Ita/299/2013 Of Geetanjali Education Society v. The Assistant Director Of Income-Tax

IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 24[th]DAY OF KEBRUARY J0O14 PRESENT THR HON’BLE MR.JUSTICE DILIP B.BRBHOSAL ANT) THR HON’BLE MR.JUSTICE B.MANOQHAR 1.T.A.NOS2993000/201 BRITWHBRE Geetanjali Education Society,Rep. by its Secretary|omt.S.Nagarathna Murthy, No.848, I[st]main, l|[st]block, |HAL II stage, New Thippasandra,Geetanjali Layout, Bangalore-560 O75. APPRLLANT (By Sri.A.Shankar, Adv.) AN): The Assistant Director of Income Tax,(Exemptions), Circle — 17(1),.III floor, C R Buildings, Queens Road,|Bangalore-560 OO1.. _ RBSPONDENT (By Sri.K.V.Aravind, Adv.) These appeals are filed under Section 260-A ofI.T.Act, 1961, arising out of the order dated 28.02.2013passed1nITANo.714/Bang/2012—&ITA.719/Bang/2012, tor the Assessment years 2006-2007. and 2007-2008, praying to formulate the substantialquestions of law stated therein and allow the appeal andset aside the order passed by the ITAT, Bangalore, inITA No.714/Bang/2012 & ITA No.715/Bang/2012—dated 28.02.2013. These appeals coming on for hearing this day,DILIP B.BHOSALE J,delivered the following:- PC;| In these appeals, the appellant-Society has raisedthe following substantial questions of law for ourconsideration:- :%<Whether on the facts and in thecircumstances of the case and in law,the Tribunal was justified in holdingthat|the.appellant-Society1SNOTexisting solely for educational purpose,merely because clauses 3(b) and 3(h) intheir memorandum of objects are otherthan education, and even though theydo not carry on those objects, still theyare not eligible to claim exemptionunder Section 10(23C)(iiad) of theIncome Tax Act, 1961?circumstances of the case and in law,the Tribunal was justified in holdingthat|the.appellant-Society1SNOTexisting solely for educational purpose,merely because clauses 3(b) and 3(h) intheir memorandum of objects are otherthan education, and even though theydo not carry on those objects, still theyare not eligible to claim exemptionunder Section 10(23C)(iiad) of theIncome Tax Act, 1961? :%%<Whether on the facts and in thecircumstances of the case and in law,the Tribunal was right in holding thatthe clauses 3(b) and 3(h) in theMemorandumoT|objectsaltenotconnected with education and that theappellant is not existing solely foreducational purpose so as to claimexemption under Section 10(23C)(iiad)of the Act? 2. Briefly stated, the facts leading to these appealsare that the appellant is a Society registered under theSocieties RegistrationAct,1960(for|short|‘theSociety’). The Society runs primary, middle and highschool in the name of Geetanjali Vidyalaya (for short‘the school’). They are not engaged in other activities”except running the _ school. They were grantedregistration under Section 12A of the Income Tax Act,1961 (for short‘the Act’). In these appeals, we areconcerned with the Assessment Years 2JOO6-O7 and2007-08. The Society filed its return of income declaring it ‘Nil’, claiming exemption under Section10(23C) (iad) of the Act. Their case was re-opened byissuing notice under Section 148 of the Act. TheAssessingOfficerV1Ideorder.dated20.10.2010,concluded the assessment for both the Assessment|years under Section 143(3) r/w Section 147 of the Actdetermining the total income of the Society atRs.23,90,710/- for the Assessment Year 2006-07 andRs.37,/72,420/- for the Assessment Year 2007-08declaring their income excess over the expenditureholding that the Society is not existing solely foreducational purpose, since it has included certainobjects in its Memorandum not connected witheducation and is, therefore, not entitled for exemptionunder Section 10(23C) (itiad) of the Act. TheOrderoT|theAssessingOfficer|dated28.10.2010 was carried in appeal by the Society beforethe Commissioner of Income Tax (Appeals) (for short TheOrderoT|theAssessingOfficer|dated28.10.2010 was carried in appeal by the Society beforethe Commissioner of Income Tax (Appeals) (for short ‘the Appellate Authority’). The Appellate Authority,|aiter considering the case of the Society vide order dated14.03.2012 allowed the appeal for both the Assessment.years holding that the Society had not carried on anyactivity other than the educational activity and grantedexemption under Section 10(23C) (itiad) of the Act. Theorder of the Appellate Authority was then carried by theRevenue in further appeal before the Appellate Tribunal. |The Appellate Tribunal by the impugned order, allowedthe appeal filed by the Revenue in respect of theAssessment years holding that the Society has includedcertain objects, not connected with education in itsmemorandum of objects and, therefore, it cannot beregarded as existing solely for the purposes ofeducation. | 3. It 1s against this backdrop, we have heardlearned counsel for the parties for some time and withtheir assistance, gone through all the three orders andother materials placed before us. 4. The Society is engaged in imparting educationin the school run by them is not in dispute. It is alsonot in dispute that from the Assessment year 2008-09onwards, the Society was granted registration undersection 12A of the Act. The objects of the Society on thebasis of which, the Revenue claim that the Societyduring the relevant assessment year was not existingsolely for education purpose, read thus:- Clause 3(b):The Society will emphasis_on establishment of Urnic, Religious andsocial institutions with job oriented coursesand paramedical institutions; and Clause 3(h):To implement women and|child welfare programs. o. It is on the basis of these objects, it appears,the Tribunal held that the Society is engaged in theactivities other than educational activity and hence notentitled to claim benefit under Section 10(23C)(itiad) ofthe Act. Section 10(23C)(i1iad) of the Act, read thus:-_| 1Q. In computing the total income of a.previous year of any person, any incomefalling within any of the following clausesshall not be included -| (23C)any income received by any)person on behalf of - | .%%%+0/any|universityOTother|educational institution existing solely foreducational purposes and not for purposes|of profit if the aggregate annual receipts ofsuch university or educational institution donot exceed the amount of annual receipts|may be prescribed; 6. From bare perusal of this provision, it is clearthat any income received by any person on behalf of theeducational institution “existing” solely for educationalpurpose and not for purposes of profit and i itsaggregate annual receipts do not exceed the amount ofannual receipts as may be prescribed, it is entitled forexemption under this provision. The amount of annual receipts prescribed is admittedly Rs.1 crore vide Rule2BC of the Income Tax Rules, 1962. 7. In the present cases, before we advert to theSubmissions advanced by learned counsel for thepartiesandTeECOCdOUTTEAaAsoO!it.would|beadvantageous to state few admitted facts. The appellant-society is an Educational Institution which runs theschool. The amount of annual receipts of the Societydid not exceed Rs.1 crore during both the AssessmentYears 1.e., 2006-07 and 2007-08. The Society did nothave any other activity except running the school duringboth the Assessment years. In other words, it is not indispute that except for conducting the school, thesociety did not carry on any other activities right frominception, in particular, during the relevant AssessmentYears (2006-07 & 2007-08). Even if it is accepted, thatthe objects of the Society as reflected in clause 3(b) and.3(h) of the Memorandum of Association are not related to education, admittedly, the society did not/is notinvolved in these activities. It is against these admittedfacts, we would now _ proceeded to consider thSubmissions advanced on behalf of both sides placingreliance upon the judgments of the Supreme Court andother High Courts. to education, admittedly, the society did not/is notinvolved in these activities. It is against these admittedfacts, we would now _ proceeded to consider thSubmissions advanced on behalf of both sides placingreliance upon the judgments of the Supreme Court andother High Courts. 8. At the outset, we would like to consider thejudgment of the Supreme Court inAmerican Hotel andLodging Association Educational Institution v. CentralBoard of Direct Taxes and others |(2008) 301 ITR 8&6(SC)/,on which, Mr.Aravind, learned counsel appearing.for the Revenue placed heavy reliance to contend thatmere existence of object/s in the Memorandum ofAssociation not related to the education is sufficient to|deny exemption/benefit under the provisions containedin Section 10(23C) (itiad) of the Act. InAmerican Hotel’scase, the Supreme Court was dealing with theprovisions contained in Section 10(22) of the Act andthe question, for our purpose, fell for its consideration was, whether the activities of the appellant-institutecame within the definition of “income of educational|institution”. The following observations were heavilyrelied upon by Mr.Aravind, learned counsel for theRevenue. “Under Section 10(22), one had toclosely analyse the activities of the institute,the objects of the institute and its source ofincome and its utilization. Even it one of theobjects enabled the institute to undertakecommercial activity, the institute would notbe entitled to approval under section 10(22). —The said section, inter alia, excludes theincome of the educational institute from the|total income”.. QO It was submitted that mere existence of clause3(b) and 3(h) in the Memorandum of Association, whichenabled the Society to undertake other activities, notrelated to the educational activities is sufficient to denyexemption as claimed by them for both the assessment.years. The Institution inAmerican Hotel, according to memorandum of understanding, had several objectsand it is in this backdrop, the following observationsmade by the Supreme Court are relevant for ourPpUuUrpoOs “To make the section with the provisoworkable we are of the view that the’monitoring conditions in the third provisolikeapplication /utilizationot income,pattern of investments to be made, etc.,could be stipulated as conditions by theprescribed authority subject to which theapproval could be granted. For example, inmarginal cases like the present case, wherethe appellant-institute was given exemptionup to the financial year ending March 31,1998 (assessment year 1998-99) and where|an application is made on April 7, 1999,within seven days of the new dispensationcoming into force, the prescribed authoritycan grant approval subject to such termsand conditions as it deems fit provided theyare not in conflict with the provisions of the1961 Act (including the abovementioned|monitoring conditions). While imposing) stipulations subject o which approval iseranted, the prescribed authority may insiston certain percentage of accounting incomeTObeutilized/applied forimpartingeducation in India. While making suchstipulations, the prescribed authority has toexamine the activities in India which the'applicant has undertaken in its constitution,memorandum)oT|understandingandagreementwith|theGovernmentoT|India/ NationalCouncil.In this case,broadly the activities undertaken by theappellant are conducting classical educationby providing course materials, designingCOUTSCS,conductingCXAIIILgrantingdiplomas, supervising exams, all under theterms of an agreement entered into withinstitutions of the Government of India. —similarly, the prescribed authority may grantapprovals on such terms and conditions as itdeems fit in case where the institute applies|for initial approval for the first time. TheprescribedauthorityMUSTPIVEan?opportunity to the applicant-institute tocomply with the monitoring conditions which have been stipulated for the first time by thethird proviso. Therefore, cases where earlier|the applicant has obtained exemption(s), as_in this case, need not be reopened on theeround that the third proviso has not beencomplied with. However, after grant ofapproval, if it is brought to the notice of theprescribed authority that conditions onwhich approval was given are breached orthat the circumstances mentioned in the'thirteenth proviso exists then the prescribed|authority can withdraw the approval earliergiven by following the procedure mentionedin that proviso. The view we have taken,namely, that the prescribed authority canstipulate|conditions|subjectTO whichapproval may be granted finds support fromsub-clause (11) (B) in the thirteenth proviso”. 10. After making these observations, the SupremeCourt set aside the order passed by the Central Board ofDirect Taxes and remitted the matter for freshconsideration in accordance with law and while doingso, clarified that, in that case, the appellant had fulfilled, the threshold pre-condition of actual existenceof an educational institution under Section 10(23C) (vi)and therefore, on that count, the Central Board ofDirect Taxes, would not reject the approval application —made by the appellant therein. 11. From bare perusal of the observations madeby the Supreme Court in|American Hotel’scase, whatappears to us, is that the Assessing Officer whileconsidering the case, such as one in hand, has toclosely analyse activities of the Institute, objects of theInstitute, its sources of income and utilization. In thatcase, the Supreme Court considered its activities asretlected in the paragraph quoted above and therefore,while remanding the matter, made it clear that theappellant had fulfilled the threshold pre-condition ofactual existence of the educational institution under|section 10(23C) (vi) with further direction to the CentralBoard of Direct Taxes not to reject the approval application on that ground. Two of the objects in thatcase as reflected in the judgment were also to offer theNational Council the lowest possible prices for theproducts and services sold to or utilized by the schools—under the umbrella of the Government of India and so'also to utilize Indian Authors whenever possible in thedevelopment of customized programmes. The SupremeCourt, despite these objects/activities, held that theinstitution in American Hotel was involved only ineducational activities, perhaps on the ground that itwas not carrying on those activities. 12.orl. Shankar, learned counsel appearingfor the appellant at the outset, invited ourattention to the judgment of Allahabad HighCourt inCP Vidya Niketan Inter CollegeShikshan Society -vs- Union oof India andothers (2013) 359 ITR £322 = (All)(for short CP1%0&+3%2" +3)andsubmitted that|afterconsidering the judgment of the Supreme Court inAmerican Hotel, the High Court held that where it is notdisputed that a society runs an educational institutionand is not for the purposes of making profit, merelybecause the object of the Society is also to serve thechurch and the nation would not mean that the!educational|institutionnotexistingsolelyfor.educational purpose.This observation was made by theHigh Court after referring to the judgments in ©C PVidya Niketan and American Hotel. The Bombay HighCourtin.VanitaVishram|Trust—VS=ChiefCommissioner of Income-Tax and another (2010)327 ITR 121 (Bom)after considering the provisioncontained in Section 10(23C)(vi) of the Act observed thatthough the objects clause contained varied objectsincludingthe.managementanddevelopmentot moveable and immoveable properties, the statement offact before the Court, which was not disputed, was that the only activity carried out by the Trust ever since itsinception was the conduct of educational institutions. |The Institution, in that case, had a history of over 80years during the course of which the only activity was ofconducting educational institution.13.)In the present case, it is not in dispute that|the society has been conducting the primary andsecondary school in the State of Karnataka since 2002. —Nor is there any dispute before us that save and exceptfor conducting school, the society has carried on anyother activities since then. Without expressing anyopinion whether the object, as reflected in Clause 3(b)and 3(h) of the Memorandum of Association, are relatedto education, it is clear that save and except educationalactivity the assessee did not/do not carry on any otheractivity is the fact, which is not in dispute. In otherwords, though the activities as reflected in Clause 3(b)and 3(h), may constitute the purpose, other than the educational|purpose,but,|during|therelevant.assessment year, it is not the case of the revenue nor isthere any material to show, that the society wasrunning any activities other than the educationalactivity. In this view of the matter, we are of theconsidered opinion that the view taken by the Tribunalis not correct and deserves to be set aside. There are'§adequate safeguards that if the activities other thaneducational activities are undertaken by the society,exemption granted can be withdrawn. Merely, becausethere exists object, which is not related to educationalactivities, in our Opinion, is not sulficient to deny theexemption/benefit of Section 10(23C)(iliad) of the Act. —In short, in the absence of any allegation or materialagainst the society showing that they are involved inany other activities than the educational activities, inour opinion, it cannot be denied exemption undersection 10(23C)(iliad). In the circumstances, we answer both the substantial questions of law in favour of the assessee and against the revenue. — 14. The appeals are accordingly disposed olf.Before we part, we observe that we have disposedof these appeals at the stage of admission. We have, by consent of the learned counsel for the parties, heardthem on the substantial questions of law as formulated in the first paragraph of this judgment. orl/Bkm. sd/-. JUDGE od/- JUDGE