Income Tax Appellate Tribunal - Amritsar
Vipan Langer, Educational Trust,, ... vs Department Of Income Tax on 1 January, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL,
AMRITSAR BENCH; AMRITSAR
(CAMP : JAMMU)
BEFORE SH. A.D. JAIN, JUDICIAL MEMBER
AND SH. T.S. KAPOOR, ACCOUNTANT MEMBER
ITA No.503(Asr)/2014
Assessment year:2010-11
PAN:AAATV9344A
Income Tax Officer, vs. M/s. Vipan Langer Educational
Ward-2(3), Jammu. Trust, Ward No.12, Rajouri (J&K)
(Appellant) (Respondent)
Appellant by:Sh. K.V.K. Singh, DR
Respondent by:Sh.Vinamar Gupta, CA
Date of hearing: 03/12/2015
Date of pronouncement: 01/01/2016
ORDER
PER A.D. JAIN, JM:
This the Department's appeal for the assessment year 2010-11, against the order, dated 23.05.2014, passed by the ld. CIT(A), Jammu. The assessee has taken the following Grounds of Appeal:
"1. Whether the ld. CIT(A) was right in allowing the exemption claimed by the assessee u/s 10(23C)(iiiad) of the I.T. Act, 1961, in respect of excess of income over expenditure.
2. Whether the ld. CIT(A) was right in allowing the exemption claimed by the assessee u/s 10(23C)(iiiad) of the I.T. Act, 1961, where the assessee does not have registration u/s 12AA of the Act.
3. Whether the ld. CIT(A) was right in not considering the income/expenditure statement of the assessee which clearly shows that the assessee has generated surplus profit out of total receipts and it has not spent all its receipts on its main aims and objects.
4. Whether the ld. CIT(A) was right in not considering the decision of Hon'ble Uttrakhand High Court in the case of CIT vs. Queens Educational Society, Haldwani and CIT vs. St. Pauls Sr. Secondly School, Kathygodam dated 24.09.2007 where in the Hon'ble High Court has answered the issue in 2 ITA No.503(Asr)/2014 Assessment year : 2010-11 negative holding that the assesse was not entitled to claim the deduction. The ratio of the decision is squarely applicable in the said case of the assessee."
2. The brief facts of the case are that the assessee trust is engaged in running a school at Rajouri under the name and style of 'International School'. The assessee-trust filed the return of income declaring nil taxable income after claiming exemption u/s 10(23C)(iiiad) of the I.T. Act on surplus of Rs.33,26,105/-. While deciding the case u/s 143(3) of the I.T. Act, the AO disallowed the exemption claimed.
3. The AO observed that the objects of the trust included many objects which were other than education. A plain reading of Sec. 10(23C) (iiiad) makes it clear that the institution should exist solely for educational purposes and not for purpose of profit. The assessee trust existed not only for purposes other than education, but for the purpose of profit year on year. The income/expenditure statement showed that the trust had generated surplus profit out of total receipts and it had not spent all its receipts on the main aims and objects of the trust. As per the decision of the Hon'ble Uttrakhand High Court in the cases of CIT vs. Queens Educational Society, Haldwani and CIT vs. St. Pauls Sr. Secondary School, Kathgodam, dated 24.09.2007, the assessee was an educational society imparting education to children. During the relevant assessment year, there was surplus in its account books after meeting all expenses incurred towards imparting education. It invested the said surplus in fixed assets like furniture and buildings with a view to expand the institution and to earn more income. The High Court was required to consider as to whether the assessee was entitled to exemption u/s 10(23C)(iiiad) of the Act. The Hon'ble High Court answered the issue in the negative, holding that the assessee was not entitled to claim the deduction. The ratio of the above decision is squarely applicable in the case of the assessee. In the above decision, the Hon'ble High Court relied on the Hon'ble Supreme Court's decision in the case of Aditanar 3 ITA No.503(Asr)/2014 Assessment year : 2010-11 Education Institution vs. Addl. CIT reported in 224 ITR 310 (SC). The AO further observed that the assessee had claimed that the ld. CIT(A) had decided the issue in the assessee's own case for the AY 2009-10, vide appeal no. 155/11-12, dated 05.11.2012, in the favour of the assessee, but the department had not accepted the decision of the CIT(A) and had filed appeal before the ITAT, Amritsar. The AO also observed that after going through the accounts of the trust, it was seen that the assessee trust had generated surplus (profit) out of their total receipts and that it could not be accepted that the surplus generated was merely incidental. The surplus generated had been utilized by the trust for making investment in fixed assets/capital assets, the construction of building, etc., in order to generate larger surplus and not for the utilization of all the objects of the trust. The AO observed that in the case of Pinegrove International Charitable Trust vs. Union of India, the department had not accepted the decision of the Hon'ble P & H High Court and had filed SLP (C) no. 5381/2011 before the Hon'ble Supreme Court; and that on a similar issue, in the case of CCIT, Amritsar vs. Ajanta Educational Centre, the department had filed Special Leave Petition SLP Civil No.4445/2011 before the Hon'ble Supreme Court against the decision dated 20.05.2010 of the Hon'ble P & H High Court.
4. On appeal, the ld. CIT(A) deleted the disallowance. Now, the department is in appeal before us.
5. The ld. DR contended that the ld. CIT(A) has erred in allowing the exemption claimed by the assessee u/s 10(23C)(iiiad) of the Act, even though the assessee trust is not registered u/s 12AA of the Act. He further contended that the ld. CIT(A) is not right in considering the income/expenditure statement of the assessee which clearly showed that the assessee had generated surplus profit out of total receipts and it had not spent all its receipts on its main aims and objects. He also placed reliance on the decisions of the Hon'ble Uttarakhand High Court, in the case of CIT vs. Queens Educational Society, Haldwani and CIT vs. St. 4 ITA No.503(Asr)/2014 Assessment year : 2010-11 Pauls. SR. Secondary School, Kathgodam dated 24.09.2007, wherein, the Hon'ble High Court has answered the issue in the negative, holding that the assessee was not entitled to claim the deduction.
6. The ld. counsel for the assessee, per contra, placed reliance on the order of the Amritsar Bench of the Tribunal, in the assessee's own case, dated 05.09.2014, passed in ITA No.26(Asr)/2013 for the assessment year 2009-10, wherein the Tribunal has upheld the order of the ld. CIT(A) on similar facts and circumstances. The ld. Counsel further stated that the ld. CIT(A) has rightly granted exemption u/s 10(23C)(iiiad) of the Act to the assessee. Further, he placed reliance on the decision of the Hon'ble Supreme Court, dated 16.03.2015, in "M/s. Queen's Educational Society vs. Commissioner of Income Tax" and other connected cases.
7. The facts of the present case are not in dispute. The assessee trust is running a school in a remote area of Rajouri (J & K) and as per record, it is not carrying out any other activity. For the year under consideration, i.e., assessment year 2010-11, the assessee had gross receipts from this activity, of less than one crore and thus, it claimed exemption u/s 10(23C)(iiiad). The assessee is not getting government aid and is running the institution from its own funds. The assessee had a surplus of Rs.33,26,105/- in the year, which was spent for educational purposes, including on construction of school building. The AO disallowed this surplus on the ground that the assessee had a few more objectives other than the object of education. The objects of the assessee trust are as under:
1. To undertake educational activities and for this purpose to construct, run and maintain school, colleges and educational centres.
2. To grant Scholarships, Stipends, Prizes, Rewards, Financial another assistance to students.
3. To establish Libraries and Book Banks for the benefit of the students.
4. To purchase and maintain play ground for the purpose of students.5 ITA No.503(Asr)/2014
Assessment year : 2010-11
5. To construct, maintain and run hostels for the benefit of students.
6. To conduct educational tours and debates for the expansion of knowledge and betterment of the students.
7. To publish literature of the betterment of the students.
8. To provide health services, medical aid of all sorts to the public and for this purpose establish, promote, support, maintain, help and run Nursing Home, Medical camps, hospitals, medical institutes etc.
9. To take over any other trust or society or organization carrying on the activities of imparting education or medical relief of the poor and whose objects are similar to the object of this trust.
10. To help and assist poor and deserving people in marriage.
11. To make donation to other public charitable trust/institutions having objects similar to this trust.
12. To assist hospitals in setting up the various facilities such as Blood Bank, Eye Bank, Burn Centres, etc., for the poor patients.
13. To promote and advance moral education charity and general welfare of the people.
14. To render financial assistance to the poor and the disadvantaged.
15. To do all acts necessary and conducive to the achievement of the object of objects mentioned hereinabove.
8. It is seen that the AO does not appear to have any problem with object nos. 1 to 7 and partly, object nos. 9, 11 and 15 of the assessee trust. These are the objects with regard to education. The AO's objection is regarding object nos. 8, 10 to14 and parts of object nos. 9, 11 and 15.
9. To reiterate, object no. 8 concerns public health services and medical aid; object no. 10 is about assistance to the poor and deserving in marriage; object no. 12 talks of assistance to hospitals in setting up health facilities for poor patients; object no. 13 is regarding promotion and advancement of moral education and charity and the general welfare of the people; and object no. 14 seeks to render financial assistance to the poor and disadvantaged. Part of object no. 9 relates to medical relief to the poor. Object no. 11 concerns donation to other trusts/institutions 6 ITA No.503(Asr)/2014 Assessment year : 2010-11 having objects similar to those of the assessee, whereas object no.15 addresses doing of all acts necessary and conducive for achieving all the other objects of the assessee. Thus, parts of these two objects, in so far as they do not relate to education, are objected to by the AO.
10. The AO observes in his order (para 3.1) that the objects of the assessee trust include many objects which are other than educational. However, these 'other objects', as enumerated above, have not been shown by the AO to be objects having any profit motive. Now, the requirement of section 10(23C)(iiiad) of the I.T. Act is that the trust/institution must not exist for purposes of profit. In the present case, nothing was brought on the record by the AO, that the assessee trust did exist for any profit motive whatsoever. To reiterate, these 'other objects' concern medical relief to the poor, financial assistance to the poor and assistance in matrimony to the poor and deserving.
11. Moreover, as correctly taken into consideration by the ld. CIT(A), the AO has not shown, much less proved, the assessee to have carried out any of these 'other objects', beside education. Before us too, the ld. CIT(A)'s observation in this regard remains unchallenged. The ld. CIT(A) has recorded, and rightly so, that these 'other objects' are merely 'objectives on paper'. The AO has not shown the assessee to have carried out any profit earning activity whereby the assessee can be alleged to be earning profit in the garb of such 'other objects'. So, for all intents and purposes, the assessee exists solely for educational purposes. Moreover, as the ld. CIT(A) has correctly noted, in section 10(23)(iiiad), the comparison is between educational and profit purposes, rather than between educational and other ones.
12. In "CIT vs. Geetha Bhavan Trust", 213 ITR 296 (Ker.) it has been held, dealing with section 10(22) of the Act, which provision preceded section 10(23C)(iiiad) on the statute and which, for our present purposes, is in pari materia with section 10(23C)(iiiad), that what is 7 ITA No.503(Asr)/2014 Assessment year : 2010-11 relevant is the source of the income derived from an educational institution existing solely for educational purposes.
13. In the present case, it remains undisputed that during the year, the assessee turst was running a school in a remote area of Rajouri in the state of Jammu & Kashmir. It was carrying out no other activity. It was not getting any Government aid and was running the school out of its own funds. The gross receipts of the assessee from this activity of running its school were of less than one crore rupees. It was, therefore, that it claimed exemption u/s 10(23C)(iiiad) of the Act. During the year, it had a surplus of Rs.33,26,105/-. This surplus was from no other activity, but of running the school. The assessee spent this surplus for educational purposes, including construction of school building. The ld. CIT(A) has rightly observed that such a surplus cannot be interpreted as existing solely for profit. In this regard, as per "CIT vs. Surat Art Silk Manfacturers' Association", 121 ITR 1(SC), every trust or institution must have a purpose for which it is established and every purpose must, for its accomplishment, involve the carrying on of an activity. Now, where an activity is not pervaded by profit motive, but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit. In the present case, undeniably, the only activity of the assessee being in its avowed field of education, no profit motive can be held to be existing.
14. Besides, for the immediately preceding assessment year, i.e., AY 2009-10, a similar disallowance was made by the AO in the assessee's case. The ld. CIT(A) deleted that disallowance.
15. Before, the AO, for the year under consideration, the assessee relied on the said order of the ld. CIT(A). The AO, however, rejected such reliance, observing that the Department was in appeal before the ITAT against the CIT(A)'s order. The ld. CIT(A), on the other hand, followed his order for AY 2009-10 in favour of the assessee.
8 ITA No.503(Asr)/2014Assessment year : 2010-11
16. For assessment year 2009-10, the ITAT, vide order dated 05.09.2014, authored by one of us (the J.M.), decided the Department's appeal against the CIT(A)'s order. It was held as follows:
"6. Having heard the rival contentions, we find that the AO disallowed exemption u/s 10(23C)(iiiad) of the Act, to the assessee- society by merely relying on the decision in 'CIT vs. M/s. Queens Educational Society' (supra). 'M/s. Queens Educational Society', however, has been differed with in 'M/s. Pinegrove International Charitable Trust vs. Union of India and Others' (supra). In 'Pinegrove International Charitable Trust' (supra), it was observed by the Hon'ble Punjab & Haryana High Court, that merely because there are surpluses in the hands of the educational institution, would not ipso facto lead to an inevitable conclusion that such an educational institution is existing for making profits and not solely for educational purposes., that, therefore, the interpretation of the department that there has to be a reasonable profit and then only an institution can only be said to be not existing solely for the purposes of profit, is a misconception of law., that there is a definite purpose behind the allowing of setting up educational institutions at the hands of private entrepreneurs including Trusts/Societies by the Government., that various other educational colleges, like Engineering colleges and Pharmacy colleges, etc. could not have been established for want of funds., that the Government, with a definite idea and object , opened this area of education for the private sector., that the Government, lacking funds, appears to have thought that the private sector could do this job very well and that once the very intention of the Government is to promote education in the private sector, the action of the department in disallowing exemption u/s 10(23C)(iiiad) of the Act would seriously discourage those activities and the avowed objected could never be achieved.
6.1. It was further observed that in the case of 'TMA Pai Foundation vs. State of Karnataka', (2002) 8 SCC 481, the Constitution Bench comprising of 11 Judges of the Hon'ble Supreme Court, has held that private educational institutions are bound to generate funds for the betterment and growth of the institutions and for which there may be surpluses for furtherance of education., that therefore, it is not only permissible, but also an important requirement, to run the institutions of such a strength.
6.2. It was further observed that in 'Aditanar educational institution Etc. vs. Addl. CIT', (1997) 224 ITR 310 (SC), it was held that when surplus is utilized for educational purposes, i.e., for 9 ITA No.503(Asr)/2014 Assessment year : 2010-11 infrastructure development, it cannot be said that the institution was having the object to make profit., that the surplus used for management and betterment of the institutions could not be termed as profit, that if the stand of the department is accepted to be correct, especially in the wake of the methodology adopted by the department in ascertaining profits, then no educational institution can be said to be existing solely for educational purposes, as in every case of an educational institution, there is bound to be a profit, that the provisions of Section 10(23C)(vi) would be rendered otiose if the interpretation adopted by the department and the manner in which the exemption validly granted was withdrawn, were to be accepted, that the approach of the department was wholly erroneous, being contrary to the express provisions of the third proviso to section 10(23C)(vi) of the Act, since unlike the provisions of section 37 and 36(xii), the incurring of capital expenditure is not expressly excluded in the said third proviso, and it had been the intention of the legislature to exclude capital expenditure while applying the income of the Trust as per the third proviso to section 10(23C)(vi), the said proviso would have contained an express embargo against such exclusion.
6.3. It was on these observations that the view expressed in M/s. Queens Educational Society (supra) was not accepted. 6.4. The above position has been duly taken into consideration by the Ld. CIT(A) while rightly granting exemption u/s 10(23C)(iiiad) of the Act to the assessee. It has also correctly been taken into consideration that the assessee-trust was running a school in a remote area of Rajouri in J & K State and was not carrying out any other activity, that the assessee had gross receipts from this activity, of less than Rs. 1 crore and had claimed exemption u/s 10(23)(iiiad), that the assessee was not getting Government funds and was running the institution out of its own surplus, which was to the tune of Rs.28,34,859/- in the A.Y. 2009-10, i.e., the year under consideration, that this surplus was spent by the assessee-society for educational purposes and in construction of school building, that the AO had disallowed this surplus on the basis that the assessee had a few more objectives, which were other than the object of education, and that however, these objectives were incidental to the purposes of education, or purely for charity in the field of health and upliftment of the poor.
6.5. Before us, the department has not brought anything on record to prove that the assessee-society was also carrying on any other activity besides education, or that the factum of the assessee carrying on educational activity was never disputed by the AO, or that the society was not a small institution only imparting education 10 ITA No.503(Asr)/2014 Assessment year : 2010-11 to the children in a remoite area where there is hardly any presence of government schools.
6.6. Before us, though it was contended that the Ld. CIT(A) erred in not following the case of 'M/s. Queens Educational Society' (supra), the department has not been able to place anything on record to counter the well reasoned, elaborate, factual as well as legal observations entered by the Ld. CIT(A) as discussed hereinabove. Further, no decision contrary either to 'M/s. Pinegrove International Charitable Trust' (supra), or to 'TMA Pai Foundation vs. State of Karnataka' (supra), or to 'Aditanar Educational Institution' (supra), has been relied on.
6.7. To reiterate, 'M/s. Queens Educational Society', has been specifically disagreed with in 'M/s. Pinegrove International Charitable Trust' (supra).
6.8. In view of the above discussion, finding no merit therein, the grievance sought to be raised by the department is hereby rejected. Thus, the order of the Ld. CIT(A) stands confirmed.
7. In the result, the appeal filed by the Department is dismissed."
17. As seen, the ITAT has followed "Pine Grove" (supra) over "Queen's Educational Society" (supra) to uphold the CIT(A)'s action of deleting the disallowance for the assessment year 2009-10.
18. For the year under consideration, the AO held the decision of the Hon'ble Uttarakhand High Court in "CIT vs. Queen's Educational Society", 177 Taxman 326 (Uttarakhand) to be squarely applicable to the present case. This decision was differed with by the Hon'ble Punjab & Haryana High Court in "Pine Grove International Charitable Trust vs. Union of India", 327 ITR 273 (P&H). The ld. CIT(A), per contra, applied "Pine Grove International Charitable Trust" (supra). As per its Ground no.4 taken before us, the Department contends that the ld. CIT(A) erred in not considering "Queen's Educational Society" (supra) over "Pine Grove" (supra).
11 ITA No.503(Asr)/2014Assessment year : 2010-11
19. In this regard, in view of "Vegetable Products Ltd.", 88 ITR 192 (SC) where there are two mutually divergent views taken by co-ordinate Benches of different High Courts, neither High Court being the jurisdictional High Court qua an assessee, the view in favour of the assessee has to be adopted. That being so, there is no force in Ground no.4 on this score itself and the said Ground is liable to be rejected for this preliminary reason.
20. However, both "Queens Educational Society" (supra) and "Pine Grove" (supra) have since been considered and decided by the Hon'ble Supreme Court. The ld. counsel for the assessee has placed on record a copy of the said Supreme Court judgment dated 16.3.2015, passed in Civil Appeal No.5167 of 2008, in the case of "M/s. Queen's Educational Society vs. Commissioner of Income Tax" and other connected cases.
21. In "Queens Educational Society" (supra), the Hon'ble Supreme Court has held as follows:
"11. Thus, the law common to Section 10(23C)(iiiad) and (vi) may be summed up as follows:
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.
The predominant object test must be applied - the purpose of education should not be submerged by a profit making motive.
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.12 ITA No.503(Asr)/2014
Assessment year : 2010-11 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.
The 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.
12. The Uttarakhand High Court in the impugned judgment dated 24th September, 2007 quoted the ITAT order in paragraph 7 as follows:
"The ITAT while granting exemption under Section 10(23C) (iiiad) recorded the following reasons:
"During the years relevant for asstt. Year 2000-01 and 2001- 02, the excess of income over expenditure stood at Rs.6,58,862/- and Rs.7,82,632/- respectively. It was also noticed that the appellant society had made investment in fixed assets including building at Rs.9,52,010/- in F.Y.1999- 2000 and Rs.8,47,742/- in FY 2000-01 relevant for Asstt. Years 2000-01 and 2001-02 respectively. Thus, if the amount of investment into fixed assets such as building, furniture and fixture etc. were also kept in view, there was hardly any surplus left..... The assessee society is undoubtedly engaged in imparting education and has to maintain a teaching and non teaching staff and has to pay for their salaries and other incidental expenses. It, therefore, becomes necessary to charge certain fee from the students for meeting all these expenses. The charging of fee is incidental to the prominent objective of the trust i.e. imparting education. The trust was initially running the school in a rented building and the surplus, i.e. the excess of the receipts over expenditure.
In the year under appeal (and in the earlier appeals) has enabled the appellant to acquire its own property, acquire computers, library books, sports equipments etc. for the benefit of the students. And more importantly the members of the society have not utilized any part of the surplus for their own benefit. The AO wrongly interpreted the resultant surplus as the main objective of the assessee trust. As held above, profit is only incidental to the main object of spreading education. If there is no surplus out of the difference between 13 ITA No.503(Asr)/2014 Assessment year : 2010-11 receipts and outgoings, the trust will not be able to achieve the objectives. Any education institution cannot be run in rented premises for all the times and without necessary equipment and without paying to the staff engaged in imparting education. The assessee is not getting any financial aid/assistance from the Government or other philanthropic agency and, therefore, to achieve the objective, it has to raise its own funds. But such surplus would not come within the ambit of denying exemption u/s 10(23C)(iiiad) of the Act."
13. Having set out the ITAT, order, the Uttarakhan High Court held :
"Thus, in view of the established fact relating to earned profit, we do not agree with the reasoning given by the ITAT for granting exemption."
14. Having said this, the impugned judgment goes on to quote Aditanar Educational Institution v. CIT, as follows:
"After meeting the expenditure, if any surplus result incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purpose since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction difference between the corpus, the objects and powers of the concerned entity If one looks at the object clause, there are other noble and pious objects but assessee society has done nothing to achieve the other objects except pursuing main object of providing education and earning profit. Further, with profit earned the society has strengthened or enhanced its capacity to earn more rather than to fulfill other noble objects for the cause of poor and needy people or advancement of religious purpose.
Therefore, the law laid down by the Apex Court has rightly been applied and exemption has also rightly been refused by the AO in the facts and circumstances of the case."
15. It is clear that the High Court did not apply its mind independently. What has been copied is one paragraph from the Supreme Court judgment in Aditanar followed by a paragraph of 14 ITA No.503(Asr)/2014 Assessment year : 2010-11 faulty reasoning by the Assessing Officer and the said faulty reasoning of the Assessing Officer has been wrongly said to be the law laid down by the Apex court.
16. Further, the Supreme Court Judgment in Municipal Corpn. of Delhi v. Children Book Trust and Safdarjung Enclave Educational Society, (1992) 3 SCC 390 has then been followed. The aforesaid judgment dealt with a property tax provision, namely, Section 115 (4) of the Delhi Municipal Act, 1957. Three questions were raised in the said judgment as follows:
(i) Whether the society or body is occupying and using the land and building for a charitable purpose within the meaning of sub-section (4)?
(ii) What is the meaning of the expression "supported wholly or in part by voluntary contribution"?
(iii) Whether any trade or business is carried on in the premises within the meaning of sub-section (5)?"
17. In answering question one, the Court held that School Education would only come within an exemption if it involved public benefit. Having so held, the Court stated:
"78. The rulings arising out of Income Tax Act may not be of great help because in the Income Tax Act "charitable purpose" includes the relief of the poor, education, medical relief and the advancement of any other object of general public utility. The advancement of any other object of general public utility is not found under the Delhi Municipal Corporation Act. In other words, the definition is narrower in scope. This is our answer to question No. 1."
18. Secondly, the extracted portion from the said judgment in the judgment of the Uttarakhand High Court concerned itself with question two, namely, whether the educational society is supported wholly or in part by voluntary contributions. It is part of paragraph 80 of the said judgment. If the sentences after the quoted portion are also set out, it becomes clear that the passage relied upon by the High Court has absolutely nothing to do with the present case. The entirety of the passage is now set out hereinbelow:
"82. ...In other words, what we want to stress is, where a society or body is making systematic profit, even though that profit is utilised only for charitable purposes, yet it cannot be said that it could claim exemption. If, merely qualitative test is applied to societies, even 15 ITA No.503(Asr)/2014 Assessment year : 2010-11 schools which are run on commercial basis making profits would go out of the purview of taxation and could demand exemption. Thus, the test, according to us, must be whether the society could survive without receiving voluntary contributions, even though it may have some income by the activities of the society. The word "part" mean an appreciable amount and not an insignificant one. The "part" in other words, must be substantial part. What is substantial would depend upon the facts and circumstances of each case."
19. It is clear, therefore, that the Uttarakhand High Court has erred by quoting a non existent passage from an applicable judgment, namely, Aditanar and quoting a portion of a property tax judgment which expressly stated that rulings arising out of the Income Tax Act would not be applicable. Quite apart from this, it also went on to further quote from a portion of the said property tax judgment which was rendered in the context of whether an educational society is supported wholly or in part by voluntary contributions, something which is completely foreign toSection 10(23C) (iiiad). The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of Section 10(23C) is to ignore the language of the Section and to ignore the tests laid down in the Surat Art Silk Cloth case, Aditanar case and the American Hotel and Lodging case. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit. In fact, in S.RM.M.CT.M. Tiruppani Trust v. Commissioner of Income Tax, (1998) 2 SCC 584, this Court in the context of benefit claimed under Section 11 of the Act held:
"9. In the present case, the assessee is not claiming any benefit under Section 11(2) as it cannot; because in respect of this assessment year, the assessee has not complied with the conditions laid down in Section 11(2). The assessee, however, is entitled to claim the benefit of Section 11(1)(a). In the present case, the assessee has applied Rs 8 lakhs for charitable purposes in India by purchasing a building which is to be utilised as a hospital. This income, therefore, is entitled to an exemption under Section 11(1). In addition, under Section 11(1)(a), the assessee can accumulate 25% of its total income pertaining to the relevant assessment year and claim exemption in respect thereof.Section 11(1)(a) does not require investment of this limited accumulation in government securities. The balance income of Rs 1,64,210.03 constitutes less than 25% of the income for Assessment Year 1970-71. Therefore, the assessee is entitled to accumulate this income and claim exemption from income tax under Section 11(1)(a)."16 ITA No.503(Asr)/2014
Assessment year : 2010-11 We set aside the judgment of the Uttarakhand High Court dated 24th September, 2007. The reasoning of the ITAT (set aside by the High Court) is more in consonance with the law laid down by this Court, and we approve its decision.
20. Revenue's appeals from the Punjab and Haryana High Court concern themselves with Sections 10(23C) (vi). A large number of writ petitions were heard in Civil Writ Petition No. 6031 of 2009 and disposed of on 29th January, 2010. By various impugned orders passed, the Chief, CIT, Chandigarh withdrew exemptions granted under Section 10(23C) (vi) of the Income Tax Act read with Rule 2CA of Income Tax Rules, 1961, for various assessment years. The operative part of the order passed by the Chief, CIT in these cases is the same and reads as follows:
"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 is clear that the ratio of the decision of Hon'ble Uttarakhand High Court is squarely applicable in this case.
5. The Hon'ble Supreme Court has held, in the case of Aditanar Educational Institution etc. v. Addl. Commissioner of Income Tax [224 ITR 310 (SC)], that in the case of an educational institution, after meeting the expenditure, if any surplus results incidentally, then the institution will not cease to be one existing solely for educational purposes.
6. The crucial condition is that surplus should result only incidentally and should not be aimed for. If substantial profits are earned in one year if (it)?would be duty of the institution to lower its fees for the subsequent year so that such profits are not intentionally generated. If, however, profits continue year after year than it cannot be said that the surplus is arising incidentally.
7. In the present ease, the profits are substantial and are arising year alter year and therefore, the decision of the Apex Court in the case of Aditanar Education Institution v. Addl. Commissioner of Income Tax as well as the decision of the Hon'ble Uttrakhand High Court is applicable.
8. Exemption u/s 10(23C)(vi) is not available to the assessee under the law in view of the above facts and circumstances and therefore, exemption already granted vide order dated 4th June, 2007 is hereby withdrawn.17 ITA No.503(Asr)/2014
Assessment year : 2010-11
9. The assessee is at liberty to reduce the fees being charged and price of its services and apply afresh, in which case the application will be duly considered on merits."
21. It is these orders that were set aside by the judgment of the Punjab and Haryana High Court impugned by the Revenue before us.
22. Section 10(23C)(vi) read with the 3rd and 13th provisos thereto and Section 11(5) of the Income Tax Act are as follows:-
"Section 10- Incomes 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-
(23-C) any income received by any person on behalf of-
(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 (iii-ab) or sub-clause (iii-ad) and which may be approved by the prescribed authority 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 (vi-
a)]-[(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 period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and;].
[(b) does not invest or deposit its funds, other than-
(i) any assets held by the fund, trust or institution [or any university or other educational institution or any hospital or other medical institution] where such assets form part of the corpus of the fund, trust or institution [or any university or other educational institution or any hospital or other medical institution] as on the 1st day of June, 1973;
[(i-a) any asset, being equity shares of a public company, held by any university or other educational institution or any hospital or other medical institution where such assets form part of the corpus of any university or other educational institution or any hospital or other medical institution as on the 1st day of June, 1998;] 18 ITA No.503(Asr)/2014 Assessment year : 2010-11
(ii) any assets (being debentures issued by, or on behalf of, any company or corporation), acquired by the fund, trust or institution [or any university or other educational institution or any hospital or other medical institution] before the 1st day of March, 1983;
(iii) any accretion to the shares, forming part of the corpus mentioned in sub-clause (i)[and sub-clause (i-a)], by way of bonus shares allotted to the fund, trust or institution[or any university or other educational institution or any hospital or other medical institution];
(iv) voluntary contributions received and maintained in the form of jewellery, furniture or any other article as the Board may, by notification in the Official Gazette, specify, for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-section (5) of Section 11:
Provided also that where the fund or institution referred to in sub- clause (iv) or trust or institution referred to in sub-clause (v) is notified by the Central Government or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (vi-a), is approved by the prescribed authority and subsequently that Government or the prescribed authority is satisfied that-
(i) such fund or institution or trust or any university or other educational institution or any hospital or other medical institution has not,-
(A) applied its income in accordance with the provisions contained in clause (a) of the third proviso; or (B) invested or deposited its funds in accordance with the provisions contained in clause(b) of the third proviso; or
(ii) the activities of such fund or institution or trust or any university or other educational institution or any hospital or other medical institution,-
(A) are not genuine; or (B) are not being carried out in accordance with all or any of the conditions subject to which it was notified or approved, it may, at any time after giving a reasonable opportunity of showing cause against the proposed action to the concerned fund or institution or trust or any university or other educational institution or any hospital or other medical institution, rescind the notification or, by order, withdraw the approval, as the case may be, and forward a copy of the order rescinding the notification or withdrawing the approval to such fund or institution or trust or any 19 ITA No.503(Asr)/2014 Assessment year : 2010-11 university or other educational institution or any hospital or other medical institution and to the Assessing Officer;] Section 11. Income from property held for charitable or religious purposes.-
(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely:-
(i) investment in savings certificates as defined in clause (c) of Section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;
(ii) deposit in any account with the Post Office Savings Bank;
(iii) deposit in any account with a scheduled bank or a cooperative society engaged in carrying on the business of banking (including a cooperative land mortgage bank or a cooperative land development bank).
Explanation.-In this clause, "scheduled bank" means the State Bank of India constituted under theState Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under Section 3of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);
(v) investment in any security for money created and issued by the Central Government or a State Government;
(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government;
(vii) investment or deposit in any public sector company:
20 ITA No.503(Asr)/2014Assessment year : 2010-11 [Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,-
(A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company;
(B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company;].
(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and [which is eligible for deduction under clause
(viii) of sub-section (1) of Section 36];
(ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and[which is eligible for deduction under clause (viii) of sub-section (1) of Section 36];
[(ix-a) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India.
Explanation.-For the purposes of this clause,-
(a) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;
(b) "public company" shall have the meaning assigned to it in Section 3 of the Companies Act, 1956;
(c) "urban infrastructure" means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;].
21 ITA No.503(Asr)/2014Assessment year : 2010-11
(x) investment in immovable property.
Explanation.-"Immovable property" does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;
(xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964);
(xii) any other form or mode of investment or deposit as may be prescribed."
23. The Punjab and Haryana High Court, by the impugned judgment dated 29th January, 2010 expressed its dissatisfaction with the view taken by the Uttarakhand High Court in the case of Queen's Educational Society as follows:
"8.8 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 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, the judgment rendered by the Uttarkhand High Court runs contrary to the provisions of Section 10(23C)(vi) of the Act including the provisos thereunder. Section 10(23C)(vi) of the Act is equivalent to the provisions of Section 10(22) existing earlier, which were introduced with effect from 1st April, 1999 and it ignores the speech of the Finance Minister made before the introduction of the said provisions, namely. Section 10(23C) of the Act [See observations in American Hotel and Lodging Association Educational Institute's case (supra)]. Thirdly, the Uttrakhand High Court has not appreciated correctly the ratio of the judgment rendered by Hon'ble the Supreme Court in the case of Aditanar Educational Institution(supra) and while applying the said judgment including the judgment which had been rendered by Hon'ble the Supreme Court in the case of Children Book Trust (supra), it lost sight of the amendment which had been carried out with effect from 1st April, 1999 leading to the introduction of the provisions of Section 10(23C) of the Act. Lastly, that view is not consistent with the law laid down by Hon'ble the Supreme Court in American Hotel and Lodging Association Educational Institute (surpa)."22 ITA No.503(Asr)/2014
Assessment year : 2010-11 It then summed up its conclusions as follows:
"8.13 From the aforesaid discussion, the following principles of law can be summed up:-
(1) It is obligatory on the part of the Chief Commissioner of Income Tax or the Director, which are the prescribed authorities, to comply with proviso thirteen (un-numbered). Accordingly, it has to be ascertained whether the educational institution has been applying its profit wholly and exclusively to the object for which the institution is established. Merely because an institution has earned profit would 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 analogous 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 underSection 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. A workable solution has been provided by Hon'ble the Supreme Court in para 33 of its judgment in American Hotel and Lodging Association's case (supra). Thus, on an application made by an institution, the prescribed authority can grant approval subject 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 statutory provisions, need not be reopened. However, alter grant of approval if it comes to the notice of the prescribed authority that the conditions on which approval was given, have been violated or the circumstances mentioned in 13th proviso exists, then by following the procedure envisaged in 13th proviso, the prescribed authority can withdraw the approval.
23 ITA No.503(Asr)/2014Assessment year : 2010-11 (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. [See para 8.7 of the judgment-Aditanar Educational Institution case (supra)] (5) Where more than 15% of income of an educational institution is accumulated on or after 1st April, 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 Queens Educational Society (supra) and the connected matters, is not applicable to cases fall within the provision 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 (supra) lays down the correct law."
And finally held:
"8.15 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 underSection 10(23C)(iv) of the Act are hereby quashed. However, the revenue is at liberty to pass any fresh orders, if such a necessity is felt after taking into consideration the various propositions of law culled out by us in para 8.13 and various other paras.
8.16 The writ petitions stand disposed of in the above terms."
24. The view of the Punjab and Haryana High Court has been followed by the Delhi High Court inSt. Lawrence Educational Society (Regd.) v. Commissioner of Income Tax & Anr., (2011) 53 DTR (Del)
130. Also in Tolani Education Society v. Deputy Director of Income Tax (Exemption) & Ors., (2013) 351 ITR 184, the Bombay High Court has expressed a view in line with the Punjab and Haryana High Court view, following the judgments of this Court in the Surat Art Silk Manufacturers Association Case and Aditanar Educational Institution case as follows:
24 ITA No.503(Asr)/2014Assessment year : 2010-11 ".....The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that the Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is education and the Petitioner exists solely for the purposes of imparting education. An incidental surplus which is generated, and which has resulted in additions to the fixed assets is utilized as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant. The Income- tax Act 1961 does not condition the grant of an exemption under Section 10(23C) on the requirement that a college must maintain the status- quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption under Section 10(23C). Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions. Knowledge in contemporary times is technology driven. Educational institutions have to modernise, upgrade and respond to the changing ethos of education.
Education has to be responsive to a rapidly evolving society. The provisions of Section 10(23C)cannot be interpreted regressively to deny exemptions. So long as the institution exists solely for educational purposes and not for profit, the test is met."
25. We approve the judgments of the Punjab and Haryana, Delhi and Bombay High Courts. Since we have set aside the judgment of the Uttarakhand High Court and since the Chief CIT's orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law 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 for educational purposes and not for purposes of profit. In addition, we hasten to add that the 25 ITA No.503(Asr)/2014 Assessment year : 2010-11 13th proviso to Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, 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.
22. Thus, the Hon'ble Supreme Court has set aside "Queen's Educational Society" (supra) rendered by the Hon'ble Uttarakhand High Court, whereas "Pine Grove" (supra) decided by the Hon'ble Punjab & Haryana High Court stands approved.
23. Therefore, respectfully following the aforesaid decision of the Hon'ble Supreme Court the case of "M/s. Queen's Educational Society", the grievance of the Department in this regard is rejected.
24. For the above discussion, finding no legal force therein, all the Grounds of Appeal are rejected.
25. In the result, the appeal is dismissed.
Order pronounced in the open court on 01/01/2016.
Sd/- Sd/-
(T.S. KAPOOR) (A.D. JAIN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 01/01/2016
/skr/
Copy of order forwarded to:
1. The Assessee:Sh. Vipan Langer Educational Trust, Rajouri
2. The ITO, Ward 2(3), Jammu.
3. The CIT(A), Jammu
4. The CIT, Jammu
5. The Sr. DR, ITAT, ASR.
26 ITA No.503(Asr)/2014Assessment year : 2010-11 True copy By order (Assistant Registrar) Income Tax Appellate Tribunal Amritsar Bench: Amritsar.