Activity of running hostel by Dental college not a separate business activity and pre conditions u/s 11(4A) do not apply – High Court
In the instant case, the assessee had challenged the order passed by the ITAT holding that in the absence of separate books of accounts, the assessee was not entitled for benefit of exemption u/s 11 of the Income Tax Act, 1961 (the Act) with respect to hostel activities.
ABCAUS Case Law Citation
ABCAUS 3515 (2021) (06) HC
Important case law relied referred:
Indian Institute of Technology Vs. State of U.P
Mahatma Gandhi Kashi Vidyapeeth Vs. State of U.P. & others
Swadeshi Cotton Mills
The appellant trust was running a Dental College. Under the directives of the Dental Council of India, it is mandatory for the institutions admitting students in the dental education course (BDS) to provide hostel accommodation in the dental college campus itself.
The trust was also running a hostel for residence of the students admitted in the said college. The trust claimed that all its activities were covered under Section 2 (15) of the Act and had been duly granted registration u/s 12A of the Act by the Commissioner, Income Tax.
The assessee had filed its return of income declaring net income as ”NIL’. The case was selected under compulsory scrutiny and notices were issued to the assessee.
the Assessing Officer (AO) concluded that the hostel activities of the trust was separable from its educational activities and the way the hostel and mess activities were being carried on they would fall within the meaning of “business” under section 2(13) and can not be treated as ”Charitable purposes’ under Section 2(15) of the Act.
According to the AO, the benefit of Section 11 of the Act could not be given to the assessee, in as much as, it had not maintained separate books of accounts which is one of the pre-conditions mentioned in Section 11(4A) for grant of such benefits.
It was also concluded that the total hostel receipt of the trust was excessively high and excessive expenses had been claimed against the hostel income.
The AO recomputed the net income from hostel fee after deduction of allowable expenditure and taxed it under Section 11(4A) of the Act. With regard to the other income of the trust, it was observed that it will continue to enjoy exemption under Section 11 of the Act.
The assessment order was affirmed in the appeals both by the CIT(A) and the Tribunal.
The substantial question of law framed by the Hon’ble High Court was as to whether under the provisions of Section 11(4A), the Hostel activity of a charitable institution engaged in imparting education in a residential institution will be included in the expression “business” and the income generated from Hostel activity can be said to be business income so as to attract the pre-conditions in a claim of exemption under Section 11 (1) of the Act?
The Hon’ble High Court observed that a careful reading of the relevant provisions shows that under the Act the “business” means to include any adventure or concern in the nature of trade, commerce or manufacture whereas the words “charitable purposes” include “education”. The word “education” in Section 2(15) of the Act is not qualified by any restrictions. It has been used in its widest amplitude so as to include education of all level to all classes of the society or category. Meaning thereby any activity which includes or relates to education would be for charitable purposes within the meaning of Section 2(15) of the Act. Further, Section 11(1)(a) provides that the income derived from property held the trust, wholly for charitable or religious purposes shall be exempted from the total income to the extent to which such income is applied for such purposes and where any such income is accumulated or set apart for application to such purposes, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.
The Hon’ble High Court also noticed that the hostel was being run in discharge of a statutory obligation as institution in question could not impart dental education without providing for the hostel. There was no dispute about the fact that the assessee has provided hostel and mess facilities only to those students who are attached with the educational institution. It is not the case of the revenue that the income generated out of the hostel fees is not used for the educational purposes.
The only reason given by the Assessing Officer to deny exemption under sub-section (11)(1) of the Act was that the income from the hostel fee was excessive and disproportionate to the income derived by other educational institutions which indulge in similar activity i.e. maintaining hostel for the students admitted in the institution, whether government or private.
The Hon’ble High Court stated that such a comparison was not open, in as much as, whether a venture or activity of the assessee is a business venture separable from its main activity and whether such activity constitutes an integral and inseparable part of the main activity, are matters to be decided on the facts and circumstances of the individual case,i.e. looking to the nature of establishment and its activities. The issues as to whether the fee charged is excessive or what should be the reasonable amount of hostel fee are wholly extraneous to the dominant purpose test. The hostel fee charged would obviously depend upon the facility provided to the students.
The Hon’ble High Court considered several decisions of the High Court and the Hon’ble Supreme Court on the similar facts and opined that considering the definition of “business” under Section 2(13) of the Act ; “Charitable purposes” under Section 2(15) and provisions of Section 11, 11(4A) and 12-AA of the Act, in the fact and circumstances of the case, it was apparent that the principal activity of the petitioner was pre-dominantly academic and charging of fees for the accommodation provided to the students admitted in the dental education course, is minor, subsidiary and subservient to the principal activity and is an integral part of its academic activity. It cannot be said that the assessee’s principal activity is doing business in a commercial way of letting out the accommodation.
The Hon’ble High Court opined that the petitioner cannot be said to be doing “business” in terms of sub-section (4A) of Section 11 and its activity of maintaining hostel and charging fees does not fall within the meaning of “business” under Section 2(13) of the Act. The hostel fee cannot be said to be income derived from the “business” of the trust.
The Hon’ble High Court added that the said integral activity of running a hostel being directly linked to the attainment of the main objectives of the trust, the requirement of maintaining separate books of accounts with regard to such activity for seeking benefit of exemption under Section 11 (1) of the Act , therefore, not attracted
The Hon’ble High Court pointed out that in a Taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.
Accordingly, the Hon’ble High Court held that activity of running the hostel was not a separate business activity and surplus income from the hostel fee cannot be treated as profit and gains of a separate business or commercial activity of the trust. Also, the exemption u/s 11(1) of the Act cannot be disallowed to the assessee.
In the result, the substantial question of law is answered in favour of the assessee.
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