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 to Section 10(23C)(vi) 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 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 1 0(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.”
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 3468 OF 2008
(arising out of SLP(C) No. 6290/2007)
American Hotel & Lodging Association Educational Institute
versus
Central Board of Direct Taxes & Ors
Date- 09.05.2008
JUDGMENT
S. H. KAPADIA, J.
Leave granted.
2. The short question which arises for consideration in this civil appeal is as to what is the scope of enquiry by the Prescribed Authority under Section 10(23C)(vi) read with the third proviso thereto inserted by Finance Act, 1998 w.e.f. 1.4.1999. In this case, Central Board of Direct Taxes (“CBDT”) being the Prescribed Authority, at the relevant time, rejected the application for approval dated 7.4.1999 vide its order dated 12.10.2004. The said order has been upheld by the impugned judgment dated 24.11.2006 delivered by Delhi High Court in Writ Petition (C) No. 17978/04, hence, this civil appeal.
3. Briefly, the facts are as follows.
4. The claim of the appellant is that it is a non-profit organization set up in USA and has been granted tax exemption as an educational institute in that country. Appellant has a branch office in India, mainly to comply with its obligations under various agreements with Government of India (Ministry of Tourism). Its branch provides a central focal point in India for Indian missions to avail of its educational courses. Its branch collects data from educational institutions/persons wishing to take the courses offered in the field of Hospitality and fees for the required course material which is thereafter remitted to USA. After collection of data and fees, the Head Office (“HO”) sends course materials, examination papers etc. to the branch in India for onward transmission to the actual user. It is the case of the appellant that, it’s Indian branch is the small office in which administrative work is done. Few employees attend to this work. The costs of running the branch office is met by deducting the same from the amounts remitted to the H.O.
5. Thus, the appellant is an Institution whose objects are known as “Statement of Purposes” in US. Under the Internal Revenue Code, 1954 in the U.S. it enjoys tax exemption status as an educational institution. It is governed by an elected Board of Trustees and it offers high quality educational and training resources to enhance the professionalism of the hospitality industry worldwide.
6. In 1993, the National Council of Hostel Management and Catering Technology, the apex Indian body overseeing hostel management and catering education under the Ministry of Tourism, signed MoU with the Educational Institute (“EI”, for short) under which approval was granted to use courses, resources and expertise of the appellant in India with a view to improve the quality of hospitality education and training in India. Consequently, the appellant opened a liaison office in Mumbai in July 1994 with the approval of Reserve Bank of India (“RBI”, for short). Subsequently, in February 1995 the liaison office was upgraded to a branch office with the approval of the Ministry of Finance, GoI, and the RBI.
7. According to the MoU, the appellant has to fulfill the following obligations:
“The Institute will :
(a) provide a full and complete, world-recognised curriculum for all hospitality education programs in India ;
(b) make available for reproduction in India the texts, course materials, and software programs utilised in the Institute’s Hospitality Management Diploma ;
(c) provide a comprehensive faculty development program to upgrade the professionalism and instructional ability of those teaching hospitality management courses in India ;
(d) offer a comprehensive certification and registration program for individuals currently employed in the hospitality industry in India ;
(e) develop an accreditation system to permit the National Council to qualify and recognise proprietary schools ;
(f) develop through grant support, an entrance test to identify individuals best qualified to enter the hospitality industry ;
(g) establish an office in India to implement and co-ordinate the Institute’s activities ;
(h) offer the National Council the lowest possible prices for the products and services sold to or utilised by the schools under the umbrella of the Government of India ;
(i) utilise Indian authors whenever possible in the development of customised programs.”
8. Thus, in accordance with the terms of the said MoU, the appellant is responsible, inter alia, for providing a full and complete curriculum, recognized throughout the worldwide, for all hospitality educational programmes in India, making available text books, course materials and software programmes utilized in the appellant’s Hospitality Management Diploma, offering a comprehensive certification and registration programme for Indians desiring to avail of education in the hospitality field in India. Under Clause 1(h) of the MoU, appellant is required to offer to the National Council in India, which is the apex body for hospitality management in India, lowest possible prices for its products/services to be utilized for Schools under the umbrella of GoI. Under Clause 2(b) of the said MoU, the National Council of Hospitality is obliged to utilize the appellant’s courses in its current and future Hospitality Management Schools.
9. At this stage, it may be noted that the appellant got exemption under Section 10(22) up to the year ending 31.3.1998. The branch office accounts during the said period showed the gross amounts collected on the income side and the costs for running the branch were shown on the expenditure side. The difference between these figures represented what was receivable by the HO from the branch for the provision of course materials and other services provided by the HO. These accounts were accepted by the Department till 31.3.1998.
10. One more fact needs to be mentioned. Appellant herein had also moved the AAR under Section 245Q(1) of the 1961 Act for a ruling from the Authority on the following questions:
