The Allahabad High Court, on 23 June, in the matter of Daya Nand Pushpa Devi Charitable Trust Ghaziabad v Additional Commissioner of Income Tax Ghaziabad, has held that the activity of running a hostel by a charitable institution engaged in the business of imparting education is not a separate business activity, and the surplus income cannot be treated as profit or gains arising out of a separate business or commercial activity.
The judgment was passed in an income tax appeal filed by Daya Nand Pushpa Devi Charitable Trust. The trust runs a hostel for students admitted in a dental college established by the trust.
According to a 25 July 2007 gazette notification, it was mandatory for the institutions admitting students in the dental education course to provide hostel accommodation to all the students in the campus.
The dental institution, as the assessee, had declared its net income as nil in an income tax return filed by the trust for the assessment year of 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 would fall within the meaning of “business” under section 2(13) and cannot 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 IT Act cannot be given to the assessee, in as much as it had not maintained separate books of accounts, which is a precondition mentioned in section 11(4A) to grant such benefits.
Before the high court for consideration was: “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 subsection; and the income generated from such hostel activity can be said to be business income so as to attract the preconditions of the said subsection in a claim of exemption under section 11(1) of the act.”
Regarding the statutory scheme of the IT Act, the high court opined that the word “education” used in section 2(15) of the act was not qualified by any restrictions and thus had been used in its widest amplitude to include “education of all level to all classes of society or category”.
Further observing that the element of trade and commerce in the hostel activity could not be found 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 Income Tax Act.
The court held that hostel fees could not be said to be income derived from the “business” of the trust, the integral activity being directly linked to the attainment of the main objectives of the trust, and the requirement of maintaining separate books of accounts with regard to such activity for seeking benefits of exemption under section 11(1) of the act.
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