TaxTMI 
TaxTMI 
2016 (10) TMI 968
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch as that since the inception the said activity is considered as part of 'education' and benefit u/s 11/12 is allowed with 100% similar facts and without any change in law about the first three limbs of section 2(15) even after 01.04.09. 4. Because, without prejudice to above but only as an alternative, the learned lower authority failed to appreciate that assessee had maintained sufficient separate accounts and Id. AO himself calculated separate surplus in said activity on the basis of said accounts hence order upholding rejection of exemption u/s 11-12 even after invoking 11 (4A) for said activities is illegal as admittedly more than 85% of income is utilized for charitable purposes. 5. Because, the learned lower authority has further erred in upholding the disallowance of Rs. 3488089/- out of total exp. incurred Rs. 6688198/- against the hostel activity and the finding that assessee could not substantiate his claim is wrong . 6. Because, in addition to above, the learned lower authority failed to appreciate the basic facts like accounts are accepted, there is no material against the assessee, past history and AO's computation is giving absurd results beside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dependent activity and cannot be termed as incidental to running of educational institution. He further held that incidental activities cannot be run as full-fledged commercial activities. The CIT(A) further held that even if it is assumed that the activity of running of hostel is incidental to the main activity of society/trust, then also the appellant is not entitled to exemption us/. 11(4A) of the Act because it has not maintained separate books of accounts as provided u/s. 11(4A) of the Act. The CIT(Appeals) finally confirmed the disallowance on two counts:- (i) Running of hostel activities is not incidental to the activities of imparting education. (ii) Even if it is assumed that it is incidental to the main activities, the benefit cannot be given as no separate books of accounts are maintained by the assessee. 5. The relevant observations of the CIT(Appeals) in this regard are extracted hereunder for the sake of reference:- " The word education has not been defined in the' Act. However, the appellant has argued that his case is covered by the definition of charitable purpose in section 2(15) of the I. T. Act. For clarity it is important to reproduce section 2(15) o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... education in the great school of life. But that is not the sense in which the word education is used in clause (15) of section 2. What education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by normal schooling." The Hon'ble Court has further held that the difficult question however still remains. What is the meaning of charitable purpose which is only indicated but not defined by section 2(15) of the Act? It seems to me that a common concept of element of charity is shared by each of the four different categories of charity. It is true that charity does not necessarily exclude carrying on an activity which leads profit provided that profit has to be used up for what is recognized as charity. The very concept of charity denotes altruistic thought and action. Its object must necessarily be to benefit others rather than oneself. Its essence is selflessness. In a truly charitable activity, any possible benefit to the person who does the charitable act is merely incidental or even accidental and immaterial. From the above judgment of the Hon'ble Supreme Court it is clear that running of hostel can&#....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onary meaning of the word 'incidental' is happening as a minor accompaniment to something else. If we see the meaning of incidental, it is clear that in order to fall under an incidental business the same has to be minor and not full fledged business. The business of running hostel for students is not an incidental activity of the appellant. As has been discussed in earlier Paras hostel can run without an educational institute. There are hundreds of business men who are providing this service to the students and earning income which is clearly chargeable to tax. It is strange to assume that the same activity will be exempted in the hands of the appellant only because it is running an educational institute and no outsider is being admitted into hostel. The fees charged are the same and the facilities provided are also comparable. There is no provision in the Income Tax Act which exempts this income. Both the activities i.e. education and hostel are independent of each other. . In fact, the appellant is not charging as per market rate but has charged more from the students which shows the commercial motive of the appellant and not the charitable one as claimed by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f individuals etc. 74. At present, all categories of income derived by charitable or religious trusts, institutions and funds, which are notified by the Central Government "under section 10(23C)(iv) and (v) of the Income-tax Act are exempt from income-tax. In conformity with the proposal to tax profits and gins of business in the case of all charitable or religious trusts and institutions, it is proposed to provide that the exemption under section 10(23C) (iv) and (v) of the Income-tax Act will not apply even in retention to profits and gains of business in the case of such notified trusts and institutions. 75. The aforesaid amendments regarding taxation of business profits or religious or charitable trusts and institutions will take effect from 1st April, 1984, and will accordingly, apply in relation to the-assessment year 1984-85 and subsequent years. " The above explanatory note clearly explains the intention of the legislature to tax business profits of religious or charitable trusts. Prior to 01.04.1992 even for a very small activity of business or profession the trusts became exigible to tax wholly i.e. they lost exemption in respect of all activities including ch....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng of hostel is an integral part of education activity, it was not required to maintain separate books of account has no force. In fact the AO has brought on record that the hostel fees charged from the students was as per the market rate. The appellant in the entire submission has not controverted to this finding of the Assessing Officer. The Hon'ble Chennai High Court in the case of Director of Income-tax(Exemption), Madras vs. Willington Charitable Trust [2010] 330 ITR 24(MAD) have replied in favour of Revenue the following question of law. "(1) When section 11 (1) read with section 11 (4) of the Income-tax Act exempts income from the business undertaking of the Trust to the extent it is applied for charitable or religious purpose, can section 11 (4A) of the Income-tax Act can be construed to have been incorporated for the very same purpose or to be construed restricting the scope of section 11 (4) of the Income-tax Act ............ " In the above case the Hon'ble High Court at para 12.1 has held as follows:- "12.1 Insofar as the compliance of the maintenance of separate books of account as required under section 11 (4A) of the Act is concerned, a reading of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ying guidelines for audit and accounting. They have given an independent opinion. The Act itself is very, clear on maintaining separate book of account which the institute has only confirmed. In the case of DIT(exemption) Madras wellington charitable trust. the Hon'ble High Court has held as under- Insofar as compliance of the maintenance of separate books of account as require under section 11 (4A) of the Act is concerned, a reading of the above said provisions would make it clear that it is mandatory and a condition precedent for the assessee to maintain the same while seeking exemption. The Hon'ble judges have also observed - Section 11 (4) of the Act specifically speaks about the power of the Assessing Officer to deal with a property held in trust. The condition stipulated under section'11 (4A) of the Act that the assessee should maintain separate books of account for the business income has been introduced with a specific purpose and object behind it. The reason for introducing such a condition is to make sure that the assessee shall not claim and get exemption for the business income which is not used for charitable purposes. Therefore, such a conditio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f business. It doesn't put a restriction that it is applicable to the fourth limbs i.e. object of any public utility. The concession granted in 11 (4A) is restricted to the business which is incidental to the attainment of the objective of the trust and separate books are maintained. In view of the above, the argument of the appellant fails." 6. Aggrieved, the assessee has preferred an appeal before the Tribunal and reiterated its contentions. It was emphatically argued that the activity of running the hostel is one of the objects of the assessee trust. In support thereof, he invited our attention to the objective of the trust which is available at page nos. 18 to 20 of the compilation. It was further contended that during the impugned assessment year, the assessee did not earn any profit from the hostel activities, rather in the Income & Expenditure account, there was a deficit of Rs. 68,198. It was further contended that if it not charitable activities, it would be incidental to the main activities of imparting education, for which the assessee trust is registered u/s. 12A of the Act. It was also stated that the assessee has taken the profit in the accounts in respect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ect of hostel activity. It was further contended that once the benefit of exemption is denied relating to hostel activity, the corresponding depreciation on hostel building cannot be allowed to the assessee. The hostel activity can only be considered to be separate business activity in accordance with law. 8. Having carefully examined the orders of authorities below and documents placed on record, I find that running of hostel activities is one of the objects of the assessee trust and it is also seen that where the educational institutions are set up, the assessee society or trust provides hostels for the students against the particular hostel fees. In the instant case, the hostel fees were charged @ Rs. 4,500 to Rs. 5,000 per month per student. During the course of hearing, it was explained that against this hostel fees, the assessee trust is providing all facilities including boarding & lodging to all the students. Therefore, this amount charged as hostel fees cannot be called to be exorbitant in comparison to the prevailing market rates. I have also examined the judgments referred to by the assessee and I find that hostel activity is certainly activity incidental to the main ac....