Mere surplus year after year cannot be deciding factor to deny exemption U/s. 11

Assessee society is generating surplus year after year is not the deciding factor to determine whether it is eligible for exemption under section 11 of the Act. And on this ground alone, the exemption claimed by the assessee society under section 11 can not be denied. What is relevant to examine is whether the surplus so generated is ploughed back in furtherance of its educational objectives and related activities or not.

RELEVANT EXTRACT OF THE ITAT JUDGMENT

3. The brief facts of the case are that the assessee is a society registered under the Rajasthan Society Registration Act, 1958 vide registration No. 518/1985-86 dated 19.02.1986. The assessee society is also registered under the provisions of Section 12AA of the IT Act, 1961 with effect from 17.12.1990. For the year under consideration, the assessee society filed its return of income on 15.10.2010 showing income as NIL after claiming exemption u/s 11(1)(a) of the IT Act, 1961 and the assessment was concluded u/s 143(3) on 25.03.2013 at total income of Rs. 8,46,93,414/-. Aggrieved with the order of AO, the assessee society filed an appeal before the ld CIT(A), Jaipur who has allowed partial relief to the assessee. Now the Revenue is in appeal against relief granted by the ld CIT(A) in terms of allowing exemption under section 11 and deleting the disallowance relating to salary, foreign travel and treating contribution to Jaipur National University as application of income. The assessee society is in appeal against the order of ld CIT(A) for not treating the allowance of depreciation as application of income.

4. The first question that arises in the present appeal is the entitlement of the assessee society to exemption under section 11 of the Act. The relevant provisions which govern the exemption under section 11, are contained in section 2(15), 11, 12 ,12A, 12AA read with section 13 of the Act.

5. Section 2(15) defines “charitable purpose” to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The Hon’ble Supreme Court in case of Sole trustee, Lok Sikshana Trust V. CIT reported in 101 ITR 234, 241 (SC) has held that “What ‘Education’ connotes in section 2(15) is the process of training and developing the knowledge, skill, mind and character of students by normal schooling. It is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received.” Further, it is noted that the proviso to section 2(15) doesnt apply to first three limbs which includes relief of the poor, education and medical relief and is limited is the last limb “the advancement of any other object of general public utility.

6. The objectives of the assessee society, on perusal of its Bye-laws, are as follows:-

7. On perusal of the above objectives of the assessee society, it is clear that the main objects of the society are setting up of educational institutions and operating them for the promotion of education and there are other stipulated objectives which are related to promotion and spreading of systematic education. During the year under consideration, in pursuance of its objectives, the assessee society is operating two educational institutions namely, Seedling Public School, Jawahar Nagar, Jaipur and Seedling Modern High School, Mahaveer Nagar, Jaipur.The society has also established a University in name of “Jaipur National University” and is the sponsoring body of the said University. The Jaipur National University has been set up by the society mainly for the promotion of technical and other higher education. It is therefore not a matter of dispute that the society is imparting “education” through various educational institutions set up by it as per its stated objectives and the activities of the assessee society fall within the ambit of the term “education” in the context of Section 2(15) of the Act.

8. We now refer to the provisions of section 11 of the Act which reads as under:

11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—

[(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;

(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property;

(c) income derived from property held under trust—

(i) created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and

(ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India:

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;

[(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.]

[Explanation.—For the purposes of clauses (a) and (b),—

(1) in computing the fifteen per cent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income;

(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount—

(i) for the reason that the whole or any part of the income has not been received during that year, or

(ii) for any other reason,

then

—

(a) in the case referred to in sub-clause (i),so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and

(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, may, at the option of the person in receipt of the income such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.]

(1A) For the purposes of sub-section

(1),—

(a) where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified here under, namely:—

(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain;

(ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset;

(b) where a capital asset, being property held under trust in part only for such purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—

(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain;

(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset.

Explanation.—In this sub-

section,—

(i) “appropriate fraction” means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes;

(ii) “cost of the transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of section 55;

(iii) “net consideration” means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.]

(1B) Where any income in respect of which an option is exercised under clause (2) of the Explanation to sub-section (1) is not applied to charitable or religious purposes in India during the period referred to in sub-clause (a) or, as the case may be, sub-clause (b), of the said clause, then, such income shall be deemed to be the income of the person in receipt thereof—

(a) in the case referred to in sub-clause (i)of the said clause, of the previous year immediately following the previous year in which the income was received; or

(b) in the case referred to in sub-clause (ii) of the said clause, of the previous year immediately following the previous year in which the income was derived.]

[(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:—

‘(a) such person specifies, by notice in writing given to the Assessing Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years;

(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5) :

Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded:

Provided further that in respect of any income accumulated or set apart on or after the 1st day of April, 2001, the provisions of this sub-section shall have effect as if for the words “ten years” at both the places where they occur, the words “five years” had been substituted.

[Explanation.—Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.

(3) Any income referred to in sub-section (2) which—

(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or

(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5),or

(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a)of that sub-section or in the year immediately following the expiry thereof,

(d) is credited or paid to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v)or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.

(3A) Notwithstanding anything contained in sub-section (3), where due to circumstances beyond the control of the person in receipt of the income, any income invested or deposited in accordance with the provisions of clause (b) of sub-section (2) cannot be applied for the purpose for which it was accumulated or set apart, the Assessing Officer may, on an application made to him in this behalf, allow such person to apply such income for such other charitable or religious purpose in India as is specified in the application by such person and as is in conformity with the objects of the trust; and thereupon the provisions of sub-section (3) shall apply as if the purpose specified by such person in the application under this sub-section were a purpose specified in the notice given to the Assessing Officer under clause (a) of sub-section (2):] Provided that the Assessing Officer shall not allow application of such income by way of payment or credit made for the purposes referred to in clause (d) of sub-section (3) of section 11: Provided further that in case the trust or institution, which has invested or deposited its income in accordance with the provisions of clause (b) of sub-section (2), is dissolved, the Assessing Officer may allow application of such income for the purposes referred to in clause (d) of sub-section (3) in the year in which such trust or institution was dissolved.

(4) For the purposes of this section “property held under trust” includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.

(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.

(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :—

(i) investment in savings certificates as defined in clause (c)of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;

(ii) deposit in any account with the Post Office Savings Bank;

(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank). Explanation.—In this clause, “scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);

(v) investment in any security for money created and issued by the Central Government or a State Government;

(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government;

(vii) investment or deposit in any public sector company:

Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,—

(A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company;

(B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company;

(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;

(ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;

(ixa) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India. Explanation.—For the purposes of this clause,—

(a) “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;

(b) “public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);

(c) “urban infrastructure” means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;]

(x) investment in immovable property.

Explanation.—”Immovable property” does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;]

(xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964);]

[(xii) any other form or mode of investment or deposit as may be prescribed.

(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.

(7) Where a trust or an institution has been granted registration under clause (b)of sub-section (1) of section 12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and the said registration is in force for any previous year, then, nothing contained in section 10 [other than clause (1) and clause (23C) thereof] shall operate to exclude any income derived from the property held under trust from the total income of the person in receipt thereof for that previous year.

9. As per the section 11(1) of the Act, subject to provisions of section 60 to 63, the income of the charitable or religious trust in receipt of the income as specified under sub clauses of the aforesaid section, applied for charitable or religious purposes and the income in form of voluntary contribution with the specific directions that they shall form part of the corpus of the trust or institution in the manner and to the extent specified shall not be included in the total income of the previous year. Sub-section (2) of section 11 deals with the situation where income referred to in clause (a) and ( b) of sub-section (1) read with Explanation to the sub-section is not applied or is not deemed to have been applied to the charitable purpose or religious purposes in India during the previous year but is accumulated or set apart either in whole or in part for application to such purposes in India and mandates that such income shall not be included in the total income of the previous year of the person in the receipt of the income on the compliance of the conditions specified in sub- clause (a) and (b). Sub-section (3) of section 11, provides that any income referred to in sub-section (2) which is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or ceases to remain invested for deposited in any of forms or modes specified in sub-section (5) or is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof or is credited or paid to any trust or institution registered under section 12A or any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause 23C of Section 10, shall be deemed to be the income of such person of the previous year in which it is so applied for ceases to be accumulated or set apart or ceases to remain so invested or deposited or credited or paid or as the case may be, of the previous year immediately following the expiry of the aforesaid period.

10. The scheme of granting fiscal incentive by way of exemption u/s 11 of the Income Tax Act, 1961 to the charitable institutions is thus devised by the legislature in such a manner that the institutions who earn from charitable work are not liable to tax if they either apply such earnings during the year or accumulate such earnings for further achieving the “charitable purposes” and do not withdraw such income for utilization for any purposes other than “charitable purposes”. In other words, the charitable institutions may earn income and enjoy tax exemptions so long as they re-circulate such earnings for charitable objectives and thereby further promote the charitable purpose. The conditions which are required to be fulfilled are as follows:

a. Income should be derived from property held under trust by the person claiming exemption.

b. Such Property from which income is derived should be held wholly for charitable or religious purposes.

c. Income for which exemption is claimed is being applied for charitable or religious purposes in India. If such income is accumulated/ set apart for such application in future then the exemption is limited to the extent of certain percentage of such income.

11. In this regard, the ld AR drawn our reference to the salient provisions of Rajasthan Society registration Act, 1958 which, read along with the Byelaws of the society (reproduced above), governs the assessee society as under:

“Section 5. Property of society in whom vested:-

(1) The property, movable and immovable, belonging to or held or acquired by a society registered under this Act, if not vested in trustees in trust for such society, shall be deemed to be so vested for the time being in governing body of such society, and in all proceedings, civil and criminal, may be described as the property of the governing body of such society.

(2) Where any such property is vested or is to become vested in trustees in trust for any society registered under this Act and any new trustees have been appointed under and in accordance with section 5-A, the property shall, notwithstanding anything contained in any instrument or in the rules and regulations of the society, become vested, without any conveyance or other assurance, in such new trustees and the continuing old trustees jointly of it, there are no old continuing trustees, in such new trustees wholly upon the same trusts, and with and subject to the same powers and provisions, as it was vested in the old trustees.:

“Section 10. Members liable to be sued as strangers:-

(1) Any Member of a society registered under this act, who may be in arrear of the subscription which, according to the rules and registrations of the society, he is bound to pay or who shall possess himself of or detain any property of the society in manner or for a time contrary to such rules and regulations or shall injure or destroy any property of the society, may be sued for such arrear or for the damage accruing from such possession, detention, injury or destruction of the property in the manner here in before provided.

(2) If in any suit or proceeding brought under sub section (1) at the instance of the society the defendant shall be successful and shall be adjudged to recover his costs, he may elect to proceed to recover the same from the officer n whose name the suit or other proceeding shall be brought or from the society , and in the latter case, shall have process against the property of the said society in the manner above described.

“Section 14. Upon dissolution no member to receive surplus property:-

If upon dissolution of any society registered under this Act there shall remain after the satisfaction of all its debts and liabilities any property whatsoever, the same shall not be paid to or distributed among the members of the said society or any of them, but shall be given to some other society, whether registered under this Act or not, to be determined by the votes of not less than two-thirds of the members present personally or by proxy at the time of the dissolution or, in default thereof, by such court as aforesaid:

Provided that the section shall not apply to any society which have been founded or established by the contributions of share-holders in the nature of a joint-stock company.

Provided further that noting in this section shall be deemed to affect any provision contained in any instrument for the payment or distribution of the property of a society dissolved under section 13”

“Section 14-A. Surplus property may be given to government:-

Not-withstanding anything contained in section 14, it shall be lawful for the members of any society dissolved under section 13 to determine by the votes of not less than two-third of their total number that any property whatsoever remaining after the satisfaction of all its debts and liabilities shall be given to the State Government to be utilized for any of the purposes specified in Section 1-B.”

12. It was submitted that the statutory provisions and regulations governing the assessee society provide that the society has perpetual succession and its managing committee/ trustee may change from time to time but the property of the society remains with the society for the benefit of its beneficiaries in trustee capacity. The members of management committee or executive committee or any office bearers of the society are merely trustees of the property of such society and caretakers thereof for the ultimate benefit of public at large. Such members of management committee or the office bearers cannot be considered to be the owner of the property of such society. Their powers, duties, obligations are defined by way of Byelaws of the society and in absence of any specific provision in Byelaws, by the governing statues, rules and regulations. They are permitted to use the funds of the society only for the objects of the society and in case there is any misuse of funds for their personal purposes, they are obliged to reimburse/ compensate to the society in respect of such misuse/ personal use in the same manner as any other person would have been liable. In light of above, it was submitted that the assessee society fulfills all the three conditions specified in section 11(1)(a) of the Act for claiming the exemption as explained below:

a. assessee society is a society which is holding all the properties including educational institutions in “trustee capacity” or “in trust”. The property is held for the benefit of the beneficiaries and no individual is the owner of the property.

b. The property held by the assessee society is held wholly for charitable purposes within the meaning of section 2(15) of the Income Tax Act, 1961 since all the objects of the society qualify as “charitable purpose” within the statutory meaning;

c. Income of assessee society is applied for “charitable purpose”and the exemption is also being claimed u/s 11 on the basis of, and to the extent of the income so applied only.

13. It was further submitted that all the objectives of the society relate to the promotion of education and activities incidental thereto and fall within the ambit of the term “charitable purpose” as defined under section 2(15) of the Income Tax Act, 1961. Thus, the society not only exists solely for “charitable purpose” but also there is no object of the society which is beyond the scope of “charitable purpose”. Whatever income is generated by the society is from the “property held under trust” for charitable purpose and the income earned by the society can be used and is actually used only for the “charitable purpose” as defined u/s 2(15) of the Act.

14. On perusal of the assessment order, it is noted that the prime reason for denial of exemption under section 11 of the Act by the Assessing officer is systematic generation of surplus year after year under various heads of income by the assessee society. As per Assessing officer, the systematic generation of surplus year after year establishes that various educational institutions are being run by assessee society with profit motive and not for any charitable purposes. The institutions are being run on commercial basis by charging hefty fees and generating heavy surplus from its education activity just like a business establishment with dominant motive being to earn profits. Negating the submissions of the assessee society that it is imparting education through various institutions and therefore carrying on charitable activity within the meaning of section 2(15), the Assessing officer held that looking at the fee structure of the institutions run by the assessee society, the children of common people and weaker section cannot afford to take education in these institutes and imparting education at such high cost cannot be treated as that of general public utility. Therefore, it was held that assessee society is not carrying on any charitable activity and surplus generated every year under various heads of fees cannot be held to be ‘income from property held for charitable purposes’ for the purposes of section 11(1) of the Act and the assessee society is therefore not entitled to exemption u/s 11 of the Act. In addition, the Assessing officer noted that the assessee society has allowed various benefits to persons covered under section 13(3) and in view of the provisions of section 13(1), the assessee society is not held eligible for exemption under section 11 of the Act.

15. Here, we refer to the decision of Hon’ble Supreme Court in case of Queen’s Education Society reported in 372 ITR 699 where relevant principles of law have been laid down to determine whether an educational institution exists solely for educational purposes and not for profit. In that case, the provisions of section 10(23C)(iiiad) of the Act were under consideration of Hon’ble Supreme Court . The Revenue therein has argued that the legislature and the language employed in the statute doesn’t contemplate making of large profits and if an educational institution, in fact, makes large profits, then even though it may plough such profits back into the purchase of assets for education, yet such institution cannot be said to be existing solely for educational purposes and it would really be for profit. The Hon’ble Supreme Court negated the said line of arguments put forward by Revenue and referred to its earlier decisions rendered in case of Surat Art Silk Cloth Manufacturing (121 ITR 1), Aditanar Educational Institution (224 ITR 310) and American Hotel & lodging Assn. Educational Institute (301 ITR 86) and laid down the following principles in law as set out in paragraph 11 of its decision which reads as under:

“11..the law common to section 10(23C)(iiiad) and (vi) may be summed up as follows:

(1) 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 ceases to exist solely for education purposes and becomes an institution for the purpose of making profit.

(2) The predominant object test must be applied -the purpose of education should not be submerged by a profit making motive.

(3) A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.

(4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes

(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons.”

16. The Hon’ble Supreme Court in above decision also approved the decision of Hon’ble Punjab and Haryana High Court in case of Pine Grove International Charitable Trust (327 ITR 273). In that case, Chief CIT, Chandigarh withdrew the exemption under section 10(23C)(vi) stating that the profits are substantial and arising year after year and not incidental as held in case of Aditanar Educational Institution and the assessee should reduce the fees and apply a fresh. In that background, the Hon’ble Punjab and Haryana High Court held as under:

“8.13 From the aforesaid discussion, the following principles of law can be summed up –

(1) It is obligatory on the part of Chief Commissioner of Income Tax or the Director which are the prescribed authorities, to comply with proviso thirteen (un-numbered). Accordingly , it has to be ascertained whether the educational institution has been applying its profit wholly and exclusively to the object for which the institution is established. Merely because an institution has earned profit would not be deciding factor to conclude that the educational institution exists for profit.

(2) The provisions of section 10(23C)(vi) of the Act are analogous to the erstwhile section 10(22) of the Act, as has been laid down by Hon’ble Supreme Court in the case of American Hotel and Lodging association (supra). To decide the entitlement of an institution for exemption u/s 10(23C)(vi) of the Act, the test of predominant object of the activity has to be applied by posing the question whetherit exists solely for education and not to earn profit [see5 Judges constitution Bench Judgement in the case of Surat Art Silk Cloth Manufactures 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 Supreme Court in para 33 of its judgement 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 assessment 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 13^th proviso exists, then by following the procedure envisaged in 13^th 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.

(5) Where more than 15% of income of an educational institution is accumulated on or after 1^st April, 2002, the period of accumulation of the amount exceeding 15% is not permissible beyond five years, provided the excessincome has been applied or accumulated for application wholly and exclusively for the purpose of education.”

17. The Hon’ble Supreme Court also approved the decision of Hon’ble Bombay High Court in case of Tolani Education Society as under:

“24. Also in Tolani Education Society v. Deputy Director of Income Tax (Exemption) & Ors., (2013)351 ITR 184, the Bombay High Court has expressed a view inline with the Punjab and Haryana High Court view, following the judgments of this Court in the Surat Art Silk Manufacturers Association Case and Aditanar Educational Institution case as follows:

“ The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that the Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is education and the Petitioner exists solely for the purposes of imparting education. An incidental surplus which is generated, and which has resulted in additions to the fixed assets is utilized as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant. The Income-tax Act 1961 does not condition the grant of an exemption under Section 10(23C) on the requirement that a college must maintain the status-quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption under Section 10(23C). Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions. Knowledge in contemporary times is technology driven. Educational institutions have to modernise, upgrade and respond to the changing ethos of education. Education has to be responsive to a rapidly evolving society. The provisions of Section 10(23C) cannot be interpreted regressively to deny exemptions. So long as the institution exists solely for educational purposes and not for profit, the test is met.” (Emphasis supplied)

18. Though the above referred decision of the Hon’ble Supreme Court in case of Queen’s educational society has been rendered in the context of section 10(23C)(iiiad) where the legislature has used the words “income received by any person on behalf of educational institution existing solely for education purposes and not for the purposes of profit”, in our view, the proposition in law is equally relevant and applicable in context of section 11 of the Act where the legislature has used the words “income derived from property held under trust wholly for charitable purposes” and wherein similar provisions exist in terms of accumulation and plough back of surplus  for educational purposes as the intent behind both the provisions is essentially the same. The said analogy also becomes clear from the fact that
the Hon’ble Supreme Court in case of Queen Education Society has itself referred to and approved its earlier decision in case of S.R.M.M.C.T.M Tiruppani Trust (2 SCC 584) which was rendered in context of section 11 while discussing the principle of accumulation and utilization of surplus for educational purposes in para 19 of its order as under:

“…9. In the present case, the assessee is not claiming any benefit u/s 11(2) as it cannot, because in respect of this assessment year, the assessee has not complied with the conditions laid down in section 11(2). The assessee however, is entitled to claim the benefit of section 11(1)(a). In the present case the assessee has applied Rs. 8 lakhs for charitable purposes in India by purchasing a building which is to be utilized as a hospital. This income, therefore, is entitled to an exemption u/s 11(1). In addition u/s 11(1)(a), the assessee can accumulate 25% of its total income pertaining to the relevant assessment year and claim exemption in respect thereof. Section 11(1)(a) does not require investment of this limited accumulation in government securities. The balance income of Rs. 1,64,210.03 constitutes less than 25% of the income for the assessment year 1970-71.Therefore, the assessee is entitled to accumulate this income and claim exemption from income tax u/s 11(1)(a).”

19. Subsequently, the Hon’ble Supreme Court in its subsequent decision in case of Visvesvaraya Technological University (Civil Appeal No. 4361-4366 of 2016) dated April 22, 2016, in context of section 10(23C)(iiiab), referred to principles laid down in Queen’s education society (supra) and stated that one  further test as laid down in CIT vs. Surat Art Silk Cloth Manufacturer’s Association and culled out in American Hotel & Lodging Association Educational Institute vs. Central Board of Direct Taxes and Others may be added which is as follows:

“In order to ascertain whether the institute is carried on with the object of making profit or not it is the 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 .”

In the said decision, it further states that the above principle has been specifically reiterated in paragraph 19 of the decision in Queen’s Educational Society (supra) in the following terms:

“The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall out of Section 10(23C) is to ignore the language of the section and to ignore the tests laid down in Surat Art Silk Cloth case (CIT vs. Surat Art Silk Cloth Manufacturer’s Association (1980) 2 SCC 31) Aditanar case (Aditanar Educational Institution Vs CIT (1997) 3 SCC 346) and American Hotel & Lodging Association, Educational Institute vs. CBDT(2008) 10 SCC 509). It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit.”

In that case, the facts of the case before the Hon’ble Supreme Court were that the University had generated huge surplus of about Rs 500 crores from the year 1999 to 2010 by realising fees under different heads in consonance with the power vested in the University. The difference between the fees collected and actual expenditure was significant and represents only a minuscule part of the fees collected. No remission, rebate or concession in the amount of fees charged under the different heads were granted to the students. At the same time, it was noted that University has grown, number of private engineering colleges affiliated to it has increased from about 64 to 194, the infrastructure of the University has increased offering educational avenues to an increasing number of students in different and varied subjects. The University has spent about Rs 504 crores and available surplus in the year 2010 to the tune of Rs 440 crores was also intended to be applied for different infrastructural work.

In the above factual matrix, it was noted by the Hon’ble Supreme Court that there is no manner of doubt that the surplus accumulated over the years has been ploughed back for educational purposes and it was held that the appellant University exists solely for educational purposes and not for the purposes of profit.

20. In our view, the above decision of Hon’ble Supreme Court in case of Visvesvaraya Technological University supports the case of assessee society where under similar fact pattern the surplus has been generated over the period of time and at the same time, the same has been ploughed back and utilised for the purposes of promotion of education through setting up educational institutions, operating them and also upgrading them from time to time for further benefits to the students at large. The society has also established a university, “Jaipur National University” for the promotion of technical and other higher education where the Society is the sponsoring body of the University and has helped set up the University and its infrastructure. Here, it would be relevant to note the surplus that has been generated by the assessee society over the years starting AY 1999-00 to AY 2011-12 and to what extent the same has been utilised over the years:

On perusal of above figures, it is clear that over the period of 11 years, it is no doubt that the assessee society has generated surplus of Rs 50.76 Crores but at the same time, the whole of the said surplus has been plouged backed and utilised on infrastructure to the tune of Rs 60.19 Crores (including borrowings) . Even for the two years under consideration, there is surplus of Rs 16.97 Crores and out of that, Rs 9 crores have already been spent on the infrastructure.

21. The CBDT has also come out with a clarification vide its circular No. 14/2015 dated 17^th August, 2015, wherein, the guidance to the Field Officers has been provided precisely on the issue under consideration on generation of surplus out of gross receipt, the relevant para is reproduced as follows:-

“3. Generation of surplus out of gross receipts:

A doubt has been raised whether generation of surplus out of gross receipts would necessarily ‘breach’ the threshold condition that the educational institution should exist ‘solely for educational purpose and not for the purpose of profit’. Perusal of prescribed provisions clearly reveal that mere generation of surplus cannot be a basis for rejection of application u/s 10(23C)(vi) on the ground that it amounts to an activity of the nature of profit making. In fact, the third Proviso to the said clause clearly provides that accumulation of income is permissible subject to the manner prescribed therein provided such accumulation is to be applied “wholly and exclusively to the objects for which it is established”. Hence, it is clarified that mere generation of surplus by educational institution from year to year cannot be a basis for rejection of application u/s 10(23C)(vi) if it is used for educational purposes unless the accumulation is contrary to the manner prescribed under law.”

22. A perusal of the above clarification issued by CBDT clearly shows that while examining that an educational institute exists solely for educational purpose or for the purpose of the profit, mere generation of surplus from year to year cannot be basis to hold that it exists for the purpose of the profit as sufficient safeguards have been provided whereby accumulation of income is permissible subject to the manner prescribed therein provided such accumulation is to be applied wholly and exclusively to the objects for which it is established. In our view, the view of the CBDT is in consonance with the express wordings provided and intended by the legislature in 10(23C)(vi) and in comfirmity with the law laid down by the Hon’ble Supreme Court in case of Queens Education Society where it is provided that where the surplus is ploughed back for education purposes, the educational institution exists solely for educational purposes and not for purposes of profit. The same will apply with equal force in context of section 11 as similar safeguards have been provided in terms of accumulation and utilisation of surplus so generated for the purposes of charitable purposes in terms of section 11(2) of the Act.

23. It is further noted that similar issue has come up in the past right from AY 2001-02 to AY 2009-10 wherein the exemption u/s 11 has been denied to the assessee society on account of generating surplus year on year. However, the Coordinate Benches have consistently taken a view that looking at the scheme of exemption as envisaged in the statue, generating surplus cannot be basis for denial of exemption under section 11 of the Act.

24. In light of above discussions, in the instant case, we are of the considered view that given that the assessee society is generating surplus year after year is not the deciding factor to determine whether it is eligible for exemption under section 11 of the Act. And on this ground alone, the exemption claimed by the assessee society under section 11 can not be

25. What is relevant to examine is whether the surplus so generated is ploughed back in furthance of its educational objectives and related activities or not.