TaxTMI 
TaxTMI 
2006 (10) TMI 186
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....he Income- tax Officer may be restored. 2. From the order of the ITO, it is seen that the assessee had shown gross total income of Rs. 2,72,49,129/-. It was claimed that a sum of Rs. 2,42,99,578/- was applied under section 11 towards the charitable purpose and the balance sum of Rs. 29,49,551/- was deemed to have been applied for such purposes. Therefore, the total income was computed at nil The assessee was required to substantiate the claim of exemption made by it under section 11. It was explained that the assessee-society is an educational institution, to whom provisions of sections 11 and 12 are applicable. It had also applied for approval under section 10(23C)(vi) of the Act, and its application is pending for disposal. The receipts from all the schools run by the assessee aggregated to Rs. 272.49 lakhs, which is shown as income. Expenditure by way of salary to teachers etc. was claimed as application of income. The Assessing Officer examined the case with reference to applicability of the provisions of sections 11 and 12. It was pointed out that the assessee derived income by way of tuition fee, admission fee, science laboratory fee, bus fee, breakage fee and hostel fee f....
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....ined in the light of provisions contained under section 10(23C)(vi) and it was pointed out that the aforesaid exemption is essentially hinged on the condition that the institution should not exist for the purpose of profit. The Assessing Officer furnished the details of gross receipts, net profit and the ratio of profit to the gross receipts for the current year and four preceding years in a tabular form on page 10 of his order, which is reproduced below for the sake of ready reference:- Sl. No. Year ending Gross receipts As per I&E a/c Net profit % of profit 1. 31-3-1997 Rs.1,38,65,833 10,71,150 7.72% 2. 31-3-1998 Rs.1,68,08,170 26,58,180 15.81% 3. 31-3-1999 Rs.1,68,90,371 25,19,310 14.91% 4. 31-3-2000 Rs.2,08,47,119 18,87,898 9.05% 5. 31-3-2001 Rs.2,71,63,172 42,96,740 15.81% On the basis of the data in the aforesaid table, it was pointed out that the assessee has been earning substantial profits year after year and such profits are not incidental to carrying on the educational activities, but the activities were intentionally so arranged that they invariably generated surplus profits in ....
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....eved by this order, the assessee moved an appeal before the CIT (Appeals). The learned CIT(A) referred to the provisions contained in section 2(15) of the Act, which define the term "charitable purpose" in an inclusive fashion. The definition includes relief of poor, education, medical relief, and advancement of any other object of general public utility. On the basis of the aforesaid definition, it was pointed out by him that the words "of general public utility" qualify only the residuary item of advancement of any other object. The word "education" stands alone and constitutes charitable purpose by itself. In other words, the residuary clause was to be read separately and the ingredients of that clause regarding general public utility could not be read in the word "education". Thereafter, he referred to the distinction between private profit and public profit and it was pointed out that if surplus generated from educational activity was not to be used for any private purpose but was to be used for advancing the cause of education, then, the society will be existing for the charitable purpose. In particular, the decision in the case of Children Book Trust rendered under section 1....
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....has not been approved by the authority concerned. However, he held that the assessee is entitled to benefit of the provisions contained in section 11. 4.1 He referred to various objects of the society, which have been reproduced by us earlier. It was pointed out that the assessee did not undertake any activities in pursuance to object Nos. 1 to 4. Object No.5 was regarding a school with nursery and kindergarten classes. This object did not authorize the assessee-society to impart education from standard 1 to 12. Therefore, his case was that the assessee had not undertaken any of the five objects mentioned in its memorandum. Sixth object was residuary in nature, permitting the assessee-society to carry out such other activity as may assist in the work of any of the first five objects. 4.2 Coming to the legal issues, he referred to the decision of Hon'ble Madras High Court in the case of S.B. Adityan v. First ITO [1964] 52 ITR 453. One of the questions before the Hon'ble Court was whether exemption under section 4(3)(i) of the 1922 Act was to be decided on the basis of the terms of the trust deed or the ITO had power to enquire into true nature and objects of the trust.....
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....e other than charitable purpose. Accordingly, it was held that income of both years was exempt under section 11(1)(a). While the decision in that case was against the revenue, the learned DR pointed out to the finding of the court that the intention has to be found out by reading the trust deed as a whole. If that is done in the instant case, it will be seen that the intent in this case was not the pursuit of a charitable purpose. 4.4 He also relied on the decision of Hon'ble Madras High Court in the case of South Indian Athletic Association Ltd v. CIT[1977] 107 ITR 108, in which it was, inter alia, pointed out that mere entertainment cannot be called to be charitable purpose. It was further pointed out that promotion of intercourse amongst members of an organization also cannot be considered to be a charitable purpose. Thus, where some of the objects of the trust were charitable and some non-charitable, and the trustees in their discretion could apply any amount of income to any object, then, the trust must fail for the purpose of claiming exemption under section 4(3)(i) of 1922 Act. The case of the learned DR was that the assessee has pursued only one object and, theref....
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.... not contain any words to the effect "not involving the carrying on of any activity for profit", as these words were omitted by the Finance Act, 1983, with effect from 1-4-1984. It may also be pointed out that plethora of case law existed that the aforesaid words qualified only the residuary activity of advancement of any other object of general public utility and these words did not qualify first three activities regarding relief of poor, education and medical relief. The instant society is one engaged in imparting of education by running schools. Therefore, the ratio of the decision of this case is not applicable to the facts of the case. 4.6 The learned DR also relied on the decision of Hon'ble Supreme Court in the case of Dharmaposhanam Co. v. CIT [1978] 114 ITR 463. The question in that case was whether for the purpose of granting exemption under section 11(1)(a), all objects had to be seen, or only the objects pursued by the assessee had to be examined. The Hon'ble Court found that some of the objects were charitable in nature while others were not charitable in nature. It was open to the assessee to apply its income to any of the objects. On these facts, it was he....
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....ll out in clear terms any specific charitable or religious object from the trust deed and, therefore, it cannot be said that the trust was set up wholly for religious or charitable purposes. There was no mention in the trust deed as to how the income derived from the trust property was to be utilized. Therefore, it was not entitled to exemption under section 11(1)(a). 4.10 He also referred to the decision of Hon'ble ITAT, Bangalore Bench "A" in the case of Sanjeevamma Hanumanthe Gowda Charitable Trust v. Director of Income-tax (Exemptions) [2006] 9 SOT 293. The facts of that case were that the trust was constituted with the objects of conducting mass marriages, feeding poor, yoga classes, relief to poor sick destitutes and promoting physical psychological and spiritual health etc. The assessee constructed a building. It applied for registration under section 12A, which was denied on the ground that the assessee was carrying out commercial activity by hiring it as a marriage hall. Nothing was done to further other objects, except that a meagre sum was spent on yoga classes and feeding the poor people. The decision was upheld on the ground that it was not established that the ....
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....he argument of the learned D.R. regarding the meaning of the term "charitable purpose", it was pointed out that the words "of general public utility" qualify only the residuary objects of the advancement of any other object. These words do not qualify the preceding three activities, namely,-(i) relief of poor, (ii) education, and (iii) medical relief. In this connection, reliance was placed on the decision of Hon'ble Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234. In that case, the Hon'ble Court pointed out that the word "education" has been used in section 2(15) in the sense in which systematic instruction, schooling or training is imparted to the youth for preparing them for the work of life. The word has not been used in the wider sense which may lead to the conclusion that reading of newspaper, travelling etc. also constitute educational activities. It was further pointed out that the words "not involving the carrying on of any activity for profit" were added at the end of the definition as given under the 1922 Act. After adding these words, advancement of any other object of general public utility would not be considered to be....
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.... institution is doing is to assist the State or to supplement the efforts of the State in that direction. That is why the Legislature provided that if the charitable purpose of the trust or institution be specific, i.e., if it includes relief of the poor, education and medical relief, it can carry on an activity of profit in actually carrying out its primary purpose but that if the charitable purpose be non-specific (any other object of general public utility) it should not involve an activity of profit (i.e., having for its objects an activity with a view to earn profit from a business or a commercial activity). The case of the learned counsel was that the assessee-society was carrying out educational activity, which was primarily the duty of the State and, therefore, the aforesaid decision was squarely applicable to the facts of this case. 5.5 He also referred to the decision of Hon'ble Delhi High Court in the case of CIT v. Lagan Kala Upvan [2003] 259 ITR 489, a decision given under section 10(22) of the Act. In that case it was recorded as a matter of fact by the learned CIT(A) that the assessee had been running educational institution for the past 25 years without any p....
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....with no specific allocation of funds. In view thereof, it cannot be said to pursue charitable purpose wholly and exclusively. We have already seen the cases quoted by the learned D.R., which lead to a definite conclusion that a partly charitable trust must fail in getting exemption and that exemption exists only under section 11(1)(b), in respect of a trust created before the commencement of this Act. As against the aforesaid, the learned counsel pointed out that imparting of education through a school is an activity of education, which is per se a charitable activity. 7.2 We may refer to the definition of the term "charitable purpose" as it is applicable to the year under consideration. It read that "charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. Before proceeding further, it may be pointed out that the words "not involving the carrying on of any activity of profit", finding place in the section at the end of the words "objects of general public utility", were omitted by the Finance Act, 1983, with effect from 1-4-1984. Therefore, the cases relied upon under the old definition will n....
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....erefore, the income was not income derived from property held under the trust. 7.4 We have considered this issue also. It is no doubt true that the fees etc. received by the assessee from the students is not in the nature of voluntary contributions, or income arising out of transaction in a capital asset held under trust. However, subsection (4) of section 11 enacts a fiction to the effect that "property held under trust" includes a business undertaking so held. Further sub-section (4A) provides that the income of the business, which is incidental to achieve the objectives of the trust etc. shall be entitled to exemption under section 11(1)(a), if separate books of account have been maintained. It is not the case of the assessee that it is running a business, which feeds its charitable objects. Its case is that the running of the school by itself means that the society is carrying on a charitable activity. Therefore, even if the school is run in a manner a business is run, we tend to agree with the learned counsel that the school will constitute a property held under trust. This leaves us with the question whether various collections made by the assessee in the school from incom....
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....ning profits from year to year and any loss in the subsidiary activities is also recouped from "Children Welfare Fund". In our view, sub-section (4A) creates a dichotomy between the trust and a business activity which is incidental to attainment of the objects of the trust, and make profits from such activity exempt from tax if separate books of account are maintained. Needless to say that such profits ought to be in the public domain as pointed out in the case of Loka Shikshana. We may add that is a necessary ingredient for any activity to be termed as charitable purpose, as such purpose, by its inherent nature, excludes private gain from its ambit. Unfortunately, neither the Assessing Officer nor the learned CIT (Appeals) have examined this aspect of the matter. Therefore, the matter is restored to the file of the Assessing Officer to consider the issue whether separate books of account are maintained in respect of the schools run by the trust and thereafter examine whether provisions of section 11(4A) are applicable to the facts of the case. The net profit earned from these schools, and not gross receipts, will then be considered for exemption under section 11(1)(a). 8. There....