TMI Blog2008 (5) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected the application for approval dated 7.4.1999 vide its order dated 12.10.2004. The said order has been upheld by the impugned judgment dated 24.11.2006 delivered by Delhi High Court in Writ Petition (C) No. 17978/04, hence, this civil appeal. 3. Briefly, the facts are as follows. 4. The claim of the appellant is that it is a non-profit organization set up in USA and has been granted tax exemption as an educational institute in that country. Appellant has a branch office in India, mainly to comply with its obligations under various agreements with Government of India (Ministry of Tourism). Its branch provides a central focal point in India for Indian missions to avail of its educational courses. Its branch collects data from educational institutions/persons wishing to take the courses offered in the field of Hospitality and fees for the required course material which is thereafter remitted to USA. After collection of data and fees, the Head Office ("HO") sends course materials, examination papers etc. to the branch in India for onward transmission to the actual user. It is the case of the appellant that, it's Indian branch is the small office in which administrative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilised by the schools under the umbrella of the Government of India ; (i) utilise Indian authors whenever possible in the development of customised programs." 8. Thus, in accordance with the terms of the said MoU, the appellant is responsible, inter alia, for providing a full and complete curriculum, recognized throughout the worldwide, for all hospitality educational programmes in India, making available text books, course materials and software programmes utilized in the appellant's Hospitality Management Diploma, offering a comprehensive certification and registration programme for Indians desiring to avail of education in the hospitality field in India. Under Clause 1(h) of the MoU, appellant is required to offer to the National Council in India, which is the apex body for hospitality management in India, lowest possible prices for its products/services to be utilized for Schools under the umbrella of GoI. Under Clause 2(b) of the said MoU, the National Council of Hospitality is obliged to utilize the appellant's courses in its current and future Hospitality Management Schools. 9. At this stage, it may be noted that the appellant got exemption under Section 10(22) up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 i.e. Form No.56D (See: page No.62 of the civil appeal paper book). 13. Over the next 5 years CBDT did not pass any order on the appellant's application. During this period certain queries were put to the appellant which were replied to by the appellant by various letters. The important point to be noted is that by the said letters appellant clarified its position regarding the type of accounts required and maintained by its branch in India under which excess of receipts over payments was not treated as income/profit/surplus as appropriate costs incurred by the HO had not been taken into account therein because the purpose for which the accounts of the branch office were required to be made was only to establish how much money was owned to the HO and not to ascertain its income or surplus. In the said correspondence it was clarified that even the AO in assessment proceedings had accepted that the excess income over and above the expenditure shown in its account, could not be taken as appellant's income. In fact, the AO had called for information regarding the HO expenses for the year ending 31.3.1999 which had not been considered in the branch office accounts. 14. Duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich will take place in the future. In this connection, learned counsel urged that application of income is the requirement mentioned in the third proviso to Section 10(23C)(vi) and that requirement can only be tested after the end of the previous year when "income" is ascertained and thereafter applied. Similarly, according to learned counsel, the requirement of accumulation, if any, in that proviso can also only be examined at the end of any previous year after "income", if any, is determined and thereafter accumulated. One more example is given by the learned counsel. The requirement of investment/deposit of funds, referred to in the third proviso, can only be tested at the stage of investment which can only take place after profit/ surplus is established. Under the 13 th proviso CBDT is empowered to withdraw the approval earlier granted. That proviso, according to learned counsel, also proceeds on the basis that the withdrawal will be for failure to comply with the terms of application or investment of funds or genuineness of activities and, therefore, implicit in that proviso is an alleged violation of application of surplus and/or investment which may result in a subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal institution. According to learned counsel, the amounts claimed to be surplus by the Department are actually not surplus if the costs of materials and other services provided by the HO are taken into account and deducted from the fees collected. In any event, according to learned counsel, surplus/deficit is not determinative of the question as to whether the appellant exists for the profit purposes. 20. According to learned counsel, the words "in India" should not be read into clause (a) of the third proviso to Section 10(23C)(vi) of the 1961 Act as done by the High Court in its impugned judgment. Learned counsel submits that the question as to whether application of income is required to be made in India or outside India, cannot be part of the decision-making process for grant of approval. The said requirement cannot be taken into account at the approval stage. In the alternative, it is urged that in any event the said requirement of application of income in India is not there in clause (a) of the third proviso. According to learned counsel, the plain words of the third proviso refer to the application of income to the objects for which the institute is established and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of approval is whether the appellant's institute is solely an educational institution without profit motive. According to the learned counsel, if surplus is remitted to USA, appellant would not be entitled to approval under Section 10(23C) (vi). According to the learned counsel, in the present case, CBDT has examined the accounts of the appellant for three years and it detected that the entire expenses was not incurred in India. According to the learned counsel, Section 10(22) was the predecessor section of the present Section 10(23C)(vi). Earlier, according to the learned counsel, when Section 10(22) existed, the PA was only required to examine the objects of the Institute and not the application of income which concept is now brought in vide Section 10(23C)(vi) read with the second, third and eleventh provisos w.e.f.1.4.1999. Therefore, according to the learned counsel, the PA has not only to examine at the stage of approval the nature of the Institution, its activities and its genuineness but also its accounts to ascertain whether the expenses incurred and the activities undertaken are in India. According to the learned counsel, "application of income" is the concept which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visos in Section 10(23C)(vi) which are conditions to be complied with by the appellant. Learned counsel submits that the provisos have got to read with the main section. That, the third proviso requires application/utilization of income accruing to the appellant in India and by remitting the aforestated amount(s), the Institute herein has failed to comply with the said proviso. Learned counsel submits that the three provisos, referred to above, are further conditions, which every applicant has to satisfy. One such condition is application of income. Learned counsel submits that in order to get exemption under Section 10 (23C)(vi) the applicant has to show that it is solely and exclusively an educational institution established solely for educational purposes and not for profit and since, in the present case, the appellant has earned surplus of Rs. 1,30,30,288.00/1.14 crores, which has been remitted to USA, it is clear that the appellant's institution does not exist solely for educational purposes and that it is profit earning institute like any other commercial institute and, therefore, it is not entitled to the benefit of exemption under the said Section 10(23C)(vi). Learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rld expenditure, Indian income and Indian expenditure. That, it ought to have declared at the very outset whether the appellant's institution is an educational institution in USA. That, at the very outset, the appellant ought to have stated and given particulars regarding its activities abroad. Since it has failed to disclose the relevant aspects mentioned above, the applicant/appellant was not entitled to approval. In conclusion, learned counsel submits that there is no dispute that certain huge amount of Rs. 1,30,30,288.00 has been remitted and that fact alone is conclusive circumstance to show that the appellant-institution is a commercial venture existing for profit and that it is not existing solely for educational purposes in India. Learned counsel urged that the third proviso brought in the concept of application of income vide the Finance Act, 1998 in order to bring about parity between universities and other educational institutions on one hand and public charitable trusts covered by Sections 11 and 12 under the 1961 Act. Therefore, according to the learned counsel, even at the stage of approval, the PA can take into account not only the nature, activities and genuinenes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal 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 Central Government, before notifying the fund or trust or institution, or the prescribed authority, before approving any university or other educational institution or any hospital or other medical institution, under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via), may call for such documents (including audited annual accounts) or information from the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, as it thinks necessary in order to satisfy itself about the genuineness of the activities of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, and the Central Government or the prescribed authority, as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under sub-clause (vi) or sub-clause (via) shall not be denied in relation to any funds invested or deposited before the 1 st Inserted by Finance Act, 2001, w.e.f. 1.4.2001 day of June, 1998, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 if such funds do not continue to remain so invested or deposited after the 30 th day of March, 2001 : Provided also that the exemption under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall not be denied in relation to voluntary contribution, other than voluntary contribution in cash or voluntary contribution of the nature referred to in clause (b) of the third proviso to this sub-clause, 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 31 st day of March, 1992, whichever is later: [Provided also that wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he approval, as the case may be, and forward a copy of the order rescinding the notification or Inserted by the Finance Act, 2007, w.e.f. 1.6.2007 withdrawing the approval to such fund or institution or trust or any university or other educational institution or any hospital or other medical institution and to the Assessing Officer;]" (emphasis supplied) 26 . We may quote Section 10(22) of the 1961 Act, as it stood prior to 1.4.1999, which reads as follows: "10. Income 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." 27. We also quote hereinbelow Section 11(1)(a) of the 1961 Act, which reads as follows: "11. Income from property held for charitable or religious purposes. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (a) income derived from property held under trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted in (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 solely for education and not to earn profit. However, the purpose would not lose its character merely because some profit arises from the activity. That, it is not possible to carry on educational activity in such a way that the expenditure exactly balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realization but would reflect unsound principles of management. In order to ascertain whether the Institute is carried on with the object of making profit or not it is 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. 32. 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 co-relation to education, exemption has to be denied. (see judgment of this Court in Oxford University Press [supra]). Therefore, the character of the reci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olely for educational purposes [which was also the requirement under Section 10 (22)] but it has now to obtain initial approval from the PA, in terms of Section 10(23C)(vi) by making an application in the standardized 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 required to vet the application. This vetting process is stipulated by the second proviso. It is important to note that the second proviso also indicates the powers and duties of the PA. While considering the approval application in the second proviso, the PA is empowered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the applicant institution. Earlier that power was not there with the PA. Under the third proviso, the PA has to ascertain while judging the genuineness of the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval. 36. 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 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 with the provisions of the 1961 Act (including the abovementioned monitoring conditions). While imposing stipulations subject to which approval is granted, the PA may insist on certain percentage of accounting Income to be utilized/applied for imparting education in India. While ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 10(22) exemption should be denied to the profits arising from the commercial printing activity of the University since Section 10(22) gave exemption only to profits/income of an Indian University. All the three Judges held that it was impermissible to read in the words "in India" into Section 10(22) of the 1961 Act. As stated above, Section 10(23C)(vi) is analogous to Section 10(22) of the 1961 Act. The majority view, however, was that the University must carry on educational activities in India in order to satisfy Section 10(22). According to the majority view, some educational activity had to be carried on in India and since Oxford University Press carried on no educational activity in India, the exemption did not apply to the University. In other words, the majority judges held that "non-profit" qualification has to be tested against Indian activities and it is in this context that remarks regarding "in India" are made in the judgment of the majority at page nos. 672 and 684. 40. Moreover, it is important to note that, even after the Finance Act, 1998 w.e.f. 1.4.1999, the third proviso to Section 10(23C)(vi), which refers to monitoring conditions, confines the words "app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India. Therefore, in our view, it is always open to the PA to impose such terms and conditions as it deems fit. The interpretation we have given is based on harmonious construction of the provisos inserted in Section 10(23C)(vi) by the Finance Act, 1998. Lastly, we may reiterate that there is a difference between stipulation by the PA of such terms and conditions, as it deems fit under the provisos, and the compliance of those conditions by the appellant. The compliance of the terms and conditions stipulated by the PA would be a matter of decision at the time of assessment as availability of exemption has to be evaluated every year in order to find out whether the institution existed during the relevant year solely for educational purposes and not for profit. 42. In the light of what is stated above, we set aside order dated 12.10.2004 passed by CBDT, we remit the matter to CBDT for fresh consideration in accordance with law. We may clarify that, in this case, appellant has fulfilled the threshold pre-condition of actual existence of an educational institution under section 10(23C)(vi) and, therefore, on that count CBDT will not reject the approval application dated 7.4.1999. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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