2012 (12) TMI 376 - AT - Income Tax

Tribunal confirms income additions, denies exemption under Section 10(23C)(iiiab)

MP Rajya Open School Bhopal Versus Deputy Commissioner of Income-tax-1(2)

The Tribunal upheld the CIT(A)'s decision, confirming additions to the total returned income and denying exemption under Section 10(23C)(iiiab). It found ... Exemption u/s 10(23C) - assessee is a registered society formed by Govt. of Madhya Pradesh for promotion and development of open school system in the State - As per audited accounts, assessee showed gross receipt of Rs. 14,34,36,039/- resulting into surplus income of Rs. 3,65,49,479/-. AO found that assessee did not file return of income for the A.Y. 2006-07, therefore, notice u/s 148 was issued. Held that:- Huge surplus has been generated by the assessee, therefore, it can be said that the profit motive of the assessee is clearly established. During hearing, the ld. Counsel for the assessee contended that the word 'substantially' will be made even if the grants are 10%. We are not agreeing with this proposition because the word is 'wholly or substantially', meaning thereby, either it can be 100% or near to 100% but in any case may not be less than 75% because it has been used with the word wholly and not singularly. Admittedly, there is no clear cut formula regarding per centage in the Act but some figure may be adopted under the facts and circumstances available on record. Assessee has not complied with two essential conditions as stipulated in the Act, therefore, we find no infirmity in the conclusion drawn in the impugned order. It is upheld. Finally, all these appeals are dismissed. Issues Involved:1. Confirmation of additions to the total returned income of the assessee for various assessment years.2. Non-availability of exemption under Section 10(23C)(iiiab) of the Income Tax Act.3. Determination of whether the assessee's surplus income constitutes taxable business income.4. Assessment of whether the institution exists solely for educational purposes and not for profit.5. Analysis of whether the institution is wholly or substantially financed by the government.Issue-wise Detailed Analysis:1. Confirmation of Additions to the Total Returned Income:The assessee challenged the confirmation of additions amounting to Rs. 3,22,16,158/- (A.Y. 2003-04), Rs. 5,76,88,324/- (A.Y. 2004-05), Rs. 5,04,87,654/- (A.Y. 2005-06), Rs. 5,04,87,653/- (A.Y. 2006-07), Rs. 8,66,69,966/- (A.Y. 2007-08), and Rs. 8,66,69,966/- (A.Y. 2008-09) to the total returned income. The Commissioner of Income Tax (Appeals) confirmed these additions, which the assessee contested, arguing that the institution was established for educational purposes and any surplus generated was applied solely for the expansion and promotion of education.2. Non-Availability of Exemption Under Section 10(23C)(iiiab):The assessee claimed exemption under Section 10(23C)(iiiab), which was denied by the Assessing Officer on the grounds that the institution did not exist solely for educational purposes and was generating systematic profits. The CIT(A) upheld this view, noting that the exemption is available only to universities or educational institutions existing solely for educational purposes and not for profit.3. Determination of Whether the Assessee's Surplus Income Constitutes Taxable Business Income:The crux of the assessee's argument was that the surplus of income over expenditure should not be considered taxable business income as the institution was established for educational purposes. The assessee cited various judicial decisions to support this claim, including those from the Hon'ble Delhi High Court and other High Courts, which emphasized that incidental surplus does not negate the educational purpose of an institution.4. Assessment of Whether the Institution Exists Solely for Educational Purposes and Not for Profit:The Tribunal considered the facts that the assessee is a registered society formed by the Government of Madhya Pradesh for promoting open school systems. Despite showing gross receipts and surplus income, the Assessing Officer and CIT(A) concluded that the institution was generating profit systematically and thus did not exist solely for educational purposes. The Tribunal referred to several judicial precedents, including the Hon'ble Delhi High Court's decision, which clarified that incidental surplus does not disqualify an institution from being considered as existing solely for educational purposes.5. Analysis of Whether the Institution is Wholly or Substantially Financed by the Government:The Tribunal analyzed the financial records and found that the institution received an initial capital contribution from the Government of Madhya Pradesh but no subsequent grants. The expenses borne by the government were not actual but notional. The Tribunal concluded that the institution was not wholly or substantially financed by the government, as required under Section 10(23C)(iiiab). The Tribunal also discussed the interpretation of 'wholly or substantially' and concluded that the institution did not meet this criterion.Conclusion:The Tribunal upheld the CIT(A)'s order, confirming the additions to the total returned income and denying the exemption under Section 10(23C)(iiiab). The Tribunal found that the institution did not exist solely for educational purposes and was generating substantial profits. Additionally, it was not wholly or substantially financed by the government. Therefore, the appeals filed by the assessee were dismissed.