HIGH COURT OF JUDICATURE AT ALLAHABAD AFR Court No.37 Civil Misc.Writ Petition No. 455 of 2014 Manas Sewa Samiti ........ Petitioner Versus Chief Commissioner of ......... Respondent Income Tax and another And Civil Misc. Writ Petition No. 609 of 2013 Manas Sewa Samiti ......... Petitioner's Versus Union of India and another......... Respondents And Civil Misc. Writ Petition No. 18 of 2012 Manas Sewa Samiti .......... Petitioner's Versus Chief Commissioner of .......... Respondents Income-Tax and another Hon'ble Tarun Agarwala, J.
Hon'ble Vinod Kumar Misra, J.
(Per: Tarun Agarwala, J.)
1. The petitioner is a Society registered under the Societies Registration Act. The petitioner has various objects. One such object is to establish an educational institution. In the year 2001-02, the petitioner established an educational institution in the name and style of Institute of Information Management and Technology at Ramghat road at Aligarh. This institution is affiliated to Dr. Bhim Rao Ambedkar University, Agra. Prior to the assessment year 2007-08, the total receipts was below the monetary limit of Rs. 10 crores. As such, the petitioner fell under Section 10 (23C) (iii ad) of the Income Tax Act (hereinafter referred to as the Act). The returns were filed accordingly which were accepted by the department and the petitioner- society was declared non taxable.
2. For the assessment year 2007-08, the petitioner filed its return showing an income of Rs.86,81,911/-, which was not accepted. The Assessing Officer found that the income of the petitioner was above Rs.10 crores and, accordingly, disallowed the exemption claimed by the petitioner under Section 10 (23C) (iiiad) of the Act on the ground that the registration was required to be obtained under Section 10(23C) (vi) of the Act. The order of the Assessing Officer was confirmed by the Income Tax Appellate Tribunal. It is contended that an appeal is pending before the High Court, under Section 260A of the Act.
3. Notwithstanding the aforesaid, the petitioner applied for registration under Section 10 (23C)(vi) of the Act for the assessment year 2008-09. The said application was rejected on the ground that the petitioner has several objects and was not running the institute solely for educational purposes. Writ Petition No. 692 of 2010 was filed, which was allowed by judgment dated 17.5.2013 and the matter was remitted to the authority to pass a fresh order in accordance with the observation made therein. Pursuant to the direction of the Court, the Chief Commissioner of Income Tax, Ghaziabad at Kanpur passed the impugned order dated 19.9.2013 again rejecting the application for registration. The petitioner, being aggrieved, has filed the present writ petition.
4. The application of the petitioner was rejected on the following grounds:
"(i) The applicant society does not exist solely for educational purpose;
(ii) The assessee society is generating profits over the years which establish the profit motive of the assessee society;
(iii) The assessee has made huge expenditure on advertisement like a commercial activity to promote the business activities to earn more and more profits;
(iv) The assessee has made huge loans/advances to the interested persons/concerns in violation of 3rd and 13th proviso to section 10(23C)."
5. Similarly, for the assessment year 2010-11, the application of the petitioner was rejected by the authority by an order dated 21.9.2011, against which, writ petition No.18 of 2012 was filed. For the assessment year 2011-12, the petitioner's application was rejected by an order dated 21.9.2011, against which writ petition No.609 of 2013 was filed. Since the issue raised is common, all the writ petitions are decided together.
6. In this backdrop, we have heard Shri S.D.Singh, the learned Sr. Advocate along with Shri Rahul Agarwal for the petitioner and Shri Ashok Kumar along with Sri Ashish Agarwal for the Income Tax Department.
7. Registration is granted under Section 10 (23C)(vi) of the Act. The relevant portion is extracted hereunder:
"10. In computing the total income of a previous year of any person, any income falling within any of the following causes shall not be included -....
(23C) Any income received any any person on behalf of ---...
(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority.
The First, second, third, thirteenth and fourteenth Proviso of Section 10 (23C) reads as under:
"First Proviso: - Provided 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 sub-clause (v) or sub-clause (vi) or sub-clause (via) shall make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of the exemption, or continuance thereof, under sub-clause (iv) or sub-clause (v) or sub-clause (via):
Second Proviso: - Provided further that the prescribed authority, before approving any fund or trust or institution or any hospital or other medial institution, under sub-clause (iv) or sub-clause (vi) or sub-clause (via), may call for such documents (including audited annual 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:
Third Proviso: - 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 sub-clause (v) or sub-clause (vi) or sub-clause (via).
Thirteenth Proviso: - Provided also that where the fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) is notified by the Central Government or is approved by the prescribed authority, as the case may be, or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), is approved by the prescribed authority and subsequently that Government or the prescribed authority is satisfied that--
(i) such fund or institution or trust or any university or other educational 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 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:
Fourteenth Proviso provided also that in case the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in the first proviso makes an application on or after the 1st day of June, 2006 for the purposes of grant of exemption or continuance thereof, such application shall be made on or before the 30th day of September of the relevant assessment year from which the exemption is sought."
8. The aforesaid provision was analysed by the Supreme Court in American Hotel and Lodging Association Educational Institution Vs. CBDT (2008) 301 ITR 86 (SC) holding that if the petitioner fulfills the threshold conditions of an educational institute under Section 10(23C) (vi) of the Act, the authority, in such an eventuality, could not reject the application. The Supreme Court held :
"In American Hotel & Lodging Association, Educational Institute vs. CBDT 2008 (301) ITR 86 SC, the Supreme Court analysed the provision and found that the second proviso lays down the powers and duties of the prescribed authority for vetting an application for approval and that the prescribed authority was empowered to call for the documents including annual accounts or information to check the genuineness of the activities of the institution. Under the third proviso, the prescribed authority, while judging the genuineness of the activities of the applicant was required to ascertain whether the applicant applies its income wholly and exclusively for the objects for which it was constituted or established. The Supreme Court held that there was a difference between stipulation of the conditions and compliance therewith. The threshold conditions are the actual existence of an educational institution and approval of the prescribed authority. It is only if the pre-conditions of the actual existence of an educational institution is fulfilled that the question of compliance with the stipulations set out in the provisos would arise. The Supreme Court held:-
"We shall now consider the effect of insertion of provisos to Section 10(23C)(vi) vide Finance (No.2) Act, 1998. Section 10(23C)(vi) is analogous to Section 10(22). To that extent, the judgments of this Court as applicable to Section 10(22) would equally apply to Section 10(23C)(vi). The problem arises with the insertion of the provisos to Section 10(23C)(vi). With the insertion of the provisos to Section 10(23C)(vi) the applicant who seeks approval has not only to show that it is an institution existing solely for educational purposes which was also the requirement under Section 10 (22) but it has now to obtain initial approval from the prescribed authority, in terms of Section 10(23C)(vi) by making an application in the standardized form as mentioned in the first proviso to that section. That condition of obtaining approval from the prescribed authority came to be inserted because Section 10(22) was abused by some educational institutions /universities. This proviso was inserted along with other provisos because there was no monitoring mechanism to check abuse of exemption provision. With the insertion of the first proviso, the prescribed authority is required to vet the application. This vetting process is stipulated by the second proviso. It is important to note that the second proviso also indicates the powers and duties of the prescribed authority. While considering the approval application in the second proviso, the prescribed authority is empowered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the applicant institution. Earlier that power was not there with the prescribed authority. Under the third proviso, the prescribed authority has to ascertain while judging the genuineness of the activities of the applicant institution as to whether the applicant applies its income wholly and exclusively to the objects for which it is constituted/established. Under the twelfth proviso, the prescribed authority is required to examine cases where an applicant does not apply its income during the year of receipt and accumulates it but makes payment therefrom to any trust or institution registered under section 12AA or to any fund or trust or institution or university or other educational institution and to that extent the proviso states that such payment shall not be treated as application of income to the objects for which such trust or fund or educational institution is established. The idea underlying the twelfth proviso is to provide guidance to the prescribed authority as to the meaning of the words 'application of income to the objects for which the institution is established'. Therefore, the twelfth proviso is the matter of detail. The most relevant proviso for deciding this appeal is the thirteenth proviso. Under that proviso, the circumstances are given under which the prescribed authority is empowered to withdraw the approval earlier granted. Under that proviso, if the prescribed authority is satisfied that the trust, fund, university or other educational institution etc. has not applied its income in accordance with the third proviso or if it finds that such institution, trust or fund etc. has not invested/deposited its funds in accordance with the third proviso or that the activities of such fund or institution or trust etc. are not genuine or that its activities are not being carried out in accordance with the conditions subject to which approval is granted then the prescribed authority is empowered to withdraw the approval earlier granted after complying with the procedure mentioned therein."
In the instant case, it is not disputed that the petitioner society is running an educational institution. Merely because there are other objects of the society does not mean that the educational institution is not existing solely for educational purpose. The emphasis of the word "solely" is in relation to the educational institution, which is running not for the purpose of making profit and is not in relation to the objects of the society."
9. The Supreme Court categorically held that the authority was required to consider the nature and genuineness of the activities of the applicant institution. The conditions set out in the third proviso was not to be tested at the stage of approval since the required facts would take place in future. The requirement mentioned in the third proviso could only be tested when assessment proceedings were being made and, the authority, at that stage, would consider the requirement provided in the third proviso. At the stage of registration, the authority is only required to examine the nature, activity and genuineness of the institution. The mere existence that there is some profit does not disqualify the applicant if the sole purpose of existence was not profit making but educational activities. The authority was required to find out the predominant object of the activity and see whether the institution exists solely for education and not to earn profit.
10. Based on the aforesaid judgment of Supreme Court, various decisions have been passed by this Court in Allahabad Young Men's Christian Association Vs. Chief Commissioner of Income Tax and others, (2015) 371 ITR 23 (All), Simpkins School Vs. Director General of Income-Tax(Investigation) And Others, (2014) 367 ITR 335 (All), Sunbeam Academy Educational Society Vs. Chief Commissioner of Income-Tax And Others, (2014) 365 ITR 378 (All). The Delhi High Court in Director of Income-Tax (Exemption) Vs. ACME Educational Society, (2010) 326 ITR 146 (Delhi) held that advancing of an interest free temporary loan by one society to another society having similar objects is neither an "investment" nor a "deposit" and, therefore such loan given does not violate the provisions of Section 13(1) (d) read with section 11(5) of the Act.
11. The Supreme Court in Queen's Educational Society Vs. Commissioner of Income-Tax, (2015) 372 ITR 699 (SC) reiterated the principles enunciated in American Hotel (Supra) and held that the mere fact that an educational institution makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit. The Supreme Court held that the predominant object must be applied.
12. It will be noticed that the section has three requirements- (a) the educational institution must exist solely for educational purposes, (b) it should not be for purposes of profit, and (c) the aggregate annual receipts of such institution should not exceed the amount or annual receipts as may be prescribed. Such prescription is to be found in rule 2CA being an amount of Rs. 1 crore.
13. In the light of the aforesaid, a categorical assertion has been made that the petitioner is only running an educational institution and is not carrying on any other activity. This fact has not been denied by the respondents in their counter affidavit. The finding given by the Commissioner that the petitioner-society does not exist solely for educational purposes is based on no reasoning. No finding has been given on this aspect. In our opinion, this finding is perverse.
14. Further, the mere fact that the petitioner is making profit does not indicate that it is carrying on the activity solely for the purpose of making a profit and that it ceases to be for an educational purpose. In our opinion, the predominant test as given by the Supreme Court in American Hotel (Supra) and Queen's Educational Society (Supra) has to be considered. Further, we find that the Commissioner has considered the profit before applying the depreciation, which is incorrect. The authority is required to consider the profit after allowing depreciation and is also further required to consider the investment made by the petitioner in the creation of fixed assets. These investments of capital nature are required to be considered while calculating the money spent by them in the educational activity. Further, the fact that the petitioner is generating profit or is carrying on commercial activity and is making a huge expenditure in advertisement is a fact, which is not required to be considered at the stage of considering the application for grant of registration. These factors would come into play under the 3rd and 13th proviso at the stage of considering the return and making the assessment. Further, expenditure on advertisement made does not necessarily means that the activity of the petitioner is commercial in nature or is being done with the intention to earn more profit. Such finding given by the authority is patently erroneous. We also find that the issue relating to the loans and advance is covered by a decision of Delhi High Court in ACME Educational Society (Supra).
15. In the light of the aforesaid, the impugned orders passed by the Commissioner Income Tax, Ghaziabad cannot be sustained and are quashed. All the writ petitions are allowed. The matter is remitted back to the competent authority to decide the matter afresh in the light of the observation made above and in the light of the principles enunciated by the Supreme Court in case of American Hotel (Supra) and Queen's Educational Society (Supra) and other decisions of this Court as stated aforesaid. The order shall be passed by the competent court within three months from the date of production of a certified copy of this order after giving an opportunity of hearing.
Dt. 02.11.2015 MAA/-
(Vinod Kumar Misra,J.) (Tarun Agarwala,J.)