DELHI BENCH "C": NEW DELHI
BEFORE SHRI G. D. AGARWAL, HON'BLE VICE PRESIDENT
AND
SHRI A. T. VARKEY, JUDICIAL MEMBER
ITA No. 4497 & 4790/Del/2012
(Assessment Year 2009-10)
Help ADIT (E),
C/o. Vinod Kumar Bindal & Co, Trust Circle-II,
CA, Sushil Bhawan, D-219, Vs. New Delhi
Vivek Vihar Phase-1,
New Delhi
AAATH2639G
(Appellant) (Respondent)
Appellant by : Vinod Bindal, Sanjeev Bindal, Adv
Respondent by : Paminder Kaur, Sr. DR
ORDER
PER A. T. VARKEY, JUDICIAL MEMBER
These are cross appeals against the order of the ld CIT(A), XXI, New
Delhi dated 11.06.2012 for the Assessment Year 2009-10.
2. The facts in brief are that the assessee is a society who has constructed
a Dharamshala for the purpose of providing accommodation to patients
visiting hospitals in Delhi. However, the AO noted that in the instant year, the
assessee's main source of receipt are from accommodation charges, rent
receipt, bed charges and other incidental income, which according to AO
are of commercial nature. He therefore, held that the assessee is covered by
Proviso to Section 2(15) of the Income Tax Act, 1961 (herein after `the Act'),
and is not thus eligible for exemption u/s 11 of the Act. And he also held that
assessee is operating a Dharamshala which is general public utility as a
commercial activity and so the entire surplus is taxable.
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3. The ld CIT(A) confirmed the actions of the AO by observing as under:-
3.3 In this regard I am inclined to agree with the view of the AO,
wherein, he has very categorically demonstrated that assessee has
generated a surplus of Rs18,83,528/-, thus, resulting net profit of 19.25%
of the total income. Furthermore, it has been noted by AO that
assessee is operating a Dharamshala which is a general public utility
and getting receipts from the patients for bed charges,
accommodation charges, incidental services including canteen,
cafeteria etc. Thus, it has been found that assessee is running its
operation like a Hotel. Furthermore, the activities done by the
appellant are not in the nature so as to be termed as relief to the poor
because running a Dharamshala can never be held as relief to the
poor. Thus, contention of the appellant that its activities are under the
ambit of first three limbs of section 2(15) of the Act, is found to be
misconceived as it has been found that appellant is running a
Dharamshala which cannot be accepted as relief to the poor. So,
finding of the AO remains conclusive, wherein, he has demonstrated
that assessee is hit by the amended provisions of section 2(15) of the IT
Act w.e.f assessment year 2009-10. There is force in the finding of the
AO that appellant trust is consistently making profit from year to year
and has generated surplus e.g. for this year surplus has been
generated to the tune of Rs.18,83,528/- and for assessment year 2008-
09 it was to the tune of Rs.26,22,922/-. So, in my considered opinion,
action of AO is justified, wherein, he has held that activities of the
appellant trust are squarely hit by amendment in section 2(15) of the IT
Act effective from assessment year 2009-10. In view of the above
discussion, grounds No.1 & 2 of the appellant are dismissed.
4. Before us, it was contended that the appellant-society was established
in the year 1993 under the Societies Registration Act, 1860 as a non-profit
organization. It was submitted that a plot of land was allotted by DDA in the
year 2001 for constructing a Dharamshala at 11, Service Centre, Opp. DDA
Chilla Sports Complex, Vasundhara Enclave, Delhi-96 (Near Dharamshila
Cancer Hospital), on the recommendation of the Social Welfare Department,
Government of NCT of Delhi. It was submitted that a Dharamshala, named
Manav Ashray, was constructed by the assessee in Financial Year 2004-05 for
the purpose of providing care to medical patients and their attendants
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visiting Delhi Hospitals for treatment from far flung places by providing
accommodations and meals to them at highly concessional/subsidized
charges. It was submitted that the Dharmshala was not used for any other
purpose. Maximum period of stay of a patient is 15 days at a time. To meet
the operating cost of Dharamshala partly, sums ranging from Rs.105/- to
Rs.470/- per day were received for the use of boarding and lodging facility
depending on the type of accommodation and facilities availed by the
patients/ attendants. An attendant is allowed to stay free of cost with the
patient in a room-accommodation.
It was submitted that the assessee society in order to augment its
resources so as to keep providing the charitable activities continuously, was
constrained to recover its day-to-day running, maintenance and upkeep
cost of Dharamshala, which if left to the generosity of people to make
voluntary donations at their sweet will cause unpredictability about fund
availability; and the Dharamshala itself may cease to function one day due
to the paucity of funds. The ld AR submitted that free meals are provided to
the patients three times a day, but nominal charges are recovered from the
attendants when they eat in the canteen called 'cafeteria'. Likewise,
whenever TV is provided in the room, its running cost on electricity &
maintenance is nominally recovered by the assessee. So the ld AR submitted
that collection of subsidized charges does not mean that these services are
being commercially exploited by the assessee. In fact, recovery of expenses
is subsidized by the assessee since as against total recovery of Rs.71.86 lacs
made from Dharamshala facilities (i.e., apart from the rental income of Rs.
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25.94 lacs received from banks), total expenses of Rs. 78.97 lacs were incurred
for providing the said services during the relevant previous year as per the
Income & Expenditure Account for the year ended on 31/03/09.
The ld AR further submitted that in addition to providing dharamshala
facilities, the assessee also provided ambulance services to its resident-
patients and recovered the operational cost only. During the relevant
previous year total recovery of Rs.1.29 lacs was made against direct cost of
Rs. 1.28 lacs incurred on fuel and repairs. The said services were also provided
towards attainment of its objectives only by the appellant and the same
cannot be understood as the services rendered in relation to carrying on of
any trade, commerce or business.
The ld AR submitted to the remark in respect of the AO's averment
`'ideally charity should be done free of cost'', that in the case of the
assessee even if it wanted to recover some cost from the customers it should
not have resulted into a profit of 19.25% of its total income (i.e., surplus of Rs.
18,83,528/- on total income of Rs. 97,80,123/-). According to the AR the said
surplus of 19.25% worked out by the AO above is misleading and it does not
reflect the true picture since it includes rents received for the portions let-out
to banks, and does not reflect the true position of surplus/deficit actually
derived from running of Dharamshala. According to the ld AR, in fact, there
was a meagre surplus of Rs. 64,967/- in Assessment Year 2008-09 while there
was a deficit of Rs.7,10,620/- reported in Assessment Year 2009-10 from
running of Dharamshala and took our attention to the PB where the
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photocopies of the computation of assessable income for the Assessment
Years 2008-09 & 2009-10, acknowledgement of filing the relevant returns of
income and the audited annual accounts for the year ended on 31/03/2008
& 31/03/2009. The ld AR further submitted that with a view to making
charitable organizations self-reliant so that they have a steady flow of funds
for their smooth functioning instead of being dependent on grants &
donations, DDA permitted the allottees of institutional land in Delhi to sub-let
25% of their total built-up area for sub- letting to service organization like
banks. Accordingly, after receiving an explicit permission from DDA in this
regard, the assessee also let-out some portions to two banks and received
total rent of Rs.25.94 lacs during the relevant previous year. This fund was used
for subsidizing Dharamshala's running cost, which reported a deficit of Rs.7.11
lacs for the financial year concerned. Thus, according to the ld AR, it is not
the case as made out by the AO that the assessee earned a profit of 19.25%
from Dharamshala in Assessment Year 2009-10. On the contrary, the assessee-
trust incurred a deficit of Rs.7.11 lacs from Dharamshala.
5. On the other hand the ld DR, supported the orders of the authorities
below.
6. We have carefully considered the rival submission and perused the
material on record. We find that in the instant year, assessee declared a
surplus of Rs.18,83,528/-. The surplus has originated on account of excess of
receipts of Rs.97,80,123/- and expenditure of Rs.78,96,595/-. Further out of the
receipt of Rs.97,80,123/-, rent receipt aggregates to Rs.25,94,148/-. If the
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aforesaid rental income is excluded, then the receipts from Dharmshala
would be of Rs.71,85,975/-. Whereas, corresponding expenditure is
Rs.78,96,595/-. In other words there is no surplus on operation of Dharmshala
by the assessee society. It appears that the AO, without having regard to
above factual position has misdirected himself, by holding that since there is
surplus and assessee is getting receipts from operation of dharmshala, it
automatically implies commercial activity so as to fall within the ken of
proviso to Section 2(15) of the Act and thus making the assessee ineligible to
claim exemption u/s 11 and 12 of the Act. The Hon'ble Gurjarat High Court in
the case of DIT Vs. Sabarmati Ashram Gaushala Trust reported in 25 ITR 701
held as under:-
"5. Term "Charitable Trust" is defined in section 2(15) of the Act
which includes the relief to the poor, education, medical relief,
preservation of environment; including watersheds, forests and wildlife
and preservation of monuments or places or objects of artistic or
historic interest and advancement of any other object of general
public utility. Proviso to Section 2(15) and further proviso whereof
inserted by Finance Act, 2010 w.ef. 1st April 2009 read, thus-
"Provided that the advancement of any other object of general
public utility shall not be a charitable purpose, if it involves the
carrying on of any activity in the nature of trade, commerce or
business, or any activity of rendering any service in relation to
any trade, commerce or business, for a cess or fee or any other
consideration irrespective of the nature of use or application, or
retention of the income from such activity:-
Provided further that the first proviso shall not apply if the
aggregate value of the receipts from the activities,
referred to therein is twenty five lakh rupees or less in the
previous year."
6. The legal controversy in the present Tax Appeal centers around
the first proviso. In the plain terms, the proviso provides for exclusion
from the main object of the definition of the term "Charitable purposes"
and applies only to cases of advancement of any other object of
general public utility. If the conditions provided under the proviso are
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satisfied, any entity, even if involved in advancement of any other
object of general public utility by virtue to proviso, would be excluded
from the definition of "charitable trust". However, for the application of
the proviso, what is necessary is that the entity should be involved in
carrying on activities in the nature of trade, commerce or business, or
any activity of rendering services in relation to any trade, commerce or
business, for a cess or fee or any other consideration. In such a
situation, the nature, use or application, or retention of income from
such activities would not be relevant. Under the circumstances, the
important elements of application of proviso are that the entity should
be involved in carrying on the activities of any trade, commerce or
business or any activities of rendering service in relation to any trade,
commerce or business, for a cess or fee or any other consideration.
Such statutory amendment was explained by the Finance Minister's
speech in the Parliament. Relevant portion of which reads as under:-
`I once again assure the House that genuine charitable
organizations will not in any way be affected. The CBDT will,
following the usual practice, issue explanatory circular
containing guidelines for determining whether any entity is
carrying on 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. Whether the purpose is a
charitable, purpose will depend on the totality of the facts of the
case. Ordinarily, Chambers of Commerce and similar
organizations rendering services to their members would not be
affected by the amendment and their activities would continue
to be regarded as "advancement of any other object of general
public utility".'
7. In consonance with such assurance given by the Finance
Minister on the floor of the House, CBDT issued a Circular No.11 of 2008
dated 19th December 2008 explaining the amendment as under:-
"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 any 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.
3.1 There are industry and trade associations who claim
exemption from tax under section 11 on the ground that their
objects are for charitable purpose as these are covered under'
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any other object of general public utility'. Under the principle of
mutuality, if trading takes place between persons who are
associated together and contribute to a common fund for the
financing of some venture or object and in this respect have no
dealings or relations with any outside body, then any surplus
returned to the persons forming such association is not
chargeable to tax. In such cases, there must be complete
identity between the contributors and the participants.
Therefore, where industry or trade associations claim both to be
charitable institutions as well as mutual organizations and their
activities are restricted to contributions from and participation of
only their members, these would not fall under the purview of the
proviso to section 2(15) owing to the principle of mutuality.
However, if such organizations have dealings with non-members,
their claim to be chargeable organizations would now be
governed by the additional conditions stipulated in the proviso
to section 2(15).
3.2 In the final analysis, however, whether the assessee has for
its object the advancement of any other object of general
public utility' is a question of fact. If such assessee is engaged in
any activity in the nature of trade, commerce or business or
renders any service in relation to trade, commerce or business, it
would not be entitled to claim that its object is charitable
purpose. In such a case, the object of general public utlity' will
be only a mask or a device to hide the true purpose which is
trade, commerce or business or the rendering of any service in
relation to trade, commerce or business. Each case would,
therefore, be decided on its own facts and no generalisation is
possible. Assessee, who claim that their object charitable
purpose' within the meaning of section 2(15), would be well
advised to eschew any activity which is in the nature of trade,
commerce or business or the rendering of any service in relation
to any trade, commerce or business."
8. What thus emerges from the statutory provisions, as explained in
the speech of Finance Minister and the CBDT Circular, is that the
activity of a trust would be excluded from the term' charitable purpose'
if it is engaged in any activity in the nature of trade, commerce or
business or renders any service in relation to trade, commerce or
business for a cess, fee and/or any other consideration. It is not aimed
at excluding the genuine charitable trusts of general public utility but is
aimed at excluding activities in the nature of trade, commerce or
business which are masked as `charitable purpose'.
9. Many activities of genuine charitable purposes which are not in
the nature of trade, commerce or business may still generate
marketable products. After setting off of the cost, for production of
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such marketable products from the sale consideration, the activity may
leave a surplus. The law does not expect the trust to dispose of its
produce at any consideration less than the market value. If there is any
surplus generated at the end of the year, that by itself would not be
the sole consideration forjudging whether any activity is trade,
commerce or business- particularly if generating `surplus' is wholly
incidental to the principal activities of the trust; which is otherwise for
general public utility, and therefore, of charitable nature."
7. Applying the above ratio, we hold that the assessee society is a
charitable society, which is not engaged in any business, trade or commerce
so as to disentitle the claim of exemption u/s 11 and 12 of the Act. Surplus
alone cannot be a ground to conclude that activities are commercial in
nature. In the instant case it is undisputed that the activities are charitable in
nature, but solely on the ground of surplus, such activities have been held to
be of commercial in nature. We already have found that there was no
surplus per-se from the operation of Dharamshala. In any case the incidental
surplus cannot be termed as commercial activity. We therefore allow the
claim of the assessee and direct the AO to allow exemption u/s 11 and 12 of
the Act. The ground raised is thus allowed.
8. Ground No.2 pertains to treatment of rental income under the head
business income instead of income from house property.
9. Since we have already held that the appellant society is eligible for
exemption u/s 11 and 12 of the Act, the necessary corollary is that treatment
of heads of income become irrelevant. The Hon'ble Supreme Court in CIT Vs.
Programme for community organization (2001) 248 ITR (SC) while approving
the Kerala High Court decision reported in (1997) 228 ITR 620 (Kerala) as to
the manner of computation of charitable institution held that income has to
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be computed on commercial basis and not head-wise on statutory basis.
(refer CBDT Circular No.5P, dated 19.06.1998). As a result this ground raised is
rejected.
ITA No.4790-Del-2012
10. The solitary ground of the revenue relates to claim of depreciation by
the appellant society on capital assets in the instant year.
11. The ld CIT(A) allowed the said claim by the following the judgment of
jurisdictional High Court in the case of Vishwa Jagriti Mission, reported at
20112-TIOL-271-HC-DEL-IT, wherein, in the relevant paragraph No.13 the
Hon'ble High Court has held as under.-
"P. 13;- The judgment of the Supreme Court in Escorts Limited vs. Union
of India (supra) has been rightly held to be inapplicable to the present
case. There are two reasons as to why the judgment cannot be
applied to the present case. Firstly, the Supreme Court was not
concerned with the case of a charitable trust/institution involving the
question as to whether its income should be computed on commercial
principles in order to determine the amount of income available for
application to charitable purposes. It was a case where the assessee
was carrying on business and the statutory computation provisions of
Chapter IV-D of the Act were applicable. In the present case, we are
not concerned with the applicability of these provisions. We are
concerned only with the concept of commercial income as
understood from the accounting point of view. Even under normal
commercial accounting principles, there is authority for the proposition
that depreciation is a necessary charge in computing the net income.
Secondly, the Supreme Court was concerned with the case where the
assessee had claimed deduction of the cost of the asset under Section
35(1) of the Act, which allowed deduction for capital expenditure
incurred on scientific research. The question was whether after claiming
deduction in respect of the cost of the asset under Section 35(1), can
the assessee again claim deduction on account of depreciation in
respect of the same asset. The Supreme Court ruled that, under
general principles of taxation, double deduction in regard to the same
business outgoing is not intended unless clearly expressed. The present
case is not one of the type, as rightly distinguished by the CIT Appeals)."
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12. Having considered the rival submission, and respectfully following the
aforesaid ratio of the jurisdictional High Court we concur with the view of the
ld CIT(A).
13. As a result the ground raised by the Revenue is dismissed.
14. In the result the appeal filed by the assessee is partly allowed and the
appeal of the revenue is dismissed.
Order pronounced in the open court on 12.12.2014.
-Sd/- -Sd/-
(G. D. AGARWAL) (A. T. VARKEY)
VICE PRESIDENT JUDICIAL MEMBER
Dated:12/12/2014
A K Keot
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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