TMI Blog2010 (1) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... ure envisaged in 13th proviso, the prescribed authority can withdraw the approval. (3) The capital expenditure wholly and exclusively to the objects of education is entitled to exemption and would not constitute part of the 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. (5) Where more than 15% of income of an educational institution is accumulated on or after 01.04.2002, 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 purpose of education. (6) The judgment of Uttrakhand High Court rendered in the case of M/s Queens Educational Society and the connected matters, is not applicable to cases fall within the provisions of Section 10(23C)(vi) of the Act. There are various reasons, which have been discussed in para 8.8 of the judgment, and the judgment of Allahabad High Court rendered in the case of City Montessori School [2009 -TMI - 33744 - ALLAHABAD HIGH COURT] lays down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been granted, could be amended. 4. The petitioner-society in response to the letter dated 3.12.2008/6.1.2009 (P-3) filed a reply giving details of excess of income over expenditure before depreciation and capital expenditure incurred by the school run by it from the Assessment Year 2006-07 as had been asked for and submitted that the phraseology of the provisions of Section 10 (23C)(vi) of the Act, namely, "Other educational Institution" would encompass the educational institutions run by a society registered under the Societies Registration Act, 1860 (for brevity, 'the 1860 Act'), inasmuch as, the term 'educational institution' or 'institution' has nowhere been defined in the Act. It was submitted that the educational institution run by the society could only be regarded as one falling within the ambit of 'other educational institution' and, therefore, it would fall within the provisions of Section 10(23C) of the Act (P-4). It has also been submitted that without affording an opportunity of hearing, show cause notice dated 11.3.2009 (P-5), was issued to the petitioner-society, inter-alia, stating as to why exemption granted to it be not withdrawn and reliance in that regard was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner-society, the Chief Commissioner of Income Tax-respondent No. 2, vide order dated 30.3.2009 (P-1) withdrew the exemption. 6. It is pertinent to notice that after grant of exemption vide order dated 31.5.2007/4.6.2007 (P-2), assessments in respect of Assessment Years, namely, 2000-01 upto 2007-08 have been framed under Section 143(3) of the Act. The petitioner-society has urged that withdrawal of exemption by respondent No. 2 is without application of mind and without evaluating the character and objects of the society on the basis of which exemption had been earlier granted, vide order dated 31.5.2007/4.6.2007 (P-2), under Section 12AA of the Act by treating the petitioner as a charitable institution. Earlier exemption was granted to the petitioner society under Section 80GT and 12AA of the Act after being satisfied that the petitioner-society is an institution solely existing for charitable purposes and not for profits. The operative part of the order passed by the Chief Commissioner reads as under:- "4. I have considered the submissions of the assessee. The decisions quoted in support of its contention are not relevant and are distinguishable on facts as well as issues. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2006-07 onwards (P-2). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 27.3.2009 withdrawing the exemption (P-1). CWP No. 9504 of 2009 9. Sikh Educational Society-petitioner has claimed that its main objects are to impart to the youths an education that will make them intelligent, patriotic and useful citizens of India by establishing, maintaining and managing educational institutions viz. Colleges and Schools or by taking over the control and management of the existing institutions. On 7.3.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10 (23C)(vi) of the Act from Assessment Year 2007-08 onwards (P-3). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to various universities/authorities. On 29.12.2006, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act effective from the Assessment Year 2002-03 onwards (P-5). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-6). It has been held by the Chief Commissioner that the aggregate gross profits of the petitioner in the last three years is 31.08% excluding depreciation, which is only a notional deduction. According to the Chief Commissioner it is the income before depreciation which is the indicator of profit margin as well as the pricing of services done by the petitionerassessee. 13. It has also been observed that it would be duty of the institution to lower its fees for the subsequent year so that such profits are not intentionally generated. Accordingly, liberty has been granted to the petitioner to reduce the fees being charged and price of its services and apply afresh. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 10(23C)(vi) of the Act from Assessment Year 2002-03 onwards (P-2). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-5). CWP No. 7065 of 2009 17. Shishu Niketan Model School-petitioner has claimed that it has been engaged for the last more than 40 years in the activity of providing education through schools at Chandigarh, Panchkula and Mohali, which are affiliated with the Central Board of Secondary Education, New Delhi. It has further been asserted that the petitioner is an educational institution existing solely for educational purposes and not for the purposes of earning profit. On 4.6.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2002-03 onwards (P-3). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serted that the petitioner is an educational institution existing solely for educational purposes and not for the purposes of earning profit. On 19.2.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2003-04 onwards (P-3). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-6). CWP No. 5649 of 2009 21. Baba Banda Singh Bahadur Education Trust-petitioner has claimed that it has been engaged in the activity of providing education. On 24.1.2008, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2007-08 onwards. Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order dated 3.2.2009 withdrawing the exemption (P-10). In para 2 of the order it has been observed that during the course of assessment proceedings in respect of Assessment Year 2006-07 the Assessing Officer noticed that the petitioner-Trust is not functioning as per the objects mentioned in the Trust Deed as it is not existing solely for purpose of education/medical services and there is an element of profit involved. This is evident from the surplus on account of fees etc. charged for the services rendered. After referring to the show cause notice dated 15.1.2009, reply submitted by the petitioner and various judgments, the Chief Commissioner came to the conclusion that the total surplus of the petitioner is ranging from 17.86% to 71.30% in the last three years, which cannot be regarded as merely incidental to the main purposes. The surpluses/profits generated are systematic and substantial. The Chief Commissioner also negated the plea of the petitioner that the surplus has been accumulated for further creation of infrastructure. It has been held by the Chief Commissioner that the petitioner is generating continuously surplus income year after year. CWP No. 5978 of 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinuously surplus income year after year. CWP No. 8317 of 2009 25. Smt. Savitri Bhagwan Dass Kaura Education Societypetitioner has claimed that it has been running a school solely for educational purposes and not for the purposes of making profit. On 27.3.2008, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act effective from the Assessment Year 2007-08 onwards (P-2). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-1). CWP No. 7038 of 2009 26. Saint Soldier Education Society-petitioner has claimed that it has been running a school solely for educational purposes and not for the purposes of making profit. On 15.2.2008, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act effective from the Assessment Year 2008-09 onwards (P-2). Upon review of the aforementioned order and after consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... review is conferred expressly by necessary implication on an authority and/or Court. It has been submitted that the Chief Commissioner in view of the un-numbered 13th proviso to Section 10(23C) of the Act is empowered to withdraw the exemption only on the grounds mentioned therein. In the case of the petitioner-society the exemption has not been withdrawn on the grounds specified in the 13th proviso of Section 10 (23C) of the Act. According to the learned counsel, the impugned order withdrawing exemption retrospectively is, thus, totally illegal and without jurisdiction. 31. Learned counsel then submitted that the impugned order dated 30.3.2009 (P-1) is ultra vires the provisions of the Act. In view of the proviso to Section 147 of the Act the assessments stood framed and finalized for the earlier assessment years by granting benefit of the exemption. Therefore, the same could not be re-opened by the Assessing Officer even if the impugned order withdrawing exemption is held to be valid though not admitted to be sustainable in law. The exercise undertaken by the Chief Commissioner of Income Tax withdrawing exemption retrospectively has, thus, been passed with total nonapplication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titution to lower its fees for the subsequent year so that such profits are not intentionally generated and if profits continue year after year then it could not be said that surplus is arising incidentally. Such reasoning is wholly irrelevant, inasmuch as, even if there is substantial surplus the institution can not cease to be one existing solely for educational purposes. 33. Another significant submission urged by the learned counsel is that the methodology adopted by the Chief Commissioner while computing surplus by not deducting the capital expenditure incurred by the petitioner-society from the gross income is contrary to the unnumbered third proviso to Section 10(23C)(vi) of the Act. The words 'not for the purposes of profit' accompanying the words 'existing solely for educational purposes' has to be read and interpreted in view of unnumbered third proviso to Section 10(23C) of the Act, which prescribes the methodology for the utilization and accumulation of income at the hands of the educational institutions by imposing two restrictions, namely, (i) accumulation of surplus upto 15% can be for any number of years by the educational institution for which purposes it is est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Supreme Court as applicable to Section 10(22) would equally apply to section 10(23C)(vi) of the Act. 35. While referring to the judgment of Hon'ble the Supreme Court rendered in the case of Municipal Corporation of Delhi v. Children Book Trust, AIR 1992 SC 1456, which has been made the basis by the Chief Commissioner for withdrawing the exemption, learned counsel has submitted that the same is not applicable to the cases under Section 10(23C)(iv) of the Act, primarily for the reason that the provisions under which the said judgment has been rendered are not pari materia to the provisions relating to exemption, namely, Section 10(23C) of the Act, apart from the scheme of the Acts being totally different. 36. Learned counsel have then referred to the judgments of Uttrakhand High Court rendered in the case of Queens Educational Society (supra) and other connected matters like M/s Saint Pauls Senior Secondary School, which have been made the basis for withdrawing the exemption by the Chief Commissioner, and submitted that the same are not applicable to the case of the petitioner-society. He has submitted that there the scope of the un-numbered third proviso was not under co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 10(23C) of the Act. It does not take the correct view of the judgment of Hon'ble the Supreme Court rendered in the case of American Hotel Lodging Association Educational Institute (supra). According to the learned counsel, in principle the judgment of Uttrakhand High Court is in direct conflict with the decision rendered by the High Court of Allahabad in the case of City Montessori School v. Union of India and Others, (decided on 29th of May, 2009). Learned counsel has also apprised the Court that the Special Leave Petition preferred against the decision in City Montessori School's case, has been dismissed by Hon'ble the Supreme Court. 39. It has been further submitted that the Uttrakhand High Court has decided the controversy arising from the regular assessment proceedings which had emerged as a result of disallowance of capital expenditure thereby treating it as profit of the assessee at the hands of the Assessing Officer within whose jurisdiction the question of allow-ability of such an expenditure had arisen, though the genuineness of the existence of the Trust was not doubted. CONTENTIONS OF THE REVENUE 40. Mr. S.K. Garg Narwana, Ms. Urvashi Dhugga, Mr. Rajesh Set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an element of public benefit or philanthropy has to be present. In the absence of a no profit no loss activity, the institution cannot be regarded as a charitable institution.They have also placed reliance on the judgment of Hon'ble the Supreme Court rendered in the case of Escorts Ltd. v. Union of India, [1993] 199 ITR 43 and argued that if an assessee incurs expenditure of a capital nature for imparting education he could claim only deduction of the specified percentage of the written down value of the asset under clause 10(2)(vi) and such a deduction could be claimed in five consecutive years of the expenditure he had incurred on the acquisition of asset. It has been emphasised that the judgment of Hon'ble the Supreme Court should not be read like a statute. The ratio has to be culled out by reading the whole judgment. It is not permissible to pick out a word or sentence from the judgment of Hon'ble the Supreme Court which may be completely divorce from the context of the question under consideration by giving it a cloak of complete law declared by the Supreme Court under Article 141 of the Constitution. In support of their submission, reliance has been placed on the observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rore] or (iiiae) xxx xxx xxx (iv) any other fund or institution established for charitable purposes which may be approved by the prescribed authority, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States; or (v) 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 sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or" [Italics added] 46. A perusal of the aforesaid provisions would show that if any income is received by a person on behalf of 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 then it would qualify for exemption as per Section 10(23C) (iiiab) of the Act. Likewise, if such an institution has annual receipt not exceeding the amount of Rs. 1 crore as prescribed by Rule 2BC then it would also be eligible for exemption irrespective of the fact whether it is wholly or substantially financed by the Gover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or other medical institution, under sub-clause (iv) or sub-clause (v) or subclause (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 such 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 prescribed authority may also make such inquiries as it deems necessary in this behalf: [un-numbered second proviso] Provided also that the fund or trust or institution or any university 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 (via) - (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified 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: [un-numbered fifth proviso] 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 subsection (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 31st day of March, 1992, whichever is later: [unnumbered sixth proviso] Provided also that nothing contained in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall apply in relation to any income of the fund or trust or institution or any university or other educational institution o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income and expenditure have not been rendered to the authority prescribed under clause (v) of sub-section (5C) of that section, in the manner specified in that clause, or which has been utilised for purposes other than providing relief to the victims of earthquake in Gujarat or which remains unutilised in terms of sub-section (5C) of section 80G and not transferred to the Prime Ministers National Relief Fund on or before the 31st day of March, 2004 shall be deemed to be the income of the previous year and shall accordingly be charged to tax: [un-numbered eleventh proviso] Provided also that where the fund or trust or institution or any university 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 (via) does not apply its income during the year of receipt and accumulates it, any payment or credit out of such accumulation to any trust or institution registered under section 12AA or to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or subclause (v) or sub-clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reof, such application shall be made at any time during the financial year immediately preceding the assessment year from which the exemption is sought: [unnumbered fourteenth proviso] Provided also that any anonymous donation referred to in section 115BBC on which tax is payable in accordance with the provisions of the said section shall be included in the total income: [un-numbered fifteenth proviso] Provided also that all pending applications, on which no notification has been issued under sub-clause (iv) or subclause (v) before the 1st day of June, 2007, shall stand transferred on that day to the prescribed authority and the prescribed authority may proceed with such applications under those sub-clauses from the stage at which they were on that day; [un-numbered sixteenth proviso]" 47. Before discussing the effect of provisos, which have been inserted by the new dispensation, it is significant to refer and examine Section 10(22) vis- -vis Section 10(23C)(vi), which have been held to be analogues to each other. The scope of section 10(22) of the Act, which is precursor of Section 10(23C)(vi), has been analysed by their Lordships' of Hon'ble the Supreme Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exists solely for education and not to earn profit. Likewise, in Aditanar Educational Institution's case (supra) the test laid down is to find out the nature of activity. Therefore, the character of the recipient of income must have the character of educational institution, to be ascertained from the nature of the activities. The law in respect of the aforesaid test even after the new dispensation from 1.4.1999 continues to be the same as it was under Section 10(22) of the Act. The aforesaid view has been expressed by their Lordships' of Hon'ble the Supreme Court in the case of American Hotel and Lodging Association (supra) by observing that 'the judgment of this Court as applicable to Section 10(22) would equally apply to Section 10(23C)(vi). The problem arises with the insertion of the provisos to Section 10(23C) (vi).' It is, therefore, evident that as long as an institution exists solely for educational purposes then it would qualify for grant of exemption under Section 10(23C)(vi) of the Act. 49. We have prefaced the discussion on provisos with the object of putting the real controversy in its true perspective. The orders passed by the Chief Commissioner are identical in al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lost the entitlement to seek exemption. It was in the aforesaid ackground that Hon'ble the Supreme Court analysed various provisos added w.e.f. 1.4.1999 and proceeded to observe that 'with the insertion of the provisos to Section 10 (23C)(vi) the applicant who seeks approval has not only to show that it is an institution existing solely for educational purposes [which was also the requirement under Section 10(22)] but it has now to obtain initial approval from the prescribed authority, in terms of Section 10(23C)(vi) by making an application in the standardized form as mentioned in the first proviso to that section'. Hon'ble the Supreme Court then proceeded to examine various provisos by observing as under:- " 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 prescribed authority. While considering the approval application in the second proviso, the prescribed authority is empowered before giving approval to call for such documents including annual accounts or information from the applicant to ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso may even extend to the examination of accounts of the institution, application of its income to the object and purposes of education and other cognate aspects as has been indicated in the observation made by their Lordships'. Once on the basis of genuineness of the activities of an educational institution approval is granted for exemption then the monitoring provisions would come in play and the Assessing Officer has to examine whether the conditions on which the exemption was given, have been fulfilled or not. The aforesaid opinion is also supported by the speech of the Finance Minister as reported in [1998] 232 ITR 13 (ST). 52. Hon'ble the Supreme Court in para 32 of the judgment rendered in American Hotel and Lodging Association (supra) has further held that there is difference between stipulation of conditions and compliance therein. It has been held that the threshold conditions are aimed at discovering the actual existence of an educational institution and approval of the prescribed authority for which an application in the standardized form in terms of the first proviso has to be given by every applicant. If the pre-requisite condition of actual existence of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The view we have taken, namely, that the prescribed authority can stipulate conditions subject to which approval may be granted finds support from sub-clause (ii)(B) in the thirteenth proviso." 53. The question then is whether accumulation of income year after year extending over 4/5 years would deprive an educational institution existing solely for education purpose, its character as an educational institution solely for education purpose and not for profit. In the 5-Judge Constitution Bench judgment rendered in the case of Surat Art Silk Cloth Manufacturers Association (supra), the question of interpretation of clause 15 of Section 2 of the Act was involved. The words 'not involving the carrying on any activity for profit' occurring at the end of the definition of 'charitable purpose' in the aforesaid provision were interpreted. After analyzing various judgments and the speech of the Finance Minister, it has been held as under:- " The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." (emphasis added) 55. It is further appropriate to point out that Rule 2BC of the Rules has prescribed the limit of Rs. 1 crore where the requirement of seeking approval for exemption would not be applicable. If the turn over is more than Rs. 1 crore then exemption in terms of Section 10(23C)(vi) is required. The un-numbered third proviso postulates the investment and deposits of surplus funds. An educational institution could make deposits and can also earn interest, which is permissible. There are certain limits imposed on the accumulations which of course have to be met. A Division Bench of Delhi High Court in the case of Director of Income-Tax (Exemption) v. Eternal Science of Man's Society, [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he educational institution like the petitioner-society and the Chief Commissioner has committed grave error in law by refusing to do so. The view of the Chief Commissioner is contrary to the third proviso to Section 10(23C) of the Act. 58. The methodology adopted by the Chief Commissioner of Income Tax, while computing surplus by not deducting the capital expenditure incurred by the petitioner-society from the gross income is contrary to the un-numbered third proviso to section 10(23C)(vi) of the Act. The words 'not for the purposes of profit' accompanying the words 'existing solely for educational purposes' has to be read and interpreted in view of third proviso to Section 10(23C), which prescribes the methodology for the utilization and accumulation of income at the hands of the educational institutions by imposing two restriction, namely, (i) that accumulation of surplus upto 15% can be for any number of years by the educational institution for which purposes it is established; and (ii) if the accumulation is more than 15% of the income the same can be accumulated for a maximum period of 5 years to be utilized for achieving the objects of the society. The inevitable consequenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the capital expenditure incurred by the trust would be application of income and the assessee would be entitled to exemption under Section 11(1) of the Act. Even the High Court of Uttrakhand in the case of CIT v. Jyoti Prabha Society, (2009) 177 Taxman 429 (Uttrakhand) has held that the educational society which had utilized rental income again for the purposes of imparting education by maintaining the buildings and constructing new building for the same purpose, would be entitled to the exemption claimed under Section 11 of the Act. Section 11(1)(a) is pari materia to the third proviso to Section 10(23C)(vi) of the Act and the only difference is with regard to the percentage of income and the period for which it can be carried forward. Yet again the judgment rendered by the High Court of Calcutta in the case of Birla Vidya Vihar Trust v. CIT, (1981) 7 Taxman 391, deserves to be taken note of wherein noticing the Circular dated 19.6.1968 it has been emphasized that capital expenditure has to be deducted from the total income of the Trust for the purposes of finding out how much has been accumulated by the assessee-Trust. Thus, both on principle and precedents the capital expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f its total income earned during the financial year for pursing its objects and the express monitoring conditions provided for by the legislature upon the fulfillment of which even if there remains a surplus at the hands of the educational institutions, it would be entitled to exemption provided the educational institution solely exists for educational purposes. 61. The observations of Hon'ble the Supreme Court quoted from para 82 of the aforesaid judgment to the effect that - "what we want to stress is where a society or body is making systematic profits, even though that profit is utilized only for Charitable purposes, yet it cannot be said that it could claim exemption" deserves to be read in conjunction with the express provisions of the third proviso to Section 10(23C)(vi) of the Act which stipulate the retention of 15% of the profits of the total income after quantification therefore, of the educational institution earned in each year provided 85% of the total income is spent for the objects of the society. In fact, the judgment rendered by Hon'ble the Supreme Court in Children Book Trust Case (supra) on the facts and in the circumstances of the case of the petitioner-soci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erate funds for betterment and growth of the institutions and for which there may be a surpluses for furtherance of education. Therefore, it is not only permissible but an important requirement to run the institutions of such a strength. Further, in Aditanar Educational Institution (supra), Hon'ble the Supreme Court has observed that when surplus is utilized for educational purposes i.e. for infrastructure development, it cannot be said that the institution was having the object to make profit. Hon'ble the Supreme Court has rightly observed time and again that surpluses used for management and betterment of the institutions could not be termed as profit. If the stand of the Department/Revenue is accepted to be correct, especially in the wake of the methodology adopted by the Chief Commissioner in ascertaining profits, then no educational institution like the petitioner-society could be said to be existing solely for educational purposes as in every case of an educational institution there is bound to be a profit. The provision of Section 10(23C)(vi) would be rendered otiose if the interpretation adopted by the Chief Commissioner is accepted and the manner in which exemption validly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in Section 10(22). The object of the society is to establish, run, manage or assist colleges or schools or other educational institutions solely for educational purposes and in that regard to raise or collect funds, donations, gifts etc. Colleges and schools are media through which the assessee imparts education and effectuates its objects. In substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the levels of colleges and schools and so, such an educational society should be regarded as an "educational institution" coming within Section 10(22). We hold accordingly." (emphasis added) 64. We have not been able to persuade ourselves to accept the view expressed by the Division Bench of the Uttrakhand High Court in the case of M/s Queens Educational Society (supra). There are variety of reasons to support our opinion. Firstly, the scope of the third proviso was not under consideration, inasmuch as, the case before the Uttrakhand High Court pertained to Section 10(23C)(iiiad) of the Act. The third proviso to Section 10(23C)(vi) is not applicable to the cases falling within the purview of Section 10(23C)(iiiad). Secondly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 85% of its income for educational purposes for the assessment years in question and, therefore, it is totally wrong on the part of the respondents to contend that the writ petition of the petitioner-society deserves to be dismissed in view of the aforesaid judgment rendered by this Court in the case of Dr. Maharaj Krishna Kapur Educational Charitable Trust and Management Society (supra). 66. Similarly, in the case of The Scientific Educational Advancement Society (supra) the petitioner, which was a school, had sold a piece of land to a private builder who had built flats on that area and had purchased two farmhouses constructed by M/s Ansal Group of Builders who had built the same as residential units. The Chairman of the petitioner in that case had been visiting the farm houses and no permission from any prescribed authority had been obtained for opening any educational institute on the property purchased. Nothing was brought on record to show that the petitioner had intended to carry out any educational activity on the said land. It was in this backdrop that this Court upheld the order of the Chief Commissioner, who had refused to grant exception under 10(23C)(vi) of the Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 not be deciding factor to conclude that the educational institution exists for profit. (2) The provisions of Section 10(23C)(vi) of the Act 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent that capital assets acquired/constructed by the educational institutions have been treated as income in a blanket manner without recording any finding whether the capital assets have been applied and utilised to advance the purpose of education. It is obligatory on the part of the prescribed authority while exercising power under un-numbered thirteenth proviso to consider whether expenditure incurred as capital investment is on the object of education or not. Therefore, the orders impugned in these petitions passed by the prescribed authority are liable to be quashed. It is appropriate to mention that in these cases the impugned orders passed by the Chief Commissioner of Income Tax, Chandigarh and those of by the Chief Commissioner of Income Tax, Ludhiana, are similar in substance and appear to have been inspired by the view taken by the Uttrakhand High Court in the case of M/s Queens Educational Society (supra), which we have not accepted. 71. As a sequel to the aforesaid discussion, these petitions are allowed and the impugned orders passed by the Chief Commissioner of Income Tax withdrawing the exemption granted under Section 10(23C) (vi) of the Act are hereby quashed. Ho ..... 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