Indus Technical Education ... vs Union Of India And Others
2015 Latest Caselaw 5555 ALL

HIGH COURT OF JUDICATURE AT ALLAHABAD
 
 

AFR
 

 

 
Civil Misc. Writ Petition (Tax) No.477 of 2012
 

 
Indus Technical Education Society	      ...... Petitioner
 

 
Vs.
 

 
Union of India and others			      ..... Respondents
 

 

 

 
******************
 
Hon'ble Tarun Agarwala, J.

Hon'ble Vinod Kumar Misra, J.

(Per: Tarun Agarwala, J.)

The petitioner is a society registered under the Societies Registration Act and has established as well as running an Engineering college at Kanpur in the name of Kanpur Institute of Technology. It is alleged that this institution came into existence with effect from July, 2004. Earlier the objects of the society was as under:-

"To establish and to run a Baby sitting, Pre Nursery, Nursery, Primary and High School, College, Evening College, Technical Institution, Management Institutions, Audit Education, Research Centres, Commerce Education, Computer Education in Hardware and Software Industrial Training Centre."

However, the objects were amended on 6th November, 2006 as under:-

"To establish and run educational institutions solely for educational purposes and not for the purposes of profit including nursery school, Primary schools, High Schools, Degree Colleges, Technical Institutions, Management Institutions, Audit Education, Research Centres, Commerce Education, Computer Education, Industrial Training Centre, Job oriented courses and Para Medical Institutions."

The petitioner applied on 2nd May, 2005 for grant of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 (hereinafter referred to as the Act) for the assessment year 2004-05 onwards contending that they are running an institution solely for education purposes and not for the purposes of profit and, therefore, requested for exemption. This application was processed, inquiries were made and a survey was also conducted on 13th November, 2007, based on which, a show cause notice was issued to show cause as to why the application should not be rejected on the ground that the society was diverting its income to the members of the society and, therefore, the society was not acting as a non-profitable institution. The petitioner submitted its reply denying any diversion of income. The Commissioner of Income Tax after considering all aspects of the matter issued an order dated 28th February, 2008 rejecting the application of the petitioner for grant of exemption under Section 10(23C)(vi) of the Act. The petitioner, being aggrieved, filed Writ Petition No.1667 of 2008, which was allowed and the matter was remitted to the Commissioner to decide the matter afresh after considering the reply of the petitioner. The extract of the judgment of this Court is quoted hereunder:-

"though in the impugned order it is stated 'a reply dated 24.12.2007 was received which has been considered but not found satisfactory' the Income Tax Officer has not disclosed any reason in his order to show as to why reply was not found satisfactory."

And further observed:

"The writ petition is allowed. The order dated 28.02.2008 passed by the Income Tax Officer (Tech.) for the Chief Commissioner of Income Tax, Kanpur is set aside. The Chief Commissioner of Income Tax, Kanpur is directed to pass fresh order after considering the reply of the petitioner giving sufficient reasons."

During the pendency of the writ petition certain developments had taken place, inasmuch as same objections were being raised in the assessment proceedings for the assessment years 2005-06 to 2008-09 in relation to the expenditure shown towards interest paid to its members on the unsecured loans given by them. The Tribunal allowed these expenditures relating to payment of interest at the rate of 12% for the assessment year 2005-06 and 18% for the assessment year 2006-07, 2007-08 and 2008-09. The claim of interest for the assessment year 2008-09 at the rate of 21% was disallowed reducing it to 18% per annum. These subsequent events were brought to the notice of the Commissioner by filing a supplementary reply.

Pursuant to the order of the writ Court, the Commissioner reconsidered the matter and rejected the application again by the impugned order dated 6th January, 2012 against which the present writ petition has been filed.

In this backdrop, we have heard Sri S.D. Singh, the learned Senior Counsel assisted by Sri Harsh Vardhan Gupta, the learned counsel for the petitioner and Sri Manu Ghildiyal, the learned counsel for the income tax department.

The Commissioner rejected the application holding that the purpose/objects of the society as per the memorandum of association does not indicate that the institution is running solely for educational purposes. The Commissioner also found that income of the institution was being diverted to the members of the society in the garb of payment of interest on unsecured loans given by them and, therefore, found that the institution was not running as a non-profit organization and was running for the purpose of profit. The Commissioner while rejecting the application also held that he would only consider the earlier reply of the petitioner and would not consider the subsequent reply given by the petitioner, inasmuch as the High Court in its order only directed the Commissioner to consider the reply already submitted before the Commissioner.

The aforesaid findings were attacked by the learned Senior Counsel on the ground that the provision of Section 10(23c)(vi) of the Act only stipulates a limited inquiry to find out about the activities of the society, namely, as to whether it was running an educational institution solely for educational purposes and not for purposes of profit. Such activities can only be found out from an inquiry and cannot be decided on the basis of the objects indicated in the memorandum of association, which does not specify explicitly that the objects of the society is solely for educational purposes. The learned Senior Counsel contended that the Commissioner committed an error in holding that based on the objects of the society, the petitioner's society was not formed solely for educational purposes. The learned Senior Counsel further contended that the finding that there had been a diversion of the income of the society by making payments of interest to its members was not illegal but permissible and an allowable expenditure under Section 13(1)(c) of the Act, which has been granted by the Tribunal for the subsequent assessment years, which fact was not considered on the pretext that subsequent events could not be considered since a limited direction was given by the High Court. The learned Senior Counsel further observed that there was no diversion of fund and the Commissioner committed an error in holding that the petitioner's institution is not a non-profit organization.

The learned Senior Counsel further submitted that the authority was only required to consider the nature and genuineness of the activities of the petitioner's institution and the conditions set out in the 3rd proviso to Section 10(23c)(vi) of the Act was not to be tested at the stage of approval since the required facts would take place in future. The learned Senior Counsel urged that the requirement mentioned in the 3rd proviso could only be tested when assessment proceedings were made and the authority at that stage would consider the requirement provided in the 3rd proviso. The learned Senior Counsel contended that at the stage of registration of the petitioner's institution, the authority was only required to examine the nature, activity and genuineness of the institution and, consequently, the finding relating to diversion of funds by way of interest was uncalled for and was not required at this stage.

In support of his submission, the learned Senior Counsel placed reliance upon various decision of this Court in Simpkins School Vs. Director General of Income Tax (Investigation) and others, 367 ITR 335, Allahabad Young Men's Christian Association Vs. Chief Commissioner of Income Tax and others, 371 ITR 23, and a recent decision of this Court in Manas Sewa Samiti Vs. Chief Commissioner of Income Tax and another passed in Writ Petition No.455 of 2014 decided on 2nd November, 20015.

The learned Senior Counsel has also placed reliance upon a decision of the Supreme Court in American Hotel and Lodging Association Educational Institution Vs. CBDT, 301 ITR 86 wherein the Supreme Court held that if the institution fulfils 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."

Having heard the learned counsel for the parties at some length, we find that the authority was not right in holding that he would only consider the reply already filed by the petitioner and that he would not consider the subsequent reply filed or that he would not consider the subsequent events that had taken place. We are of the opinion that when the High Court remitted the matter back to the Commissioner to consider the reply of the petitioner and pass a fresh order, the High Court did not confine the reply of the petitioner to be considered, which had already been filed but the Commissioner was required to consider all the replies that were filed by him including such replies filed after the decision of the High Court. To that extent, the Commissioner committed an error.

We are also of the opinion that the essential requirements for granting an exemption under Section 10(23C)(vi) of the Act is to find out about the activities of the educational institution, namely, whether it is existing solely for educational purpose and whether it is running for the purpose of profit or not. These activities can only be found out through an inquiry and not on the basis of objects mentioned in the memorandum of association of the petitioner's society. We are of the opinion that the mere fact that the petitioner's society in its memorandum of association does not indicate that it is running an educational institution solely for education purpose and not for the purpose of profit will not allow the Commissioner to reject the application at the threshold on this ground.

The Commissioner is required to process the application and after making due inquiries and after considering the balance sheets and such other evidence has to give a categorical finding as to whether the activities of the educational institution is existing solely for educational purposes and not for purposes of profit. Consequently, the Commissioner committed an error in holding that the petitioner's institution is not running solely for educational purposes on the basis of the memorandum of association. To that extent, the order of the Commissioner is incorrect. At this stage, the Court could have remitted the matter again to the Commissioner to re-decide the issue but we find that it is not necessary to do so in view of the following:

Assuming that the petitioner is running an educational institution solely for educational purposes, nonetheless, the petitioner is also required to show that its activities in running the educational institution is not for the purpose of profit. This is an essential ingredient, which is required to be considered at this stage under the second proviso. The contention that the question, whether the institution is running for profit or not has to be considered at the stage of assessment under the 3rd proviso is incorrect. The Commissioner while considering the application in granting exemption is required to make an inquiry under the 2nd proviso with regard to the activities and prima facie, should come to a conclusion whether the educational institution is running for the purpose of profit or otherwise. If the Commissioner prima facie comes to the conclusion that the institution is not running for profit then the Commissioner is bound to grant exemption but if the Commissioner finds that the institution is running for profit then it can certainly decline to grant exemption.

In the light of the aforesaid, we find from the perusal of the impugned order that based on a survey, a show cause notice was given and, thereafter, a finding has been given that the profits of the institution are being diverted to the members of the society in the garb of payment of interest on the unsecured loans given by them. The genuineness of this transaction has been doubted. A specific finding has been given that at the time when the members gave the loan, no rate of interest was payable by the institution but subsequently, for the subsequent assessment years, the rate of interest of 12% was charged to obviate the profit by way of interest and divert the money to its members in the garb of payment of interest on the loan given. For the assessment year 2005-06, the rate of interest was increased from 12% to 18% and in 2006-07 the rate of interest was increased to 21%. This increase in rate of interest was to ensure that the income of the society was diverted to its members in the garb of payment of interest. The increase in the rate of interest could be seen on account of the increase in the income of the society. There is also a specific finding that the bye-laws had no provision for taking loan on interest, though, subsequently, the amendment was made in its bye-laws during the financial year 2006-07, which will have no effect in so far as the present application of the petitioner is concerned.

In the light of these findings, an irresistible inference can be drawn that the petitioner's society, even if it was running an educational institution solely for education purposes, yet it was with the intention of earning a profit and it was not for a non-profit purpose. On this short ground, we are of the opinion that the order of the Commissioner does not require any interference.

For the reasons stated aforesaid, the writ petition fails and is dismissed.

Date:18.12.2015

Bhaskar

(Vinod Kumar Misra, J.) (Tarun Agarwala, J.)