Charitable purpose – Exemption u/s 11 – Conditional exemption where trust is carrying on business – Meaning of ‘business’ – Trust running residential college – Maintenance of hostel in accordance with statutory requirement – Maintenance of hostel did not amount to business – Trust entitled to exemption

Charitable purpose – Exemption u/s 11 – Conditional exemption where trust is carrying on business – Meaning of ‘business’ – Trust running residential college – Maintenance of hostel in accordance with statutory requirement – Maintenance of hostel did not amount to business – Trust entitled to exemption

The assessee was registered as a charitable trust. The trust was also recognised and registered u/s 12A as an institution whose objects were charitable in nature. The trust ran a dental college which was a residential institution. In pursuance of the statutory obligation imposed by the Dental Council of India requiring all students to reside in the halls of residence or hostel built by the institute within its campus, the assessee ran a hostel for residence of the students (both boys and girls) admitted in the institute. The hostel fees charged from the students included a mess fee. The A.O. concluded that the hostel activities of the trust were separable from its educational activities and would fall within the meaning of ‘business’ u/s 2(13) and could not be treated as ‘charitable purposes’ u/s 2(15). The benefit of section 11 was denied to the assessee.

The assessment order was affirmed in appeals both by the Commissioner (Appeals) and the Tribunal.

But the Allahabad High Court allowed the appeal filed by the assessee and held as under:

‘i) Under sub-section (4A) of section 11, income of any business of a trust in the nature of profit and gains of such business can be exempted under sub-section (1) of section 11 only if two preconditions mentioned in the sub-section are fulfilled. The first condition is that the business must be incidental to the attainment of the objectives of the trust. The crucial word in sub-section (4A) is “business” which has to be understood according to the meaning provided u/s 2(13). Any interpretation or meaning given to the word “business” in the literal parlance cannot be read into the Act as the word “business” has been defined in the Act itself.

ii) The applicability of sub-section (4A) of section 11 presupposes income from a business, being profits and gains of the business, and hence the test applied is whether the activity which is pursued is integral or subservient to the dominant object or is independent of or ancillary or incidental to the main object or forms a separate activity in itself. The issue whether the institution is hit by sub-section (4A) of section 11 will essentially depend upon the individual facts of the case where considering the nature of the individual activity, it will have to be tested whether it forms an incidental, ancillary or connected activity and whether it was carried out predominantly with the profit motive in the nature of trade or commerce.

iii) Having regard to the object and purpose for which the institution in question had been established by the trust and the mandate of the Dental Council of India in the Gazette Notification of the year 2007, its activity in maintaining the hostel by charging hostel fee (for its maintenance and providing mess facility) was an integral part of the main activity of “education” of the assessee. The hostel and mess facility sub-served the main object and purpose of the trust and were an inseparable part of its academic activity. The hostel fee could not be said to be income derived from the “business” of the trust. The activity being directly linked to the attainment of the main objectives of the trust, the requirement of maintaining separate books of accounts with regard to such activity for seeking benefit of exemption u/s 11(1) was, therefore, not attracted.

iv) There was no material on record with the Revenue to hold that the hostel activity was a separate business. From any angle, it could not be proved by the Revenue that the income from the hostel fee could be treated as profits and gains of the separate business or commercial activity. The assessee was entitled to exemption u/s 11.’