Section 10 (23C) (iiiad) Total annual receipts of each institution should be taken separately for the benefit of tax exemption

M/s. Vivekanand Society of Education and Research Vs CIT (Jammu & Kashmir High Court)

Where there are more than one such institutions, which are under a particular society or trust, such as the assessee society in the present case, the aggregate annual receipts of each of the educational institutions would have to be considered separately and not together. Thus, if there are two institutions A and B and if the aggregate annual receipts of the Institution A is less than Rs. 1.00 crore, then the income received by a person (such as the assessee society) on behalf of the Institution A, would not be included in the total income of that person (such as the assessee society). At the same time, if the aggregate annual receipts of Institution B exceeds Rs. 1.00 crore, then any income received by any person on behalf of Institution B would be included in the total income of that person. Similarly, by taking this logic further, if neither Institution A nor Institution B has aggregate annual receipts of Rs. 1.00 crore or more, any income received by any person on behalf of these institutions, would not form part of the total income for the purposes of income tax.

FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-

1. This appeal by the assessee, (Vivekanand Society of Education and Research, Kachi Chawani, Jammu), (hereinafter referred to as ^„the assessee society‟), is directed against the order dated 13.02.2014 passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar, in ITA No. 305 (Asr)/2010 pertaining to the assessment year 2005-06.

2. On 16.09.2014 when this appeal was admitted to hearing, the following questions of law were framed for consideration of this Court:-

“A) Whether on the facts and circumstances of the case, the Tribunal is correct in law in holding that exemption in terms of provisions of Section 10 (23C) (iiiad) of the Income Tax Act, 1961 is not available to the educational institutions though the annual receipts of each of the educational institution is less than prescribed limit of Rs. 1.00 crore?

B) Whether on the facts and circumstances of the case as strict interpretation is required to be given to sub-clause (iiiad) of Section 10(23C) of the Income Tax Act, 1961 the Hon‟ble Tribunal is justified in law in holding that the receipts of both the institutions required to be clubbed, though each of the educational institution is under separate Managing Committees and there is no control of the Appellant?”

3. Essentially both the above questions relate to the interpretation to be given to Section 10 (23C) (iiiad) of the Income Tax Act, 1961.

4. The assessee society has two institutions – (1) Vivekanand College of Education, Kathua, and, (2) Vivekanand Institute of Education, Training & Research, Lakhanpur. Both these institutions individually had aggregate annual receipts of less than Rs. 1 crore in the year in question. However, if the two receipts are clubbed, then they would exceed the sum of Rs. 1 crore, which has been prescribed under Rule 2BC of the Income Tax Rules, 1962, (hereinafter referred to as ^„the said Rules‟).

5. The questions, which have been framed, arise in the context of total annual receipts of Rs. 98,48,150/- having been received by the Vivekanand Institute of Education & Research, Lakhanpur and the aggregate annual receipts of Rs. 63,56,365/- of the Vivekanand College of Education, Kathua. Individually the aggregate annual receipts of these institutions are below the prescribed limit of Rs. 1.00 crore.

6. The Assessing officer clubbed the aggregate annual receipts of these two institutions to arrive at the figure of Rs. 1,62,04,515/- which was in excess of Rs. 1.00 crore and, thereby came to the conclusion that the income in the hands of the society received on behalf of these institutions was to be included in the total income of the society and, consequently, after deducting the expenditures from the aggregate annual receipts, he arrived at the surplus figure of Rs. 69,27,948/- as income in the hands of the assessee society, which had been received by it on behalf of the said two institutions. The Assessing officer was of the view that since the sum total of the receipts of the two institutions clubbed together exceeds Rs. 1.00 crore, this income was not of the kind mentioned in Section 10 (23C) (iiiad) of the said Act and, therefore, was taxable in the computation of total income of the assessee society.

7. This view was, of course, rejected by the Commissioner of Income Tax (Appeals) when the assessee society appealed against the assessment order dated 31.12.2008. The CIT (A), by virtue of his order dated 26.04.2010 took the view that, the aggregate annual receipts of the two institutions cannot be clubbed together for the purposes of Section 10 (23C) ( iiiad) of the said Act. He was of the view that if each of these institutions qualify in the sense that their aggregate annual receipts taken individually are less than Rs. 1 crore, then any income that may be received by the assessee society on behalf of the said institutions would not form part of the total income, and, therefore, would not be subject to income tax.

8. We may point out at this stage that initially the assessee society had not filed any return of income in respect of the said assessment year because, in its view, it had no taxable income in its hands. The Assessing officer issued notice under Section 148 of the said Act and in response to that notice, the assessee society filed a nil return of income which was thereafter assesseed under Section 143 (3) of the said Act and, it is in the course of such assessment that the Assessing officer took the view, which we have already indicated above. That view was over turned by the CIT(A).

9. Being aggrieved, the revenue went in appeal before the Income Tax Appellate Tribunal, which, after considering the arguments on both sides, agreed with the revenue and the Assessing officer and set aside the order of the CIT (A) on this aspect of the matter. Now the assessee society is in appeal against the impugned order dated 13.02.2014 of the Tribunal and the above mentioned questions had been framed for our consideration.

10. We have also pointed out that essentially the two questions can be reduced to one question and, that is, “ whether the aggregate annual receipts of the said two institutions are to be clubbed for the purposes of Section 10 (23C) (iiiad) or not ?

11. Before we analyze the relevant provisions, it would be necessary to set them out. Section 10 (23C) (iiiad) reads as under:-

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included –

xxxx xxxx xxxx xxxx xxxx xxxx

(23C) any income received by any person on behalf of-

xxxx    xxxx     xxxx   xxxx xxxx xxxx xxxx

(iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; or

xxxx              xxxx             xxxx        xxxx                     xxxx”

12. Rule 2BC of the said Rules, which prescribes the limit of Rs. 1.00 crore, to the extent relevant, reads as under:-

“2BC Amount of annual receipts for the purposes of sub-clauses (iiiad) and (iiiae) of clause (23C) of section 10

(1) For the purposes of sub-clause (iiiad) of clause (23C) of section 10, the amount of annual receipts on or after the 1st day of April, 1998, of any university or other educational institution, existing solely for educational purposes and not for purposes of profit, shall be one crore rupees.

xxxx xxxx xxxx xxxx xxxx                                       xxxx.”

13. On a plain reading of the above provisions, it is evident that any income received by any person on behalf of any University or other educational institution existing solely for educational purposes and not for purposes of profit, if the aggregate annual receipts of such University or educational institution do not exceed the amount of aggregate receipts, as may be prescribed (which is Rs. 1 crore as per Rule 2BC of the said Rules), would not be included in the total income of that person.

14. It is not in issue that ^„the person‟ in the facts of the present case has reference to the assessee society. It is also not in issue that the expression ^„educational institution‟ has reference to the two institutions of the assessee society. It is also not disputed that these two institutions exist solely for educational purposes and not for purposes of profit. It is, therefore, clear that there is a distinction between the expression ^„any person‟ and ^„educational institution‟, and that the two are not the same. Had it been the intention of the legislature to have limited the scope of the provision to the interpretation which has been given by the Tribunal, it could easily have said that, if the aggregate annual receipts of any person from all institution(s) do not exceed Rs. 1.00 crore then the income derived there from would not be included in the total income of that person. But, this is not the case here. The reference here is pointedly to the ^„aggregate annual receipts‟ of the educational institution. The expression, ^„educational institution‟ and ^„any person‟ do not refer to the same entity and are distinct and different insofar as Section 10 (23C) (iiiad) of the said Act is concerned.

15. In our view, therefore, where there are more than one such institutions, which are under a particular society or trust, such as the assessee society in the present case, the aggregate annual receipts of each of the educational institutions would have to be considered separately and not together. Thus, if there are two institutions A and B and if the aggregate annual receipts of the Institution A is less than Rs. 1.00 crore, then the income received by a person (such as the assessee society) on behalf of the Institution A, would not be included in the total income of that person (such as the assessee society). At the same time, if the aggregate annual receipts of Institution B exceeds Rs. 1.00 crore, then any income received by any person on behalf of Institution B would be included in the total income of that person. Similarly, by taking this logic further, if neither Institution A nor Institution B has aggregate annual receipts of Rs. 1.00 crore or more, any income received by any person on behalf of these institutions, would not form part of the total income for the purposes of income tax.

16. This is our opinion and view upon a plain reading of the provisions. We are, of course, not alone insofar as this interpretation is concerned. The High Court of Karnataka has considered this very issue in its decision in the case of The Commissioner of Income Tax and Deputy Commissioner of Income Tax v. M/S Children Education Society, (2013) 358 ITR 373 (Kar). In that decision, several questions had been framed. We are concerned with question nos. 2 and 3, which are as under:-

“ 2. Whether, on the facts of the case, the Tribunal is correct in holding that the exemption in terms of provisions of Section 10(23C) (iiiad) of Income Tax Act, 1961, is available to the respondent- assessee as annual receipts of each of the institutions of the respondent- society is less than the prescribed limit under the said provision ?

3. Whether the Tribunal is correct in holding that the exemption in terms of Section 10(23C) (iiiad) of Income-Tax Act, 1961, is allowable ?”

17. Those are the exact issues which arise in the present case also. The answer given to these questions is that the aggregate annual receipts of other educational institutions means the total annual receipts of each educational institution, taken separately and not clubbed together. Paragraph nos. 23, 24 and 25 of the said decision makes the position very clear:-

“23. No doubt, education has become a business, a very profitable business also. But it requires huge investment. It is the duty of the Government to provide education to all its citizens, as the Government is not able to shoulder the responsibility completely. Therefore, the field of education is now thrown open to private organizations. But for throwing open the field to the private operators, probably, the country would not have achieved in the field of education what it has achieved. Therefore, lot of funds are invested in running these educational institutions, either by creating a Society or a Trust. In course of time, they have expanded their activity providing course in various subjects at various levels and for that purpose they have established more than one educational institution. Each educational institution is a separate entity controlled under various statutes for various purposes. May be the Management of these educational institutions would be in the hands of the Societies or the Trust, but for all other purposes they are different, independent entities. That is the reason why Section 10 (23)(c) is worded as under:

“Any income received by any person on behalf of…”

24. Here “any person” refers to the assesseee and “on behalf of” refers to such institutions. It may be an University, it may be an educational institution, it may be a hospital or other institutions of similar nature. As all such institutions are independent entity and they generate income and when that income is received by the assesseee, it becomes the income in the hand of the assesseee and it is such income which is sought to be excluded while computing the total income of the assesseee under Section 10. The test prescribed under the aforesaid provision is not the income of the educational education. It is the aggregate annual receipts of such educational institution that is prescribed at Rs.1 crore. Therefore, irrespective of the expenditure incurred by those institutions, the exemption is based on the total receipts. Even if the word “aggregate” has to be understood as suggested by the Revenue as the annual receipts of such educational institutions put together, probably, the said provision regarding exemption would be of no use at all. Especially, if the society is running a medical college or any engineering college or other professional courses, then the annual receipt of each institution would run to few crores and therefore, the very object of granting exemption to such genuine institution would be lost. Therefore, the word “aggregate annual receipt” has to be understood with the context in which it is used and the purpose for which the said provision was inserted, keeping in mind, the Scheme of the Act. Therefore, if an assesseee is running several educational institutions, if any of them is wholly or substantially financed by the Government, then the income from such educational institution received by the assesseee is not included while computing his total income. Similarly, income from each educational institution if they are not receiving any aid from the Government wholly or substantially in respect of which the aggregate annual receipt do not exceed Rs.1 crore received by the assesseee, is also not included while computing annual total income of the assesseee.

25. Clause (vi) makes it clear that if educational institution do not fall under either of those two categories and still such educational institutions are also entitled to the exemption, provided such institutions are approved by the prescribed authority. Therefore all these three provisions apply under three differed spheres. Otherwise, there was no necessity for the Legislature to introduce these three provisions. In that view of the matter, the finding recorded by the Tribunal that aggregate annual receipt of other educational institution means, total annual receipt of each educational institution, is correct and it does not call for any interference. Therefore the substantial questions of law No.2 and 3 is answered in favour of the assesseee and against the revenue.”

18. We entirely agree with the conclusion arrived at by the Karnataka High Court in the case of Children’s Education Society (supra).

19. In view of the foregoing, the questions are answered in favour of the assessee and against the revenue. As a consequence, the decision of the Tribunal on this aspect of the matter is set aside and that of the CIT (A) is upheld. The result would be that the addition of Rs. 69,27,948/- made to the taxable income of the assessee society would stand deleted.

20. The appeal is allowed as above. There shall be no order as to costs.