Prior Year’s Untaxed Income Cannot Be Added in the Current Year Under Section 68
Issue
Whether income that was admittedly earned by an assessee in a prior assessment year, but not offered to tax in that year, can be added to the assessee’s income in the current assessment year as an “unexplained cash credit” under Section 68 of the Income-tax Act.
Facts
- The assessee, a university, had earned income from hostel and mess activities in prior years, accumulating a corpus up to March 31, 2014 (relevant to AY 2014-15).
- The assessee did not include this income in its return for AY 2014-15.
- In the current assessment year (AY 2015-16), the assessee made a journal entry crediting this amount to “Reserve & Surplus,” which the Assessing Officer (AO) discovered.
- The AO treated this credit entry as unexplained income for AY 2015-16 and made an addition under Section 68.
- The Commissioner (Appeals) upheld this addition, citing the assessee’s own admission.
Decision
- The High Court held that the addition under Section 68 for AY 2015-16 was not valid.
- It affirmed the fundamental principle that every assessment year is a separate and distinct unit.
- Income earned in a particular year can only be assessed or reassessed in that specific year. The court stated that there is no option for either the assessee or the tax authorities to assess the income of ‘Year X’ in ‘Year X+1’.
- Since the income pertained to years up to AY 2014-15, it could not be taxed in AY 2015-16. The only available course of action for the Revenue was to reopen the assessment for the relevant prior year(s).
- The matter was remanded to the Assessing Officer for a fresh examination, with a specific direction to also consider the assessee’s claim for exemption under Section 10(23C)(iiiab) during the proceedings.
Key Takeaways
- Sanctity of the Assessment Year: This principle is a cornerstone of tax law. Income cannot be arbitrarily shifted between years to suit the convenience of either the taxpayer or the tax department.
- Section 68 Inapplicable to Prior-Period Income: Section 68 is used to tax unexplained credits appearing in the books for the current year. It cannot be used as a tool to tax income that is explained but which pertains to a prior year.
- Correct Remedy is Reassessment: The only legal method to tax income that has “escaped” assessment in a prior year is to initiate reassessment proceedings under Section 147/148 for that specific year, subject to the prescribed time limits.
II. University’s Hostel/Mess for Students is Part of Education, Not a Separate Business
Issue
Whether providing hostel and mess facilities by a university exclusively to its students constitutes a “business” under Section 11(4A) of the Income-tax Act, thereby restricting the 15% standard exemption under Section 11(1)(a) to the “net income” (profit) from that activity, instead of the “gross receipts.”
Facts
- The assessee, a university engaged in education, provided hostel and mess facilities.
- These facilities were provided only to its students and not to any outsiders.
- The Assessing Officer (AO) treated this as a “business” that was merely incidental to the university’s main object (education).
- Consequently, the AO applied Section 11(4A) and calculated the 15% standard exemption on the net profit from the hostel/mess, rather than on the gross receipts as claimed by the assessee.
- The Commissioner (Appeals) upheld the AO’s action.
Decision
- The High Court ruled in favour of the assessee.
- It held that the activity of providing hostel and mess facilities exclusively to students is not a separate business. It is an integral part of the main educational activity and is incidental to imparting education.
- Because the activity is not a “business” within the meaning of Section 11(4A), the restrictions of that section do not apply.
- Therefore, the 15% exemption for accumulation under Section 11(1)(a) must be calculated on the gross receipts from the hostel and mess activities, not on the net income.
Key Takeaways
- “Integral” vs. “Incidental”: The court distinguished between an activity that is a separate (though incidental) business and one that is an integral part of the main charitable object. Providing lodging to one’s own students is integral to education.
- Exclusivity is Decisive: The fact that the facilities were not provided to outsiders was a key factor in proving that the activity was not a “business” venture.
- Impact on Calculation: This ruling is significant for educational institutions, as it allows them to claim the 15% standard exemption on the gross receipts of ancillary student services (like hostels, mess, transport) rather than just on the profits, provided these services are exclusively for students.
IN THE ITAT INDORE BENCH
National Law Institute University
v.
Deputy Commissioner of Income-tax (Exemption)
Paresh M. Joshi, Judicial Member
and B.M. Biyani, Accountant Member
and B.M. Biyani, Accountant Member
IT Appeal No. 423 (Ind.) of 2024
[Assessment year 2015-16]
[Assessment year 2015-16]
OCTOBER 9, 2025
Ashish Goyal and N.D. Patwa, ARs for the Appellant. Anoop Singh, CIT-DR for the Respondent.
ORDER
B.M. Biyani, Accountant Member.- Feeling aggrieved by order of first-appeal bearing DIN & Order No.: ITBA/NFAC/S/250/2023-24/1058947878(1) dated 21.12.2023 [“impugned order”] passed by learned Commissioner of Income-Tax (Appeals)-NFAC, Delhi [“CIT(A)”], which in turn arises out of assessment-order dated 12.12.2017 passed by learned DCIT (Exemption), Bhopal [“AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2015-16, the assessee has filed this appeal.
2. The registry has informed a delay of 78 days (the assessee has calculated 74 days) in filing this appeal. Ld. AR for assessee invited our attention to the condonation-application filed by assessee, supported by an affidavit on stamp, explaining the reason of delay as under:
“To
The Hon’ble Members,
Income Tax Appellate Tribunal,
Indore Bench
Subject: Application for Condonation of Delay in Filing Appeal in Case of National Law Institute university, Bhopal PAN No AAAJN0534C
Respected Members,
With reference to the subject cited above, it is respectfully submitted that the delay in filing the appeal was due to the following reasons:
While filing the appeal before the Commissioner of Income Tax (Appeals) on 16.10.2017, the email ID of our consultant, CA Sanjay Srivastava, was provided. However, subsequently, finance officers and other officials were appointed on deputation/contract basis in NLIU. Consequently, the email ID of the Accountant, Mr. Alok Aggarwal, being the only regular employee in the Accounts Section at that time, was updated on the portal.
When the appeal order was finalized on 21.12.2023. Mr. Alok Aggarwal had already proceeded on deputation to the Atal Bhujal Yojana. As a result, the final order could not come to the notice of the University.
During the process of finalizing the accounts for the Financial Year 2023-24, the order came to our notice on 15th April 2024. Thereafter, with the due approval of the competent authority, the appeal was filed on 3rd May 2024. Thus, there is a delay of 74 days in filing the appeal.
In light of the genuine and reasonable circumstances explained above, we respectfully request that the delay of 74 days be kindly condoned, and the appeal be admitted in the interest of justice.
Thanking you,
Yours faithfully,
For National Law Institute University
(Vivek Baksi) Registrar
Dated 11.04.2025
3. The reasoning given by assessee is discussed and the Ld. DR for revenue left this issue for the wisdom of bench without raising any objection against condonation of delay. After a careful consideration, the delay of 78/74 days is condoned taking into account the explanation given by assessee in above application in the light of Collector, Land Acquisition v. Mst. Katiji (SC)/1987 AIR 1353/1987 2 SCC 387 having settled the law long back that all such technical aspects must make a way for the cause of substantial justice.
4. Brief facts as culled out from the orders of lower-authorities and as emerged during hearing are such that the assessee is a law university established under Rashtriya Vidhi Sansthan Viswavidhyalaya Adhiniyam, 1997. Uptill AY 2014-15, the assessee was entitled to exemption u/s 10(23C)(iiiab). Thereafter, w.e.f. 01.04.2014, the assessee has been granted registration u/s 12AA by CIT(Exemption), Bhopal vide Registration No. AAAJNO534C/03/15-16/1-0164 order dated 26.08.2015. Thus, the assessee has become entitled to exemption u/s 11/12 from previous year 2014-15 / AY 2015-16. Accordingly, for AY 2015-16 under consideration, the assessee filed return on 30.09.2015 declaring total income of Rs. Nil after claiming exemption u/s 11/12. The case was selected for scrutinyassessment and the AO issued statutory notices u/s 143(2)/142(1) which the assessee complied. Ultimately, the AO completed assessment vide assessment-order dated 12.12.2017 u/s 143(3) determining total income at Rs. 5,62,97,660/- after making certain adjustments [Para 6 of assessmentorder]. Aggrieved, the assessee carried matter in first-appeal before CIT(A) and contested the adjustments made by AO but did not get any success. Now, the assessee has come in next appeal before us.
5. The grounds raised by assessee are as under:
“1. The Ld. AO was not justified in passing the order, which is bad-in-law, void ab initio, barred by limitation, illegal, contrary to the facts and circumstances of the case, liable to be annulled.
2. The Ld. CIT(A) was not justified in confirming the order, which is bad-inlaw, void ab initio, barred by limitation, illegal, contrary to the facts and circumstances of the case, liable to be annulled.
3. The Ld. CIT(A) was not justified in confirming the addition of Rs. 5,42,75,671/- on account of Reserves & Surplus of mess A/c without considering the facts and circumstances of the case.
4. The Ld. CIT(A) was not justified in confirming the addition of Rs. 20,21,992/- on account of treating income from mess u/s 11(4) without considering the facts and circumstances of the case.
5. The appellant carves leave to add, amend or modify any of the grounds of appeal. “
Ground No. 1 & 2:
6. During hearing, these grounds are not pressed and accordingly dismissed at the request of Ld. AR for assessee.
Ground No. 3:
7. In this ground, the assessee challenges the addition of Rs.5,42,75,671/- made by AO and upheld by CIT(A) on account of ‘Reserve & Surplus of Mess’.
8. The AO has dealt this issue in Para 4 of assessment-order. The precise facts giving rise to the issue are such that during scrutiny-proceedings, the AO found that the assessee has credited a sum of Rs. 5,42,75,671/- in “Reserve & Surplus A/c” of Balance-Sheet under the sub-heading “Balance of Mess Account unutilized of earlier year”. Since this amount is directly credited to Balance-Sheet without crediting/adding to Income & Expenditure A/c or Computation of Total Income, the AO asked assessee vide notice dated 31.01.2017 to furnish details of same and justification for not considering the same as income. However, the assessee did not furnish any reason/justification in the reply submitted to AO [Para 4.1 of assessment-order]. Thereafter, the AO issued another notice dated 29.08.2017 giving opportunity to assessee to explain as to why the impugned amount should not be considered as income and also to explain whether the same was offered as income in earlier years or not [Para 4.2 of assessment-order]. In response, the assessee took several adjournments and ultimately filed reply dated 27.11.2017 stating that the necessary files and records relevant to the amount were still being worked out. Finally, vide reply dated 05.12.2017, the assessee submitted that it was running a mess, the receipts of which were being maintained in a separate account and separate books of account were being maintained and that neither the receipts were taken as income nor the payments were taken as expenses. The assessee further submitted that the unutilized opening balance of Rs. 5,42,75,671/- was added to ‘Reserve & Surplus A/c” [Para 4.3 of assessment-order]. Based on reply of assessee, the AO formed a view that the impugned amount was income of assessee which has to be offered as income. Accordingly, vide order-sheet entry dated 05.12.2017, the AO asked assessee to furnish year-wise break-up of the amount of Rs. 5,42,75,671/-[Para 4.5 of assessment-order]. The assessee filed reply dated 08.12.2017 intimating to AO that it is not possible to bifurcate year-wise break-up and the assessee offered the same as income for tax in the year under assessment (i.e. AY 2015-16) [Para 4.6 of assessment-order]. Taking into account submission of assessee, the AO made addition of Rs. 5,42,75,671/-as unexplained credit u/s 68 [Para 4.8 of assessment-order].
9. During first-appeal, the assessee made submission which is reproduced by CIT(A) in impugned order. However, after consideration, the CIT(A) rejected assessee’s submission and passed following order upholding the action of AO:
“6.1.1 I also find that the assessee during the appellate proceedings has submitted that though it could not give year wise bifurcation during the assessment proceedings but it can submit the same now and it does not pertain to the year under consideration. I am unable to agree with the assessee’s proposition as the assessee itself during the assessment proceedings had itself vide a letter dated 08.12.2017 offered the accumulated profits surplus of Rs. 5,42,75,671/- from running of Hostel and Mess as taxable income for the year under consideration. In the circumstances, I do not see any reason to interfere with the well-reasoned and speaking order of the AO.
Hence, the ground of appeal No. 1 is Dismissed. “
10. During hearing before us, Ld. AR for assessee at first drew us to the following submission made by assessee to CIT(A) during first-appeal, which is re-produced by CIT(A) in impugned order on Page No. 6-7:
“It is submitted here that Assessee is an Educational Institution. Its income up to A.Y. 2014-15 was exempted u/s 10(23C)(iiiab), however since A.Y. 2015-16 its income is exempted u/s 12AA of Income Tax act 1961. It is submitted that the Mess accounts were maintained by separate person and was kept separately from the university main accounts. There was no intention of the Assessee to hide it. It was simply due to mistake and this is the cause that as soon as Assessee came to know about it, they merged entire surplus of Rs. 5,42,75,671/- till 31.03.2014 year in Final account in the year Assessed though assessment years. Receipts and Expenditure have been taken to Income and expenditure account. It is submitted that the receipt on account of Mess services is given below:
| S.No. | Year | Op. Balance | Receipt | Expenditure | Closing balance |
| 1. | 2007-08 | 11268735 | 8184000 | 5204949 | 14247786 |
| 2. | 2008-09 | 14247786 | 11624823 | 6082726 | 19789883 |
| 3. | 2009-10 | 19789883 | 11549711 | 7269503 | 24070091 |
| 4. | 2010-11 | 24070091 | 13923736 | 8167016 | 29826811 |
| 5. | 2011-12 | 29826811 | 16995760 | 9480334 | 37342237 |
| 6. | 2012-13 | 37342237 | 16872473 | 9232865 | 44981845 |
| 7. | 2013-14 | 44981845 | 22615216 | 13321390 | 54275671 |
From the above chart it is clear that the surplus of Rs. 5,42,75,671/- is not related to any one year, rather it is surplus of entire previous years since beginning. We are enclosing here certified copy of Mess account for above years as per Annexure “A”.
It is further submitted that had the surplus of the previous years routed through Income and expenditure account of the relevant year, there would had no tax as such occurred to the Assessee since institutions income in the previous years was exempted u/s 10(23C)(iiiab) of Income Tax Act, 1961. We are enclosing herewith copy of judgment of Tribunal for A.Y. 2014-15 in favour of the Assessee where it was accepted that the Appellant income was Exempted u/s 10(23C)(iiiab) of Income Tax Act 1961 (Annexure “B” enclosed). It is, therefore, not fair to presume it as unaccounted and unexplained u/s 68 of income Tax act 1961 in the hand of the Assessee simply on the basis of the fact that the entire surplus has been routed through Balance-Sheet in Assessed Year. We are enclosing herewith Annexure “C” which shows Govt Grant and fees without taking Mess fess and another chart in Annexure “D” which shows Govt grant and fees taken Mess fess which shows that if the said receipts would had added in previous years then also the Appellant income was exempted u/s 10(23C)(iiiab) of Income Tax Act 1961.
It is, therefore, requested to kindly delete addition of Rs. 5,42,75,671/- on account of this issue. “
11. Thereafter, Ld. AR drew us to “Schedule-2” titled as “Reserve & Surplus” forming part of audited Balance-Sheet of assessee, available at Page 10 of Paper-Book, wherein it is clearly mentioned: “Balance of Mess account unutilized of earlier year – Rs. 5,42,75,671.10”. Ld. AR submitted that the impugned amount was brought in assessee’s books through a journal entry recorded on 01.04.2024. He submitted that both of the lower-authorities, viz. AO and CIT(A), have accepted that the impugned balance of Rs. 5,42,75,671/- relates to earlier years and they are not against this factual aspect. However, during scrutiny-proceeding, when the AO asked assessee to supply year-wise breakup of earlier years, the then counsel of assessee filed a reply which has been taken into consideration by AO in Para 4.6 of assessment-order in these words: “In response to the above, vide written submission dated 08.12.2017, the assessee submitted that it is not possible to bifurcate the above unutilized amount year-wise and the assessee offered the same income for tax in the year under assessment.” Ld. AR drew us to the impugned letter dated 08.12.2017 filed by assessee’s then counsel, available at Page 31 of Paper-Book, the same is scanned and re-produced for an immediate reference:
12. Ld. AR contended that the admission/confession made by assessee’s counsel offering income of earlier years for taxation in current year, is not binding upon assessee. Ld. AR filed following Written-Synopsis also in this regard:
“2. Surrender by the counsel is not binding
| a. | It is a settled proposition of law that there cannot be any estoppel against the law. The law is settled that every year is a different unit of taxation, and income of one year cannot be taxed in another year. |
| d. | It is always open to the assessee to withdraw his admission on facts. Murugesan & Bros (G) (1973) 88 ITR 432 (SC). Also Sohani Devi Jain 109 ITR 130 (Gau.) (FB). |
| h. | The doctrine of ‘approbate and reprobate’ is only a species of estoppels; it applies only to the conduct of parties. As in the case of estoppels, it cannot operate against the provisions of a statue. If a particular income is not taxable under the IT Act, it cannot be taxed on the basis of estoppels or any other equitable doctrine. Equity is out of place in tax law; a particular income is either exigible to tax under the taxing statue or it is not. If it is not, the ITO has no power to impose tax on the said income. |
CIT v. MR.P. Firm 56 ITR 67 (SC)
CIT v. Keshavlala Lallubhai Patel 55 ITR 537 (SC);
Smt. Mohini Thapar 1972 CTR 214 (SC);
CIT v. C.P. Sarathy Mdaliar 83 ITR 170 (SC)
Manish Maheshwari 289 ITR 341 (SC)
Tapan Kumar Datta (SC)
| i. | It is therefore submitted that the concession of the counsel, to offer the income, which was not at all taxable, being not related to current year; cannot be taxed in the current year. “ |
13. Ld. AR next contended that as per the scheme of the Income-tax Act, 1961, each previous/assessment year is independent and the ‘total income’ of each year is separately taxable in the concerned year only and cannot be taxed in any other year, preceding or subsequent. Further, in the light of various judicial rulings cited in above Written-Synopsis filed by him, it is also clear that there cannot be any ‘estoppel’ against the provision of law. Therefore, the AO has violated the scheme/provisions of the Act by taxing the sum of Rs. 5,42,75,671/- which was the opening balance as on 01.04.2014 brought forward from 31.03.2014 out of incomes earned in earlier years.
14. Ld. AR also contended that the opening balance of Rs. 5,42,75,671/-, even if recorded in current year’s books by way of a journal entry on 01.04.2014, cannot be taxed as unexplained credit u/s 68. He submitted that there is no flow of funds to assessee from the opening balance. So far as non-furnishing of year-wise break up is concerned, Ld. AR narrated that the assessee has subsequently complied the relevant data and submitted to CIT(A) during proceeding of first-appeal.
15. Without prejudice, Ld. AR made a further submission that the assessee was entitled to exemption u/s 10(23C)(iiiab) in earlier years and therefore the accumulation of income of Rs. 5,42,75,671/- would not be taxable because of exemption available. Therefore, taxation of same in respective earlier years would not have brought any additional tax to department. Hence, even if the same was not taxed in earlier years, there is no loss of tax to department.
16. With these submissions, Ld. AR made a straightforward prayer that the addition made by AO is against law and must be deleted instantly.
17. Per contra, Ld. DR for revenue made a strong opposition to the pleadings of Ld. AR. He raised following contentions and argued that the assessee does not deserve any sympathy or relief in this matter:
| (i) | During scrutiny-proceeding, the AO has given multiple opportunities to assessee to submit year-wise break up but the assessee took several adjournments. The assessee also submitted to AO that the necessary files and records were being worked out [Para 4.3 of assessment-order]. Still the assessee failed and finally expressed inability to submit any data and agreed before AO for taxation in current year [Para 4.6 of assessment-order]. Therefore, in such a situation when the assessee did not have the data required by AO, the credit entry of Rs. 5,42,75,671/- remained unexplained and the AO rightly invoked deeming provision of section 68 to tax the same. Section 68 of the act is a deeming provision which automatically applies when an assessee is not able to explain the nature and source of any sum credited in books of account. |
| (ii) | That, the assessee evaluated its position and with the support of counsel and filed a considered reply to AO giving offer for taxation in current year. The submission by assessee was after due consideration under the consultation of counsel and not in air. |
| (iii) | Before CIT(A) also, the assessee has simply filed figures of year-wise data but could not provide any documentation. Even now before Tribunal, the assessee has not given any document in support of yearwise break-up. In absence of documentation, the assessee’s claim of earlier years or year-wise break-up cannot be accepted. |
18. We have considered rival submissions of both sides and carefully perused the orders of lower-authorities. The dispute here is with regard to the addition of Rs. 5,42,75,671/- made by AO and upheld by CIT(A). The addition is in respect of a credit entry to “Reserve & Surplus” recorded by assessee in books of account. While the assessee claimed before AO during assessment-proceeding that the said entry, recorded on 01.04.2014, was related to the income earned in earlier years but when the AO asked assessee to furnish details/year-wise break-up, initially the assessee sought adjournments with the reasoning that the necessary files and records relevant to the amount were being worked out but at last the assessee could not furnish details and offered the same for taxation in current year. This led the AO to make impugned addition u/s 68. At present, the assessee is claiming that the impugned addition could not have been made by AO in current year and must be excluded. The assessee is raising this claim precisely on the strength of three contentions/propositions, namely (i) the scheme of Income-tax Act, 1961 is very clear which creates charge of tax on total income of each year. Further, each year is a separate and distinct year, (ii) the provisions of section 68 cannot apply to a ‘journal entry’ recorded in books of account, and (iii) the admission/confession made by counsel to AO to tax the impugned sum of Rs. 5,42,75,671/- in current year is not binding upon assessee. On a careful consideration, we find a strong merit in the first contention raised by Ld. AR. We find that the section 4 of the Income-tax Act, 1961 creates charge of tax for ‘every assessment-year’ and the term ‘assessment-year’ is defined in section 2(9) according to which ‘assessment year’ is a period of twelve months commencing on the 1st day of April every year. Thus, under the scheme of Act, every assessment year is a separate and distinct year. Further, if the income of a year goes untaxed for any reason, whether such reason is attributable to assessee or to the tax authorities and whether the situation giving rise to untaxing is unintentional or a designed attempt of assessee, the only course available to authorities is to open/re-open assessee’s case of relevant assessment year and assess or re-assess such untaxed income in the concerned assessmentyear only. There is no option, either to assessee or to tax authorities, to assess income of ‘X year’ in ‘X+1 year’ or ‘X-1’ year. This is the law of Income-tax Act, 1961 and nobody can dispute it. In present case, the assessee has passed a ‘journal entry’ in books of account on 01.04.2014 which was the first day of previous year relevant to AY 2015-16 under consideration giving credit of Rs. 5,42,75,671/- to “Reserve & Surplus” and simultaneously debiting/crediting corresponding/other elements of assets/ liabilities. During hearing, we asked the Ld. AR to file the details of ‘journal entry’ passed and in reply, the following letter is filed by assessee:
19. On a careful reading of above document filed by assessee, we find that there are significant amounts of Bank of Baroda A/c, Dena Bank A/c, Fixed Deposit with SBI and Fixed Deposit with HDFC Bank amongst other assets. There can hardly be any doubt that these balances in Bank A/c and Fixed Deposits were existing as on 31.03.2014 being the last day of previous year 2013-14 relevant to AY 2014-15 immediately preceding the AY 2015-16 under consideration. Further, the transactions of hostel/mess activity have been done by assessee through those bank accounts. Thus, there is an undisputable position manifest from the elements of ‘journal entry’ to signify/establish that the assessee carried hostel/mess activity and earned income therefrom in earlier years and accumulated corpus upto 31.03.2014. When it is so, we agree, in principle, that the taxation of the amount of Rs. 5,42,75,671/- in AY 2015-16 relevant to previous year 2014-15 is against the very scheme of Income-tax Act, 1961 and not sustainable.
20. However, in order to dig the issue further, we sought some more documents/clarifications from assessee and relisted this case for clarification hearings. On those dates, Ld. AR/assessee filed the documents required by bench, as under:
| (i) | At Pages 59-74 of Paper-Book, the assessee filed audited financial statements being audited Balance-Sheet, Income & Exp. A/c, Receipt & Payment A/c, etc. of ‘National Law Institute University’ [i.e. the assessee] for the financial year 2013-14 relevant to AY 2014-15. These audited financial statements bear the date of 04th October, 2014 and have been audited by M/s S.L. Chhajed & Co, Chartered Accountants. |
| (ii) | At Pages 40-43 of Paper-Book, the assessee filed audited financial statements being audited Balance-Sheet, Income & Exp. A/c, Receipt & Payment A/c, etc. of ‘National Law University (Mess)’ [i.e. Hostel/Mess Activity] for the very same financial year 2013-14 relevant to AY 2014-15. These audited financial statements also bear the date of 04th October, 2014 and have been audited by very same auditors M/s S.L. Chhajed & Co, Chartered Accountants. |
21. Thus, on a careful examination of above documents during hearing, we found that the accounts of assessee (excluding hostel/mess activity) as well as accounts of hostel/mess activity carried by assessee for AY 2014-15; both sets of accounts have been audited by same auditors on the very same date of 04.10.2014. When it is so, the question arises as to why the assessee did not include the transactions/income of hostel/mess activity of at least financial year 2013-14 in the return of AY 2014-15 filed to Income-tax Department on 18.11.2014? When we raised this particular query to Ld. AR, the Ld. AR did not have any reply except to say that the documents are before bench. From this observation made during hearing, we are at least able to infer that the assessee has knowingly not included the transactions/income of hostel/mess activity in the return of income of AY 2014-15. The assessee has passed a journal entry in the books of financial year 2014-15 relevant to AY 2015-16 under consideration and routed the relevant transactions through Balance-Sheet with the idea that it would remain unnoticed by department. But by the way, the case of assessee came under the scanner of scrutiny and the AO was diligent enough to discover the journal entry made by assessee. Further, during assessment-proceeding, when the AO asked assessee to give details of hostel/mess activity, the assessee sought adjournments and at last filed a letter admitting for taxation of the amount of Rs. 5,42,75,671/- in current year but now the assessee is claiming that the admission made by counsel is not binding upon it. This approach of assessee, who is a renowned National Law University, is not appreciable. Is it so that the then counsel made a confession/admission on his own without consulting assessee? If it is so, the assessee is free to deal with counsel in his own manner. Be that as it may, we find a negligent or disobedient attitude on the part of assessee firstly, in not including year-to-year transactions/incomes of hostel/mess activity in its accounts/return; secondly, in not including transactions/ income of hostel/mess activity at least for the financial year 2013-14 in return of AY 2014-15 when the audited accounts of hostel/mess activity dated 04.10.2014 were very much available with assessee; thirdly, in filing a letter offering for taxation of entire sum of Rs. 5,42,75,671/- in AY 2015-16 but now pleading the provisions/scheme of the Act and requesting for exclusion from AY 2015-16 despite himself not following the provisions of law for several years by not reporting transactions of hostel/mess activity to Income-tax Department and keep on building a large corpus. In this entire process, the assessee has wasted resourceful time and energy of all authorities of Income-tax Department, therefore we impose a cost of Rs. 50,000/- upon assessee to be paid to “Income-tax Department” by challan.
22. So far as the adjudication of issue is concerned, we have already agreed in principle that the amount of Rs. 5,42,75,671/- cannot be taxed in AY 2015-16 as it would be against the scheme of Income-tax Act, 1961. Therefore, we restore this issue again at the level of AO for a fresh examination. We keep AY 2015-16 alive so that the assessee could file all evidences/records/ documents of year-wise data for the full satisfaction of AO. The AO shall give sufficient opportunities to assessee and consider assessee’s submissions judicially without being influenced by his earlier order in any manner. Thereafter, the AO shall take appropriate decision and action(s) as permitted under the provisions of Income-tax Act, 1961 for taxation in correct assessment-year(s). Further, while undertaking this exercise, the AO shall also consider the exemption u/s 10(23C)(iiiab), if the assessee demands. We make it clear that the AO shall resume proceeding of fresh adjudication only after the assessee submits a paid challan of cost of Rs. 50,000/-. We also direct that the AO shall, if necessary, assist assessee in making payment of Rs. 50,000/- on departmental system. The Ground No. 3 is accordingly allowed for statistical purpose.
Ground No. 4:
23. In this ground, the assessee challenges the addition of Rs. 20,21,992/- made by AO and upheld by CIT(A) on account of “income from mess” earned in current year.
24. The AO has dealt this issue in Para 5 of assessment-order. The AO has noted that the assessee is providing hostel/mess facility to students on payment basis and specific fee was charges from students for such facility. The AO has treated this activity as ‘business’ incidental to the attainment of the objectives of assessee. The AO further noted that the gross receipts from this activity were Rs. 2,27,31,112/- and expenses were Rs. 1,34,79,944/-. The AO found that the assessee has credited gross receipts and debited expenses on respective sides of Income & Exp. A/c and while computing exemption u/s 11, taken full amount of gross receipts of Rs. 2,27,31,112/-as income; deducted full amount of expenditure of Rs. 1,34,79,944/- as ‘application to charitable purpose’; and also deducted 15% ‘standard exemption’ u/s 11(1)(a) on full amount of Rs. 2,27,31,112/-. Basically, the AO’s understanding is that the activity of assessee is covered u/s 11(4)/(4A) being in the nature of ‘business’ incidental and therefore CBDT Circular No. 5-P (LXX-6) of 1968 dated 19.06.1968 applies. Accordingly, placing reliance on section 11(4)/ (4A) and CBDT Circular, the AO viewed that the quantum of ‘standard exemption’ should be computed on ‘net income’ [i.e. gross receipts (-) expenses] of hostel/mess activity and not on ‘gross receipts’ as done by assessee. The AO show-caused assessee. In reply, the assessee claimed that it is a university not established with the intention of earning profit and that the hostel/mess facility was provided only to its students and not to non-students. That the activity of providing hostel/mess is a part of assessee’s educational activity, it is not a ‘business’. The assessee claimed that the working of ‘standard exemption’ made by it on the basis of ‘gross receipts’ is correct. The AO, however, rejected assessee’s claim and re-computed the amount of exemption as per his understanding, which resulted in an addition of Rs. 20,21,992/- to assessee’ total income. During first-appeal, the CIT(A) upheld AO’s order.
25. Before us, Ld. AR for assessee submitted that it is a fact that the assessee provided hostel/mess only to its students and not to non-students and this fact is very much admitted by AO. He submitted that the assessee is a university located in outside area from city of Bhopal and the provision of hostel/mess to students was very much essential. He submitted that the activity of hostel/mess facility is ‘incidental to imparting education’ and cannot be termed as ‘business undertaking’ or ‘business’ by any logic. He submitted that this aspect has already been examined and decided by Hon’ble Supreme Court in New Noble Educational Society v. Chief CIT (SC):
“74. In R.R.M Educational Society’s appeal before this court, the charitable status of the appellant within Section 10(23C) was denied inter alia on the ground that the institution was not merely imparting education but also was running hostels. It is clarified that providing hostel facilities to pupils would be an activity incidental to imparting education. It is unclear from the record whether R.R.M Educational Society was providing hostel facility only to its students or to others as well. If the institution provided hostel and allied facilities (such as catering etc.) only to its students, that activity would clearly be ‘incidental’ to the objective of imparting education. “
[emphasis supplied]
26. Thereafter, he referred CBDT Circular No. 5-P (LXX-6) of 1968 dated 19.06.1968 relied by AO:
“Circular: No. 5-P(LXX-6) of 1968, dated 19-6-1968
1. In Board’s Circular No. 2-P(LXX-5), dated 15-5-1963, it was explained that a religious or charitable trust, claiming exemption under section 11(1), must spend at least 75 per cent of its total income for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question has been reconsidered by the Board and the correct legal position is explained below.
2. Section 11(1) provides that subject to the provisions of sections 60 to 63, “the following income shall not be included in the total income of the previous year.” The reference in clause (a) is invariably to “Income” and not to “total income”. The expression “total income” has been specifically defined in section 2(45) as “the total amount of income computed in the manner laid down in this Act”. It would, accordingly, be incorrect to assign to the word “income”, used in section 11(1)(a), the same meaning as has been specifically assigned to the expression “total income” vide section 2(45).
3. In the case of a business undertaking, held under trust, its “income” will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the ITO, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed in the account will be eligible for exemption under section 11(1), the permitted accumulation of 25 per cent will also be calculated with reference to this income.
4. Where the trust derives income from house property interest on securities, capital gains, or other sources, the word “income” should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should be not less than 75 per cent of the later, if the trust is to get the full benefit of the exemption under section 11(1).
5. To sum up the business income of the trust, as disclosed by the accounts plus its other income computed as above, will be the “income” of the trust for the purposes of section 11(1). Further, the trust must spend at least 75 per cent of this income and not accumulate more than 25 per cent thereof. The excess accumulation, if any, will become taxable under section 11(1).”
27. Ld. AR contended that the Para 3 of above Circular in which the CBDT has clarified to compute exemption on the basis of ‘net income’, is not at all applicable to assessee when the activity of hostel/mess done by assessee is not a ‘business undertaking’ or ‘business’ as per decision of Hon’ble Supreme Court in New Noble Educational Society (supra). He submitted that the assessee has rightly claimed 15% of gross receipts as eligible exemption u/s 11(1)(a). He relied upon following decisions:
| (i) | CIT v. Programme for Community Organisation ITR 1 (SC) : |
“3. The question that really requires consideration is whether, for the purposes of section 11(1)(a) of the Income-tax Act, 1961 (‘the Act’), the amount for the grant of exemption of twenty-five per cent should be the income of the trust or it should be its total income determined for the purposes of assessment to income-tax. This question has to be answered in the light of these facts:
the assessee-trust received donations in the aggregate sum of Rs. 2,57,376. It applied thereout for its charitable purposes the aggregate sum of Rs. 1,70,369 leaving a balance of Rs. 87,010. The question is whether the assessee is entitled to accumulate twenty-five per cent of Rs. 2,57,376, as it contends, or twenty-five per cent of Rs. 87,010, as the revenue appeared to contend.
Section 11(1)(a) reads thus :
“11. Income from property held for charitable or religious purposes.—
(1)(a) Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property;”
4. Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent of its income derived from property held under trust. For the present purposes, the donations, the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate twenty-five per cent thereout. It is unclear on what basis the revenue contended that it was entitled to accumulate only twenty-five per cent of Rs. 87,010.
5. For the aforesaid reasons, the civil appeal is dismissed.”
| (ii) | Artificial Limbs Manufacturing Corporation of India v. Addl. CIT (Exemption) (Delhi – Trib.) : |
“17. Considered the rival submissions and material placed on record. We observed from the record that the assessee a GOI undertaking established with the sole purpose of making the artificial limbs and its accessories to needy persons in particular to the disable persons at reasonable cost. In this process, it has established the charitable institution u/s 25 of the erstwhile Companies Act, 1956 and also grants substantial amounts as grants and also grants loans to modernize the facilities. With this background, we observed that the assessee has achieved manufacturing of artificial limbs and accessories to the extent of Rs. 162.15 crores and other income of Rs. 10.71 crores. As per the chart submitted by the assessee, the majority of the artificial limbs are sold under SSA scheme. For this main purpose of the institution, the assessee has incurred material consumptions and installed new fixed assets. The main issue raised by the AO with regard to application of revenue for the purpose of availing deduction u/s 11(1) of the Act, as per which the assessee is allowed to accumulate 15% of the income of the trust or its total income determined for the purpose of Income Tax. The AO has considered the net income generated by the assessee i.e., total revenue of the manufacturing activities less manufacturing expenditure and recomputed the eligible amount of 15% considering the Government Grants. It is relevant to notice that he has treated the manufacturing activities as incidental to main object of the entity. The question raised before us is whether the main revenue from activities of manufacturing carried on by the assessee has to be treated as eligible to be included for the purpose of determining the income of the entity or not. The revenue has relied on the various decisions in which the issue under consideration was considered by the various courts and held that the main revenue like donations, income from the assets held under the trust and any incidental activities carried on by the institution to generate additional revenue for the purpose of charitable purpose can be considered as gross income of the trust/institution. For the purpose of section 11(1) of the Act, the various courts have held that the direct revenue generated by the institution and net income from the incidental activities has to be considered for the purpose of applying provisions of section 11(1) of the Act. Therefore, from the various decisions rendered by the various courts, the controversy of determining the eligible income for the purpose of section 11(1) is settled. However, the same cannot be applied universally and it will change according to the relevant facts in the particular case.
18. In the given case, we observed that the main activities and purpose of establishing the institution is to serve the disabled persons with affordable prices of various artificial limbs. If that be the case, the whole operation carried on by the assessee and the revenue generated is to be considered as applied for the charitable purpose. We observe that the Special Bench of ITAT Mumbai Bench in the case of Bai Sonabai Hirji Agiary Trust v. ITO ITD 70 (Mumbai) (SB) in which the Special bench has relied on the decision of Hon’ble Supreme Court in the case of Programme for Community Organization(supra) held that the donations received by the assessee would constitute its property and it is entitled to accumulate 25% thereout. Therefore, in the given case also the relevant sale of artificial limbs in the concessional rates has to be treated as income derived from the property held under the trust. It is settled facts on the record that the assessee has manufactured the artificial limbs from the property held in the trust. One cannot deny the above facts on record. It is relevant to point out that the main purpose of existence of the institution is to serve the disabled persons by providing the limbs at affordable purpose. Without this purpose, there is no existence of this institution and also it operates as nodal agency on behalf of the GOI. Therefore in our considered view, the revenue generated out of the manufacturing activities has to be treated as eligible income for the purpose of accumulation u/s 11(1) of the Act. It cannot be considered as gross income.
19. Further, what is relevant is the income available for the purpose of applying the same for the purpose of charitable purpose. We intend to explain the above aspect by an example:
Let’s say the institution has earned Rs. 1000 from the property in the trust and also undertakes certain additional services to generate income for the trust, wherein it generate gross sales of Rs. 2000 and incurs expenditures of Rs. 1500. The eligible income for the purpose of section 11(1) of the Act is:
| Income from the property | Rs. 1000 | |
| Net income from the additional services: | ||
| Gross sales | Rs. 2000 | |
| Expenses | Rs. 1500 | |
| Net income | for the purpose of charity | Rs. 500 |
| The eligible | income u/s 11(1) | Rs. 1500 |
20. The above issue is well settled on the basis of various decisions of Courts However, the above method of determining the eligible income which is available for the main activities of the institution whereas the situation changes when we determine the eligible income for the main activities has to determine the income available for the main activities, in the given case, the whole revenue available for the purpose of achieving the main purpose has to include the gross revenue along with the grants of GOI. Therefore, the eligible income has to be determined as under:
| Revenue from operation (in place of net profit taken by AO) | Rs. 17285.39 Lakhs |
| Grants from ADIP Scheme | Rs. 5150.77 Lakhs |
| Grants from ADIP- SSA Scheme | Rs. 2050.00 Lakhs |
| Grants from SIPDA Scheme | Rs. 24.85 Lakhs |
| Grants from ADIP Awareness Camp | Rs. 4.08 Lakhs |
| Total Income as per Section 11(1) | Rs. 24515.09 Lakhs |
| 15% allowable accumulation | Rs. 3677.26 Lakhs |
| The Application of income: (extracted from Profit and loss Statement) | |
| Cost of material and establishment | Rs. 14120.01 Lakhs |
| Less: Depreciation | Rs. 154.88 Lakhs |
| Net cost of production | Rs. 13965.13 Lakhs |
| ADIP Scheme | Rs. 5492.83 Lakhs |
| ADIP-SSA Scheme | Rs. 1878.73 Lakhs |
| Addition of Fixed assets | Rs. 193.98 Lakhs |
| Addition inCWIP | Rs. 47.04 Lakhs |
| Total Application of Income | Rs. 21577.71 Lakhs |
| Net Accumulation for the year | Rs. 2937.38 Lakhs |
From the above it is clear that the assessee has actually utilized the income of trust more than the 85% of the income earned by the assessee during the year. The stand of the lower authorities on this issue is not as per the various judicial precedents. In our view, the above view was supported by the decision of ITAT Bangalore Bench in Dy CIT (Exemptions) v. BS&G Foundation [IT Appeal No. 884 (Bang) of 2016, dated 4-10-2017]. The relevant ratio is reproduced below:
“4.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements referred to. The issue for adjudication before us is whether the ld. CIT(A) was right in directing the AO to allow the assessee accumulation of income for application to the extent of 15% of gross receipts u/s. 11(1)(a) of the Act.
4.3.2 The assessee claimed accumulation of income for application for charitable purposes u/s, 11(1)(a) of the Act at 15% of gross receipts for the year under consideration. The Assessing Officer (‘AO’) however, was of the view that accumulation will be allowed only to the extent of 15% of the net receipts i.e.; gross receipts less revenue expenditure and not on the gross receipts as claimed by the assessee. On appeal, the Id. CIT(A) allowed the assessee’s claim that it is to be allowed accumulation of income for application for charitable purposes to the extent of 15% of gross receipts u/s. 11(1)(a) of the Act and not 15% of net receipts as held by the AO. 4.3.3 The issue to be decided by us is as to whether for the purpose of accumulation of income for application for charitable purposes u/s. 11(1)(a) of the Act is to be allowed at 15% of gross receipts or net receipts i.e.; gross receipts less Revenue expenditure. We find that the issue in question was considered and adjudicated by a co-ordinate bench of the Tribunal in the case of Mary Immaculate Society and in its order in ITA Nos. 240 & 241/Bang/2015 dated 23.06.2015 held that the assessee is to be allowed accumulation of income for application for charitable purposes u/s. 11(1)(a) of the Act at 15% of gross receipts following the decision of the ITAT Special Bench in the case of Bai Sonabai Hirji Agiary Trust v ITO, 93 ITD 0070 (SB). In its order (supra), the co-ordinate bench has held as under at paras 15 and 16 thereof:
“15. The issue to be decided is therefore as to whether for the purpose of computing accumulation of income of 15% under Sec. 11(1)((a) of the Act, one has to take the gross receipts or gross receipts after expenditure for charitable purpose i.e., the net receipts. This is issue is no longer res integra and has been decided by the Special Bench Mumbai in the case of Bai Sonabai Hirji Agiary Trust v. ITO 93 ITD 0070 (SB). The facts in the aforesaid case were that the assessee was a public charitable trust enjoying exemption under s. 11 of the IT Act. As per the requirement of s. 11(1) of the IT Act, as it prevailed at that point of time, the assessee had to apply 75 per cent of its income for the objects and purposes of the trust and the assessee was permitted to accumulate or set apart upto 25 per cent of its income, which was subject to fulfillment of other conditions. While calculating the aforesaid 25 per cent, the important question which arose was as to whether for this purpose, the gross income earned by the assessee is relevant or the income as computed in accordance with the provisions of IT Act. In other words, whether outgoings from out of gross income which are in the nature of application of income, should be first deducted from the gross income and 25 per cent of only the remaining amount should be allowed to be accumulated or set apart. The Special Bench of the ITAT on the issue held as follows:-
“9. Coming to the merits of the issue, we are of the view that the same is clearly covered by the decision of the Hon’ble Supreme Court in the case of CIT v. Programme for Community Organization (supra). In the decision, their Lordships, after taking note of provisions of s. 11(1)(a), have held as under:
“Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent of its income derived from property held under trust. For the present purposes, the donations the assessee received, in the sum of Rs. 2,57,346/-would constitute its property and it is entitled to accumulate twenty-five per cent thereout. It is unclear on what basis the Revenue contended that it was entitled to accumulate only twenty five per cent of Rs. 87,010.
For the aforesaid reasons, the civil appeal is dismissed.
It is clear from the above that deduction of twenty-five per cent was held to be allowable not on total income as computed under the IT Act. Any amount or expenditure, which was application of income, is not to be considered for determining twenty five per cent to be accumulated. Their Lordships, as noted earlier affirmed the decision of Kerala High Court in (1997) 141 CTR (Ker) 502: [1997] 228 ITR 620 (Kerala) (supra) wherein it is held as under:
At the outset, the statutory language of s. 11(1)(a) of the IT Act, 1961, relates to the income derived by the trust from property. The trust is required to be wholly for charitable or religious purposes, and the income is expected to have relation to the extent to which such income is applied to such purposes in India. It is thereafter the statutory provision proceeds further that such income is not to be understood to be in excess of 25 per cent of the income from such properties. It other words, the very language of the statutory provision under consideration sets apart 25 per cent of the income from the source of property with reference to the extent to which such income is applied for such purposes, charitable or religious, In other words, for the purpose of s. 11(1)(a) of the Act, the income in terms of relevance would be the income of the trust from and out of which 25 per cent is set apart in accordance with the spirit of the statutory provision.”
This means that, when it is established that trust is entitled to full benefit of exemption under s. 11(1), the said trust is to get the benefit of twenty-five per cent and this twenty-five per cent has to be understood as income of the trust under the relevant head of s. 11(1). In other words, income that is not to be included for the purpose of computing the total income would be the amount expended for purposes of trust in India. Their Lordships in the above case have emphasized on the clear and unambiguous language of s. 11(1)(a) and decided the matter on the basis of the same. It has been held that as per the statutory language of the above section the income which is to be taken for purpose of accumulation is the income derived by the trust from property.
If both the decisions are carefully read, it becomes evident that any expenditure which is in the shape of application of income is not to be taken into account. Having found that trust is entitled to exemption under s. 11(1), we are to go to the stage of income before application thereof and taken into account 25 per cent of such income. Their Lordships have pointed that the same has to be taken on “commercial” basis and not “total income” as computed under the IT Act. Their Lordships in the decided case rejected the contention of the Revenue that the sum of Rs. 1,70,369 which was spent and applied by the assessee for charitable purposes was required to be excluded for purpose of taking amount to be accumulated.
Having regard to the clear pronouncement of their Lordships of the Supreme Court, it is difficult to accept that outgoings which are in the nature of application of income are to be excluded. The income available to the assessee before it was applied is directed to be taken and the same in the present case is Rs. 3,42,174. Twenty five per cent of the above income is to be allowed as a deduction. Similar view has also been taken by the Hon’ble Madhya Pradesh High Court in Parsi Zorastrian Anjuman Trust v. CIT (supra). No reason whatsoever has been given by the Revenue authorities for deducting Rs. 2,17,126 in this case for purposes of s. 11(1)(a). The decision cited on behalf of the Revenue did not take into account the decision of the Supreme Court referred to above. The circular of CBDT has also been considered by the Hon’ble Kerala High Court in its decision referred to above. Accordingly the question referred to is answered in the affirmative and in favour of the assessee.”
16. The aforesaid decision clearly supports the plea of the Assessee. Following the same, we hold that the accumulation u/s. 11(1)(a) of the Act should be allowed as claimed by the Assessee.”
4.3.4 Respectfully following the decision of the co-ordinate bench in the case of Mary Immaculate Society (supra), we hold and direct the AO that the accumulation u/s. 11(1)(a) of the Act is to be allowed at 15% of gross receipts, as claimed by the assessee. Consequently, grounds raised by the Revenue are dismissed.”
21. Respectfully following the above decisions and the cases relied by the revenue authorities including Ld. DR are distinguishable to the facts on record as discussed in the above paragraphs. Hence, the ground no 2 and 3 raised by the assessee are allowed.”
28. Per contra, Ld. DR raised following contentions:
| (i) | That the assessee is charging fee from students for running hostel/mess. He submitted that this point alone is against the very concept of ‘charity’. He submitted that ‘charity’ pre-supposes giving from own sources, though one may accept donations/grants from donors. |
| (ii) | That, section 11 (4) prescribes for maintenance of separate books of account. In the light of concept of ‘charity’ as narrated by him and having regard to the provisions of section 11(4)/(4A), the books of account of business cannot be mixed up with other books of account. He submitted that the assessee’s own action of maintaining separate books for the activity of hostel/mess, supports his stand that the said activity done by assessee was in the nature of business. |
| (iii) | That, the CBDT has brought Circular to clarify the position of law and the AO is very much justified in applying same to assessee. |
29. Ld. DR thereafter submitted that the Community Organisation (supra) cited by Ld. AR deals a case of ‘donation receipt’ wherein the Hon’ble Supreme Court has accepted % of gross receipts in the form of donations. He submitted that the activity of hostel/mess done by assessee is not at parity with the donation receipts and therefore the decision of Hon’ble Supreme Court is not relevant. He relied upon a contrary decision of ITAT, Ahmedabad in Shree Bhartimaiya Memorial Foundation v. ACIT [IT Appeal No. 369/Ahd/2020, dated 13.02.2023], the relevant portion of order is reproduced:
“4. Brief background of the case being that the assessee is a registered charitable trust, both under the Income Tax Act and with the Charity Commissioner, providing services to the public at large. During the impugned year it had shown gross receipts of Rs. 23,90,62,222/- including receipt of Rs. 7,40,55,485/- from its pharmacy business. Finding the pharmacy business to be incidental to the charitable activities of the assessee-trust, the AO held that in terms of the provisions of section 11(1)(a) of the Act it was only profits and gains of the pharmacy business which were to be considered for the purpose of computing the amount to be allowed to set apart, at the rate of 15% of the income. The assessee had computed the same on the gross-receipts of the pharmacy business. Accordingly the excess accumulation claimed by the assessee to the tune of Rs. 33,40,283/- was denied by the AO. The same was upheld by the ld. CIT(A). The finding of the ld. CIT(A) in this regard at para 4.3 to 4.4 of the order is as under:
XXX
10. The contention of the Ld. Counsel for the assessee that it is the gross receipts of the business on which the quantum of accumulation is to be determined is based on case laws which have been rightly distinguished by the ld. CIT(A). The decision of the Hon’ble Apex Court in the case of Programme for Community Organization (supra), relied upon by the Ld. Counsel for the assessee was followed by the ITAT, Bangalore Bench in the case of Society of the Servant of the Holy Spirit (supra). The Ld. CIT(A) has rightly distinguished the same pointing out that the said case dealt with a totally different issue and was rendered entirely on different set of facts. In the said case, the issue was not as to what would comprise income of an incidental business carried out by a charitable entity, but on the contrary, the issue before the Bench was whether the gross-receipts of the charitable entity, as such would qualify as income for determining the amount statutorily allowed to be set apart/accumulated in terms of section 11(1)(a) of the Act or the net receipts. In the said case, the ITAT followed the decision of the Hon’ble Apex Court in the case of Programme for Community Organization (supra) and held that it would be gross- receipts viz. donation and income from charitable activities, which would qualify as income for the said purpose. The decision clearly did not address as to what would constitute income of business incidental to charitable activities for the purpose of accumulation/setting apart. Therefore, the said decision does not apply to the case before us.
11. The reliance placed on the decision of the Hon’ble Apex Court in the case of ALN Rao Charitable Trust (supra) also we find is of no assistance to the assessee, wherein the Hon’ble Apex Court had interpreted the provision of law relating to exemption provided to charitable entities in terms of section 11 of the Act, and had more particularly dealt with the quantification of the amount allowed to be set apart in terms of section 11(1)(a) of the Act and the amount to be accumulated in terms of section 11(2) of the Act. The Hon’ble Court held that the amounts accumulated/set apart in terms of section 11(2) of the Act would be reduced from the income of the charitable trust over and above the amount allowed to be statutorily accumulated in terms of section 11(1)(a) of the Act. The said decision was rendered in totally different context and is of no assistance to the assessee where the issue is the scope of the term income of an business incidental to charity for determining the statutory allowed deduction at the rate of 15% thereof.
12. In view of the above, we uphold order of the ld. CIT(A) holding that it is the only profits and gains derived from the incidental business of the assessee charitable-trust i.e. its pharmacy business, which would qualify as income for the purpose of computing the statutorily allowed accumulation at the rate of 15% in terms of section 11(1)(a) of the Act.”
30. We have considered rival contentions of both sides and perused the orders of lower-authorities as well as the material held on record to which our attention has been drawn. The controversy between parties is as to the nature of hostel/mess activity done by assessee and consequently the computation of correct amount of exemption allowable u/s 11(1)(a). Undisputably, the assessee is a renowned University engaged in imparting education to its students. Another undisputed fact is that the assessee has provided hostel/mess facility only to its students and not to others. Therefore, in these facts, the decision in New Noble Educational Society (supra) is directly applicable in which the Hon’ble Supreme Court has categorically clarified that providing hostel facilities to pupils would be an activity incidental to imparting education. Notably, in the case of New Noble Education Society (supra), the Hon’ble Supreme Court was concerned with the interpretation of activity of carrying hostel for the purpose of section 10(23C) which section has a much stricter phraseology. The section 10(23C) grants exemption to an institution ‘existing solely for educational purpose’ and it is in that context that the Hon’ble Supreme Court held that providing hostel facility to students is an activity incidental to imparting education. Thus, when the Hon’ble Apex Court has accepted assessee’s claim in the context of much stricter section 10(23C), there is no reason or justification to treat the hostel/mess facility provided by present assessee as something in the nature of ‘business’ or ‘business undertaking’. Therefore, in our considered view, the provisions of section 11(4)/(4A) do not have any application in present case and so also the Para 3 of CBDT Circular is not applicable.
31. In so far as the decision of Shree Bhartimaiya Memorial Foundation (supra) relied by Ld. DR is concerned, the same has dealt a case of ‘pharmacy business’ carried on by assessee but the ‘hostel/mess activity’ done by present assessee is not a ‘business’ as discussed in preceding para, therefore the said decision has not application to assessee.
32. In so far as the decisions relied by Ld. AR are concerned, the Ld. DR has weightage in submitting that the decision of Community Organisation (supra) was concerned with a case of ‘donation receipt’ and directly not applicable to assessee but, however, we find that the conclusion taken by Hon’ble Supreme Court is in favour of proposition that 15% must be computed with reference to the “income derived from property held under trust”. The decision of Artificial Limbs Manufacturing Corporation of India (supra) relied by Ld. AR has dealt various judicial precedents including the decision of Community Organisation (supra) and held that in a given case, the gross revenue derived from activity shall be treated as “income derived from property held under trust” and shall be eligible for 15% standard exemption. In present case of assessee, the facility of hostel/mess has been developed and provided to the students who pursue education in assessee’s institution, therefore the said activity is a part of assessee’s main activity of imparting education. Therefore, when the gross-revenue/fee charged from students towards main activity of education is considered as eligible for computing standard exemption u/s 11(1)(a), there is no reason to deny same treatment to the gross revenue/fee charged towards hostel/mess activity provided to students. For this reason and in the light of decision in Artificial Limbs Manufacturing Corporation of India (supra), we accept assessee’s claim of 15% on the basis of gross receipts from hostel/mess activity. Consequently, we direct the AO to allow exemption in the manner claimed by assessee. This will result in deletion of the addition of Rs. 20,21,992/- made by AO. The Ground No. 4 of assessee is accordingly allowed.
Ground No. 5:
33. This is a general ground and not pleaded during hearing, therefore dismissed.
34. Resultantly, this appeal is allowed in terms mentioned above.