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

2016 (7) TMI 333 - PUNJAB & HARYANA HIGH COURT

Grant of approval for exemption under Section 10(23C)(vi) rejected - whether the education institution cease to exist solely for educational purposes? - Held that:- 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 only on this ground that one of the clauses in the objec .....

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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 existing solely for educational purposes. That merely a conferment of power to do business would not debar the right for consideration to the trust without any finding being recorded that the predominant object of the Trust was to do business. Thus, respondent no. 1 misdirected itself by rejecting the application on this ground without coming to any conclusio .....

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Commissioner of Income Tax-respondent no. 1 wherein, the application of the petitioner for grant of approval for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 (in short 'the Act') has been rejected. The predominant reason which weighed with respondent no. 1- The Chief Commissioner of Income Tax, Ludhiana was that the petitioner- Trust had an intention to carry out business activity which was not permissible for charitable organizations. The trustees were in place for t .....

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or educational purposes and is being regularly assessed to income tax. An application was submitted in Form 56D under Section 10(23C)(vi) of the Act read with Rule 2CA seeking exemption from payment of income tax as per requirements and it also filed the audited balance sheets for the last 3 years plus the trust deed. Certain information was asked for and a detailed reply was filed clarifying each and every issue and an opportunity of hearing was afforded by respondent no. 1, who rejected the cl .....

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& H). The said order was accordingly justified that even if one of the objects enables the institute to undertake commercial activities, entitlement for approval under the provisions of the Act would not be there. The petitioner-Trust also filed replication that a supplementary trust deed had been executed and the objecting words and any other business as decided by the trustees had been deleted. The said fact had also been noticed in a subsequent assessment made on 21.12.2012 (Annexure P-9) .....

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r upheld by the Apex Court in Queen's Educational Society vs. CIT, (2015) 372 ITR 699, the respondent no. 1 was not justified in rejecting the case. Counsel for the Department, on the other hand, contended that the order was justified and within the ambit of the provisions of the Act and once the Trust was having other objectives which were not related to the charitable purposes, no fault could be found in the decision of respondent no. 1. The objectionable clause which was part of the trust .....

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ing the total income of the previous year of any person, income falling within any of the specified clauses is not to be included which is received on behalf of any educational institution existing solely for educational purposes and not for purposes of profit than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) of Section 10(23C) of the Act. The relevant provisions read thus:- 10. In computing the total income of a previous year of any person, any income falling within any of the fo .....

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ity or educational institution do not exceed the amount of annual receipts as may be prescribed; or xxx xxx xxx (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit,other than those mentioned in subclause(iiiab) of sub-clause(iiiad) and which may be approved by the prescribed authority; The said provisions were discussed in a threadbare manner by the Division Bench of this Court in Pine Grove's case (supra) wherein, exem .....

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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? (B) Whether the amount spent on acquiring/constructing capital assets wholly and exclusively becomes part of the total income or it becomes entitled to exemption under Section 10(23C) (vi)of the Act? (C) Whether an institution registered as a Society under the Societies Registration Act,1860,loses its character as an educational institution .....

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on Educational Institute v. CBDT, (2008) 301 ITR 86; CIT (Addl.) vs. Surat Art Silk Cloth Manufacturers Association, 1980 (121) ITR 1 (SC) and the view in Queen's Educational Society's case (supra) was specifically not accepted. It was held that where the educational institutions which are registered, the society would retain their character as such and they would be eligible to apply for exemption. The relevant observations read thus:- (1) It is obligatory on the part of the Chief Commi .....

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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 (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 Man .....

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to such terms and conditions as it may deems fit provided that they are not in conflict with the provisions 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 statu .....

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total income. (4) The educational institutions, which are registered as a Society, would continue to retain 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)]. Accordingly, the orders passed withdrawing the exemptions were quashed with liberty to pass fresh orders. The said view has been specifically approved by the Apex Court in Queen's Educational Society& .....

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e lost. The predominant object test was to applied which was the promotion of education and the principles were laid down as under:- (1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit. (2) The predominant object test must be applied - the purpose of education sho .....

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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. It is also pertinent to note that while relying upon the earlier judgments of the Apex Court namely American Hotel and Lodging Association (supra) and keeping in view the provisos of the sections in mind especially 13th proviso which provided that after giving a reasonable opportunity, the approval granted to the trust could be withdrawn if it .....

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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 reiterate that the correct tests which have been culled out in the three Supreme Court judgments stated above, namely, Surat Art Silk Cloth, Aditanar, and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely .....

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, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that revenue is at liberty to pass fresh orders if such necessity is felt after taking into consideration the various 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 .....

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colleges, workshop, industrial and technical schools, institutions for the promotion of agriculture, hostels for the benefit of needy students, maintain agriculture farms for the benefit of the poor. (b) To establish, maintain or acquire library or libraries for the benefit of the students community. (c) To institute and award scholarships in India for the study, research and apprenticeship for all or any of the aforesaid educational purpose. (d) To establish, maintain, run, develop, improve, ex .....

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od, famine,. Epidemic orphanages and welfare institutions. (f) To carry on community development programmes for the upliftment of the economically weaker sections of the society and construct and develop community centres or halls for carrying on such activities. (g) To provide food, shelter, clothing, medical care and education 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 othe .....

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Trust had intentions to carry out the business and the said institute was not existing solely for educational purposes would amount to giving a very narrow meaning to the section and the predominant object test was to be applied. As noticed above, it was not that respondent no. 1 came to the conclusion that the Trust was doing 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 per .....

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ch business is carried out, the registration granted is liable to be cancelled. The principles laid down by the Apex Court in American Hotel and Lodging Association's case (supra) can thus be also applied in the circumstances. The said principles read thus:- 33. Having analysed the provisos to Section 10 (23C)(vi) 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 appro .....

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t of income in specified assets whose compliance depends on events that have not taken 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/utilization of income, pattern of investments 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 appell .....

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in percentage of accounting Income to be utilized/applied for imparting education in India. While making such stipulations, the PA has to examine the activities in India which the applicant has undertaken in its Constitution, MoUs. and Agreement with Government of India/National Council. In this case, broadly the activities undertaken by the appellant are - conducting classical education by providing course materials, designing courses, conducting exams, granting diplomas, supervising exams, all .....

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