The issue under consideration is whether the CIT(A) is correct in concluding that the hostel running activity is a business activity?
The assessee society was established with the aim to impart education and other charitable activities covered under section 2(15) of The Income Tax Act. The trust is imparting education for bachelor degree in the field of engineering, pharmacy, business administration and hotel management etc. and running engineering and professional college. In scrutiny, A.O. asked assessee to explain as to why hostel receipt should not be treated as business income of the trust?
Assessee stated that for the educational activities of the assessee, large number of students comes from other cities and states and in the absence of hostel facility; they shall be deprived of the education. Therefore running of hostel is not a business activity and in fact, it is a mandatory requirement of educational Institute.
ITAT observed that, It is not the case of the revenue that assessee has provided the hostel and mess facilities to the students who are not attached with the educational Institute of the assessee trust. It is also not the case of the revenue that income generated out of the hostel fees is not used for educational purposes. As hostel fee income is subservient to the main object of the education and therefore A.O. is directed to treat the same as not a business income but income derived from the charitable activities of education. Accordingly, ITAT allowed the appeal.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal is filed by the appellant, charitable trust [ The ‘Assessee’, ‘Appellant’, ‘Trust’ ] against the order of The Commissioner Of Income Tax (Appeals), Ghaziabad (The learned CIT – A) dated 22/05/2015 for Assessment Year – 2011 – 12. This order was made in appeal filed by the assessee against the order of The Additional Commissioner Of Income Tax, Range – 1, Ghaziabad (The Learned AO) passed u/s 147 read with section 143 (3) of The Income Tax Act, 1961 (The Act) dated 28/2/2014, wherein the appeal of the assessee is partly allowed.
2. The assessee has raised following grounds of appeal:-
a. That having regard to the facts and circumstances of the case, the learned CIT – A erred both on the facts and in law in confirming the addition of ₹ 60,91,641/– against the returned income filed by the assessee/appellant.
b. That having regard to the facts and circumstances of the case, the learned CIT (Appeals) erred both on the facts and in law in concluding that the hostel running activity is a business activity and failed to appreciate the fact that appellant is a registered with AICTE , hostel facility is a mandatory requirement of AICTE to run the educational Institute.
c. That having regard to the facts and circumstances of the case, the learned CIT (Appeals) erred both on the facts and in law in concluding that running of hostel is a business activity covered by the provisions of section 11 (4A) of the act and failed to appreciate the fact that the appellant had been running the hostel facility for last so many years and the same has been assessed as a charitable activity.
d. That having regard to the facts and circumstances of the case, the learned CIT (Appeals) erred both on the facts and in law in allowing the expense of RS 2,43,68,399/– against the hostel receipts and calculating the surplus of ₹ 60,91,641/– from maintaining hostel for all students which is arbitrary, wholly incorrect and without any basis.
3. Facts shows from the orders of lower authorities that Memorandum the society, assessee was established with the aim to impart education and other charitable activities covered under section 2 (15) of The Income Tax Act. The trust is imparting education for bachelor degree in the field of engineering, pharmacy, business administration and hotel management etc. and running engineering and professional college under the name and style of HRIT College of engineering at Ghaziabad. The assessee trust is registered as a society on 11/10/2008 and has been registered under section 12 AA of the act per certificate dated 13/2/2002. The assessee filed its return of income on 27/9/2011 declaring Nil income claiming exemption u/s 11 and 12 of the Act.
4. On scrutiny,, the learned assessing officer asked assessee to explain as to why hostel receipt should not be treated as business income of the trust in absence of not maintaining separate books of accounts as per section 11 (4A) of the income tax act. The assessee submitted that running of hostel is not a business activity. Assessee stated that for the educational activities of the assessee, large number of students comes from other cities and states and in the absence of hostel facility; they shall be deprived of the education. Therefore running of hostel is not a business activity and in fact, it is a mandatory requirement of educational Institute. The assessee stated that it is having 2280 number of students during the relevant year, out of which 585 students were availing the hostel facility. Assessee further submitted that the entire surplus generated from the hostel activity is utilized for the charitable purposes as per the requirement of AICTE.
5. The learned assessing officer noted that the assessee has not maintained separate books of account of hostel activity as assessee is running a hostel and every year surplus is generated. The learned assessing officer noted that, undoubtedly, certain condition has been fixed for maintaining the hostel to certain extent by AICTE [All India Council for Technical Education] but nowhere condition of generating surplus has been provided. According to him, had it not been the business of the assessee Trust, it could have reimbursed its surplus to the beneficiaries or all the members of the hostel or else could have reduced the cost of subsequent year to the fees charged from hostel student. He noted that Institute charges fees per student which is also comparable with market price ranging between ₹ 4500 – ₹ 5500 per month per student. Therefore,relying on the decision of the honourable Supreme Court in case of MUNICIPAL CORPORATION OF DELHI versus Children Book Trust in which it was pointed out that education cannot be regarded as a charitable object, he held that amendment in section 2 (15) of the act, word educational activities not-for-profit has been removed which clearly shows that the profit is allowed but its application can be given deduction as per section 11, 12 and 13 of The Income Tax Act. According to him, educational activities like of assessee are not charitable as on date. He further relied on the decision of Sole Trustee Lokshikshan Trust versus CIT [101 ITR 234] and held that hostel running and Mess running activity cannot be stated to be educational activity because educational activity means systematic education. Thereafter he proceeded to examine the expenditure of the assessee on hostel and mess activities. Thereafter, he noted that assessee has claimed ₹ 37924668/– against hostel running expenses, however, actual amount incurred is only ₹ 27360879/– Thereafter, he examined details of expenses and only allowed Rs. 21868399/– in lieu of the claimed expenditure of ₹ 37924668/–. Thus, he derived surplus from hostel activity of ₹ 8591641 against the loss claimed by the assessee of ₹ 7464628/– Accordingly, he computed gross hostel receipt of ₹ 30460040/– and granted deduction of expenditure of Rs 21868399 resulting in to net profit from hostel business of ₹ 8591641/– . He considered it as a business income to which provision of section 11 (4A) of the Act applies.
6. The learned assessing officer further found that assessee has claimed depreciation of Rs 2,74,10,629/– in its income and expenditure account. The learned assessing officer noted that as fixed assets of the society has been created out of the exempt income and they are allowed as application of income at the time of purchase, therefore, subsequent grant of the depreciation from year to year results into double deduction. Therefore, relying on the decision of The Honourable Supreme Court in case of Escorts Limited and Honourable Kerala High Court in case of lissie medical institutions vs. Commissioner of income tax( 2012) 76 DTR 0377, (2013) 255 CTR 0324, (2012) 348 ITR 0344, he disallowed a sum of Rs. 27410629/–.
7. Consequently the assessment order was passed determining the total income of the assessee from business of ₹ 8591641/– and from charitable activities at rupees Nil by order dated 28/2/2014.
8. The assessee aggrieved with the order of the learned A O , preferred an appeal before the learned CIT – A. He confirmed the action of the learned assessing officer holding that hostel activities are business of the assessee. However, he further granted deduction of expenditure of ₹ 25 lakhs from such activities on account of expenses. With respect to the disallowance of the depreciation claim of Rs. 27410629/–, he confirmed the action of the learned assessing officer holding that once the cost of assets has been allowed as deduction by way of application of income that depreciation on the same assets cannot be allowed.Thus, appeal of the assessee was partly allowed.
9. Assessee aggrieved with the order of the learned assessing officer is preferred this appeal before us.
10. The assessee has also made an application for admission of the additional ground of appeal stating that the learned CIT – A has erred in law and on facts in not allowing depreciation of ₹ 27410629/– as deduction and application of income. It is submitted that the above issue is squarely covered in favour of the assessee by the decision of the Honourable Supreme Court in case of CIT versus Rajasthan and Gujarati charitable foundation order in civil appeal numbers 7186/2014. It was further stated that above ground does not require any fresh facts to be investigated. Therefore, relying on the decision of the honourable Supreme Court in case of NTPC Ltd [229 ITR 383] and Sinhgad education society [397 ITR 344] , assessee submitted that this additional ground may be admitted for
11. At the time of hearing, none appeared on behalf of the assessee. No adjournment application is also received. The appeal is already fixed twice earlier and on both the occasions, the assessee seeks the adjournment. Looking to the nature of the issues involved in this appeal, the appeal is decided on the merits of the case as per information available on record.
12. The learned departmental representative relied upon the orders of the lower authorities. On the issue of the admission of the additional ground of appeal, he submitted that the above ground has not been raised in the appeal memo by the assessee and therefore now it cannot be raised as an additional ground.
13. On the issue of admission additional ground, we find that the issue has been decided by the learned CIT – A in the order at para number 4.1 against the assessee. The facts of the ground of appeal are available in the assessment as well as appellate order. The issue is legal in nature that whether the assessee is eligible for depreciation on the fixed assets or not, the cost of which has already been granted as deduction as application of income to the assessee. Therefore, no fresh investigation of facts is required. Assessee can raise legal ground at any point of time. In this case it is clearly an omission to not to have raised the above ground in the original appeal memo as the learned CIT – A decided this issue against the assessee. Therefore, we admit the additional ground raised by the assessee.
14. Admitting the additional ground raised by the assessee of whether assessee is eligible for depreciation on the assets, cost of which has already been granted as an application of income at the time of acquisition of the asset, amounts to double deduction and therefore, depreciation should not be allowed. This issue has already been decided by the honourable Supreme Court in Commissioner of Income Tax-III, Punev.Rajasthan &Gujarati Charitable Foundation Poona* 89 taxmann.com 127 (SC)/ 253 Taxman 165 (SC)/ 402 ITR 441 (SC)/ 300 CTR 1 (SC) has held as under:-
“1. These are the petitions and appeals filed by the Income Tax Department against the orders passed by various High Courts granting benefit of depreciation on the assets acquired by the respondents-assessees. It is a matter of record that all the assessees are charitable institutions registered under Section 12A of the Income Tax Act (hereinafter referred to as ‘Act’).For this reason, in deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income-tax Act and not under general principles. The Court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income-tax Act. The Court rejected the argument on behalf of the revenue that section 32 of the Income-tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a Charitable Trust derived from building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income-tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforesatated judgment of the Bombay High Court, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the Department.
4. Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of Director of Income-tax (Exemption) v. FramjeeCawasjee Institute  109 CTR 463. In that case, the facts were as follows: The assessee was the Trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the Trust. The ITO held that depreciation could not be taken into account because, full capital expenditure had been allowed in the year of acquisition of the assets. The assessee went in appeal before the Assistant Appellate Commissioner. The Appeal was rejected. The Tribunal, however, took the view that when the ITO stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as ‘application of income’ of the Trust in the year in which the income was spent in acquiring those assets.This did not mean that in computing income from those assets in subsequent years, depreciation in respect the previous year to the year with which we are concerned and in which year the depreciation was claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes under Section 11(1)(a) of the Act.The view taken by the Assessing Officer in disallowing the depreciation which was claimed under Section 32 of the Act was that once the capital expenditure is treated as application of income for charitable purposes, the assessees had virtually enjoyed a 100 per cent write off of the cost of assets and, therefore, the grant of depreciation would amount to giving double benefit to the assessee. Though it appears that in most of these cases, the CIT (Appeals) had affirmed the view, but the ITAT reversed the same and the High Courts have accepted the decision of the ITAT thereby dismissing the appeals of the Income Tax Department. From the judgments of the High Courts, it can be discerned that the High Courts have primarily followed the judgment of the Bombay High Court in ‘CIT v. Institute of Banking Personnel Selection (IBPS)' 131 Taxman 386. In the said judgment, the contention of the Department predicated on double benefit was turned down in the following manner:
“3. As stated above, the first question which requires consideration by this Court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years? In the case of CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084 the facts were as follows. The assessee was a Charitable Trust. It was registered as a Public Charitable Trust. It was also registered with the Commissioner of Income Tax, Pune. The assessee derived income from the temple property which was a Trust property. During the course of assessment proceedings for assessment years 1977-78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building @ 2½% and they also claimed depreciation on furniture @ 5%. The question which arose before the Court for determination was : whether depreciation could be denied to the assessee, as expenditure on acquisition of the assets had been treated as application of income in the year of acquisition? It was held by the Bombay High Court that section 11 of the Income-tax Act makes provision in respect of computation of income of the Trust from the property held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income-tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business shall be computed in accordance with section 30 to section 43C. That, section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. It further provides for of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court in the above judgment. Hence, Question No. 2 is covered by the decision of the Bombay High Court in the above Judgment. Consequently, Question No. 2 is answered in the Affirmative i.e., in favour of the assessee and against the Department.”
2. After hearing learned counsel for the parties, we are of the opinion that the aforesaid view taken by the Bombay High Court correctly states the principles of law and there is no need to interfere with the same.
3. It may be mentioned that most of the High Courts have taken the aforesaid view with only exception thereto by the High Court of Kerala which has taken a contrary view in ‘Lissie Medical Institutions v. CIT  24 taxmann.com 9/209 Taxman 19 (Mag.)/348 ITR 344’.
4. It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income-tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature.
5. It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well.”
The assessment year in appeal before us is assessment year 2011 – 12, which is prior to assessment year 2015 – 16 where from the amendment has been made denying the double deduction. Therefore, for this year the assessee is entitled to the depreciation allowance. Accordingly, additional ground raised by the assessee is allowed.
15. Ground number one is general in nature, challenges determination and computation of the total income in the assessment order. The main addition has been challenged by the assessee as per ground number 2-4 of the appeal and therefore this ground of appeal is dismissed.
16. Ground number 2-4 of the appeal are with respect to the claim of the assessee that the hostel earning activity is not a business activity but charitable activity, subservient to main educational activity for which assessee exists and therefore surplus arising there from is not chargeable to tax as business income of the assessee u/s 11 (4A) of the Act . It should be taxed as an income derived from the charitable activities under section 11, 12 and 13 of The Income Tax Act. Accordingly, claim of the assessee is that it should be allowed the complete deduction of expenditure incurred by the assessee on hostel and mess activities. Admittedly the issue is squarely covered in favour of the assessee by the decision of the coordinate bench in case of019 (6) TMI 653 – ITAT DELHI SETH ANANDRAM JAIPURIA EDUCATION SOCIETY SETH ANAND RAM JAIPURIA SCHOOL VERSUS ACIT, EXEMPTION CIRCLE GHAZIABAD, JCIT, RANGE-2 GHAZIABAD and 2017 (9) TMI 1030 – ITAT DELHI KRISHNA CHARITABLE SOCIETY VERSUS ADDL. CIT, RANGE-1, GHAZIABAD where in identical issues has been decided as under :-
“ 11. We have carefully considered the rival contentions and perused the orders of the lower authorities and other judicial pronouncement placed before us. In the grounds No. 1 – 3 assessee is contesting that addition made by the Ld. assessing officer treating hostel places provided to college student as business of the society and text the alleged surplus of ₹ 9887873/– as business income of the appellant. It was not the case of the revenue that assessee has rented out these hostels to the students who are not parted education in the above institutes. It was also not the case of revenue that assessee is primarily engaged in the business of providing hostel facilities to the students. The above issue is no more res Integra in view of the decision of the Hon’ble Karnataka High Court in CIT versus Karnataka lingayat education society in ITA No. 5004/2012 dated 15/10/2014 wherein it has been held that providing hostel to the students/staff working for the society’s incidental to achieve the object of providing education, namely the object of the society. In view of this, we are of the opinion that providing of hostel facilities and transport facilities to the student and staff member of the educational Institute cannot be considered as business activity but is subservient to the object of educational activities performed by the society. We are also supported by our view by the decision of the Hon’ble Allahabad High Court in IIT versus state of UP, (1976) 38 STC 428 (All) wherein question arose in Indian Institute of Technology v. State of U.P. (1976) 38 STC 428 (All) with respect to the visitors’ hostel maintained by the Indian Institute of Technology where lodging and boarding facilities were provided to persons who would come to the Institute in connection with education and the academic activities of the Institute. It was observed that the statutory obligation of maintenance of the hostel, which involved supply, and sale of food was an integral part of the objects of the Institute nor could the running of the hostel be treated as the principal activity of the Institute. The Institute could not be held to be doing business. Further meals being supplied in a hostel to the scholars, visitors, guest faculty etc. can not be exigible to sales tax where main activity is academics as held in Scholars home Senior Secondary School 42 VST 530. Further, the reliance placed by the lower authorities on the decision of the Hon’ble Madras High Court in case of DCIT versus Wellington charitable trust is also misplaced because in that case, the only activity of that particular trust was renting out of the property and not education. We are also not averse to considering the latest legal developments too where in the recently introduced new legislation of Goods and service tax it is provided that no GST would be chargeable on the hostel fees etc recovered from the Students, faculties and other staff for lodging and boarding as they are engaged in education activities. Therefore we reverse the finding of the lower authorities and held that transport and hostel facilities surplus cannot be considered as business income of the assessee society which is mainly engaged in business activities and these activities are subservient to the main object of education of the trust. In the result 1 – 3 of the appeal of the assessee are allowed.”
17. There is no change in the facts and circumstances of the case. It is not the case of the revenue that assessee has provided the hostel and mess facilities to the students who are not attached with the educational Institute of the assessee trust. It is also not the case of the revenue that income generated out of the hostel fees is not used for educational purposes. Hon supreme court in SOLE TRUSTEE, LOKA SHIKSHANA TRUST vs. COMMISSIONER OF INCOME TAX(1975) 43 CCH 0506 ISCC(1975) 1975 CTR 0281 (SC), (1975) 101 ITR 0234,”Education” in s. 2(15) connotes the process of training and developing the knowledge skill, mind and character of students by normal schooling as held by the Honourable Supreme court is with respect to the class room teaching . In this case , it is not denied that student who pays the hostel fees do not get education in classrooms. Hon Supreme Court held so in the facts of the case that the trustee had carried on a lucrative business of printing, under the name of “Karnataka Prakashana Mandal”, at Belgaum, and, thereafter, it was shifted to Hubli where he started publishing a daily newspaper called “Samyukta Karnatak”. The printing business must have been lucrative because investments of profits from it, together with some possible “donations”, expanded the assets of the re- declared trust of 1962 so much, that the schedule attached to the trust deed of 1962 shows their value to be Rs. 2,97,658. After deducting the total liabilities of the trust, shown as Rs. 1,24,086-10-0, the net value of the assets is given as Rs. 1,73,571-14-4. Thus the facts in those case were not at all comparable as assessee is running educational institutes , income from which has been accepted by ld AO himself as falling u/s 2 (15 ) of the act. All other decisions cited by Revenue have already been considered by the coordinate benches in above two decisions cited supra. In view of this, respectfully following the decision of the coordinate benches on identical facts and circumstances, we direct the learned assessing officer to not to treat the excess of Rs 8591641/– as taxable income on account of hostel receipts under section 11 (4A) of The Income Tax Act. As hostel fee income is subservient to the main object of the education and therefore the learned assessing officer is directed to treat the same as not a business income but income derived from the charitable activities of „ education‟. Accordingly,we allow ground number 2-4 of the appeal.
18. In the result, we allow appeal of the assessee partly.
Order pronounced in the open court on 27/05/2020.