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2018 (4) TMI 714

d that:- The assessee fulfilled the requirements under section 10(23C)(vi) of the Act to qualify for exemption; DPS Society is maintaining its eleven schools and the 120 satellite schools in furtherance of the education joint venture agreements with an educational purpose that also qualifies as a “charitable purpose” within the meaning of section 2(15) of the Act and is not in contravention of section 11(4A) of the Act. - This court feels compelled to observe that Section 10(23C)(vi) ought to be interpreted meticulously, on a case-to-case basis. The larger objective of an educational/ charitable purpose of the institution and its manifestation can only be subjectively adjudged; for instance, in the present situation, the balance sheets of the assessee demonstrate how the profits are utilized for the growth and maintenance of the very schools they are accrued from, thus, subscribing to a charitable motive. - Educational institutions may take more creative steps to qualify their objectives as an “educational purpose” that is more universal than the individual objectives set out in the memoranda of objectives of such institutions. For instance, a percentage of profits earned .....

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hereafter the revenue ) against orders of the Income Tax Appellate Tribunal ( ITAT ). Facts and Contentions 2. The assessee is aggrieved by the rejection by the DGIT of its application grant of exemption for assessment years 2008-09 onwards, as a charitable organization. The assessee is a society registered under the Societies Registration Act, 1860 with the Registrar of Societies, Delhi. It has established 11 schools and has also permitted societies/ organizations/ trusts with similar objects to open schools under the name of Delhi Public School , in and outside India. As on date, 120 schools are functioning under that name in and outside India as on date. The arrangement for opening schools by other societies is through execution of an education joint venture agreement (hereinafter, also referred to as agreement ). In terms of the agreement, the parties jointly agree to manage the school where the Assessee has a significant say and control in the management of these schools. 3. The main object of DPS Society as detailed in their memorandum of association is as follows: (i) to establish progressive schools or other educational institutions in Delhi or outside Delhi, open to all wi .....

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that it would be entitled to exemption under section 10(23C)(vi) of the Act. It is urged that considering that the receipts from such activity were ploughed back for pursuing the objects of the Assessee. This entitled it to claim the exemption. The decision of the Supreme Court, reported as ACIT v. Thanthi Trust 247 ITR 785 was cited in this regard. There it was held that: The substituted sub-section (4A) states that the income derived from a business held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the trust or institution if "the business is incidental to the attainment of the objective of the trust or, as the case may be, institution" and separate books of account are maintained in respect of such business. Clearly, the scope of sub-section (4A) is more beneficial to a trust or institution than was the scope of subsection (4A) as originally enacted. In fact, it seems to us that the substituted sub-section (4A) gives a trust or institution a greater benefit than was given by section 13(1)(bb). … As it stands, all that it requires for the business income of a trust or institution to be .....

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ools which are established by other societies or entities, but are engaged in imparting education. The DPS society s role is to help those schools to maintain a level of proficiency in teaching and education, and enable them to be described as DPS schools. This would in fact be part of the DPS society s objective of imparting education and providing access to schools to a wider section of the population, not only those which are in Delhi or National Capital Territory, or those directly established and administered by the assessee, but others who follow its pattern of administration and imparting education. The proceeds of such maintenance charges received by the DPS society are used directly by it for the society s activities in imparting education in its schools. 10. In the appeals, the revenue primarily contended the impugned orders of the ITAT whereby, the ITAT deleted the additions of various amounts for the assessment years of 1998-1999, 1999-2000, 2000-2001, 2001-2002, 2003-2004 and 2005-2006, made respectively by the Assessing Officer, holding that the income received by the assessee in each such case as a franchisee fee was exempt under section 10(23C)(vi) of the Act and th .....

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t. Accordingly, the Assessing Officer held that the activity carried out by the assessee was not incidental to attainment of the objects of the trust but for profit motive. 13. The AO held, for AY 2001-02 (which was decided first) that the activity charging franchisee fee could not be regarded as charitable activity within the meaning of section 2(15) of the Act and therefore, the Assessee was held to be not entitled to benefit under section 11 of the Act, also due to contraventions of provisions of section 11 (4A) of the Act. Accordingly, it was held that the amounts received by the Assessee as franchisee fee from various schools was held to be a business income chargeable to maximum marginal rate of tax. The relevant findings of the AO are extracted below: On a bare perusal of the provisions of the said section it is clear that profit and gains of the business shall not be eligible for exemption us 11(1), (2), (3) and (3A) unless such business is incidental to the attainment of the object of the trust and separate books of account are maintained by such trust in respect of such business. A business can be described as a continuous exercise of an activity. It is done on a systemat .....

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f account. Further Memorandum of Association of the society has been gone through. In this regard, the relevant object clause of the society is reproduced as under:- To establish progressive schools or other educational institutions in Delhi or outside Delhi open to all without any distinction of race or creed or caste or special status with a view: On perusal of the said object clause, it is no where provided that grant of licenses on commercial basis to other societies bodies to open schools at other places is a stated object. It is only provided to establish school institute by the society by itself. The activity of the society to use its name commercially for permitting other entities to open schools cannot be considered as a falling within the sphere of incidental to attainment of objects of the society. This is purely a commercial pursuit. The act of giving licenses to use the name of Delhi Public School against financial consideration does not fall within the ambit of activity incidental to attainment the object of the society. It is purely a commercial and independent activity with profit motive and cannot be related with aims and objects of charitable nature. In view of th .....

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tax the amounts received from the collaborators school by terming the said receipts as business income. We also find that one of the objects of the assessee is to establish progressive schools or other educational institutions in Delhi or outside Delhi. Perusal of the agreement under which satellite schools were being set up by the assessee, also shows, that apart from allowing the satellite schools to use the name of Delhi Publish School and its Logo and Moto, the assessee also undertakes rendering of several services. These services include imparting of education and providing the necessary staff to impart education. By no stretch of imagination can it be said that the purpose sought to be achieved through this agreement for establishing satellite schools is not educational. Apart from the above, the prescribed authority having satisfied itself that the assessee exists for educational purposes and not for the purpose of profit, has thought it fit to approve the assessee for the purpose of applicability of provisions of sec. 10(23C)(vi) of the Act. The Hon'ble AP High Court in the case of Governing. Body of Rangaraya Medical College Vs ITO reported in 117 ITR 284 (AP) had ano .....

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to the society for common expenses from various schools with which it had entered into agreement' to provide services have been duly incorporated. A complete set of accounts of the society had also been furnished before the AD. Apart from the above, The Chandigarh Bench of the Tribunal in the case of ITV vs Trilok Tirath Vidyavati Chuttani Charitable Trust has held that the purposes of maintaining separate books of account is only to enable the AO to find out true income and also whether the assessee fulfills the conditions laid down u/s 11 for exemption and also whether running of such undertakings is for profit motive or incidental to the objectto the trust. The Bench held that it is not mandatory and non-maintenance of separate books of account shall not prove fatal to the claim of the assessee for exemption u/s 11. As already observed, a separate set of books of accounts were' maintained by the assessee showing the receipts towards reimbursement of the expenses from the various other schools. 16. In view of the above, we are of the view that revenue authorities were not justified in bringing to tax the amount received by the assessee from the satellite schools. The add .....

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irement ignored, the assessee had created a separate revenue stream. 17. Ms. Malhotra submitted that the so called maintenance charges were in fact nothing more than a franchise fee, for use of the DPS trade mark and logo. Consequently, the amounts received were for name lending. She contested the submissions of the society with respect to education in the DPS pattern, provided by the satellite schools, by stating that the record nowhere showed that such schools were charitable in nature or their underlying objectives were not coloured by profit motive. In the absence of any such indication, there could be no conclusion, except that the amounts were collected in furtherance of a business activity, without complying with the legislative requirement of maintaining separate books of account. It was lastly submitted that the assessee concededly was subjected to service tax and was paying it. She relied on the findings of the Customs Excise and Service tax Appellate Tribunal (CESTAT) in its order, in support of her submission. 18. Mr. Syali, for the assessee relied on the submissions made in support of the writ petition. He submitted that there was evidence to establish that the account .....

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follows: 10. lncomes 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 nor for purposes of profit. The subsequently introduced Section 10(23C)(iii) (ad) and (vi) of the Act, are as follows: 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- …any income received by any person on behalf of- …. (iiiad) 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 amount of annual receipts as may be prescribed; … (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 .....

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ates a mandatory requirement that the accounts of such educational institutions ought to be audited in respect of that year and it should furnish the same along with the return of income for the relevant year. 22. There is a multitude of authorities that have surveyed and analyzed the exemption permitted under Section 10(23C)(vi),which broadly conclude that if the educational institution merely acquires a profit surplus from running its institution, that alone would not belie its larger education purpose. For instance, in Queen s Educational Society (supra) the Supreme Court, by citing, inter alia, Aditanar Educational Institution v. Additional Commissioner of Income Tax (1997) 224 ITR 310, and American Hotel and Lodging Assn. Educational Institute v. CBDT (supra), focused on the requirements that were germane to qualify for exemption under the erstwhile section 10(22) and the subsequent section 10(23C)(vi) of the Act, namely that: the activities of the educational institution should be incidental to the attainment of its objectives and separate books of account should be maintained by it in respect of such business; primarily to highlight that even if an educational institution in .....

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tity and (b) Separate books of account should be maintained in respect of such business. 24. In Queen s Educational Society (supra), the Supreme Court went on to summarize the law that arises under Section 10(23C) as follows: 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 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 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 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 w .....

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ve 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 Prescribed Authority (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. 26. As can be seen from the present income tax appeals, the prescribed authority has examined the assessee s application for exemption under Section 10(23C)(vi) in light of the recent audits of the assessee s accounts. Although DPS Society, in the earlier years had been granted exemption under section 10(23C)(vi), that itself does not cause for a res judicata principle, as examination of the Assessee s audited accounts may be done afresh by the prescribed authority, corresponding to the specific assessment year, as prescribed in th .....

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see has maintained, accounts audited in detail for financial years 2000-2001, 2003-04, 3004-05 and 2005-06. That aspect has been found by the ITAT for those assessment years. Such accounts have been maintained in compliance to what is required under the seventh proviso to Section 10(23C)(vi) and section 11(4A) of the Act. 29. Furthermore, the memorandum of association of DPS Society, as well as the joint venture agreements entered into by DPS Society with the satellite schools validate the motive of an educational purpose that the Assessee aims through its business activities and substantiate its contentions in that regard. On review of the assessee s audited accounts, it can be observed that the surpluses accrued by DPS Society are being fed back into the maintenance and management of the DPS schools themselves. This, reaffirms the Assessee s argument that the usage of the gains arising out of its agreements are incidental to its educational purpose outlined by its objective of the Assessee. 30. The interpretation of section 10(23C)(vi) is one that requires fulfillment of a two pronged test: firstly, that any business activity if carried out by the educational institution applying .....

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essee has set out in its memorandum of objectives. 32. This court also notices that after the Assessee filed an application for grant of exemption under section 10(23C)(vi) for assessment year 2008-09 onwards, that was rejected; in a notification, the DGIT under section 10(23C)(vi) issued certain conditions which were also duly fulfilled by the Assessee, as follows: Sl.No. CONDITIONS COMPLIANCE I The assessee will apply its income or accumulate for application wholly and exclusively to the objects for which it is established. The society as in the past has applied its income wholly and exclusively to the object for which it was established. Never in the past has there been violation in respect of application of income by the society. II The assessee will not invest or deposit its funds (other than voluntary contributions received and maintained in the form of jewellery, furniture etc.) for any period during the previous years relevant to the assessment years mentioned above otherwise than in any one or more of the forms or modes specified in subsection (5) of section 11. Complied with III This order will not apply in relation to any income being profits and gains of business unless .....

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the profits are utilized for the growth and maintenance of the very schools they are accrued from, thus, subscribing to a charitable motive. However, the educational institutions may take more creative steps to qualify their objectives as an educational purpose that is more universal than the individual objectives set out in the memoranda of objectives of such institutions. For instance, a percentage of profits earned from a business activity indulged in by such an educational institution may be mandated towards fructifying the implementation the provisions of the Right to Education Act, 2009, particularly, to create a more sensitive learning environment for children with disabilities in implementation of the provisions in the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, or have a system to analyze the ratio of inflow of money over progressive assessment years as opposed to how much of this money is channeled back into the growth and maintenance of such educational purpose, in order to put in place a visible system of accountability. This is an observation, to ensure that the purpose for which section 10(23C)(vi) of the Act .....

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