Case Law Details
Delhi HC Rules Exemption Under Section 10(23C)(vi) of the Income Tax Act, 1961 cannot be denied merely because there is a surplus.
Delhi High Court held 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. The assumption that for exemption there should not be any surplus and if it is otherwise the institution society exists for profit and not charity is not justified.
Delhi High Court
W.P.(C) 1254/2010
St. Lawrence Educational Society (Regd.) & Another
Vs.
Commissioner of Income Tax Delhi (Central) & Another
W.P.(C) 2463/2010
The Baptist Educational Socy & Anr.
Vs.
Chief Commissioner of Income Tax
Date- 04.02.2011
O R D E R
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 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 Vs. 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.1 0BB 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 Aditanar Educational Institution vs Addl.CIT (1997) 224 ITR 310 . Further the authority referred to the decision in Municipal Corporation of Delhi Vs. 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 Vs. Chief Commissioner of I ncome-Tax and Another (2010) 327 ITR 121(Bom), Himachal Pradesh High Court in Maa Saraswati Trust Vs. Union of I ndia (2010) 194 Taxman 84 (HP) and Punjab and Haryana High Court in Pinegrove I nternational Charitable Trust Vs. Union of I ndia 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 I nstitution (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:-
“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.”
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.
CHIEF JUSTICE
SANJIV KHANNA, J.
FEBRUARY 04, 2011
NA
e have ?l cm0P3(? on the correctness or otherwise of the said decision of the Tribunal as that was not the issue before us. The reason for taking note of this fact was that the learned counsel for the Revenue justified the protective assessment in the case of these assessees as his plea was that when it was not clearly ascertainable as to whether the addition should be made in the case of sood or these assessees, it was very well within the powers of the AO to make substantive addition in the case of Shri P.K. Sood and protective addition in these cases.
12. Coming to the powers of the AO to make addition on protective basis, the learned counsel referred to the judgment of the Supreme Court in the case of Lalji Haridas Vs. Income Tax Officer & Another and Chhotalal Haridas Vs. M.D. Karnik and Another [43 ITR 387] wherein the Court delineated the following principle justifying the reason for making protective addition:
“In cases where it appears to the income-tax authorities that certain income has been received during the relevant assessment year but it is not clear who has received that income and prima facie it appears that the income may have been received either by A or B or by both together, it would be open to the relevant income-tax authorities to determine the said question by taking appropriate proceedings both against A and B. That being so, we do not think that Mr. Nambiar would be justified in resisting the enquiry which is proposed to be held by respondent No. 1 in pursuance of the impugned notice issued by him against the appellant.”
13. Following the aforesaid judgment, Gauhati High Court in the case of Jagannath Bawri and Others Vs. Commissioner of Income Tax and Others [234 ITR 464] has explained the concept of protective assessment in the following manner:
“As regards the contention of Ms. Hazarika, learned counsel for the petitioners about income-tax returns, on perusal of annexure-A series it can only be said that those documents are only intimation which is sent to the assessee specifying the sum so payable under section 143(1)(a). At any rate, the assessments made are only protective assessments. Under the law it is open to the department to make assessments on two persons in respect of the same income, where there is some ambiguity as to the liability to charge, Such assessments are made to protect the interest of the revenue so much so, unless such protective or alternate assessment is made, assessment proceedings against the party finally found to be liable may become barred by time. It has now become an established practice that in the case of doubt as to the person who will be and deemed to be in receipt of the income, it is open to the department to make protective or alternative assessment. “
14. What clearly emerges from the discussion in the aforesaid judgments is that even when there is no specific provision in the Income Tax Act for protective assessment, power lies with the AO to make such an assessment on protective basis under certain circumstances. When there is such a power to make the protective assessment while carrying out the normal assessment proceedings even in the absence of specific provision, we fail to understand how the absence of provision should be a ground to preclude the AO for making protective assessment in block assessment proceedings under Section 158BC/BD of the Act. Principle of law laid down by the Supreme Court holding that the AO has power to make protective assessment even when there is no specific provision under the Act would equally apply to the block assessment also.
15. We, therefore, are not in agreement with the approach of the Tribunal. We answer the question of law as formulated in the affirmative, i.e., in favour of the Revenue and against the assessee. As a result, these appeals are allowed and the impugned order passed by the Tribunal is set aside. Since the appeals were not disposed on merits, the matters are remitted back to the Tribunal for deciding the appeals on merits.
JANUARY 31, 2011
