Tribunal remands case on franchise agreement, exemption claim, profit motive, directs decision in 6 months

The Tribunal set aside the Ld. CIT(E)'s order and remanded the case for fresh consideration regarding the franchise agreement, claim of exemption without approval, and profit motive due to transportation fees and surplus. The Ld. CIT(E) was directed to decide within six months, allowing the appellant reasonable opportunities to be heard. The appeal was allowed for statistical purposes.

---

---

Issues Involved:
1. Franchise Agreement and Concealment of Commercial Activity
2. Claim of Exemption under Section 10(23C)(vi) without Approval
3. Profit Motive due to Transportation Fee and Surplus

Issue-wise Detailed Analysis:

1. Franchise Agreement and Concealment of Commercial Activity:
The primary objection by the Ld. CIT(E) was that the appellant society had a franchise agreement with M/s. S.K. Educational Pvt. Ltd. for running a play school named "Bachpan" and was paying a monthly fee equivalent to fifteen percent of the gross collection to the franchiser. The appellant society did not initially disclose this relationship, which was only revealed upon inquiry by the Department. The Ld. CIT(E) considered this concealment as evidence of indulging in purely commercial activities, thus rejecting the application for registration under Section 12AA of the Income Tax Act.

The Tribunal referred to the Delhi High Court judgment in the case of Director of Income Tax (Exemption) vs. Delhi Public School Society, which held that franchise agreements do not necessarily entail rejection of the application for exemption if the entity maintains separate accounts in compliance with the Act. However, since the appellant failed to disclose the franchise agreement initially, this issue requires fresh consideration by the Ld. CIT(E).

2. Claim of Exemption under Section 10(23C)(vi) without Approval:
The Ld. CIT(E) noted that the appellant society claimed exemptions under Section 10(23C)(iiiad) until the Financial Year 2013-14 and subsequently under Section 10(23C)(vi) without the prescribed authority's approval. The Tribunal observed that a Co-ordinate Bench had directed the Ld. CIT(E) to grant registration under Section 10(23C)(vi) in a previous order dated 05.12.2017. However, the applicability of this order to specific financial years was unclear. Therefore, this issue also requires determination by the Ld. CIT(E) regarding the claim for the Financial Years 2013-14 to 2015-16.

3. Profit Motive due to Transportation Fee and Surplus:
The Ld. CIT(E) reasoned that the appellant society's emphasis had shifted to acquiring buses, generating significant income from transportation fees, which exemplified a profit motive. The Tribunal referred to the Supreme Court judgment in Queen's Educational Society vs. CIT, which held that surplus ploughed back for educational purposes does not negate the educational institution's charitable status. The Apex Court laid down principles distinguishing between making a surplus and carrying on an institution for profit.

The Tribunal directed the Ld. CIT(E) to determine the quantum of the surplus amount and its utilization, and to impose any necessary conditions for the utilization of the surplus or fixing transportation charges on a charitable basis.

Conclusion:
The Tribunal set aside the order passed by the Ld. CIT(E) and remanded the case for fresh consideration, taking into account the observations made and the legal precedents set by the Supreme Court and Delhi High Court. The Ld. CIT(E) is to decide within six months, providing reasonable opportunities for the appellant to be heard. The appeal filed by the appellant was allowed for statistical purposes.

Order Pronounced:
The order was pronounced in the open Court on 29/10/2019.

---