Council For The Indian School, Certificate Examinations v. Director General Of Income Tax

THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 23.05.2014 + W.P.(C) 2184/2013 COUNCIL FOR THE INDIAN SCHOOL, CERTIFICATE EXAMINATIONS versus DIRECTOR GENERAL OF INCOME TAX ..... Petitioner ..... Respondent Advocates who appeared in this case:For the Petitioner : Mr M.P. Rastogi with Mr K.N. Ahuja. For the Respondent : Mr Sanjeev Sabharwal, Sr. Standing Counsel with Ms Ruchi Bhatia, Jr. Standing Counsel. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1.The present writ petition has been filed under Article 226/227 of the Constitution of India, by the Council for the Indian School Certificate Examinations. The petitioner has challenged the order dated 07.06.2012 (hereinafter referred to as “impugned order”) passed by the Director General of Income Tax (Exemptions), (hereinafter referred to as “DGIT(E)”), refusing to grant exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the AY 2008-09 onwards, to the petitioner. 2.The Petitioner is a society registered under the Societies Registration Act XXI of 1860, (Punjab Amendment) Act, 1957 as extended to the Union Territory of Delhi. The petitioner is recognised and listed as a body conducting public examinations under the Delhi School Education Act, 1973. 3.The Petitioner had applied for the approval under Section 10(23C)(vi) of the Act for AY 1999-2000 to 2001-02 to Central Board of Direct Taxes (hereinafter referred to as “CBDT”). The CBDT, by order dated 31.10.2006, rejected the Petitioner's application holding that the Petitioner was not an educational institution but was an examination body which conducts examinations for ICSC and ISC and therefore, could not be granted the exemption as an educational institution under Section 10(23C)(vi) of the Act. 4.The Petitioner states that it had also filed applications for approval under Section 10(23C)(vi) of the Act for AY 2002-03 to 2004-05 and 2005-06 to 2007-08 which have not been disposed of so far. 5.The Petitioner had filed an application for approval under Section 10(23C)(vi) of the Act, for the AY 2008-09 to 2010-11, with the Respondent on 23.11.2007. By an order dated 08.10.2008, the respondent dismissed the application on the ground that the Petitioner is not an educational institution but an examination body conducting examinations for ISCE and ISC. 6.The petitioner filed a writ petition being W.P.(C) No. 4716/2010 in this court challenging the said order dated 08.10.2008. The said writ petition was disposed of by an order dated 20.03.2012, passed by a division bench of this court, whereby it was held that the petitioner is an educational institution as contemplated under Section 10(23C)(vi) of the Act and the matter was remanded to the respondent to pass an order in accordance with law. 7.In compliance of the order of this Court dated 20.03.2012, the Respondent considered the matter and passed the impugned order dated 07.06.2012, whereby the respondent declined to grant the approval under section 10(23C)(vi) of the Act, inter alia, on the ground that the petitioner had failed to justify its claim that it did not exist for the purposes of profit. The respondent further held that the petitioner had conducted its affairs in a systematic manner to earn profits and the same were diverted in a clandestine manner. The Respondent further noticed that the Auditor had in its report, in respect of the Balance sheet of the petitioner relevant for the Financial Year 2008-09 (AY 2009-10), pointed out that there were lapses –while awarding the contract to M/s Ratan J. Batliboi Architects Pvt. Ltd. (hereinafter referred to as “RJB-APL”) for installing IT enabled services and was thus unable to form an opinion on whether the accounts showed a true and fair view. Submissions of the Petitioner Submissions of the Petitioner 8.The Petitioner submits that it is a society established to promote education which includes the promotion of science, literature, the fine arts and the diffusion of useful knowledge by conducting school examinations. 9.Petitioner stated that up to the AY 1998-99, the income of the Petitioner was exempt under Section 10(22) of the Act, which fact was within the knowledge of the Revenue (Income Tax Officer) as intimated by the petitioner by letter dated 31.05.1999 in compliance to query letter dated 21.05.1999, during the registration proceedings under Section 12A of the Act. No assessments were made and/or no demands for income tax were raised for any of the years prior to the AY 1999-2000. The petitioner further submitted that the criteria for exemption under Section 10(22) of the Act, as existing prior to 01.04.1999 was identical to the criteria for exemption under section 10(23C) of the Act. Therefore, the petitioner ought to be granted the said exemption. 10.Petitioner stated that Rule 3 of the Rules and Regulations of the Petitioner allows the application of the income solely for the promotion of its object as set-forth in the Memorandum and also prohibits the transfer of income and property of the petitioner society, directly or indirectly, by way of profit, dividend and bonus to the persons, who at any time are or have been members of the petitioner society and also prohibits the payment of remuneration to its members. Petitioner further stated that none of the portion of its income was spent for other than its objects. 11.Petitioner contended that the Petitioner is an unaided organization and for the purpose of development and expansion, it has to create its own resources. Prior to the Financial Year 2008-09, i.e. AY 2009-10, there was a constant fee charged for some years, but from AY 2009-10, in order to create the resources as required for future expansion, modernization, development and construction of the building, the Petitioner increased the fee and the fee remained constant till the Financial Year 2011-12, i.e. AY 2012-13, but after considering the sufficiency of available resources and the future requirement of funds, the Petitioner from April 2012 had reduced the fee to a great extent and the surplus in various years cannot be made basis for refusal of approval under Section 10(23C)(vi) of the Act. 12.The Petitioner further contended that awarding the contract to RJB-APL in the financial year 2008-09 by agreement dated 05.09.2008, for installing IT enabled services was a commercial transaction and the work was awarded for development, implementation and maintenance of e-enabled system for registration, examination of answer sheets, development of software for facilities management services etc. RJB-APL had maintained their website, collated and disseminated the results of ICSC and ISC for 2009 and had started e-registration and development of related software but on account of various complaints received from school principals about the system not working properly, further payments were not released and RJB-APL also stopped working on development of software with effect from December 2009. The petitioner thereafter demanded a refund of the amount paid to RJB-APL and ultimately succeeded in receiving back `8,24,50,000/-, on 31.08.2012, in full and final settlement of its claims. Submissions of the Respondent 13.The respondent supported the impugned order dated 07.06.2012 and contended that the petitioner was functioning for profit purposes in the garb of education and, therefore, was not entitled to any exemption. The Submissions of the Respondent 13.The respondent supported the impugned order dated 07.06.2012 and contended that the petitioner was functioning for profit purposes in the garb of education and, therefore, was not entitled to any exemption. The activities of the petitioner were not genuine and the same were purely on commercial basis. According to the revenue, the surplus of income over expenditure in the range of 24% to 28% for AY 2005-06 to AY 2008-09, and thereafter 67.87% in AY 2009-10, 71.56% in AY 2010-11 and 69.56% in AY 2011-12, showed that the Petitioner was being run for generation of profit in a systematic and calculated manner year after year and the huge surplus of the petitioner has not been applied towards the achievement of the objectives of the petitioner, which are merely paper clauses. It was submitted that the main object of the Petitioner was to conduct examinations and to award certificates and the petitioner was charging fees as “Registration & Affiliation charges”, “Examination charges”, “Eligibility Charges Class XI”, “Recheck Charges”, etc. for the same. 14.The respondent asserted that the steep hike in the examination fee from ` 460/- to `2100/- per student, further indicated that the petitioner was only a profit making organisation and the subsequent roll back of the fee was an afterthought to get the continued exemption. The learned counsel for the revenue also referred to following table: It was contended that the above table had been prepared after excluding the component of depreciation and including the capital expenditure incurred over the years. This according to the learned counsel indicated the cash flows for the relevant assessment years and substantiated the view of the Prescribed Authority (respondent) that the petitioner was being run to generate surplus and not for the object for which it was established. 15. The respondent also contended that the auditor of the petitioner in his report for the Financial Year 2008-09, had advised investigation of the petitioner’s financial affairs. He also contended that the petitioner entering into agreement with RJB-APL without enquiry reflected its recklessness, as RJB-APL was an architect and not competent to undertake the assignment of software development, which fact has not been disputed by the Petitioner. 16.The respondent further contended that, the fact that the Petitioner had been previously granted exemption under Section 10(22) or 10(23C)(vi) of the Act, does not guarantee that the exemption will apply mechanically for all subsequent assessment years. All proceedings under the Act are independent of each other. According to the procedure provided by the second proviso to the Section 10(23C) of the Act, the Prescribed Authority, after examining the objects and genuineness of the activities of such trust/society, has to satisfy himself as to whether the applicant deserves the approval under Section 10(23C) of the Act. 17.We have heard the learned counsel for the parties. 16.The respondent further contended that, the fact that the Petitioner had been previously granted exemption under Section 10(22) or 10(23C)(vi) of the Act, does not guarantee that the exemption will apply mechanically for all subsequent assessment years. All proceedings under the Act are independent of each other. According to the procedure provided by the second proviso to the Section 10(23C) of the Act, the Prescribed Authority, after examining the objects and genuineness of the activities of such trust/society, has to satisfy himself as to whether the applicant deserves the approval under Section 10(23C) of the Act. 17.We have heard the learned counsel for the parties. 18.The approval under Section 10(23C)(vi) of the Act has been denied to the petitioner for two reasons. First of all, the respondent has concluded that the surplus generated by the petitioner from its activities indicates that the activities of the petitioner are in the nature of business and for the purposes of generating profit. Accordingly, the respondent has held that the petitioner did not qualify the test of existing only for the purpose of education and not for profit. Secondly, the respondent has concluded that the activities of the petitioner were not genuine in view of the fact that the petitioner had released payments amounting to `1838.67 lacs to RJB-APL. The respondent also took note of the observations of the auditor whereby the auditors had concluded that the petitioner had not followed the “General Business Practices” in awarding the contract to RJB-APL. The auditor had also found various lapses in monitoring the execution of the contract by RJB-APL and had concluded that in view of the said lapses as well as in view of the fact that the work done by RJB-APL had not been verified and certified by an IT expert, they were unable to form an opinion as to whether the accounts of the petitioner reflected a true and fair picture. In view of the observations made by the auditor, the respondent concluded that the activities of the petitioner were not genuine. The relevant extract of the impugned order indicating the aforesaid reasons for rejection of the application filed by the petitioner are quoted below:- “9. In view of the discussion held in forgoing paragraph of this order, the applicant’s claim for exemption u/s 10(23C) (vi) for the AY 2008-09 and onwards is rejected on the following grounds:- (i) The generation of huge surplus year after year clearly established that the applicant is in the business of education like any other entrepreneurs and service providers by collecting huge fees from their clients who in this particular case are students of the schools affiliated with the applicant Council. Therefore it is held that the applicant Council is existing for the purpose of profits. established that the applicant is in the business of education like any other entrepreneurs and service providers by collecting huge fees from their clients who in this particular case are students of the schools affiliated with the applicant Council. Therefore it is held that the applicant Council is existing for the purpose of profits. (i) The generation of huge surplus year after year clearly established that the applicant is in the business of education like any other entrepreneurs and service providers by collecting huge fees from their clients who in this particular case are students of the schools affiliated with the applicant Council. Therefore it is held that the applicant Council is existing for the purpose of profits. established that the applicant is in the business of education like any other entrepreneurs and service providers by collecting huge fees from their clients who in this particular case are students of the schools affiliated with the applicant Council. Therefore it is held that the applicant Council is existing for the purpose of profits. (ii) Activities of the applicant Council are not genuine as the Statutory Auditors of the Council have raised various objections and pointed out various irregularities, as stated above, in their Audit report for the A Y 2009-10 and 2010-11 on the Agreement amount to Rs 3980.65 lacs made by the Council with Ratan J. Batliboi Architects P Ltd., Mumbai and releasing of payments amounting to Rs. 1838.67 lacs to RJB-APL. The objection raised and irregularities pointed out by the Auditors’ clearly establishes that the funds of the Council are not being used prudently for the purpose of its Objects.” Statutory Auditors of the Council have raised various objections and pointed out various irregularities, as stated above, in their Audit report for the A Y 2009-10 and 2010-11 on the Agreement amount to Rs 3980.65 lacs made by the Council with Ratan J. Batliboi Architects P Ltd., Mumbai and releasing of payments amounting to Rs. 1838.67 lacs to RJB-APL. The objection raised and irregularities pointed out by the Auditors’ clearly establishes that the funds of the Council are not being used prudently for the purpose of its Objects.” 19. The principal controversy that needs to be considered is, whether in the facts of the present case the generation of surplus by the petitioner would indicate that the petitioner was also existing for the purposes of profit. The second question that needs to be addressed is whether the lapses on the part of the petitioner in awarding the contract for IT services to RJB-APL would amount to not applying the funds exclusively for the object for which the petitioner was established as contemplated under third proviso to Section 10(23C) of the Act. 20.Before proceeding further it would be necessary to refer to the provisions of Section 10(23C) of the Act. The relevant extract of the said provisions are quoted below:- “—(23C) any income received by any person on behalf of xxxx xxxx xxxx xxxx xxxx (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or xxxx xxxx xxxx xxxx xxxx Provided that the fund or trust or institution 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) shall make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of the exemption, or continuance thereof, under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via): xxxx xxxx xxxx xxxx xxxx Provided that the fund or trust or institution 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) shall make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of the exemption, or continuance thereof, under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via): Provided further that the prescribed authority, before approving any fund or trust or institution or any university or other educational institution or any hospital or other medical institution, under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via), may call for such documents (including audited annual accounts) or information from the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, as it thinks necessary in order to satisfy itself about the genuineness of the activities of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, and the prescribed authority may also make such inquiries as it deems necessary in this behalf: Provided also that the fund or trust or institution 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)- (a)applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is wholly and exclusively to the objects for which it is established and in a case where more than fifteen per cent of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and xxxx xxxx xxxx xxxx xxxx Provided also that the exemption under sub-clause (iv) or sub-clause (v) shall not be denied in relation to any funds invested or deposited before the 1st day of April, 1989, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 if such funds do not continue to remain so invested or deposited after the 30th day of March, 1993: Provided also that the exemption under sub-clause (vi) or sub-clause (via) shall not be denied in relation to any funds invested or deposited before the 1st day of June, 1998, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 if such funds do not continue to remain so invested or deposited after the 30th day of March, 2001. Provided also that the exemption under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall not be denied in relation to voluntary contribution, other than voluntary contribution in cash or voluntary contribution of the nature referred to in clause (b) of the third proviso to this sub-clause, subject to the condition that such voluntary contribution is not held by the trust or institution or any university or other educational institution or any hospital or other medical institution, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1992, whichever is later: Provided also that nothing contained in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall apply in relation to any income of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business: Provided also that nothing contained in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall apply in relation to any income of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business: Provided also that any notification issued by the Central Government under sub-clause (iv) or sub-clause (v), before the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, shall, at any one time, have effect for such assessment year or years, not exceeding three assessment years" (including an assessment year or years commencing before the date on which such notification is issued) as may be specified in the notification: Provided also that where an application under the first proviso is made on or after the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, every notification under sub-clause (iv) or sub-clause (v) shall be issued or approval under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall be granted or an order rejecting the application shall be passed within the period of twelve months from the end of the month in which such application was received: Provided also that where the total income, of the fund or trust or institution 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), without giving effect to the provisions of the said sub-clauses, exceeds the maximum amount which is not chargeable to tax in any previous year, such trust or institution or any university or other educational institution or any hospital or other medical institution shall get its accounts audited in respect of that year by an accountant as defined in the Explanation below sub-section (2) of section 288 and furnish along with the return of income for the relevant assessment year, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed: Provided also that any amount of donation received by the fund or institution in terms of clause (d) of sub-section (2) of section 80G in respect of which accounts of income and expenditure have not been rendered to the authority prescribed under clause (v) of sub-section (5C) of that section, in the manner specified in that clause, or which has been utilised for purposes other than providing relief to the victims of earth quake in Gujarat or which remains unutilised in terms of sub-section (5C) of section 80G and not transferred to the Prime Minister's National Relief Fund on or before the 31st day of March, 2004, shall be deemed to be the income of the previous year and shall accordingly be charged to tax: Provided also that where the fund or trust or institution 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) does not apply its income during the year of receipt and accumulates it, any payment or credit out of such accumulation to any trust or institution registered under section 12AA or to any fund or trust or institution 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) shall not be treated as application of income to the objects for which such fund or trust or institution or university or educational institution or hospital or other medical institution, as the case may be, is established: Provided also that where the fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) is notified by the Central Government or is approved by the prescribed authority, as the case may be, or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), is approved by the prescribed authority and subsequently that Government or the prescribed —authority is satisfied that (i) such fund or institution or trust or any university or other educational institution or any hospital or other —other educational institution or any hospital or other —medical institution has not, (A) applied its income in accordance with the provisions contained in clause (a) of the third proviso; or provisions contained in clause (a) of the third proviso; or (B) invested or deposited its funds in accordance with the provisions contained in clause (b) of the third proviso; or with the provisions contained in clause (b) of the third proviso; or (ii) the activities of such fund or institution or trust or any university or other educational institution or any —any university or other educational institution or any —hospital or other medical institution, (A) are not genuine; or (B) are not being carried out in accordance with all or any of the conditions subject to which it was notified or approved, or any of the conditions subject to which it was notified or approved, it may, at any time after giving a reasonable opportunity of showing cause against the proposed action to the concerned fund or institution or trust or any university or other educational institution or any hospital or other medical institution, rescind the notification or, by order, withdraw the approval, as the case may be, and forward a copy of the order rescinding the notification or withdrawing the approval to such fund or institution or trust or any university or other educational institution or any hospital or other medical institution and to the Assessing Officer: Provided also that in case the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in the first proviso makes an application on or after the 1st day of June, 2006 for the purposes of grant of exemption or continuance thereof, such application shall be made on or before the 30th day of September of the relevant assessment year from which the exemption is sought: Provided also that any anonymous donation referred to in section 115BBC on which tax is payable in accordance with the provisions of the said section shall be included in the total income: Provided also that all pending applications, on which no notification has been issued under sub-clause (iv) or sub-clause (v) before the 1st day of June, 2007, shall stand transferred on that day to the prescribed authority and the prescribed authority may proceed with such applications under those sub-clauses from the stage at which they were on that day;” 21.A plain reading of Clause (vi) of Section 10(23C) of the Act indicates that exemption under the said clause would be available to any educational institution “existing solely for educational purposes and not for purposes of profit.”. The question whether the petitioner is an educational institution is no longer res integra. This Court by order dated 20.03.2012 in W.P.(C) No.4716/2010 has already held that the petitioner is an educational institution for the purposes of Section 10(23C) of the Act. Therefore, the essential question that arises is whether the petitioner exists solely for educational purposes or also for the purposes of profit. In order to answer this question, it would be necessary to consider the activities carried on by the petitioner. 21.A plain reading of Clause (vi) of Section 10(23C) of the Act indicates that exemption under the said clause would be available to any educational institution “existing solely for educational purposes and not for purposes of profit.”. The question whether the petitioner is an educational institution is no longer res integra. This Court by order dated 20.03.2012 in W.P.(C) No.4716/2010 has already held that the petitioner is an educational institution for the purposes of Section 10(23C) of the Act. Therefore, the essential question that arises is whether the petitioner exists solely for educational purposes or also for the purposes of profit. In order to answer this question, it would be necessary to consider the activities carried on by the petitioner. 22.The petitioner is a registered society and is engaged in ensuring high standards of education imparted through the medium of schools. The petitioner has 1750 schools which are affiliated to it and provide education from nursery to twelfth standard. It selects the courses, syllabus, books and literature for different standards to be studied by the students in order to maintain a uniform standard throughout India. The petitioner is recognized and listed as a body conducting public examinations under the Delhi School Education Act, 1973. It conducts examinations (ICSE and ISC) of the students who have completed their studies and awards certificates to the successful students. The petitioner, in order to maintain the standard of education and to make the teachers aware of the latest developments in the education field, from time to time undertakes, supports and promotes study and research and also holds training conferences and seminars for the teachers. 23.The petitioner owes its genesis to Inter-State Board for Anglo Indian Education which was set up in 1935. The said Board looked after the work and standard of Anglo Indian schools preparing the students for “Overseas School Certificate” examination conducted by the University of Cambridge. In 1958, the Inter-State Board for Anglo Indian Education set up a council for the Indian School Certificate Examination and on 19.12.1967, the council was registered as a society under the Societies Registration Act XXI of 1860, (Punjab Amendment) Act, 1957 as extended to the Union Territory of Delhi. 24.It is also necessary to advert to the objects of the petitioner society. The aims and objects of the Petitioner contained in Clause 3 of its Memorandum of Association are as under: “3. The object of the Society is educational, and includes the promotion of science, literature, the fine arts and the diffusion of useful knowledge by conducting School examinations through the medium of English. The Society exists solely for educational purposes and not for purposes of profit. (a) For the object aforesaid or in furtherance thereof: (i)to conduct examinations and award certificates for the time being in co-operation with the University of Cambridge, Local Examinations Syndicate and to frame regulations for the conduct of its examinations and to modify, alter or cancel such regulations. the time being in co-operation with the University of Cambridge, Local Examinations Syndicate and to frame regulations for the conduct of its examinations and to modify, alter or cancel such regulations. (ii)to publish books, periodicals, magazines and any other literature. other literature. (iii)to hold seminars, courses, educational workshops, for in-service training of teachers. for in-service training of teachers. (a) For the object aforesaid or in furtherance thereof: (i)to conduct examinations and award certificates for the time being in co-operation with the University of Cambridge, Local Examinations Syndicate and to frame regulations for the conduct of its examinations and to modify, alter or cancel such regulations. the time being in co-operation with the University of Cambridge, Local Examinations Syndicate and to frame regulations for the conduct of its examinations and to modify, alter or cancel such regulations. (ii)to publish books, periodicals, magazines and any other literature. other literature. (iii)to hold seminars, courses, educational workshops, for in-service training of teachers. for in-service training of teachers. (iv)to enter into arrangements with any Government or authority whether Union, State, Municipal, Local or otherwise that may seem to be conducive to the object of the Society or to obtain from any such Government or authority such rights, concessions, and privileges as the society may thing desirable and to obtain and carry out, exercise and comply with any such arrangements, rights, privileges, and concessions. authority whether Union, State, Municipal, Local or otherwise that may seem to be conducive to the object of the Society or to obtain from any such Government or authority such rights, concessions, and privileges as the society may thing desirable and to obtain and carry out, exercise and comply with any such arrangements, rights, privileges, and concessions. (v)to accept donations, gifts movable and immovable and to raise money fees or otherwise. and to raise money fees or otherwise. (vi)to borrow and raise funds, with or without security in any manner the Society may think fit and to repay the same. in any manner the Society may think fit and to repay the same. (vii)to purchase, take on lease for exchange, hire or otherwise acquire, for and on behalf of the Society, properties movable and immovable and rights or privileges as they may think fit. otherwise acquire, for and on behalf of the Society, properties movable and immovable and rights or privileges as they may think fit. (viii)to sell, exchange, lease, borrow by mortgaging properties of the Society, mortgage, gift, dispose of, turn to account, or otherwise deal with, all or any part of the properties and rights of the Society as they may think necessary and convenient. properties of the Society, mortgage, gift, dispose of, turn to account, or otherwise deal with, all or any part of the properties and rights of the Society as they may think necessary and convenient. (ix)to hire and to employ secretaries, clerks, servants, examiners and moderators and others and to pay examiners and moderators and others and to pay them such salaries, wages and fees and honoraria as the Society may decide from time to time. as the Society may decide from time to time. (x)to frame and establish Provident Fund, Gratuity and Pension Schemes for the employees of the Society, as the Society may decide from time to time. and Pension Schemes for the employees of the Society, as the Society may decide from time to time. (b)To do or cause to be done all such lawful things which are incidental or conducive to the attainment of the above object.”are incidental or conducive to the attainment of the above object.” 25.The rules and by laws of the petitioner also proscribe distribution of any surplus and it is specified that funds/surpluses of the petitioner would be utilised solely for its objects. The relevant clause of the Rules and Regulations is as under: “3. The income and property of the Society, whencesoever derived, shall be applied solely for the promotion of its object as set forth in the Memorandum. No portion of the income or property aforesaid shall be paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise by way of profit, to persons who at any time are, or have been members of the Society or to any one or more of them or to any persons claiming through any one or more of them provided that: 25.The rules and by laws of the petitioner also proscribe distribution of any surplus and it is specified that funds/surpluses of the petitioner would be utilised solely for its objects. The relevant clause of the Rules and Regulations is as under: “3. The income and property of the Society, whencesoever derived, shall be applied solely for the promotion of its object as set forth in the Memorandum. No portion of the income or property aforesaid shall be paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise by way of profit, to persons who at any time are, or have been members of the Society or to any one or more of them or to any persons claiming through any one or more of them provided that: (a)No remuneration or other benefit in money or money’s worth shall be given by the Society to any of its members whether officers or servants of the Society or not, except payment of out-of-pocket expenses, reasonable and proper interest on money lent, or reasonable and proper rent on premises lent to the society. money’s worth shall be given by the Society to any of its members whether officers or servants of the Society or not, except payment of out-of-pocket expenses, reasonable and proper interest on money lent, or reasonable and proper rent on premises lent to the society. (b)No member shall be appointed to any office, under the Society, which is remunerated by salary, fees or in any other manner not accepted by clause (a). under the Society, which is remunerated by salary, fees or in any other manner not accepted by clause (a). (c)Nothing in this clause shall prevent the payment by the Society in good faith of reasonable remuneration to any of its officers or servants (not being members) or to any persons (not being members), in return for any services actually rendered to the Society.”by the Society in good faith of reasonable remuneration to any of its officers or servants (not being members) or to any persons (not being members), in return for any services actually rendered to the Society.” 26. It is apparent from the above narrative that the aims and objects, as well as the activities undertaken by the petitioner, fall within the definition of “charitable purposes” under section 2(15) of the Act. Even though, the objects and by laws of the petitioner are clear and unambiguous, the respondent has come to a conclusion that the petitioner is being run for generation of profit. This conclusion has been arrived at only for the reason that the petitioner has been generating surplus from its activities. Petitioner’s main source of funds is from charging fees from schools for registration and affiliation and fees charged from the students who are enrolled to take the exams conducted by the petitioner. The petitioner had been charging a uniform fee for several years prior to the Financial Year 2008-09. It is contended by the petitioner that it increased the fees in the Financial Year 2008-09 in order to create resources for construction of the petitioner’s office building at Saket, New Delhi, introducing computer technology (which entailed purchases of computer and development of software) and purchase of other assets. The petitioner submitted that it was also required to incur expenditure for renovation and repair, as well as requisition of other movable and immovable properties. The petitioner envisaged that substantial expenditure would be required to modernise the activities of the petitioner. The petitioner also pointed out that in the subsequent years i.e. from Financial Year 2012-13, the petitioner has reduced the examination fee, since it had accumulated the necessary funds for its purposes. reduced the examination fee, since it had accumulated the necessary funds for its purposes. 27.In the above facts, the issue to be addressed is whether generation of surplus by the petitioner can be construed to mean that the petitioner is not existing solely for educational purposes but also for the purposes of profit. 28.In our view, the fact that the petitioner had generated certain profits would not dilute the purposes for which the petitioner has been established. There is no dispute that the activity carried on by the petitioner is solely in the field of education. It is also important to note that there is no distribution of the surplus accumulated by the petitioner. It is now well settled that a provision of service in the nature of charity would not cease to be charitable only because it entails receiving a charge for the same. The nature of the activity carried on by an entity would be the predominant factor to determine whether the purpose of the organization is charitable. It is not necessary that a charitable activity entails giving or providing a service and receiving nothing in return. Collection of a charge for providing education would, nonetheless, be charitable provided, the funds collected are also utilised for the preservation of the charitable organization or for furtherance of its objects. In the present case, the petitioner has provided an explanation for the surpluses being accumulated. In our view, if the surpluses have been generated for the purposes of modernising the activities and building of the necessary infrastructure to serve the object of the organisation, it would be erroneous to construe that the generation of surpluses have in any manner negated or diluted the object of the organization. In the present case, the petitioner has been existing solely for educational purposes. Generation of profit and its distribution is not the object of the petitioner society. The fact, that surpluses have been generated in order to build the infrastructure for modernising the operation, is clearly in the nature of furthering the objects of the society rather than diluting them. In our view, the conclusion of the respondent that the increase in the fees for generating surplus would by itself exclude the petitioner from the ambit of Section 10(23C)(vi) of the Act is clearly erroneous. Generation of profit or surplus by an organization cannot be construed to mean that the purpose of the organization is generation of profit/surplus, as long as the surpluses generated are accumulated/utilized only for educational purposes. The same would not disable the petitioner from claiming exemption under Section 10(23C)(vi) of the Act. 29.As stated earlier, the predominant object of the activity conducted by the petitioner would be the determinative test, merely because profit is generated, it would not dilute the object for which the petitioner has been established. The Supreme Court in the case of Addl. Commissioner of Income Tax v. Surat Art Silk Cloth Manufacturers Association: (1980) 121 ITR (SC) applied the test of predominant object while considering whether any surplus generated by an organisation established for charitable purposes, would disable the said organisation from claiming that it was established for charitable purposes. The relevant extract of the decision reads as under:- “The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an “The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management.” 30.In the case of Aditanar Educational Institution v. Addl. CIT:(1997) 224 ITR 310 (SC) the Supreme Court has observed as under:- “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