Rental Income Intended For Charitable & Educational Purposes Eligible For Section 10(23c)(Vi) Exemption

Durgapur Society of Management Science Vs ITO (ITAT Kolkata)

The case of Durgapur Society of Management Science vs. ITO (Income Tax Appellate Tribunal, Kolkata) revolves around the tax implications of rental income earned by a society registered under Section 10(23C)(vi) of the Income Tax Act, 1961 (“the Act”). The society, engaged in promoting education, faced a challenge to its assessment order for the Assessment Year 2018-19. This article delves into the grounds of appeal, the contentions raised, and the subsequent decisions made by the Commissioner of Income Tax (Exemption) and the Income Tax Appellate Tribunal.

Background and Grounds of Appeal: The assessee society, registered under Section 10(23C)(vi) of the Act, filed its return for the Assessment Year 2018-19, declaring Nil income. The gross receipts included rental income from a building, which prompted a scrutiny by the Assessing Officer (AO). The AO, in his assessment order, accepted the Nil return without delving into the nature of the rental income and its implications.

The Commissioner of Income Tax (Exemption) (CIT(E)) invoked Section 263 of the Act, challenging the assessment order on the grounds that the rental income, forming more than 50% of total receipts, was not incidental to the objectives of the society. The CIT(E) argued that the AO failed to verify whether the income from letting out the building fell under the category of “business income” and whether it was incidental to the society’s objectives.

The grounds of appeal raised by the assessee include contentions against the CIT(E)’s jurisdiction, classification of rental income as business income, compliance with Section 11(4A), and the applicability of the 7th proviso to Section 10(23C)(vi).

Grounds of Appeal and Assessee’s Contentions: The grounds of appeal raised by the assessee can be summarized as follows:

• Application of Judgement in New Noble Educational Society Case: The assessee argued that the CIT(E) erroneously applied the judgment of the Hon’ble Apex Court in the case of New Noble Educational Society, contending that the judgment had prospective application and should not impact the assessment order.
• Nature of Rental Income: The assessee contested the CIT(E)’s classification of rental income as business income, emphasizing that the society’s primary objective was education, and maintaining separate books of accounts for such income was unnecessary.
• Compliance with Section 11(5) and Proviso 3 of Section 10(23C): The assessee contended that the investment in immovable property complied with Section 11(5) read with proviso 3 of Section 10(23C), and income from such investments should not be treated as business income.
• Enquiry Regarding 7th Proviso to Section 10(23C)(vi): The assessee argued that the AO had treated the rental income as income from other sources, and the absence of a specific discussion on the 7th proviso did not render the order erroneous.
• Computation of Income: The assessee asserted that the income of the society should be computed as income from house property, and even if considered separately, the rental income was ascertainable.

CIT(E)’s Decision and Rationale: The CIT(E) held that the AO’s assessment order was erroneous and prejudicial to the interest of revenue. The key points in the CIT(E)’s decision are:

• Nature of Business: The CIT(E) emphasized that if income had characteristics of profit and gains from business, it must meet conditions, including being incidental to the society’s objectives and maintaining separate books of accounts. Lack of verification by the AO regarding these conditions rendered the order erroneous.
• 7th Proviso of Section 10(23C)(vi): The CIT(E) criticized the AO for not conducting an inquiry into the applicability of the 7th proviso to Section 10(23C)(vi) regarding income from business, further supporting the view that the order was erroneous.
• Explanation-2 of Section 263: The CIT(E) invoked Explanation-2 of Section 263, emphasizing that an order shall be deemed erroneous if it is passed without necessary inquiries or verifications. The absence of a thorough examination of relevant issues by the AO rendered the order erroneous and prejudicial.

Assessee’s Response and Tribunal’s Decision: The assessee, in response, maintained that the society’s intention was to generate revenue for charitable purposes through the rental income. The contention was that even if the society did not exist solely for educational purposes, the judgment of the Hon’ble Jurisdictional High Court in the case of DIT(Exemption) vs. Sahu Jain Trust applied. Additionally, the assessee highlighted the prospective application of the judgment in New Noble Educational Society.

The Income Tax Appellate Tribunal (ITAT) analyzed the contentions and held that the AO’s order was neither erroneous nor prejudicial to the interest of the revenue. The key points in the ITAT’s decision are:

• Prospective Application of Judgement: The ITAT acknowledged the prospective application of the judgment in New Noble Educational Society and, therefore, held that it did not impact the assessment order.
• Objective of Society: The ITAT considered the society’s intention to generate revenue for charitable purposes and emphasized that the rental income was applied for the society’s educational objectives.
• Application of Section 10(23C)(vi): The ITAT opined that the AO, in accepting the claim under Section 10(23C)(vi), did not commit an error, as the rental income was directly related to the society’s educational activities.

Conclusion: The case of Durgapur Society of Management Science vs. ITO highlights the complexities surrounding the tax treatment of income earned by educational societies, especially rental income. The ITAT’s decision, favoring the assessee, underscores the importance of the society’s intentions and the application of income for charitable and educational purposes. The prospective application of judgments and the need for a thorough examination of relevant provisions are crucial takeaways from this case. As tax laws evolve, such cases contribute to the jurisprudence in determining the eligibility for exemptions under specific sections of the Income Tax Act.