By TIOL News Service

NEW DELHI, NOV 13, 2017: THE issue is - Whether provisions of Section 11(4A) will apply to schools, if surplus generated by it from transportation activity is used for its educational activities. NO is the answer.

Facts of the case:

The Assessee is a trust carrying on the educational activities for about 30 years and is also registered u/s 12A of Income tax act. The assessee has earned income from fees, income from games and transportation. The AO enquired that games income, transportation income and other incomes, why the provisions of section 11 (4A) should not be applied to that as according to him these were in the nature of business. The assessee replied that these were the activities provided by the Society for the purpose of furtherance of the education activity and was not in business. The AO was however of the opinion that educational activity not-for-profit were now only covered under section 2(15). Therefore he held that the activities in which the surpluses generated on account of transportation and gaming or any other activity falls under the business category, which was business. Consequently he held that provisions of section 11(4A) applies to all these activities. According to him the transportation running activity could not be stated to be incidental to educational activity. He separately granted deduction of insurance and interest on vehicles and then determined net surplus from transportation activity of Rs. 5292097/- and taxed it as business income. Similarly, he held that Assessee was also conducting games and charging fees for the same. Accordingly, he held that the expenditure incurred by assessee on the game activities was also disproportionate, as it had 54 teachers and other staffs of Physical education.

On appeal, the CIT(A) held that there was no dispute that merely getting admission to the course would not make a student eligible to get transport facility and huge fees charging that they most forceful which no justification had been given by Assessee. He further held that when getting of transport activities not linked to getting admission in the College it had no force in the argument of Assessee that the transportation activity should be termed as education.

Tribunal held that,

++ undisputedly assessee's main object is 'Education'. The assessee has provided the facilities of the Transportation for the students and staff of the educational activity on chargeable basis which has generated surplus. It is not the case of the revenue that Assessee provides transportation facilities to other outsiders also by charging the fees. Admittedly such facilities is for the purposes of the students etc to whom education is imparted by the society. The claim of AO that merely because of the admission of the student in the school, he does not become entitle to avail the transport or games facility but has to pay some more fees towards them, is unsustainable. We are of the opinion that for the students who are studying in the colleges if they want to avail such facilities, then they are charged such fees, which is nothing but providing an additional facility to the students. Therefore it cannot be said that it is not incidental to the education. None of the instances were found by AO or appellate Authorities where the student is not studying in the school and is providing transport or games facility. It is also not the case of Revenue that surplus generated by Assessee in transportation activity is not used for the educational activities. Further the provisions of section 11 (4A) does not apply in case the activity generating profit is incidental to the attainment of the objectives of the trust;

++ in the present case, it is not disputed that activities of the games and transportation is for the students of the society and hence both these activities are incidental to the main objects of the trust. Hence the lower authorities erroneously applied the above provisions and taxed the surplus as the separate income of the assessee denying benefit of section 11 and 12 of the act. The Supreme court also said in the Queens's Educations Case, that If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes. Therefore in view of decision of supreme court, we are of the view that transportation activities and Games activity are incidental to the educational activity of the trust and therefore surplus generated from it once used for educational purposes cannot be denied the benefit of section 11 & 12 of the act.

(See 2017-TIOL-1570-ITAT-DEL)