Seth Ramjidas Modi Vidhya Niketan Society Vs CIT (Exemptions) (ITAT Jaipur)
The issue under consideration is whether CIT(exemption) is correct in rejecting the claim of the assessee u/s 10(23C) who is mainly engaged in education facilities?
In the instant case, AO observed that the Assessee Society is not existing solely for educational purposes. The society advanced huge amounts of funds from year to year to Dr. R.N. Modi Hospital which is a unit of Ram Niwas Modi Charitable Society (“RNMCS” for short). During the year no interest was charged on such advances, whereas the Assessee Society was paying huge interest on its market borrowings mostly from the trustees. The RNMCS was earlier a part of the Assessee Society, but was demerged from the Assessee Society on 02.10.2014 due to adverse view taken by the department in respect of allowability of exemption u/s 10(23C)(vi) since hospital cannot be run by a society approved u/s 10(23C)(vi). Even after demerger of RNMCS, the Assessee Society has not amended its constitution in which one of the objects is to run medical college and hospitals, which is against the spirit of approval granted u/s 10(23C)(vi). Consequently, a show-cause notice dated 03.12.19 was issued by the ld. CIT(E) to the Assessee Society proposing to rescind the notification u/s 10(23C)(vi) of the Act.
ITAT states that the main object and the purpose of the society was nothing but imparting education. The society exists solely for educational purposes and not for the purposes of profit and not towards any other object. The society was registered under Rajasthan Societies Registration Act 1948 (Rajasthan Act No. 28, 1958). Since its inception, the society has been promoting and establishing institution of excellence with main focus on building capabilities of the students with holistic development of their personality so that the students passing out of the portals of “Modi Group of Educational Institutions” shall contribute in building a strong nation. ITAT had also carefully gone through the audited annual statement of the account of the assessee and found that the major receipts are only from the fees from students and the expenditures are also aimed and meant for Education. There is absolutely no other source of income except the school fees / i.r.t imparting of education. After demerger the object was duly annexed excluding the part relating to hospital. The law requires an educational institution to exist solely for educational purposes and not for profit but that does not mean that ancillary activities, which helps the institution attaining the main object, should also not be carried out. With a view to disentitle an Institution from the exemption u/s 10 (23C) (vi), the revenue has to establish that firstly, the institution was not existing for solely for education and Secondly & cumulatively, the revenue must also establish that such institution was found engaged/ was existing for the purposes of profit. Unless these twin conditions are fulfilled and established, the revenue cannot deny/ withdraw exemption (where already granted). In the present case, however, the ld. CIT (E) has alleged that the Society did not exist solely for educational purposes but at the same time utterly failed to establish that the Assessee Society existed for the purposes of Profit (but not for education purposes). The repeated allegation that the society borrowed interest bearing funds and diverted to other charitable society RNMCS, is grossly insufficient to establish that the Assessee Society existed for profit only and not for education. Further, it was not the case of the CIT (E) that the Assessee Society was engaged in some money lending activity or that the funding to RNMCS/other party was with a profit motive or that it was a separate venture of the Assessee Society. It was ignored that only because of some peculiar circumstances which compelled the assesse to support the other charitable society (which was earlier a part of the Assessee Society only before the demerger) involved in charitable activities. No case is made out that similar financial transactions were entered with other third parties also with a profit motive, thus CIT(E) failed to establish that the Assessee Society existed for profit motive. There is otherwise no evidence to suggest anything contrary to this contention. Surprisingly, the ld. CIT (E) is completely silent on this factual contention made before him. ITAT also observe that the ld. CIT(E) himself agreed that the RNMCS could have taken loan directly from the members as contained by the assessee also that there was no motive and it was only the after effects of the demerger. In view of the above discussion, facts and circumstances of the case and the legal position, the order passed by the ld. CIT(exemptions) U/s 10(23C)(vi) of the Act is not sustainable. In the result, appeal of the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee against the order of ld. CIT(Exemptions), Jaipur dated 27/01/2020 rescinding notification U/s 10(23C)(vi) of the Income Tax Act, 1961 (in short, the Act). Following grounds have been taken by the assessee:
“1. The impugned order dated 27/01/2020 passed under to 15th proviso to S. 10(23C)(vi) of the Act, is bad in law and on facts of the case, being beyond the scope of the said provision and for various other reasons and hence, the impugned order kindly be quashed.
2. The ld. CIT(Exemptions), Jaipur erred in law as well as on the facts of the case in rescinding the approval already granted u/s 10(23C)(VI) vide notification CCIT/Udr/ITO(Tech)/2008-09/2071 dated 13/10/1981, by invoking the 15th proviso of Sec. 10(23C)(VI) of the Act. The rescinding the approval by the ld.CIT(Exemption), Kota is bad in law and on facts of the case and hence, the approval already granted, please be restored.
3.1 The ld. CIT(Exemption), Jaipur erred in law alleging & confirming that the assessee society has not applied its income in accordance with the provisions contained in clause (a) of the 3rd proviso and has also not invested or deposited its funds in accordance with the provisions contained in the clause (b) of the 3rd proviso of S. 10(23C)(vi), which finding is bad in law and contrary to facts and hence the rescinding the approval invoking 15th proviso to Section 10(23C)(vi) of the Act deserves to be quashed.
3.2 The ld. CIT(Exemptions), Jaipur further erred in law alleging & confirming that the funds of assessee society were invested in modes other than specified in Sec.11(5) of the Act, which is bad in law and on facts of the case and which finding is bad in law and contrary to facts and hence the rescinding the approval invoking 15th proviso to Section 10(23C)(VI) of the Act deserves to be quashed.
4. The ld. CIT(Exemptions), Jaipur erred in law as well as on the facts of the case in recording the findings adverse to the appellant assesse society which are contrary to the facts and material already on record and therefore, such finding kindly be negated/quashed.
5. The appellant prays your honour indulgences to add, amend or alter of or any of the grounds of the appeal on or before the date of hearing.”
2. The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic. Rival contentions have been heard and record perused. The facts in brief are that the assessee is a society and running an educational institution in the name of M/s Seth Ramji Das Modi Vidya Niketan society. The assessee is registered u/s 12AA of the Act w.e.f. 3rd July 1986 and thereafter the assessee was approved u/s 10(23C) by the CCIT, Udaipur for A.Y.2009-10 and onwards vide order dated 13-10-2008 vide notification CCIT/Udr/ITO(Tech.)/2008-09/2071. The ld. CIT(Exemptions) in his order dated 27/01/2020 has noted that during the assessment proceedings for. A.Y. 2017-18, the AO observed that the Assessee Society is not existing solely for educational purposes. The society advanced huge amounts of funds from year to year to Dr. R.N. Modi Hospital which is a unit of Ram Niwas Modi Charitable Society (“RNMCS” for short). During the year no interest was charged on such advances, whereas the Assessee Society was paying huge interest amounting to Rs. 56,71,990/- on its market borrowings mostly from the trustees. The RNMCS was earlier a part of the Assessee Society, but was demerged from the Assessee Society on 02.10.2014 due to adverse view taken by the department in respect of allowability of exemption u/s 10(23C)(vi) since hospital cannot be run by a society approved u/s 10(23C)(vi). Even after demerger of RNMCS, the Assessee Society has not amended its constitution in which one of the objects is to run medical college and hospitals, which is against the spirit of approval granted u/s 10(23C)(vi). Consequently, a show-cause notice dated 03.12.19 was issued by the ld. CIT(E) to the Assessee Society proposing to rescind the notification u/s 10(23C)(vi) of the Act.
3. The Assessee Society filed detailed reply is dated 26.12.2019 stating that society exists solely for educational purpose and not for the purposes of profit. There apart, the Assessee Society applied more than 85% of its income for the objects of the trust in accordance with the law and also similarly invested or deposited its own fund in accordance with the prescribed manner and up to the prescribed limit. The Assessee Society further submitted that the Assessee Society borrowed funds of Rs.4,83,53,000/- from various lenders and repaid Rs. 1,05,49,736/- thus, the net unsecured loan was Rs. 3,78,03,264/- during the year, out of which the Assessee Society only advanced Rs. 2,39,82,043/- to RNMCS. Therefore, it is only financial help for time being to RNMCS because of its weak financial position and thus, there was a reasonable cause and the peculiar circumstances behind these financial transactions. Hence, entering in to financial transactions by the Assessee Society cannot by itself be made a valid ground for rescinding of the notification. However, the ld. CIT(Exemptions) did not agree with the assessee’s contention and observe that the Assessee Society was demerged from RNMCS on 02.10.14 in order to comply with the provisions of S.10(23C)(vi), which require the Assessee Society to apply its income solely towards educational objects and not towards any other objects.
4. The ld. CIT(Exemptions) has further observed as under:
1. That the Assessee Society has continued to divert its funds towards non-educational activities by way of huge advances to RNMCS.
2. That the amount of advance to RNMCS reached a figure of Rs. 6,48,83,543/- as on 06.08.18, which is just before the issue of scrutiny notice u/s 143(2) dated 09.08.18, which seems to have prompted the Appellant Society to gradually reduce such advances made for non-educational purposes and were finally squared up by 15.05.19.
3. That the Appellant Society diverted the trust funds for non-educational purposes violating the 3rd proviso since the funds of the trust have not been wholly and exclusively applied towards the objects of the trust and have also not been invested or deposited in the modes specified in Section 11(5).
4. That no interest has been charged by the Appellant Society on the advances to RNMCS, except a small amount of interest of Rs. 38,98,180/- charged in financial year 2017-18.
5. That the borrowed funds as well as funds generated by the Appellant Society both constitute the funds of the Appellant Society and both are required to be applied exclusively for the purposes of education.
6. That the Appellant Society’s own funds as well as its borrowings are all getting credited to common bank accounts and hence it is not possible to establish a one to one co-relation between the borrowed funds and the diverted funds. It is, therefore, clear that the Appellant Society has diverted its funds for noneducational purposes.
7. That the activities for which diversion of funds has taken place are not incidental or ancillary activities to education but are involving funding of hospital, which goes against the requirement of S.10(23C)(vi) viz., solely for educational purposes.
Finally, he withdrew the approval granted to the vide notification CCIT/Udr/ITO(Tech.)/2008-09/2071 dated 13.10.08 vide impugned order dt. 27.01.2020
5. Against this order of the ld. CIT(Exemptions), the assessee is in further appeal before the ITAT.
6. We have considered the rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by the ld. CIT(Exemptions) in his order as well as cited by the ld. AR and ld. DR during the course of hearing before us in the context of factual matrix of the case. From the record, we found that the main object and the purpose of the society was nothing but imparting education. The society exists solely for educational purposes and not for the purposes of profit and not towards any other object. The society was registered under Rajasthan Societies Registration Act 1948 (Rajasthan Act No. 28, 1958). Since its inception, the society has been promoting and establishing institution of excellence with main focus on building capabilities of the students with holistic development of their personality so that the students passing out of the portals of “Modi Group of Educational Institutions” shall contribute in building a strong nation.
7. We had also carefully gone through the audited annual statement of the account of the assessee and found that the major receipts are only from the fees from students and the expenditures are also aimed and meant for Education. There is absolutely no other source of income except the school fees / i.r.t imparting of education. Please refer a chart Pg. 8 of this written submission. After demerger the object was duly annexed excluding the part relating to hospital vide resolution dated 01.04.2016. The law requires an educational institution to exist solely for educational purposes and not for profit but that does not mean that ancillary activities, which helps the institution attaining the main object, should also not be carried out. With a view to disentitle an Institution from the exemption u/s 10 (23 C) (vi), the revenue has to establish that firstly, the institution was not existing for solely for education and Secondly & cumulatively, the revenue must also establish that such institution was found engaged/ was existing for the purposes of profit. Unless these twin conditions are fulfilled and established, the revenue cannot deny/ withdraw exemption (where already granted). In the present case, however, the ld. CIT (E) has alleged that the Society did not exist solely for educational purposes but at the same time utterly failed to establish that the Assessee Society existed for the purposes of Profit (but not for education purposes). He even did not whisper on this aspect what to talk of establishing the fulfillment of this basic condition. The repeated allegation that the society borrowed interest bearing funds and diverted to other charitable society RNMCS, is grossly insufficient to establish that the Assessee Society existed for profit only and not for education. Further, it was not the case of the CIT (E) that the Assessee Society was engaged in some money lending activity or that the funding to RNMCS/other party was with a profit motive or that it was a separate venture of the Assessee Society. It was ignored that only because of some peculiar circumstances which compelled the assesse to support the other charitable society (which was earlier a part of the Assessee Society only before the demerger) involved in charitable activities. To repeat, the Assessee Society continued imparting education exclusively and continued existing solely for education and not for any purpose other than this. No case is made out that similar financial transactions were entered with other third parties also with a profit motive, thus CIT(E) failed to establish that the Assessee Society existed for profit motive. There is otherwise no evidence to suggest anything contrary to this contention. Surprisingly, the ld. CIT (E) is completely silent on this factual contention made before him. There is no dispute on the fact that whatever surplus was earned was ploughed back for education purposes only and therefore the assessee has to be held existing solely for educational purposes not for profit as repeatedly held in various cases.
8. The ld. CIT(Exemptions) in his order, further alleged that the Assessee Society has not applied its income and has not invested its fund in accordance with the provisions sub-clause (a) and (b) of 3rd proviso of section 10(23C)(vi) r/w S. 11 (5) hence, it attracts 15th Proviso of S. 10(23C)(vi) of the I.T. Act, 1961. In this regard, we observe that 3rd proviso, clauses (a) and (b) along with 13th proviso to S. 10(23C)(vi) which confers a power of rescinding on the competent authority, very specifically and categorically prescribed the requirement of the application of income of the concerned educational institution only (here Educational Society-Assessee) and not of others in as much as the words used are “…applied its income in accordance with the ” which clearly indicates that it has got to be essentially the income of the concerned institution alone and not of anyone else. Similar is the position when the condition has been put of making investment in the prescribed mode than also, the amount of investment has got to be its own fund i.e. fund of the concerned institution only and not of any fund of other institution or third party. Because here also the words used are “…invested or deposited its funds in accordance with ….”.
9. Furthermore, the statute has very specifically denoted/identified which particular amount is required to be applied/ invested. It is not that any or every amount (or fund or loan or anything else) of any other trust, fund or institution or of a third party viz. a debtor, which is also required to be applied / invested. The contention of the ld. CIT that the borrowed funds are own funds having been deposited in the same bank account has lost its color and therefore it is difficult to establish one to one co-relation between the own funds & outgoing and borrowed funds & outgoing, is something beyond understanding. Hence, otherwise there is no violation as alleged. Also it clearly shows that neither income nor funds of the Assessee Society is being used for any purpose other than mentioned in objects of Assessee Society above the prescribed limits.
10. We had also carefully gone through the bank statements of different Accounts were submitted before the ld. CIT (E) to support the assessee’s contention that normally unsecured loans were taken (mainly group/family members) and were onward transferred to RNMCS as and when they needed. Assesse’s own fund were not utilized nor it is so alleged by the ld. CIT (E). On the contrary he himself admitted the fact the assesse’s own fund were separate and there were borrowed funds however in his view, both the funds taken together found a kitty and therefore should be treated as Assessee Society’s own fund. We do not find any merit in the observation of the ld. CIT(Exemptions)that the Assessee Society’s own fund and borrowed fund both were deposited in the same bank account and were shown in the balance sheet and hence they should be treated as the Assessee Society’s own fund for the purposes of applying 3rd proviso and 13th proviso of S. 10(23C)(vi) of the Act. In this regard we observe that the borrowing shall always remained borrowing and can never become the property of the borrower (here the Assessee Society). Had it been so, why should the Assessee Society have shown in the audited annual statement of accounts as the borrowed funds taken under the head loans & advances. As per CIT (E) borrowed fund has become the Assessee Society’s own money which is not at all legally possible and that is the reason admittedly RNMCS paid back the entire amount to the assessee by 15.05.2019.
11. As per our considered view, the legislature intended that they meant own Income and own fund only & of the Institution only and it is manifest from 3rd Proviso (b) & newly inserted Explanation thereto by Finance Act, 2020 w.e.f. 01.04.2020 to the effect that donation received towards the corpus, is not required to be invested in the specified securities, making it clear even though it is Institution’s own fund yet such requirement was not pressed. Therefore, in absence of the specific requirement of law of applying/ investing third party’s funds, institution’s failure on that part cannot authorize the ld. CIT to withdraw the exemption.
12. We place reliance on the decision of the Hon’ble Supreme Court in the case of Aditanar Educational Institution vs. Addl. CIT (1997) 224 ITR 310 (SC), wherein it was held that overall view is to be taken and without being hyper technical in granting exemption under s. 10(22) of the Act, which include the objects of the society.
13. The Hon’ble Rajasthan High Court in the case of CCIT v/s Geetanjali University Trust (2013) 84 DTR 337 (Raj) wherein it was held that:
“Violation of the prescribed rules and regulations in the matter of admission of students does not deprive an educational institution of its character as an entity existing solely for the purpose of education and, therefore, approval for exemption under s. 10(23C)(vi) of the Act cannot be denied to the Appellant Society-trust which is running educational institutions on the mere ground that the method of admission of students followed by it has been held to be illegal by the court.”
14. The Hon’ble Supreme Court in the case of Queen’s Educational Society vs. CIT (2015) 372 ITR 699 (SC), held that Exemption under ss. 10(23C)(iiiad) and 10(23C)(vi)—Educational institution—Profit motive— Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it has ceased to exist solely for educational purposes and has become an institution for the purpose of making profit—In such case, the predominant object test must be applied—A distinction must be drawn between making of a surplus and the object of carrying on the institution “for profit”—Merely because imparting of education results in making a profit, no inference arises that it has become an activity for profit—Ultimate test is whether on an overall view of the matter in the relevant assessment year the object is to make profit as opposed to educating persons—When a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit—13th proviso to s. 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down.
15. The Hon’ble Delhi High Court in the case of DIT (E) v/s All India Personality Enhancement & Cultural Centre for Scholars Society (2015) 379 ITR 464 (Delhi), it was opined that “An educational institution existing solely for educational purposes would not cease to be so only for the reason that some of its activities have yielded surpluses; fact that certain advances have been made to chairman and some of his family members who were involved in running the school cannot be construed as diluting the predominant object of the Assessee Society had realigned all its investment in the manner as specified under provisos to s. 10(23C) r/w s. 11(5) prior to 31st march,2001 and had complied with the provisos of s. 10(23c); thus, the assessee would qualify for exemption under s. 10(22)/10(23C).”
16. In DCIT vs. COSMOPOLITAN EDUCATION SOCIETY 244 ITR 0494 (Raj.), affirming the finding of the ld. ITAT, it was held that there is allegation of misutilisation of the funds of the Society or mismanagement or the activities of the Society, the action could be taken against the members of the society as per the provision of various Institutes governing the Society. However, even such misutilisation and mismanagement by the members could not be the basis of rejection of the claim of exemption to the assessee education Society. Further the SLP against the judgement stood dismissed vide 241 ITR 132 (St). This was again relied upon on the case Mahima Sikhsha Samiti in DBIT No. 262/2017 vide order dated 23.09.2017 by the Hon’ble Rajasthan High Court.
17. This case also directly applies because the nature of allegation in both the matters are more or less the same. Hence, merely because of some financial transactions in peculiar circumstances could not be the basis of denying exemption.
18. After perusing entire documents placed on record, we observe that the Assessee Society has applied its own income in accordance with the law and also similarly invested or deposited its own fund in accordance with the prescribed manner and up to the prescribed limit. These contentions are supported and evident from the Audit Report and R & E Account that the assessee was in receipt of income of Rs. 14,53,01,969/-out of which, after defraying/ incurring expenditure of Rs. 13,22,57,344/-(the ld. Auditor however considered the expenditure after reducing interest also at Rs. 13,79,29,334/-, on the attainment of the objects of the Society, there remained surplus which is less than 15% of income. Thus, the application of the income was more than 85%.
