Allahabad High Court
M/S Bal Bharti Nursery School vs Chief Commissioner Of Income Tax, ... on 7 November, 2013
Bench: Sunil Ambwani, Surya Prakash Kesarwani
HIGH COURT OF JUDICATURE AT ALLAHABAD
Court No. - 32 A.F.R
Reserved on 11.9.2013
Delivered on 7.11.2013
Case :- WRIT TAX No. - 1520 of 2009
Petitioner :- M/S Bal Bharti Nursery School
Respondent :- Chief Commissioner Of Income Tax, Allahabad
Counsel for Petitioner :- R.S. Agrawal,Ravi Kant
Counsel for Respondent :- C.S.C. (Income Tax),A.N.Mahajan,B.Agarwal
Hon'ble Sunil Ambwani,J.
Hon'ble Surya Prakash Kesarwani,J.
(Delivered by Hon'ble Surya Prakash Kesarwani,J.)
1. In this writ petition the petitioner has prayed for a writ, order or direction in the nature of certiorari to quash the order dated 25.3.2009 (Annexure No.8) passed by the first respondent i.e. the Chief Commissioner of Income Tax, Allahabad for assessment years 2007-08, 2008-09 and 2009-10 under Section10 (23 C)(vi) of the Income Tax Act 1961 (hereinafter referred as theAct).
2. Briefly stated the facts of the present case are that the petitioner is a society registered under the Societies Registration Act having registration No. 2358/83-84 renewed up to 14.12.2010 vide renewal order dated 21.2.2006 (Annexure No.1). It moved an application dated 25.3.2008 (Annexure No. 3) for approval of the institution for exemption of Income under Section 10 (23 C) (vi) of the Act in prescribed form no. 56 D before the respondent claiming it to be engaged in the activity of imparting education. On the said application, the respondent called for report from the CIT Allahabad. On the submission of the report dated 5.3.2009 (Annexure No.4), the respondent issued a show cause notice dated 6.3.2009 (Annexure No.6) to the petitioner enclosing therewith the copy of the report and certain other documents and required the petitioner to produce the books of account, copies of assessment order and the details of ownership of movable and immovable properties held in the name of society. Certain other queries were also made. The petitioner filed the reply dated 17.3.2009 (Annexure No.7) to the report of CIT Allahabad. The petitioner submitted as under :
"1. The applicant society has submitted exhaustive details and documents before the Assessing Officer for the purposes of her report on society's application for approval. This report of the Commissioner of Income tax has been submitted without considering the report of the AO and without providing opportunity to the applicant society.
2. The Society is running educational institution and has been granted exemption of income under Section 10(22) of the Income-tax Act, 1961 for several earlier assessment years. In the assessment for the Ays : 1985-86; 1986-87 and 1988-89 the order of CIT (Appeals) allowing exemption of income u/s 10(22) of the Income-tax Act, 1961 upheld by ITAT, Allahabad. The Departmental application for reference and appeal has been rejected by ITAT and hon'ble High Court, respectively. Copy of respective orders of ITAT and High Court Allahabad are filed enclosed here with for your honour's immediate ready reference.
3. Learned CIT, Allahabad has submitted his report dated: 06.03.2009, mainly on the basis of findings in order of ITAT for AY; 1989-90 which is subjudice and is not yet final. He has erred to disregard the decision of ITAT for immediately preceding year and earlier two years which are in favour of the applicant society on the issue of exemption of income u/s 10(22) of the Act. The order of ITAT for the Assttt. Years 1985-86; 1986-87 and 1988-89 have become final by the order of hon'ble High Court.
4. The appeal of the applicant society has been listed for hearing before the hon'ble High Court in this week. There are all possibilities that the society's appeal will be decided shortly and the controversy arising from the order of ITAT for AY:1989-90 will be decided, hopefully in favour of the society.
5. During the years for which approval has been applied the coaching activity is run by a private limited company in which none of the members of the society is participating. The company is assessed to tax separately and liable to pay taxes on its income. The observation of the learned CIT on this point is without any basis.
6. The object of the society is to impart education and it is running an educational institution. It is existing solely for educational purposes and its object is not to make profit. It is meeting all the conditions and requirements of Section 10(23C)(vi) of the Income-Tax Act, 1961. It has already been granted exemption of income u/s 10(22) of the Act for several earlier assessment years. The provisions of Section 10(23C)(vi) is analogous to the provisions of Section 10(22) of the Act. The educational objects of the society and the activity of giving education has neither been questioned nor challenged by any authority, so far. The utilization and application of income being subject matter of monitoring at the assessment stage as per the proviso to Section 10(23C)(vi) of the Act as held by hon'ble Supreme Court in case of American Hotel & Lodging Association Educational Institution Vs. CBDT and others 301 ITR 86, the compliance and non compliance of the same cannot be considered and gauged at the stage of granting approval by the prescribed authority."
3. The petitioner relied on the judgment of Hon'ble Supreme Court in the case of American Hotel & Lodging Association Educational Institute Vs. Central Board of Direct Taxes and others (2008) 301 ITR 86 SC (Annexure No.7). The respondent considered the reply of the petitioner and passed the impugned order dated 25.3.2009 (Annexure No.8) and rejecting the application for grant of exemption under Section 10 (23 C) (vi) of the Act. Aggrieved with the order, the petitioner has filed the present writ petition.
4. We have heard Sri Ravi Kant, learned Senior Advocte assisted by Sri R.S.Agrawal, learned counsel for the petitioner and Sri Shambhu Chopra, Senior Standing Counsel for the respondent and perused the records.
Submission on behalf of the petitioner
5. Sri Ravi Kant submits that the petitioner society runs educational institution known as Bal Bharti School which is recognized by the Central Board of Secondary Education. He submits that the documents required by the respondent pertained to utilization and application of income, being subject matter of assessment were wholly irrelevant for grant of certificate of exemption. He relied on the judgment of Hon'ble Supreme Court in the case of American Hotels (supra). He further submits that the impugned order has been passed without application of mind and without understanding the provisions of Section 10(23C) (vi) of the Act. The respondents have focused their attention only on the application/utilization of income and thus the respondent travelled beyond the jurisdiction conferred for the purposes of Section 10(23C) (vi) of the Act. In the impugned order, the respondent has referred the income/expenditure of preceding years namely AY: 2001-02 to 2006-07 which was totally irrelevant for disposal of the application under Section 10(23C) (vi) of the Act for the Assessment year 2007-08, 2008-09 and 2009-10. He also submits that it was wholly beyond the jurisdiction of the respondent to refer and consider the income of a private limited company namely, M/s. Career Coaching Institute Pvt. Ltd. in which son of the Secretary of the petitioner Society is the Managing Director and non-charging of rent by the petitioner society from the said company. He further submits that the petitioner society is not the owner of the building in which the institution is housed. The building belongs to Smt. Ruqquia Begum, the mother of the Secretary of the petitioner society and thus rent has not been charged. The petitioner society cannot be faulted for the same. The refusal of Registration on another ground that the funds of the society have been diverted for personal purpose of Sri HRA Bakht and his family members is illegal and arbitrary as it has invested huge amount in repair and maintenance of building over the years. He further submits that these issues are wholly irrelevant for the purpose of disposal of application by the respondent under Section 10(23C) (vi) of the Act. He submits that the judgment of Hon'ble Supreme Court in the case of Americal Hotels (supra) even though cited before the respondent; was not considered by him while passing the impugned order.
Submission on behalf of respondent
6. Sri Shambhu Chopra, learned counsel for the respondent submits as under :
(i) The application of the petitioner under Section 10(23C) (vi) of the Act was not maintainable for assessment year 2007-08 in view of the 14th Proviso of Section 10(23C) (vi) of the Act, in as much as the application was moved beyond time.
(ii) The petitioner Society is not an educational institution existing solely for educational purpose and not for the purpose of profit.
(iii) The evidences discussed by the respondent in the impugned order clearly reveals that the main motive of the petitioner is to make profit.
(iv) The funds of Society have been diverted to benefit individuals.
(v) The judgment of Hon'ble Supreme Court in the case of American Hotels does not support the case of the petitioner on the facts of the present case.
Our Findings
7. Section 10(23C) (vi) of the Act reads as under :
Section 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 -
...................................................................
..................................................................
(23 C) (vi) :- Any income received by any person on behalf of -
(i)............................................................
(ii)...............................................
(iii).............................................
[(iiia)..........................................
[(iiiab).........................................
(iiiac)..........................................
(iiiad)..........................................
(iiiae)...........................................
[(iv).............................................
(v)................................................
(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.
8. The first, second 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 medical 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 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:]
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 Jude, 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:]"
9. In the impugned order, the respondent has held that application was not maintainable for assessment year 2007-08 in view of the 14th Proviso to Section 10(23C) (vi) of the Act. It is not disputed that the petitioner moved the application under Section 10(23C) (vi) of the Act on 26.3.2008 before the respondent Chief Commissioner of Income Tax Allahabad. As per 14th Proviso quoted above, the application was required to be made or on before 30th day of December of the relevant assessment year for which exemption is sought. Thus, the application was not maintainable for the assessment year 2007-08. In view of the facts, we find no error in the impugned order which holds that the application was not maintainable for the assessment year 2007-08.
10. The scheme of exemption under Section 10(23C) (vi) of the Act relevant for the purposes of the controversy involved in the present writ petition may be briefly summarised as under :
(i) The university or educational institution should exist solely for educational purposes and not for purposes of profit.
(ii) It must be approved by the prescribed authority.
(iii) As per the first Proviso, the application is to be moved in the prescribed form and manner to the prescribed authority for grant of exemption or continuance thereof.
(iv) As per second Proviso the prescribed authority, before approving any university or other educational institution, may call for such document (including audited annual accounts) or information from the university or other educational institution, as it thinks necessary in order to satisfy itself about the genuineness of the activities of such university or other educational institution and may also make such inquiries as it deems necessary in this behalf.
(v) The third Proviso deals with application of funds.
11. Our conclusion is also supported by the law laid down by Hon'ble Supreme Court in para 31 and 32 in the case of American Hotels (supra) held as under :
"31. We shall now consider the effect of insertion of provisos to Section 10(23C)(vi), vide the Finance 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 the 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.
32.Having analysed the provisos to Section 10(23C)(vi) one finds that there is a difference between stipulation of conditions and compliance therewith. 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 with 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."
(Emphasis supplied by us)
12. In the impugned order after considering the report of the CIT Allahabad, reply of the petitioner and evidences on record the Chief Commissioner of Income Tax Allahabad has recorded the findings of fact in Paragraphs 8, 9, 10, 11, 12, 13, 17 and 18 as under :
"8. The facts of the case is the society was incorporated in 1983. Initially, the society was running one School and one Coaching Institute. Thereafter, the coaching activity was taken over by a company and according to the Memorandum of Understanding between the applicant society and the company, the company would run the coaching activity in the premises of the applicant society and the company need not pay any rent for five years and a rent of Rs. 75,000/- p.m. may be paid from 01.04.2009. The Managing Director of M/s. Career Coaching Institute Pvt. Ltd. which runs the coaching activity, is the son of the Secretary of the applicant Society. From these facts, it is clear that the applicant society is running the Coaching activity through back door and there is no valid reason to give the premises of the applicant society without charging any rent.
9.The applicant has annexed the assessment orders for A.Y.2001-02 & 2003-04 along with the written submission filed on 17.3.2009. On perusal of the assessment order for A.Y.2001-02, it is found that in the F.Y.2000-01 the assessee has shown an addition of Rs. 31,98,245/- under the head "building under construction" in the property belonging to Sri H.R.A. Bakht & his family members which means that the society's funds have been diverted by the assessee to serve the personal purpose of Sri H.R.A.Bakht & his family members. During the F.Y.2000-01, the society has spent a sum of Rs. 3,69,217/- under the head 'Repair & Maintenance' on the building belonging to Sri H.R.A.Bakht & his family members without any obligation on the society as no agreement between the society and the land lord was available. Further, the electricity expenses of the residence is also met by the society. Also, the telephone expenses made by the society could not be proved to be exclusively for the purpose of the society. Also the payments for repairing charges of the vehicles used by Mr. Bakht were met by the society. In these circumstances, the Assessing Officer has concluded that the funds of the society were not utilized for the objects of the society but for the personal benefit of Sri Bakht & his family members and the society did not have any control to recover the money invested by the society in the properties owned by Sri Bakht & his family members.
10.In the A.Y. 2003-04, the Assessing Officer has observed that :
(i) The Secretary Sri Bakht had absolute powers to manage the affairs of the society at this own sweet will.
(ii) The property at Lucknow belongs to Sri Bakht and this proves that the funds of the society are being used for personal benefit of the Secretary.
(iii) Expenditure has been incurred by the society on repairs and maintenance of the building which is not belonging to the society, and since there is no lease deed entrusting this responsibility to the society, there is no obligation on the part of the society to incur this expenditure.
(iv) Instalments are being paid by the society on the vehicle in the name of Sri Bakht without any evidence to show that the vehicles were used by the society for achieving the objects of the society.
11.On perusal of the Balance Sheet as on 31.3.2008, it is found that during the year 2007-08 the applicant society has made an addition of Rs. 11,98,258/- under the head 'Building under Construction'. Further, on perusal of Income and Expenditure a/c for the F.Y.2007-08, it is found that the applicant society has incurred expenses under the head 'Repair and Maintenance' of Rs. 39,39,516/- 'Conveyance & Travelling expenses' of Rs. 5,19,155/- and 'Publicity Expenses' of Rs. 2,73,433/-.
12.The Income & Expenditure account filed by the applicant shows debits for each of the three years under the following heads :
F.Y.2004-05
Head Amount(Rs.)
Repair & Maintenance 17,10,248/-
Publicity Expenses 19,16,410/-
Bank Charges and interest paid 4,02,048/-
Excess of Income over Expenditure 3,14,500/-
F.Y.2005-06
Head Amount(Rs.)
Repair & Maintenance 18,86,620/-
Publicity Expenses 4,43,158/-
Bank Charges and interest paid 3,40,488/-
Excess of Income over Expenditure 16,61,221/-
F.Y.2006-07
Head Amount(Rs.)
Repair & Maintenance 32,15,773/-
Publicity Expenses 1,41,501/-
Bank Charges and interest paid 79,010/-
Excess of Income over Expenditure 21,57,364/-
13.Most of these expenses are not for the purspose of education, and it cannot constitute to be an expenditure solely incurred for education.
17. In the instant case there is a surplus income of Rs. 3,14,500/- in the F.Y.2004-05, Rs. 16,61,221/- in the F.Y. 2005-06 & Rs. 21,57,364/- in the F.Y. 2006-07. There is an addition to the Furniture & Fixtures of Rs. 15,000/- in the financial year 2004-05 and of Rs. 27,792/- in the F.Y.2006-07. Thus, in each year the surplus as shown by the applicant is increasing and is used for activities which are aimed at enhancing the income of the institution. This also suggests that the fees charged from the students is on the higher side as in each year there is an element of profit.
18. In view of the discussion above, it is held that the applicant society is not existing solely for educational purposes as its main motive seems to be making profit by charging higher fees from students. Further, the applicant is existing for purposes of profit and therefore the application received on 26.3.2008 for grant of exemption u/s 10 (23C)(vi) for A.Y.2008-09 & onwards is hereby rejected."
13. We find that the respondent authority was competent in view of the plain language in Section 10 (23C) (vi) of the Act read with first and second Proviso and the law laid down by Hon'ble Supreme Court in para 31 and 32 of the judgment in the case of American Hotel(supra), to call for such document including annual accounts or information from the petitioner to check the genuineness of the activities of the petitioner institution which power was earlier not there with the prescribed authority under Section 10(22) of the Act. He has been conferred powers to ascertain while judging the genuineness of the activities of the petitioner institution as to whether the petitioner applies its income wholly and exclusively to the objects for which it is constituted/established.
14. The findings of fact recorded by the respondent authority in the impugned order clearly shows that the petitioner institution is existing and its main motive is to make profit. It is not existing solely for educational purpose. The diversion of fund for personal use has been noted in the impugned order based on documentary evidences.
15. In view of the discussions made above, we are of the view that the respondent has not committed any error of law or facts to reach on the findings that the petitioner Society is not existing solely for educational purposes as its motive seems to be making profit and it is existing for purposes of profit. The application for grant of exemption under Section 10 (23 C) (vi) of the Act for AY 2008-09 was correctly rejected.
16. The impugned order does not suffer from any infirmity. In result the writ petition fails and is hereby dismissed. However, there shall be no order as to cost.
Order Date :07.11.2013
Ashish Prasad
