not incidental to the educational purpose but were instead a separate business activity.Treatment of competing arguments: The Trust contended that the hostel operations supported its educational mission and were conducted at reasonable rates. However, the Tribunal found that the rates were not nominal and indicated a commercial intent.Conclusions: The Tribunal concluded that the Trust's hostel operations were not aligned with the statutory definition of charitable purpose and were conducted with a profit motive.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: The Tribunal noted, 'The amount charged from the students per day and the surplus generated of Rs. 6.12 crores clearly proves that the assessee is engaged in the activity of running hostels separately to earn profits.'Core principles established: The judgment reinforces the principle that for an institution to qualify for exemption under Section 10(23C)(vi), its activities must be solely for educational purposes and not involve separate business activities aimed at profit generation.Final determinations on each issue: The Tribunal determined that the Assessee Trust's activities, particularly the operation of hostels for non-students, did not qualify for exemption under Section 10(23C)(vi) as they were not solely for educational purposes. The appeal by the Revenue was allowed, and the order of the CIT(A) was overturned.