2014 (4) TMI 924 - AT - Income Tax

Educational institution qualifies for tax exemption under Income Tax Act, with religious activities integral to curriculum.

Deputy Director of Income-tax Versus M/s. Madarasa E-Bakhiyath-Us-Salihath Arabic College

The Tribunal affirmed that the assessee, an educational institution, is eligible for exemption under section 10(23C)(iiiad) of the Income Tax Act. The ... Nature of assessee – Charitable institution or not u/s 12A of the Act – Exemption u/s 10(23C)(iiiad) of the Act - Held that:- The assessee exists more than 127 years and the college is established for the purpose of Arabic language, literature and culture and the college is affiliated to Madras University and simply because the students have to read the Quran and do prayers and have specific dress code, it cannot be said that it is not an educational institution - all activities are necessary for the educational institution to maintain discipline and equality among the students - the educational institutions have their own code of conduct to maintain the discipline to achieve ultimate object of education – CIT(A) also that the assessee is an educational institution - the assessee is an educational institution and 12A registration is not required for the relevant assessment year and eligible to claim exemption u/s 10(23C)(iiiad) of the Act. Monetary limitation u/s 10(23C)(iiiad) of the Act – Held that:- CIT(Appeals) has rightly classified the annual receipts during the financial year 2003-04 at Rs. 51,86,887/-being the annual and recurring income of the assessee - The sale proceeds of land and bonds which are capital receipts in nature, are not recurring income and are once in a lifetime – Relying upon Commissioner of Income-tax Versus St. Mary's Malankara Seminary [2012 (3) TMI 263 - KERALA HIGH COURT] - CIT (A) has rightly classified the annual receipts and granted exemption to the assessee u/s 10(23C)(iiiad) of the Act - thus, the assessee is an educational institution and the annual receipt of the assessee is below Rs. 1.00 crore and eligible for deduction u/s 10(23C)(iiiad) of the Act – Decided against Revenue. Issues Involved:1. Eligibility of the assessee for exemption under section 10(23C)(iiiad) of the Income Tax Act.2. Classification of receipts as annual or capital in nature.3. Determination of whether the assessee's activities are solely educational or include religious activities.Issue-wise Detailed Analysis:1. Eligibility of the Assessee for Exemption under Section 10(23C)(iiiad) of the Income Tax Act:The core issue revolves around whether the assessee, an educational institution, is eligible for exemption under section 10(23C)(iiiad). The Assessing Officer (AO) denied the exemption on the grounds that the institution was not solely for educational purposes and that its annual receipts exceeded Rs. 1 crore. The AO noted that the institution engaged in religious activities, such as requiring students to pray five times a day and adhere to a specific dress code, and that it received donations for religious purposes. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Tribunal found that these activities were part of maintaining discipline and were integral to the educational curriculum. The Tribunal also noted that the Chief Commissioner of Income Tax had granted recognition to the institution under section 10(23C)(vi) from the assessment year 2008-09 onwards, reinforcing its educational status.2. Classification of Receipts as Annual or Capital in Nature:The AO included the sale proceeds of land and bonds, amounting to Rs. 2.69 crores, in the annual receipts, thus exceeding the Rs. 1 crore limit for exemption under section 10(23C)(iiiad). The CIT(A) and the Tribunal, however, agreed with the assessee's contention that these were capital receipts and not recurring annual income. The CIT(A) held that the sale proceeds were once-in-a-lifetime receipts and should not be considered as annual receipts. Consequently, the actual annual receipts of Rs. 51,86,887 were below the Rs. 1 crore threshold, making the institution eligible for the exemption.3. Determination of Whether the Assessee's Activities are Solely Educational or Include Religious Activities:The AO argued that the institution's activities were not solely educational due to the religious practices imposed on students. However, the CIT(A) and the Tribunal found that the study of the Quran and related activities were part of the Arabic language and culture curriculum, which is essential for an institution focused on Arabic education. The Tribunal emphasized that the institution was not exclusively for the Islamic community and that students from other communities were not prohibited from enrolling. The expenses on religious activities were minimal and did not exceed 1.5% of the total expenses, further supporting the institution's claim of being primarily educational.Conclusion:The Tribunal upheld the CIT(A)'s decision, confirming that the assessee is an educational institution eligible for exemption under section 10(23C)(iiiad) of the Income Tax Act. The annual receipts were correctly classified, excluding the capital receipts from the sale of land and bonds. The institution's activities were deemed to be primarily educational, with religious practices being a minor part of the overall curriculum. The appeal by the Revenue was dismissed, and the order of the CIT(A) was affirmed.