Income Tax Appellate Tribunal (ITAT) Mumbai in a recent judgment has held that consultancy charges received for services rendered by the institute through its professors constituted non-charitable business income and hence taxable under section 11(4A) of Income tax Act, 1961

Case Details:
 ITA No.3808/Mum/2015 AY : 2010-11
The Assistant Commissioner of Income Tax (E) (Appellant) vs Institute of Chemical Technology (Respondent)
Date of Order: 28-10-2015

Brief Facts of the Case:
The assessee was an Institute established as a Department of Chemical Technology by the University of Mumbai. Subsequently, the assessee was declared as an autonomous Institute and a deemed University by the Central Government. The main aims and object of the Institute are to provide instructions, study, teaching, training and research in various branches of Science and Technology. The Assessing Office (AO) observed that the institute was generating income by rendering the consultancy services through its professors to various organizations/companies. AO observed that Companies had deducted tax u/s 194C and 194J and the objects of the institute, did not mention providing of consultancy either main objects or as an incidental object. AO considering the continuity, magnitude, quantum and frequencies of the consultancy activities concluded that same are being conducted with an intention to make profits in the shield of charitable activities. The AO noted that the institute had not maintained separate books of account as required under Section 11(4) and (4A) of the Income Tax Act. Accordingly, AO taxed the net consultancy fees of Rs.53,18,171/- as business income u/s 11(4A)

The assessee institute appealed the order before CIT(A) who accepted the contention that that the income from the consultancy fees was incidental income

Excerpts from ITAT Judgment
From the conjoint reading of section 2(15) and 11(4A), it is clear that any activity in the nature of trade, commerce or business, or any activity of rendering any services in relation to any trade, commerce or business, for a cess or fees or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, shall not be for the purposes of charitable unless such activities is incidental to the attainment of the object of the trust and separate books of account are maintained by such trust qua profit and gains.

….. the assessee contends that the income of the assessee is an exempt income, and therefore, is required to be exempt. It was also contended that for providing consultancy services by the Professors is an incidental activity of imparting education, and therefore, in furtherance of advancement of the education. It was also contended that the assessee is not doing anything rather the Professors are independently providing consultancy services to various Government and other organizations and it was only sharing the fees between the assessee and the Professors. It was also contended that two ledger account showing consultancy fees received and paid are the only accounts, which are required to be maintained and are being maintained by the assessee. The assessee in support of its case, relied upon various judgments ….

We find that invariably, the consultancy services provided for the specific project or a specific purpose which has direct co-relation with the education imparted by the assessee-University should come within the realm of services imparted for the attainment of the object of the trust. But in the present case, a sample letter from Bharat Petroleum Corporation Ltd. placed on record clearly shows that the expert advice services were sought from Dr. V.V.Mahajani for the corporate R & D Centre, Greater Noida. The letter dated 29th October, 2010 has been reproduced hereinabove was addressed to the Director, Institute of Chemical Technology (the assessee). Therefore, it is not right on the part of the assessee to allege that it is not rendering any services, rather, its Professors are rendering the services. The juristic person like the assessee can only execute its work either through its trustees or employees. Since the employees of the assessee trust (juristic person) are rendering consultancy / advice services for a fee and the part of the fee is also coming to the chest of the assessee, therefore, in our opinion, the activity of the assessee is not covered by the provisions of section 2(15) of the Act and the assessee is not entitled to any exemption for the consultancy fees. The reliance on the definition of the business is of no help to the assessee.

The Circular of the University dated 31.07.1985 clearly postulates various things including para 2A, which provides that the consultancy work should not interfere with the normal teaching / research work of the department / university and other duties which may be assigned to staff by University authorities. The Circular further provides in para 12, 15 and 16 that the annual fees should not be more than Rs.50,000 per month or Rs.6,00,000 per annum. The fees which had been collected for consultancy work was Rs.91,19,356. This clearly shows that the magnitude, and therefore, the same cannot be deemed as an activity incidental to the advancement of the object of the trust. The object of the trust as mentioned hereinabove is “……… and the consultancy does not fall within the objects of the trust.” More over once the Professor is travelling from Mumbai to Delhi or any other destination without any other associate Professor or student, in our opinion, there will not be any value addition to the students. As a matter of fact, huge amount has been earned by the Professors through this consultancy work, though the same is separately taxed but on account of the work done by the Professors of the University, the University being the employer had also earned. In view of the above, the consultancy work done by the assessee-University (through the modus of sharing of revenue with its Professors) is not in any way relatable to the aims and object for which the assessee was established, therefore, we hold that the assessee is not entitled for any exemption under the provisions of the Act. This Tribunal is not oblivious to the fact that if the Professors of the assessee / gives consultancy / advice work on regular basis, that will have the colour of the advice given by the assessee. Further the said consultancy work will also impair the regular studies of the students.

The Hon’ble High Court of Punjab & Haryana in the case of Regional Computer Centre Vs.: Commissioner of Income Tax [2009] 311 ITR 182 (P&H) in the identical facts and circumstances had held that the assessee is not entitled for exemption under the Act.

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