High Hostel Fees Disqualify Educational Institution from Tax Exemption.

Aarsi Prasad, CIT-DR for the Appellant. M.K. Patel, Adv. for the Respondent.

ORDER

Dr. B.R.R. Kumar, Vice-President.- This appeal has been filed by the Revenue against the order of the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (in short ‘the CIT(A)’) dated 08.12.2023 passed under Section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act” for short], for Assessment Year (AY) 2018-19.

2. The Revenue has taken following grounds of appeal:-

“1. Whether on the facts and circumstances of the case, Ld. CIT(A) has erred in allowing the exemption under Section 10(23C)(vi) of the Income tax Act in respect of the entire income of Rs.17,86,23,269/-received during the year, in violation of seventh proviso to Section 10(23C)(vi) of the Act ignoring the facts that activity of keeping children below 6 years in hostels is not permissible as per ‘Regulatory guidelines for hostel of educational institutions for children’ issued by National Commission for Protection of Children Rights.

2. Whether, on the facts and circumstances of the case, Ld. CIT(A) has erred in allowing the exemption under section 10(23C)(vi) of the Income tax Act, 1961 when one of the objectives as per Trust Deed is.

is not solely for the purpose of education and as per details of activities filed by the assessee before Assessing Officer during assessment proceedings it is clear that assessee is also involved in other charitable activities.”

2.1 The brief facts of the case are that the Assessee is a Trust stated to be engaged in carrying out educational activities. The Assessee filed its Return of Income for the A.Y. 2018-19 on 30.10.2018, declaring total income at Nil, after claiming exemption under section 10(23C)(vi) for income of Rs. 17,86,23,269/- during the year. The assessment was completed under section 143(3) read with section 143(3A) and 143(3B) of the Act on 25.03.2021, wherein the total income was determined at Rs. 6,21,81,062/-after denying the claim of exemption under section 10(23C) (vi) of the Act on the ground that the Trust was not existing solely for educational purposes, and it was engaged in carrying on activities other than the main object of providing education.

3. Aggrieved, the assessee has filed appeal before the ld. CIT(A) who allowed the appeal of the assessee and directed the Jurisdictional Assessing Officer to allow the assessee’s claim of exemption u/s 10(23C)(vi) of the Act.

4. Aggrieved, the Revenue is in appeal before the Tribunal.

5. Before us, ld. DR argued that to claim exemption u/s 10(23C)(vi) of the Act the assessee has to exist solely for educational purpose and not for any other purpose. The ld. DR argued that the assessee is engaged in carrying out many activities other than educational activities. The Ld. DR detailed the activities other than educational activities viz.

The Ld. DR thus contended that the exemption to the assessee trust has been rightly denied by the Assessing Officer as it does not fall within the purview of Section 10(23C)(vi) of the Act, which is available ‘solely’ for the educational purpose and not for any other purpose. The Ld. DR submitted that the assessee is running schools and providing hostel providing to their own students. At the same time, the assessee is running hostels to students who do not belong to their schools but to the students of other schools. Thus, it was argued that the fees charged by the inmates of the hostels who are not the students of the assessee constitute a separate entity and it involves carrying of activity in the nature of business. The Ld. DR argued that providing facilities of hostel to the students of their own schools can be treated as one integrated part as established by the various judicial orders but running hostels separately for other students has to be considered as a separate activity in the nature of business outside the purview of section 10(23C)(vi) of the Act.

6. On the other hand, Ld. Counsel for the assessee submitted that the assessee-trust is carrying on activity of providing education as per its objectives, and it is still holding a valid certificate u/s 10(23C)(vi) of the Act. He also submitted that the trust is also holding Registration Certificate u/s 12A of the Act. He argued that the education activities are charitable activities which includes providing, promotion, propagation, disbursement of knowledge and all such activities which aids or supports such activity. He also submitted that the income earned from the student hostels are spent for or applied for promotion of education which fact was not even disputed by the Assessing Officer. He thus submitted that the rejection of claim for exemption u/s 10(23C)(vi) of the Act is incorrect and appeal of the Revenue is liable to be dismissed. The Ld. AR submitted that the word charitable includes education and providing pre-primary education is also an education and there is no dispute that Assessee Trust is providing education. The Ld. AR submitted that carrying on activity of providing activity of Hostel accommodation to students studying in Primary / Secondary Higher Secondary Schools is a Charitable activity. It was argued that “Education” activity includes providing, promotion, propagation, disbursement of knowledge and all such activities which aids or support such activity and thus that Primary, Secondary, Higher Secondary education like Medical, Engineering, Computer Science etc. or Research on Science, Medical, Space Science, Physics, Chemistry etc. is provided under one Roof/ Institute like University, is an educational activity though University or a Main body may not be carrying on activity of providing education. It was argued that the Government of Gujarat and Maharashtra under the State Laws granted exemption to a Charitable Trust carrying on activities of providing hostel accommodation, Lodging and Boarding facilities and hostels providing facilities to Students, Teachers, Staff, Research Workers acquiring education Pre-primary, Primary Secondary, Higher Secondary Medical, Engineering and or any degree course/faculty. The Ld. AR argued that the expression existing for profits or “not for Profits” has been considered by the Supreme Court in case of Surat Art Silk Cloth Mfg. Association v. CIT (1980) 121 ITR 24, 278 (SC). It was submitted that the Apex Court held that, if pre-dominant motive is to carry on Charitable activity the mere fact that the activities of the Trust yield profit will not alter the Charitable character of the Trust if the profitmaking is not the real object. The Ld. AR argued that the amended provision of Sec.2(15) of the Act will come into force only when the advancement of any other object of general public utility shall not be a charitable purpose, ‘if it involves the carrying on of any activity in the nature of trade, commerce or business…’. In the case under consideration, the assessee trust did not in anyway involve itself in indulging in carrying on of any activity in the nature to any trade, commerce or business. Therefore, the question of bringing the assessee trust’s case under the ambit of the amended provisions of s. 2(15) of the Act doesn’t arise.

6.1 On the factual aspect, the Ld. AR submitted that the assessee has also provided free education and free hostel facility to adivasi tribal and poor students (girls and boys) during the year under consideration. He also submitted a comparative chart of the fees for providing hostel facilities which are lower than market rates charged by Hotels or commercial establishments, as under:-

6.2 From the other table it will be noticed that Hostel fees charged by the Assessee Trust is very reasonable and is charitable as compared to charges of Commercial entities. Thus, the Hostel fees received by the Trust being very low, the activities carried on by the Assessee is not commercial and is charitable. Thus, activities are not commercial activities as assumed by the deemed Officer without bringing on record any material to show that fees charged are very high and/or at market rates. The Ld. AR also argued that even if it is considered as activity incidental to or ancillary activity of providing Hostel facilities to students studying in or getting Primary / Secondary / Higher Secondary education in Schools run by the Charitable Trust under the Associate or Trust under the same group. Such activity is a charitable activity and entire profits earned or surplus is applied for education and has not been and shall not be capable of being distributed to Trustees or for non-charitable objects. To buttress his argument, Ld. AR submitted that during Financial Year 2017-2018 the assessee spent Rs.1,13,86,773/- for School Building and running PrePrimary & CBSE Affiliated School from Standard I to IX situated at Antalia, Bilimora Dist. Navsari, Gujarat. Relying on the Supreme Court judgment in Surat Art Silk Cloth Manufacturers Association (supra), it was argued that such an activity even if it is a commercial activity, it is a charitable activity as Apex Court held that the property includes business undertaking securities fixed deposits etc. held under the Trust constitute income of the Trust and is exempt u/s. 10(23C)(vi) or u/s. 11 of the Act.

7. Heard both the parties and perused the material available on record.

8. We have gone through the facts of the case. The pertinent facts required for adjudication of the case are that :-

8.1 We have also gone through the various judicial pronouncements on this issue. The Ld. CIT(A) held that the main criteria for eligibility u/s 10(23C)(vi) was that the institution is existing solely for educational purposes and not for purpose of profit and also gave a finding that providing hostel facility is an integral part of the main object and surplus generated from hostel facility of Rs.6.21 crores is being ploughed back towards the main object of imparting education. This is where we feel that the Ld. CIT(A) erred on appreciation of the facts.

8.2 The Ld. CIT(A) relied on the orders in the case of Shree Shanskar Tirth Educational and Charitable Trust v. CIT (E), (ITAT Rajkot), wherein it was held that exemption u/s 10(23C) could not be denied merely because object clause of trust deed of assessee also contained objects other than educational activities.

8.3 The Ld. CIT(A) relied on the order of the ITAT Ahmedabad Bench in the case of Shree Ahmedabad Lohana Vidyarthi Bhavan v. ITO (Ahd Trib.) wherein it was held that where providing hostel facility to students is an essential component of education institution and also an aid for attaining educational object, said activity would fall under purview of ‘education’ as provided u/s 2(15) of the Act. Similar view has been held by the Hon’ble Allahabad High Court in the case of CIT v. Durga Charitable Society (Allahabad).

8.4 Ld. CIT(A) has also relied on the order of the ITAT Agra Bench in the case of Society for Advance Health Education v. CIT8 ITR(T) 706 (Agra – Trib.)) and also on the order of Hon’ble Allahabad High Court in the case of Daya Nand Pushpa Devi Charitable Trust v. Addl. CIT ITR 406 (Allahabad), wherein it was held that activity of running hostels was not a separate business activity of assessee trust running a dental college, surplus income from hostel fee could not be treated as profit and gains of a separate business or commercial activity of trust.

8.5 Ld. CIT(A) has also relied upon the order of the Hon’ble Karnataka High Court in the case of CIT v. Karnataka Lingayat Education Society (Karnataka)) (Karnataka), wherein it was held that where voluntary donations received by assessee-society were genuine and it was providing hostel to staff/students which was incidental to main object of providing education, assessee’s registration could not be cancelled. The Ld. CIT(A) has also relied on the judgement of Hon’ble Supreme Court in the case of CCIT v. St Peter’s Educational Society ITR 66 (SC))(SC), wherein it was held that where a surplus was made by educational institution which was ploughed back for educational purposes, said institution was to be held to be existed solely for educational purpose and not for purpose of profit.

8.6 We have gone through the recent judgment of the Hon’ble Apex Court in case of ACIT (Exemption) v. Ahmedabad Urban Development Authority 389 (SC) on the issue of General Public Utility, Charitable Purpose along with the provisions of Section 10(23C)(vi) of the Act. The said provisions read as under:-

Sub-clause (iiiad) reads as under:-

Section 2(15) reads as under:-

(15) “charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless—

8.7 The Hon’ble Supreme Court of India in the case of Ahmedabad Urban Development Authority (supra) dealt with the provisions and conditions of a charitable institution engaged in the activity of advancing an object of General Public Utility (GPU), New Noble Educational Society v. CIT [2022] 18 S.C.R. 1082, dealt with the issue of whether educational institutions can be engaged in other activities. In the case of AUDA, the Hon’ble Apex Court held that a charitable organisation cannot be engaged in any trade, commerce or business, or provide services in relation thereto for any consideration unless such commercial activity is incidental to the main object of GPU and is also within the monetary threshold of up to 20% of its total receipts, as prescribed under section 2(15) of the IT Act. To ascertain whether an activity would constitute “trade, commerce or business”, the Hon’ble Apex Court clarified that it would depend on the cost at which the services are availed and the price at which they are provided by the institution to its beneficiaries.

8.8 Section 2(15) of the Income-Tax Act defines charitable purpose to include, the advancement of any other object of GPU. The proviso to section 2(15) of the Act provides that such advancement of object of GPU would not be considered charitable, if an institution is engaged in trade, commerce or business, or provides any service relating to trade, commerce or business for which a cess or fee or any other consideration is received. The charitable institutions submitted that even if their proposed activity is not the predominant object of the GPU, any incidental involvement in such activities should be considered favourably. Nevertheless, the Hon’ble Apex Court held that instead of looking at the predominant object, an analysis of the nature of activities undertaken by the charitable organisation must be made to ascertain whether or not they were intrinsically linked to GPU and in order to qualify as a charitable organisation engaged in GPU, such activities should be conducted in the course of achieving the GPU at an affordable price to the target populace.

8.9 Further, where charges for the said services merely covers costs or consists of nominal mark-up, such activities must not be considered to be in the nature of “trade, commerce or business” and may remain permissible. However, in case the entity charges a substantial amount, significantly higher than the costs incurred by it, such activities could get categorised as “trade, commerce or business”; and assuming the consideration is significantly higher than the costs, the income will attract the mischief of the proviso to section 2(15), and be considered to be commercial in nature if the threshold limit of 20% is crossed. This is squarely applicable to the facts of this case. The amount charged from the students per day and the surplus generated of Rs.6.12 crores clearly proves that the assessee is engaged in the activity of running hostels separately to earn profits. These hostels are clearly not meant for the students of the schools run by the assessee who are in the pre-primary stages of education. These hostels are not meant for the pre-primary students who are less than 6 years of age. Thus, this cannot be termed as incidental to the attainment of its objectives.

8.10 The Hon’ble Apex Court has held that such analysis of income and expenditure of GPU charitable institutions must be done on an annual basis to determine the nature of their activities. This would indicate whether the amounts charged are nominal or significantly higher and accordingly determine if such activity amounts to “trade, commerce or business”. The facts in this case clearly proves that the fees charged are not nominally but significantly higher. The Hon’ble Apex Court has duly dealt with the arguments and judgments in the case of American Hotel and Lodging Association v. CBDT (2008) 10 SCC 509, Queens Education Society v. CIT 2015 (8) SCC 47, Surat Art Silk Cloth Mfg. Association (supra), which was decided in the context of charities engaged in advancing objects of GPU and not in a case dealing with educational institutions. Hence, the reasoning of the two cases relied upon is incorrect and accordingly, the application of the predominant object test cannot be used in the case involving educational institutions. The Hon’ble Apex Court also analysed the section 10(23C)(vi) of the Act, which permits the educational institution to record profits and gains of business, which is incidental to the attainment of its objectives. Since the educational institution solely exists for the purpose of education, the activity must be interpreted as related to education and educational activities. The Hon’ble Apex Court observed that activities incidental to providing education could include providing textbooks, hostel, bus facilities for their students, or organising educational camps. However, activities like renting out the premises for external events would not qualify as activities incidental to education.

Hence, based on the facts of the case, we hold that :-

8.11 The Hon’ble Apex Court held that where “fee, cess or other consideration” is statutorily fixed or where it represents recoupment of cost or cost with nominal mark up, the activity may not be construed as “trade, commerce or business” and will be excluded from the mischief of commercial activity under the amended provision. If, however, “fee, cess or other consideration” charged is substantially higher over cost, it is considered as “trade, commerce or business” and will qualify for tax exemption only if receipts are within the quantitative limit prescribed by the amended provision. The observations and ratio thereof of the Hon’ble Apex Court are squarely applicable to the facts of the instant case and hence, we hereby affirm the order of the Assessing Officer and decline to support the order of the Ld. CIT(A).

8.12 In the result, the appeal of the Revenue is allowed.