M/S. Harf Charitable Trust (Regd.), Malerkotla v. The Chief Commissioner Of Income Tax, Ludhiana And Another

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH CWP No. 24895 of 2014Reserved on:- 07.05.2015Date of Decision:- 06.07.2015 M/s. Harf Charitable Trust (Regd.), Malerkotla ......Appellant(s) vs. The Chief Commissioner of Income Tax, Ludhiana and another ......Respondent(s) CORAM:- HON'BLE MR. JUSTICE S.J. VAZIFDAR,ACTING CHIEF JUSTICE HON'BLE MR. JUSTICE G.S.SANDHAWALIA Present:-Mr. Sanjay Bansal, Sr. Advocate,with Mr. B.M. Monga, Advocate,and Mr. Yash Paul Goyal, Advocate,for the petitioner. Ms. Savita Saxena, Advocate,for the respondents. G.S. SANDHAWALIA, J. Challenge in the present writ petition is to the order dated17.09.2012 (Annexure P-5) passed by the Chief Commissioner of IncomeTax-respondent no. 1 wherein, the application of the petitioner for grant ofapproval for exemption under Section 10(23C)(vi) of the Income Tax Act,1961 (in short 'the Act') has been rejected. The predominant reason which weighed with respondent no. 1-The Chief Commissioner of Income Tax, Ludhiana was that the petitioner-Trust had an intention to carry out business activity which was notpermissible for charitable organizations. The trustees were in place for thewhole duration of their life and it gave the organization a look and characterof a private body rather than a charitable organization and the objectiveswere not related to the promotion of education and the educational trust did not exist solely for educational purposes. The petitioner's case is that the Trust is registered under theSocieties Registration Act, 1860 and is a public charitable trust and runninga school in the name of Sohrab Public School, Nabha Raod, Malerkotlasolely for educational purposes and is being regularly assessed to incometax. An application was submitted in Form 56D under Section 10(23C)(vi)of the Act read with Rule 2CA seeking exemption from payment of incometax as per requirements and it also filed the audited balance sheets for thelast 3 years plus the trust deed. Certain information was asked for and adetailed reply was filed clarifying each and every issue and an opportunityof hearing was afforded by respondent no. 1, who rejected the claim onuntenable grounds. In the written statement filed on behalf of the respondents, pleataken was that the education institution is to exist “solely for educationalpurposes” and if the institution existed for other purposes, the exemptioncould not be granted and reliance was placed upon the provisions of Section10(23C)(vi) of the Act and the observations made by the Division Bench ofthis Court in Pine Grove International Charitable Trust vs. Union of India and others, (2010) 327 ITR 73 (P & H). The said order was accordinglyjustified that even if one of the objects enables the institute to undertakecommercial activities, entitlement for approval under the provisions of theAct would not be there. The petitioner-Trust also filed replication that a supplementarytrust deed had been executed and the objecting words “and any otherbusiness as decided by the trustees” had been deleted. The said fact hadalso been noticed in a subsequent assessment made on 21.12.2012 (Annexure P-9). Counsel for the petitioner has thus submitted that merelybecause there was a clause in the trust deed which provided that the Trustcould carry on other business would not mean that there was an absolute barfor consideration of the benefit under Section 10(23C)(vi) of the Act oncethe predominant purpose and objects of the trust were charitable in nature.It is accordingly submitted that in view of the observations of the DivisionBench in Pine Grove's case (supra), which had been further upheld by the Apex Court in Queen's Educational Society vs. CIT, (2015) 372 ITR 699,the respondent no. 1 was not justified in rejecting the case. (Annexure P-9). Counsel for the petitioner has thus submitted that merelybecause there was a clause in the trust deed which provided that the Trustcould carry on other business would not mean that there was an absolute barfor consideration of the benefit under Section 10(23C)(vi) of the Act oncethe predominant purpose and objects of the trust were charitable in nature.It is accordingly submitted that in view of the observations of the DivisionBench in Pine Grove's case (supra), which had been further upheld by the Apex Court in Queen's Educational Society vs. CIT, (2015) 372 ITR 699,the respondent no. 1 was not justified in rejecting the case. Counsel for the Department, on the other hand, contended thatthe order was justified and within the ambit of the provisions of the Act andonce the Trust was having other objectives which were not related to thecharitable purposes, no fault could be found in the decision of respondentno. 1. The objectionable clause which was part of the trust deed was clause(i) which provided that one of the objects of the trust was “to carry on otherbusiness as decided by the trustees”. On the strength of the said clause, asnoticed above, the impugned order has been passed against the petitioner-trust on the strength of the provisions that the trust did not exist solely foreducational purposes. To appreciate the controversy in question, it would benecessary to examine the provisions of Section 10(23C)(vi) of the Actwhich provides that in computing the total income of the previous year ofany person, income falling within any of the specified clauses is not to beincluded which is received on behalf of any educational institution existingsolely for educational purposes and not for purposes of profit than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) of Section 10(23C) ofthe Act. The relevant provisions read thus:- “10. In computing the total income of aprevious year of any person, any income falling withinany of the following clauses shall not be included- xxxxxxxxx (23C) any income received by any person onbehalf of- xxxxxxxxx (iiiab) any university or other educationalinstitution existing solely for educational purposesandnot for purposes of profit , which is wholly orsubstantially financed by the Government; or xxxxxxxxx (iiiad) any university or other educationalinstitution existing solely for educational purposesandnot for purposes of profit if the aggregate annualreceipts of such university or educational institution donot exceed the amount of annual receipts as may beprescribed; or xxxxxxxxx (vi) any university or other educationalinstitution existing solely for educational purposesandnot for purposes of profit,other than those mentioned insubclause(iiiab) of sub-clause(iiiad) and which may beapproved by the prescribed authority;” The said provisions were discussed in a threadbare manner by the Division Bench of this Court in Pine Grove's case (supra) wherein,exemption granted had been withdrawn on the ground that the educationalinstitutions being run were for generating profits and did not exist solely foreducational purpose. While issuing show cause notice, the authorities hadplaced reliance upon the judgment of the Uttrakhand High Court in CIT vs. Queen's Educational Society, (2009) 318 ITR 160.The Division Bench framed the following substantial questions of law:- “(A) Whether an educational institution wouldcease to exist 'solely' for educational purposes and notfor purposes of profit merely because it has generatedsurplus income over a period of 4/5 years after meetingits expenditure? (B)Whether the amount spent onacquiring/constructing capital assets wholly andexclusively becomes part of the total income or itbecomes entitled to exemption under Section 10(23C)(vi)of the Act? Queen's Educational Society, (2009) 318 ITR 160.The Division Bench framed the following substantial questions of law:- “(A) Whether an educational institution wouldcease to exist 'solely' for educational purposes and notfor purposes of profit merely because it has generatedsurplus income over a period of 4/5 years after meetingits expenditure? (B)Whether the amount spent onacquiring/constructing capital assets wholly andexclusively becomes part of the total income or itbecomes entitled to exemption under Section 10(23C)(vi)of the Act? (C)Whether an institution registered as aSociety under the Societies Registration Act,1860,losesits character as an educational institution, eligible toapply for exemption under Section 10(23C)(vi)of theAct?” Question no. (A) as to whether the education institution ceaseto exist solely for educational purposes was answered in favour of theinstitutions by holding that the predominant object of the activity is to betaken into consideration. Reliance was placed upon the judgments of the Apex Court in Aditanar Educational Institution vs. AdditionalCommissioner of Income Tax, 1997 (224) ITR 310; American Hotel andLodging Association Educational Institute v. CBDT, (2008) 301 ITR 86;CIT (Addl.) vs. Surat Art Silk Cloth Manufacturers Association, 1980(121) ITR 1 (SC) and the view in Queen's Educational Society's case(supra) was specifically not accepted. It was held that where theeducational institutions which are registered, the society would retain theircharacter as such and they would be eligible to apply for exemption. The relevant observations read thus:- “(1) It is obligatory on the part of the ChiefCommissioner of Income Tax or the Director, which arethe prescribed authorities, to comply with provisothirteen (un-numbered). Accordingly, it has to beascertained whether the educational institution hasbeen applying its profit wholly and exclusively to theobject for which the institution is established. Merelybecause an institution has earned profit would not bedeciding factor to conclude that the educationalinstitution exists for profit. (2) The provisions of Section 10(23C)(vi) of theAct are analogues to the erstwhile Section 10(22) of theAct, as has been laid down by Hon’ble the SupremeCourt in the case of American Hotel and LodgingAssociation (supra). To decide the entitlement of aninstitution for exemption under Section 10(23C)(vi) ofthe Act, the test of predominant object of the activityhas to be applied by posing the question whether itexists solely for education and not to earn profit [See 5-Judges Constitution Bench judgment in the case ofSurat Art Silk Cloth Manufacturers Association(supra)]. It has to be borne in mind that merely becauseprofits have resulted from the activity of impartingeducation would not result in change of character ofthe institution that it exists solely for educationalpurpose. A workable solution has been provided byHon’ble the Supreme Court in para 33 of its judgmentin American Hotel and Lodging Association’s case(supra). Thus, on an application made by an institution,the prescribed authority can grant approval subject tosuch terms and conditions as it may deems fit providedthat they are not in conflict with the provisions of theAct. The parameters of earning profit beyond 15% andits investment wholly for educational purposes may beexpressly stipulated as per the statutory requirement. Thereafter the Assessing Authority may ensurecompliance of those conditions. The cases whereexemption has been granted earlier and theassessments are complete with the finding that there isno contravention of the statutory provisions, need notbe reopened. However, after grant of approval if itcomes to the notice of the prescribed authority that theconditions on which approval was given, have beenviolated or the circumstances mentioned in 13th provisoexists, then by following the procedure envisaged in 13[th]proviso, the prescribed authority can withdraw theapproval. (3) The capital expenditure wholly andexclusively to the objects of education is entitled toexemption and would not constitute part of the totalincome. (4)The educational institutions, which areregistered as a Society, would continue to retain theircharacter as such and would be eligible to apply forexemption under Section 10(23C)(vi) of the Act. [Seepara 8.7 of the judgment – Aditanar EducationalInstitution case (supra)]. Accordingly, the orders passed withdrawing the exemptionswere quashed with liberty to pass fresh orders. The said view has been specifically approved by the ApexCourt in Queen's Educational Society's case (supra) and the judgment of theUttrakhand High Court has been reversed. The Apex Court has accordingly discussed the predominant charitable character of the purpose of setting of the institution would be lost.The predominant object test was to applied which was the promotion ofeducation and the principles were laid down as under:- “(1)Where an educational institution carrieson the activity of education primarily for educatingpersons, the fact that it makes a surplus does not leadto the conclusion that it ceases to exist solely foreducational purposes and becomes an institution for thepurpose of making profit. (2)The predominant object test must beapplied - the purpose of education should not besubmerged by a profit making motive. (3)A distinction must be drawn between themaking of a surplus and an institution being carried on"for profit". No inference arises that merely becauseimparting education results in making a profit, itbecomes an activity for profit. (4)If after meeting expenditure, a surplusarises incidentally from the activity carried on by theeducational institution, it will not be cease to be oneexisting solely for educational purposes. (5)The ultimate test is whether on an overallview of the matter in the concerned assessment year theobject is to make profit as opposed to educatingpersons.” It is also pertinent to note that while relying upon the earlierjudgments of the Apex Court namely American Hotel and LodgingAssociation (supra) and keeping in view the provisos of the sections inmind especially 13[th] proviso which provided that after giving a reasonableopportunity, the approval granted to the trust could be withdrawn if it isfound that the activities are not genuine or in accordance with any of theSHIVANI GUPTAconditions, there could be a conditional approval subject to the monitoring.2015.07.07 11:20I attest to the accuracy andintegrity of this documentChandigarh The relevant observations read thus:- (5)The ultimate test is whether on an overallview of the matter in the concerned assessment year theobject is to make profit as opposed to educatingpersons.” It is also pertinent to note that while relying upon the earlierjudgments of the Apex Court namely American Hotel and LodgingAssociation (supra) and keeping in view the provisos of the sections inmind especially 13[th] proviso which provided that after giving a reasonableopportunity, the approval granted to the trust could be withdrawn if it isfound that the activities are not genuine or in accordance with any of theSHIVANI GUPTAconditions, there could be a conditional approval subject to the monitoring.2015.07.07 11:20I attest to the accuracy andintegrity of this documentChandigarh The relevant observations read thus:- “25. We approve the judgments of the Punjaband Haryana, Delhi and Bombay High Courts. Sincewe have set aside the judgment of the UttarakhandHigh Court and since the Chief CIT's orders cancellingexemption which were set aside by the Punjab andHaryana High Court were passed almost solely uponthe law declared by the Uttarakhand High Court, it isclear that these orders cannot stand. Consequently,Revenue's appeals from the Punjab and Haryana HighCourt's judgment dated 29.1.2010 and the judgmentsfollowing it are dismissed. We reiterate that the correcttests which have been culled out in the three SupremeCourt judgments stated above, namely, Surat Art SilkCloth, Aditanar, and American Hotel and Lodging,would all apply to determine whether an educationalinstitution exists solely for educational purposes andnot for purposes of profit. In addition, we hasten to addthat the 13th proviso to Section 10(23C) is of greatimportance in that assessing authorities mustcontinuously monitor from assessment year toassessment year whether such institutions continue toapply their income and invest or deposit their funds inaccordance with the law laid down. Further, it is ofgreat importance that the activities of such institutionsbe looked at carefully. If they are not genuine, or arenot being carried out in accordance with all or any ofthe conditions subject to which approval has beengiven, such approval and exemption must forthwith bewithdrawn. All these cases are disposed of making itclear that revenue is at liberty to pass fresh orders ifsuch necessity is felt after taking into consideration thevarious provisions of law contained in Section 10(23C)read with Section 11 of the Income Tax Act.” In the present case, under the second proviso, the authority wasto call for documents including audited annual accounts from the trust andin order to satisfy itself about the genuineness of the activities of the trust,the inquiries had to be made. The objects of the petitioner-trust read thus:- “2.OBJECTS OF THE TRUST (a)To spread education and for achieving thesaid object to establish, maintain, run, develop andimprove, extend, grant donations in cash and kind andassist in the establishment, running, development,improvement and extension of schools, colleges,workshop, industrial and technical schools, institutionsfor the promotion of agriculture, hostels for the benefitof needy students, maintain agriculture farms for thebenefit of the poor. (b)To establish, maintain or acquire libraryor libraries for the benefit of the students community. ( c)To institute and award scholarships inIndia for the study, research and apprenticeship for allor any of the aforesaid educational purpose. (d)To establish, maintain, run, develop,improve, extend, grant donations for and to aid andassist in the establishment maintenance, running,development, improvement and extension of hospitals,clinics, XRay plants, dispensaries, maternity houses,recreating centres and all similar institutions as willafford treatment to alleviate human sufferings. (b)To establish, maintain or acquire libraryor libraries for the benefit of the students community. ( c)To institute and award scholarships inIndia for the study, research and apprenticeship for allor any of the aforesaid educational purpose. (d)To establish, maintain, run, develop,improve, extend, grant donations for and to aid andassist in the establishment maintenance, running,development, improvement and extension of hospitals,clinics, XRay plants, dispensaries, maternity houses,recreating centres and all similar institutions as willafford treatment to alleviate human sufferings. (e)To conduct feeding to poor generally givefood and raiment to the poor, needy and disabledpersons and to afford relief to people in distress due tonatural calamities, accident, earthquake, flood,famine,. Epidemic orphanages and welfareinstitutions. (f)To carry on community developmentprogrammes for the upliftment of the economically weaker sections of the society and construct anddevelop community centres or halls for carrying onsuch activities. (g)To provide food, shelter, clothing, medicalcare and education for the needy. (h)To provide assistant to best players and also to promote various sports by organizing tournaments in the interest of the Public. (i)To carry out other business as decided bythe Trustees.” It is not disputed that the school as such is also affiliated withthe Central Board of Secondary Education, New Delhi and has also beengranted registration under Section 12-A w.e.f. 15.07.1997. Merely becauseone of the clauses of the trust deed provided that the trust would carry onother business as decided by the trustees would not per se dis-entitle it frombeing considered for registration under Section 10(23C)(vi) of the Act. Thereasoning that the Trust had intentions to carry out the business and the saidinstitute was not existing solely for educational purposes would amount togiving a very narrow meaning to the section and the predominant object testwas to be applied. As noticed above, it was not that respondent no. 1 cameto the conclusion that the Trust was doing some other business and the saidbusiness was generating substantial amounts which would over ride themain objects of the trust which have been reproduced above which pertainmainly to the cause of education. Keeping in view the principles whichhave been discussed regarding the words 'solely for educational purposesand of generating profit', we are of the opinion that in the absence of anysuch finding that the trust was doing business, the application could nothave been rejected only on this ground that one of the clauses in the objectsSHIVANI GUPTAprovided such right to the trust. The prescribed authority could have made2015.07.07 11:20I attest to the accuracy andintegrity of this documentChandigarh it conditional by holding that if any such business is carried out, theregistration granted is liable to be cancelled. The principles laid down bythe Apex Court in American Hotel and Lodging Association's case (supra)can thus be also applied in the circumstances. The said principles readthus:- it conditional by holding that if any such business is carried out, theregistration granted is liable to be cancelled. The principles laid down bythe Apex Court in American Hotel and Lodging Association's case (supra)can thus be also applied in the circumstances. The said principles readthus:- “33. Having analysed the provisos to Section 10(23C)(vi) one finds that there is a difference betweenstipulation of conditions and compliance thereof. Thethreshold conditions are actual existence of aneducational institution and approval of the prescribedauthority for which every applicant has to move anapplication in the standardized form in terms of thefirst proviso. It is only if the pre-requisite condition ofactual existence of the educational institution isfulfilled that the question of compliance ofrequirements in the provisos would arise. We find meritin the contention advanced on behalf of the appellantthat the third proviso contains monitoringconditions/requirements like application, accumulation,deployment of income in specified assets whosecompliance depends on events that have not taken placeon the date of the application for initial approval. 34. To make the section with the provisoworkable we are of the view that the MonitoringConditionsinthethirdprovisolikeapplication/utilization of income, pattern of investmentsto be made etc. could be stipulated as conditions by thePA subject to which approval could be granted. Forexample, in marginal cases like the present case, whereappellant-Institute was given exemption up to financialyear ending 31.3.1998 (assessment year 1998-99) andwhere an application is made on 7.4.1999, within sevendays of the new dispensation coming into force, the PA can grant approval subject to such terms andconditions as it deems fit provided they are not inconflict with the provisions of the 1961 Act (includingthe abovementioned monitoring conditions). Whileimposing stipulations subject to which approval isgranted, the PA may insist on certain percentage ofaccounting Income to be utilized/applied for impartingeducation in India. While making such stipulations, thePA has to examine the activities in India which theapplicant has undertaken in its Constitution, MoUs.and Agreement with Government of India/NationalCouncil. In this case, broadly the activities undertakenby the appellant are - conducting classical educationby providing course materials, designing courses,conducting exams, granting diplomas, supervisingexams, all under the terms of an Agreement enteredinto with Institutions of the Government of India.Similarly, the PA may grant approvals on such termsand conditions as it deems fit in case where the Instituteapplies for initial approval for the first time. The PAmust give an opportunity to the applicant-institute tocomply with the monitoring conditions which have beenstipulated for the first time by the third proviso.Therefore, cases where earlier the applicant hasobtained exemption(s), as in this case, need not be re-opened on the ground that the third proviso has notbeen complied with. However, after grant of approval,if it is brought to the notice of the PA that conditions onwhich approval was given are breached or thatcircumstances mentioned in the thirteenth provisoexists then the PA can withdraw the approval earliergiven by following the procedure mentioned in thatproviso. The view we have taken, namely, that the PAcan stipulate conditions subject to which approval maybe granted finds support from sub-clause (ii)(B) in the thirteenth proviso.” thirteenth proviso.” Accordingly, we are of the view that the impugned order cannotbe justified solely on the ground that in view of a clause which providedthat the Trust could run a business, it would be debarred as such fromregistration on the ground that it was not existing solely for educationalpurposes. That merely a conferment of power to do business would notdebar the right for consideration to the trust without any finding beingrecorded that the predominant object of the Trust was to do business. Thus,respondent no. 1 misdirected itself by rejecting the application on thisground without coming to any conclusion that the trust was carrying on anyother activity as per clause (i). It is also a matter of fact, as noticed, nowthat the trust has already also deleted the objectionable clause and which hasalso been noticed in the subsequent assessment made in the assessmentorder dated 21.12.2012 for the year 2010-11. Accordingly, the writ petition is allowed and the impugnedorder dated 17.09.2012 (Annexure P-5) is quashed. The competentauthority shall decide the said application afresh keeping in view theobservations made hereinabove. (S.J. VAZIFDAR) (G.S. SANDHAWALIA) ACTING CHIEF JUSTICEJUDGE 06.07.2015shivani