Section 10(22) exemption is allowable to American School of Bombay Education Trust

DCIT Vs American School of Bombay Education Trust (ITAT Mumbai)

Conclusion: Assessee-American School of Bombay Education Trust was eligible for income tax exemption u/s. 10(22) as assessee had reasonable cause and justified the expenses claimed in the Income and Expenditure statement filed along with the return of income.

Held:  AO noted that assessee-American School of Bombay Education Trust had not produced the books of account or documents to prove its claim of exemption made u/s. 10(22) that assessee-trust solely existed for educational purposes. He stated that even the Directorate of Enforcement made enquiries and pointed out certain inconsistencies. Even CBDT had rejected the application made by assessee u/s. 10(23C)(vi) and in absence of registration u/s. 12A of the Act, assessee was not entitled for exemption u/s. 11. Therefore, AO had rightly denied the claim of exemption to assessee u/s. 10(22). It was noted infamous flood hit occurred in Mumbai caused damages to the documents as well as various records, articles and goods lying in assessee’s premises which could be considered as a reasonable cause. Moreover, from the heads of expenses claimed in the Income and Expenditure statements, it was evident that these were the expenses which were necessarily required to have incurred for the purposes of running the school. Without incurring these expenses, it was not possible to run a school. Therefore, AO was not justified in disallowing the entire expenses claimed in the Income and Expenditure statement filed along with the return of income, merely on the ground that assessee could not furnish the details and supporting evidence.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the Revenue and Cross Objection by assessee are arising out of the order of Commissioner of Income Tax (Appeals)-I, Mumbai, in appeal No. CIT(A)-I/IT-E2(88)/2013-14 vide dated 27-06-2014. The Assessment was framed by the Asst. Director of Income Tax(Exemption)-II(2), Mumbai for the AY 1998-99 vide order dated 28-03-2013 under section 143(3) read with section 253 of the Income Tax Act, 1961 (hereinafter ‘the Act’).

2. The only issue in this appeal of Revenue is against the order of CIT(A) granting exemption u/s. 10(22) of the Act by treating the assessee as educational institute, existed purely for education. For this, Revenue has raised the following four effective grounds:

1. “Whether on the facts and circumstances of the case, and in law, the CTT(A) was justified in directing the AO to grant exemption u/s. 10(22) of the I.T. Act, 1961 inspite of the fact that the assesses cannot be treated as educational institution for exemption as the activities of the assessee are business in nature”

2. “Whether on the facts and circumstances of the case, and in law, the CIT(A) was justified in directing the AO to grant exemption u/s. 10(22) of the I.T. Act, 1961 inspite of the fact that the assessee trust is a beneficiary trust whose beneficiaries are foreigners.”

3. “Whether on the facts and circumstances of the case, and in law, the CIT(A) was justified in directing the AO to grant exemption u/s. 10(22) or the I,T. Act, 1961 inspite of the fact that the assessee way receiving part fees from students in India and part of fees was collected in foreign exchange abroad by an arrangement with an organization SAIESF (South Asia International Education Service Foundation), Princeton, New Jersey, USA) which is out of purview of audit in India and how the funds are utilized by the said organization cannot be ascertained.

4. “Whether on the facts and circumstances of the case, and in law, the CIT(A) was justified in directing the AO to grant exemption u/s. 10(22) of the I.T. Act, 1961 inspite of the direction given by CBDT in F.No.l94/16/77-IT(AI) dated 29/10/1977 – CBDT Bulletin Tech XXIII/330 wherein it has been clearly stated that where, if surplus can be used for non-educational purposes, it cannot be said, that the institution is existing solely for educational purposes and such institution will not be liable for exemption under section 10(22]”.

3. Briefly stated facts are that original assessment was framed by the AO u/s. 143(3) read with section 147 vide order dated 27-02-2006, denying exemption u/s. 10(22) of the Act by proceeding on the basis that assessee has claimed exemption u/s. 10(23C) of the Act, which was rejected by CBDT. The Tribunal restored the matter to the file of AO in ITA No. 2582/Mum/2008, vide order dated 31-03-2011, directing the AO for Denovo adjudication the issue with reference to Section 10(22) of the Act. The Tribunal categorically noted and ordered in the following manner:

“2. At the outset, learned Counsel for the assessee submitted that as far as assessment year 1998-99 is concerned, the entire proceedings proceeded on the premise that the assessee had claimed exemption under section 10(23C)(vi), whereas, the assessee was entitled to exemption under section 10(22). He, therefore, submitted that the matter needs to be restored back to the file of Assessing Officer for examining assessee trust’s income in the light of the provisions contained under section 10(22) of the Act as the same has not been considered by the Assessing Officer.

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5. We have heard rival contentions and gone through the facts and circumstances of the case. the rival submissions, perused the orders of the lower authorities and the materials available on record. In view of the submissions noted above, we set aside the impugned order of the learned CIT(A) for assessment year 1998-99 and restore the matter back to the file of Assessing Officer for deciding the issue denovo with reference to section 10(22) in accordance with law”.

3.1. The AO framed assessment u/s. 143(3) read with section 253 of the Act vide order dated 28-03-2013, just repeating the earlier assessment order dated 27-02-2006. The assessee carried the mater before the CIT(A) and CIT(A) passed order u/s. 251 of the Act, after considering the submissions of assessee vide order dated 27-06-2014, allowed the claim of exemption u/s. 10(22) of the Act vide paras 7 to 7.5 as under:

“7. I have considered the facts and circumstances of the case, submissions of the appellant and the assessment order. It is noticed that the assessment proceedings were restored back to the A.O. for deciding the issue of taxability and computation of income in reference to section 10(22) of the I.T. Act, 1961. It has been noted by A.O. on page 3 of the assessment order as also reproduced above that “the assessee was engaged in imparting education but was carrying out business activity for the purpose of earning profit as per findings given in the original assessment order passed on 27.02.2006‘.  The A.O. has further concluded that “on the facts and circumstance of the case, the Assessing Officer has assessed the income of the assessee at ₹ 17,50,02,804/-under various receipts. In view of the above, the assessee is not entitled for exemption u/s. 10(22) for the income assessed in the original assessment order’. (para 4 of the assessment order). The specific direction under the order of Hon’ble Tribunal dated 31.03.2011 for deciding the issue of exemption u/s.10(22) has not been addressed by the A.O. The A.O. has relied on the assessment order which has been rejected/ restored back to A.O. by the Hon’ble Tribunal on the issue of exemption u/s. 10(22) of the I.T. Act. Therefore reliance placed by the A.O. on the said earlier assessment order and re-endorsing the same without considering the issues in reference to section 10(22) of the I.T. Act is erroneous and void because the Hon’ble Tribunal in ITA No. 2582, 2583, 2584, 2585/Mum/2008 dated 31.03.2011, has categorically noted and ordered in the following manner-

“2. At the outset, learned Counsel for the assessee submitted that as far as assessment year 1998-99 is concerned, the entire proceedings proceeded on the premise that the assessee had claimed exemption under section 10(23C)(vi), whereas, the assessee was entitled to exemption under section 10(22). He, therefore, submitted that the matter needs to be restored back to the file of Assessing Officer for examining assessee trust’s income in the light of the provisions contained under section 10(22) of the Act as the same has not been considered by the Assessing Officer.

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5. We have heard rival contentions and gone through the facts and circumstances of the case. the rival submissions, perused the orders of the lower authorities and the materials available on record. In view of the submissions noted above, we set aside the impugned order of the learned CIT(A) for assessment year 1998-99 and restore the matter back to the file of Assessing Officer for deciding the issue denovo with reference to section 10(22) in accordance with law’.

7.1 It has been reiterated and submitted by the appellant that the relevant provision under which exemption has been claimed by the appellant for the current assessment year (1998-99) is section 10(22) of the I.T. Act. It has further been submitted that the only condition for exemption u/s. 10(22) is existence of institution for educational purposes and not for the purpose of profit. The appellant has submitted details of recognition and affiliation of various courses taught by the appellant, and the ambit of its activities confined to the educational purposes, as summarily reproduced by way of relevant submissions of the appellant above. There is no discussion and material bringing out business activity for the purpose of earning profit so as to deny exemption u/s. 10(22) of the I.T.Act as claimed by the appellant in the assessment order under appeal. The observations contained in the assessment order relating to various additions are mainly connected to tuition fees-Rs.2,02,46,320/- + Rs. 2,02,46,320/-, donations-Rs.5,73,69,137/-, interest income -Rs-1,53,897/- and other income Rs.85,739/- (page 1 of the assessment order) which prima facie do not reflect or denote any activity and income for the earning profit so as to debar the appellant under section. 10(22) of the I.T. Act, 1961.

7.2 Section 10(22) of the I.T. Act, was omitted by Finance (No.2) Act, 1998 w.e.f. 1-4-1998 i.e. was applicable for assessment year 1998-99 (F.Y, ending March,1998) which is the current year under Appeal. Therefore, the reason given by A.O. for denial of exemption u/s 10(22) of the IT Act ‘in absentia’, without taking into account the existence and applicability of section 10(22) is prima facie invalid and contrary to law. In this context, the A.O. has noted on-page 3 of the assessment order that –

“Moreover, it is pertinent to mention here that the predecessor Assessing Officer has passed the assessment order on 27.2.2006, and at that time the said Section 10(22) is not there in the statute book. But on the facts and circumstances of the case, the Assessing Officer-had assessed income of the assesses at Rs.17,50,02,804/- under various receipts. In view of the above, the sssessee is not entitled for exemption u/s.10(22) for the income assessed in the original assessment order.”

7.3 The appellant in its submission has explained that the rejection of exemption u/s. 10(23C) by the CBDT for the appellant, which has later been, granted vide order F.No.CClT/MUM/10(23C)(vi)/152/2007-08 dated 31.03.2008, filed by the appellant during the appellate proceeding, placed on record, w.e.f. A.Y.2007-08 onwards and irregularities in respect of tuition fees collection which also been condoned by the RBI vide its letter No.FE.CO/NRFAD/796/22.18 /2005-06 dated July 12, 2006 para 3 by stating that “In view of the circumstances explained by you, It has been decided to condone the lapse”, as such have no bearing to the exemption u/s.10(22) of the I.T. Act for this particular assessment year. As per the legal provisions of section 10(22) under the Income Tax Act,196l, applicable for A.Y.1998-99, the requirements for exemption are clearly laid down. The condition precedent for claiming exemption u/s.10(22) was that ‘the_educational institution_must_exist solely for educational purposes and not for profit and once this condition was fulfilled the fact that the recipient of income was a person other than the educational institution would not affect the position’. I.T.O. vs. Shri Bhuvanendra College Trust [1983] 4 ITD (Bang.) It was also laid down in Shanti Devi Progressive Educational Society vs. Asst. Director (1999) 68 ITD (Del.) that – Exemption u/s.10(22) not to be denied_since Revenue could not point out any case where any part of profit/income being diverted for purpose other than for educational purpose. The facts and circumstances of the case of the appellant for claim of exemption u/s.10(22) of the I.T. Act find support and are endorsed by these judicial decisions.

7.4 The legal position viz. section 10(22) of the I,T. Act, 1961 in respect of facts and circumstances of the case of the appellant is well settled in the following decisions of the Hon’ble higher Judicial authorities – .

1. Exemption cannot tie denied merely because there is a surplus

– After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes, since the object is not one to make profit. The decisive or acid test is whether on an overall! view of the matter the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity – Aditanar Educational Institution v Addl.  CIT [1997] 90 Taxman 528/224 ITR 310 (SC)

2. Income from any other source will also be exempt, if that income is used for educational purposes – If an institution exists solely for the purpose of education and it derives income from any other source and if that income is used only for the purpose of education, then it will come under section 10(22) – Brahmin Educational Society v. Asstt, CIT  [1996] 89 Taxman 434 (Ker.).

7.5. In view of the above settled positions for applicability of section 10(22) of the I.T. Act, 1961, it is found that me appellant had carried out educational activities -during the year which is not under question either in the assessment order or else and also there are no facts and reasons pointed out by A.O. showing that the appellant has carried out business activities for earning profit. Under the circumstances, it is held that the appellant Is entitled for exemption under section.10(22) of the I.T.Act, 1961 for the year under this appeal i.e, A.Y. 1998-99.

In view of above and for the reasons therein, Ground Nos.9 to 20 of appeal are allowed”.

Aggrieved, Revenue is in second appeal before the Tribunal.

4. Before us, Ld.CIT-Departmental Representative Shri Anadi Varma, first of all took us through the assessment order and stated that the assessee has not produced the books of account or documents to prove its claim of exemption made u/s. 10(22) of the Act that the assessee-trust solely existed for educational purposes. He stated that even the Directorate of Enforcement made enquiries and pointed out certain inconsistencies. Even the CBDT has rejected the application made by assessee u/s. 10(23C)(vi) of the Act and in absence of registration u/s. 12A of the Act, the assessee was not entitled for exemption u/s. 11 of the Act. Therefore, he argued that the AO has rightly denied the claim of exemption to assessee u/s. 10(22) of the Act. It was the finding of AO that the assessee is unable to produce any evidence relating to correctness of its accounts of South Asia International Education Service Foundation (SAIESF). AO observed that the expenditure claimed by assessee incurred by SAIESF on behalf of assessee is not allowable as the accounts of SAIESF were not audited by CPA in USA or by any Chartered Accountant in India. According to him, the completeness and authenticity of the accounts could not be proved with regard to the claim made by assessee. Accordingly, Ld. CIT-Departmental Representative supported the assessment order and urged to restore the order of Assessing Officer.

5. On the other hand, Ld. Counsel for the assessee Shri Porus Kaka argued that the assessee is eligible for exemption u/s. 10(22) of the Act considering that it fulfills the requirement that it is an institution existing solely for educational purposes and not for the purpose of profit. It was contended that assessee is following international curriculum. The International Baccalaureate (IB) program was established at ASB in 1998.

ASB has been authorised by the International Baccalaureate, an international educational foundation headquartered in Geneva, Switzerland to offer the IB Primary Years Program (PYP) and the IB Diploma Program, and is thus, recognized as an ‘IB World School’. The IB Diploma, is recognized by universities across the world. It has also been recognized in India since 1983 by the Association of Indian Universities (AIU) an organization responsible for determining equivalency of foreign degrees/certificates in India, as an entry qualification to Indian universities. It equates the IB Diploma Program with grade 12 (10+2) of an India Board Assessment.

5.1. Ld. Counsel for the assessee drew our attention through assessee’s Paper Book, wherein the following documents are enclosed:

It was argued by the Ld. Counsel that ASB has received full accreditation from middle state assessment of college and schools of USA and MSA is one of the six regional accrediting organisations that together serve institutions in the USA in many other countries around the world.

5.2. Ld. Counsel for the assessee also stated that assessee has maintained complete records, but books of account which were damaged in the floods i.e., in the unprecedented heavy rainfall which struck Mumbai on 26th July, 2005. He stated that the school is located at Bandra Kurla Complex, a low lying area, which is bordered by the Mithi River. It was stated that the entire schools area including the basement where the documents were stored was destroyed due to water logging caused from flooding of the Mithi River. Many documents/computers containing records including supporting of expenses were destroyed. The assessee has also filed First Information Report (FIR) with the local police and copy of FIR is now enclosed in assessee’s Paper Book at page No. 78. Ld. Counsel for the assessee stated that the ledger accounts extracted from computer were produced before the AO and vouchers were destroyed in the flood could not be produced. Ld. Counsel also submitted that this issue has been considered by the Hon’ble Delhi High Court in W.P.(C) No. 2186/2014 and CM No. 4561/2015, dated 13th August, 2015 has given a finding that the assessee exists solely for the educational purposes and not for the purpose of profit and the relevant finding in para 6, reads as under:

“6. The only question that survives before us is whether we remit the matter to the CBDT once again for it to decide the question of approval or on the basis of available material, we direct the CBDT to grant the approval. We have noted that in Digember Jain Society (supra) this court had in fact issued a mandamus directing the revenue to grant exemption to the petitioner therein under section 10(23C)(vi) of the said Act. The court, while doing so, also directed that the concerned authority would be free to incorporate stipulations and conditions in terms of the third proviso. We find that it is an admitted fact in the present case that the petitioner exists solely for educational purposes and not for the purposes of profit. These are the only requirements for grant of approval and, therefore, in the same manner as in the case of Digember Jain Society (supra) we issue a writ of mandamus directing the respondents to grant approval to the petitioner under section 10(23C)(vi) of the said Act for the Assessment Years 1999-2000 to 2001-02. However, we are making it clear that as the assessments for the three years in question are open, the Assessing Officer can certainly go into the question as to whether the conditions stipulated in the third proviso and the 13th proviso to Section 10(23C)(vi) of the said Act have been met and appropriate orders can been passed by the Assessing Officer in accordance with law. The writ petition is allowed to the aforesaid extent. There shall be no order as to costs”.

It was contended that the SLP filed by the Department against the judgment of Hon’ble Delhi High Court was dismissed by the Hon’ble Supreme Court vide order dated 18-07-2016. The copies are enclosed in assessee’s case law Paper Book. Ld. Counsel also drew our attention to the judgment of Hon’ble Bombay High Court in W.P. Nos. 4333 to 4336 of 2013, wherein the Hon’ble High Court has decided vide its judgment dated 12-11-2013, wherein the issue relating to AYs 1998-1999, 1999-2000, 2000-2001 and 2001-2002, regarding exemption application filed with CBDT u/s. 10(23C)(vi) of the Act. The Hon’ble High Court while giving finding on the aspect of claim of exemption u/s. 10(22) of the Act for the relevant assessment year 1998 has also set aside the order of lower authorities and direct the CIT(A) to frame the appellate order afresh vide para 7 as under:

“7. So far as assessment order dated 28 March 2013 for the A.Y. 1998-1999 is concerned, there was no direction by the Tribunal to await the result of any application made to the CBDT. Thus, there is no disobedience of the order dated 31 March 2011 of the Tribunal. In the circumstances, so far as the order dated 28 March 2013 of the Assessing Officer for the A.Y. 1998-1999 is concerned, the Petitioners are at liberty to avail of the remedies available under the Act. However, in view of the fact that these petitions were pending in the Court, the delay in filing an appeal against the order dated 28 March, 2013 in respect of A.Y. 1998-1999 before the Commissioner of Income Tax (Appeals) is condoned, if it is filed within a period of three weeks from today before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) is directed to entertain the appeal, if so filed, on merits”.

6. We have gone through the facts and circumstances of the case. We find from the facts of the case that during the infamous flood hit occurred in Mumbai, the assessee’s school being located in a low lying area as a result, flood water entered the school premises and caused damages to the documents as well as various records, articles and goods lying in their premises. The copies of photographs also reveal these facts of damages. From the photographs we find that damages to the records and documents and goods lying in the premises are clearly visible. Therefore, assessee’s liability to furnish the supporting documentary evidences was caused by these circumstances which could be considered as reasonable cause. Moreover, from the heads of expenses claimed in the Income and Expenditure statements it is evident that these are the expenses which are necessarily required to have incurred for the purposes of running the school. Without the teachers and staff to whom salaries are required to be paid, school administration cannot be run. Similarly without the electricity the school cannot function. The school premises are taken by assessee on rental basis without which one cannot run a school. Similarly repairs and maintenance expenses, legal and professional fees, general expenses, administration expenses etc., are all found to be in relation to the running of school. Without incurring these expenses, it is not possible to run a school. Therefore, the AO in our view was not justified in disallowing the entire expenses claimed in the Income and Expenditure statement filed along with the return of income, merely on the ground that assessee could not furnish the details and supporting evidences. The AO has also not appreciated the fact that the records of assessee pertaining to these expenses were destroyed during the worst flood hit of Mumbai. Despite the fact that the records were damaged in the flood and also filing of FIR copy with the AO, the AO is found simply disbelieved the assessee’s claim and merely on the ground that the assessee has not reported the damage of computer the details could be extracted, treated the entire expenditure as inadmissible. But without specifically pointing out any inadmissible expenses, the AO has also to appreciate the fact that for running the school, the expenses are necessarily to be incurred without which the school cannot be run. Therefore, we are of the view that in this case the CIT(A) has rightly directed AO to allow these expenses.

6.1. In view of the above facts, we have gone through the provisions of Section 10(22) of the Act (now omitted with effect from 01-04-1999 by the Finance (No.2) Act, 1998) on examination of this provision of the Act, the conditions precedent to the availability of exemption to an educational institute upto AY 1998-99, the year under consideration before us in the case of assessee, can be stated as under:

“(a) the educational institution must actually exist for the application of the said section and the mere taking steps would not be sufficient to attract the exemption;

(b) the educational institution need not be affiliated to any university or Board, in fact a society need not itself be imparting education and it is enough if it runs some schools or colleges;

(c) the educational institution must exist solely for educational purposes and not for purposes of profit but merely because there is a surplus, that is to say, a surplus of receipts over expenditure, it cannot be said that the educational institution exists for profit;

(d) an entity may be having income from different sources but if a particular income is from an educational institution which exists solely for educational purposes and not for purposes of profit, then that income would be entitled to exemption and further the income should be directly relatable to the educational activity”.

6.2. We find that even the Hon’ble Supreme Court in the case of American Hotel & Lodging Association, Educational Institute Vs. CBDT [301 ITR 86 (SC)] has considered the entitlement to claim exemption u/s. 10(22) of the Act in respect of its various amounts of income from the following sources in India:

(a) Conducting various courses and certification programmes in hospitality management and operations;

(b) Providing educational and training materials;

(c) Conducting seminars, workshops and other programmes;

(d) Providing training, course materials and instructional resources to the in-house faculty of various institutions”.

6.3. In view of the above interpretation by the Hon’ble Supreme Court and given the facts of the case, we are of the view that unlike the present Section 10(23C)(vi) of the Act, there are no conditions in relation to obtaining approval, audit of accounts, application of income etc. The provisions of Section 10(22) of the Act for claiming exemption, the requirement is that the university or the educational institute must exist solely for educational purposes in India. In other words, the recipient of the income must have the character of an educational institute in India and its character outside India or it being a part of university existing outside India is not relevant for deciding whether its income would be exempt u/s. 10(22) of the Act or not. In the present case, there is no charge by AO or now by Ld.CIT-Departmental Representative that the assessee does not exist solely for the purpose of education, hence we find no infirmity in the order of CIT(A), allowing the claim of exemption to assessee-institution u/s. 10(22) of the Act. Accordingly, we dismiss the appeal of Revenue.

7. As regards the Cross-objection raised by assessee, Ld. Counsel for the assessee has not argued the same. Hence, the same is also dismissed as not pressed.

8. In the result, the appeal of Revenue as well as the Cross-objection of assessee, both are dismissed.