Running Hostel By Charitable Institution Engaged In Imparting Education Not Separate Business Activity, Eligible For IT Exemption : Allahabad HC

The Allahabad High Court has held that the activity of running hostel by a charitable institution engaged in the business of imparting education is not a seperate business activity and as such the surplus income cannot be treated as profit or gains arising out of a seperate business or commercial activity.

A division bench comprising of Justice Deepak Verma and Justice Sunita Agarwal held thus:

"Having held that the activity of running the hostel is not a separate business activity and surplus income from the hostel fee cannot be treated as profit and gains of a separate business or commercial activity of the trust, it is held that the exemption under Section 11(1) of the Act cannot be disallowed to the assessee."

"The element of trade and commerce in the hostel activity cannot be found so as to bring the same within the meaning of "business". The grounds taken by the revenue that the assessee was carrying on the commercial activity which is not incidental to the objects of the trust and that the assessee has not complied with the provisions under Section 11 (4A) of the Act by not maintaining separate books of accounts of the income of the said business even if said business is said to be incidental to the objectives of the trust, are found faulty." The Court said.

The development came in an income tax appeal filed by Daya Nand Pushpa Devi Charitable Trust created in the year 1988. The trust ran a hostel for residence of students admitted in the college. The appeal challenges the order of Income Tax Tribunal, Delhi whereby the appellate order of CIT(A) and the assessment order dated 12.03.2013 passed by the Additional Commissioner of Income, Ghaziabad was affirmed.

According to a gazette notification dated 25th July 2007, it was mandatory for the institutions admitting students in the dental education course to provide hostel accommodation, based on the number of admissions, to all the boys and girls in the dental college campus itself.

The dental institution as the assessee had declared its net income as 'NIL' with regards to the return of income filed by the trust for the assessment year 2010-11.

The Assessing Officer had concluded that the hostel activities of the trust is separable from its educational activities and the way the hostel and mess activities are being carried on they would fall within the meaning of "business"under section 2(13) and can not be treated as 'Charitable purposes' under Section 2(15) of the Income Tax Act. 

It was also concluded that the benefit of Section 11 of the Act cannot be given to the assessee, in as much as, it has not maintained separate books of accounts which is one of the pre- conditions mentioned in Section 11(4A) for grant of such benefit.

The question before the High Court for due consideration was thus:

"Whether under the provisions of Section 11(4A), the Hostel activity of a charitable institution engaged in imparting education in a residential institution such as the assessee will be included in the expression "business" in the said subsection; and the income generated from such Hostel activity can be said to be business income so as to attract the pre-conditions of the said sub- section in a claim of exemption under Section 11 (1) of the Act?"

Going through the statutory scheme of the Income Tax, the High Court opined that the word "education" used in Section 2(15) of the Act is not qualified by any restrictions and thus has been used in its widest amplitude so as to include "education of all level to all classes of the society or category."

"The question, therefore, would be whether the hostel activity of the trust which is imparting dental education in the institution established by it is a business activity incidental to the attainment of its objectives or it is an activity which is an integral and inseparable part of the main activity(education) carried on by the assessee. The determinative test shall be the theory of dominant purpose which has all through the years, been upheld to be the determining factor laying down whether the Institution is Charitable in nature or not." The Court observed.

Coming to the facts of the case, the Court held that running of hostel constitutes an "integral and inseparable part of the academic activities" carried on by the assessee and that it is not possible to isolate or insulate it from the main activity and treat as business within the meaning of Section 11(4A).

"It has to be noticed that the hostel is being run in discharge of a statutory obligation as institution in question cannot impart dental education without providing for the hostel." The Court said.

Furthermore, it was observed thus:

"According to us, such a comparison was not open, in as much as, whether a venture or activity of the assessee is a business venture separable from its main activity and whether such activity constitutes an integral and inseparable part of the main activity, are matters to be decided on the facts and circumstances of the individual case,i.e. looking to the nature of establishment and its activities. The issues as to whether the fee charged is excessive or what should be the reasonable amount of hostel fee are wholly extraneous to the dominant purpose test. The hostel fee charged would obviously depend upon the facility provided to the students."

"The hostel fee cannot be said to be income derived from the "business" of the trust. The said integral activity being directly linked to the attainment of the main objectives of the trust, the requirement of maintaining separate books of accounts with regard to such activity for seeking benefit of exemption under Section 11 (1) of the Act , therefore, not attracted." The court said.

Further observing that the element of trade and commerce in the hostel activity cannot be found so as to bring the same within the meaning of "business", the Court held that the surplus generated out of the activity of maintaining halls and residents for the students being an integral part of the main object of education, was liable to be treated as income from the property held by the trust wholly for charitable purposes and was, therefore, deductible from the total income of the trust by granting exemption under Section 11 of the Act.

Allowing the appeal, the Court held thus:

"The matter is remitted back to the Assessing Officer with the direction to examine the same afresh in the light of the observations made above, treating the hostel fee income, subservient to the main object of the education and not as a business income but income derived from the charitable activity of education."

Title: Daya Nand Pushpa Devi Charitable Trust Ghaziabad v. Additional Commissioner Of Income Tax Ghaziabad

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