TaxTMI 
TaxTMI 
2018 (4) TMI 714
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.... 2000-2001, ITA No. 1086/2005 for AY 2001-2002, ITA No. 501/2008 for AY 2003-2004 and ITA No. 1432/2010 for AY 2005-2006). The assessee Delhi Public School Society ("DPS Society" or "the Assessee") claims relief against the revenue's ruling dated 30.04.2008, rejecting its application under Section 10(23C)(vi) of the Income Tax Act, 1961 ("the Act" hereafter) for grant of exemption, in the writ petition; the appeals have been preferred by the the income tax department under Section 260A of the Act, (hereafter "the revenue") against orders of the Income Tax Appellate Tribunal ("ITAT"). Facts and Contentions 2. The assessee is aggrieved by the rejection by the DGIT of its application grant of exemption for assessment years 2008-09 onwards, as a charitable organization. The assessee is a society registered under the Societies Registration Act, 1860 with the Registrar of Societies, Delhi. It has established 11 schools and has also permitted societies/ organizations/ trusts with similar objects to open schools under the name of "Delhi Public School", in and outside India. As on date, 120 schools are functioning under that name in and outside India as on date. The arrangement for op....
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....hat, inter alia, the franchisee fee received by it from the satellite schools in lieu of its name, logo and motto amounts to a "business activity" with a profit motive and certain clauses of the assessee's Memorandum of Association were not in conformity with its objectives. The Assessee contests this order in the writ petition. 6. Mr. Syali, learned senior counsel submitted that arguendo, even if the activity of entering into agreement were to be construed as business activity, it is incidental to the attainment of its object, and that it would be entitled to exemption under section 10(23C)(vi) of the Act. It is urged that considering that the receipts from such activity were ploughed back for pursuing the objects of the Assessee. This entitled it to claim the exemption. The decision of the Supreme Court, reported as ACIT v. Thanthi Trust 247 ITR 785 was cited in this regard. There it was held that: "The substituted sub-section (4A) states that the income derived from a business held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the trust or institution if "the business is incidental to the attainmen....
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....ication for approval under section 10(23)(C) of the Act, inter alia, observed that at the stage of granting approval, the compliance of threshold condition needs to be seen, viz., actual existence of an educational institution etc. 9. It is argued that the DPS society's general objects relating to education and education related activities have to be construed in their natural manner and thus, would include its entering into arrangements to provide consultancy and other related services, that are entirely education centric, to schools which are established by other societies or entities, but are engaged in imparting education. The DPS society's role is to help those schools to maintain a level of proficiency in teaching and education, and enable them to be described as DPS schools. This would in fact be part of the DPS society's objective of imparting education and providing access to schools to a wider section of the population, not only those which are in Delhi or National Capital Territory, or those directly established and administered by the assessee, but others who follow its pattern of administration and imparting education. The proceeds of such maintenance charges receiv....
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....he Assessing Officer observed that the assessee was engaged in a systematic business activity purely on commercial terms by charging varied amounts from different schools depending upon the place and the time of opening of such school and was not constant for all the satellite schools. These charges were received by the Assessee for using the name of "Delhi Public School" by the satellite schools in and outside India and no separate books of accounts were maintained by the assessee for this business activity as required under section 11(4A) of the Act. Accordingly, the Assessing Officer held that the activity carried out by the assessee was not incidental to attainment of the objects of the trust but for profit motive. 13. The AO held, for AY 2001-02 (which was decided first) that the activity charging franchisee fee could not be regarded as charitable activity within the meaning of section 2(15) of the Act and therefore, the Assessee was held to be not entitled to benefit under section 11 of the Act, also due to contraventions of provisions of section 11 (4A) of the Act. Accordingly, it was held that the amounts received by the Assessee as franchisee fee from various schools wa....
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.... of giving permission to open satellite schools and receiving of workshop fee. No specific reply was submitted. It was submitted that it would be difficult to apportion the expenses pertaining to such activity. It shows that whatever expenses pertaining to the activity of providing licenses to open schools in the name of Delhi Public school have been mixed with other expenses. It means no separate books of account are maintained by the society in respect of business income from satellite schools. All the affairs of society are controlled through single books of account. Further Memorandum of Association of the society has been gone through. In this regard, the relevant object clause of the society is reproduced as under:- "To establish progressive schools or other educational institutions in Delhi or outside Delhi open to all without any distinction of race or creed or caste or special status with a view: On perusal of the said object clause, it is no where provided that grant of licenses on commercial basis to other societies bodies to open schools at other places is a stated object. It is only provided to establish school institute by the society by itself. The activity ....
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....efore whether the education exists solely for the purpose of education and not for the purpose of profit. In this regard we have also perused the copy of the notification dt. 8.7.04 issued by the Director General of Income Tax (Exemption, New Delhi). The assessee has been duly approved as an Educational Institution for the purpose of sub. Clause (vi) of Clause 23C of Sec. 10 of the I.T Ace As already stated, any income of an educational institution notified u/s 10 (23C)(vi) is exempt. In view of the notification referred to above, there can be no question of bringing to tax the amounts received from the collaborators school by terming the said receipts as business income. We also find that one of the objects of the assessee is to establish progressive schools or other educational institutions in Delhi or outside Delhi. Perusal of the agreement under which satellite schools were being set up by the assessee, also shows, that apart from allowing the satellite schools to use the name of Delhi Publish School and its Logo and Moto, the assessee also undertakes rendering of several services. These services include imparting of education and providing the necessary staff to impart educati....
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....ional activity. We have already pointed out as to how the assessee had complied with all the various conditions that have been mentioned in the notification by the prescribed Authority u/s 10(23C)(vi) of the Act. For the reasons given above, we are of the view that the provisions of sec. 11(4A) of the Act were not applicable in the present case. 15. With regard to the separate Books of account, it is seen that the assessee had maintained a separate account under the heading "Secretary's office". In this account, the receipts towards reimbursement to the society for common expenses from various schools with which it had entered into agreement' to provide services have been duly incorporated. A complete set of accounts of the society had also been furnished before the AD. Apart from the above, The Chandigarh Bench of the Tribunal in the case of ITV vs Trilok Tirath Vidyavati Chuttani Charitable Trust has held that the purposes of maintaining separate books of account is only to enable the AO to find out true income and also whether the assessee fulfills the conditions laid down u/s 11 for exemption and also whether running of such undertakings is for profit motive or incid....
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.... learned counsel for the revenue, argued that clearly, the so called services provided by the DPS society to the other schools were not charitable but business. Whether it related to management of schools or provision for curricula or the system of administration, they were not "education" and amounted to a separate line of activity, which the lower revenue authorities correctly surmised, were purely for profit. She highlighted that the significant change introduced by the amendment to the provisions were the requirement of maintaining separate books of account. Not only was that requirement ignored, the assessee had created a separate revenue stream. 17. Ms. Malhotra submitted that the so called maintenance charges were in fact nothing more than a franchise fee, for use of the "DPS" trade mark and logo. Consequently, the amounts received were for name lending. She contested the submissions of the society with respect to education in the DPS pattern, provided by the satellite schools, by stating that the record nowhere showed that such schools were charitable in nature or their underlying objectives were not coloured by profit motive. In the absence of any such indication, there....
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....tion related services provided to other schools would not rob it of the entitlement to be treated as a charitable trust or organization. He highlighted that besides, the arrangement with such outlying or satellite schools had existed since 1977 and the revenue consistently accepted the returns and never questioned the assessee or alleged that such activity amounted to business. Analysis: 20. The relevant provisions of law involved in the writ petition and these appeals is discussed hereafter. Section 10(22) of the Act, prior to its omission by the Finance (No. 2) Act, 1998, w.e.f. 1.04.1999, is as follows: "10. lncomes not included in total income. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- ************* ***************** (22) any income of a university or other educational institution, existing solely for educational purposes and nor for purposes of profit." The subsequently introduced Section 10(23C)(iii) (ad) and (vi) of the Act, are as follows: "In computing the total income of a previous year of any person, any income....
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....case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business." 21. What emerges from the statutory provisions above, is that when any university or other educational institution exists solely for educational purposes and not for purposes of profit, by virtue of the procedure prescribed, such institutions will be liable to apply for exemption in calculating the total income for the previous year. It is fundamental, such educational institutions have an overarching motive that is educational and not profit- making to fall within this exception. Further, the seventh proviso to Section 10(23C)(vi) incorporates a mandatory requirement that the accounts of such educational institutions ought to be audited in respect of that year and it should furnish the same along with the return of income for the relevant year. 22. There is a multitude of authorities that have surveyed and analyzed the exemption permitted under Section 10(23C)(vi),which broadly conclude that if the educational institution merely acquires a profit surplus from running its institution, that alone would not belie its larger education purpose. For ins....
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.... would not be lost." 23. Likewise, the test to determine the predominant objective was highlighted earlier, in ACIT v. Surat Silk Cloth Manufacturers Association (1980) 121 ITR 1 (SC), by the application of which it was to be adjudged whether the institution existed solely for education and not for profit. This point was re-iterated in Venu Charitable Society and Ors. v. Director General of Income Tax (2017) 246 Taxman 396 (Delhi) as follows: "18. The incidental carrying on of commercial activities is subject to certain conditions stipulated under the seventh proviso to Section 10 (23C). They are- (a) The business should be incidental to the attainment of the objectives of the entity and (b) Separate books of account should be maintained in respect of such business." 24. In Queen's Educational Society (supra), the Supreme Court went on to summarize the law that arises under Section 10(23C) as follows: "11. Thus, the law common to Section 10(23C) (iiiad) and (vi) may be summed up as follows: (1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it....
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....y a profit making motive that emerges more as a business activity rather than an educational purpose. Section 10(23C)(vi) of the Act while guiding the manner of this determination also, provides a certain amount of discretion to the authority assessing the compliance to these conditions for ascertaining whether the requirements of the provision are met with. Such scrutiny is to be carried out every year, irrespective of any preceding pattern in the assessment of the previous years. This point was highlighted in American Hotel and Lodging Assn. Educational Institute (supra) as follows: "Therefore, in our view, it is always open to the PA to impose such terms and conditions as it deems fit. The interpretation we have given is based on harmonious construction of the provisos inserted in "Section 10(23C)(vi) by the Finance Act, 1998. Lastly, we may reiterate that there is a difference between stipulation by the Prescribed Authority (PA) of such terms and conditions, as it deems fit under the provisos, and the compliance of those conditions by the appellant. The compliance of the terms and conditions stipulated by the PA would be a matter of decision at the time of assessment as avai....
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....in the meaning of section 2(15) of the Act, and thus, inapplicable for exemption under section 10(23C)(vi) of the Act, has not been adequately substantiated, despite examination of the assessee's audited accounts. The DGIT asserted that the Assessee is carrying out a business activity for profit motives by entering into franchise agreements, whereby, it has opened and is running around 120 schools, and that these charges were received by the Assessee for using the name of Delhi Public School by the satellite schools in and outside India and no separate books of accounts were maintained by the Assessee for the business activity as required under section 11(4A) of the Act. This is prima facie not correct, because the assessee has maintained, accounts audited in detail for financial years 2000-2001, 2003-04, 3004-05 and 2005-06. That aspect has been found by the ITAT for those assessment years. Such accounts have been maintained in compliance to what is required under the seventh proviso to Section 10(23C)(vi) and section 11(4A) of the Act. 29. Furthermore, the memorandum of association of DPS Society, as well as the joint venture agreements entered into by DPS Society with the sat....
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....profits are being utilized within the meaning of the larger charitable purpose as defined in section 2(15) of the Act or not. On scrutiny, it can be observed that the accounts marked the heading "Secretary's Account", detail the heads of income and expenditure that cater to the various requirements of running and maintaining the satellite schools. Thus, arguendo if it were held that the objected activity were indeed commercial in nature, nevertheless, the realization of profit by the assessee is through an activity incidental to the dominant educational purpose that its memorandum of association sets out, and is in turn being channeled back into the maintenance and management of the same schools, thus, fulfilling the objectives the Assessee has set out in its memorandum of objectives. 32. This court also notices that after the Assessee filed an application for grant of exemption under section 10(23C)(vi) for assessment year 2008-09 onwards, that was rejected; in a notification, the DGIT under section 10(23C)(vi) issued certain conditions which were also duly fulfilled by the Assessee, as follows: Sl.No. CONDITIONS COMPLIANCE I The assessee will apply its income or....
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....ew of the above analysis, it is concluded that the assessee fulfilled the requirements under section 10(23C)(vi) of the Act to qualify for exemption; DPS Society is maintaining its eleven schools and the 120 satellite schools in furtherance of the education joint venture agreements with an educational purpose that also qualifies as a "charitable purpose" within the meaning of section 2(15) of the Act and is not in contravention of section 11(4A) of the Act. 34. This court feels compelled to observe that Section 10(23C)(vi) ought to be interpreted meticulously, on a case-to-case basis. This is because, the larger objective of an educational/ charitable purpose of the institution and its manifestation can only be subjectively adjudged; for instance, in the present situation, the balance sheets of the assessee demonstrate how the profits are utilized for the growth and maintenance of the very schools they are accrued from, thus, subscribing to a charitable motive. However, the educational institutions may take more creative steps to qualify their objectives as an "educational purpose" that is more universal than the individual objectives set out in the memoranda of objectives of su....