2021 (9) TMI 230 - AT - Income Tax

Tribunal grants approval to educational society, emphasizing compliance with provisions

M/s The Oxford Educational & Charitable Society (Oxbridge World School, Kotkapura) Versus CIT (E), Chandigarh.

The Tribunal allowed the appeal, overturning the CIT(E)'s decision and granting approval under Section 10(23C)(vi) to the appellant society, emphasizing ... Exemption u/s 10(23C) (vi) - rejection of the application u/s 12AA - charitable activity u/s 2(15) - Appellant is a society registered under the society registration Act 1860 and is running a school in the name of Oxbridge World School at village Dhilwan on Kotakapura to Bhathinda Road - rejecting the application was that the assessee has taken the unsecured loan from the president, executive member and chief patron of the society and is paying the interest @ 9% to three person and @ 12% to Smt. Prem Rani and thus the assessee is violating the provisions of section 13(1c) - HELD THAT:- CIT(E) has not disputed the fact that the loan taken by the assessee from the patron, executive member and the president of the society were solely utilized for the purposes of educational institution. Further the CIT(E) has not alleged that the loan taken by the assessee was used for any other purposes, other than running the school. In our considered opinion the section 13(1)(c) would only triggered only if the assessee society is exempted u/s 12 of the Income Tax Act 1961. In the present case , the exemption/approval is yet to be granted to the appellant society, therefore in our opinion section 13 (1) (c) would not be applicable to the facts and circumstances of the case. Whether paying the interest at the rate of 9%/12% to the above then person was a benefit to the specified person, was required to be examined by the assessing officer during the assessment proceedings and for that purposes it was incumbent upon the assessing officer to bring on record the contemporaneous comparative instances of the similar society indicating that the interest of rate paid by the assessee was far more than that was prevailing in the open market. In the light of the above, the first objection raised by the CIT(E) was without any basis. Assessee has made addition of van /buses in the financial year 2012-13 to 2014-15 - The assessee had filed the income and expenditure account for all the three years and in the income the assessee has shown the fees of ₹ 13093505/- for the year ending upto 31.03.2015 and the said fees, have been utizlied for various purposes mentioned in the income and expenditure - assessee is entitled to the claim of depreciation on the fixed assets and was not restricted to only to the buses but was also relatable to the other fix assets as per schedule 5 of the balance sheet - facts remains the assessee was only having of actual surplus of ₹ 2,36,800/- (after claiming depreciation). In our view, no fault can be found in the computation of the assessee. In our view, none of the head mentioned by the assessee on the expenditure side shows the utilization of the fund for any purpose other than education. In our considered opinion generation of surplus fund by the educational institution is not a taboo. The Hon'ble Apex Court in the case of Queen's Educational Society [2015 (3) TMI 619 - SUPREME COURT] has held that when surplus is ploughed back for educational purpose, the educational institutions exist solely for educational purposes and not for purposes of profit. The Apex Court further approved accumulation to the tune of 15% of its total income pertaining to the relevant assessment year as per Sec.11(1)(a) of the Act No fault can be found in utilization of surplus fund by the assessee for the purposes of buying the buses / transportation. Admittedly, the buses are ferrying to 66 villages and transporting to the students to the school. In the absence of buses the quality education would be a pipedream and would not be a reality. In our considered opinion the education per se cannot be given a pedantic or narrow interpretation and it should be given the wide interpretation so that all the ancillary but necessary activity would form the part of education. In the absence of necessary transport facility, the students will not be able to attend school regularly and punctually. Therefore, the provision for transportation is sine qua non and is integral part of imparting education. In view of the above, the objection of the CIT(E) is devoid of any merit. Assessee is not paying the sufficient salary to the teachers and thereby violating the CBSE guidelines by not paying the 6th pay commission salary - The scope and ambit of the verification u/s 10(23C) (vi) was only to verify whether the assessee was established / running solely for the purpose of education or not. Once the CBSE grant affiliation to the assessee, then it is for the CBSE to ensure compliance of the terms and condition of attached with the affiliation. Undoubtedly, the assessee was into imparting of solely for education purposes and this aspect has not been denied by the CIT(E). In our considered opinion payment of the salary to the teacher in violation of 6th pay commission cannot be a ground to deny the approval u/s 10(23C) (vi) of Income Tax Act 1961. Recently, the coordinate bench in the matter of Dr. Madan Lal Atri had held that the scope and ambit of the enquiry at the time of registration should be confined to find out whether the activity of the assessee are charitable and genuine in nature and not. The CIT(E) should not expand the horizon for the purposes of finding whether the assessee is following the conditions laid down by the other Act at the time of approval / affiliation. CIT(E) is directed to grant approval, to the assessee from the date of application i.e. 21.09.2015 u/s 10(23C) (vi) of Income Tax Act 1961 and in view of Reham Foundation [2019 (10) TMI 151 - ALLAHABAD HIGH COURT] - Decided in favour of assessee. Issues Involved:1. Eligibility for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961.2. Compliance with Section 13(1)(c) of the Income Tax Act, 1961.3. Utilization of surplus funds and acquisition of assets.4. Payment of salaries to teachers in accordance with CBSE guidelines and the 6th Pay Commission.Issue-wise Detailed Analysis:1. Eligibility for Exemption under Section 10(23C)(vi):The appellant society, registered under the Society Registration Act, 1860, and running a school, applied for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961. The CIT(E) rejected the application on grounds including unsecured loans from members, acquisition of buses, and low salaries to teachers. The Tribunal noted that the primary objective of the society was educational, and the affiliation with CBSE was evidence of its educational activities. The Tribunal emphasized that the scope of Section 10(23C)(vi) is to verify if the institution exists solely for educational purposes and not for profit.2. Compliance with Section 13(1)(c):The CIT(E) rejected the application citing violation of Section 13(1)(c) due to interest payments on loans from members. The Tribunal clarified that Section 13(1)(c) applies only if the society is already exempt under Section 12. Since the society was yet to receive approval, Section 13(1)(c) was not applicable. Furthermore, the interest rates paid were lower than market rates, and the loans were used solely for educational purposes, negating any undue benefit to members.3. Utilization of Surplus Funds and Acquisition of Assets:The CIT(E) objected to the acquisition of buses, arguing that surplus funds were used to generate additional income through transportation fees. The Tribunal found that the surplus generated was incidental and ploughed back for educational purposes, aligning with the principles laid down by the Supreme Court in Queen's Educational Society vs. CIT. The Tribunal held that providing transportation was integral to imparting education, especially given the school's remote location and the need to ferry students from 66 villages.4. Payment of Salaries to Teachers:The CIT(E) noted that the society paid meager salaries to teachers, violating CBSE guidelines and the 6th Pay Commission. The Tribunal ruled that the scope of verification under Section 10(23C)(vi) is limited to ensuring the institution exists solely for educational purposes. Compliance with salary guidelines is the responsibility of CBSE, not the CIT(E). The Tribunal referenced a coordinate bench decision, emphasizing that the CIT(E) should not expand its inquiry beyond verifying the genuineness and charitable nature of the institution's activities.Conclusion:The Tribunal quashed the order of the CIT(E) and directed the grant of approval under Section 10(23C)(vi) from the date of application (21.09.2015). The appeal of the assessee was allowed, reinforcing the principle that educational institutions can generate surplus funds as long as they are used for educational purposes and not for profit.