TMI Blog2014 (5) TMI 898X X X X Extracts X X X X X X X X Extracts X X X X ..... or also for the purposes of profit - the aims and objects, as well as the activities undertaken by the assessee, fall within the definition of “charitable purposes” u/s 2(15) of the Act. Any expenditure incurred by an assessee for computerisation and developing an IT enabled system for carrying on its activities would be application of its resources wholly and exclusively for its purposes - The exemption u/s 10(23C) of the Act is available provided that the income of the assessee is applied “wholly and exclusively to the objects for which it is established” - the contract entered into with the RJB-APL was for furthering the object for which the petitioner was established - the assessee has along with RJB-APL amicably determined the amount payable for the work done and recovered the balance - The reasonableness of the amount spent and the quality of the decisions of the management are not the subject matter in respect of which the satisfaction of the Prescribed Authority is required. The expression used in Section 37 of the Act, “wholly or exclusively for the purposes of business and profession” is similar in its import as the expression “applied wholly and exclusively to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the Director General of Income Tax (Exemptions), (hereinafter referred to as DGIT(E) ), refusing to grant exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) for the AY 2008-09 onwards, to the petitioner. 2. The Petitioner is a society registered under the Societies Registration Act XXI of 1860, (Punjab Amendment) Act, 1957 as extended to the Union Territory of Delhi. The petitioner is recognised and listed as a body conducting public examinations under the Delhi School Education Act, 1973. 3. The Petitioner had applied for the approval under Section 10(23C)(vi) of the Act for AY 1999-2000 to 2001-02 to Central Board of Direct Taxes (hereinafter referred to as CBDT ). The CBDT, by order dated 31.10.2006, rejected the Petitioner's application holding that the Petitioner was not an educational institution but was an examination body which conducts examinations for ICSC and ISC and therefore, could not be granted the exemption as an educational institution under Section 10(23C)(vi) of the Act. 4. The Petitioner states that it had also filed applications for approval under Section 10(23C)(vi) of the Act for AY 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance to query letter dated 21.05.1999, during the registration proceedings under Section 12A of the Act. No assessments were made and/or no demands for income tax were raised for any of the years prior to the AY 1999-2000. The petitioner further submitted that the criteria for exemption under Section 10(22) of the Act, as existing prior to 01.04.1999 was identical to the criteria for exemption under section 10(23C) of the Act. Therefore, the petitioner ought to be granted the said exemption. 10. Petitioner stated that Rule 3 of the Rules and Regulations of the Petitioner allows the application of the income solely for the promotion of its object as set-forth in the Memorandum and also prohibits the transfer of income and property of the petitioner society, directly or indirectly, by way of profit, dividend and bonus to the persons, who at any time are or have been members of the petitioner society and also prohibits the payment of remuneration to its members. Petitioner further stated that none of the portion of its income was spent for other than its objects. 11. Petitioner contended that the Petitioner is an unaided organization and for the purpose of development and expan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been applied towards the achievement of the objectives of the petitioner, which are merely paper clauses. It was submitted that the main object of the Petitioner was to conduct examinations and to award certificates and the petitioner was charging fees as Registration Affiliation charges , Examination charges , Eligibility Charges Class XI , Recheck Charges , etc. for the same. 14. The respondent asserted that the steep hike in the examination fee from Rs. 460/- to Rs.2100/- per student, further indicated that the petitioner was only a profit making organisation and the subsequent roll back of the fee was an afterthought to get the continued exemption. The learned counsel for the revenue also referred to following table:- A.Y. Gross Receipts Expenditures after Depreciation Capital Expenditures Capital Expenditures (Out of Accumulation of earlier years) Total expenditure for the year Surplus % Surplus over total receipts 2005-06 116683397 80262907 2599265 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act are independent of each other. According to the procedure provided by the second proviso to the Section 10(23C) of the Act, the Prescribed Authority, after examining the objects and genuineness of the activities of such trust/society, has to satisfy himself as to whether the applicant deserves the approval under Section 10(23C) of the Act. 17. We have heard the learned counsel for the parties. 18. The approval under Section 10(23C)(vi) of the Act has been denied to the petitioner for two reasons. First of all, the respondent has concluded that the surplus generated by the petitioner from its activities indicates that the activities of the petitioner are in the nature of business and for the purposes of generating profit. Accordingly, the respondent has held that the petitioner did not qualify the test of existing only for the purpose of education and not for profit. Secondly, the respondent has concluded that the activities of the petitioner were not genuine in view of the fact that the petitioner had released payments amounting to Rs.1838.67 lacs to RJB-APL. The respondent also took note of the observations of the auditor whereby the auditors had concluded that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject for which the petitioner was established as contemplated under third proviso to Section 10(23C) of the Act. 20. Before proceeding further it would be necessary to refer to the provisions of Section 10(23C) of the Act. The relevant extract of the said provisions are quoted below:- (23C) any income received by any person on behalf of xxxx xxxx xxxx xxxx xxxx (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or xxxx xxxx xxxx xxxx xxxx Provided that the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of the exemption, or continuance thereof, under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via): Provided further that the prescribed authority, before approving a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary contribution of the nature referred to in clause (b) of the third proviso to this subclause, subject to the condition that such voluntary contribution is not held by the trust or institution or any university or other educational institution or any hospital or other medical institution, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1992, whichever is later: Provided also that nothing contained in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall apply in relation to any income of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business: Provided also that any notification issued by the Central Government under sub-clause (iv) or sub-clause (v), before the date on which the Taxation Laws (Amendment) Bill, 2006 receives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly be charged to tax: Provided also that where the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) does not apply its income during the year of receipt and accumulates it, any payment or credit out of such accumulation to any trust or institution registered under section 12AA or to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or subclause (v) or sub-clause (vi) or sub-clause (via) shall not be treated as application of income to the objects for which such fund or trust or institution or university or educational institution or hospital or other medical institution, as the case may be, is established: Provided also that where the fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) is notified by the Central Government or is approved by the prescribed authority, as the case may be, or any university or other educational institution referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th such applications under those sub-clauses from the stage at which they were on that day; 21. A plain reading of Clause (vi) of Section 10(23C) of the Act indicates that exemption under the said clause would be available to any educational institution existing solely for educational purposes and not for purposes of profit. . The question whether the petitioner is an educational institution is no longer res integra. This Court by order dated 20.03.2012 in W.P.(C) No.4716/2010 has already held that the petitioner is an educational institution for the purposes of Section 10(23C) of the Act. Therefore, the essential question that arises is whether the petitioner exists solely for educational purposes or also for the purposes of profit. In order to answer this question, it would be necessary to consider the activities carried on by the petitioner. 22. The petitioner is a registered society and is engaged in ensuring high standards of education imparted through the medium of schools. The petitioner has 1750 schools which are affiliated to it and provide education from nursery to twelfth standard. It selects the courses, syllabus, books and literature for different standards to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtain from any such Government or authority such rights, concessions, and privileges as the society may thing desirable and to obtain and carry out, exercise and comply with any such arrangements, rights, privileges, and concessions. (v) to accept donations, gifts movable and immovable and to raise money fees or otherwise. (vi) to borrow and raise funds, with or without security in any manner the Society may think fit and to repay the same. (vii) to purchase, take on lease for exchange, hire or otherwise acquire, for and on behalf of the Society, properties movable and immovable and rights or privileges as they may think fit. (viii) to sell, exchange, lease, borrow by mortgaging properties of the Society, mortgage, gift, dispose of, turn to account, or otherwise deal with, all or any part of the properties and rights of the Society as they may think necessary and convenient. (ix) to hire and to employ secretaries, clerks, servants, examiners and moderators and others and to pay them such salaries, wages and fees and honoraria as the Society may decide from time to time. (x) to frame and establish Provident Fund, Gratuity and Pension Schemes for the employees of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The petitioner had been charging a uniform fee for several years prior to the Financial Year 2008-09. It is contended by the petitioner that it increased the fees in the Financial Year 2008-09 in order to create resources for construction of the petitioner s office building at Saket, New Delhi, introducing computer technology (which entailed purchases of computer and development of software) and purchase of other assets. The petitioner submitted that it was also required to incur expenditure for renovation and repair, as well as requisition of other movable and immovable properties. The petitioner envisaged that substantial expenditure would be required to modernise the activities of the petitioner. The petitioner also pointed out that in the subsequent years i.e. from Financial Year 2012-13, the petitioner has reduced the examination fee, since it had accumulated the necessary funds for its purposes. 27. In the above facts, the issue to be addressed is whether generation of surplus by the petitioner can be construed to mean that the petitioner is not existing solely for educational purposes but also for the purposes of profit. 28. In our view, the fact that the petitioner h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner would be the determinative test, merely because profit is generated, it would not dilute the object for which the petitioner has been established. The Supreme Court in the case of Addl. Commissioner of Income Tax v. Surat Art Silk Cloth Manufacturers Association: (1980) 121 ITR (SC) applied the test of predominant object while considering whether any surplus generated by an organisation established for charitable purposes, would disable the said organisation from claiming that it was established for charitable purposes. The relevant extract of the decision reads as under:- The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income Tax v. Queens Educational Society: (2009) 319 ITR 160 (Uttaranchal), whereby the Court had set aside the decision of the ITAT by holding that the assesee was not entitled to exemption under Section 10(23C)(iiiad) of the Act. The Court held that the surplus generated by the educational society would become income of the society which was exigible to tax. 33. In our opinion, this view would not be applicable in the present case. The Punjab and Haryana High Court in the case of Pinegrove International Charitable Trust v. Union of India: (2010) 327 ITR 73 (P H) had considered the above mentioned decision of the Uttarakhand High Court and held as under:- (2) The provisions of Section 10(23C)(vi) of the Act are analogues to the erstwhile Section 10(22) of the Act, as has been laid down by Hon'ble the Supreme Court in the case of American Hotel and Lodging Association [2008] 301 ITR 86. To decide the entitlement of an institution for exemption under Section 10(23C)(vi) of the Act, the test of predominant object of the activity has to be applied by posing the question whether it exists solely for education and not to earn profit (See 5- Judges Constitution Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall within the provisions of Section 10(23C)(vi) of the Act. There are various reasons, which have been discussed in para 8.8 of the judgment, and the judgment of Allahabad High Court rendered in the case of City Montessori School [2009] 315 ITR 48 lays down the correct law. 34. This Court in the case of St. Lawrence Educational Society v. Commissioner of Income Tax: (2013) 353 ITR 325 (Del.) referred to the above decisions and accepted the view of the Punjab and Haryana High Court in Pinegrove International Charitable Trust (supra). This Court concluded held as under:- 8. In view of the aforesaid decisions, the opinion expressed by the respondent that the educational institutions seeking exemption should not generate any quantitative surplus is legally untenable and incorrect. The Chief Commissioner has erred in assuming that for exemption there should not be any surplus, otherwise the institution society exists for profit and not charity i.e. education in the present case. In view of the aforesaid judgments of the Supreme Court, Bombay High Court and Punjab and Haryana High Court, reasoning inscribed by the competent authority solely on the foundation that there has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, the fact that the petitioner conducts the examination for class 10th and 12th students with respect to schools that are affiliated with the petitioner is indisputable. The nature of the predominant activity, therefore, cannot be questioned. There is no doubt about the genuineness of this activity of the petitioner, thus the conclusion drawn by the respondent that the activities of the petitioner were not genuine merely because a contract entered into by the petitioner has been brought into question, is not warranted. It is also not the respondent s case that the petitioner carries on any activity other than for educational purpose. However, the observations made by the auditor raise a separate question with respect to the application of the funds of the petitioner company. 38. In view of the above, the question that needs to be addressed is whether the petitioner would be disentitled to the exemption under Section 10(23C)(vi) of the Act on account of falling foul of the third proviso to Section 10(23C). In order to address this controversy, it is necessary to consider whether the amounts released by the petitioner to RJB-APL can be construed to have been applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd news events Duration: September 2008 to February 28, 2009 Development of Mister Plan Detailed development for modules where information available from CISCE Scope of works as detailed on May 26, 2009 Infrastructure requirements Requirements of various stakeholders Regulatory and compliance requirements Data security processes Time lines Training requirements for Council staff and other stakeholders Escalation and resolution processes Duration: On-going from November 2008 Security management structuring for user management, audit trail, archiving, overall system. Database design initially on Oracle and subsequent transfer to MS SQL under the guidance of Mr. Guil Vaz. The change was recommended because Mr. Vaz did not approve the purchase of Oracle by the Council on account of its high price and after considering that MS SQL was available on lease and rent. Design and selection of infrastructure: Definition of process Determination of parameters Peak and average loads Up-time Response time Security Integrity Determination of hardware and third-party software requirements based on above parameters Vendor selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nomics in Jharkhand reported full completion as early September 1, 2009 Support provided to schools through e-mail and telephone About 1500 e-mails received directly from schools About 1500 calls received by a team of up to 5 persons at our offices Statistics of data successfully registered First month 1,76,158 students data Within two months 1,88,782 students data was uploaded and 98% of the schools (1611 ICSE schools) had completed the process Duration: November 2008 and continuing pending transfer to CISCE. 40. The petitioner submitted that RJB-APL had raised invoices aggregating a sum of Rs.16,36,41,250/- which were paid by the petitioner. The petitioner had also paid service tax and the payments made to RJBAPL were subject to Tax Deducted at Source. In view of the objections raised by the auditor as well as several complaints received from affiliated schools, further payments to RJB-APL were withheld. This resulted in disputes arising between the petitioner and RJB-APL which were subsequently settled and in terms of the same RJB-APL had refunded a sum of Rs.8,24,50,000/- to the petitioner. 41. Indisputably, any expenditure incurred by an assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n deployed. The contract entered into with RJB-APL may not be the best decision from the standpoint of the Prescribed Authority and perhaps in the opinion of the Prescribed Authority, the petitioner society may have ended up paying more than the value of services received. But the same cannot be read to mean that the resources of the petitioner have been deployed for purposes other than for its objects. The words wholly and exclusively to the object for which it has been established must be read to mean that the income should not be applied for any purpose other than the object for which the institution has been established. Thus, the application of funds must be for carrying on the purpose for which the petitioner has been established and not for any other purpose. In the present case, the assessee entered into the contract with RJB-APL for development, implementation and maintenance of an eenabled system for managing registration of schools/students, examination of answer sheets, collating of results etc. RJB-APL had, undisputedly, developed and maintained a website of the petitioner, developed software for assisting in the activities carried on by the petitioner. The results o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rily . Ordinarily, it is for the assesee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. 43. The expression used in Section 37 of the Act: wholly or exclusively for the purposes of business and profession is similar in its import as the expression applied wholly and exclusively to the object for which it is established as occurring in Section 10(23C)(vi) of the Act. Therefore, the tests as laid down by various decisions for determining whether an amount is expended wholly and exclusively for the purposes of the business would apply equally in determining whether the income is applied by the assessee wholly and exclusively for its objects. 44. We may also observe that although, it has been suggested that the contract with RJB-APLL was only a conduit for diverting the funds of the petitioner, the same is not borne out by the material on record. In order to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Supreme Court considered the scheme of Section 10(22) and Section 10(23C) of the Act in the case of American Hotel Lodging Association (supra) and explained that under Section 10(22) of the Act, once an approval had been granted the exemption was automatic and Section 11 and Section 13 of the Act did not apply. Thus, there would be neither assessment nor demand in cases where approval under Section 10(22) of the Act had been granted to an assessee. In the event an institution fell within the expression: exists solely for educational purposes and not for profit , the institution was entitled to avail the exemption under Section 10(22) of the Act and there were no other conditions that were required to be complied with. The Supreme Court observed that: The mere existence of profit/surplus did not disqualify the institution if the sole purpose of its existence was not profitmaking but educational activities as section 10(22) by its very nature contemplated income of such institution to be exempted. Under section 10(22) the test was restricted to the character of the recipient of income, viz., whether it had the character of educational institution in India, its character ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed Authority, would issue an approval to the eligible institution, albeit with a condition that the institution would comply with the third proviso to Section 10(23C) of the Act. In the event it was found that the assesse was non compliant with the third proviso to Section 10(23C) of the Act, the approval would be revoked under the thirteenth proviso to Section 10(23C) of the Act. 49. Following the aforesaid principle, the assesse would be entitled to the approval under section 10(23C)(vi) of the Act, however if it was found that the funds of the assesse had not been utilized for its objects during the relevant year or had otherwise not complied with the provisos to the Section 10(23C) of the Act, the approval would be revoked at the end of the relevant year. Since, by virtue of its nature, the petitioner is entitled to an exemption, the same would also be available to the petitioner for the subsequent year(s). However the question whether the exemption is liable to be revoked would have to be considered at the end of the year after reviewing whether the petitioner had complied with the conditions imposed, inter alia, by the third proviso to Section 10(23C) of the Act. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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