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Help C/o. Vinod Kumar Bindal & Co, CA, Sushil Bhawan, D-219, Vivek Vihar Phase-1, New Delhi Vs. ADIT (E), Trust Circle-II, New Delhi
December, 17th 2014
                    DELHI BENCH "C": NEW DELHI

                          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
           (Appellant)                           (Respondent)

                 Appellant by   : Vinod Bindal, Sanjeev Bindal, Adv
               Respondent by    : Paminder Kaur, Sr. DR


      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.
                                                                      Page 2 of 11

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
                                                                    Page 3 of 11

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.
                                                                        Page 4 of 11

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
                                                                       Page 5 of 11

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


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
                                                                          Page 6 of 11

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
                                                                 Page 7 of 11

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'
                                                                 Page 8 of 11

      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
                                                                        Page 9 of 11

      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
                                                                      Page 10 of 11

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


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)."
                                                                         Page 11 of 11

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
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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