Educational trust allowed exemption on hostel income and related party payments found reasonable and genuine

By | December 1, 2025
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Educational trust allowed exemption on hostel income and related party payments found reasonable and genuine

Issue

Whether the Assessing Officer was justified in making various disallowances (Advertisement, Royalty, Hostel Income, etc.) against an educational trust under Section 13(1)(c) regarding related party transactions and treating hostel activities as commercial, despite the trust holding valid registration under Section 12AA.

Facts

  • Entity Status: The assessee is an educational institution (running Medical and Engineering colleges) registered under Section 12AA.

  • AO’s Treatment: Despite the valid registration (restored by a previous Tribunal order), the Assessing Officer (AO) treated the assessee as an Association of Persons (AOP) and made multiple additions.

  • Advertisement Disallowance: The AO disallowed ₹13.29 Crores paid to MIPS (Maharana Infrastructure & Professional Services Pvt. Ltd.) for advertisement, alleging it was a related party transaction violating Section 13(1)(c) as directors were common.

  • Royalty Disallowance: ₹3.53 Crores paid as royalty to MIPS for the “Maharana Pratap” trademark was disallowed on the ground that the name existed since 1995 and payment to a founder member’s company was a diversion of funds.

  • Branding & Curriculum: The AO made ad-hoc disallowances (50%) on depreciation claimed for branding (₹1.23 Cr) and curriculum development (₹29.73 Lakhs) for a new university campus.

  • Hostel Income: The AO treated hostel receipts as commercial business income, applying incorrect figures (taking ₹6.02 Cr instead of the actual ₹29.06 Cr) and disallowing 20% of expenses.

  • Donations: A small sum of ₹83,019 claimed as donation/charity was disallowed for lack of explanation.

  • Appellate Order: The CIT(A) deleted all additions, ruling that payments were reasonable and hostel facilities were integral to education. The Revenue appealed to the ITAT.

Decision

  • Section 13(1)(c) & Related Parties: The Tribunal held that merely transacting with a specified person (u/s 13(3)) does not attract Section 13(1)(c) unless the payment is unreasonable or excessive.

    • The AO failed to bring on record any comparable market rates to prove the advertisement or royalty payments were excessive.

    • Since the services rendered by MIPS were not disputed, the payment could not be disallowed solely based on the relationship.

  • Royalty Payments: The Tribunal affirmed that the AO cannot “sit in the armchair of the assessee” to decide commercial prudence. Valuing intangibles/goodwill is complex, and without cogent material to prove unreasonableness, the royalty payment was valid.

  • Hostel Activities: The Tribunal ruled that hostel facilities are an integral part of educational institutions (especially medical colleges where they are mandatory). Therefore, hostel income is incidental to the charitable objective and not taxable as distinct business income.

  • Ad-hoc Disallowances: The ad-hoc disallowance of 50% on depreciation (Branding/Curriculum) and 20% on general expenses was struck down as arbitrary, given that the underlying expenditure was verified and audited.

  • Donations: The Tribunal accepted that the “donations” were actually fee concessions/rebates given to poor students, which directly furthered the trust’s charitable objects.

  • Conclusion: The Revenue’s appeal was dismissed, and the CIT(A)’s order deleting all additions was upheld.

Key Takeaways

Unreasonableness is Key: For a charitable trust, transactions with related parties (Trustees, etc.) are not automatically barred. The Revenue must prove that the payment was excessive or unreasonable compared to fair market value to invoke Section 13(1)(c).

Hostel is Charitable: Income from hostels run by educational institutions is exempt under Section 11 as it is intrinsically linked to the objective of imparting education.

Commercial Prudence: Tax authorities cannot dictate the business necessity of an expenditure (like branding or royalty) or question its commercial wisdom unless they have evidence of tax evasion or inflation of costs.

THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “F”NEW DELHI
DCIT, Exemption,
Vs.
MAHARANA PRATAP
EDUCATION CENTRE
I.T.A No.2840/Del/2018
Pronouncement on 28.11.2025

Source :- 1764323501-vfWZW6-1-TO