No Exemption u/s.10(23C) to educational institute if It earns huge profits

IN THE ITAT INDORE BENCH

M.P. Rajya Open School Bhopal

Versus

Deputy Commissioner of Income-tax-1(2)

IT Appeal Nos. 193 to 198 (Ind.) of 2012

[Assessment Years 2003-04 to 2008-09]

November 8, 2012

ORDER

Joginder Singh, Judicial Member – These are the appeals filed by the assessee against the consolidated order dated 25.1.2011 of the Commissioner of Income Tax (Appeals) for the assessment years 2003-04 to 2008-09. The sum and substance of the grounds taken by the assessee in these appeals is that the learned CIT(A) was not justified in confirming the additions of Rs. 3,22,16,158/- (A.Y. 2003-04), Rs. 5,76,88,324/- (A.Y. 2004-05), Rs. 5,04,87,654/- (A.Y. 2005-06), Rs. 5,04,87,653/- (A.Y. 2006-07), Rs. 8,66,69,966/- (A.Y. 2007-08) and Rs. 8,66,69,966/- (A.Y. 2008-09) to the total returned income of the assessee and further erred in taking a view that exemption u/s 10(23C)(iiiab) of the Act is not available to the assessee without considering the decisions in IIM, Bangalore v. CIT [2009] 121 TTJ (Bang.) 560 and Maharashtra Rajya Sahkari Sangh v. ITO [2011] 7 ITR 675 (ITAT, Pune).

2. During hearing of these appeals, we have heard Shri Sumit Nema, learned counsel for the assessee and Shri Darshan Singh, learned CIT DR. The crux of arguments on behalf of the assessee is identical to the ground raised by further submitting that the learned CIT(A) erred in taking a view that surplus of income over expenditure is a taxable business income, despite the fact, the institution was established for providing education to the general public and surplus, if any, generated by the institution must be applied solely and wholly for the purpose of expanding and promotion of education. The learned counsel placed reliance on the decision from Hon’ble Delhi High Court in the case of St. Lawrenace Educational Society & Others (WP(C) 1254/2010, WP (C) 2463/2010 – The Baptist Educational Society and others v. Chief CIT order dated 4th February, 2011 and placed the copy of the said order on record. Reliance was also placed upon the decision in Governing Body of Rangaraya Medical College v. ITO 117 ITR 284 (AP), American Hotels (301 ITR 86), Pine Grow International Charitable Trust; 188 Taxman 402 (P&H); Vanita Vishram Trust v. CCIT; 327 ITR 121 Bom; Maa Saraswati Trust [2010] 194 Taxman 84 (HP) and Bihar State Text Book Corpn; 240 CTR (Pat.) 403 On the other hand, the learned CIT DR defended the impugned order by contending that the assessee is solely doing business and is not established for providing any education to the public and was generating surplus funds. It was also contended that the expenditure so generated was not used for promotion of education and was for the personal benefit of the assessee.

3. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a registered society formed by Govt. of Madhya Pradesh for promotion and development of open school system in the State. Initially, the Govt. of MP financed the assessee institution by capital contribution for setting up infra structure and capital investment including primary expenses for its running and maintenance. The remuneration and other facilities were claimed to be provided by the State of Madhya Pradesh from its own sources to its office bearers. As per audited accounts, the assessee showed gross receipt of Rs. 14,34,36,039/- resulting into surplus income of Rs. 3,65,49,479/-. The Assessing Officer found that the assessee did not file return of income for the A.Y. 2006-07, therefore, notice u/s 148 was issued. The assessee filed nil income for the A.Y. 2003-04 on 3.3.2009 after claiming exemption u/s 10(23C)(iab). During assessment proceedings, books of accounts were produced by the assessee. The sum and substance of the issue is that the claimed exemption was denied to the assessee on the ground that such exemption is only available to the University or other educational institution solely existing for educational purposes and not for the purpose of profit and, therefore, the required condition is not fulfilled by the assessee. The Assessing Officer opined that the assessee is systematically generating profit, therefore, it is not existing for the benefit of public at large, therefore, the claimed exemption was denied. On appeal, the learned CIT(A) affirmed the stand of the Assessing Officer which is under challenge before the Tribunal.

3.1 Before coming to any conclusion, we are reproducing hereunder the relevant portion from the order dated 4th February, 2011 passed by the Hon’ble Delhi High Court in the case of St. Lawrence Educational Society/Baptist Edcuational Society & Others (supra) :-

“1.  Regard being had to the similitude of the issue involved in both the writ petitions, they were heard together and are being disposed of by a singular order. For the sake of clarity and convenience the facts in W.P. (C) 1254/2010 are adumbrated herein.

 2.  The assessee-petitioner, a society registered under the Societies Registration Act, 1860 filed an application in Form No. 56D for grant of approval for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 (for brevity, the Act) on 30th September, 2008 for the financial year 2008-09 before the Chief Commissioner of Income Tax, Delhi (Central). The authorized representative on behalf of the assessee-petitioner appeared and a query was made by the authority why the application should not be rejected in view of the decision rendered by the Uttarakhand High Court in CIT v. Queens’ Educational Society & Another [2009] 319 ITR 160. A written submission was filed contending, inter alia, that the assessee-society is basically engaged in imparting education inasmuch as it is running a school from nursery to 10th standard and the principal and primary objective of the society is to impart education and not to earn profit. It was also contended that the surplus that is generated is less than 7% of the gross receipt and the same was utilized for development of facilities, infrastructure, etc.

 3.  The authority concerned required the assessee to file the audit report in Form No. 10BB and eventually came to held that the assessee was engaged in running a primary school i.e., Lawrence Public School; that on a perusal of the audit reports for the assessment years 2006-07 and 2007-08 and Form No. 10BB for the assessment year 2008-09 and the income-expenditure statement for the aforesaid periods, it was clear that the assessee-society had shown surplus income of 3.35%, 7.40% and 2.06% respectively in its gross receipts after deducting all expenses including depreciation in the relevant assessment years. In case of the petitioner in W.P.(C) No.2463/2010, the Baptist Educational Society the surplus was 7.57%, 8.23% and 4.04% for the assessments years 2006-07, 2007-08 and 2008-09 respectively. The authority thereafter came to opine that the educational institutions run by the assessee-applicants were generating surplus out of their gross receipts year after year and it cannot be accepted that the surplus generated is merely incidental. An opinion was expressed that the surplus generated as above has been utilized by the educational institutions for making addition to building and purchase of furniture, electrical equipments etc. Thereafter, a reference was made to the decision in Aditanars Educational Institution v. Additional CIT [1997] 224 ITR 310. Further the authority referred to the decision in Municipal Corporation of Delhi v. Children Book Trust [1992] 3 SSC 390 and came to held as follows:- “To sum up, for the grant of approval to an educational institution seeking exemption u/s 10(23C)(vi), the basic requirement of sub-clause(vi) of clause (23C) of Section 10 is that the educational institution seeking exemption should be existing solely for the purpose of education and not for the purpose of profit. Here emphasis is laid on the word solely. Considering the facts of the present case in entirety as discussed above and respectfully following the ratio of the aforesaid judgment of the Hon’ble High Court of Uttrakhand, it cannot be said that the assessee-applicant society and the educational institutions run by it are existing solely for the purpose of education and not for the purpose of profit. Hence, the application for the assessee-applicant, seeking grant of approval for the purpose of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 for the financial year 2008-09 is hereby rejected.”

 4.  Mr. V.P. Gupta, learned counsel for the petitioner submitted that the respondent has fallen into a grave error by expressing opinion solely on the basis of the decision rendered in Queens’ Educational Society (supra). Learned counsel also submitted that the decision in the case of Queens’ Educational Society (supra) has been distinguished by the Bombay High Court in Vanita Vishram Trust v. Chief Commissioner of Income-Tax and Another [2010] 327 ITR 121 (Bom.), Himachal Pradesh High Court in Maa Saraswati Trust v. Union of India [2010] 194 Taxman 84 (HP) and Punjab and Haryana High Court in Pinegrove International Charitable Trust v. Union of India and Others [2010] 327 ITR 73 (P&H).

 5.  Mr. Sanjeev Sabharwal, learned counsel for Revenue supported the order passed by the competent authority. 6. In Aditanars Educational Institution (supra) the Apex Court while dealing with the factum of exemption has held thus:- “The language of section 10(22) of the Act is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for purposes of profit. After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes, since the object is not one to make profit. The decisive or acid test is whether, on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity.”

 6.  In American Hotel & Lodging Association, Educational Institute vs. CBDT 2008 (301) ITR 86 SC, their Lordships have laid down the principal on following terms.- “In Addl. CIT v. Surat Art Silk Cloth Manufacturers Association reported in [1980] 121 ITR 1, it has been held by this court that the test of predominant object of the activity is to be seen whether it exists solely for education and not to earn profit. However, the purpose would not lose its character merely because some profit arises from the activity. That, it is not possible to carry on educational activity in such a way that the expenditure exactly balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realization but would reflect unsound principles of management. In order to ascertain whether the institute is carried on with the object of making profit or not it is duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established.”

 7.  In the case of Pinegrove International Charitable Trust (supra), the Punjab and Haryana High Court after referring to the decision in the field has expressed the following opinion:- (2) The provisions of Section 10(23C)(vi) of the Act are analogues to the erstwhile Section 10(22) of the Act, as has been laid down by Hon’ble the Supreme Court in the case of American Hotel and Lodging Association (supra). To decide the entitlement of an institution for exemption under Section 10(23C)(vi) of the Act, the test of predominant object of the activity has to be applied by posing the question whether it exists solely for education and not to earn profit [See 5-Judges Constitution Bench judgment in the case of Surat Art Silk Cloth Manufacturers Association (supra)]. It has to be borne in mind that merely because profits have resulted from the activity of imparting education would not result in change of character of the institution that it exists solely for educational purpose. A workable solution has been provided by Hon’ble the Supreme Court in para 33 of its judgment in American Hotel and Lodging Association’s case (supra). Thus, on an application made by an institution, the prescribed authority can grant approval subject to such terms and conditions as it may deems fit provided that they are not in conflict with the provisions of the Act. The parameters of earning profit beyond 15 % and its investment wholly for educational purposes may be expressly stipulated as per the statutory requirement. Thereafter the Assessing Authority may ensure compliance of those conditions. The cases where exemption has been granted earlier and the assessments are complete with the finding that there is no contravention of the statutory provisions, need not be reopened. However, after grant of approval if it comes to the notice of the prescribed authority that the conditions on which approval was given, have been violated or the circumstances mentioned in 13th proviso exists, then by following the procedure envisaged in 13th proviso, the prescribed authority can withdraw the approval. (3) The capital expenditure wholly and exclusively to the objects of education is entitled to exemption and would not constitute part of the total income. (4) The educational institutions, which are registered as a Society, would continue to retain their character as such and would be eligible to apply for exemption under Section 10(23C)(vi) of the Act. [See para 8.7 of the judgment – Aditanar Educational Institution case (supra)] (5) Where more than 15% of income of an educational institution is accumulated on or after 01.04.2002, the period of accumulation of the amount exceeding 15% is not permissible beyond five years, provided the excess income has been applied or accumulated for application wholly and exclusively for the purpose of education. (6) The judgment of Uttrakhand High Court rendered in the case of Queens Educational Society (supra) and the connected matters, is not applicable to cases fall within the provisions of Section 10(23C)(vi) of the Act. There are various reasons, which have been discussed in para 8.8 of the judgment, and the judgment of Allahabad High Court rendered in the case of City Montessori School (supra) lays down the correct law.”

 8.  In view of the aforesaid decisions, the opinion expressed by the respondent that the educational institutions seeking exemption should not generate any quantitative surplus is legally untanable and incorrect. The Chief Commissioner has erred in assuming that for exemption there should not be any surplus, otherwise the institution society exists for profit and not charity i.e. education in the present case. In view of the aforesaid judgments of the Supreme Court, Bombay High Court and Punjab and Haryana High Court, reasoning inscribed by the competent authority solely on the foundation that there has been some surplus profit is unjustified.

 9.  In the result, we allow the writ petition and set aside the order passed by the competent authority and remit the matter to the said authority for fresh adjudication in accordance with law in the light of the aforesaid decisions.”

3.2 We find that while coming to a particular conclusion, the learned CIT(A) discussed the decisions in IIM, Bangalore v. CIT [2009] 121 TTJ (Bang.) 560; Maharashtra Rajya Sahkari Sangh v. ITO [2011] 7 ITR 675 (ITAT), ACIT v. Gold Mines Shares & Finance Pvt. Ltd. [2008] 302 ITR (AT) 208 and Queens Educational Society, etc. along with others. It is noted that the Hon’ble Bombay High Court in a later decision dated 6th May, 2010 in Vanita Vishram Trust distinguished the decision of Hon’ble Uttarakhand High Court in Queens Education Society; 319 ITR 160 and considered various decisions like Aditanar Educational Institution v. Addl. CIT; 224 ITR 310 (SC), Pinegrove International Charitable Trust; 327 ITR 73 (P&H), Trustees of Vanita Vishram v. CIT (280 ITR 345)(Bom.) and held that petitioner will be entitled to succeed by enlightening on the scope of section 10(23C) wherein investment of surplus from activities applied for educational purposes, rejection of approval u/s 10(23C)(vi) was held to be not valid. We have carefully gone through the order from Hon’ble Delhi High Court as reproduced hereinabove. The basic crux of the order by the Hon’ble High Court is that the opinion expression by the respondent that the educational institutions seeking exemption should not generate any quantitative surplus is legally untenable and incorrect and as such the learned CCIT erred in assuming that for exemption, there should not be any surplus otherwise the institution society exists for profit and not for charity i.e., education in the present case. The issue was sent for fresh adjudication to the competent authority in accordance with law. Even otherwise, to decide entitlement of an institution for exemption u/s 10(23C)(vi) test of predominant object of its activity has to be applied by posing question whether it exists solely for education and not to earn profit and merely because profits have resulted from activity of imparting education, within prescribed limit, would not result in change of character of an institution that it exists solely for educational purposes. If after meeting expenditure, a surplus results incidentally from an activity lawfully carried on by educational institution, it would not cease to be one which is existing solely for educational purposes where object is not to make profit. If the institution or the trust exists solely for educational purposes, the fact that it has other objects would not disentitle it to exemption so long as the activities carried out by it in that assessment year were that of running an educational institution and not for profit. Only the application of income as required under the Act and the predominant objects have to be kept in mind while granting or refusing such exemption.

3.3 If the facts of the case of the assessee available on record are perused, the assessee is trying to bring its case within the ambit of sec. 10(23C)(iiiab) of the Act, therefore, we are reproducing the same hereunder:

“10(23C)(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;”

3.4 If the language used in sub-section is analysed, it speaks about any educational institution which is solely existing for educational purposes and not for profit and at the same time, which is wholly or substantially financed by the Government. We have asked the assessee to produce its purposes and financial position. The ld. Counsel for the assessee provided the same, therefore, we are summarizing such receipts hereunder:

(Amounts in lacs)

If the language used in the section is analysed, it speaks about educational purposes and not for the purposes for profit and at the same time, it should be wholly and substantially financed by the Govt. If the aforesaid chart is analysed, one fact is clearly oozing out that there is huge profit generated which is as on 31.3.2009 at Rs. 1997.11 lacs. So far as the next condition of wholly and substantially financed by the Govt., we find that only during 1996-97, the amount of Rs. 50 lacs was granted by the Govt. and thereafter there is no grant. The figures mentioned in the expenses borne by the Govt. are also not actual and are notional, meaning thereby, these were not actually received by the assessee. Huge surplus has been generated by the assessee, therefore, it can be said that the profit motive of the assessee is clearly established. During hearing, the ld. Counsel for the assessee contended that the word “substantially” will be made even if the grants are 10%. We are not agreeing with this proposition because the word is “wholly or substantially”, meaning thereby, either it can be 100% or near to 100% but in any case may not be less than 75% because it has been used with the word wholly and not singularly. Admittedly, there is no clear cut formula regarding per centage in the Act but some figure may be adopted under the facts and circumstances available on record.

3.5 We are analyzing this issue with respect to section 10(23C)(iiiad) of the Act which is reproduced hereunder:

“10(23C)(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 does not exceed the amount of annual receipts as may be prescribed;”

The language used speaks about existence of solely for educational purposes and not for the purposes of profit if the annual receipts do not exceed the prescribed limit. However, if the aforesaid chart/income is analysed, we find that a huge abnormal profit has been created/earned by the assessee and the amounts are definitely beyond the prescribed limit. Vide Rule 2BC, the amount prescribed is Rs. 1 crore whereas the surplus generated by the assessee is in crores. On questioning from the Bench regarding conducting of examination, it was canvassed by the assessee that various schools of the Govt. are used by the assessee as examination centers free of cost, therefore, it may be considered as a grant. We are not agreeing with this proposition also because these schools are already in existence and actually claimed expenses are not incurred, therefore, there is no force in the arguments of the assessee. The cases relied upon by the assessee have already been considered by the ld. CIT(A), therefore, the same are not being repeated. When the language of the provision is clear and unambiguous, we are not expected to look into the intention. The meaning of words used by the Legislature is to be analysed from its plain and natural meaning. So far as the decisions in the case of Secondary Board of +Education v. ITO (86 ITR 408), CIT v. Kshetriya Girls School Managing Board (109 Taxman 77) (Mad.), Governing Body of Rangacharya Medical College (117 ITR 284) (AP) are concerned, the issue of wholly and substantially financed by the Govt. was not involved in these cases. The case of Shri Saket Mahavidyalaya Samiti v. DCIT [2010] 132 TTJ (Lucknow) 39 was on different facts as there was no much surplus or profit. The case of ACIT v. Bank of India (ITA No.468/Ind/2009) was also on different facts. If the totality of facts are analysed, we are of the view that the assessee has not complied with two essential conditions as stipulated in the Act, therefore, we find no infirmity in the conclusion drawn in the impugned order. It is upheld. Finally, all these appeals are dismissed.