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2015 (3) TMI 619 - SUPREME COURT

2015 (3) TMI 619 - SUPREME COURT - [2015] 372 ITR 699 (SC), 2015 AIR 3253, 2015 (3) SCR 838, 2015 (8) SCC 47, 2015 (9) JT 169, 2015 (3) SCALE 641 - Exemption under Section 10(23C) (iiiad) denied - Pine Grove International Charitable Trust v. Union of India - [2010 (1) TMI 49 - HIGH COURT OF PUNJAB AND HARYANA AT] judgment challenged - AO observed that it ceases to exist solely for educational purposes and becomes a profit making enterprise - Held that:- We approve the judgments of the Punjab and .....

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cases fall within the provisions of Section 10(23C)(vi) of the Act. - Since we have set aside the judgment of the Uttarakhand High Court Queens Educational Society (2007 - TMI - 75307 - UTTARAKHAND HIGH COURT) and since the Chief CIT’s orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law declared by the Uttarakhand High Court, it is clear that these orders cannot stand. Consequently, Revenue’s appeals from the Punjab and .....

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or purposes of profit. In addition, we hasten to add that the 13th proviso to Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in a .....

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OF 2010, C.A. NO.909 OF 2011, CIVIL APPEAL NO. 2919 OF 2015, [ARISING OUT OF SLP (CIVIL) NO.3804 OF 2011], CIVIL APPEAL NO. 2920 OF 2015, [ARISING OUT OF SLP (CIVIL) NO.5381 OF 2011], - Dated:- 16-3-2015 - T. S. Thakur And R. F. Nariman,JJ. JUDGMENT R.F.Nariman, J. 1. Leave granted in the special leave petitions. 2. The present appeals relate to a common judgment dated 24th September, 2007 passed by the High Court of Uttarakhand, Nainital in two income tax appeals, and a judgment of the Punjab a .....

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em, namely, the Queen s Educational Society case. The appellant filed its return for assessment years 2000-2001 and 2001-2002 showing a net surplus of ₹ 6,58,862/- and ₹ 7,82,632/- respectively. Since the appellant was established with the sole object of imparting education, it claimed exemption under Section 10(23C) (iiiad) of the Income Tax Act, 1961. The Assessing Officer vide its order dated 20th February, 2003 rejected the exemption claimed by the appellant. The CIT (Appeals) by .....

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(23C) (iiiad) of the Act: Section 10- Incomes not included in total income.-In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- (23-C) any income received by any person on behalf of- (iii-ad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the a .....

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ith effect from 1st April, 1999. Prior thereto, the Income Tax Act had a corresponding Section, namely, Section 10(22) which was as follows:- Section 10- Incomes not included in total income.-In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- (22) any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit 7. We have heard learned cou .....

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ise. In support of the Punjab and Haryana High Court judgment under appeal, counsel for the assessees argued that since the sole basis for not granting them exemption for the assessment years under question was the following of the Uttarakhand High Court judgment, if the said judgment is found to be incorrect, they are bound to succeed. For that reason, the revenue s appeal against the Punjab and Haryana High Court judgment should be dismissed. Counsel for the revenue, on the other hand, attempt .....

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21 ITR 1, this Court while construing the definition of charitable purpose in Section 2(15) of the Income Tax Act held: 17. The next question that arises is as to what is the meaning of the expression activity for profit . Every trust or institution must have a purpose for which it is established and every purpose must for its accomplishment involve the carrying on of an activity. The activity must, however, be for profit in order to attract the exclusionary clause and the question therefore is .....

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the end to which the activity must be directed or in other words, the predominant object of the activity must be making a profit. Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit. But where, on the other hand, an activity is carried on with the predominant object of earning profit, it would be an activity for profit, though it may be carried on in advancement of the .....

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ofit making motive; the latter should not masquerade under the guise of the former. The purpose of the trust, as pointed out by one of us (Pathak,J.) in Dharmadeepti v. CIT [(1978) 3 SCC 499 : 1978 SCC (Tax) 193] must be essentially charitable in nature and it must not be a cover for carrying on an activity which has profit making as its predominant object. This interpretation of the exclusionary clause in Section 2 clause (15) derives considerable support from the speech made by the Finance Min .....

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ing newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words not involving the carrying on of any activity for profit should be added to the definition. It is obvious that the exclusionary clause was added with a view to overcoming the decision of the Privy Council in the Tribune case [AIR 1939 PC 208 : In Re the Trustees of the Tribune, (1939) 7 ITR 415] where it was held that the o .....

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s its predominant object, but even so it was held by the Judicial Committee that since the purpose served was an object of general public utility, it was a charitable purpose. It is clear from the speech of the Finance Minister that it was with a view to setting at naught this decision that the exclusionary clause was added in the definition of charitable purpose . The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the obje .....

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require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management. We, therefore, agree with Beg, J., when he said in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC .....

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should not involve the carrying on of any activity for profit would be satisfied if profit making is not the real object (emphasis supplied). We wholly endorse these observations. The application of this test may be illustrated by taking a simple example. Suppose the Gandhi Peace Foundation which has been established for propagation of Gandhian thought and philosophy, which would admittedly be an object of general public utility, undertakes publication of a monthly journal for the purpose of ca .....

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se the predominant object of the activity of publication of the monthly journal would be to carry out the charitable purpose by propagating Gandhian thought and philosophy and not to make profit or in other words, profit making would not be the driving force behind this activity. But it is possible that in a given case the degree or extent of profit making may be of such a nature as to reasonably lead to the inference that the real object of the activity is profit making and not serving the char .....

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ation another example given by Krishna Iyer, J., in the Indian Chamber of Commerce case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796] where a blood bank collects blood on payment and supplies blood for a higher price on commercial basis. Undoubtedly, in such a case, the blood bank would be serving an object of general public utility but since it advances the charitable object by sale of blood as an activity carried on with the object of making profit, it would be difficult to call .....

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ses out of certain observations made by this Court in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234] as well as Indian Chamber of Commerce case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796] . It was said by Khanna, J. in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234] : [I]f the activity of a trust consists of carrying on a business and there are no restrictions on its making pr .....

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ircumstances the making of profit stands loudly negatived .... A pragmatic condition, written or unwritten, proved by a prescription of profits or by long years, of invariable practice or spelt from some strong surrounding circumstances indicative of anti-profit motivation - such a condition will qualify for charitable purpose. Now we entirely agree with the learned Judges who decided these two cases that activity involved in carrying out the charitable purpose must not be motivated by a profit .....

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ely because the activity results in profit. It is in our opinion not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no profit no loss basis or that profit shall be proscribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the a .....

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missioner of Income Tax, (1997) 224 ITR 310, this Court while construing the predecessor Section, namely, Section 10(22) of the Income Tax act, held: The High Court has made an observation that any income which has a direct relation or incidental to the running of the institution as such would qualify for exemption. We may state that the language of Section 10(22) of the Act is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution .....

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ld also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity. 10. In American Hotel & Lodging Assn. Educational Institute v. CBDT, (2008) 301 ITR 86, this Court dealt with Section 10(23C)(vi) as follows: 29. In CIT v. Surat Art Silk Cloth Manufacturers' Assn. [(1980) 2 SCC 31 : 1980 SCC (Tax) 170 : (1980) 121 ITR 1] it has been held by this Court that test of predominant object of the activity is to be seen whether it exists solel .....

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f making profit or not it is the duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established. 30. In deciding the character of the recipient, it is not necessary to look at the profits of each year, but to consider the nature of the activities undertaken in India. If the Indian activity has no correlation with education, exemption has to be denied (see judgment of this Court in Oxford Universi .....

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se (see judgment of this Court in Aditanar Educational Institutionv. CIT [(1997) 3 SCC 346 : (1997) 224 ITR 310] ). The test is-the nature of activity. If the activity like running a printing press takes place it is not educational. But whether the income/profit has been applied for non-educational purpose has to be decided only at the end of the financial year. 32. We shall now consider the effect of insertion of provisos to Section 10(23-C)(vi) vide the Finance (No. 2) Act, 1998. Section 10(23 .....

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nitial approval from the PA, in terms of Section 10(23-C)(vi) by making an application in the standardised form as mentioned in the first proviso to that section. That condition of obtaining approval from the PA came to be inserted because Section 10(22) was abused by some educational institutions/universities. This proviso was inserted along with other provisos because there was no monitoring mechanism to check abuse of exemption provision. With the insertion of the first proviso, the PA is req .....

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cation of income to the objects for which such trust or fund or educational institution is established. The idea underlying the twelfth proviso is to provide guidance to the PA as to the meaning of the words application of income to the objects for which the institution is established . Therefore, the twelfth proviso is the matter of detail. The most relevant proviso for deciding this appeal is the thirteenth proviso. Under that proviso, the circumstances are given under which the PA is empowere .....

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with the conditions subject to which approval is granted then the PA is empowered to withdraw the approval earlier granted after complying with the procedure mentioned therein. 33. Having analysed the provisos to Section 10(23- C)(vi) one finds that there is a difference between stipulation of conditions and compliance therewith. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an applicatio .....

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aken place on the date of the application for initial approval. 34. To make the section with the proviso workable we are of the view that the monitoring conditions in the third proviso like application/utilisation of income, pattern of investments to be made, etc. could be stipulated as conditions by the PA subject to which approval could be granted. 11. Thus, the law common to Section 10(23C) (iiiad) and (vi) may be summed up as follows: (1) Where an educational institution carries on the activ .....

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ly because imparting education results in making a profit, it becomes an activity for profit. (4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes. (5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons. 12. The Uttarakhand High Court in the impugned .....

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8,47,742/- in FY 2000-01 relevant for Asstt. Years 2000-01 and 2001-02 respectively. Thus, if the amount of investment into fixed assets such as building, furniture and fixture etc. were also kept in view, there was hardly any surplus left….. The assessee society is undoubtedly engaged in imparting education and has to maintain a teaching and non teaching staff and has to pay for their salaries and other incidental expenses. It, therefore, becomes necessary to charge certain fee from the .....

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bers of the society have not utilized any part of the surplus for their own benefit. The AO wrongly interpreted the resultant surplus as the main objective of the assessee trust. As held above, profit is only incidental to the main object of spreading education. If there is no surplus out of the difference between receipts and outgoings, the trust will not be able to achieve the objectives. Any education institution cannot be run in rented premises for all the times and without necessary equipme .....

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th the reasoning given by the ITAT for granting exemption. 14. Having said this, the impugned judgment goes on to quote Aditanar Educational Institution v. CIT. as follows:- After meeting the expenditure, if any surplus result incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purpose since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the obj .....

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than to fulfill other noble objects for the cause of poor and needy people or advancement of religious purpose. Therefore, the law laid down by the Apex Court has rightly been applied and exemption has also rightly been refused by the Assessing Officer in the facts and circumstances of the case. 15. It is clear that the High Court did not apply its mind independently. What has been copied is one paragraph from the Supreme Court judgment in Aditanar followed by a paragraph of faulty reasoning by .....

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s follows:- 56. In the present case, the questions which arise for our determination are: (i) Whether the society or body is occupying and using the land and building for a charitable purpose within the meaning of sub-section (4)? (ii) What is the meaning of the expression supported wholly or in part by voluntary contribution ? (iii) Whether any trade or business is carried on in the premises within the meaning of sub-section (5)? 17. In answering question one, the Court held that School Educati .....

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s narrower in scope. This is our answer to question No. 1. 18. Secondly, the extracted portion from the said judgment in the judgment of the Uttarakhand High Court concerned itself with question two, namely, whether the educational society is supported wholly or in part by voluntary contributions. It is part of paragraph 80 of the said judgment. If the sentences after the quoted portion are also set out, it becomes clear that the passage relied upon by the High Court has absolutely nothing to do .....

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test, according to us, must be whether the society could survive without receiving voluntary contributions, even though it may have some income by the activities of the society. The word part mean an appreciable amount and not an insignificant one. The part in other words, must be substantial part. What is substantial would depend upon the facts and circumstances of each case. 19. It is clear, therefore, that the Uttarakhand High Court has erred by quoting a non existent passage from an applicab .....

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a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of Section 10(23C) is to ignore the language of the Section and to ignore the tests laid down in the Surat Art Silk Cloth case, Aditanar case and the American Hotel and Lodging case. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit. In fact, in S.RM.M.CT.M. Tiruppani .....

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haritable purposes in India by purchasing a building which is to be utilised as a hospital. This income, therefore, is entitled to an exemption under Section 11(1). In addition, under Section 11(1)(a), the assessee can accumulate 25% of its total income pertaining to the relevant assessment year and claim exemption in respect thereof. Section 11(1)(a) does not require investment of this limited accumulation in government securities. The balance income of ₹ 1,64,210.03 constitutes less than .....

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(vi). A large number of writ petitions were heard in Civil Writ Petition No. 6031 of 2009 and disposed of on 29th January, 2010. By various impugned orders passed, the Chief, CIT, Chandigarh withdrew exemptions granted under Section 10(23C) (vi) of the Income Tax Act read with Rule 2CA of Income Tax Rules, 1961, for various assessment years. The operative part of the order passed by the Chief, CIT in these cases is the same and reads as follows: 4. I have considered the submissions of the asses .....

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dentally, then the institution will not cease to be one existing solely for educational purposes. 6. The crucial condition is that surplus should result only incidentally and should not be aimed for. If substantial profits are earned in one year if (it)? would be duty of the institution to lower its fees for the subsequent year so that such profits are not intentionally generated. If, however, profits continue year after year than it cannot be said that the surplus is arising incidentally. 7. In .....

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. 9. The assessee is at liberty to reduce the fees being charged and price of its services and apply afresh, in which case the application will be duly considered on merits. 21. It is these orders that were set aside by the judgment of the Punjab and Haryana High Court impugned by the Revenue before us. 22. Section 10(23C)(vi) read with the 3rd and 13th provisos thereto and Section 11(5) of the Income Tax Act are as follows:- Section 10- Incomes not included in total income.-In computing the tot .....

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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 (vi-a)]-[(a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established and in a case where more than fifteen per cent of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income sh .....

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ublic company, held by any university or other educational institution or any hospital or other medical institution where such assets form part of the corpus of any university or other educational institution or any hospital or other medical institution as on the 1st day of June, 1998;] (ii) any assets (being debentures issued by, or on behalf of, any company or corporation), acquired by the fund, trust or institution [or any university or other educational institution or any hospital or other m .....

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specify, for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-section (5) of Section 11: 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 any university or other educational institution referred to in subclause (vi) or any hospital or other medical institution referred to in sub-clause (vi-a), is approved by the .....

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nd or institution or trust or any university or other educational institution or any hospital or other medical institution,- (A) are not genuine; or (B) are not being carried out in accordance with all or any of the conditions subject to which it was notified or approved, it may, at any time after giving a reasonable opportunity of showing cause against the proposed action to the concerned fund or institution or trust or any university or other educational institution or any hospital or other me .....

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to in clause (b) of sub-section (2) shall be the following, namely:- (i) investment in savings certificates as defined in clause (c) of Section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government; (ii) deposit in any account with the Post Office Savings Bank; (iii) deposit in any account with a scheduled bank or a cooperative society engaged in carrying on the .....

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ction 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934); (iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963); (v) investment in any security for money created and issued by the Central Government or a State Government; (vi) investment in debentures issued by, or on behalf of, .....

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se for a period of three years from the date on which such public sector company ceases to be a public sector company; (B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company;]. (viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and [ .....

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ic company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India. Explanation.-For the purposes of this clause,- (a) long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years; (b) public company shall have the meaning assigned to it in Section 3 of the Companies Act, 195 .....

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with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964); (xii) any other form or mode of investment or deposit as may be prescribed. 23. The Punjab and Haryana High Court, by the impugned judgment dated 29th January, 2010 expressed its dissatisfaction with the view taken by the Uttarakhand High Court in the case of Queen s Educational Society as follows: 8.8 We have not been able to persuade ourselves to accept the view exp .....

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ttarkhand High Court runs contrary to the provisions of Section 10(23C)(vi) of the Act including the provisos thereunder. Section 10(23C)(vi) of the Act is equivalent to the provisions of Section 10(22) existing earlier, which were introduced with effect from 1st April, 1999 and it ignores the speech of the Finance Minister made before the introduction of the said provisions, namely. Section 10(23C) of the Act [See observations in American Hotel and Lodging Association Educational Institute' .....

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ns of Section 10(23C) of the Act. Lastly, that view is not consistent with the law laid down by Hon'ble the Supreme Court in American Hotel and Lodging Association Educational Institute (surpa). It then summed up its conclusions as follows: 8.13 From the aforesaid discussion, the following principles of law can be summed up:- (1) It is obligatory on the part of the Chief Commissioner of Income Tax or the Director, which are the prescribed authorities, to comply with proviso thirteen (un-numb .....

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he case of American Hotel and Lodging Association (supra). 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 judgment in the case of Surat Art Silk Cloth Manufacturers Association (supra)]. It has to be borne in mind that merely because profits have resulted from the act .....

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ns of the Act. The parameters of earning profit beyond 15% and its investment wholly for educational purposes may be expressly stipulated as per the statutory requirement. Thereafter the Assessing Authority may ensure compliance of those conditions. The cases where exemption has been granted earlier and the assessments are complete with the finding that there is no contravention of the statutory provisions, need not be reopened. However, alter grant of approval if it comes to the notice of the p .....

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in their character as such and would be eligible to apply for exemption under Section 10(23C)(vi) of the Act. [See para 8.7 of the judgment-Aditanar Educational Institution case (supra)] (5) Where more than 15% of income of an educational institution is accumulated on or after 1st April, 2002, the period of accumulation of the amount exceeding 15% is not permissible beyond five years, provided the excess income has been applied or accumulated for application wholly and exclusively for the purpos .....

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these petitions are allowed and the impugned orders passed by the Chief Commissioner of Income Tax withdrawing the exemption granted under Section 10(23C)(iv) of the Act are hereby quashed. However, the revenue is at liberty to pass any fresh orders, if such a necessity is felt after taking into consideration the various propositions of law culled out by us in para 8.13 and various other paras. 8.16 The writ petitions stand disposed of in the above terms. 24. The view of the Punjab and Haryana .....

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se as follows: …..The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that the Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is .....

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grant of an exemption under Section 10(23C) on the requirement that a college must maintain the status-quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption under Section 10(23C). Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exe .....

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unjab and Haryana, Delhi and Bombay High Courts. Since we have set aside the judgment of the Uttarakhand High Court and since the Chief CIT s orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law declared by the Uttarakhand High Court, it is clear that these orders cannot stand. Consequently, Revenue s appeals from the Punjab and Haryana High Court s judgment dated 29.1.2010 and the judgments following it are dismissed. We re .....

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