Dit (Exemptions) vs M/S. Lala Lajpatrai Memorial ...
2016 Latest Caselaw 1463 Bom

     Rng                                        1                                                     
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                 IN THE HIGH COURT OF JUDICATURE AT BOMBAY




                                                                                                 
                    ORDINARY ORIGINAL  CIVIL  JURISDICTION
                      INCOME TAX APPEAL NO.2307 OF 2013




                                                             
     Director of Income Tax (Exemptions)           }
     6th Floor, Piramal Chambers,
     Lalbaug, Mumbai-400 012.                       } ..   Appellant




                                                            
                        vs

     M/s Lala Lajpatrai Memorial Trust               }




                                        
     Lala Lajpatrai Marg,
     Haji Ali, Mumbai-400 034.ig                     }  .. Respondent
     PAN :AABCA0832C                                 }
                            
     Mr.A.R.Malhotra for Appellant
     Mr.Phiroz Andhyarujina Sr.Counsel a/w 
     Mr.A.P. Singh, Mr.Asim Sarode for Respondents 
      

                                       ...
                                   CORAM:       S.C.DHARMADHIKARI &
   



                                                G.S.KULKARNI, JJ
     JUDGMENT RESERVED ON:                       4TH APRIL, 2016
     JUDGMENT PRONOUNCED ON:                     13TH APRIL 2016

     JUDGMENT (Per G.S.Kulkarni, J)

1. This appeal of the revenue under section 260A of the

Income Tax Act, 1961 (for short 'the Act') challenges the order dated

25th May 2013 passed by the Income Tax Appellate Tribunal (for

short ' the tribunal') whereby the appeal filed by the respondent-

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assessee against an order passed by the Director of Income Tax

(Exemption) (for short 'the DIT (E)') withdrawing the registration of

the assessee under section 12A of the Act stands allowed.

2. The assessment year in question is 2009-10. The

revenue has proposed the following question of law for our

consideration:

6.1 "Whether on the facts and in circumstances of the case, the Hon'ble ITAT was justified in allowing the

appeal of the assessee brushing aside the provisions of Section 11 (4A) of the Income Tax Act, 1961 ?"

3. 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

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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

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schools. The income which was received by the assessee from letting

out the premises to Lala Lajpatrai Institute was claimed as exempted

from taxation. This was the position right from 1976 till the

Assessment year in question (A.Y.2009-10).

5. The Income Tax officer (Exemption) for A.Y.2009-

10 forwarded a proposal to the DIT (E) that on verification of the

record of the assessee, it was prima facie found that the first proviso

to section 2 (15) of the Act as inserted by an amendment to the Act

with effect from A.Y.2009-10 was attracted in view of the income

earned by the assessee from letting out of the said premises.

6. At this stage, we may note the provision of section 2

(15) of the Act which reads thus:

"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

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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 value of the receipts from the activities referred to therein is ten lac rupees or less in the previous year."

By virtue of the first proviso "advancement of any

other object of general public utility," if it involved carrying out of

any activity in the nature of trade, commence or business or any

activity of service in relation to trade, commerce or business for a

cess or any other consideration was excluded to be a charitable

purpose.

7. 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. The main thrust of the

revenue's case in issuing the show cause notice was that the assessee

has received service charge of Rs.12 lacs for renting out the premises

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for running the institution of Management. Further, the assessee had

earned an income of Rs.15,02,182/- for letting out of the

auditorium. The assessee's objects were of "advancement of

education" and thus receiving rent would fall in the category of "any

other object of general public utility " attracting the first proviso to

section 2 (15) of the Act as applicable from the year 2009-10.

8.

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

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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 Air-conditioners 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.

9. The DIT (E) however passed an order dated 15 th

December 2011, withdrawing/cancelling registration of the assessee

under section 12A of the Act. The DIT (E) observed that the claim of

the assessee that its activity of letting out the premises is educational

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cannot be accepted as the assessee by itself was not running the

educational institutes but, the educational institutes were being

conducted by a different entity to whom the assessee had given its

buildings for its use. It was observed that the assessee was exploiting

its property commercially and received Rs.12.00 lacs on account of

service charges and Rs.15,02,182/- being income from the

auditorium which was required to be taken as 'business income.' It

was observed that this income was required to be treated as 'business

income' by application of proviso to section 2 (15) of the Act as

introduced with effect from Assessment year 2009-10. Accordingly,

it was held that the assessee though a charitable trust, the activities

of the assessee ceased to be charitable thereby resulting in the

assessee loosing its charitable character no longer being entitled to

the benefits of section 11. The Director of Income Tax (Exemption)

accordingly held that section 12AA (3) was attracted and cancelled

the registration of the assessee granted under section 12A of the Act

with effect from Assessment year 2009-10.

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10. The assessee preferred an appeal before the

Tribunal assailing the above order and findings of the DIT (E). The

assessee interalia contended that the activities of the assessee were

"advancement of education only" and secondly the activities of the

trust were a charitable purpose as defined under section 2 (15) of

the Act and the proviso in the facts of the case was clearly

inapplicable.

11. In the impugned order, the tribunal examining the

facts has come to a conclusion that the main object of the asseesse-

trust assessee- was to promote educational activities. It is in the

course of this activity the premises were let out to Lala Lajpatrai

Institute. The tribunal has observed that letting out of the premises

to the said Institute was for educational purposes. As regards the

letting out of the auditorium it was observed that it was not the

dominant object of the assessee-trust and that merely because, the

auditorium was incidentally let out to outsiders for commercial

purpose, the case of the assessee did not cease to be 'advancement

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of education' and fall in the category of "any other object of general

public utility" so as to attract the proviso to section 2 (15) of the Act.

The order of the DIT (E) was accordingly set aside by the Tribunal.

12. Learned counsel for the revenue in assailing the

impugned order passed by the Tribunal and in support of the appeal

contends that this is a case wherein clearly the first proviso to section

2 (15) of the Act had become applicable in as much letting out the

premises by the assessee amounted to an activity in the nature of

trade, commerce or business and not the object of 'advancement of

education' as contended by the assessee. It is submitted that the

educational institutes are not being conducted by the assessee-trust

but by a separate management. It is contended that the tribunal has

failed to appreciate the provisions of section 11 (4A) of the Act that

the assessee had not maintained separate books of account as

required under the said provision in respect of the amounts received

from letting out of the auditorium as also running of the Institution

of Management on 6th and 7th floors. On behalf of the revenue it is

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urged that if the case of the assessee was that these activities are

incidental to the 'advancement of education' then as per requirement

of section 11(4A) separate accounts ought to have been maintained.

It is therefore, contended that the question of law as formulated

would arise for consideration of this Court.

13. On the other hand, learned counsel for the

assessee supported the order passed by the Tribunal. The assessee

would contend that the question of law as framed is misconceived in

as much as from the order passed by the DIT (E), this provision is not

the subject matter of assertion on the part of the revenue. It is

contended that the Tribunal has clearly held that the object of the

trust was 'advancement of education' and merely because the

auditorium being incidentally let out to outsiders for commercial

purpose, would not change the dominant object of the trust which

was 'advancement of education'. In support of the submissions,

learned counsel for the assessee has relied on the Division bench

decision of this Court in Director of Income Tax (Exemptions)

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Mumbai vs. M/s Shri Vile Parle Kelavani Mandal as also a Circular

no.11 of 2008 dated 19th December 2008 issued by the CBDT.

14. We have heard learned counsel for the parties and

with their assistance we have perused the order passed by the DIT

(E) and the impugned order of the tribunal and other documents as

placed in the paper book. The admitted position is that the assessee-

trust being founded on 10th April 1959 had applied for registration

under section 12A of the Act on 29th June 1973 and was granted

registration under section 12A of the Act, considering the object of

the trust to be charitable. Even after amendment of the Trust Deed

the main object of the trust was to promote education and conduct

colleges or schools, institutions etc for advancement of education,

giving scholarship or assistance to students prosecuting studies.

Further one of the object was also to pay some part of income to any

other institutions which are carrying out the said objects. In

furtherance of these objects, the building of the assessee-trust which

consist of ground floor and class rooms from 2nd to 7 th floors were

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let out to Lala Lajpatrai Institute which conducts junior college,

senior college, Law college and a management Institution on the 6 th

and 7th floors. In the Assessment year in question it was observed

that the assessee had received service charges of Rs.12.00 lacs and

letting out of the premises for running the Institution of Management

and also an amount of Rs.15,02,182/-was received for letting out of

the auditorium. On this basis the DIT (E) by an order dated 22 nd

May 2013 concluded that case of the assessee would fall within the

proviso to section 2 (15) of the Act as made applicable with effect

from Assessment year 2009-10, in as much as case of the assessee

could no more be categorized as 'advancement of education' and

would fall under the first proviso to section 2 (15) of the Act so as to

be "any other object of general public utility", which stands excluded

to be a charitable purpose as it involved an activity in the nature of

trade, commerce or business in exchange for a consideration and the

use or application or retention of the income from such activity. The

Tribunal however, negatived these findings of the DIT (E).

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15. We may observe that the premises of the assessee were

let out to Lala Lajpatrai Institute to conduct junior college, senior

college, Law College and a management Institution which is

indisputedly an educational purpose. This is also in consonance with

the objects of the assessee-trust which is to conduct colleges and

schools and achieve 'advancement of education.' It is further an

admitted position that these premises were let out on a nominal rent.

The objection of the DIT (E) that the 6th and 7th floors rendered an

income of Rs.12.00 lacs from the Institution of Management by way

of service charges which according to the DIT (E) indicated that the

assessee was involved in carrying out activities in the nature of trade,

commerce or business, amounting to the assessee deviating from its

object of 'advancement of education'. In our opinion, considering the

facts, this conclusion of the DIT (E) is not well founded. The DIT (E)

has overlooked that the principal purpose for which the premises

were let out was for conducting an educational activity namely the

Management Institution. There is no material before the DIT (E) to

show that the 6th and 7th floors were used for purposes other than the

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Management Institution or for any other purpose which is not an

educational purpose. First Proviso to section 2 (15) of the Act would

also not be attracted in this situation. As regards the auditorium the

same was also part of the building housing these colleges conducted

by Lala Lajpatrai Institute which was used by the colleges for 209

days and it was vacant for 76 days and was let out only for 80 days

only when it was not needed by the colleges. In the course of this

letting out the assessee had incurred expenses for electricity and Air-

Conditioners. Letting out of the auditorium was not the dominant

object of the trust and admittedly the auditorium was incidentally let

out to outsiders for commercial purpose. It thus cannot be said that

such letting out would fall within the first proviso to section 2 (15)

of the Act.

16. 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

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purpose or to earn profit. If the pre-dominant object is to carryout 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).

17. 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 6 th 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 the

dominant 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

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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. In this context, we may usefully refer to the

observations of the division bench of this Court in the case of

Director of Income Tax (Exemption) vs Vile Parle Kelawani

Mandal to which one of us (S.C.Dharmadhikari, J) is a member) in

which a similar contention as urged on behalf of the revenue was

repelled. The division bench observed as under :

"5. The Tribunal has held that the "Management and Development Program & Consultancy Charges' is part and parcel of

'Narsee Monjee Institute of Management Studies' which has been set up by the respondent-assessee. The respondent-assessee is a trust and has set up 30 schools and colleges. The Commissioner as also the Tribunal has found that the element of business is missing in

conducting management courses. There may be some surplus generated which itself is applied towards the attainment of the object of the educational institute. The separate books of account cannot be insisted upon because once this programme is part and parcel of the activities undertaken and carried out by the Narsee

Moonjee Institute of Management Studies, then the condition precedent set out in sub-section (4A) of section 11 of the I.T. Act is completely satisfied. Such finding of fact cannot be termed as perverse and it is in consonance with the factual aspect regarding activities of the trust and the object that it is seeking to achieve. Similarly, in regard to income from the hiring of the premises and

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advertisement rights, the said question is also not substantial

question of law. Letting out of halls for marriages, sale and advertisement rights has not been found to be a regular activity undertaken as a part of business. The educational institutions

require funds. The income is generated from giving various halls and properties of the institution on rentals only on Saturdays and Sundays and on public holidays when they are not required for educational activities, then, this cannot be said to be a business

which is not incidental to attain the objects of the trust. This being merely an incidental activity and the income derived from it is used for the educational institute and not for any particular person, separate books of account are also maintained, then, this income

cannot be brought to tax. This conclusion is also not perverse and given the facts and circumstances which are undisputed."

ig (emphasis supplied)

18. 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

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involves the carrying on of commercial activities.

3. The newly inserted proviso to section 2 (15) will apply only to entities whose purpose is 'advancement of

any other object of general public utility i.e. the fourth limb of the definition of 'charitable purpose ' contained in section 2 (15). Hence such entities will not be eligible for

exemption under section 11 or under section 10 (23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which

will be decided based on the nature, scope, extent and frequency of the activity."

ig (emphasis supplied)

19. In the light of the above discussion, we find no

fault in the order of the tribunal. We answer the question accordingly

in affirming the view taken by the tribunal and dismiss the appeal

with no order as to costs.

     G.S.KULKARNI, J                                                   S.C.DHARMADHIKARI, J