TaxTMI 
TaxTMI 
2014 (5) TMI 898
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..... The petitioner is recognised and listed as a body conducting public examinations under the Delhi School Education Act, 1973. 3. The Petitioner had applied for the approval under Section 10(23C)(vi) of the Act for AY 1999-2000 to 2001-02 to Central Board of Direct Taxes (hereinafter referred to as "CBDT"). The CBDT, by order dated 31.10.2006, rejected the Petitioner's application holding that the Petitioner was not an educational institution but was an examination body which conducts examinations for ICSC and ISC and therefore, could not be granted the exemption as an educational institution under Section 10(23C)(vi) of the Act. 4. The Petitioner states that it had also filed applications for approval under Section 10(23C)(vi) of the Act for AY 2002-03 to 2004-05 and 2005- 06 to 2007-08 which have not been disposed of so far. 5. The Petitioner had filed an application for approval under Section 10(23C)(vi) of the Act, for the AY 2008-09 to 2010-11, with the Respondent on 23.11.2007. By an order dated 08.10.2008, the respondent dismissed the application on the ground that the Petitioner is not an educational institution but an examination body conducting examinations for ISC....
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....petitioner ought to be granted the said exemption. 10. Petitioner stated that Rule 3 of the Rules and Regulations of the Petitioner allows the application of the income solely for the promotion of its object as set-forth in the Memorandum and also prohibits the transfer of income and property of the petitioner society, directly or indirectly, by way of profit, dividend and bonus to the persons, who at any time are or have been members of the petitioner society and also prohibits the payment of remuneration to its members. Petitioner further stated that none of the portion of its income was spent for other than its objects. 11. Petitioner contended that the Petitioner is an unaided organization and for the purpose of development and expansion, it has to create its own resources. Prior to the Financial Year 2008-09, i.e. AY 2009-10, there was a constant fee charged for some years, but from AY 2009-10, in order to create the resources as required for future expansion, modernization, development and construction of the building, the Petitioner increased the fee and the fee remained constant till the Financial Year 2011-12, i.e. AY 2012-13, but after considering the sufficiency of ava....
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....nation fee from Rs. 460/- to Rs.2100/- per student, further indicated that the petitioner was only a profit making organisation and the subsequent roll back of the fee was an afterthought to get the continued exemption. The learned counsel for the revenue also referred to following table:- A.Y. Gross Receipts Expenditures after Depreciation Capital Expenditures Capital Expenditures (Out of Accumulation of earlier years) Total expenditure for the year Surplus % Surplus over total receipts 2005-06 116683397 80262907 2599265 0 82862172 33821225 28.99 2006-07 123250764 92591390 521783 0 93113173 30137591 24.45 2007-08 129095657 91641050 4273554 0 95914604 33181053 25.70 2008-09 141636868 98157116 3472575 0 101629691 40007177 28.25 2009-10 426161552 136933674 0 6220613 136933674 289227878 67.87 2010-11 539294674 153385804 0 21233060 153385804 385908870 71.56 2011-12 589269733 179346521 0 26669123 179346521 409923212 69.56 It was contended that the above table had been prepared after excluding the component of depreciation and including the capital expenditure incurred over the years. This according to the learned counsel i....
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....ses as well as in view of the fact that the work done by RJB-APL had not been verified and certified by an IT expert, they were unable to form an opinion as to whether the accounts of the petitioner reflected a true and fair picture. In view of the observations made by the auditor, the respondent concluded that the activities of the petitioner were not genuine. The relevant extract of the impugned order indicating the aforesaid reasons for rejection of the application filed by the petitioner are quoted below:- "9. In view of the discussion held in forgoing paragraph of this order, the applicant's claim for exemption u/s 10(23C) (vi) for the AY 2008-09 and onwards is rejected on the following grounds:- (i) The generation of huge surplus year after year clearly established that the applicant is in the business of education like any other entrepreneurs and service providers by collecting huge fees from their clients who in this particular case are students of the schools affiliated with the applicant Council. Therefore it is held that the applicant Council is existing for the purpose of profits. (ii) Activities of the applicant Council are not genuine as the Statutory Auditors of t....
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.... accounts) or information from the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, as it thinks necessary in order to satisfy itself about the genuineness of the activities of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, and the prescribed authority may also make such inquiries as it deems necessary in this behalf: Provided also that the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or subclause (v) or sub-clause (vi) or sub-clause (via)- (a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established and in a case where more than fifteen per cent of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and xxxx xxxx xxxx xxxx xxxx Provided also that the exemption under sub-clau....
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....tion: Provided also that where an application under the first proviso is made on or after the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, every notification under sub-clause (iv) or sub-clause (v) shall be issued or approval under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall be granted or an order rejecting the application shall be passed within the period of twelve months from the end of the month in which such application was received: Provided also that where the total income, of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or subclause (via), without giving effect to the provisions of the said sub-clauses, exceeds the maximum amount which is not chargeable to tax in any previous year, such trust or institution or any university or other educational institution or any hospital or other medical institution shall get its accounts audited in respect of that year by an accountant as defined in the Explanation below sub-section (2) of section 288 and ....
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....tional institution or any hospital or other medical institution has not,- (A) applied its income in accordance with the provisions contained in clause (a) of the third proviso; or (B) invested or deposited its funds in accordance with the provisions contained in clause (b) of the third proviso; or (ii) the activities of such fund or institution or trust or any university or other educational institution or any hospital or other medical institution,- (A) are not genuine; or (B) are not being carried out in accordance with all or any of the conditions subject to which it was notified or approved, it may, at any time after giving a reasonable opportunity of showing cause against the proposed action to the concerned fund or institution or trust or any university or other educational institution or any hospital or other medical institution, rescind the notification or, by order, withdraw the approval, as the case may be, and forward a copy of the order rescinding the notification or withdrawing the approval to such fund or institution or trust or any university or other educational institution or any hospital or other medical institution and to the Assessing Officer: Provided also....
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....certificates to the successful students. The petitioner, in order to maintain the standard of education and to make the teachers aware of the latest developments in the education field, from time to time undertakes, supports and promotes study and research and also holds training conferences and seminars for the teachers. 23. The petitioner owes its genesis to Inter-State Board for Anglo Indian Education which was set up in 1935. The said Board looked after the work and standard of Anglo Indian schools preparing the students for "Overseas School Certificate" examination conducted by the University of Cambridge. In 1958, the Inter-State Board for Anglo Indian Education set up a council for the Indian School Certificate Examination and on 19.12.1967, the council was registered as a society under the Societies Registration Act XXI of 1860, (Punjab Amendment) Act, 1957 as extended to the Union Territory of Delhi. 24. It is also necessary to advert to the objects of the petitioner society. The aims and objects of the Petitioner contained in Clause 3 of its Memorandum of Association are as under: "3. The object of the Society is educational, and includes the promotion of science, lite....
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.... be utilised solely for its objects. The relevant clause of the Rules and Regulations is as under: "3. The income and property of the Society, whencesoever derived, shall be applied solely for the promotion of its object as set forth in the Memorandum. No portion of the income or property aforesaid shall be paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise by way of profit, to persons who at any time are, or have been members of the Society or to any one or more of them or to any persons claiming through any one or more of them provided that: (a) No remuneration or other benefit in money or money's worth shall be given by the Society to any of its members whether officers or servants of the Society or not, except payment of out-ofpocket expenses, reasonable and proper interest on money lent, or reasonable and proper rent on premises lent to the society. (b) No member shall be appointed to any office, under the Society, which is remunerated by salary, fees or in any other manner not accepted by clause (a). (c) Nothing in this clause shall prevent the payment by the Society in good faith of reasonable remuneration to any of its officers or serva....
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....rvice in the nature of charity would not cease to be charitable only because it entails receiving a charge for the same. The nature of the activity carried on by an entity would be the predominant factor to determine whether the purpose of the organization is charitable. It is not necessary that a charitable activity entails giving or providing a service and receiving nothing in return. Collection of a charge for providing education would, nonetheless, be charitable provided, the funds collected are also utilised for the preservation of the charitable organization or for furtherance of its objects. In the present case, the petitioner has provided an explanation for the surpluses being accumulated. In our view, if the surpluses have been generated for the purposes of modernising the activities and building of the necessary infrastructure to serve the object of the organisation, it would be erroneous to construe that the generation of surpluses have in any manner negated or diluted the object of the organization. In the present case, the petitioner has been existing solely for educational purposes. Generation of profit and its distribution is not the object of the petitioner society.....
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....on but would also reflect unsound principle of management." 30. In the case of Aditanar Educational Institution v. Addl. CIT: (1997) 224 ITR 310 (SC) the Supreme Court has observed as under:- "After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity." 31. The predominant object test as explained in Surat Art Silk Cloth Manufacturers Association (supra) has also been applied by the Supreme Court in American Hotel and Lodging Association vs CBDT: [2008] 301 ITR 86 with respect to exemption under Section 10(23C)(vi) of the Act. The Court reiterated the said principle as under: "In deciding the character of the recipient, it is not necessary to look at the profits of each year, but to consider the nature of the activities undertak....
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....urt in para 33 of its judgment in American Hotel and Lodging Association's case [2008] 301 ITR 86. Thus, on an application made by an institution, the prescribed authority can grant approval subject to such terms and conditions as it may deems fit provided that they are not in conflict with the provisions of the Act. The parameters of earning profit beyond 15% and its investment wholly for educational purposes may be expressly stipulated as per the statutory requirement. Thereafter, the Assessing Authority may ensure compliance with those conditions. The cases where exemption has been granted earlier and the assessments are complete with the finding that there is no contravention of the statutory provisions, need not be reopened. However, after grant of approval if it comes to the notice of the prescribed authority that the conditions on which approval was given, have been violated or the circumstances mentioned in 13th proviso exists, then by following the procedure envisaged in 13th proviso, the prescribed authority can withdraw the approval. (3) The capital expenditure wholly and exclusively to the objects of education is entitled to exemption and would not constitute part ....
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....ction 10(23C)(vi) of the Act since it had generated a surplus is not sustainable. 36. The next question that needs to be considered is, whether the finding of the respondent that the activities of the petitioner are not genuine is erroneous. By virtue of the second proviso of Section 10(23C) of the Act, the Prescribed Authority (the respondent) is entitled to call for such information as it thinks necessary to satisfy itself that the activities of the fund or an institution are genuine. The respondent had called for information, including the financial records of the petitioner and had discovered that Auditor had expressed reservations with respect to the final accounts of the petitioner for the Financial Year 2008-09 and 2009-10. The controversy relates to a contract entered into by the petitioner with RJBAPL for modernising and installing IT enabled services for conduct of the activities of the petitioner. The petitioner had entered into an agreement, on 26.09.2008, with RJB-APL for that purpose. The total cost for the project was agreed at Rs.3980.65/- lacs and aggregate amount paid to RJB-APL on account of invoices raised was Rs.16,36,41,250/-. The auditors had raised serious ....
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....d to RJB-APL after the petitioner had obtained quotations from three parties, viz., M/s Wipro, M/s TYC World Softinfrastructure Pvt. Ltd. and RJBAPL. The scope of work to be carried out by the parties was evaluated and RJB-APL was found to be more suitable. Thereafter, a formal agreement was entered into on 05.09.2008. It was pointed out that RJB-APL had commenced the work and also submitted monthly status reports. Initially, RJB-APL had made presentations and based on the demonstrations an interactive website had been developed. It is stated that there were several modules that had been worked on by RJB-APL. The petitioner has also drawn our attention to a letter dated 30.10.2009 addressed by RJB-APL to the executive committee of the petitioner, wherein the overview of work performed from the date of execution of the agreement had been summarized. The work claimed to be done by the RJB-APL is quoted below:-. Development of general scope and concept of the project under the direction of Mr. Guil Vaz through an iterative process of demonstration through multiple presentations by us to Mr. Vaz. Select presentations were then made by Mr. Vaz to the Executive Committee. Areas discusse....
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....ted SMS system 42,080 results disseminated by SMS on the day of the results Automated e-mail system to pre-registered students Duration: March 2009 to May 2009 Results and data information dissemination to all school Principals including selection of and contracting with email system vendor Created accounts of 1,494 Principals Generated letters containing the log-in details for all above Principals 886 Principals activated their e-mail account Supported the Principals on call for log-in issues 4452 reports comprising tabulation sheet, comparison tables and Council annual statistics 2009 were delivered to the Principals on the day of the results Duration: On an expedited basis from April 17, 2009 to May 19, 2009 Readied on-line, interactive statistical analysis module for Council and Principals based on various parameters: Geographical distribution School Subject Year Duration: April 2009 Conversion of the static website to an interactive web portal with capabilities of addressing all areas and activities as determined in the general scope and concept detailed above Duration: From February 2009 and April 2009 E-registration of students by schools Based on analysi....
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....g an interface with the schools which are affiliated with the petitioner, as well as the students enrolled with the petitioner, was considered necessary and it cannot be contended that any sum spent towards the modernising and computerization would not be towards the object of the petitioner society. The problem essentially arises on account of the apprehension that the contract awarded to RJB-APL entailed payments in excess of the value received by the petitioner. It is also suggested that RJB-APL had been chosen in a nontransparent manner and the concerned persons who were in charge of the affairs of the petitioner society were derelict in not evaluating the work performed by RJB-APL. In our opinion, clear distinction must be drawn between inefficient utilization of funds and utilization of funds for objects other than that for which a society has been established. Merely, because the funds of the petitioner may not have been utilized in the best possible manner cannot lead to a conclusion that they have not been applied to the object for which the petitioner has been established. It is not essential that all decisions made by the management of a society yield optimum results. A ....
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....mputerization cannot be stated to be for the purposes other than the object as specified in the petitioner's charter. The same cannot be mistaken to be deployed for any other purpose. Thus, in our view, any irregularity in the manner in which the contract had been entered into with RJB-APL would not be sufficient for a conclusion that the respondent had not deployed its funds for the purposes of its objects. 42. As noticed earlier, the assessee has along with RJB-APL amicably determined the amount payable for the work done and recovered the balance. The question whether the decision to set up an e-enabled system was necessary or the amount settled between the assessee and the service provider is reasonable, is not required to be considered by the Prescribed Authority. The reasonableness of the amount spent and the quality of the decisions of the management are not the subject matter in respect of which the satisfaction of the Prescribed Authority is required. Although, the Prescribed Authority can examine whether the expenditure is real, the question whether the same was necessary or should have been incurred is not within the scope of the subjective satisfaction of the Prescribed....
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.... view of the above discussion, it is not necessary to consider whether the exemption under section 10(23C)(vi) of the Act could be denied to the petitioner only for the relevant year during which payments were released to RJB-APL and could not be denied altogether. However, as we have heard the learned counsel on the issue, we consider it appropriate to examine the position where an assesse is found to be non compliant with the provisos to Section 10(23C) of the Act. 46. Section 10(22) of the Act, which was the applicable provision for the exemptions prior to introduction of Section 10(23C)(vi) of the Act, provided for exemption in respect of income of a university or other educational institution, existing solely for educational purpose and not for purpose of profit. Under Section 10(22) of the Act, if the income of the institution was derived in the course of carrying out an activity for educational purposes, the same was exempt and the assesse was not required to prove the application of income so derived. By virtue of the Finance (No.2) Act, 1998, Section 10(22) was omitted with effect from 01.04.1999 and the said provision was replaced by Section 10(23C)(vi). The CBDT in its ....
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....of conditions and compliance thereof. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardized form in terms of the first proviso. It is only if the pre-requisite condition of actual existence of the educational institution is fulfilled that the question of compliance of requirements in the provisos would arise. We find merit in the contention advanced on behalf of the appellant that the third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval." 48. If one applies the above principle to the facts of the present case then the petitioner would be entitled to an approval under Section 10(23C)(vi) of the Act at the threshold. However, that would not absolve the petitioner from complying with the provisos to Section 10(23C) of the Act. The petitioner would be obliged to apply the funds solely for its objects and if the third proviso to Section 10(23C) of the Act was viola....