Denial of deduction u/s 10(23C)(iiiad) on account of running school for profit motive

ITO(Exemption) Vs M/s Vidya Bharti Samiti (ITAT Jaipur)

Conclusion: Sharing of the profit or income under the agreement between the parties and assessee and 80% of the income was going to the commercial entities clearly established the intention of the parties in this arrangements being for profit were not solely for providing education, therefore, the benefit of Section 10(23C)(iiiad) was not available to assessee.

Held: Assessee- society was running two schools in the name Tree House High School for Girls and Tree House High School for Boys both in Jaipur. It had applied for registration U/s 12AA which was rejected by CIT(E) on the ground that assessee-society had not commenced its activity of imparting education during the financial year 2010-11. AO also rejected the claim of exemption U/s 10(23C)(iiiad). Assessee-society had entered into an agreement/joint venture with Tree House Education and Accessories Limited (‘THEAL’) receiving  a total sum of Rs. 8.25 Crores and agreed to pay 50% of the gross receipt for the period to THEAL for providing facility in running the schools. Assessee had also taken the school buildings on lease from Arihant Enterprises and United Developers for each school. The 30% of the receipt of the schools would be paid as rent to these enterprises apart from security deposit of Rs. 5 cores and Rs. 2 crores each to these entities. Thus out of the total received from the activity of running of the schools assessee had to pay 50% to THEAL and 30% to these two landlords namely Arihant Enterprises and United Developers. The balance receipt of 20% remained with assessee to meet the expenses of salary and electricity and other expenses of running the schools. Thus the said amount of Rs. 8.25 crores received by assessee from THEAL was used for making the deposit with the landlord from whom the schools were taken on lease. AO in the assessment order treated the said receipt as part of the revenue received by assessee during the year from two schools. It was held in substance THEAL had made an investment more than Rs. 8 crores and in return was entitled to 50% of the gross receipts from running of the schools. Therefore, this arrangement was not to provide the facility of running of the schools but it was for sharing the profit of the income from activity of running the school. Similarly assessee had taken the school buildings on lease with the conditions that the minimum 30% of the receipt would be paid for each schools as rent to the parties from whom the schools were taken on lease. The pre dominate purpose was to run the schools in the capacity of intermediary and to serve the commercial interests of THEAL under the arrangements. Similarly the rent payable to the Arihant Enterprises and United Developers was also in the nature of sharing the income.  Thus the sharing of the profit or income under the agreement and 80% of the income was going to the commercial entities clearly established the intention of the parties in this arrangements being for profit were not solely for providing education. There was no intention of generating any income to be applied for education purposes and to meet the requirement of future expenses, modernization or to provide latest facility or infrastructure to the student. Hence, assessee was not existed solely for education purpose and consequently the benefit of Section 10(23C)(iiiad) was otherwise not available to assessee.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal filed by the Revenue is directed against the order dated 21.06.2018 of the ld. CIT (A)-1, Jhodhpur (Camp at Jaipur) for the assessment year 2012-13. The Revenue has raised the following grounds:-

“ on the facts and in the circumstances of the case, the ld. CIT(A) has erred in;

1. On the facts and the circumstances of the case and in law the ld. CIT(A) has erred in deleting the addition of Rs. 8,13,29,766/-made on account of receipts received from THEAL without appreciating the facts that such amount was received by the assessee society on account of transfer of rights exclusively to the THEAL (Tree House Education and Accessories Ltd.

2. On the facts and the circumstances of the case and in law the ld. CIT(A) has erred in holding the amount received from THEAL as repayable liability instead of receipts in lieu of surrendering exclusive rights ignoring the fact mentioned by the AO that there was no recovery clause mentioned in agreement date 28.03.2011 held between the assessee society and THEAL that the sum is refundable to the THEAL.

3. On the facts and the circumstances of the case and in law the ld. CIT(A) has erred in holding the amount received from THEAL as security deposit instead of Business Commercial Receipts (BCR) without appreciating the detailed reasoning given by the AO in respect of BCR in assessment order.

4. On the facts and the circumstances of the case and in law the ld. CIT(A) has erred in allowing exemption U/s 10(23C)(iiiad) ignoring the fact that the assessee exceeds prescribed limit for gross receipts of 1 crore during the year under consideration.

5. Any other question of law as deemed fit in the facts and circumstances of the case may also be framed before the Hon’ble Tribunal in the interest of justice. ”

2. The assessee is a society and running two schools in the name Tree House High School for Girls and Tree House High School for Boys both in Jaipur. The assessee society applied for registration U/s 12AA of the Act vide application dated 22.06.2011 which was rejected by the ld. CIT(E) on the ground that the assessee society had not commenced its activity of imparting education during the financial year 2010-11. Subsequently the Tribunal vide order dated 20.05.2013 directed the ld. CIT(A) to reconsider the application of the assessee society however, till the date no order has been passed by the ld. CIT(A) U/s 12AA of the Act. The assessee filed its return of income for the year under consideration declaring the total income at Nil after claiming the exemption U/s 11 of the Act. During the scrutiny assessment the AO has made addition of Rs. 8,13,29,766/- on account of transfer rights and after giving benefit of expenses at Rs. 1,11,33,258/- a total income of the assessee was computed at Rs. 7,14,56,68/-. The AO denied the benefit of Section 11 of the Act as the registration U/s 12AA of the Act was not granted to the assessee. The AO also rejected the claim of exemption U/s 10(23C)(iiiad) of the Act. The assessee filed the appeal before the ld. CIT(A) and contended that the assessee society is existed solely for the education and therefore, the benefit of Section 10(23C)(iiiad) is available to the assessee. The ld. CIT(A) accepted the claim of the assessee and deleted the addition made by the AO.

3. Before us, the ld. DR has submitted that the assessee has entered into an agreement/joint venture with Tree House Education and Accessories Limited (hereinafter referred to as ‘THEAL’) under which the assessee agreed to pay 50% of the gross receipt for the period to THEAL. Further, the assessee has also entered into separate agreements with Arihant enterprises and United Develops under which the assessee has taken the school buildings on rent and made a deposit of Rs. 5 crores and Rs. 2 crores respectively for taking school buildings on lease. It is also agreed by the assessee that minimum 30% of the gross receipt are to be paid as rent from which certain fixed amount is adjusted against security deposit. Thus, the ld. DR has submitted that 80% of the gross receipt has to go to these parties and only less than 20% would be in the hand of the assessee. Thus the intent and object of running these schools is not for doing any activity exclusively for the education but these are only to facilitate the business of the other 3 parties namely THEAL, Arihant Enterprises and United Developers. Thus the assessee is not existed solely for the education but the sole purpose is to earn the profit through these activities for these three other entities. The DR has further contended that the payment of 50% of the gross receipt to THEAL and 30% of the gross receipt to Arihant Enterprises and United Developers is nothing but for sharing the income of the assessee with these business entities and therefore, the assessee is not solely existed for the education. The entire arrangement is to carry out these activities for transferring the profit to these entities. The ld. DR has referred to the SEBI orders dated 07.03.2018 and 16.11.2018 whereby THEAL along with Director/promoter of Shri Rajesh Bhatia, Shri Vishal Shah and Shri Hinten Trivedi were restrained from accessing scrutiny market and also prohibited there from buying selling or otherwise dealing in security any manner either directly and indirectly. The SEBI found that these persons involved the activity of purchase and sale of security in violation of the SEBI Rules. They were also found involved in some dubious transactions with related parties by creating through some trust therefore, the SEBI has also ordered for forensic audited of THEAL. He has contended that the assessee is also paying interest to the THEAL as stated in para 4.3.1 of the ld. CIT(A). Thus, the ld. DR has submitted that the AO has rightly made the addition and treating the said amount of Rs. 8,13,29,766/- received from THEAL as part of the gross receipt of the schools. Therefore, when the gross receipt is more than Rs. 1 crore the provisions U/s 10(23C)(iiiad) are not applicable in the case of the assessee.

4. On the other hand, the ld. AR has submitted that the AO has treated the security deposit made by THEAL as income of the assessee whereas the said deposit is refundable at the end of the tenure by the agreement or termination of the agreement. The ld. AR has further contended that the agreement with THEAL was entered into for the services to be provided by the THEAL in running of the schools including management, curriculum and other accessories. Thus, this arrangement is made to mobilize the fund to run the international standard schools. The payment of security to Arihant Enterprises and United Developers is a transaction with third party and not a transaction with the specified persons U/s 13(3) of the Income Tax Act. He has referred the particulars of the trustees of the assessee society and submitted that during the year under consideration none of these trustees were having any relation with these other parties namely THEAL, Arihant Enterprises or United Developers. The details produce by the AO is not correct as the assessee has produced the details of the trustees in the return of income itself. The assessee has entered into agreement with THEAL for providing the necessary services to achieve the objects of highest standards of education in the schools managed by the assessee. The THEAL engaged in the business of setting up, developing pre schools and also providing the services in running the schools. Thus as per facilitation agreement the THEAL was to provide facilitation services to the assessee society which includes providing curriculum and teaching aids, education imparting methods for optimum utilization of resources. This agreement is for a period of 30 year under which the THEAL has provided interest free refundable security deposit of Rs. 8.13,29,766/-. Since the assessee was not having its own building, the assessee has taken the school building from the developers namely Arihant Enterprises and United Developers on lease and agreed to pay the rent not less than 30% of the gross receipt of each school. The payment to the THEAL is also a sum equal to 50% of gross average fee per child. The ld. AR has submitted that the facilitation agreement with respect to provide service to the assessee and is not an agreement for transfer of exclusive right and therefore, the AO has failed to appreciate the correct facts by treating the security deposit as income of the assessee for transfer of exclusive right. The assessee has shown this amount in the balance sheet as liability therefore, this cannot be treated as income of the assessee for the year under consideration. Thus the ld. AR has submitted that the security deposit was only to ensure the due performance of facilitation of services which is not transferred of right. The ld. AR has further pointed that in the year under consideration the assessee society has received a sum of Rs. 2 crores for transfer of business commercial rights however, due to some clerical error the same was not recorded in the books of the assessee and it was noticed while preparing the accounts of the subsequent year. This receipt of Rs. 2 crores was then treated as income in reassessment proceedings which has not been challenged by the assessee society. The ld. AR has referred to the various clauses of the agreement and submitted that security deposit is refundable on termination of agreement and therefore, the same cannot be treated as income. In support of his contention, he has relied upon the following decisions:-

1. Siddheshwar Sahakari Sakhar Karkhana Ltd. vs. CIT 270 ITR 1 (SC).

2. High Range Foods (P.) Ltd. vs. DCIT 15 com332 (Cochin)

3. CIT vs. Gulmohar Green Golf & Country Club Ltd. 77 taxmann.com 68 (Gujarat).

Thus, he has contended that each and every receipt cannot be treated as income. Deposit received by the assessee as security under the agreement which is liable to be refunded on termination of the agreement cannot be characterized as income of the assessee. The ld. AR has submitted that the AO as denied the exempts U/s 10(23C)(iiiad) of the Act due to monitory limit of more than Rs. 1 crore. Once the income of the assessee is not breaching the monitory limit, the benefit of Section 10(23C)(iiiad) of the Act is available to the assesse. He has supported the impugned order the ld. CIT(A).

5. We have considered the rival submissions as well as the relevant material on record. The entire controversy in this case is revolving around the arrangement made by the assessee with THEAL vide agreement dated 20.03.2011 under which the assessee agree to receive the services from THEAL for providing facility in running the schools. The assessee has also received a total sum of Rs. 8.25 Crores from trust under the agreement and in return the parties agreed that the assessee will share 50% of the schools revenue with THEAL. The assessee has also taken the school buildings on lease from Arihant Enterprises and United Developers for each school. The 30% of the receipt of the schools would be paid as rent to these enterprises apart from security deposit of Rs. 5 cores and Rs. 2 crores each to these entities. Thus out of the total received from the activity of running of the schools the assessee has to pay 50% to THEAL and 30% to these two landlords namely Arihant Enterprises and United Developers. The balance receipt of 20% remained with the assessee to meet the expenses of salary and electricity and other expenses of running the schools. The amount of Rs. 8.25 crores received by the assessee from THEAL was used in furnishing the deposit under the lease agreement to the tune of Rs. 7 crores which including Rs. 5 crores to Arihant Enterprises and Rs. 2 crores to United Developers. Thus the said amount of Rs. 8.25 crores received by the assessee from THEAL was used for making the deposit with the landlord from whom the schools were taken on lease. The Assessing Officer in the assessment order denied the contention of the assessee that the amount received from THEAL is loan and held that the assessee received this amount under the agreement and against the transfer of specific rights in favour of THEAL. Accordingly, the AO treated the said receipt as part of the revenue received by the assessee during the year from two schools namely Tree House High School for Girls and Tree House High School for Boys both in Jaipur and computed gross receipt total income of the assessee at Rs. 8,25,89,946/-. The relevant computation made by the AO as under:-

“In view of foregoing discussion in Section-II the institute wise income of the assessee society are:-

Since income of assessee has crossed the prescribed limited of rupees one crore and also individually for each institute. Hence, the assessee-society is not covered under provisions of Section 10(23C)(iiiad) of the Act. Therefore no exemption u/s 10(23C)(iiiad) of the Act is allowed.

Having decided the issue of exemption to the assessee society in negative. The income of the assessee is assessed under the head ‘Income from Business & Profession’ treating its status as AOP.

The AO has denied the exemption U/s 10(23C)(iiiad) on the ground that the gross total receipt of the assessee during the year under consideration is more than Rs. 8,25,89,946/-. The assessee society contended before the ld. CIT(A) that the said amount of Rs. 8,13,29,766/- receipt under the agreement as a security deposit and cannot be treated as income of the assessee. The ld. CIT(A) accepted the said contention and allowed the claim of the asessee. At the time of the hearing, the ld. AR of the assessee has clearly admitted that there was a receipt of Rs. 2 crores by the assessee during the year under consideration for transfer of business/ commercial rights which were not recorded in the books of the assessee due to certain clerical error.

However, the AO has reopened the assessment and treated the said amount of Rs. 2 crores as income of the assessee in the reassessment proceedings which has not been challenged by the assessee society in view of this undisputed fact that there was receipt of Rs. 2 crores apart from the admitted receipt by the assessee from two schools at Rs. 9,96,370/- and Rs. 2,63,810/- total Rs. 12,60,180/-, the total undisputedly received for the year under consideration is Rs. 2,12,60,000/-. Hence, even as per the admitted gross receipts for the year under consideration breaches the limit provided U/s 10(23C)(iiiad) of the act and therefore, the said benefit of provisions of Section 10(23C)(iiiad) would not available to the assesse. Accordingly to that extent we set aside the order of the ld. CIT(A) and restore the order of the Assessing Officer for denying the claim of exemption U/s 10(23C)(iiiad) of the Act.

5.1 As regards treating the receipt of Rs. 8.13,29,766/- from THEAL it is pertinent to note that the entire arrangement between the assessee society and THEAL is in the nature of joint venture for 30 years. The agreement in question is irrevocable as the parties to the agreement have no right to terminate the agreement accept fulfillment of terms and conditions as provided under clause 7.1 to 7.5 which reads as under:-

“7.1 Either party (“the Terminating party”) shall be entitled to terminate this agreement if:

(ii) the other party (“Defaulting party”) shall neglect or fall to perform any of its obligations or conditions undertaken under this agreement or under the agreement, or

(ii) if any of the statement/s as contained in this Agreement or the Agreement and Attributable to the Defaulting party is/are false, misleading or untrue in any manner whatsoever;

Ant the Defaulting party fails to remedy such default, neglect or failure to the reasonable satisfaction of the terminating party within 30 days of the receipt by the defaulting party of written notice thereof from the terminating party.

7.2 Notwithstanding anything contained in clause 7.1 above, in the case of persistent neglect or failure of the institution to perform any of its obligations under this Agreement or under the Agreement, the Institution shall not be entitled to any further period of grace within which to remedy any such neglect, default or failure.

7.3 Notwithstanding anything contained in clause 7.1 above the provider shall have the right to terminate this Agreement, forthwith by notice in writing to the institution, without prejudice to its other rights under this Agreement, if;

I. the institution ceases, or takes any steps of cease, the running of the new educational institutes or any or all of the educational institutes which are all run and managed under the same management of the institution;

ii. There is a change in the management or control of the institution or a change in the constitution or identify of the institution without prior consultation with the provider;

iii. the institution challenges the provider’s ownership of the intellectual property;

iv. The institution engages in any conduct prejudicial to the goodwill of facilitation services provided by the provider;

7.4 On the termination of this agreement in terms of this clause, the provider shall in addition to the amounts payable to it under clause 12.4 of the agreement, be entitled to, without prejudice to any other remedy available to it in law for the breach of this agreement, be liable to pay a compensation as per mutually agreed terms. The institute shall be under an obligation to repay the said amounts within 60 days of termination of this agreement. Further, the interest free refundable security Deposit amount shall be refunded on earlier termination as mentioned in this Agreement.

7.5 Notwithstanding that any party hereto may exercise its right of termination during the course of any academic year of the school termination of the agreement shall become effective and taken effect only at the end of the academic year during which the right of termination is exercised, with a view that there shal l not be any disruption of the education of the students of schoo l in the middle of an academic year. ”

Therefore, only on default on the part of a party the agreement cannot be terminated and not on will by giving a notice to other party. In substance the THEAL has made an investment more than Rs. 8 crores and in return was entitled to 50% of the gross receipts from running of the schools. Therefore, this arrangement is not to provide the facility of running of the schools but it is for sharing the profit of the income from activity of running the school. Similarly the assessee has taken the school buildings on lease with the conditions that the minimum 30% of the receipt will be paid for each schools as rent to the parties from whom the schools were taken on lease. There is a further rider in payment of rent in case of 30% of receipt is less than Rs. 6 lacs Per Annum, the minimum will be paid as rent. Thus, it is clear that the assessee is not existed solely for education purpose but for the purpose of profit. The pre dominate purpose is to run the schools in the capacity of intermediary and to serve the commercial interests of THEAL under the arrangements vide agreement dated 20.03.2011. Similarly the rent payable to the Arihant Enterprises and United Developers is also in the nature of sharing the income. Therefore, in substance the arrangement between the parties and the activity carried out by the assessee are to earn the profit from the activity and then transfer the same in the ratio as per the agreement to the other parties. The other entities are undisputed existed solely for the commercial activity and for earning the profit and not invested in the assessee for any charitable purpose. Thus the sharing of the profit or income under the agreement and 80% of the income is going to the commercial entities clearly established the intention of the parties in this arrangements being for profit are not solely for providing education. Further, from the facts and circumstances of the case there is no intention of generating any income to be applied for education purposes and to meet the requirement of future expenses, modernization or to provide latest facility or infrastructure to the student. The income generated from the activity of running the school is substantially going in the hand of the commercial entities under these agreements. Hence, in our considered view the assessee is not existed solely for education purpose and consequently the benefit of Section 10(23C)(iiiad) of the Act is otherwise not available to the assessee. In view of the above discussion we set aside the impugned order of the ld. CIT(A) and restore the order of the Assessing officer.

In the result, the appeal of the Revenue is allowed.

Order pronounced in the open court on 08/08/2019.