2023 (7) TMI 1602 - AT - Income Tax

Dividend and interest excluded from 'annual receipts' under s.10(23C)(iiiad); educational institution income under Rs.1 crore fully exempt

ITAT KOLKATA allowed the assesee's appeal, holding that dividend and interest arise from sources other than educational activities and therefore do not ... Exemption u/s 10(23C)(iiiad) - assessee is an educational institution existing solely for the educational purpose and nor for purpose of profit and that its annual receipt is less than 1.00 Cr. - CIT(A) dismissed the appeal of the assessee by justifying the taxing of dividend income in excess of 10 lakhs u/s 115BBDA of the Act as the earning of divided income is not a activity undertaken for running the educational institution. Whether the income of the society from a source other than the educational activities is part of the annual receipt for the purpose of determining the claim of exemption u/s 10(23C)(iiiad)? HELD THAT:- Undisputedly the income of the society from dividend and interest is from a source other than the educational activities and exceeds 1.00 Cr. After hearing the rival arguments and perusing the case laws as placed before us, we are of the considered view that the same is not the part of annual receipt of the educational institution for purpose of Section 10(23C)(iiiad) of the Act as it clearly talks about the annual receipt from the educational activities which apparently does not include the income of the society from a source other than from the educational activities of the society. CIT(A) has unequivocally given a finding in the appellate order that the assessee is eligible to claim exemption u/s 10(23C)(iiiad) of the Act as its annual receipt from the educational activities does not exceed 1.00 Cr however concurrently held that the said exemption can not be extended to other income of the society which has been correctly brought to tax. Therefore we are not in concurrence with the conclusion drawn by the Ld. CIT(A) on this issue. We are supported in our conclusion by a series of decisions discussed hereinafter. In the case of CIT vs. Madrasa E-Bakiyath-Us-Salihath Arabic College [2014 (8) TMI 565 - MADRAS HIGH COURT] it was held that the sale proceed of land and bond cannot be equated to annual receipts as stated under section 10(23C) of the Act. The sale is in the nature of conversion of a capital asset from one to another. As in the case of assessee society, the annual receipt of the assessee from the educational institution is less than 1.00 crore as the interest and dividend received by the assessee trust do not constitute the part of the annual receipt of the school for determining the eligibility for exemption u/s 10(23C)(iiiad) of the Act and therefore the entire income of the educational institution is exempt from tax. Accordingly we set aside the order of Ld. CIT(A) and direct the AO to delete the disallowance. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether income of an educational society from sources other than its educational activities (specifically dividend and interest from investments/corpus) forms part of 'aggregate annual receipts' for the purpose of claiming exemption under section 10(23C)(iiiad) of the Income-tax Act. 2. Whether taxing dividend income under section 115BBDA is appropriate where the assessee claims exemption under section 10(23C)(iiiad) on the ground that aggregate annual receipts from its educational activities are below the prescribed threshold. ISSUE-WISE DETAILED ANALYSIS Issue 1: Inclusion of non-educational receipts (dividend/interest) in 'aggregate annual receipts' under section 10(23C)(iiiad) Legal framework: Section 10(23C)(iiiad) provides exemption where a university or other educational institution exists solely for educational purposes and not for profit, and the aggregate annual receipts of such institution do not exceed the prescribed amount (Rs. 1 crore for the relevant year). The statutory text refers to aggregate annual receipts of the educational institution as a condition for exemption. Precedent treatment: The Court relied on earlier decisions that distinguish capital receipts or receipts from non-core activities from the annual receipts contemplated by section 10(23C) provisions. Decisions of coordinate benches were cited to the effect that sale proceeds of capital assets and income from investments used to further institutional objects need not be treated as part of annual receipts for determining eligibility under section 10(23C) clauses. Interpretation and reasoning: The Tribunal interpreted 'aggregate annual receipts' in section 10(23C)(iiiad) to mean receipts from the educational activities of the institution, not all receipts of the entity from other sources. It affirmed the factual finding that the society existed solely for educational purposes and did run a school, albeit charging no fees. The Tribunal noted that dividend and interest were earned from investments of corpus/surplus and were applied or accumulated for future educational purposes (infrastructure, new schools). Therefore such receipts, being from sources other than the educational activity itself, do not fall within the statutory phrase 'annual receipt from the educational activities' used to determine the threshold for exemption. The Tribunal also relied on analogy with prior tribunals where income from investments or capital asset sales were not equated to annual receipts under section 10(23C) when applied to determine exemption eligibility. Ratio vs. Obiter: Ratio - The decisive legal proposition is that for section 10(23C)(iiiad) purposes the statutory threshold of aggregate annual receipts is to be computed with reference to receipts from the educational activity (i.e., receipts that flow from the institution's educational objects), and income from investments/dividends/interest forming corpus or surplus for future application to educational objects does not form part of such aggregate annual receipts. Obiter - Observations about policy considerations (poverty of students, remote area) are factual supports rather than new legal principles. Conclusion: The Tribunal concluded that dividend and interest income derived from investments/corpus do not constitute part of the aggregate annual receipts of the educational activities for determining exemption under section 10(23C)(iiiad). Since the annual receipts from educational activities were found to be below Rs. 1 crore, the institution satisfied the statutory condition and was entitled to exemption for its income. Issue 2: Applicability of section 115BBDA tax on dividend income where exemption under section 10(23C)(iiiad) is claimed Legal framework: Section 115BBDA taxes dividend income in excess of Rs. 10 lakh in the hands of certain resident individuals and entities at a concessional rate. The interplay between section 115BBDA and a specific exemption under section 10(23C)(iiiad) arises when an exempt institution derives significant dividend/interest income. Precedent treatment: Tribunal relied on decisions holding that income categorised as non-core (investment/dividend) may nevertheless be disregarded for the purpose of the 'annual receipts' threshold under section 10(23C) when the society/trust otherwise satisfies the conditions of existence solely for the charitable/educational purpose and the receipts are applied or accumulated for institutional objects. Prior decisions affirmed that the source of income being outside the core philanthropic activity does not, by itself, disqualify the institution from exemption if statutory conditions are met. Interpretation and reasoning: The Tribunal accepted the lower authority's factual finding that the educational receipts were below the threshold but disagreed with the conclusion that dividend income must be taxed under section 115BBDA notwithstanding section 10(23C)(iiiad). The Tribunal reasoned that where the statute contemplates exemption based on aggregate annual receipts of educational activities, separate non-educational receipts invested for furthering the institution's objects should not be aggregated against that threshold. Consequently, taxing such dividend income under section 115BBDA would negate the statutory exemption which Congress intended to grant to qualifying educational institutions; therefore the taxing of the dividend was not appropriate once the institution met the section 10(23C)(iiiad) conditions. Ratio vs. Obiter: Ratio - Where an institution exists solely for educational purposes and its receipts from educational activities are within the prescribed limit, income from investments/dividends/interest held as corpus or accumulated for future educational objectives cannot be taxed by treating them as part of the institution's aggregate annual receipts for the purpose of denying exemption under section 10(23C)(iiiad), and consequently such income is not required to be taxed under section 115BBDA in that context. Obiter - Remarks on the percentage of application versus accumulation of receipts (e.g., 38% applied, 53.65% accumulated) serve to establish factual sufficiency rather than novel legal rules. Conclusion: The Tribunal set aside the order that taxed dividend income under section 115BBDA, held that the society satisfied the conditions of section 10(23C)(iiiad) (existing solely for educational purposes and having annual receipts from educational activities below Rs. 1 crore), and directed deletion of the disallowance and tax demand; the appeal was allowed. Cross-reference See Issue 1 conclusion for the foundational determination that non-educational receipts (dividend/interest) do not form part of the aggregate annual receipts for section 10(23C)(iiiad); Issue 2 flows from and depends on that determination, leading to reversal of taxation under section 115BBDA in the factual matrix where funds are applied or accumulated for educational purposes and the institution exists solely for education and not profit.