Hostel Facilities of Educational Institutes Run by Charitable Trusts Not a Business and Exempt Under Income Tax Act: Allahabad HC
Allahabad High Court in Daya Nand Pushpa Devi Charitable Trust Ghaziabad vs Additional Commissioner of Income Tax Ghaziabad — Income Tax Appeal No. – 103 Of 2017 allowed exemption of tax on the income of Hostels established by charitable educational institutes under Section 11 of Income Tax Act, 1961. The court held that a hostel run by a registered charitable trust with objects of promoting education is not business under the Act.
The two-judge bench of Hon’ble Mrs. Sunita Agarwal and Hon’ble Deepak Verma made the observation:
“Any interpretation or meaning given to the word “business” in the literal parlance cannot be read into the Income Tax Act as the word “business” has been defined in the Act itself.”
Petitioner is a registered charitable trust with objects of carrying out the cause of public charity, one of which is to promote education. The trust runs Harsharan Dass Dental College and also a hostel for the residence of the students admitted to the said college. The petitioner contended that all of its activities, including that of running the hostel, fall within Section 2(15) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and are exempt from the income tax.
Respondent raised the contention that running of hostels is a business activity and to claim exemption as being incidental to the charitable purpose under section 11(4A), petitioner has to maintain separate books of accounts. As the petitioner failed to maintain separate books, and in the opinion of the Assessing Officer the fee charged for the hostel was excessive compared to other similar establishments, the assessee was not granted an exemption.
The issue before the court was whether the activity of the hostel established by the charitable trust imparting education is a business activity or not. Section 11(1) exempts all charitable activities and if a trust uses income from a business for charitable purposes, that income is exempt under Section 11(4A). This exemption prescribes two conditions:
- such business is incidental to the attainment of the objectives of the trust;
- separate books of accounts are maintained.
The court observed that Section 11(4A) presupposes a business venture of the trust or institution which is independent of its main activity but incidental to its objectives. The hostel was established as per the mandate of the Dental Council of India which prescribes the establishment of hostel facilities for all students studying in dental institutes. The court applied the test of ‘dominant purpose’, where the main activity of the assessee was to ‘promote education’. The Court held that the hostel and mess facilities provided are minor, subsidiary and subservient to the principal activity and are an integral part of its academic activity. The separation of this activity and treating it as a business would be unrealistic. Therefore, the court held that Section 11(4A) did not apply to the petitioner and observed as
“Applying the theory of dominant purpose in the facts of the present case it can be safely concluded that the surplus, if any, 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 (person in receipt of the income) by granting exemption under Section 11 of the Act.”
Respondents had claimed further that in literal parlance, business means any “occupation” and education being an industry or occupation, even an activity relating to or incidental to education has to be treated as a business. Dismissing this, the court observed that for taxing statute, the rule of strict interpretation must be applied as established by Apex Court in various judgments. The court has determined the nature of activities reading provisions of Income Tax Act, 1961 thoroughly. The appeal was allowed and the matter was remitted back to the Assessing Officer for fresh assessment in light of the above-made observations of the Court.
Vaibhav Karadale | Research Intern | EduLegaL
Swapna Iyer | Legal Editor | EduLegaL