Income Tax Appellate Tribunal - Jaipur
Shekhawathi Chatrawas Samiti, Sikar vs Commissioner Of Income Tax, ... on 21 August, 2019
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE 'A' JAIPUR
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BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 779/JP/2018
Shekhawati Chatrawas Samiti cuke CIT(Exemptions)
Losal, Sikar Road, Vs. Jaipur
Sikar
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s Assessee by : Shri P. C. Parwal (CA)
jktLo dh vksj ls@ Revenue by : Shri Varindar Mehta (CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 07/08/2019
mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 21/08/2019
vkns'k@ ORDER
PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of ld. CIT(Exemptions), Jaipur dated 27.04.2018 wherein the assessee has taken the sole ground of appeal:-
"1. The Ld. CIT has erred on facts and in law in rejecting the application of assessee for grant of registration u/s 12AA of Income Tax Act, 1961 on the ground that hostel facility provided to the students by charging fees cannot be regarded as charitable activity in view of proviso to section 2(15) ignoring that the same is without any profit motive."
2. The ld AR submitted that the assessee society is registered under Rajasthan Society Rajasthan Act, 1958 vide registration certificate dt. 20.10.2001. The main object of society is to provide hostel facility along with meals to the students without any discrimination and profit motive. The assessee filed an application for seeking registration u/s 12AA of the IT Act, ITA No. 779/JP/2018 Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur 1961 in Form No.10A on 23.10.2017. The Ld. CIT(E) vide letter dt. 26.10.2017 and 08.01.2016 required the assessee to file certain details/information/clarification and in response to same, assessee filed reply vide letter dt. 26.12.2017 and 22.01.2018.
3. It was submitted that the Ld. CIT(E), however, rejected the application of assessee by holding that from the accounts for FY 2015-16 to 2017-18, it can be noted that whole of the income of the assessee is coming from hostel fees. This income is being spent for running of hostel only. Running of hostel by charging fees cannot be regarded as charitable activity. As the predominant object of the assessee is business, it cannot be treated as charitable institution. Merely stating that activities are not done with profit motive does not absolve the assessee from predominant activity test. The concept of charity is that primarily the activities should be charitable. If activities itself are commercial then no added words can help the assessee. Hence, the applicant cannot be held as charitable within the meaning of section 2(15) of the IT Act, 1961.
4. The ld. AR submitted that from the object clause of samiti, it can be noted that the main object of the assessee is to establish hostels for spreading education from the primary level education to higher level education. In pursuance to this object, the assessee is running a hostel at Losal, Sikar where the students of Shekhawati Public Senior Secondary School are provided accommodation and stay facility at reasonable rate without any profit motive. Thus, the activity of assessee was an aid for attaining the educational objects and falls within the ambit of expression 'education' employed in section 2(15) of the Act. Simply because assessee is charging hostel fees from the students would not mean that the activity of assessee is not charitable or that the predominant activity is business. In fact, the Ld. CIT(E) has not brought on record any material to establish that how the objective of assessee is business 2 ITA No. 779/JP/2018 Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur when he himself has reproduced the Income & Expenditure A/c from which it is noted that there is hardly any surplus in running of the hostel.
5. The ld AR submitted that the CBDT in Circular No.11/2008 dt. 19.12.2008 has clarified as under:-
"In the final analysis, however, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is charitable purpose within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business."
6. It was submitted that from the above circular, it is clear that the proviso to section 2(15) would apply only when the activities are in the nature of trade, commerce or business and section 2(15) is used only as a mask or a device to hide the true purpose which is trade, commerce or business. Therefore, the genuine institutions who carries out the activity of general public utility for the general welfare of public at large without any profit motive would not be hit by the proviso to section 2(15) even when it charges fees or consideration for the services rendered by it.
3 ITA No. 779/JP/2018Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur
7. It was further submitted that this very issue has come up for consideration before the ITAT Ahmedabad Bench in case of Shree Ahmedabad Lohana Vidyarthi Bhavan Vs. Income Tax Officer (Exemption) 172 ITD 11 where the AO held that running a hostel by charging fees from the students does not fall within the ambit of charitable purpose u/s 2(15) of the Act. The ITAT after examining the facts and also the law held that providing hostel facility is one of the essential components of an educational institution and is to be considered as imparting education. The relevant para 6 of the order is reproduced as under:-
"6. Short question required to be adjudicated by the Tribunal is, whether providing hostel facility to the students by appellant-trust is to be considered as imparting education within the meaning of section 2(15) of the Act or it would fall within the clause "advancement of any other object of general public utility" provided in the proviso appended to section 2(15) of the Act. The AO was of the opinion that providing hostel facility is not an activity akin to education. Hence, the activity performed by the assessee would not fall within the meaning of clause 2(15) giving meaning of expression "charitable purpose". He construed "advancement of any other object of general public utility" falling within the ambit of proviso appended to section 2(15). For harbouring this plea, basically the ld.AO has not assigned any reason, rather simply observed that hostel facility cannot be construed as imparting education. Before considering reasons assigned by the Revenue authorities below, we deem it appropriate to understand the meaning and objects of this facility. It is pertinent to note that human personality is shaped by the experiences of life. When a child is born, family provides a protective environment for the child. At the beginning, interactions are limited latter social interactions increase, and the process of socialization starts. Education is a part of child development. Though it started with the birth and lasted 4 ITA No. 779/JP/2018 Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur till the time of death, but formal education of language and others are being imparted in the school and colleges. Hostel is an essential institution for the students to stay in big cities and hostel plays an important role in education and training of these students. They provide residential opportunities for the students to continue the process of education. It is a place where students stay for pursuing formal education away from their homes. The concept of hostel is not only limited to place of residence, rather it is a human practical laboratory for development of students. It is a center of education. Students learn as much as from their teachers as well as fellows during hostel stay. It enriches understanding of the curriculum through analytical discussion amongst the students living in the hostels, and may contribute to character building as well. Students in hostel not only learn the theoretical material, they also learn how to enhance their personal abilities and learn to live independently. Hostel life has an impact upon the behavioral as well as personality development of students. It is one of the essential components of an educational institution. Some of the institutions like IITs, Medical Colleges provide compulsory stay in the hostel. Thus, how the AO can segregate this component from the concept of education provided in the main provision of section 2(15) ? If it is accepted that hostel is just an essential part of educational institution, then all that discussions made by the AO would be irrelevant. The simple reason is that assessee-trust came into existence in the year 1947. It has been providing hostel facilities for more than 60 years. It has always been treated as a charitable institution. In the assessment year 2010-11 a scrutiny assessment was made. Its status of "charitable institution" was accepted even after introduction of section 2(15) in the statute book. Not only it has been treated as "charitable institution" by 5 ITA No. 779/JP/2018 Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur giving registration under section 12AA of the Act, but under section 80G(5) it has again been recognized as "charitable institution".
In view of above, it was submitted that the Ld. CIT(E) be directed to grant registration u/s 12AA of the IT Act to assessee trust.
8. The ld CIT DR was heard who has supported the order of the ld CIT(E) and our reference was drawn to the findings of the ld CIT(E) which reads as under:
"8........From the above accounts, it can be seen that the whole of the income of the applicant is coming from Hostel Fees. The above income is being spent on related expenses i.e. salary, electricity & water exp. etc. The accounts reflect that the expenses were incurred for running of Hostel only. Running of hostel by charging fee cannot be regarded as charitable activity.
9. The applicant is claiming that the society is registered under Registration Society Regulation Act, 1958 vide registration No. 301/Sikar/2001-02 dated 20.10.2001. As per the deed of the samiti the objective of the samiti is to provide hostel facilities alongwith meals to the students without any discrimination and without any profit motive.
10. In this case, the main factor to be seen is the predominant activity undertaken by the applicant. In the case of the applicant, the predominant activity test totally goes against it, as it has carried out one and solely one activity i.e. providing hostel facility after chagrining fee. As the predominant object of the applicant/activity is business, it cannot be treated as charitable institution. Merely stating that the activities are not done with profit motive does not absolve the assessee from predominant activity test. The concept of charity is that primarily the 6 ITA No. 779/JP/2018 Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur activities should be charitable. If activities itself are commercial then no added words can help the assessee.
11. Similar issue came up before Hon'ble Delhi High Court in the case of Institute of Chartered Accountant of India vs. DGIT 347 ITR, 99 wherein the Hon'ble High Court observed as under:-
"Reliance placed by the petitioners on Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1979] 2 Taxman 501/[1980] 121 ITR 1 (SC) may not be fully appropriate after introduction of the first proviso as the statutory requirements were then different. Utilization of the funds or income earned whether for charitable purpose or otherwise is not relevant now in view of the first proviso and cannot be a determining factor for deciding whether the petitioner institute is covered by section 2(15) of the Income-tax Act."
12. In the nutshell, the Hon'ble High Court has stated that the concept of business feeding charity is not relevant after the insertion of the proviso to Section 2(15). To be a charitable institution, the predominant activity should be charitable. In the case of the applicant, there is only one activity i.e. running of hostel after charging fees. The samiti cannot be regarded as charitable institution.
13. Based on above discussion, it is clear that the activities of the applicant samiti are not charitable in nature as it is predominantly carrying out business on commercial basis. The applicant cannot be held as charitable within the meaning of Sec. 2(15) of the Income-tax Act, 1961. Based on above, I am satisfied that the applicant sansthan is not fit for registration and, therefore, registration u/s 12AA is rejected."
7 ITA No. 779/JP/2018Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur
9. We have heard the rival contentions and perused the material available on record. The assessee society is not a newly registered society, it is an existing running society and therefore, at the time of examination of its application for seeking registration under section 12AA of the Act, the ld CIT(E) is well within his jurisdiction to examine the genuineness and the intent behind the actual activities being undertaken by the assessee society and whether the same are in consonance with its stated objects for which the society has been formed and whether the same are carried out as charitable activity or with a profit motive in garb of any charitable activity.
10. The ld CIT(E), as part of such examination and on review of financial statements of the assessee society for last three years, noted that whole of the income of the assessee society in all these years is received in form of hostel fees and running of hostel by charging fees cannot be regarded as charitable activity and merely stating that the activities are not done with profit motive doesn't absolve the assessee from predominant activity test which should be charitable at first place. Per contra, the ld AR submitted that the main object of the assessee is to establish hostels for spreading education from the primary level education to higher level education and in pursuance of such object, the assessee is running a hostel at Losal, Sikar where the students of Shekhawati Public Senior Secondary School are provided accommodation and stay facility at reasonable rate without any profit motive. It was submitted that the activity of assessee was an aid for attaining the educational objects and falls within the ambit of expression 'education' employed in section 2(15) of the Act.
11. We find that there is nothing on record in support of aforesaid contention so raised by the ld AR. Further, no finding has been recorded by the ld CIT(E) that the students of Shekhawati Public Senior Secondary School are provided accommodation and stay facility by the assessee society. Further, there is nothing on record which helps determine the reasonability of hostel fees vis-à-
8 ITA No. 779/JP/2018Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur vis similar facilities provided by any other service provider and in absence thereof, it would be difficult for us to examine the aforesaid contention so raised by the ld AR.
12. Further, during the course of hearing, in order to examine the rent payment made by the assessee society, the Bench has asked the ld AR to submit copies of rent agreement which has been entered into by the assessee society which has subsequently been placed on record and on perusal of the same, it is noted that three of these rent agreements have been entered into with related parties so defined in section 13(3) even as per the audit report for the financial year ended March 31, 2017 relevant to assessment year 2017-18. It needs to be examined whether the rent payment to related parties are commensurate with the area taken on rent and local market/locality conditions where such premises is situated. Such examination will help determine the intent behind setting up of hostel facilities as to whether the hostel facility has been set up as an charitable activity or the rental arrangement has been so structured by way of a cash extraction mechanism where the hostel fees so collected is paid by way of rental payments beyond the acceptable and commensurate amount vis-à-vis area/premises taken on rent so as to benefit the related persons. Therefore, merely because there is nominal surplus at the end of the financial year is not determinative of the charitable nature of the activity, however, the whole financial structure which has been designed need to be examined to see the real intent behind such activities. Where the financial structure is so designed to benefit the trustees directly or indirectly through any such rental arrangements which are finally held to be unreasonable or not commensurate with the market conditions, it would be difficult to hold that the hostel facilities are not run with profit motive. However, we are leaving the matter open for the ld CIT(E) to examine taking into consideration the aforesaid discussion.
9 ITA No. 779/JP/2018Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur
13. During the course of hearing, the ld CIT DR also pointed that in the fixed asset schedule of the financial statements for the year ended March 31, 2017, the assessee society has shown asset block of building with written down value of Rs 43,45,512. It was submitted that on perusal thereof and the fact that there is also rental arrangements, it is not clear in respect of which all properties, the assessee is paying rent and which all properties/building are owned by the assessee society. We find that these are also matters which require to be examined as the same will again have a bearing on the overall financial structure which has been put in place by the assessee society which is an existing running society.
14. In light of above discussions and in the entirety of facts and circumstances of the case, the matter is set-aside to the file of the ld CIT(E) to examine the same afresh taking into consideration the aforesaid discussion.
In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in the Open Court on 21/08/2019.
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(Vijay Pal Rao) (Vikram Singh Yadav)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Tk;iqj@Jaipur
fnukad@Dated:- 21/08/2019
*Ganesh Kr.
vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- Shekhawati Chatrawas Samiti, Sikar
2. izR;FkhZ@ The Respondent- CIT(Exemptions), Jaipur
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr@ CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur.10 ITA No. 779/JP/2018
Shekhawati Chatrawas Samiti, Sikar Vs. CIT(Exemptions), Jaipur
6. xkMZ QkbZy@ Guard File {ITA No. 779/JP/2018} vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar 11