Newly inserted proviso to section 2 (15) will not apply to first three limbs of section 2(15) i.e. relief of the poor, education or medical relief
Even after amendment of the Trust Deed the main object of the trust was to promote education. Letting out was incidental and not the principle activity of the assessee trust.Thus carrying out such incidental activity and the income derived from it is used for the educational institute and not for any particular person & thus newly inserted proviso to section 2 (15) is not attracted in the assessee’s case.
Fact of the case:
The facts lie in a narrow compass. The assessee is a trust founded under a Trust Deed dated 10th April, 1959. The assessee claimed that the object for the establishment of the assessee trust was “advancement of education” which fell within charitable purpose as defined under section 2 (15) of the Act. On 29th June 1973, the assessee had made an application seeking registration under section 12A of the Act. The Commissioner of Income Tax, Mumbai City IV approved the assessee trust as a charitable trust and granted registration under section 12A (a) of the Act. Thereafter, the trust deed was amended, however the main object of the trust deed did not change. The objects were to promote, support, establish and conduct college or colleges, schools, institutions etc for advancement of education and give scholarship or other assistance to students prosecuting studies. One of the objects was also to pay some part of income to any of the institutions which are carrying out the said objects. Thus, it was submitted that the main object of the trust was always promotion of education. 4. The assessee owns a plot of land at Haji Ali, Mumbai with an approximate area of 1,00,000 sq.ft, having a building consisting of an auditorium on the ground floor and class rooms from 2nd to 7th floors. This building was let out to one Lala Lajpatrai Institute which conducts Junior College, Senior college, Law College etc and the 6th and 7th floors are let out to run a Management Institute. The letting out was in consonance with the objects of the trust which intended to promote and/or establish colleges and schools. The income which was received by the assessee from letting out the premises to Lala Lajpatrai Institute was claimed as exempted from taxation.
Invoking proviso to section 2 (15) a show cause notice was issued to the assessee as to why registration under section 12A shall not be withdrawn in exercise of the powers under section 12AA (3) of the Act, as according to the DIT (E), activities of letting out the building as carried out by the assessee were in the nature of trade, commerce, commercial business etc.
Contention of Assessee:
The assessee responded to the show cause notice interalia explaining that the trust was being conducted as per the main object namely ‘promotion of education’ and such letting out of the property of the trust did not amount to any trade, business or commercial activity and thus there was no case for withdrawing of the exemption granted to the assessee. The assessee submitted that the building from 2nd to 5th floors was let out to the Lala Lajpatrai Institute at a very nominal rent wherein junior college, senior college, and a Law College was being conducted. It was pointed out that 6th and 7th floors were used for running the Management Institute and the said premises were let out for Rs.12 lacs and this amount is received under the head “service charges”. The assessee submitted that the auditorium is also part of the building and used mainly by the colleges as and when is not required for use by the colleges, it is let out. The assessee stated that out of the 365 days the auditorium was used by the colleges for 209 days and it was vacant for 76 days whereas it was let out only for 80 days. It was pointed out that expenses of electricity and Airconditioners were borne by the assessee and that letting out the building was not the main activity but, only incidental to the main activity i.e. promotion of education. It was thus, contended that the proviso to section 2 (15) of the Act is not attracted in the assessee’s case. In support of its submissions, the assessee also relied on a CBDT Circular No.11/2008 dated 19th December 2008.
Judgement of reputed High Court:
The revenue’s contention that the tribunal has overlooked the provisions of section 11(4A) is unfounded. We have noted above that the service charges received in respect of 6th and 7th floor were clearly on account of educational purpose. Letting out was incidental and not the principle activity of the assessee trust. Thus, in our opinion, section 11(4A) which require separate account to be maintained would not be attracted in view of our conclusion that the said amounts as received by the assessee for the assessment year have been received from educational activity which is thedominant activity of the assessee trust. In our opinion, if this be the case, separate books of accounts cannot be insisted upon as the said activity becomes part and parcel of the educational activities carried out by the assessee trust. In such a case, the benefit of exemption under section 11 (4A) cannot be denied. An interpretation as urged on behalf of the revenue would render nugatory the very spirit, rationale and the object of the exemption provisions making the same unworkable.
It is well settled principle of law that the test to determine as to what would be a charitable purpose within the meaning of section 2 (15) of the Act, is to ascertain what is the dominant object of the activity; whether it is to carry out a charitable purpose or to earn profit. If the predominant object is to carry out a charitable purpose and not to earn profit the purpose would not lose its charitable character merely because the some profit arises from the activity.
(See CIT Andhra Pradesh vs APSRTC Hyderabad (1986) 2 Supreme Court Cases 391).
The assessee has also appropriately relied on the Circular No.11 of 2008 of the CBDT and which was issued in view of the amendment to section 2 (15) of the Act and insertion of the first proviso in question. The circular further clarifies the position as held by us above. The CBDT in para 2 has clarified the following implications arising from the amendment :
“2. The following implications arise from this amendment:_2.1 “ The newly inserted proviso to section 2 (15) will not apply in respect of the first three limbs of section 2 (15) i.e. 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.
“Section 2 (15):
“Charitable Purpose” includes relief of the poor, education, medical relief / preservation of environment (including water sheds, forests and wildlife and preservation of monuments or places or objects of artistic 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 out 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 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 valueof the receipts from the activities referred to therein is ten lac rupees or less in the previous year.”