2013 (6) TMI 674 - AT - Income Tax

Partial win for assessee in tax appeal, eligible for exemption under 10(23C)(iiiab) despite pending registration.

The Tribunal partially allowed the appeal, ruling that the assessee qualified for exemption under section 10(23C)(iiiab) as it was substantially funded by ... Denial of exemption under section 10(23C)(iiiab) - Objection on Sole purpose of the trust - Eduction should be sole purpose - Objection on substantial funding by government - Disallowance of contributions made by trust - Held that:- In the instant case, a perusal of income and expenditure account for the year ended March 31, 2009, which is placed at page 8 of the paper book shows the total income of the assessee from various sources, viz., fee collection, grant received from the State Government as well as the UGC, interest received from bank, miscellaneous collections, scholarship collections amounts to ₹ 8,51,66,550. Out of which grant-in-aid from the State Government is ₹ 4,01,01,971, which is almost 47 per cent. of the total income of the assessee. Thus, the assessee is substantially funded by the Government or instrumentality of the Government, i.e., UGC. The Commissioner of Income-tax (Appeals) erred in concluding that educational institution is only said to be substantially funded by the Government, if it is either established or created by a special statute of Parliament. Refereed case - [2010 (8) TMI 890 - KARNATAKA HIGH COURT] The fact that the trust exists solely for educational purposes is evidenced from the assessment orders for the assessment years 2000- 01 and 2006-07, copies of which form a part of the record before the court. Both these orders which have been made under section 143(3) of the Act, contain a statement to the effect that the assessee is running schools with Gujarati and English as medium of instruction at the primary and secondary stages and that the assessee also conducts a college for girls with the sole intent of imparting education. The record of these proceedings also contains a judgment of a Division Bench of this court dated June 29, 2005 [Trustees of Vanita Vishram [2005 (6) TMI 17 - BOMBAY High Court]] in a reference under section 256(1) to which the petitioner was the applicant. The issue before the court in the reference was whether the assessee was entitled to exemption under section 10(22) on interest earned on surplus funds of the school run by the trust for the assessment years 1979-80 and 1980-81. The Division Bench observed that merely because a certain surplus arose from the operations of the trust, it could not be held that the institution was run for the purpose of profit, so long as no person or individual was entitled to any portion of the profit and the profit was utilised for the purpose of promoting the objects of the institution. The income of the trust was, therefore, held to be exempt under section 10(22). The Division Bench followed the decision of the Supreme Court in Aditanar Educational Institution [1997 (2) TMI 3 - SUPREME Court] and noted as a principle of law that if after meeting the expenditure, a surplus results incidentally from an activity lawfully carried on by the educational institution, the institution would not cease to be one which is existing solely for educational purposes since the object is not to make profit. The Division Bench also observed that if the trust exists solely for educational purposes and conducts an educational institution, the fact that it had other objects would not disentitle it to the exemption so long as the activity carried out by it in that assessment year was that of running an educational institution and not for profit. The court observed that the assessee had existed only for educational purposes which consisted of running educational institution and not for earning profits. In Aditanar Educational Institution, the Supreme Court, while construing the provisions of section 10(22), held that the availability of exemption should be evaluated each year to find out whether the institution has existed during the relevant year solely for educational purposes and not for the purposes of profit. If after meeting the expenditure, a surplus results incidentally from an activity lawfully carried on by the educational institution, the institution will not cease to be one existing solely for educational purposes since the object is not to make profit. The decisive or acid test, the Supreme Court observed, is whether on an overall view of the matter, the object is to make a profit. In evaluating or appraising the issue, the Supreme Court noted that one should bear in mind the distinction between the corpus, the objects and the powers of the concerned entity. Therefore, in the facts and circumstances of the present case and the law laid down by the hon'ble Bombay High Court, the view of the authorities below that the assessee is not carrying on the sole object of education, is misconceived. However, we observe that the assessee during the period has made certain contributions towards Lions Club International (service organisation) and Meenakshi Sundararajan Fine Arts Academy. The Lions Club International (service organisation) may be undertaking some charitable activities, but by and large, it is a social club, and cannot be strictly construed to be a social organisation for undertaking social work as envisaged in the study curriculum.As regards the contribution to the Meenakshi Sundararajan Fine Arts Academy, there is no explanation furnished by the assessee that as to why contributions were made. The only plausible reason for making contribution to the abovesaid two organisations is that secretary-cum-correspondent of the assessee was an office bearer of the abovesaid organisation. The expenditure claimed by the assessee towards the contribution to the aforesaid two organisations cannot be allowed as expenditure. Since we have held that the assessee is eligible for claiming exemption under the provisions of section 10(23C)(iiiab), it is not mandatory for the assessee to seek registration under the provisions of section 10(23C)(vi). Be that as it may, the assessee had applied for registration in the year 2002, nothing was communicated to the assessee regarding the rejection or allowing application of the assessee for registration. The assessee cannot be held responsible for the inaction of the Department. If the Department is in slumber, the assessee cannot be faulted. - Decided partly in favour of assessee. Issues Involved:1. Whether the assessee is substantially funded by the Government.2. Whether the assessee exists solely for educational purposes and not for purposes of profit.3. Whether the assessee is entitled to claim benefit under the provisions of section 10(23C)(iiiab).Issue-wise Detailed Analysis:1. Whether the assessee is substantially funded by the Government:The assessee, a trust registered under section 12A(a) of the Income-tax Act, 1961, claimed exemption under section 10(23C)(iiiab) for the assessment year 2009-10. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) (CIT(A)) denied this exemption, arguing that the assessee was not wholly or substantially financed by the Government. The Tribunal, however, noted that the term 'substantially funded' is not defined in the Act. Referring to the judgment in CIT v. Indian Institute of Management [2011] 196 Taxman 276 (Karn), it was determined that substantial funding by the Government could be inferred if a significant portion of the institution's income comes from government grants. The assessee received Rs. 4,01,01,971 as grant-in-aid from the State Government, which constituted almost 47% of its total income of Rs. 8,51,66,550. Thus, the Tribunal concluded that the assessee was substantially funded by the Government or its instrumentality, satisfying the conditions of section 10(23C)(iiiab).2. Whether the assessee exists solely for educational purposes and not for purposes of profit:The AO contended that the assessee was not solely for educational purposes because one of its objects included 'the advancement of any other charitable object of public utility not involving any activity for profit.' The Tribunal, however, emphasized that the primary object of the assessee was to impart education, and any other charitable objects were subservient to this main objective. Citing the judgment in Vanita Vishram Trust v. Chief CIT [2010] 327 ITR 121 (Bom), the Tribunal noted that the existence of surplus funds does not necessarily imply that the institution is profit-oriented, as long as the surplus is utilized for educational purposes. The Tribunal found that the assessee's activities were solely for educational purposes, and the incidental surplus did not disqualify it from exemption under section 10(23C)(iiiab).3. Whether the assessee is entitled to claim benefit under the provisions of section 10(23C)(iiiab):The Tribunal examined the contributions made by the assessee to Lions Club International and Meenakshi Sundararajan Fine Arts Academy, where the secretary-cum-correspondent had personal interests. The Tribunal acknowledged the necessity of social activities in the educational curriculum but opined that such activities could be conducted through government schemes like NSS and NCC. The contributions to these organizations were not deemed allowable expenditures. Despite this, the Tribunal held that the assessee was eligible for exemption under section 10(23C)(iiiab) as it was substantially funded by the Government and existed solely for educational purposes.Conclusion:The Tribunal partly allowed the appeal, concluding that the assessee satisfied the conditions for exemption under section 10(23C)(iiiab) due to substantial government funding and its sole focus on educational purposes. The contributions to Lions Club International and Meenakshi Sundararajan Fine Arts Academy were disallowed as expenditures. The Tribunal also noted that the assessee's pending application for registration under section 10(23C)(vi) did not affect its eligibility for exemption under section 10(23C)(iiiab).