| SooperKanoon Citation | sooperkanoon.com/75283 |
| Court | Income Tax Appellate Tribunal ITAT Delhi |
| Decided On | Oct-27-2006 |
| Judge | N Vasudevan, K Bansal |
| Reported in | (2007)103ITD403(Delhi) |
| Appellant | Dy. Cit |
| Respondent | Beer Shiva Educational Social |
2. From the order of the Income Tax Officer, it is seen that the assessee bad shown gross total income of Rs. 2,72,49,129. It was claimed that a sum of Rs. 2,42,99,578 was applied under Section 11 towards the charitable purpose and the balance sum of Rs. 29,49,551 was deemed to have been applied for such purposes. Therefore, the total income was computed at nil. The assessee was required to substantiate the claim of exemption made by it under Section 11. It was explained that the assessee-society is an educational institution, to whom provisions of sections 11 and 12 are applicable. It had also applied for approval under Section 10(23C)(vi) of the Act, and its application is pending for disposal. The receipts from all the schools run by the assessee aggregated to Rs. 272.49 lakhs, which is shown as income.
Expenditure by way of salary to teachers etc. was claimed as application of income. The assessing officer examined the case with reference to applicability of the provisions of sections 11 and 12. It was pointed out that the assessee derived income by way of tuition fee, admission fee, science laboratory fee, bus fee, breakage fee and hostel fee from the students. The Income Tax Officer was of the view that these receipts were not income derived from property held under trust for charitable or religious purposes. Such income could be either income derived from the property, voluntary contributions received with a direction that they shall form part of the corpus, income arising out of transaction in capital asset, the consideration of which is utilized for acquiring another capital asset, income of a business undertaking, and any voluntary contributions received by it. The fee etc. received by the assessee was not in the nature of voluntary contributions or any income derived from property. Therefore, the same could not be said to be the income, which formed subject-matter of deduction under Section 11 of the Act. In view thereof, he was of the view that the assessee was not entitled to get exemption under Section 11. It is also mentioned that the assessee- society is registered under Section 12A of the Act by the order of Commissioner of Income Tax, Lucknow dated 15-11-1985. However, that by itself does not mean that activities of the society could be said to be charitable in nature. For this purpose, he relied on the decision of Honble Supreme Court in the case of Municipal Corpn. of Delhi v. Children Book Trust , in which it was pointed out that education per se cannot be regarded as a charitable object. If education was carried on with a view to make profit, it would be unreasonable to call it a charitable purpose. It may be mentioned that the aforesaid decision was rendered under Section 115 of the Delhi Municipal Corporation Act. The assessing officer also considered the objects of the assessee-society, which are reproduced below for ready reference: 6. All such other activities as may assist in the work of any of the above." 2.1 The aforesaid objects were examined in the light of provisions contained under Section 10(23C)(vi) and it was pointed out that the aforesaid exemption is essentially hinged on the condition that the institution should not exist for the purpose of profit. The assessing officer furnished the details of gross receipts, net profit and the ratio of profit to the gross receipts for the current year and four preceding years in a tabular form on page 10 of his order, which is reproduced below for the sake of ready reference: Year ending Gross receipts As per I&E a/c Net profit % of profit 1 31-3-1997 Rs.13865833 1071150 7.72% On the basis of the data in the aforesaid table, it was pointed out that the assessee has been earning substantial profits year after year and such profits are not incidental to carrying on the educational activities, but the activities were intentionally so arranged that they invariably generated surplus profits in a systematic manner.
2.2 The assessing officer also examined the object clauses of the society which, inter alia, included what was stated to be various noble and pious objects, namely, rehabilitation centre for physically handicapped persons, orphanage for the children of leprosy patients, school for deaf and dumb children etc. However, the society chose to start nursery and kindergarten school, listed as 5th object. With profit earned from this school, it extended its net work instead of undertaking any of the aforesaid mentioned noble and pious objects.
2.3 Certain other issues were also raised which, according to the Income Tax Officer, pointed towards the intention of the assessee-society. It was pointed out that in the year 2001, the articles of association of the society were amended, by which Mrs. H.Bhatt remained the only founder member. Mrs. N.N.D. Bhatt died and Ms.
Nirupamma Bhatt and Mr. Sarvesh Bhatt were ousted, which could not have been done because they were founder members. The ostensible reason for eviction of the founder members was that Mrs. Nirupama Bhatt was married to a non-Christian. She was also a deaf and dumb person, so she was not able to contribute to the activities of the society. It was also stated that Shri Sarvesh Bhatt was acting against the interests of society and the school and, therefore, his membership was terminated.
It was also pointed out by the assessing officer that on 5- 101990, a piece of land was purchased for Rs. 65,000 by Smt. Hilda Bhatt, on which building of Kitchha branch was constructed. Another piece of land was purchased on 22-7-1994 in the name of Smt. Hilda Bhatt and this land was leased to the school. All the vehicles purchased by the society were registered in the name of the Manager of Beersheba School.
Therefore, it was contended that the usufruct of the property vested either with Mrs. Hilda Bhatt or her husband. Certain instances were cited where loss in sale of books or stationery was recouped by debiting the amount to "children welfare account".
2.4 On the basis of aforesaid arguments and facts, the assessing officer came to the conclusion that the assessee-society was being run as a commercial enterprise and, therefore, it was not entitled to exemption under sections 11 and 12 or Section 10(23C)(vi). Denying these exemptions, the income of the assessee was computed at Rs. 51,03,164.
3. Aggrieved by this order, the assessee moved an appeal before the CIT (Appeals). The learned Commissioner (Appeals) referred to the provisions contained in Section 2(15) of the Act, which define the term "charitable purpose" in an inclusive fashion. The definition includes relief of poor, education, medical relief, and advancement of any other object of general public utility. On the basis of the aforesaid definition, it was pointed out by him that the words "of general public utility" qualify only the residuary item of advancement of any other object. The word "education" stands alone and constitutes charitable purpose by itself. In other words, the residuary clause was to be read separately and the ingredients of that clause regarding general public utility could not be read in the word "education". Thereafter, he referred to the distinction between private profit and public profit and it was pointed out that if surplus generated from educational activity was not to be used for any private purpose but was to be used for advancing the cause of education, then, the society will be existing for the charitable purpose. In particular, the decision in the case of Children Book Trust rendered under Section 115 of the Delhi Municipal Act was distinguished, as the definitions under that Act and under the Income Tax Act, 1961 were different. The Honble Supreme Court had also pointed out in that case that the rulings under the Income tax Act may not be of great help because the definition under Income Tax Act includes the relief of poor, education, medical relief, and the advancement of any other object of general public utility. The words "advancement of any other object of general public utility" are not found under the Delhi Municipal Corporation Act.
3.1 Coming to the issue whether profits earned from the school constituted income from property held under trust, it was pointed out that the aforesaid word should be read in the widest possible manner.
In this connection references were made to certain decisions, referred to at page 13 of his order and it was pointed out that the word "property" is a term of widest import, and subject to any limitation or qualification which the context may require, it signifies every possible interest which a person may acquire, hold and enjoy. Upon this holding, it was pointed out that the tuition fees etc. could not have been received but for the organization and, therefore, such fees and other receipts derived from the organization constitute income derived from the property. In view thereof, it was held that the assessee-society fulfilled all conditions for grant of exemption under sections 11 and 12 of the Act.
3.2 He also pointed out that the prescribed authority has not granted exemption to the assessee under Section 10(23C)(vi) and, therefore, there was no question of deciding the issue of exemption under the provisions of this section.
4. The learned Departmental Representative opened his arguments by pointing out that the revenue has taken up only one ground to the effect that the learned CIT (Appeals) erred in holding that the assessee is entitled to exemption under Section 11. It was further pointed out that the assessee is an educational institute, running classes from nursery to class XII. The institute is affiliated with the Central Board of Secondary Education. The assessee had claimed exemption under Section 10(23C)(vi) as well as under Section 11.
However, the learned CIT(Appeals) rejected the claim under Section 10(23c)(vi) on the ground that the society has not been approved by the authority concerned. However, he held that the assessee is entitled to benefit of the provisions contained in Section 11.
4.1 He referred to various objects of the society, which have been reproduced by us earlier. It was pointed out that the assessee did not undertake any activities in pursuance to object Nos. 1 to 4. Object No.5 was regarding a school with nursery and kindergarten classes. This object did not authorize the assessee-society to impart education from standard 1 to 12. Therefore, his case was that the assessce had not undertaken any of the five objects mentioned in its memorandum. Sixth object was residuary in nature, permitting the assessee-society to carry out such other activity as may assist in the work of any of the first five objects.
4.2 Coming to the legal issues, he referred to the decision of Honble Madras High Court in the case of S.B. Adityan v. First Income Tax Officer (1964) 52 ITR 453 (Mad). One of the questions before the Honble court was whether exemption under Section 4(3)(1) of the 1922 Act was to be decided on the basis of the terms of the trust deed or the Income Tax Officer had power to enquire into true nature and objects of the trust. The Honble court pointed out that the Income Tax Officer was not bound to confine himself to the terms of the trust deed, He could very well take other factors also into consideration and determine the true character of the trust and the income therefrom. He was also entitled to ask the assessee to produce further evidence relating to the aforesaid matter and then decide whether the trust was entitled to get exemption under Section 4(3)(1) of that Act. The case of the learned D.R. was that the assessing officer was competent to examine the actual conduct of the activities, the intention of the managing committee of the society and then decide whether the assessee is entitled to get exemption under Section 11 or not. We tend to agree with him up to this extent. But, his further argument was that since the society was running as a commercial enterprise and its properties were controlled by the husband and wife, therefore, the activities were not conducted for carrying out any charitable purpose.
4.3 He further relied on the decision of Honble Gujarat High Court in the case of Satya Vijay Patel Hindu Dharamshala Trust v. CIT . That trust was created for maintenance and enlarging a Hindu Dharamshala. The trustees were empowered to utilize a part of the fund for any emergency. In the previous years relevant to assessment years 1962-63 and 1963-64, the trustees utilized the entire surplus for constructing a new Dharamshala. The Income Tax Officer pointed out that utilization of 25 per cent of the income in emergency could not be said to be application of income for charitable purposes.
It was also pointed out that the expenditure incurred for construction of a new Dharamshala would not qualify for exemption under Section 11.
The Honble court while agreeing with the Income Tax Officer that though the word "emergency" was vague and indefinite, but also pointed out that the trustees were bound to apply income set apart for emergency in relation to fulfilment of a charitable purpose only. Therefore, upon such application, the expenditure would be entitled for exemption under Section 11. Coming to the issue of construction of new Dharamshala, it was pointed out that the expenditure was incurred from the net income of the relevant previous year. Even if such expenditure exceeded the prescribed percentage of the income, it could not be said that the application was for any purpose other than charitable purpose.
Accordingly, it was held that income of both years was exempt under Section 11(l)(a). While the decision in that case was against the revenue, the learned Departmental Representative pointed out to the finding of the court that the intention has to be found out by reading the trust deed as a whole. If that is done in the instant case, it will been seen that the intent in this case was not the pursuit of a charitable purpose.
4.4 He also relied on the decision of Honble Madras High Court in the case of South Indian Athletic Association Ltd. v. CIT , in which it was, inter alia, pointed out that mere entertainment cannot be called to be charitable purpose. It was further pointed out that promotion of intercourse amongst members of an organization also cannot be considered to be a charitable purpose.
Thus, where some of the objects of the trust were charitable and some non charitable, and the trustees in their discretion could apply any amount of income to any object, then, the trust must fail for the purpose of claiming exemption under Section 4(3)(1) of 1922 Act. The case of the learned Departmental Representative was that the assessee has pursued only one object and, therefore, the case of the assessee must fail for exemption under Section 11. We may state here that the decision of the Honble court in that case was quite different from its exposition made by the learned Departmental Representative. The decision of the Honble court is that in case of a partly charitable trust, in a situation where the trustees have discretion to apply the income to any object, the assessee will not be entitled to exemption under Section 11. Reason is quite obvious that the assessee could apply the whole of the income for a non-charitable purpose. In such a situation, the assessee will not be entitled to get exemption under Section 11. It may also be mentioned here that the concept of partly charitable trust does not exist any longer under the new provision applicable to the assessment year at hand, as Section 11(1)(a) speaks of exemption only if income is derived from property held under trust wholly for charitable or religious purposes. Section 11(l)(b), regarding partly charitable trust, is applicable to such trusts only which had been created before the commencement of this Act. Such is not the case before us. Further, it has also to be examined whether all objects are charitable or not in the case at hand.
4.5 The learned Departmental Representative also relied on the decision of Honble Supreme Court in the case of Indian Chamber of Commerce v.CIT . In that case, the question was whether Indian Chamber of Commerce could be covered under the residuary clause of "advancement of any object of general public utility not involving the carrying on of an activity for profit", for deciding whether it was entitled to get exemption under Section 11 in respect of profits derived from arbitration fee, weighment fee etc. The Honble court pointed out that the activities of the Chamber were carried on for profit and, therefore, the income from such activities was liable to income-tax. In this connection, it, was pointed out that an activity which yields profit or gain in the ordinary course must be resumed to have been done for profit or gain. Therefore, in order to bring itself within the meaning of Section 2(15), the onus is on the assessee to show that its objects were carried out without involvement of any profit thereunder. It may be mentioned by us here that the definition of the term "charitable purpose" has undergone a change since then. The section does not contain any words to the effect "not involving the carrying on of any activity for profit", as these words were omitted by the Finance Act, 1983, with effect from 1-4-1984. It may also be pointed out that plethora of case law existed that the aforesaid words qualified only the residuary activity of advancement of any other object of general public utility and these words did not qualify first three activities regarding relief of poor, education and medical relief. The instant society is one engaged in imparting of education by running schools. Therefore, the ratio of the decision of this case is not applicable to the facts of the case.
4.6 The learned Departmental Representative also relied on the decision of Honble Supreme Court in the case of Dharmaposhanam Co. v. CIT . The question in that case was whether for the purpose of granting exemption under Section 11(1)(a), all objects had to be seen, or only the objects pursued by the assessee had to be examined. The Honble court found that some of the objects were charitable in nature while others were not charitable in nature. It was open to the assessee to apply its income to any of the objects. On these facts, it was held that the claim of exemption fails. As pointed out earlier, Section 11(1)(a), as it exists now, deals only with such trusts which are wholly charitable or religious in nature.
4.7 The learned D.R. also relied on the decision of Honble Delhi High Court in the case of CIT v. All India Hindu Mahasabha . The Honble court pointed out that for the purpose of exemption from tax as a charitable organization, what is to be seen is the dominant object and purpose for which it was established. It does not matter as to what was the character of the body in question. If the dominant object was a charitable purpose, then, it would be entitled to exemption notwithstanding the fact that the origin or character of the body may be considered to be political in nature. The case of the learned Departmental Representative, on the basis of this decision of the jurisdictional High Court, was that the dominant object and purpose was to earn profit by running a school, and, therefore, it cannot be said to be a charitable purpose. We may point out here that the learned Departmental Representative has been basing his argument on the assumption that running a school is not a charitable purpose. We may further point out that the decision of jurisdictional court is that the character of the body is immaterial for this purpose.
4.8 He also relied on decision of Honble Patna High Court in the case of Bihar Institute of Mining & Mine Surveying v. CIT (1994) 208 ITR 608 (Pat), in which it was held that a coaching institute cannot be said to be an institute where normal schooling is done. If such a wide meaning is given to the word "education", then, the purpose of the Act will be defeated. The Honble court pointed out that what was intended under Section 2(15) was the normal schooling with a view to impart education to the students. Therefore, coaching of students for appearing in various examinations will not be an activity covered by Section 2(15).
Accordingly, the income will not be exempt under Section 10(22) of the Act.
4.9 The learned Departmental Representative pointed out that most of the expenditure was incurred in payment of salaries etc., which cannot be said to be the application of income to the charitable purpose. He also referred to the decision of Honble Supreme Court of India in the case of Gangabai Charities v. CIT . The Honble court had pointed out that it was not possible to cull out in clear terms any specific charitable or religious object from the trust deed and, therefore, it cannot be said that the trust was set up wholly for religious or charitable purposes. There was no mention in the trust deed as to how the income derived from the trust property was to be utilized. Therefore, it was not entitled to exemption under Section 11(1)(a).
4.10 He also referred to the decision of Honble ITAT, Bangalore Bench "A" in the case of Sanjeevamma Hanumanthe Gowda Charitable Trust v.Director of Income Tax (2006) 9 SOT 293. The facts of that case were that the trust was constituted with the objects of conducting mass marriages, feeding poor, yoga classes, relief to poor sick destitutes and promoting physical psychological and spiritual health etc. The assessee constructed a building. It applied for registration under Section 12A, which was denied on the ground that the assessee was carrying out commercial activity by hiring it as a marriage hall.
Nothing was done to further other objects, except that a meager sum was spent on yoga classes and feeding the poor people. The decision was upheld on the ground that it was not established that the trust was pursuing wholly charitable activities.
5. The learned Counsel of the assessee opened his arguments by pointing out that in this case the assessing officer held that the assessee is not entitled to exemption under Section 11 of the Act. He fairly conceded that his application for approval under Section 10(23C)(vi) is pending before the prescribed authority. It was pointed out that the finding of the assessing officer, regarding non-availability of exemption under Section 11 of the Act, was reversed by the learned CIT (Appeals). In this connection, it was pointed out that the assessee is carrying on educational activities in pursuance of its object No. 5, which reads - "a school with nursery and kindergarten classes". It was explained that a school normally means a school which imparts education to students at primary, middle or secondary level or at all the aforesaid levels. The words "with nursery and kindergarten classes" does not mean that only such classes will be run and these words should be read along with the word "school", which means that the school can have nursery and kindergarten classes also. it was further pointed out that in the relevant previous year, a school for deaf and dumb children with 40 such students was also run by the assessee. However, this was objected to by the learned D.R. on the ground that such fact does not emerge either from the orders of the authorities below or from the paper book filed by the assessee. Therefore, it was agitated that this fact should be ignored while coming to the conclusion in the matter.
5.1 Coming to the objections mentioned in the order of the assessing officer and also agitated by the learned Departmental Representative, it was pointed out that land was bought by the trustees and leased to the trust for running school. The school is being run by a managing committee, empowered to undertake policy decisions in running the school.
5.2 The first objection of the assessing officer was that the income earned by the assessee did not constitute income from the property held under trust. It was pointed,out that this finding has been reversed by the learned Commissioner (Appeals) by holding that the word "property" has a very wide connotation and, therefore, the income by way of fees etc. arose on account of the school run by the assessee-society.
Therefore, the income arose from the property held under trust.
5.3 Coming to the argument of the learned Departmental Representative regarding the meaning of the term "charitable purpose", it was pointed out that the words "of general public utility" qualify only the residuary objects of the advancement of any other object. These words do not qualify the preceding three activities, namely,(i) relief of poor, (ii) education, and (iii) medical relief. In this connection, reliance was placed on the decision of Honble Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT . In that case, the Honble court pointed out that the word "education" has been used in Section 2(15) in the sense in which systematic instruction, schooling or training is imparted to the youth for preparing them for the work of life. The word has not been used in the wider sense which may lead to the conclusion that reading of newspaper, travelling etc.
also constitute educational, activities. It was further pointed out that the words "not involving the carrying on of any activity for profit"were added at the end of the definition as given under the 1922 Act. After adding these words, advancement of any other object of general public utility would not be considered to be charitable purpose unless it is shown that the above purpose does not involve carrying on of any activity for profit. Thus, the effect of change in the definition is that in order to bring the case within the fourth category of charitable purpose, it would be necessary to show that(i) the purpose of the trust is advancement of any other object of general public utility, and (ii) the above purpose does not involve the carrying on of any activity for profit. It was also pointed out that on the facts of that case, it was not necessary for the decision of the case to go into the question as to whether the words "not involving the carrying on of any activity for profit" also qualify the first three categories of charitable purpose, namely, relief of poor, education and medical relief. It was also pointed out that the word "profit" in the expression mean the private profit as the words "general public utility" exclude objects of private gain by the very nature of the words. Therefore, if the spending of the income of a charitable activity is done exclusively or primarily for charity, then, the mere fact that activities of the trust yield profit will not alter the charitable character of the trust. The learned Counsel also referred to paragraph 78 of the decision of Honble Supreme Court in the case of Municipal Corporation of Delhi (supra), relied upon by the learned Departmental Representative, in which it was specifically pointed out that the rulings arising out of Income Tax Act may not be of great help because in the Act "charitable purpose" includes the relief of poor, education, medical relief and the advancement of any other object of general public utility. The advancement of any other object of general public utility is not found under the Delhi Municipal Corporation Act.
Therefore, the definition under the Act is narrower in scope than the definition under the Act.
5.4 He also referred to the decision of Honble ITAT, Delhi Bench in the case of Samaj Kalyan Parishad v. Income Tax Officer (1989) 30 ITD 1 (SB), in which it was pointed out that India is a welfare State. The basic idea behind the grant of exemption under Section 11 is that if an assessee-trust or institution has for its object, the attainment of such charitable purpose as is the primary duty of the State to secure for its citizen, the income derived by such a trust or institution should not be taxed because what such trust or institution is doing is to assist the State or to supplement the efforts of the State in that direction. That is why the Legislature provided that if the charitable purpose of the trust or institution be specific, i.e., if it includes relief of the poor, education and medical relief, it can carry on an activity of profit in actually carrying out its primary purpose but that if the charitable purpose be non-specific (any other object of general public utility) it should not involve an activity of profit (i.e., having for its objects an activity with a view to earn profit from a business or a commercial activity). The case of the learned Counsel was that the asscssee-society was carrying out educational activity, which was primarily the duty of the State and, therefore, the aforesaid decision was squarely applicable to the facts of this case.
5.5 He also referred to the decision of Honble Delhi High Court in the case of CIT v. Lagan Kala Upvan , a decision given under Section 10(22) of the Act. In that case it was recorded as a matter of fact by the learned Commissioner (Appeals) that the assessee had been running educational institution for the past 25 years without any profit motive. Loans were given to certain persons in earlier years and in those years exemption under Section 10(22) was not denied. The claim of depreciation in respect of certain assets did not show per se that the activities were carried out with a profit motive, leading to disentitlement of exemption under Section 10(22). In these circumstances, it was held that the assessing officer was not justified in taking a different view only in respect of the assessment for assessment year 1993-94, when such exemption was consistently allowed to the assessee right from assessment year 1970-71. Thus, it was argued that the assessee is also entitled to exemption on the basis of rule of consistency.
6. In the rejoinder, the learned Departmental Representative pointed out that there can be two kind of schools, one set up with the purpose of charity and the other set up with the motive of earning profit. The assessing officer has extensively examined this issue and pointed out that the assessee carried out its activities as if those were the activities of commercial enterprise. Therefore, the impugned object of the assessee was not charitable in nature.
7. We have considered the facts of the case, the rival submissions and the case law on the issue. it may be pointed out here that certain cases have been quoted without having regard to the amendments made in those provisions from time to time. Therefore, it will be necessary to refer to the statutory provision before taking a decision in the matter.
7.1 The first issue to be decided in this case is whether the objects of the assessee-society are wholly charitable in nature or not. The case of the learned Departmental Representative was that the assessee did not pursue object Nos. 1 to 4, but pursued the object of running a school with nursery and kindergarten classes. From the profits, classes I to XII were added. The school has been run in a manner a commercial enterprise is run. The school has earned profit from year to year. Even in subsidiary activities, when there was a loss, the same was recouped from the "Children Welfare Fund". Therefore, object No. 5 was not charitable in nature. There was no guideline laid down in the trust deed for allocation of funds to various activities and, therefore, the management could divert any amount of money towards this object, which was non-charitable. Therefore, his case was that the instant society has mixed objects with no specific allocation of funds. In view thereof, it cannot be said to pursue charitable purpose wholly and exclusively. We have already seen the cases quoted by the learned Departmental Representative, which lead to a definite conclusion that a partly charitable trust must fail in getting exemption and that exemption exists only under Section 11(1)(b), in respect of a trust created before the commencement of this Act. As against the aforesaid, the learned Counsel pointed out that imparting of education through a school is an activity of education, which is per se a charitable activity.
7.2 We may refer to the definition of the term "charitable purpose" as it is applicable to the year under consideration. It read that "charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. Before proceeding further, it may be pointed out that the words "not involving the carrying on of any activity of profit", finding place in the section at the end of the words "objects of general public utility", were omitted by the Finance Act, 1983, with effect from 1-4-1984. Therefore, the cases relied upon under the old definition will not come to the aid of the revenue. This definition does not make a distinction between institutions carrying on any activity for profit or non-profit institutions. It is further seen that punctuation, and the word "and" are used after medical relief and, therefore, the words "relief of poor", education, medical relief stand on different footing than the words "advancement of any other object of general public utility". The Honble Supreme Court has pointed out that private profit motive is manifestly excluded by the words "general public utility", but these words qualify only the words "advancement of any other object". Therefore, we are of the considered view that relief of poor, education and medical relief are charitable activities per se and if any institution is carrying out any of these objects, then, such an institution will be pursing a charitable purpose. Thus, it follows that all objects mentioned in the memorandum of the assessee-society are charitable purposes. Accordingly, the case law regarding partly charitable objects is not applicable on the facts and in the circumstances of the case.
7.3 The second issue is whether fee etc. collected by the assessee from the students from income from property held under trust. The case of the learned Commissioner (Appeals) and the assessee was that the word "property" has a very wide import and since the assessee-society is owning and running the schools, the fees etc. is income from property held under trust. On the other hand, the learned Departmental Representative relied on the order of the assessing officer, in which the intent and purpose of the aforesaid phrase was culled out from various sub-sections to Section 11. It was pointed out that the aforesaid phrase includes, - (i) property held under trust for charitable or religious purposes, (ii) income in the form of voluntary contributions with a direction that they shall form part of the corpus of the institution, (iii) income arising out of transactions in capital asset, (iv) any business undertaking held by the institution, and (v) any voluntary contribution received by an institution created wholly for charitable or religious purposes. The case of the learned Departmental Representative was that the fees was not a voluntary contribution, it was not the initial corpus of the institution, it did not arise out of any transaction in capital asset, it was not a business undertaking held by the assessee and, therefore, the income was not income derived from property held under the trust.
7.4 We have considered this issue also. It is no doubt true that the fees etc. received by the assessee from the students is not in the nature of voluntary contributions, or income arising out of transaction in a capital asset held under trust. However, Sub-section (4) of Section 11 enacts a fiction to the effect that "property held under trust" includes a business undertaking so held. Further Sub-section (4A) provides that the income of the business, which is incidental to achieve the objectives of the trust etc. shall be entitled to exemption under Section 11(1)(a), if separate books of account have been maintained. It is not the case of the assessee that it is running a business, which feeds its charitable objects. Its case is that the running of the school by itself means that the society is carrying on a charitable activity. Therefore, even if the school is run in a manner a business is run, we tend to agree with the learned Counsel that the school will constitute a property held under trust. This leaves us with the question whether various collections made by the assessee in the school from income derived from property held under trust, or only the surplus is such income? In other words, the question now is whether the expenditure incurred by the assessee on running the school qualifies for exemption under Section 11(1)(a) or only the net surplus derived from the school? 7.5 The case of the learned Departmental Representative was that since the income is not derived from the property held under the trust, the expenditure could not have been allowed under the aforesaid clause. On the other hand the case of the learned Counsel was that since the income was derived from property held under trust, the expenditure incurred will have to be deducted under Section 11(1)(a).
7.6 We have considered the rival arguments on this issue also. We are of the view that the issue regarding taxation of the income of the assessee has not been considered properly by the lower authorities, inasmuch as the provisions of Sub-section (4A) of Section 11 were not considered by any one of them. In view of our finding that the income is derived from property held under trust, it clearly transpires that provisions of Section 11(1)(a) are not applicable to the gross receipts. However, it is seen that Sub-section (4A) was substituted in the Act by Finance (No. 2) Act, 1991, with effect from 1-4-1992.
Therefore, the substituted section is applicable to the statement of this year. This sub-section provides that sub-sections (1), (2), (3) and (3A) shall not apply in relation to any income of a trust or in institution, being profits and gains of business, unless the business is incidental to attainment of the objectives of the trust or, as the case may, institution and separate books of account are maintained by such trust or institution in respect of such business. On reading of this sub-section, it will be clear that if the business carried on by a trust or an institution is incidental to the attainment of its objectives and separate books of account are maintained, then, the assessee will be entitled to exemption under Section 11(1). On perusal of the objects, it is seen that one object is for providing a school with nursery and kindergarten classes. This object relates to educational activities. We have already held that this is a charitable purpose. However, the activities are being run in the manner in which a commercial enterprise is being run, as is clear from the facts that the assessee has been earning profits from year to year, and any loss in the subsidiary activities is also recouped from "Children Welfare Fund". In our view, Sub-section (4A) creates a dicho to my between the trust and a business activity which is incidental to attainment of the objects of the trust, and make profits from such activity exempt from tax if separate books of account are maintained. Needless to say that such profits ought to be in the public domain as pointed. out in the case of Loka Shikshana. We may add that is a necessary ingredient for any activity to be termed as charitable purpose, as such purpose, by its inherent nature, excludes private gain from its ambit.
Unfortunately, neither the assessing officer nor the learned CIT (Appeals) have examined this aspect of the matter. Therefore, the matter is restored to the file of the assessing officer to consider the issue whether separate books of account are maintained in respect of the schools run by the trust and thereafter examine whether provisions of Section 11(4A) are applicable to the facts of the case. The net profit earned from these schools, and not gross receipts, will then be considered for exemption under Section 11(1)(a).
8. There were also minor issues raised by the learned Departmental Representative regarding expulsion of the earlier members, which according to him, showed the real intent and purpose of the present members of the society. We are unable to persuade ourselves to agree with the learned Departmental Representative for the reason that the question to be seen is whether the objects are charitable and the income is applied for charitable purposes. The exemption under Section 11 does not depend upon the fact whether the trust was run by one set of people or the other set of people. What is to be seen is whether the objects are charitable in nature and the income is applied for the objects of the trust. This view finds support from the decision of Honble jurisdictional High Court in the case of All India Hindu Mahasabha (supra).
9. The learned Counsel had also relied on the rule of consistency to argue that expenditure incurred on fees etc. paid to teachers and other expenditure qualified for exemption under Section 11(1)(a). We are afraid that this argument does not hold good in this case. The rule of consistency is a very weak defense against explicit provisions of the Act. This is so even if assessees arguments had been accepted expressedly or impliedly in the past. It is a fact that the assessee has been running schools and such activities constitute "charitable purpose". But running schools in a systematic manner and generating profits from year to year also constitute a business activity. The only saving grace in this case is that such an activity is incidental to attainment of the object No. 5 of the society for the simple reason that running of schools is incidental to educational purpose. Thus, the case is covered under Section 11(4A). On the facts, it cannot be said that expenditure incurred in a commercial activity is entitled to exemption under Section 11(1)(a).
10. In view of the above, the appeal of the revenue is treated as allowed only for statistical purposes with a direction that the assessing officer shall frame a fresh assessment after granting reasonable opportunity of being heard to the assessee on the issue of applicability of provisions of Section 11(4A) of the Act and grant of exemption under Section 11(1)(a) from net profit of the schools in respect of amounts applied for charitable purposes, mentioned in the unts applied for charitable purposes, mentioned in the Memorandum.