2013 (7) TMI 205 - HC - Income Tax

Petitioner's Education Activities Qualify as Charity Under Section 2(15) and Exempt Under Section 10(23C)(iv)

The HC ruled in favor of the assessee, holding that the petitioner institute's activities qualify as charitable under Section 2(15) and are eligible for ... Denial to grant exemption u/s 10(23C)(iv) - Activities of Institute of Chartered Accountants of India (ICAI) - Charitable Institution u/s 2(15) - Nature of education and the conduct of the courses by the ICAI - advancement of an object of general public utility - Profit motive - Held that:- Substantial activity of the petitioner institute revolves around providing education to students for the purposes of feeding the profession of Chartered Accountancy in India - Petitioner was providing education and the conduct of the courses by the petitioner could not be equated or categorized as coaching classes conducted by private institutions for students to appear in entrance examination or for pre-admission in examinations being conducted by universities and other Institutions - Private coaching institute does not have any statutory or regulatory duty to perform and in this aspect, the case of the petitioner was different and the activities undertaken by the petitioner satisfied the term ‘education’ - Decided in favour of Assessee. While construing the term business for the purpose of Section 2(15) of the Act the object and purpose of the Section must be kept in mind and a broad and extended definition of business would not be applicable for the purpose of interpreting and applying the first proviso to Section 2(15) - The activities being undertaken by the petitioner substantially involve imparting education in the field of accountancy in order to ensure that the standards or profession of accountancy are maintained - The petitioner institute is the sole body empowered to conduct or approve a course in the field of accountancy - The activity of petitioner in conducting coaching classes is integral to the activity of the petitioner institute in conducting the courses in accountancy - The coaching classes being conducted by the petitioner cannot be equated with private coaching classes being conducted by organisations on commercial basis for preparing students to undertake entrance or other examinations in various professional courses The comparison of the petitioner institute with UPSC (Union Public Service Commission) is also not apposite - The object of the study programme or post-qualification courses being conducted by the petitioner institute is to impart knowledge and skill in the field of accountancy and related subjects to students and the same is not similar to the function as performed by UPSC The impugned order completely ignores the nature of the educational programme being conducted by the petitioner which includes not only designing of the course, imparting of training, providing study material but also instructions by an expert faculty - Campus placement is only a small incidental activity carried on by the petitioner institute like several other universities for placement of their students in gainful employment - This too is an activity ancillary to the educational programme being conducted by the petitioner institute and cannot be considered as a business being carried on by a placement agency - The object of the petitioner institute is not to carry on such business but to assist its students in securing employment. It is not necessary that a person should give something for free or at a concessional rate to qualify as being established for a charitable purpose - If the object or purpose of an institution is charitable, the fact that the institution collects certain charges does not alter the character of the institution - petitioner has submitted figures to indicate that expenditure on salaries and depreciation exceeds the surplus as generated from holding coaching classes. In addition, the petitioner institute provides study material and other academic support such as facilities of a library without any material additional costs. There is nothing on record to indicate the assertion of the petitioner that its activities are not fuelled by profit motive is incorrect - The functions performed by the petitioner institute are in the genre of public welfare and not for any private gain or profit and in this view, it cannot be said that the petitioner is involved in carrying on any business, trade or commerce - Following decisions of Khoday Distilleries Ltd. v. State of Karnataka [1994 (10) TMI 269 - SUPREME COURT], State of Andhra Pradesh v. H. Abdul Bakhi and Bros. [1964 (4) TMI 75 - SUPREME COURT], The State of Gujarat Versus Raipur Manufacturing Co. Ltd.[1966 (9) TMI 82 - SUPREME COURT] and Re:Trustees of Tribune [1939 (6) TMI 7 - PRIVY COUNCIL] - Decided in favour of Assessee. Violation of Section 13 - Held that:- petitioner had submitted that it had not granted any loan or advance to ICAI Accounting Research Foundation and in any event the funds paid to the Jaipur Development Authority and Government of Rajasthan for establishing an institution by ICAI Accounting Research Foundation must be considered as application of funds towards the object of the petitioner institute since ICAI Accounting Research Foundation has been incorporated under Section 25 of the Companies Act,1956 as a company not for profit and for the purposes of carrying on research in the field of accountancy - ICAI Accountancy Research Foundation is also entitled to exemption under Section 10 (23C)(iv) read with Section 11 - No violation of Section 13 - Decided in favour of Assessee. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the petitioner qualifies as an institution established for charitable purposes within the meaning of Section 2(15) of the Income Tax Act, 1961 ('the Act'), and is thus entitled to exemption under Section 10(23C)(iv) of the Act for the assessment years 2006-07 to 2011-12. 2. Whether the activities of the petitioner, specifically conducting coaching/revisionary classes for students preparing for Chartered Accountancy examinations and charging fees for the same, amount to carrying on a business, trade, or commerce, thereby attracting the exception carved out in the first proviso to Section 2(15) of the Act. 3. Whether the fees charged by the petitioner for coaching/revisionary classes and campus placement interviews preclude it from being considered a charitable institution under the Act. 4. Whether the funds paid by the petitioner to the ICAI Accounting Research Foundation violate the provisions of Section 13 of the Act, thereby disentitling the petitioner from claiming exemption. 5. The applicability and interpretation of the proviso to Section 2(15) of the Act introduced w.e.f. 01.04.2009, particularly in relation to activities involving trade, commerce, or business for a fee or other consideration. 6. The relevance and effect of prior judicial precedents and statutory provisions governing the petitioner's status and activities in determining its entitlement to exemption. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the petitioner qualifies as an institution established for charitable purposes under Section 2(15) and is entitled to exemption under Section 10(23C)(iv) of the Act. Relevant Legal Framework and Precedents: - Section 2(15) defines 'charitable purpose' to include relief of the poor, education, medical relief, preservation of environment, preservation of monuments, and advancement of any other object of general public utility, subject to provisos excluding activities involving trade, commerce, or business for a fee. - Section 10(23C)(iv) exempts income of notified charitable institutions having regard to their objects and importance. - Prior to 01.04.2009, the proviso excluding trade or business activities was absent. - Judicial precedents establish that education and advancement of general public utility are charitable purposes; the dominant object test applies to determine charitable status. Court's Interpretation and Reasoning: - The petitioner is a statutory body constituted under the Institute of Chartered Accountants Act, 1949 ('ICAI Act') with the object to regulate the profession of Chartered Accountants and to provide education and training to students and members. - The petitioner's activities include designing courses, conducting examinations, imparting education and training, and regulating professional standards. - The Court recognized that the petitioner's dominant object is charitable, falling within education and advancement of objects of general public utility categories under Section 2(15). - The petitioner's coaching and revisionary classes are integral to its educational program and statutory duties, not separate commercial ventures. - Prior judicial decisions, including those of the Income Tax Appellate Tribunal and this Court, have held that the petitioner's activities constitute education and charitable purpose. Key Evidence and Findings: - The petitioner conducts an extensive educational program with over one million students appearing for examinations. - It provides study materials, model test papers, online guidance, and post-qualification courses. - The petitioner regulates the profession and maintains standards of competence and ethics. Application of Law to Facts: - The petitioner's statutory mandate and activities satisfy the definition of charitable purpose under Section 2(15). - The exemption under Section 10(23C)(iv) is applicable given the petitioner's objects and nationwide importance. Treatment of Competing Arguments: - The Revenue contended that coaching activities and fees charged convert the petitioner's activities into business. - The Court rejected this, holding that the activities are ancillary and integral to the petitioner's charitable objects and not commercial business. Conclusion: - The petitioner qualifies as an institution established for charitable purposes under Section 2(15) and is entitled to exemption under Section 10(23C)(iv) of the Act. Issue 2: Whether conducting coaching/revisionary classes and charging fees amounts to carrying on business, trade, or commerce under the first proviso to Section 2(15) of the Act. Relevant Legal Framework and Precedents: - The first proviso to Section 2(15), effective from 01.04.2009, excludes from charitable purpose any advancement of objects of general public utility involving trade, commerce, or business or rendering services for a fee or consideration. - Supreme Court decisions interpret 'business' as an activity with profit motive or carried on with continuity on recognized business principles. - The dominant object test determines whether an activity is business or incidental to charitable purpose. - Prior decisions have distinguished statutory bodies' educational activities from private coaching institutes. Court's Interpretation and Reasoning: - The Court emphasized that the petitioner's coaching classes are part of its statutory educational program, integral to its objects. - The petitioner's activities lack profit motive; administrative expenses exceed surplus from coaching fees. - The Court rejected the DGIT(E)'s analogy comparing petitioner's coaching to UPSC conducting coaching or private commercial coaching institutes. - The Court held that charging uniform nominal fees does not negate charitable purpose; eleemosynary element is not essential. - The Court relied on the petitioner's compliance with statutory duties and the absence of profit motive to conclude no business activity exists. Key Evidence and Findings: - Detailed financial data showing salaries and depreciation exceed surplus from coaching fees. - Provision of free study materials and academic support without separate charges. - Coaching fees charged are nominal and uniform without concession schemes but do not amount to profit-making business. Application of Law to Facts: - The petitioner's coaching activity is ancillary and incidental to its charitable objects, not a trade or business. - The first proviso to Section 2(15) does not apply to exclude the petitioner's activities from charitable purpose. Treatment of Competing Arguments: - The DGIT(E) argued that charging fees without concessions to poor students and conducting campus placement interviews for fees indicate commercial activity. - The Court rejected these arguments, holding that uniform fees do not negate charitable purpose and campus placement is ancillary to education, not a business. - The DGIT(E)'s reliance on the Bihar Institute of Mining and Mine Surveying case was held to be misplaced and inapplicable. Conclusion: - The petitioner's coaching and related activities do not constitute carrying on business, trade, or commerce under the proviso to Section 2(15). Issue 3: Whether charging fees for coaching and campus placement interviews precludes the petitioner from charitable status. Relevant Legal Framework and Precedents: - Charitable purpose under the Act does not require that services be provided free or at concessional rates. - Courts have held that charging fees does not negate charitable status if the dominant object is charitable. Court's Interpretation and Reasoning: - The Court held that the petitioner charging nominal fees uniformly does not convert its activities into commercial business. - The absence of specific concessions to poor students does not negate the charitable character. - Campus placement services are ancillary and incidental to the educational objectives and do not amount to business. Key Evidence and Findings: - Uniform fee structure for coaching classes. - Campus placement interviews conducted for nominal fees as a facilitation service. Application of Law to Facts: - Fee charging per se is not determinative of business or commercial activity. - The petitioner's activities remain charitable in nature despite fees charged. Treatment of Competing Arguments: - Revenue's contention that absence of concessional or free coaching to poor students negates charitable status was rejected. Conclusion: - Charging fees for coaching and campus placement does not preclude the petitioner from being recognized as a charitable institution. Issue 4: Whether funds paid by the petitioner to ICAI Accounting Research Foundation violate Section 13 of the Act. Relevant Legal Framework and Precedents: - Section 13 prohibits certain transactions by charitable institutions that result in private benefit or impermissible application of funds. - Companies registered under Section 25 of the Companies Act, 1956 (now Section 8 Companies) are non-profit entities and eligible for exemption. Court's Interpretation and Reasoning: - The petitioner's payments to ICAI Accounting Research Foundation are applications of funds towards its objects, not deposits or loans. - ICAI Accounting Research Foundation is a Section 25 company engaged in research and education in accountancy. - Revenue and DGIT(E) have not found any violation of Section 13 in any orders. Key Evidence and Findings: - Assessment orders and appellate decisions accepting no violation of Section 13. Application of Law to Facts: - Payments to a charitable foundation incorporated under Section 25 for advancing the petitioner's objects do not violate Section 13. Treatment of Competing Arguments: - No substantive challenge or finding of violation was made by Revenue or DGIT(E). Conclusion: - No violation of Section 13 has been established; funds paid to ICAI Accounting Research Foundation do not disentitle the petitioner from exemption. Issue 5: Applicability and interpretation of the proviso to Section 2(15) introduced w.e.f. 01.04.2009. Relevant Legal Framework and Precedents: - The proviso excludes from charitable purpose any advancement of objects of general public utility involving trade, commerce, or business or rendering services for a fee or other consideration. - Legislative intent was to exclude entities carrying on regular trade or business from charitable exemption. - Courts interpret 'business' narrowly in this context, focusing on dominant object and profit motive. Court's Interpretation and Reasoning: - The proviso is to be interpreted restrictively to exclude only entities whose dominant object is trade or business. - Incidental activities for furtherance of charitable objects do not fall within the proviso. - The petitioner's dominant object remains charitable, and coaching activities are incidental and integral to its objects. - The Court relied on the Finance Minister's Budget Speech clarifying intent to exclude only entities carrying on regular business. Key Evidence and Findings: - Petitioner's financial data showing no profit motive and expenses exceeding surplus. Application of Law to Facts: - The proviso does not apply to the petitioner as its activities are not trade, commerce, or business in dominant character. Treatment of Competing Arguments: - DGIT(E) failed to apply the test of dominant object and profit motive as directed by the Court on remand. Conclusion: - The proviso to Section 2(15) does not exclude the petitioner's activities from charitable purpose. Issue 6: Treatment of prior judicial precedents and statutory provisions governing the petitioner's status. Relevant Legal Framework and Precedents: - ICAI Act, 1949 establishes the petitioner as a statutory body with powers to regulate the profession and conduct education. - Prior judgments of this Court and Income Tax Appellate Tribunal have consistently held the petitioner's activities as charitable. - Decisions of Supreme Court on interpretation of 'business' and charitable purpose. Court's Interpretation and Reasoning: - The Court relied on statutory provisions, the preamble, objects, and functions of the petitioner under the ICAI Act. - Prior judicial findings affirming the petitioner's educational and regulatory role were given binding effect. - The Court held that DGIT(E) disregarded binding precedents and directions on remand. Key Evidence and Findings: - Statutory provisions and regulations under ICAI Act. - Prior appellate orders and judicial decisions. Application of Law to Facts: - The petitioner's statutory mandate and judicial precedents support its claim to charitable exemption. Treatment of Competing Arguments: - DGIT(E)'s contrary approach was found to be erroneous and contrary to settled law. Conclusion: - The petitioner's status as a charitable institution is supported by statutory mandate and judicial precedent.