TaxTMI 
TaxTMI 
2016 (1) TMI 1356
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.... all its receipts on its main aims and objects. 4. Whether the ld. CIT(A) was right in not considering the decision of Hon'ble Uttrakhand High Court in the case of CIT vs. Queens Educational Society, Haldwani and CIT vs. St. Pauls Sr. Secondly School, Kathygodam dated 24.09.2007 where in the Hon'ble High Court has answered the issue in negative holding that the assesse was not entitled to claim the deduction. The ratio of the decision is squarely applicable in the said case of the assessee." 2. The brief facts of the case are that the assessee trust is engaged in running a school at Rajouri under the name and style of 'International School'. The assessee-trust filed the return of income declaring nil taxable income after claiming exemption u/s 10(23C)(iiiad) of the I.T. Act on surplus of Rs. 33,26,105/-. While deciding the case u/s 143(3) of the I.T. Act, the AO disallowed the exemption claimed. 3. The AO observed that the objects of the trust included many objects which were other than education. A plain reading of Sec. 10(23C) (iiiad) makes it clear that the institution should exist solely for educational purposes and not for purpose of profit. The assessee trust existed....
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.... and that on a similar issue, in the case of CCIT, Amritsar vs. Ajanta Educational Centre, the department had filed Special Leave Petition SLP Civil No.4445/2011 before the Hon'ble Supreme Court against the decision dated 20.05.2010 of the Hon'ble P & H High Court. 4. On appeal, the ld. CIT(A) deleted the disallowance. Now, the department is in appeal before us. 5. The ld. DR contended that the ld. CIT(A) has erred in allowing the exemption claimed by the assessee u/s 10(23C)(iiiad) of the Act, even though the assessee trust is not registered u/s 12AA of the Act. He further contended that the ld. CIT(A) is not right in considering the income/expenditure statement of the assessee which clearly showed that the assessee had generated surplus profit out of total receipts and it had not spent all its receipts on its main aims and objects. He also placed reliance on the decisions of the Hon'ble Uttarakhand High Court, in the case of CIT vs. Queens Educational Society, Haldwani and CIT vs. St. Pauls. SR. Secondary School, Kathgodam dated 24.09.2007, wherein, the Hon'ble High Court has answered the issue in the negative, holding that the assessee was not entitled to claim the deducti....
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....dical relief of the poor and whose objects are similar to the object of this trust. 10. To help and assist poor and deserving people in marriage. 11. To make donation to other public charitable trust/institutions having objects similar to this trust. 12. To assist hospitals in setting up the various facilities such as Blood Bank, Eye Bank, Burn Centres, etc., for the poor patients. 13. To promote and advance moral education charity and general welfare of the people. 14. To render financial assistance to the poor and the disadvantaged. 15. To do all acts necessary and conducive to the achievement of the object of objects mentioned hereinabove. 8. It is seen that the AO does not appear to have any problem with object nos. 1 to 7 and partly, object nos. 9, 11 and 15 of the assessee trust. These are the objects with regard to education. The AO's objection is regarding object nos. 8, 10 to14 and parts of object nos. 9, 11 and 15. 9. To reiterate, object no. 8 concerns public health services and medical aid; object no. 10 is about assistance to the poor and deserving in marriage; object no. 12 talks of assistance to hospitals in setting up health facilities for po....
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....iiiad), that what is relevant is the source of the income derived from an educational institution existing solely for educational purposes. 13. In the present case, it remains undisputed that during the year, the assessee turst was running a school in a remote area of Rajouri in the state of Jammu & Kashmir. It was carrying out no other activity. It was not getting any Government aid and was running the school out of its own funds. The gross receipts of the assessee from this activity of running its school were of less than one crore rupees. It was, therefore, that it claimed exemption u/s 10(23C)(iiiad) of the Act. During the year, it had a surplus of Rs. 33,26,105/-. This surplus was from no other activity, but of running the school. The assessee spent this surplus for educational purposes, including construction of school building. The ld. CIT(A) has rightly observed that such a surplus cannot be interpreted as existing solely for profit. In this regard, as per "CIT vs. Surat Art Silk Manfacturers' Association", 121 ITR 1(SC), every trust or institution must have a purpose for which it is established and every purpose must, for its accomplishment, involve the carrying on of a....
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....idea and object , opened this area of education for the private sector., that the Government, lacking funds, appears to have thought that the private sector could do this job very well and that once the very intention of the Government is to promote education in the private sector, the action of the department in disallowing exemption u/s 10(23C)(iiiad) of the Act would seriously discourage those activities and the avowed objected could never be achieved. 6.1. It was further observed that in the case of 'TMA Pai Foundation vs. State of Karnataka', (2002) 8 SCC 481, the Constitution Bench comprising of 11 Judges of the Hon'ble Supreme Court, has held that private educational institutions are bound to generate funds for the betterment and growth of the institutions and for which there may be surpluses for furtherance of education., that therefore, it is not only permissible, but also an important requirement, to run the institutions of such a strength. 6.2. It was further observed that in 'Aditanar educational institution Etc. vs. Addl. CIT', (1997) 224 ITR 310 (SC), it was held that when surplus is utilized for educational purposes, i.e., for infrastructure development, it can....
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....n, or purely for charity in the field of health and upliftment of the poor. 6.5. Before us, the department has not brought anything on record to prove that the assessee-society was also carrying on any other activity besides education, or that the factum of the assessee carrying on educational activity was never disputed by the AO, or that the society was not a small institution only imparting education to the children in a remoite area where there is hardly any presence of government schools. 6.6. Before us, though it was contended that the Ld. CIT(A) erred in not following the case of 'M/s. Queens Educational Society' (supra), the department has not been able to place anything on record to counter the well reasoned, elaborate, factual as well as legal observations entered by the Ld. CIT(A) as discussed hereinabove. Further, no decision contrary either to 'M/s. Pinegrove International Charitable Trust' (supra), or to 'TMA Pai Foundation vs. State of Karnataka' (supra), or to 'Aditanar Educational Institution' (supra), has been relied on. 6.7. To reiterate, 'M/s. Queens Educational Society', has been specifically disagreed with in 'M/s. Pinegrove International Charitable T....
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....es and becomes an institution for the purpose of making profit. The predominant object test must be applied - the purpose of education should not be submerged by a profit making motive. A distinction must be drawn between the making of a surplus and an institution being carried on "for profit". No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit. If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes. The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons. 12. The Uttarakhand High Court in the impugned judgment dated 24th September, 2007 quoted the ITAT order in paragraph 7 as follows: "The ITAT while granting exemption under Section 10(23C) (iiiad) recorded the following reasons: "During the years relevant for asstt. Year 2000-01 and 2001- 02, the excess of income over expenditure stood at Rs. 6,58,862/- and Rs. 7,82,632/- respective....
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....ult incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purpose 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 powers of the concerned entity If one looks at the object clause, there are other noble and pious objects but assessee society has done nothing to achieve the other objects except pursuing main object of providing education and earning profit. Further, with profit earned the society has strengthened or enhanced its capacity to earn more rather than to fulfill other noble objects for the cause of poor and needy people or advancement of religious purpose. Therefore, the law laid down by the Apex Court has rightly been applied and exemption has also rightly been refused by the AO in the facts and circumstances of the case." 15. It is clear that the High Court did not apply its mind independently. What has been copied is one paragraph from the Supreme Co....
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....ercial basis making profits would go out of the purview of taxation and could demand exemption. Thus, the test, according to us, must be whether the society could survive without receiving voluntary contributions, even though it may have some income by the activities of the society. The word "part" mean an appreciable amount and not an insignificant one. The "part" in other words, must be substantial part. What is substantial would depend upon the facts and circumstances of each case." 19. It is clear, therefore, that the Uttarakhand High Court has erred by quoting a non existent passage from an applicable judgment, namely, Aditanar and quoting a portion of a property tax judgment which expressly stated that rulings arising out of the Income Tax Act would not be applicable. Quite apart from this, it also went on to further quote from a portion of the said property tax judgment which was rendered in the context of whether an educational society is supported wholly or in part by voluntary contributions, something which is completely foreign toSection 10(23C) (iiiad). The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own pre....
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....ubmissions of the assessee. The decisions quoted in support of its contention are not relevant and are distinguishable on facts as well as issues. It is clear that the ratio of the decision of Hon'ble Uttarakhand High Court is squarely applicable in this case. 5. The Hon'ble Supreme Court has held, in the case of Aditanar Educational Institution etc. v. Addl. Commissioner of Income Tax [224 ITR 310 (SC)], that in the case of an educational institution, after meeting the expenditure, if any surplus results incidentally, then the institution will not cease to be one existing solely for educational purposes. 6. The crucial condition is that surplus should result only incidentally and should not be aimed for. If substantial profits are earned in one year if (it)?would be duty of the institution to lower its fees for the subsequent year so that such profits are not intentionally generated. If, however, profits continue year after year than it cannot be said that the surplus is arising incidentally. 7. In the present ease, the profits are substantial and are arising year alter year and therefore, the decision of the Apex Court in the case of Aditanar Education Institutio....
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.... other educational institution or any hospital or other medical institution where such assets form part of the corpus of any university or other educational institution or any hospital or other medical institution as on the 1st day of June, 1998;] (ii) any assets (being debentures issued by, or on behalf of, any company or corporation), acquired by the fund, trust or institution [or any university or other educational institution or any hospital or other medical institution] before the 1st day of March, 1983; (iii) any accretion to the shares, forming part of the corpus mentioned in sub-clause (i)[and sub-clause (i-a)], by way of bonus shares allotted to the fund, trust or institution[or any university or other educational institution or any hospital or other medical institution]; (iv) voluntary contributions received and maintained in the form of jewellery, furniture or any other article as the Board may, by notification in the Official Gazette, specify, for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-section (5) of Section 11: Provided also that where the fund or institution referred to in subclause (iv)....
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.... Explanation.-In this clause, "scheduled bank" means the State Bank of India constituted under theState Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under Section 3of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934); (iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963); (v) investment in any security for money created and issued by the Central Government or a State Government; (vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government; (vii) investment or deposit in any public sector company: [Provided that where an investment or deposit in any public....
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....er form or mode of investment or deposit as may be prescribed." 23. The Punjab and Haryana High Court, by the impugned judgment dated 29th January, 2010 expressed its dissatisfaction with the view taken by the Uttarakhand High Court in the case of Queen's Educational Society as follows: "8.8 We have not been able to persuade ourselves to accept the view expressed by the Division Bench of the Uttrakhand High Court in the case of Queens Educational Society (supra). There are variety of reasons to support our opinion. Firstly, the scope of the third proviso was not under consideration, inasmuch as, the case before the Uttrakhand High Court pertained to Section 10(23C)(iiiad) of the Act. The third proviso to Section 10(23C)(vi) is not applicable to the cases falling within the purview of Section 10(23C)(iiiad). Secondly, the judgment rendered by the Uttarkhand High Court runs contrary to the provisions of Section 10(23C)(vi) of the Act including the provisos thereunder. Section 10(23C)(vi) of the Act is equivalent to the provisions of Section 10(22) existing earlier, which were introduced with effect from 1st April, 1999 and it ignores the speech of the Finance Minister made ....
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....f its judgment in American Hotel and Lodging Association's case (supra). 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 of 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, alter 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 of the total income. (4)....
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.... Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is education and the Petitioner exists solely for the purposes of imparting education. An incidental surplus which is generated, and which has resulted in additions to the fixed assets is utilized as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant. The Incometax Act 1961 does not condition the grant of an exemption under Section 10(23C) on the requirement that a college must maintain the status- quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption under Section 10(23C). Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptio....