• Feb
  • 12
  • 2013

Section 10(23C) cannot be interpreted regressively to deny exemptions

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HIGH COURT OF BOMBAY

Tolani Education Society

Versus

Deputy Director of Income-tax (Exemptions) – I(2), Mumbai

Dr. D.Y. CHANDRACHUD And A.A. SAYED, JJ.

WRIT PETITION NO. 1167 OF 2012

JANUARY 31, 2013

S.E. Dastur, Nitesh Joshi, Atul K. Jasani and P.C. Tripathi for the Petitioner. A.R. Malhotra for the Respondent.

JUDGMENT

Dr. D.Y. Chandrachud, J. – Rule, by consent returnable forthwith. With the consent of Counsel and at their request the Petition is taken up for hearing and final disposal.

2. The Petitioner which is registered as a public trust under the Bombay Public Trusts Act, 1950 since 30 October 1980 and is a Society registered under the Societies’ Registration Act, 1960 was formed with the main object of promoting education in different branches of learning. The Petitioner conducts a college of commerce in Mumbai. The college is affiliated to the University of Mumbai and receives aid from the State government. A Certificate of Registration was granted to the Petitioner on 11 December 1980 under Section 12A of the Income Tax Act, 1961. On 10 May 2004, the Petitioner made an application for exemption under Section 10 (23C)(vi) for Assessment Year 2003-04. By a communication dated 26 September 2005, the Office of the Director of Income-tax (Exemption) informed the Petitioner that since from its accounts it appeared that the Petitioner had derived a substantial income by way of government grants for the years ending on 31 March 2001, 31 March 2002 and 31 March 2003, the file pertaining to the claim of exemption under Section 10(23C)(vi) was closed. The Petitioner was informed that “the cases which are wholly or substantially financed by the Government are covered by the provisions of Section 10(23C)(iiiab).” A certificate was issued to the Petitioner under Section 80(G)(5) on 4 September 2008.

3. Between 1985-86 and 2005-06, the Petitioner was allowed the benefit of the provisions of Section 11. For Assessment Year 2006-07 and 2007-08, the claim of exemption under Section 10(23C)(iiiab) was allowed. For Assessment Year 2006-07 that claim was allowed in pursuance of an order under Section 143(3) whereas, for Assessment Year 2007-08, an intimation was issued under Section 143(i) accepting the claim of exemption under Section 10(23C)(iiiab). For Assessment Year 2008-09, the benefit of Section 10(23C)(iiiab) was denied to the Petitioner though, admittedly the benefit of Section 11 was granted. The assessing officer has held that in order to be an institution substantially funded by government, the institution must receive at least 75% of its receipts from government grants. Reliance for this inference has been placed on the provisions of the Comptroller and Auditor General (Duties, Powers and conditions of Service) Act, 1971. The Petitioner is in Appeal for Assessment Year 2008-09 before the C.I.T. (A). For Assessment Year 2009-10, the benefit of the exemption under Section 10(23C)(iiiab) was allowed and an intimation was furnished under Section 143(1). Assessment proceedings for Assessment Year 2010-11 are in progress. For Assessment Year 2011-12, the Petitioner submitted an application for the grant of an exemption under Clause (vi) of Section 10(23C) to the Chief Commissioner of Income-tax. By an order dated 29 November 2011, the Chief Commissioner of Income-tax, Mumbai has held that (i) Since the grants which are received by the Petitioner from the Government form a substantial part of the total receipts, the Petitioner does not fall within the purview of Section 10(23C)(vi); (ii) the Petitioner does not meet the requirement of an institution existing solely for educational purposes and not for the purposes of profit and that, consequently, the Application for the grant of approval under Section 10(23C)(vi) for Assessment Year 2011-12 onwards stood rejected.

4. The college conducted by the Petitioner is in receipt of grants from the State Government and is an aided institution. On the one hand the Director of Exemptions informed the Petitioner by a communication dated 26 September 2005 that being an institution wholly or substantially financed by the Government, the case of the Petitioner would not be governed by Clause (vi) of Section 10(23C), but by Section 10(23C)(iiiab). This position is reiterated in the order of the Chief Commissioner of Income-tax dated 29 November 2011 (which is impugned in these proceedings). The Petitioner is nonetheless denied the benefit of an exemption under Section 10(23C)(iiiab) by the Assessing Officer. In the affidavit-in-reply that has been filed on behalf of the Revenue, it has been stated that the fact that the Petitioner is in receipt of government grants and has a deficit is not conclusive proof of its existence solely for educational purposes and not for the purposes of making profits. The affidavit-in-reply seeks to sustain the validity of both the order denying the benefit of an exemption under Section 10(23C)(iiiab) as well as of the order of the Chief Commissioner denying the benefit of the provisions of Clause (vi) of Section 10(23C). In sum and substance, the grievance of the Petitioner is that it is be entitled to the benefit of an exemption under Section 10(23C) and if the Assessing Officer comes to the conclusion as he has that the benefit of the exemption under Clause (iiiab) is to be denied, the Petitioner would in that case be entitled in law to the benefit of the exemption under Clause (vi). The grievance of the Petitioner is that the Revenue has not taken a firm position since while on the one hand the Chief Commissioner of Income-tax took the view that the benefit of Clause (vi) of Section 10(23C) could not be availed of on the ground that the Petitioner is in receipt of substantial grants from the State Government (thereby implying that the Petitioner would be governed by the provisions of Clause (iiiab)), yet an inconsistent stand is sought to be taken by the Assessing Officer. Hence it has been urged that as a result of a palpably inconsistent line of reasoning adopted by two arms of the revenue, the assessee is left without a remedy but to move these proceedings under Article 226 of the Constitution of India.

5. In order to appreciate the nature of the controversy, a reference to the statutory provisions having a bearing on the Petition would be in order. Section 10 enunciates categories of income which are not to be included in computing the total income of the previous year of any person. Clause (23C) provides for any income received by any person on behalf inter-alia of a university or other educational institution falling within the purview of sub-clauses (iiiab), (iiiad) and (vi). For convenience of reference it should be appropriate to extract those three clauses for clarity :

“Sub-clause (iiiab) – Any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government ;

Sub-clause (iiiad) – Any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; and

Sub-clause (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.”

6. Sub-clauses (iiiab), (iiiad) and (vi) apply to universities or other educational institutions. All the three clauses required that such institutions must exist solely for educational purposes and not for the purposes of profit. Sub-clause (iiiab) applies to those institutions which are wholly or substantially financed by the government. Sub-clause (iiiad) applies to those institutions whose annual aggregate receipts do not exceed such amount as may be prescribed. Sub-clause (vi) covers universities or educational institutions, other than those mentioned in sub-clauses (iiiab) or (iiiad) and which may be approved by the prescribed authority. For an institution which is wholly or substantially financed by government and which falls within the purview of Sub-clause (iiiab), no requirement of an approval of the prescribed authority is mandated. Similarly, under Sub-clause (iiiad) no requirement of approval is stipulated in the case of those institutions whose aggregate annual receipts are below such amount as may be prescribed. On the other hand, sub-clause (vi) of Section 10(23C) which covers institutions other than those falling under sub-clauses (iiiab) or (iiiad) requires the approval of the prescribed authority before a claim to exemption can be allowed. An application under sub-clause (vi) for approval is required by the fourteenth proviso to Section 10(23C) to be filed on or before 30 September of the relevant Assessment Year.

7. Now in this background, it will be necessary to consider the legality of the order that has been passed by the Chief Commissioner, denying the benefit of the exemption under sub-Clause (vi) of Section 10(23C). The first part of the order of the Chief Commissioner makes a reference to the fact that the Petitioner is an aided institution, being in receipt of financial aid from the State Government of Maharashtra towards salary grants. The Petitioner also receives financial assistance from the University Grants Commission (U.G.C.) for the purchase of library books, equipment and such other requirements. The Chief Commissioner noted that for Assessment Years 2008-09, 2009-10, 2010-11 and 2011-12, the percentage of grants received as a proportion of the expenditure incurred on the objects of the trust, was 56%, 63%, 52% and 58%. On this ground, the Chief Commissioner came to the conclusion that the Petitioner is in receipt of government grants which form a substantial part of the total receipts and consequently, the case of the Petitioner would not fall within the purview of Section 10(23C)(vi). On this aspect, the line of reasoning of the Chief Commissioner would indicate that since a substantial part of the total receipts of the Petitioner consists of aid received from the Government, it would not fall within the purview of sub-clause (vi) for the reason that an institution which is wholly or substantially financed by the Government falls within the ambit of sub-clause (iiiab). Sub-clause (vi) as noted earlier applies to those institutions which do not fall within the ambit of sub-clause (iiiab) or sub-clause (iiiad). The line of reasoning of the Chief Commissioner would therefore suggest that he was of the view that an institution which is in receipt of substantial grants from the Government would consequently not fall within the ambit of sub-clause (vi). Since a substantially or wholly grant aided institution would fall under sub-clause (iiiab), clause (vi) which is more of a residuary provision would not apply. The Chief Commissioner is correct in so far as he indicates that an institution which falls within the ambit of sub-clause (iiiab) would not fall within the purview of sub-clause (vi) since Clause (vi) applies to those institutions which do not fall within the ambit of either Sub-clauses (iiiab) or (iiiad). But having observed thus, the Chief Commissioner inquired into the further question as to whether the Petitioner fulfills the criterion for the grant of approval under sub-clause (vi) viz. of being an institution which exists solely for educational purposes and not for the purposes of profit. Though the Chief Commissioner inquired into this question for the purposes of his determination under sub-clause (vi) of Section 10(23C), the requirement that an institution must exist solely for educational purposes and not for the purposes of profit one which is common both to sub-clause (iiiab) as well as sub-clause (iiiad). Hence, the grievance of the Petitioner is that while on the one hand the Chief Commissioner has held that Sub-clause (vi) would not be applicable to an institution which is in receipt of substantial grants from the Government (such an institution being governed by Sub-clause (iiiab)), at the same time, the finding that the Petitioner does not exist solely for educational purposes and not for the purposes of profit would, in effect, not merely lead to the rejection of the exemption under Sub-clause (vi) but would also affect the claim of the Petitioner to the grant of an exemption under Sub-clause (iiiab) as well.

8. In view of the finding of the Chief Commissioner that the Petitioner does not exist solely for educational purposes and not for the purposes of profit, it becomes necessary for the Court to scrutinize the validity of that finding. The Chief Commissioner has held, in the course of his order, that the fees which were collected by the Petitioner as reflected in the income and expenditure account for the year ending on 31 March 2011 would indicate that the Petitioner did not exist solely for educational purposes. To support this finding, the Chief Commissioner has relied upon certain receipts which are part of the following table contained in the impugned order :-

S. No.
1 Air Rifle shooting Rs.29,375/-
2 Extra curricular Activities Rs.5,12,37/-
3 Gymkhana fee Rs.4,09,855/-
4 Misc. Income Rs.1,67,852/-
5 Inter University sports & cultural fees Rs.26,540/-
6 Development Fund Rs.10,24,700/-
7 Auditorium / Class room booking Rs.2,31,170/-

The Chief Commissioner has also noted that the Petitioner has collected from the students utility fees, project work fees, industrial visit fee and a magazine fee from which it is sought to be deduced that the Petitioner does not exist solely for educational purposes. Moreover, according to the impugned order, there was an increase in the asset base with a generation of surplus which indicated that the activities of the Petitioner were not devoted solely for educational purposes. The Chief Commissioner has held on that basis that the Petitioner exists for the purposes of profit.

9. Now, in assessing the legality of this finding, it is necessary to emphasise at the outset that the common element in sub-clauses (iiiab), (iiiad) and (vi) is that the university or educational institution must exist “solely for educational purposes and not for the purposes of profit”. The ambit of this expression can find elucidation on the basis of a Judgment of the Supreme Court in the Additional Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth Manufacturers Association 121 ITR 1. In that case, while considering the expression “Activity for Profit” for the purposes of Section 2(15) of the Income-tax, 1961, the Supreme Court held that the test that must be applied is not whether as a matter of fact an activity results in profit but whether the activity is carried on with the object of earning profit. In other words, in order to attract the exclusion, profit making must be the end to which the activity is directed or the predominant object of the activity must be the making of profit. The test which has been enunciated by the Supreme Court is in the following terms :

“The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit.”

10. Sub-clauses (iiab), (iiiad) and (iv) require that the institution must exist solely for educational purposes and not for profit. Existence comprehends the purpose, goal, object and mission of the institution. Where the purpose of the institution and the defining character of its mission is education, and education alone, the test is fulfilled. The fact that incidentally, a surplus has resulted in a year will not render such an institution as existing for profit. Existence is defined by the fundamental underlying purpose of its being, though the manner in which it has consistently carried on its activities may assume relevance. Institutions exist for what they are formed to pursue and if that pursuit is solely and exclusively education, the statutory norm is fulfilled.

11. While considering the provision of Section 10(22) of the Act, the Supreme Court in Aditanar Educational Institution v. Additional CIT [1997] 224 ITR 310 held that the decisive or acid test is whether on an overall view of the matter, the object is to make a profit. The observations of the Supreme Court in Aditanar (Supra) were followed in a Judgment of a Division Bench of this Court in Vanita Vishram Trust v. Chief Commissioner of Income-tax [2010] 327 ITR 121 (Bom.). The case before this Court was of a trust which was existing for over eighteen years and which had only carried on the activity of conducting educational institutions. The application submitted by the Petitioner for approval under Section 10(23C)(vi) was rejected inter-alia on the ground that the objects for which the trust existed were of a varied nature and did not fulfill the condition that it must exist solely for the purposes of education. Moreover, the trust, had a surplus which had been utilized for the purchase of assets as reflected in the balance-sheet. While setting aside the order refusing approval, this Court noted the position that since the establishment of the trust, save and except for carrying on an educational institution, no other activity had been carried on for long years. Moreover, the fact that a surplus may arise in the activity of the trust after meeting the expenditure incurred for conducting educational activities was held not to dis-entitle the trust for the benefit of the provisions of Section 10(23C). In addition, on the aspect of surplus, this Court adverted to the provision contained in the third proviso to Section 10(23C).

12. Now, it is in this background and particularly, having regard to the law laid down by the Supreme Court that the facts of the present case would have to be assessed. The Petitioner has averred that the main source of its income consists of grants received from the government and fees received from the students for pursuing their education and training at the college of commerce. The material which has been placed on the record by the Petitioner on affidavit consists of a tabulated statement of the details of the total receipts and the amount spent by the Petitioner towards its objects for the financial years from 1989-90 to 2010-11. The statement indicates that (i) cumulatively for all the years taken together from Assessment Years 1989-90 to 2010-11, the Petitioner has a deficit and its expenditure is in excess of its income; (ii) if the government grants as reflected in the income and expenditure account and the corpus and scholarship contribution as reflected in the balance-sheet are excluded, the Petitioner has sustained a loss for every year except financial years 1989-90, 1990-91 and 1992-93; (iii) if government grants are included as part of the income and only corpus donation and scholarship contribution being balance-sheet items are excluded, there would be a deficit save and except for financial years 1989-90, 1990-91, 1992-93, 2008-09 and 2010-11. Between 1989-90 and 2010-11, the figures placed on the record on affidavit indicate the following position :-

(i) Government grants Rs.13,46,75,326/-
(ii) Fees from students and other receipts Rs.13,67,30,941/-
(iii) Corpus donations and scholarship contributions Rs.5,43,64,221/-
(iv) Expenditure on running the institution Rs.26,69,95,136/-
(v) Expenditure on addition to fixed assets : Rs.2,45,33,331/-

The statement which has been placed on record would indicate that if Government grants are excluded, the Petitioner has consistently had a deficit of expenditure over income since 1993-94. Receipts by way of Government grants have been excluded because those receipts cannot lead to the conclusion that the Petitioner exists for the purposes of profit. Moreover, it has been stated on affidavit that fees by way of Extra Curricular Activities, Gymkhana Fees, Miscellaneous Income, Inter University Sports and Cultural Fees, Development Fund, Utility Fees, Project Work Fees, Industrial Visit Fees, and Magazine Fees have been charged in accordance with the circulars issued by the University of Mumbai. Fees by way of sports and cultural fees and project work fees are, it is stated required to be shared with the University of Mumbai. As regards receipts on account of rifle shooting, it has been stated that the total training fee collected in the previous year relevant to Assessment Year 2010-11 was Rs.31,925/- (representing 0.19% of the total income during that year). The expenditure on the activity was Rs.61,050/- resulting into an excess of expenditure over income. For Assessment Year 2011-12 as against fees of Rs.45,780/- (representing 0.21% of the total income), an expenditure of Rs.64,400/- was incurred.

13. However it has been urged on behalf of the revenue that the income and expenditure account of the Petitioner for Assessment Years 2007-08, 2008-09 and 2009-10 would reflect a surplus of Rs.7.38 lakhs, Rs.56.53 lakhs and Rs.11.48 lakhs respectively. The figures which are contained in the income and expenditure account contain a reference only to items of a revenue nature without taking into account capital expenditure which is incurred by the college during the concerned years. For instance, for the year ending on 31 March 2008, the Petitioner made additions to the fixed assets of Rs. 23.81 lakhs including among other items towards purchase of library books and electronic data processing equipment. These are essential items of expenditure for an educational institution. The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that the 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 Income-tax 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 exemptions have been granted to educational institutions. Knowledge in contemporary times is technology driven. Educational institutions have to modernise, upgrade and respond to the changing ethos of education. Education has to be responsive to a rapidly evolving society. The provisions of Section 10(23C) cannot be interpreted regressively to deny exemptions. So long as the institution exists solely for educational purposes and not for profit, the test is met.

14. In the circumstances, and for these reasons, we have come to the conclusion that the Chief Commissioner of Income-tax was in error in holding that the Petitioner does not exist solely for the educational purposes or that it exists for profit. The issue pertaining to the claim of the Petitioner for the grant of an exemption under Sub-clause (iiiab) of Section 10(23C) for Assessment Year 2008-09 is now pending in Appeal before the CIT(A). It may also be noted here that the Petitioner has been consistently granted the benefit of the provisions of Section 11, which would postulate that the Petitioner does not exist for the purposes of profit.

15. For Assessment Year 2008-09 the Petitioner has filed an Appeal before the CIT (A) against the denial of an exemption under Sub-clause (iiiab) of Section 10(23C) by the Assessing Officer. We direct that the CIT(A) shall, in determining whether the Petitioner should be granted an exemption under Clause (iiiab) do so, without being influenced by any observations contained in the impugned order of the Chief Commissioner of Income-tax which, to the extent that it holds that the Petitioner does not exist for educational purposes and that it exists for the purposes of profit is quashed and set aside.

16. In view of the finding which has been arrived at in the present Judgment, we hold that in the event that the Petitioner is held not to be entitled to the benefit of an exemption under Section 10(23C) (iiiab), the Petitioner would in that event be entitled to the benefit of an exemption under Clause (vi) of Section 10(23C). We clarify that since the Petitioner is in appeal before the CIT(A) for Assessment Year 2008-09, we have not dealt with the legality of the assessment order dated 21 December 2010 (Exh.A) for that year. All rights and contentions in that regard including in regard to the applicability of sub-Clause (iiiab) of Section 10(23C) are kept open.

17. Rule is made absolute in the aforesaid terms. There shall be no order as to costs.


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