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M/s Harf Charitable Trust (Regd) Versus The Chief Commissioner of Income Tax, Ludhiana And Another

2015 (8) TMI 848 - PUNJAB & HARYANA HIGH COURT

Exemption under Section 10(23C)(vi) denied - Whether an educational institution would cease to exist 'solely' for educational purposes and not for purposes of profit merely because it has generated surplus income over a period of 4/5 years after meeting its expenditure? - Held that:- The impugned order cannot be justified solely on the ground that in view of a clause which provided that the Trust could run a business, it would be debarred as such from registration on the ground that it was not e .....

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dy also deleted the objectionable clause and which has also been noticed in the subsequent assessment made in the assessment order dated 21.12.2012 for the year 2010-11. - Decided in favour of assessee. - CWP No. 24895 of 2014 - Dated:- 6-7-2015 - S J Vazifdar, ACJ And G S Sandhawalia, JJ. For the Appellant : Mr Sanjay Bansal, Sr. Adv., with Mr B M Monga, Adv. and and Mr Yash Paul Goyal, Adv. For the Respondent : Ms Savita Saxena, Adv. ORDER G. S. Sandhawalia, J. Challenge in the present writ pe .....

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permissible for charitable organizations. The trustees were in place for the whole duration of their life and it gave the organization a look and character of a private body rather than a charitable organization and the objectives were not related to the promotion of education and the educational trust did not exist solely for educational purposes. The petitioner's case is that the Trust is registered under the Societies Registration Act, 1860 and is a public charitable trust and running a s .....

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portunity of hearing was afforded by respondent no. 1, who rejected the claim on untenable grounds. In the written statement filed on behalf of the respondents, plea taken was that the education institution is to exist "solely for educational purposes" and if the institution existed for other purposes, the exemption could not be granted and reliance was placed upon the provisions of Section 10(23C)(vi) of the Act and the observations made by the Division Bench of this Court in Pine Gro .....

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. The said fact had also been noticed in a subsequent assessment made on 21.12.2012 (Annexure P-9). Counsel for the petitioner has thus submitted that merely because there was a clause in the trust deed which provided that the Trust could carry on other business would not mean that there was an absolute bar for consideration of the benefit under Section 10(23C)(vi) of the Act once the predominant purpose and objects of the trust were charitable in nature. It is accordingly submitted that in view .....

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be found in the decision of respondent no. 1. The objectionable clause which was part of the trust deed was clause (i) which provided that one of the objects of the trust was "to carry on other business as decided by the trustees". On the strength of the said clause, as noticed above, the impugned order has been passed against the petitionertrust on the strength of the provisions that the trust did not exist solely for educational purposes. To appreciate the controversy in question, i .....

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:- "10. 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 xxx xxx xxx (23C) any income received by any person on behalf of xxx xxx xxx (iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit , which is wholly or substantially financed by the Government; or xxx xxx xxx (iiiad) any university or other educational institution existin .....

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ere discussed in a threadbare manner by the Division Bench of this Court in Pine Grove's case (supra) wherein, exemption granted had been withdrawn on the ground that the educational institutions being run were for generating profits and did not exist solely for educational purpose. While issuing show cause notice, the authorities had placed reliance upon the judgment of the Uttrakhand High Court in CIT vs. Queen's Educational Society, (2009) 318 ITR 160. The Division Bench framed the fo .....

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stitution registered as a Society under the Societies Registration Act,1860,loses its character as an educational institution, eligible to apply for exemption under Section 10(23C)(vi)of the Act?" Question no. (A) as to whether the education institution cease to exist solely for educational purposes was answered in favour of the institutions by holding that the predominant object of the activity is to be taken into consideration. Reliance was placed upon the judgments of the Apex Court in A .....

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y would be eligible to apply for exemption. The relevant observations read thus:- "(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-numbered). Accordingly, it has to be ascertained whether the educational institution has been applying its profit wholly and exclusively to the object for which the institution is established. Merely because an institution has earned profit would n .....

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er 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 activity of imparting education would not result in change of character of the institution that it exists solely for educational purpose. A workable solution has been provided by Hon ble the Supreme Court in para 33 of its judgment in American Hotel .....

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ases 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, after grant of approval if it comes to the notice of the prescribed authority that the conditions on which approval was given, have been violated or the circumstances mentioned in 13th proviso exists, then by following the procedure envisaged in 13th proviso, the prescribed authority can withdraw the approval. ( .....

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ashed with liberty to pass fresh orders. The said view has been specifically approved by the Apex Court in Queen's Educational Society's case (supra) and the judgment of the Uttrakhand High Court has been reversed. The Apex Court has accordingly discussed the predominant objects of the educational institution and whether it exists solely for educational purposes and not for the purposes of profit. Accordingly, conclusion was arrived at that merely because some profit arises from the acti .....

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poses and becomes an institution for the purpose of making profit. (2) The predominant object test must be applied - the purpose of education should not be submerged by a profit making motive. (3) A distinction must be drawn between the making of a surplus and an institution being carried on "for profit". No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit. (4) If after meeting expenditure, a surplus arises incidenta .....

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in mind especially 13th proviso which provided that after giving a reasonable opportunity, the approval granted to the trust could be withdrawn if it is found that the activities are not genuine or in accordance with any of the conditions, there could be a conditional approval subject to the monitoring. The relevant observations read thus:- "25. We approve the judgments of the Punjab and Haryana, Delhi and Bombay High Courts. Since we have set aside the judgment of the Uttarakhand High Cou .....

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above, namely, Surat Art Silk Cloth, Aditanar, and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for 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 a .....

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provisions of law contained in Section 10(23C) read with Section 11 of the Income Tax Act." In the present case, under the second proviso, the authority was to call for documents including audited annual accounts from the trust and in order to satisfy itself about the genuineness of the activities of the trust, the inquiries had to be made. The objects of the petitioner-trust read thus:- "2. OBJECTS OF THE TRUST (a) To spread education and for achieving the said object to establish, m .....

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holarships in India for the study, research and apprenticeship for all or any of the aforesaid educational purpose. (d) To establish, maintain, run, develop, improve, extend, grant donations for and to aid and assist in the establishment maintenance, running, development, improvement and extension of hospitals, clinics, XRay plants, dispensaries, maternity houses, recreating centres and all similar institutions as will afford treatment to alleviate human sufferings. (e) To conduct feeding to poo .....

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for the needy. (h) To provide assistant to best players and also to promote various sports by organizing tournaments in the interest of the Public. (i) To carry out other business as decided by the Trustees." It is not disputed that the school as such is also affiliated with the Central Board of Secondary Education, New Delhi and has also been granted registration under Section 12-A w.e.f. 15.07.1997. Merely because one of the clauses of the trust deed provided that the trust would carry on .....

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ing some other business and the said business was generating substantial amounts which would over ride the main objects of the trust which have been reproduced above which pertain mainly to the cause of education. Keeping in view the principles which have been discussed regarding the words 'solely for educational purposes and of generating profit', we are of the opinion that in the absence of any such finding that the trust was doing business, the application could not have been rejected .....

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one finds that there is a difference between stipulation of conditions and compliance thereof. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardized form in terms of the first proviso. It is only if the pre-requisite condition of actual existence of the educational institution is fulfilled that the question of compliance of requirements in the provisos would ar .....

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nvestments to be made etc. could be stipulated as conditions by the PA subject to which approval could be granted. For example, in marginal cases like the present case, where appellant-Institute was given exemption up to financial year ending 31.3.1998 (assessment year 1998-99) and where an application is made on 7.4.1999, within seven days of the new dispensation coming into force, the PA can grant approval subject to such terms and conditions as it deems fit provided they are not in conflict w .....

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vities undertaken by the appellant are - conducting classical education by providing course materials, designing courses, conducting exams, granting diplomas, supervising exams, all under the terms of an Agreement entered into with Institutions of the Government of India. Similarly, the PA may grant approvals on such terms and conditions as it deems fit in case where the Institute applies for initial approval for the first time. The PA must give an opportunity to the applicant-institute to compl .....

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