Case Law Details

Case Name : Jaycees Public School Vs. ITO (ITAT Delhi)
Appeal Number : ITA No. 4554/Del/2012
Date of Judgement/Order : 16/10/2017
Related Assessment Year : 2006-07 and 2007-08
Courts : All ITAT (4351) ITAT Delhi (960)

Jaycees Public School Vs. ITO (ITAT Delhi)

We do not find that assessee is not engaged in the educational activities as merely charging of the fees does not make it existing for the purposes of the profit. This fact is also fortified for the reason that assessee has earned very meager amount of sum and which is also not alleged to have been applied for non-educational purposes. The assessee is running an educational institute but that does not mean that assessee must run it for free. Further it is also not alleged that the fees charged by the assessee is exorbitant and the primary motive of the assessee is to earn the profit. If the assessee does not charge the fees from student then it would not be possible for trust to carry on its activities for which it is established as the excess would not be available for ploughing back for development of the educational facility for the students. Hence, we do not find that the order of the Ld. CIT in cancelling the registration to the trust is sustainable.

Full Text of the ITAT Order is as follows:-

1. These are the 3 appeals filed by the assessee, a society carrying on educational activities.

2. The 1st appeal in ITA No. 4554/del/2012 is filed against the order of the Commissioner of income tax, (Haldwani) passed under section 1 2AA (3) of the income tax act, 1961 on 04/07/2012, wherein the registration already granted to the assessee under section 12 A of the income tax act was withdrawn w.e.f. 0 1/04/2007.

3. Before us, The assessee has raised the following grounds of appeal in ITA No. 4554/Del/2012:-

1. That having regard to the facts and circumstances of the case CIT has erred in law and on facts in cancelling the registration of society u/s 12AA (3) and that too with effect from 01-04-2007 by observing that activities of the society are not in the nature of charitable and has further erred in relying upon the assessment order passed u/s 143(3) in assessee’s own case for AY 2008-09.

2. That Ld. CIT has erred in law and on facts in cancelling the registration u/s 12A by making the following observations:-

(a) In the assessment order passed u/s 143(3), it has been established that income of the assessee society is not eligible for exemption u/ 11 & 12 of the IT Act, 1961.

(b) Income of the assessee is from fee and other related levies which cannot constitute the income falling within the ambit of classes as defined in section 11 & 12.

(c) The receipts of the society in the form of fee and other charges do not qualify for the exemption u/s 11 & 12 of the IT Act, 1961.

(d) The assessee’s activities are commercial in nature and there is no element of charity.

3. That in any view of the matter and in any case, action of Ld CIT in canceling the registration under section 12AA is bad in law and against the facts and circumstances of the case and is contrary to the principles of natural justice as the impugned order has been passed without granting adequate opportunity of hearing, by recording incorrect facts and findings and the appellant ought to have been granted benefit of registration under the law.

4. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.

Brief facts

4. Assessee, appellant, is a society deriving income from running a school and has claimed its income exempt under section 11 of the income tax act, 1961. For the assessment year 2008 – 09 the assessee filed its return of income declaring nil income on 29/09/2008. During the course of assessment proceedings, the books of accounts of the assessee were examined by the Ld. assessing officer and tested the claim of the assessee under section 11 and 12 of the income tax act. The Ld. assessing officer examined the income and expenditure statement of the assessee where he found that fees is charged from students under different heads such as admission fee, tuition fee, computer fee, late fee, games fee, library fee, examination fee, miscellaneous fees, prospectus fees, signs and fees and all those fees total to approximately 2.01 crores. Therefore, the Ld. assessing officer was of the view that above income of the assessee cannot be said to be the income derived from property held under trust. According to him the fees received from the student does not amount to voluntary contribution. Hence, he held that the assessee has only object to impart education and the education is imparted by charging fees from the students. Looking to the amount of fees collected by the assessee from the student the Ld. assessing officer held that the carrying on of the business should be incidental to the attainment of the objects of the trust and it should feed charity and not to be fed by it holding that assessee is engaged in the activity for profit-making. In short, his views were that if education is run on commercial lines, merely because it is a school, it does not mean that it would be entitled to the exemption under section 11 of the income tax act. Therefore he held that society’s income generated by way of tuition fees and other fees is not eligible for exemption under section 11 and 12 of the income tax act, 1961. He further held that as the exemption application of the society under section 10 (23C)(vi) has been rejected on 31/10/2010, Therefore, the surplus shown by the Society of Rs. 579743/– is neither eligible for exemption under section 11 and 12 or under section 10 (23C) of the act. He made several other addition for that particular year.

Proceedings before Ld CIT

5. In view of the above assessment order, the Ld. Commissioner of income tax issued show cause notice to the assessee that why it’s registration under section 12 A of the income tax act, 1961 may not be cancelled. In response to this notice the assessee filed certain written submissions on various dates and relied upon certain decisions. However, the Ld. CIT rejected the contentions of the assessee and held that as per order under section 143 (3) of the income tax act, 1961 passed by the assessing officer for assessment year 2008 – 09, it has been established that the income of the assessee society is not eligible or exemption under section 11 and 12 of the income tax act. The main reasons given by him in his order, are as under:-

a. that the income derived by the assessee is from fees collected from the students and is not income derived from property held under trust.

b. The fees received from the students is not a voluntary contribution

c. the assessee has only object of imparting education, which is imparted by charging fees from the students and is no relief is provided to the poor and needy by way of a cheaper and subsidize Further, if the students have to pay more than what is to be spent on them for imparting education, then there is no relief provided and the activity is merely a commercial and business activity.

d. He relied heavily on the decision of the Hon’ble High Court of Uttarakhand in the case of CIT versus Queens education society 177 Taxmann 321.

e. The assessee society has taken a term loan of Rs. 2.64 crores for purchase of land and construction of building of the school in such fund has been given to 3rd parties through bearer cheques as advance for purchase of land.

6. Consequently he passed an order under section 12AA(3) of the act on 04/07/20 12 holding that assessee society exists for profit and no longer engaged in charitable activities. Hence, the registration granted to the society originally was withdrawn w.e.f. 0 1/04/2007.

Arguments of assessee

7. Assessee aggrieved with that order has preferred an appeal before us contesting that assessee is carrying on educational activities which are one of the charitable activities. It is further submitted that the surplus derived by the assessee is a meager sum and merely because it runs on the fees collected from the student it cannot be said to be carrying on any business or commercial activity. It was further stated that the decision relied by the CIT of Hon. Uttarakhand High Court has been reversed by the Hon’ble Supreme Court and therefore the reasoning given therein does not apply to the facts of the case. It was further submitted that the amount of borrowing made by the assessee society was for the purpose of the charitable objects only and it was not spent for any other reasons. He further referred to the paper book filed by the assessee wherein various replies submitted stating that assessee is existing solely for the purpose of the education and the money collected is fees from student is also used for the educational purposes. He further submitted that assessee has earned a meager sum of Rs. 579743 i.e. excess of income or expenditure and therefore it is apparent that assessee is not earning profit and it does not exist for the same. He further referred to the decision of the coordinate bench in case of the assessee for assessment year 2005 – 06 and 2008– 09 dated 27/11/2013 wherein the issue was considered and the coordinate bench has held that the approach of Department regarding charging of the fees holding against the assessee was not approved. Therefore he submitted that the assessee trust, society should have been granted and continued to have been granted the registration under section 12 AA of the income tax act.

Arguments of the revenue

8. The Ld. departmental representative relied upon the order of the Ld. CIT.

Reason and Decision

9. We have carefully considered the rival contentions and carefully perused the order of the Ld. CIT passed under section 12 A A cancelling the registration of the trust w.e.f. 01/04/2007. Hon’ble Supreme Court recently in Queen’s education society versus CIT 372 ITR 699, has held that where a surplus is made by an educational institute which is also ploughed back for educational purpose, the said institution was to be held existed solely for educational purposes and not for the purposes of the profit. The Hon’ble Supreme Court further held that:-

“11. Thus, the law common to Section 1 0(23C) (iiiad) and (vi) may be summed up as follows:

(1) Where an educational institution carries on the activity of education primarily for persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational 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.

12. The Uttarakhand High Court in the impugned judgment dated 24th September, 2007 quoted the ITAT order in paragraph 7 as follows:

‘The ITAT while granting exemption under Section 1 0(23C) (iiiad) recorded the following reasons:

“During the years relevant for asst. Years 2000-01 and 2001-02, the excess of income over expenditure stood at Rs. 6,58,862/- and Rs. 7,82,632/- respectively. It was also noticed that the appellant society had made investment in fixed assets including building at Rs. 9,52,010/- in F. Y. 1999-2000 and Rs. 8,47,742/- in FY 2000-01 relevant for asst. years 2000-01 and 2001-02 respectively. Thus, if the amount of investment into fixed assets such as building, furniture and fixture etc. were also kept in view, there was hardly any surplus left  The assessee society is undoubtedly engaged in imparting education and has to maintain a teaching and non teaching staff and has to pay for their salaries and other incidental expenses. It, therefore, becomes necessary to charge certain fee from the students for meeting all these expenses. The charging of fee is incidental to the prominent objective of the trust ie. imparting education. The trust was initially running the school in a rented building and the surplus, ie. the excess of the receipts over expenditure.

In the year under appeal (and in the earlier appeals) has enabled the appellant to acquire its own property, acquire computers, library books, sports equipments etc. for the benefit of the students. And more importantly the members of the society have not utilized any part of the surplus for their own benefit. The AO wrongly interpreted the resultant surplus as the main objective of the assessee trust. As held above, profit is only incidental to the main object of spreading education. If there is no surplus out of the difference between receipts and outgoings, the trust will not be able to achieve the objectives. Any education institution cannot be run in rented premises for all the times and without necessary equipment and without paying to the staff engaged in imparting education. The assessee is not getting any financial aid/assistance from the Government or other philanthropic agency and, therefore, to achieve the objective, it has to raise its own funds. But such surplus would not come within the ambit of denying exemption u/s 1 0(23C) (iiiad) of the Act.’

13. Having set out the ITAT order, the Uttarakhand High Court held:

“Thus, in view of the established fact relating to earned profit, we do not agree with the reasoning given by the ITAT for granting exemption.”

14. Having said this, the impugned judgment goes on to quote Aditanar Educational Institution (Supra) as follows:—

“After meeting the expenditure, if any surplus result incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purpose 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 powers of the concerned entity.

If one looks at the object clause, there are other noble and pious objects but assessee society has done nothing to achieve the other objects except pursuing main object of providing education and earning profit. Further, with profit earned the society has strengthened or enhanced its capacity to earn more rather than to fulfil other noble objects for the cause of poor and needy people or advancement of religious purpose.

Therefore, the law laid down by the Apex Court has rightly been applied and exemption has also rightly been refused by the Assessing Officer in the facts and circumstances of the case.”

15. It is clear that the High Court did not apply its mind independently. What has been copied is one paragraph from the Supreme Court judgment in Aditanar Educational Institution (Supra) followed by a paragraph of faulty reasoning by the Assessing Officer and the said faulty reasoning of the Assessing Officer has been wrongly said to be the law laid down by the Apex Court.

16. Further, the Supreme Court Judgment in Municipal Corpn. of Delhi v. Children Book Trust [1992] 63 Taxman 385 has then been followed. The aforesaid judgment dealt with a property tax provision, namely, Section 115 (4) of the Delhi Municipal Corporation Act, 1957. Three questions were raised in the said judgment as follows:—

’56. In the present case, the questions which arise for our determination are:

(i) Whether the society or body is occupying and using the land and building for a charitable purpose within the meaning of sub-section (4)?

(ii) What is the meaning of the expression “supported wholly or in part by voluntary contribution”?

(iii) Whether any trade or business is carried on in the premises within the meaning of sub-section (5)?’

17. In answering question one, the Court held that School Education would only come within an exemption if it involved public benefit. Having so held, the Court stated:

’78. The rulings arising out of Income Tax Act may not be of great help because in the Income Tax Act “charitable purpose” includes the relief of the poor, education, medical relief and the advancement of any other object of general public utility. The advancement of any other object of general public utility is not found under the Delhi Municipal Corporation Act. In other words, the definition is narrower in scope. This is our answer to question No. 1.’

18. Secondly, the extracted portion from the said judgment in the judgment of the Uttarakhand High Court concerned itself with question two, namely, whether the educational society is supported wholly or in part by voluntary contributions. It is part of paragraph 80 of the said judgment. If the sentences after the quoted portion are also set out, it becomes clear that the passage relied upon by the High Court has absolutely nothing to do with the present case. The entirety of the passage is now set out herein below:

’82. …In other words, what we want to stress is, where a society or body is making systematic profit, even though that profit is utilized only for charitable purposes, yet it cannot be said that it could claim exemption. If, merely qualitative test is applied to societies, even schools which are run on commercial basis making profits would go out of the purview of taxation and could demand exemption. Thus, the test, according to us, must be whether the society could survive without receiving voluntary contributions, even though it may have some income by the activities of the society. The word “part” mean an appreciable amount and not an insignificant one. The “part” in other words, must be substantial part. What is substantial would depend upon the facts and circumstances of each case.’

19. It is clear, therefore, that the Uttarakhand High Court has erred by quoting a non existent passage from an applicable judgment, namely, Aditanar and quoting a portion of a property tax judgment which expressly stated that rulings arising out of the Income Tax Act would not be applicable. Quite apart from this, it also went on to further quote from a portion of the said property tax judgment which was rendered in the context of whether an educational society is supported wholly or in part by voluntary contributions, something which is completely foreign to Section 1 0(23C) (iiiad). The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of Section 1 0(23C) is to ignore the language of the Section and to ignore the tests laid down in the Surat Art Silk Cloth Mfrs. Association (supra) case, Aditanar Educational Institution (supra) case and the American Hotel and Lodging case. 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 fact, in S.RM.M. CT.M. Tiruppani Trust v. CIT J1998] 230 ITR 636/96 Taxman 635 (SC), this Court in the context of benefit claimed under Section 11 of the Act held:

“9. In the present case, the assessee is not claiming any benefit under Section 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 under Section 11(1). In addition, under Section 1 1(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 Assessment Year 1970-71. Therefore, the assessee is entitled to accumulate this income and claim exemption from income tax under Section 11 (1)(a).”

We set aside the judgment of the Uttarakhand High Court dated 24th September, 2007. The reasoning of the ITAT (set aside by the High Court) is more in consonance with the law laid down by this Court, and we approve its decision”

10. Therefore in view of the above decision of the Hon’ble Supreme Court, we do not find that assessee is not engaged in the educational activities as merely charging of the fees does not make it existing for the purposes of the profit. This fact is also fortified for the reason that assessee has earned very meager amount of sum and which is also not alleged to have been applied for non-educational purposes. The assessee is running an educational institute but that does not mean that assessee must run it for free. Further it is also not alleged that the fees charged by the assessee is exorbitant and the primary motive of the assessee is to earn the profit. If the assessee does not charge the fees from student then it would not be possible for trust to carry on its activities for which it is established as the excess would not be available for ploughing back for development of the educational facility for the students. Hence, we do not find that the order of the Ld. CIT in cancelling the registration to the trust is sustainable.

11. Further, merely because of the reason that assessee has borrowed some amount from the bank and given the same for purchase of the land through bearer cheques amounts to utilization of the fund for non educational It is an application of the fund for the objects of the trust. It is not the case of the revenue that the above loans given by the assessee are for altogether different purposes.

12. The contention of the CIT that it is necessary that assessee should charge fees or exempt fees to the poor students or charge fees at the concessional rate, then only it can be said that it is existing for the charitable purposes. We do not approve of such finding for the reason that

a. assessee is carrying on educational activity,

b. section 2 (15) does not also prescribe such condition,

c. the assessee does not derive any profit looking at the excess of income or expenditure which is also meager, and

d. All the fees charged by the assessee are for attainment of the ultimate object of the assessee of educational activities.

13. In view of the above facts we direct the Ld. CIT to restore the registration granted to the assessee trust under section 12A A of the income tax act. We also clarify here that coordinate bench has set aside the assessment order passed by the Ld. assessing officer for assessment year 2005 – 06 and 2008 – 09 to the file of the Ld. assessing officer with certain directions which may be carried out considering the decision of the Hon’ble Supreme Court stated above. In the result ITA No. 4554/del/2012 filed by the assessee is allowed.

ITA No 4555 / Del/2012 for AY 2006-07

14. This appeal is filed by the assessee against the order of the ld CIT(A)-II, Dehradun dated 02.07.20 12 for the Assessment Year 2006-07.

15. The assessee has raised the following grounds of appeal in ITA No. 4555/Del/2012 for Assessment Year 2006-07 :-

“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in framing the impugned assessment order and that too without complying the mandatory conditions of section 147 to 151 of the Income Tax Act, 1961 and reopening of the case and framing the impugned assessment order is bad in law and beyond the jurisdiction of the Ld. A.O.

2. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making dis allowance of Rs. 23,71,886/- out of salary claimed and that too relying upon the assessee’s case for AY 2008-09

3. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming the action of Ld. AO in holding that assessee society has been running institution on commercial basis and has further erred in taxing the income/surplus of Rs.20,76,171/- shown by the assessee, more so when Ld. CIT(A) has granted the benefit of exemption u/s 11 & 12 of the Act and Ld. CIT(A) further erred in not granting the exemption u/s 10(23C)(iiiad) or u/s 10(23C)(vi) to the appellant society.”

16. For assessment year 2006 – 07 The Ld. assessing officer for the similar reasons as stated by the assessing officer in his order for assessment year 2008 – 09 in case of the assessee has reopened the assessment of the assessee by issuing notice under section 148 of the income tax act on 06/10/2010. Subsequently against the returned income filed on 21/07/2006 declaring nil income assessment under section 143 (3), read with section 147 of the income tax act, 1961, was framed denying the exemption to the assessee under section 11 and 12 of the act. Further, the Ld. assessing officer has also noted that a tax evasion petition (TEP) was received alleging that the salary expenses incurred by the assessee have been inflated as the amount of salary of Rs. 237 1886/– has been paid in cash and no subscription to the employees Provident fund has been shown, therefore the amount was disallowed. Consequently, the income of the assessee was assessed at Rs. 444 8057/-. The assessee preferred an appeal before the Ld. CIT (A) who vide order dated 02/07/20 12 upheld the reopening. However, decided the issue of taxability on the pattern of direction given for assessment year 2008 – 09 of his order.

17. The assessee, aggrieved with the order of the Ld. CIT (A) has preferred an appeal before us raising grounds against the reopening of the assessment as well as regarding dis allowance of salary and claiming exemption under section 11 and 12 of the income tax act.

18. The Ld. authorized representative reiterated that the identical issue arose in the case of the assessee for assessment year 2005 – 06 and the coordinate bench has passed order for assessment year 2005 – 06 and 2008 – 09 setting aside the issue to the file of the assessing officer. The Ld. departmental representative Lee supported the orders of the lower

19. We have carefully considered the rival contentions and also perused the orders of the lower authorities. So far as the issue of reopening of the assessment is concerned, no arguments were advanced before us by the Ld. authorized representative. Therefore ground No. 1 of the appeal of the assessee is dismissed.

20. Regarding the ground No. 2 and ground No. 3 of the appeal of the assessee. We have carefully perused the order of the coordinate bench where the identical issue was considered in paragraph No. 2, where the salary was disallowed. On the ground that employees Provident fund has not been paid as well as the denial of deduction under section 11 and 12 of the income tax act were considered. The coordinate bench has set aside the whole issue back to the file of the Ld. assessing officer vide para No. 3 of that order. In view of this we also set aside ground No. 2 and 3 of the appeal of the assessee back to the file of the Ld. assessing officer with similar direction as contained in that paragraph No. 3 of the order of the coordinate bench. In the result ground No. 2 and 3 of the appeal of the assessee is allowed with about direction.

21. In the result ITA No. 4555/del/2012 filed by the assessee for assessment year 2006 – 07 is partly allowed for statistical purposes.

ITA No. 4556/del/2012/assessment year 2007-08

22. This appeal is filed by the assessee against the order of the LD CIT (A)-II, Dehradun dated 02.07.20 12 for the Assessment Year 2007-08.

23. The assessee has raised the following grounds of appeal:-

“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in framing the impugned assessment order that too without complying the mandatory conditions of section 147 to 151 of the Income Tax Act, 1961 and reopening of the case and framing the impugned assessment order is bad in law and beyond the jurisdiction of the Ld. A.O.

2. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs. 18,68,341/- out of salary claimed and that too by relying upon the assessee’s case for AY 2008-09.

3. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making dis allowance of Rs. 2,29,077/- out of depreciation claimed on buildings and that too by relying upon the assessee’s case for AY 2008-09.

4. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs. 14,02,719/- on account of interest and that too by wrongly observing that the society has utilized the loan amount for non educational purposes and by relying upon the assessee’s case for AY 2008-09.”

24. Brief facts in the case for assessment year 2007 – 08 are similar to the facts stated in assessment year 2008 – 09. The parties before us are have also submitted that there is no change in the facts or circumstances of the case, as compared to the assessment year 2008 – 09. They have also stated that their arguments also remained the same and coordinate bench has already set aside this issue back to the file of Ld. assessing officer for assessment year 2008 – 09. Therefore the issue is in appeal for this year may also be set aside to the file of the Ld. assessing officer with similar direction.

25. We have carefully considered the rival contention and also perused the orders of the lower authorities and we are also convinced that the facts of the assessee for assessment year 2008 – 09 as well as for this assessment year are similar. Therefore we also following the decision of the coordinate bench for assessment year 2008 – 09 in the assessee’s own case set aside the whole issue back to the file of the Ld. assessing officer to decide it afresh with a similar direction as contained in paragraph No. 3 of that order. In the result appeal of the assessee is allowed with about direction.

26. In the result ITA No. 4556/del/2012 for assessment year 2007-08 is allowed for statistical purposes.

Order pronounced in the open court on 16/10/2017.

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