Exemption u/s 11 available as renting of auditorium is incidental to fulfilment of object of trust

M.Ct.M. Chidambaram Chettiar Foundation Vs DDIT (ITAT Chennai)

ITAT Chennai held that renting of auditorium for the purpose of conducting guest lectures or topics to address the students is incidental to fulfilment of the object of the trust i.e. education. Accordingly, exemption under section 11 of the Income Tax Act available.

Facts- The only common issue in these four appeals of assessee is as regards to the order of CIT(A) confirming the action of AO in holding the Assessee trust falling in the category of Advancement of any other object of General Public Utility in regards to letting out of auditorium was a commercial activity contradicting proviso to section 2(15) of the Act as against the assessee trust being falling in the category of Education u/s 2(15) of the Act.

Conclusion- Held that the assessee trust exist for the purpose of education and the auditorium which is within the school complex for the purpose of conducting guest lectures or topics to address the students in connection with the curriculum and this is incidental and to earn rental from conducting conferences, music, dance and letting out to general public for conference meetings etc., is incidental to education Once the assessee falls under the category of education in term of section 2(15) of the Act, assessee is eligible for exemption u/s.11 of the Act because letting out of auditorium is incidental to fulfilment of the object of the trust i.e., education.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

These four appeals by the assessee are arising out of common order of the Commissioner of Income Tax (Appeals)-17, Chennai in ITA Nos.252/13-14, 70&474/14-15 & 191/16-17 dated 07.02.2019. The assessments were framed by the DDIT (Exemptions)-1 / ITO (Exemptions), Ward-1, Chennai for the assessment years 2010-11, 2011-12, 2012-13 & 2013-14 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide orders dated 28.03.2013, 24.03.2014, 06.03.2015 & 31.08.2016 respectively.

2. The only common issue in these four appeals of assessee is as regards to the order of CIT(A) confirming the action of AO in holding the Assessee trust falling in the category of Advancement of any other object of General Public Utility in regards to letting out of auditorium was a commercial activity contradicting proviso to section 2(15) of the Act as against the assessee trust being falling in the category of Education u/s 2(15) of the Act. For this, assessee has raised common and identical grounds in all these four years and facts are also identical, as admitted by ld.AR for the assessee. Hence, we will take the facts from assessment year 2010-11 in ITA No.976/Chny/2019 and will decide the issue. For this, assessee has raised the following four grounds:-

“1. CIT(A) erred both in law and on the facts of case in holding that letting-out auditorium was a commercial activity, attracting proviso to Sec.2(15) of the Income-tax Act.

2. He failed to appreciate that the auditorium is used only for educational purposes for the students during school houses and it was let-out, beyond school hours for educational purposes and promotion of fine-arts, etc., in order to augment the income to be used for educational purposes.

3. He erred in holding that letting-out of auditorium is service in the nature of trade, commerce or business.

4. The decisions relied upon the CIT(A) are distinguishable on facts.

3. Brief facts are that the assessee’s trust is registered u/s.12AA of the Act as a society vide DIT(E) proceedings in DIT(E) No.2(500)/95-96 dated 18.11.1998. The assessee trust in its grounds of appeal claimed that it is running an educational institution for the past several years and the auditorium is in the school campus for conducting conferences, lectures, meetings, etc., for its institutions. The auditorium is also used for letting out to institutions for which the assessee received rent for use of the auditorium. The assessee filed its return of income for the assessment year 2010-11 on 21.03.2011 declaring gross income at Rs.2,03,13,514/- and claimed excess application of Rs.2,68,856/-after claiming exemption u/s.11 of the Act. During the course of scrutiny assessment proceedings, the AO required the assessee to give the details of miscellaneous receipt declared by assessee’s trust in its books of accounts. The assessee responded that the major portion of miscellaneous receipts pertain to income generated from let out of auditorium hall and for that purpose he submitted the details to whom the auditorium was let out and for what purpose it was let out. The AO has reproduced the details of receipts earned by assessee by letting out the auditorium. The AO noted that the auditorium has been let out to general public for a total of 227 days during the relevant financial year 2009-10 relevant to assessment year 2010-11. The AO noted that the income generated by the assessee by letting out the auditorium was to the tune of Rs.40,84,433/-. The AO noted in his assessment that auditorium has been let out to general public for conduct of dance programme, music programme, corporate meetings, corporate conference, corporate get together and family functions. According to him, the auditorium has been allowed for general public utility for their private functions and this letting out has been done with a profit motive and accordingly, net income was declared at Rs.25,06,582/-and claimed the same as exempt u/s.11 of the Act. The AO noted that the receipts from auditorium let out is in the nature of trade, business or services and therefore, hit by the proviso to section 2(15) of the Act. Therefore, he show caused the assessee as to why the claim of exempt be not denied, since the activities are in the nature of trade, business or commerce as evidenced from the above receipts. The assessee filed written submissions dated 25.03.2013 stating that the auditorium is located inside the premises of school and predominantly utilized by school for promotion of cultural and extracurricular activities. The assessee contended that the main purpose of auditorium is to provide facilities for the school in exhibiting the student’s artistic talents. The auditorium was let out to outside parties only when the same was not needed by school and the proceeds received from letting out of auditorium hall was utilized in promotion of education and hence, it would not lose character of charitable purpose merely because some profit arises from the activity. The assessee objected to the proposal of AO and argued that the trust has not carried out any business / trade / commerce as provided in the proviso to section 2(15) of the Act. It was claimed that the income from this activity is only incidental and not business in nature and thus, letting out of auditorium hall for rent is not carrying on business and the income of the trust so received by way of rent would continue to enjoy exemption u/s.11 of the Act. The AO examined the submissions of the assessee and relying on the proviso to section 2(15) of the Act as introduced w.e.f. 01.04.2009 held that the activities of letting out of auditorium and receiving income from the same is nothing but commercial activity to generate income. He noted that the activity will come under the activity of advancement of object of general public utility and therefore hit by the proviso to section 2(15) of the Act. He noted that the objects of the trust are of general public utility in nature and the assessee trust is receiving commercial receipts to provide service to general public and in this assessment year, the threshold limit as prescribed in the Act is Rs.10 lakhs and hence, the assessee is not eligible for claim of any exemption u/s.11 of the Act in regard to receipt of rent of auditorium. Therefore, the AO assessed the net receipt of Rs.25,06,582/- as taxable and denied exemption u/s.11 of the Act. However, the AO allowed exemption u/s 11 of the Act on the receipts of school holding the same from educational activity. Aggrieved, assessee preferred appeal before the CIT(A).

3.1 The CIT(A) by common order for all the four years noted the details of gross receipts minus expenditure incurred on auditorium and total taxable income computed by AO u/s.143(3) of the Act as under:-

The assessee before CIT(A) claimed that the school campus includes an auditorium for conducting conferences, lecture meetings, etc., for its students. The auditorium is also used for letting out to institutions for promotion of fine arts, educational purposes, etc., for which the assessee receives rent. The assessee also maintains separate books of accounts for the auditorium. Accordingly, the assessee contended that letting out of auditorium and earning rental receipts was not a commercial activity for the reason that as part of the educational programme, the assessee had to conduct lecture meetings by inviting various guest lectures to address the students on various topics in connection with the curriculum. These lecture meetings might be over by 5.p.m. To increase the revenue and to reduce overheads, the assessee had let out the auditorium for educational purposes for conducting lecture meetings, conferences and to promote find-arts such as music, dance, etc. This is also part of the education and not connected with any trade or commerce or business activity. The assessee does not carry any activity related to trade, commerce or business. It was further argued that the assessee’s activities are covered by CBDT circular No.11/2008 dated 19.12.2008, wherein it is specifically mentioned as under:-

“The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of Section 2(15) ie, relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of commercial activities.”

The CIT(A) noted that in the present case, assessee let out auditorium for 227 days during the financial year 2009-10 and earned substantial amount of Rs.40,84,433/- from such let out during the year. Hence, he concluded that the assessee earned substantial receipts from letting out of the auditorium which is an activity in the nature of trade, commerce or business as the main activity but not as incidental to the main activity. Therefore, the CIT(A) upheld the action of the AO and dismissed the appeal of assessee for all the four years. Aggrieved, assessee came in appeal before the Tribunal.

4. Before us the ld.AR for the assessee stated that the assessee is running a matriculation school since 1985 having an auditorium in its campus for school purposes. It was contended that outside the school hours and on holidays, it was let out on hire. The school is affiliated to matriculation board of Tamil Nadu State Government. The building was constructed after 1985 belongs to school but the land and the old building belongs to another charitable trust for which the assessee is not paying any rent or compensation. The assessee before us filed the details how the auditorium as part of its infrastructure is used and the details he filed is as under:-

(i) conducting weekly meetings by the Educational Advisor / Principal and staff;

(ii) monthly meetings of the parents and teachers. This is usually on all Saturdays in the fore-noon by dividing the students into 3 groups;

(iii) Holding lecture meetings on school related subjects by inviting Guest Lecturers;

(iv) Conducting Annual Day, Children’s Day celebrations, etc. in batches;

(v) Conducting inter-school competitions on various subjects, quiz, music, etc; and

(vi) Conducting inter-school competition in memory of the Founder of the Organisation.

(vii) Using the Auditorium by students during leisure hours for studies, etc.

The assessee also filed written submissions giving the details of factually incorrect mistakes committed by AO that the auditorium has a separate gate and exclusive car parking for providing access by outsiders and general public and it is letting out to general public for corporate meetings, corporate conferences or family functions. It was also contended that it is also wrong that the auditorium has been let out in financial year 2009-10 relevant to assessment year 2010-11 for 227 days whereas it was actually let out for 134 days. The ld.AR has contradicted the facts given by AO and CIT(A) as under:-

The ld.AR for the assessee in its paper-book has filed trust deed of the assessee’s trust which came into existence on 28.12.1971. The ld.AR also relied on the following case laws:-

(i) Lala Lajpat Rai Memorial Trust vs. DIT(E), 28 ITR 546

(ii) Social Pedia Knowledge Foundation vs. DIT(E), 141 ITR 398

(iii) Entertainment Society vs. CIT, (2013) 34 com 210 (Goa Bench)

(iv) Indian Institute of Technology vs. DDIT(Exemptions), (2018) 96 com 78 (Madras)

5. On the other hand, the ld. Senior DR relied on the decision of Hon’ble Supreme Court in the case of ACIT (Exemptions) vs. Ahmedabad Urban Development Authority, [2022] 449 ITR 1. The ld.Senior DR argued that in view of the decision of Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority, supra, the idea of predominant object among several other objects is discarded by Hon’ble Supreme Court in view of the proviso to section 2(15) of the Act after its amendment by the Finance Act, 2008 w.e.f. 01.04.2009 and as it stands today. He contended that the prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by charities carrying out objects of general public utility. He contended that the proviso to section 2(15) of the Act, the conditions are (i) that such activities in the nature of trade, commerce, business or services (in relation to trade, commerce or business for consideration) should be in the course of actual function to attain the object of general public utility and (ii) the quantum of receipts from such activities should not exceed the limit prescribed of Rs.10 lakhs or Rs.20 lakhs, as the case may be depending on the year of assessment. He argued that both parts of the proviso i.e., (i) & (ii) have to be read conjunctively for the reason that the legislature has given the conscious use of ‘or’ connecting the two. He argued that the meaning of the proviso is that if charitable trust carries on any activity in the nature of any business, trade or commerce, in the actual cause of fulfilling its object, the income from such business should not exceed the limit defined in sub-clause (ii) to the proviso. He argued that in the present case, there is a clear finding given by the AO and the CIT(A) and from the details filed by assessee before Tribunal even in its paper-book, it clearly reveals that the auditorium is let out to like example, on 20.05.2009 Bharathi Airtel Ltd., on 01.06.2009 Metropolis Entertainment and on 02.07.2000 Chemplast Sanmar Ltd., etc. It means that the assessee is letting out auditorium to general public and therefore it is clearly hit by proviso to section 2(15) of the Act and the issue is squarely covered in favour of Revenue by the decision of Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority, supra.

6. We have heard rival contentions and gone through facts and circumstances of the case. We have gone through the indenture created this trust vide dated 28.12.1971 which has the object of running school and relevant clause of the trust reads as under:-“WHEREAS the three Trusts are desirous of

(a) establishing and maintaining a hospital and a school to be constructed in the property known as “Rama vilas”, situated in Luz Church Road, Mylapore, Madras, which has recently been purchased by the Thirupani Trust for this purpose and (b) repairing, renovating, re-constructing and/or expanding Sir M. Ct, Muthiah Chettiar Hlgh School, Lady Muthiah Chettiar Girls High School and M.Ct. M. Chidambaram Chettyar Memorial Boys Hostel, all situated in Madras and M. Ct. M. Chidambaram Chettyar Memorial Higher, Elementary School, Kanadukathan.

WHEREAS 1n view of the magnitude of the 8cheme and especially in order to expeditiously construct the hospital and school, it is considered expedient that a separate Trust should be created for the aforesaid purposes, appointing a competent and independent body of persons as the Board of Trustees;

Further, the trust deed also noted the following objects:-

1) The Trust hereby constituted shall be called “M. Ct. M. Chidambaram Chettyar Foundation”.

2) Sri F. B. Pithavadian, Sri C. Ramakrishna and Sri T. M. Srinivasan shall constitute the Board of Trustees.

3) The Settlors hereby transfer a sum of Rs.15,000/- (Rupees fifteen thousand) to the Board of Trustee s made up of a sum of Rs.5,000/-contributed out of each of the three Trusts. The Board of Trustees shall hold the said funds and any other funds or assets that may hereafter be transferred by the Settlors or any other persons and all income from such funds or assets and all accumulations thereof or the objects and purposes hereinafter mentioned, namely

(a) to construct a hospital in the premises belonging to the Thirupani Trust and known as “Rama vilas”, situated in Luz Church Road, Mylapore, Madras, and maintaining and managing the said hospital, and for such purpose to prepare a scheme and carry it out as expeditiously as possible;

(b) to repair, renovate, re-construct and/or expand sir M.ct. Muthiah Chettiar High School, Lady Muthiah Chettiar Girls High school and M.Ct. M. Chidambaram Chettyar Memorial Boys Hostel, all situated in Madras and expand M. Ct.M. Chidambaram Chettyar Memorial Higher Elementary School, Kanadukathan,

(c) to meet all expenses necessary and incidental for carrying out the aforesaid purposes and for management of the Trust hereby constituted:

(d) subject to availability o£ funds after providing £or the aforesaid objects, to construct a school for education in “Rama Vilas ” property and maintain and manage the school;

4) The Rama Vilas property will continue to be the property of the Thirupani Trust. The Board of Trustees are, however authorised to enter the premises, construct the hospital and school as aforesaid and manage the hospital and the school. The property tax and other outgoings in respect of the Rama vilas property shall be paid by the Board of Trustees out of the funds available with them.

7. Admittedly, the assessee is running a Matriculation School and it is also having an auditorium in its campus which is let out to various people for conducting meetings for school purpose or dance competition, music programme, etc., as contended by ld.AR for the assessee. From the records produced before us by the assessee in its paper-book and the details noted by the AO of list of parties from whom the assessee has received rent clearly reveals that the auditorium has been let out to general public also for conduct of dance programme, music programme, corporate meetings, corporate conference, corporate get together, etc. From the details filed by assessee before Tribunal even in its paper-book, it clearly reveals that the auditorium is let out to like example, on 20.05.2009 Bharathi Airtel Ltd., on 01.06.2009 Metropolis Entertainment and on 02.07.2000 Chemplast Sanmar Ltd., etc on the days whenever the auditorium is not in use by or for the purposes of school. It means that the assessee is letting out auditorium to general public as well as for the students of the school, which has not been contradicted by revenue before us or the lower authorities. Now this issue has been interpreted by Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority, supra, wherein Hon’ble Supreme Court has considered the proviso to section 2(15) of the Act as well as the provisions of section 2(15) of the Act. The Hon’ble Supreme Court has considered the amended provisions and has observed that paradigm change achieved by Section 2(15) of the Act after its amendment in 2008 and as it stands today, is that the Amendments to Section 2 (15) of the Act by Finance Act, 2008 (w.e.f. 01.04.2009), which had been amended last in 1983, was again amended, by Finance Act, 2008, w.e.f. 01.04.2009. Some other amendments too were made, with effect from the same date by the Finance Act, 2009 and Finance Act, 2010. With the said amendments, as on 01.04.2009, the provision read as follows:

(15) “charitable purpose” includes relief of the poor, education, 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:”

Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is [ten lakh rupees] or less in the previous year;

In the second proviso, the reference to ten lakhs was substituted, and the figure of rupees twenty-five lakhs, was inserted, by the Finance Act, 2011 (w.e.f. 01.04.2012). By Finance Act, 2015 (w.e.f. 01.04.2016), the first two provisos to Section 2(15) were deleted, and instead, the following proviso was inserted:

“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—

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;”

7.1 From the facts of the case and above stated provisions, it is clear that the assessee is a trust running a school and existed for the purpose of education and falling under the category of education as provided u/s.2(15) of the Act. From the facts it is clear that the school campus includes an auditorium for conducting conferences, lecture meeting etc., for its students. The auditorium is also used for letting out to institutions for promotion of fine arts, educational purposes etc., for which the assessee received rent. The assessee also maintains separate books of accounts for letting out of auditorium and recording of earning of rental receipts, the assessee maintains separate books of accounts. The assessee, as contended by ld.counsel, that, letting out of auditorium and earning of rental receipts was not a commercial activity falling within the category of GPU u/s. 2(15) of the Act because the same is part of educational programme, as the assessee had to conduct lecture meetings by inviting various guest lectures to address the students on various topics in connection with curriculum. These meetings or lectures are over by 5 PM sometime it goes on. On holidays, on saturdays & sundays, to increase the revenue and to reduce the overheads, the assessee had to let out the auditorium for conducting meetings, conferences, for music, dance, etc. The ld.counsel for the assessee also relied on the decision of Hon’ble Supreme Court in the case of Ahmedabad Urban Authority, supra and drew our attention to placitum 126 at page 88 of the ITR, wherein Hon’ble Supreme Court has observed as under:-

126. As observed at the beginning of this judgment, GPU charities have been recognized as distinct from the ‘per se categories’ of charity (education, medical relief, relief to the poor; and later – preservation of water sheds, monuments, environment, and yoga). The judgment of this court in Dharmadeepti (supra) has clarified that the per se categories – are not subjected to the restrictive condition of eschewing activities of profit. This enunciation of the principle has been endorsed in all later decisions – starting with Surat Art Silk (supra). Therefore, (1975) 3 SCR 783 (1960) 3 SCR 837 (1991) 1 SCR 938 the restriction imposed by Parliament against charities – prohibiting them from carrying on activities of profit do not apply to the first six categories. Although the occasion did not so arise in Surat Art Silk (supra) (since this Court was dealing with AYs prior to 1975), the provision in Section 13(1)(bb) which prevailed then with effect from 01.04.1977 made the position clearer in that it permitted these per se category charities, in the course of their actual carrying on of their activities, to earn profits. Of course, this provision was deleted from 01.04.1984. Alongside, the restriction imposed on GPUs from engaging in activities for profit, was also deleted.

We have noted from the above para, that if the assessee’s activity or category for charity is education, the restriction imposed by parliament against charities as prescribed under the proviso to section 2(15) of the Act prohibiting them from carrying on activities of profit do not apply to the first six categories including education.

7.2 In view of the above fact situation that the assessee trust exist for the purpose of education and the auditorium which is within the school complex for the purpose of conducting guest lectures or topics to address the students in connection with the curriculum and this is incidental and to earn rental from conducting conferences, music, dance and letting out to general public for conference meetings etc., is incidental to education and even from the facts it is clear that it is let out only for 134 days in assessment year 2010-11, for 144 days in assessment year 11-12, for 140 days in assessment year 2012-13 and 141 days in assessment year 2013-14. Even the rental earned from renting out of auditorium in relevant AY 2010-11 is Rs.40,84,433/- minus expenditure of Rs.15,77,851/- and the net income receipts is declared at Rs.25,06,582/- as against gross total income from educational activity at Rs.2,03,13,541/-, which is only to the extent of 12.5% of total receipts. Once the assessee falls under the category of education in term of section 2(15) of the Act, assessee is eligible for exemption u/s.11 of the Act because letting out of auditorium is incidental to fulfilment of the object of the trust i.e., education. Hence, we allow the appeal of assessee for AY 2010­11. Consequently, all the four appeals of assessee are allowed.

8. In the result, the appeals filed by the assessee in ITA Nos.976, 977, 978 & 979/CHNY/2019 are allowed.

Order pronounced in the open court on 11^th January, 2023 at Chennai.