2019 (4) TMI 2193 - AT - Income Tax

Educational purpose and substantial Government financing secured exemption for a State-controlled textbook board under section 10(23C)(iiiab).

A State-controlled textbook board was treated as an educational body because its objects were confined to preparing, publishing and distributing school ... Educational institution existing solely for educational purposes - Substantial financing by Government - Exemption under section 10(23C)(iiiab)Educational institution existing solely for educational purposes - Profit motive - Binding precedent - The assessee-society continued to be an educational institution existing solely for educational purposes and not for purposes of profit. - HELD THAT: - The Tribunal held that the assessee was created by the State Government to take over and carry on the work of the textbook board for preparation, publication and distribution of textbooks and related educational material for school education. Its governing body was composed of Government functionaries and its objects were directed to advancement of education, including supply of textbooks under Government schemes. The Tribunal further held that this question already stood concluded in the assessee's own case under section 10(22), where it had been held that mere generation of surplus from publication and sale of textbooks did not alter the educational character of the institution so long as the surplus was used only for educational purposes. The contrary finding of the Commissioner (Appeals) treating the activity as commercial was therefore held to be unsustainable, being contrary to the binding precedent and also inconsistent with the Supreme Court's approach in the case of a similar State textbook corporation. [Paras 6]The assessee was held to satisfy the condition of existing solely for educational purposes and not for profit.Substantial financing by Government - Government reimbursement under educational scheme - Exemption under section 10(23C)(iiiab) - The assessee-society was substantially financed by the State Government for the years under consideration. - HELD THAT: - The Tribunal held that, for section 10(23C)(iiiab), the test of being wholly or substantially financed by the Government had to be examined year-wise. Though the initial capital contribution was made at the time of creation of the society, the determinative factor was that, in the relevant years, more than 50 per cent of the assessee's receipts came from the State Government against free distribution of textbooks under Government schemes. Such receipts represented Government financing of the assessee's educational activity, and not merely ordinary commercial income. Since the Government component exceeded 50 per cent in both years, the assessee was regarded as substantially financed by the Government and fulfilled the additional requirement introduced in section 10(23C)(iiiab). [Paras 7]The assessee was held entitled to exemption under section 10(23C)(iiiab) for both assessment years.Final Conclusion: The Tribunal held that the assessee, being a State-controlled textbook board existing solely for educational purposes and receiving more than 50 per cent of its receipts from the State Government under textbook supply schemes, was eligible for exemption under section 10(23C)(iiiab). The denial of exemption for both assessment years was therefore set aside and the appeals were allowed. Issues: (i) whether the assessee, a State-controlled textbook board, existed solely for educational purposes and not for the purpose of profit; (ii) whether it was wholly or substantially financed by the Government so as to qualify for exemption under section 10(23C)(iiiab).Issue (i): whether the assessee, a State-controlled textbook board, existed solely for educational purposes and not for the purpose of profitAnalysis: The assessee's objects were directed to preparation, publication and distribution of school textbooks and allied educational material for implementation of the State's education policy. Its governing body was composed predominantly of Government officials and nominees, and the activity was held to be part of the machinery for advancing education rather than a commercial venture. Earlier decisions in the assessee's own case and the parallel reasoning accepted in similar textbook-board cases were treated as supporting the educational character of the .Conclusion: The assessee was held to exist solely for educational purposes and not for profit.Issue (ii): whether it was wholly or substantially financed by the Government so as to qualify for exemption under section 10(23C)(iiiab)Analysis: The Tribunal examined the funding pattern and found that the initial capital was contributed by the State Government and that the receipts for the relevant years were substantially derived from supply of books to Government schools under the State scheme, with the Government component exceeding the threshold of substantial financing. The surplus generated from such receipts was retained in reserve and did not alter the character of Government financing for the relevant years. The Tribunal also relied on comparable textbook-board decisions treating similar funding structures as substantial Government financing.Conclusion: The assessee was held to be substantially financed by the Government and thus entitled to exemption under section 10(23C)(iiiab).Final Conclusion: The denial of exemption was unsustainable, the additions based on treating the assessee as a taxable AOP could not stand, and the assessee's claim for exemption succeeded.Ratio Decidendi: A State-controlled educational body engaged in textbook publication for implementing public education policy qualifies for exemption where its dominant object is education, no profit motive is established, and Government receipts constitute substantial financing for the relevant year.