St.la Wrence Educational Sogfeity (Regd.)& Another v. Commissioner Of Income Tax Delhi (Central) & Another

* IN THE HIGH COURT OF DELHI AT NEW DELHI + W.P.(C) 1254/2010 VI ST.LA WRENCE EDUCATIONAL SOGfEITY (REGD.)& ANOTHER ..... Petitioner Through Mr. V.P. Gupfa and Mr. Basant Kumar, Advocates. versus COMMISSIONER OF INCOME TAX DELHI (CENTRAL) & ANOTHER ANOTHER ..... Respondent Through Mr. Sanjeev Sabharwal, Advocate. + 4P.(C) 2463/2010 / THE BAPTIST EDUCATIONAL SOCY & ANR .... Petitioner Through Mr. V.P. Gupta and Mr. Basant Kumar, Advocates. + 4P.(C) 2463/2010 versus CHIEF COMMISSIONER OF INCOME TAX Through Mr. .... Respondent Mr. Sanjeev Sabharwal, Advocate. CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE SANJIV KHANNA Ofo ORDER 04.02.2011 Regard being had to the similitude of the issue involved in both the writ petitions, they were heard together and are being disposed of by a singular order. For the sake of clarity and convenience the facts m W.P.(C) Nos.1254/2010 & 2463/2010 Page 1 of 8 Page 1 of 8 W.P.(C) 1254/2010 are adumbrated herein. 2. The assessee-petitioner, a society registered under the Societies Registration Act, 1860 filed an application in Form No.56D for grant of approval for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 (for brevity, the Act) on 30th September, 2008 for the financial year 2008-09 before the Chief Commissioner of Income Tax, Delhi (Central). The authorized representative on behalf of the assessee-petitioner appeared and a query was made by the authority why the application should not be rejected in view of the decision rendered by the Uttarakhand High Court in CIT Vs. Queens' Educational Society & Another (2009) 319 ITR 160. A written submission was filed contending inter alia that the 7 !:.--.. assessee-society is basically engaged in imparting education inasmuch as it is running a school from nursery to 1Oth standard and the principal and primary objective of the society is to impart education and not to earn profit. It was also contended that the surplus that is generated is less than 7% of the gross receipt and the same was utilized for development of facilities, infrastructure, etc. 3. The authority concerned required the assessee to file the audit report in Form No.1 OBB and eventually came to held that the assessee was engaged in running a primary school i.e. Lawrence Public School; W.P.(C) Nos.1254/2010 & 2463/2010 Page 2 of 8 that on a perusal of the audit reports for the assessment years 2006-07 and 2007-08 and Form No.lOBB for the assessment year 2008-09 and the income-expenditure statement for the aforesaid periods, it was clear that the assessee-society had shown surplus income of 3.35%, 7.40% and 2.06% respectively in its gross receipts after deducting all expenses including depreciation in the relevant assessment years. In case of the petitioner in W.P.(C) No.2463/2010, the Baptist Educational Society the surplus was 7.57%, 8.23% and 4.04% for the assessments years 2006-07, 2007-08 and 2008-09 respectively. The authority thereafter came to opine that the educational institutions run by the assessee-applicants were generating surplus out of their gross receipts year after year and it cannot be accepted that the surplus generated is merely incidental. An opinion was expressed that the surplus generated as above has been utilized by the educational institutions for making addition to building and purchase of furniture, electrical equipments etc. Thereafter, a reference was made to the decision in Aditanars Educational Institution Vs. Additional CIT (1 997) 224 ITR 310 . Further the authority referred to the decision in Municipal Corporation of Delhi Vs. Children Book Trust (1992) 3 SSC 390 and came to held as follows:- "To sum up, for the grant of approval to an W.P.(C) Nos.1254/2010 & 2463/2010 Page 3 of 8 W.P.(C) Nos.1254/2010 & 2463/2010 Page 3 of 8 "To sum up, for the grant of approval to an W.P.(C) Nos.1254/2010 & 2463/2010 Page 3 of 8 W.P.(C) Nos.1254/2010 & 2463/2010 Page 3 of 8 educational institution seeking exemption u/s 1 0(23C)(vi), the basic requirement of sub-clause( vi) of clause (23C) of Section 10 is that the educational institution seeking exemption should be existing solely for the purpose of education and not for the purpose of profit. Here emphasis is laid on the word solely. Considering the facts of the present case in entirety as discussed above and respectfully following the ratio of the aforesaid judgment of the Hon' ble High Court of Uttrakhand, it cannot be said that the assessee-applicant society and the educational institutions run by it are existing solely for the purpose of education and not for the purpose of profit. Hence, the application for the assessee-applicant, seeking grant of approval for the purpose of exemption under Section 1 0(23C)(vi) of the Income Tax Act, 1961 for the financial year 2008-09 is hereby rejected." ::r / 4. Mr. V.P. Gupta, learned counsel for the petitioner submitted that the respondent has fallen into a grave error by expressing opinion solely on the basis of the decision rendered in Queens' Educational Society (supra). Learned counsel also submitted that the decision in the case of Queens' Educational Society (supra) has been distinguished by the Bombay High Court in Vanita Vishram Trust Vs. Chief Commissioner of Income-Tax and Another (2010) 327 ITR 121(Bom), Himachal Pradesh High Court in Maa Saraswati Trust Vs. Union of India (2010) 194 Taxman 84 (HP) and Punjab and Haryana High Court in Pinegrove International Charitable Trust Vs. Union of India and Others (2010) 327 ITR 73 (P&H). W.P.(C) Nos.l254/2010 & 2463/2010 Page 4 of 8 ---------------·----- 5. Mr. Sanjeev Sabharwal, learned counsel for Revenue supported the order passed by the competent authority. 6. In Aditanars Educational Institution (supra) the Apex Court while dealing with the factum of exemption has held thus:- "The language of section 1 0(22) of the Act is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for purposes of profit. 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." 6. In American Hotel and Lodging Association Educational Institute Vs. CBDT (2008) 301 ITR 86(SC), their Lordships have laid down the principal on following terms:- "In Addl. CIT v. Surat Art Silk Cloth Manufacturers Association reported in [ 1980] 121 ITR 1, it has been held by this court that the test of predominant object of the activity is to be seen whether it exists solely for education and not to earn profit. However, the purpose would not lose its character merely because some profit arises from the activity. That, it is not possible to carry on educational activity in such a way that the W.P.(C) Nos.1254/2010 & 2463/2010 Page 5 of8 balancesthe incomeand there is noexpenditureexactlyresultantprofit, for, to achieve this, would not only bedifficult of practical realization but would reflectunsoundprinciplesofmanagement.Inorderto ascertainwhether the institute is carried on with the object ofmaking profit or not it is duty of the prescribedauthorityto ascertainwhetherthe balanceof income isappliedwhollyand exclusivelyto the objectsfor whichthe applicant is established." 7.In the case of PinegroveInternationalCharitableTrust(supra), balancesthe incomeand there is noexpenditureexactlyresultantprofit, for, to achieve this, would not only bedifficult of practical realization but would reflectunsoundprinciplesofmanagement.Inorderto ascertainwhether the institute is carried on with the object ofmaking profit or not it is duty of the prescribedauthorityto ascertainwhetherthe balanceof income isappliedwhollyand exclusivelyto the objectsfor whichthe applicant is established." 7.In the case of PinegroveInternationalCharitableTrust(supra), the Punjab and HaryanaHigh Court afterreferringto the decisionin the field has expressedthe followingopinion:- (2) The provisionsofSection10(23C)(vi)ofthe Act>are analoguesto the erstwhileSection10(22)ofthe Act,^as has been laid down by Hon'blethe SupremeCourtinthe case of American Hotel and Lodging Association(supra). To decide the entitlementof an institutionforexemptionunder Section 10(23C)(vi)of the Act, thetest of predominantobject of the activity has to beappliedby posing the questionwhetherit exists solelyfor education and not to earn profit [See 5-JudgesConstitutionBench judgmentin the case of Surat ArtSilk Cloth Manufacturers Association (supra)]. It has to^be borne in mind that merely because profits haveresultedfrom the activityof impartingeducationwouldnotresultin changeof characterofthe institutionthat it6'xists for educational A workable solely purpose.solution has been provided by Hon'ble the SupremeCourtin 33 of itsinAmericanHotel andjpara judgmentLodging Association's case (supra). Thus, on anapplication made by an institution, the prescribedauthoritycan grant approval subjectto such terms andconditions as it may deems fit provided that they are notin conflict with the provisions of the Act. Theparameters of earning profit beyond 15% and itsW.P.(C) Nos.1254/2010&2463/2010Page 6of > Page 6of8 investment wholly for educational purposes may be asexpressly stipulated per the statutory requirement.ThereaftertheAssessingAuthoritymayensurecompliance of those conditions. The cases whereexemptionhas been grantedearlierand the assessmentsare complete with the finding that there is nocontravention of the statutory provisions, need not bereopened.However,after grant of approvalif it comesto 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_13th proviso,the prescribedauthoritycan withdrawthe•approval. (3) The capital expenditurewholly and exclusivelytothe objects of education is entitled to exemption andwould not constitute part of the total income.the objects of education is entitled to exemption andwould not constitute part of the total income. (4) The educationalinstitutions,which are registeredasa would continue to retain their character as Society,such and would be eligible to apply for exemptionunder Section 10(23C)(vi)of the Act. [See para 8.7 ofthe - Aditanar Educational Institutioncase judgment(supra)' (5) Where more than 15% ofincome of an educationalfinstitutionis accumulatedon or after 01.04.2002,theperiodofaccumulationofthe amountexceeding15% isnot fivethe excess permissiblebeyond years, providedincomehas been appliedor accumulatedfor application*andfor theof education.wholly exclusivelypurpose ^ (6) ThejudgmentofUttraldiandHigh Courtrenderedinthe case of Queens EducationalSociety(supra)and theconnectedmatters, is not applicableto cases fall withinthe provisionsof Section10(23C)(vi)ofthe Act. Thereare various reasons, which have been discussed in para8.8 of the judgment, and the judgment of Allahabad W.P.(C)Nos.1254/2010&2463/2010 High Court rendered in the case of City Montessori School (supra) lays down the correct law." 8. In view of the aforesaid decisions, the opinion expressed by the ^ (6) ThejudgmentofUttraldiandHigh Courtrenderedinthe case of Queens EducationalSociety(supra)and theconnectedmatters, is not applicableto cases fall withinthe provisionsof Section10(23C)(vi)ofthe Act. Thereare various reasons, which have been discussed in para8.8 of the judgment, and the judgment of Allahabad W.P.(C)Nos.1254/2010&2463/2010 High Court rendered in the case of City Montessori School (supra) lays down the correct law." 8. In view of the aforesaid decisions, the opinion expressed by the respondent that the educational institutions seeking exemption should not generate any quantitative surplus is legally untanable and incorrect. The Chief Commissioner has erred in assuming that for exemption there should not be any surplus, otherwise the institution society exists for profit and not charity i.e. education in the present case. In view of the judgments of the Supreme Court, Bombay High Court and Punjab and Haryana High Court, reasoning inscribed by the competent authority solely on the foundation that there has been some surplus profit is unjustified. 9. In the result, we allow the writ petition and set aside the order passed by the competent authority and remit the matter to the said authority for fresh adjudication in accordance with law in the light of the aforesaid decisions . . •. CHIEF JUSTICE FEBRUARY 04, 2011 NA W.P.(C) Nos.1254/2010 & 2463/2010 SANJIV KHANNA, J. Page 8 of 8