Tca/619/2011 Of Commissioner Of Income Tax v. M/S Angels Educational Trust

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM The Honourable Mr.Justice T.S.SIVAGNANAMand The Honourable Mr.Justice SATHI KUMAR SUKUMARA KURUP Judgment Reserved On Judgment Pronounced On06.08.202117.08.2021T.C.A.No.619 of 2011 Commissioner of Income Tax,Salem .. Appellant/Respondent M/s.Angels Educational Trust,Aniyapuram Main Road,Aniyapuram Post, Namakkal. .. Respondent/Appellant Appeal under Section 260A of the Income Tax Act, 1961against the order dated 09.06.2011 made in I.T.A.No.1707(Mds)/2009 on the file of the Income Tax Appellate Tribunal 'D' Bench,Chennai.Against the order of the Commissioner of Income-Tax, Salem,dated 25.08.2009, made in C.No.9755 (159) SLM/2008-2009. This appeal, by the appellant/Revenue, filed under Section260A of the Income Tax Act, 1961 (hereinafter referred to as https://hcservices.ecourts.gov.in/hcservices/ “the Act”), is directed against the order dated 09.06.2011, madein I.T.A.No.1707(Mds)/2009 on the file of the Income TaxAppellate Tribunal 'D' Bench, Chennai (for brevity “theTribunal”). 2.The appeal was admitted on 20.02.2012, on the followingsubstantial question of law:- “Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in setting aside theorder of the Commissioner of Income Tax underSection 12 AA of the Income Tax Act and directinghim to grant registration to the assessee Trustwithout appreciating the various issues raised inthe order of the Commissioner of Income Taxpointing out the defects in the trust deed andalso the systematic earning of substantialsurplus of income out of the gross receipts?” 3.The respondent is a Trust (hereinafter referred to as“the assessee”), which came into being pursuant to a Deed ofTrust dated 28.08.1995, registered as Document No.30 of 1995 onthe file of the Sub Registrar, Mohanur. The Trust was foundedby four Trustees with a corpus of Rs.501/- established foreducational purposes and known as 'Angles Educational Trust'.The principle object of the Trust was to run an educational orother institutions to provide, establish, maintain, run, developand improve or assist in the establishment, maintenance,running, developing and improving education; to institute andaward scholarships to poor and deserving students and to assistthem in any manner of their study, research or apprenticeship.There were other objects of the Trust, which were incidental andancillary to the main object, viz., education. The first andsecond Trustees or their successors in office of the Board ofTrustees, were given full power and authority to administer theTrust, its properties and affairs and to do all acts, deeds andthings which were calculated to fulfil the objects of the Trustfor which it was established. 4.The 'powers of the Trustees' were enumerated in Clause 6of the Deed of Trust. 4.1.In terms of Clause 11 of the Deed of Trust, which dealswith 'application of income and trust fund', the Trustees shallafter providing for the payments mentioned in the Deed and itsdisbursements, apply and utilize the net income or the corpus ofthe Trust funds for the benefit of the citizens of India withoutany discrimination on the grounds of religion, sect, cast andcreed after complying with the provisions of the Act. 4.2.Clause 12 of the Deed of Trust provided that the founder of the Trustees and their relatives are not to bebenefited. 4.3.Clause 13 states that none of the Trustees shall beentitled to draw any remuneration from the Trust. 4.4.In terms of Clause 18, special power was given to thefirst Trustee to amend the covenants of the Trust except theobjects of the Trust and all or any other provisions of theTrust Deed, which castes obligation on them to conform with theprovisions of the Act as amended from time to time. 4.2.Clause 12 of the Deed of Trust provided that the founder of the Trustees and their relatives are not to bebenefited. 4.3.Clause 13 states that none of the Trustees shall beentitled to draw any remuneration from the Trust. 4.4.In terms of Clause 18, special power was given to thefirst Trustee to amend the covenants of the Trust except theobjects of the Trust and all or any other provisions of theTrust Deed, which castes obligation on them to conform with theprovisions of the Act as amended from time to time. 5.By Deed of Codicil dated 16.09.1999, registered asDocument No.107/1999, on the file of the Sub Registrar, Mohanur,decided to amend the Deed of Trust by altering certain clausesby enumerating the first trustee as the President and the secondtrustee as the Secretary of the Trust. By Deed of Codicil dated20.08.2009, on account of the death of the founder trustee andadmission of additional trustees, amended Clause 16 of the Deedof Trust by making the Trust as irrevocable. However, givingliberty to the Trustees to dissolve the Trust and decided tofollow the instructions issued by the Commissioner of IncomeTax, Salem (for brevity “the CIT”), to the effect that the Trustwill not carry on any activity with an intention of earningprofit; it will not carry any activity outside India and theincome of the Trust will be solely utilized towards the objects;and no portion of it will be utilized for payment to the membersby way of profit, interest, dividends etc. 6.The assessee-Trust filed an application in Form 10A dated27.03.2009, before the appellant for registration under Section12AA of the Act. The said application was rejected by theappellant by order dated 25.08.2009. In the said order, theappellant stated that the Trust runs a Matriculation School withinstructions both in English and Tamil Medium and alsoestablished a Teachers Training College from the financial year2007-08. The appellant noted the income in excess ofexpenditure for the two educational institutions for fourfinancial years, that is, from 2005-06 to 2008-09. The Trusteeswere called upon to explain and they stated that the excess ofincome over expenditure from the School fell down considerablyduring the financial years 2007-08 and 2008-09, on account ofcompetition by other educational institutions, which wereestablished in the neighbourhood and this prompted the assessee-Trust to provide free bus service to students, who opt foreducation in Tamil medium. Since the income over expenditurefrom the school considerably got reduced, the Trust establisheda Teacher Training College, which provided good returns and theprofits of the Trust increased during the financial years 2007-08 and 2008-09. According to the appellant, this was done witha clear motive for earning profits, which subsumes thecharitable activity of the assessee-Trust. The appellant stated that since the Trust is making profit year after year, thefunctioning of the Trust cannot be termed as 'charitable' and inthis regard, placed reliance on the decision of the High Courtof Uttaranchal in CIT vs. Queen's Educational Society reportedin (2009) 223 CTR 395. After extensively referring to the saiddecision, the appellant held that the net surplus made by theassessee-Trust, ever since its inception, clearly suggests thatthe educational institutions are being run on commercial lineswith a view of earning profits. For such reason, theapplication filed for Registration under Section 12AA of the Actwas rejected. Aggrieved by such order dated 25.08.2009, theassessee-Trust preferred appeal before the Tribunal. The appealwas allowed by order dated 09.06.2011, which is impugned beforeus. 7.Mr.J.Narayanaswamy, learned Senior Standing Counsel forthe appellant submitted that the Tribunal directed registrationto be granted to the assessee-Trust under Section 12AA withoutappreciating the detailed reasons set out by the appellant inhis order dated 25.08.2009, while rejecting the application.Further, it is submitted that the Tribunal failed to notice thatthe Trust was claiming exemption under Section 10(23C)(iiiad)whereas, there were non-educational objects, which were clearlybrought out by the appellant in his order dated 25.08.2009. 8.Further, it is submitted that the appellant had clearlymentioned that the covenants and conditions in the Deed of Trustas amended by two Codicils were self-contradictory and notingthis, the application was rejected, which aspect was notappreciated by the Tribunal. Further, it is submitted that theexcess of income shown for four years will clearly establishthat the Trust has been founded with a profit motive and withoutconsidering this aspect, the appeal was allowed. Further, it issubmitted that the Tribunal failed to take note of the fact thatall powers have been vested with two of the Trustees withoutnoticing that a corum was required and the majority of theTrustees alone could take a decision. Therefore, it issubmitted that the Tribunal erred in interfering with thereasoned order passed by the appellant dated 25.08.2009, whilerejecting the application. Therefore, it is submitted that theappeal may be allowed and the substantial question of law beanswered against the Revenue. 9.Mr.R.Sivaraman, learned counsel for the assessee-Trustsought to sustain the order passed by the Tribunal and submittedthat the Tribunal had elaborately considered the factualposition, the various conditions contained in the Deed of Trustand the two Codicils and clearly held that the Trust was notestablished with an intention of making profits, but with agenuine intention of serving for the cause of education more particularly, the students from rural background, who opted totake the medium of instruction in Tamil. 10.Further, it is submitted that the decision in Queen'sEducational Society (supra) rendered by the High Court ofUttaranchal was tested for its correctness before the Hon'bleSupreme Court by the Trust in Queen's Educational Society vs.CIT reported in (2015) 55 taxmann.com 255 (SC) and the saiddecision was reversed. Further, the said decision could nothave been applied to the case of the assessee-Trust, as the casewas whether the said Queen's Educational Society had fulfilledthe three requirements as stipulated under Section 10(23C) ofthe Act whereas, in the instant case, the issue is whether theapplication filed by the assessee-Trust for registration underSection 12AA could have been rejected. Therefore, the appellanterroneously rejected the application without noticing the factthat the claim made by the Queen's Educational Society was aclaim for exemption under Section 10(23C) of the Act and suchclaim made by them was rejected by the Assessing Officer, thesaid order was reversed by the CIT(A), which order was confirmedby the Tribunal in an appeal filed by the Revenue andchallenging the order, appeal was filed before the High Court,which was allowed by setting aside the order of the Tribunal andaffirming the order of the Assessing Officer and aggrieved bythe same, the said assessee filed appeal before the Hon'bleSupreme Court. It is submitted that in the said decision,various other decisions of the Hon'ble Supreme Court werereferred to and the law laid down in those decisions will cometo the aid and assistance of the assessee-Trust and therefore,the Tribunal rightly allowed the appeal filed by the assessee-Trust and directed registration to be granted under Section 12AAof the Act. 11.We have elaborately heard the learned counsels for theparties and perused the materials placed on record. 11.We have elaborately heard the learned counsels for theparties and perused the materials placed on record. 12.The undisputed facts are that the assessee-Trust wasestablished and is administering Matriculation School offeringeducation both in Tamil and English medium. It has alsoestablished a Teachers Training College during the financialyear 2007-08. The income for four financial years was takeninto consideration by the appellant and noting the figures, theappellant opined that the income is in excess of expenditure forboth the educational institutions and came to the conclusionthat the Trust has been established with a clear motive ofearning profits. 13.In Addl. CIT v. Surat Art Silk Cloth Mfr. Associationreported in (1980) 121 ITR 1, the Hon'ble Supreme Court whileconstruing the definition of “charitable purpose” in Section 2 https://hcservices.ecourts.gov.in/hcservices/ (15) of the Act, held that every Trust or institution must havea purpose for which it is established and every purpose must forits accomplishment involve the carrying of an activity. Theactivity must, however, be for profit in order to attract theexclusionary clause and the question therefore, is when can anactivity be said to be one for profit? It was held that it isnot enough that as a matter of fact, an activity results inprofit, but it must be carried on with the object of earningprofit. It was further observed that profit-making must be theend to which the activity must be directed or in other words,the predominant object of the activity must be making a profit.Further, where an activity is not pervaded by profit motive, butis carried on primarily for serving the charitable purpose, itwould not be correct to describe it as an activity for profit,though it may be carried on in advancement of the charitablepurpose of the Trust or institution. It was further pointed outthat the predominant object of such activity must be to subservethe charitable purpose and not to earn profit. 14.By referring to the decision in the case of Dharmadeeptivs. CIT reported in (1978) 3 SCC 499, it was pointed out thatthe activity must be “essentially charitable in nature” and itmust not be a cover for carrying on an activity, which hasprofit making as its predominant object. Further, it waspointed out that this interpretation of the exclusionary clausein Section 2(15) derives considerable support from the speechmade by the Finance Minister while introducing that provision.It was further pointed out that the test to be applied iswhether the predominant object of the activity involved incarrying out the object of general public utility is to subservethe charitable purpose or not to earn profit. Where profitmaking is the predominant object of the activity, the purpose,though an object of general public utility, would cease to be acharitable purpose. But where the predominant object of theactivity is to carry out charitable purpose and not to earnprofit, it would not lose its character of a charitable purposemerely because some profit arises from the activity. Further,it was pointed out that the exclusionary clause does not requirethat the activity must be carried on in such a manner that itdoes not result in any profit. Further, it would be difficultfor persons in-charge of a Trust or institution to carry on theactivity that the expenditure balances the income and there isno resulting profit and that would not only be difficult ofpractical realisation, but would also reflect unsound principleof management. The Hon'ble Supreme Court agreed with thedecision in Sole Trustee, Loka Shikshana Trust vs. CIT reportedin (1975) 101 ITR (SC), that if the profits must necessarilyfeed a charitable purpose under the terms of the Trust, the merefact that the activities of the Trust yield profit will notalter the charitable character of the Trust. 15.The decision in Aditanar Educational Institution vs.Addl. CIT reported in (1997) 224 ITR 301 was noted wherein, itwas observed that the decisive or acid test is whether anoverall view of the matter, the object is to make profit. Thus,the law, which was common to Section 10(23C)(iiiad) and Section10(23C)(vi) was summed up as follows:- “11. Thus, the law common to Section 10(23C) (iiiad) and (vi) may be summed up as follows:1) Where an educational institution carrieson the activity of education primarily foreducating persons, the fact that it makes asurplus does not lead to the conclusion that itceases to exist solely for educational purposesand becomes an institution for the purpose ofmaking 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 beingcarried on "for profit". No inference arises thatmerely because imparting education results inmaking a profit, it becomes an activity forprofit. 4) If after meeting expenditure, a surplusarises incidentally from the activity carried onby the educational institution, it will not becease to be one existing solely for educationalpurposes. 5) The ultimate test is whether on anoverall view of the matter in the concernedassessment year the object is to make profit asopposed to educating persons.” 16.The Court took into consideration the decision of theHigh Court of Punjab and Haryana, which has been followed by theDelhi High Court in St. Lawrence Educational Society (Regd.) vs.CIT reported in (2013) 353 ITR 320 and also in Tolani EducationSociety vs. Dy. DIT (Exemptions) reported in (2013) 35 ITR 184,where the High Court of Bombay held that the petitioner(therein) has a surplus of income over expenditure for the threeyears cannot by any stretch of logical reasoning, lead to theconclusion that the petitioner therein does not exist solely foreducational purposes or that it exists only for profit. https://hcservices.ecourts.gov.in/hcservices/ Further, it was held that the test to be applied is as towhether the predominant nature of the activity is educational.The fact that an incidental surplus, which is generated andwhich has resulted in additions to the fixed assets, is utilizedtowards upgrading the facilities of the educational institution,was held to be permissible. Further, it was observed thatwithout the advancement of technology, no college or institutioncan offer to remain stagnant. Further, it was held that aneducational institution cannot be prohibited from upgrading itsinfrastructure or facilities save on the pain of losing thebenefit of the exemption under Section 10(23C) and imposing sucha condition, which is not contained in the statute, would leadto a perversion of the basic purpose for which such exemptionshave been granted to educational institutions. It was furtherpointed out that knowledge in contemporary times is technologydriven. Educational institutions have to modernize, upgrade andrespond to the changing ethos of education. The said decisionof the High Court of Bombay and the other decisions of the HighCourts were approved by the Hon'ble Supreme Court. 17.Bearing the above legal principles in mind, we proceededto examine the facts of the case. Though the order passed bythe appellant dated 25.08.2009, which was impugned before theTribunal, appears to be an elaborate order, it is so because theappellant had quoted extensively from the decision of the HighCourt of Uttaranchal, which has been set aside by the Hon'bleSupreme Court. The only reason we can decipher from theimpugned order, which was the basis for rejection of theapplication, is on the ground that for four financial years, theincome of the Trust was in excess of its expenditure from thetwo educational institutions. 17.Bearing the above legal principles in mind, we proceededto examine the facts of the case. Though the order passed bythe appellant dated 25.08.2009, which was impugned before theTribunal, appears to be an elaborate order, it is so because theappellant had quoted extensively from the decision of the HighCourt of Uttaranchal, which has been set aside by the Hon'bleSupreme Court. The only reason we can decipher from theimpugned order, which was the basis for rejection of theapplication, is on the ground that for four financial years, theincome of the Trust was in excess of its expenditure from thetwo educational institutions. 18.The learned Senior Standing Counsel for the appellantwould point out that for the financial years 2005-06 and 2006-07, the excess income from the Matriculation School is close to20% and for the financial years 2007-08 and 2008-09, the excessincome from the Teachers Training College is 50% and this willclearly show that the motive for establishing the Trust was onlyfor the purpose of earning profit and not for a charitableactivity. The manner in which the appellant had approached theissue is wholly erroneous. There is no finding rendered by theappellant that the Trust was established solely for makingprofit. The appellant has not rendered any finding that theactivities of the Trust were carried on only with the object ofearning profit and whether such was the predominant object ofthe assessee-Trust, no such finding has been rendered by theappellant while rejecting the application. The explanationoffered by the assessee-Trust was that on account of variousother educational institutions come up in the neighbourhood, theincome generated from the school had grossly fallen down and at that juncture, the Trust took a decision to establish a TeacherTraining College, which proved to be successful. The specificcase of the assessee-Trust was that they have provided free busservices to the students, who opted to study in Tamil medium.This was with a view to encourage students to attend the schooland obviously would fulfil the object for which the Trust wasestablished. Therefore, the Tribunal was right in holding thatthe appellant has not brought down any material on record toshow that the assessee-Trust was motivated by earning profit.The Tribunal appreciated the assessee-Trust for establishing theschool with medium of instruction in Tamil and that itself washeld to be a charitable activity carried on by the assessee-Trust and by providing free bus service, it would motivate thestudents to attend the school and get themselves educated inTamil medium and merely because, bus services were provided freeof cost cannot be treated to be an activity for making profit.The assessee's institution was rightly regarded as aninstitution carrying on educational activity and in the absenceof any material available with the appellant, the Tribunal wasright in itself observing that there was nothing on record toshow that the Teachers Training College has been establishedsolely for making profit. Furthermore, the Tribunal was rightin its observation that excess of income over expenditure byitself is not a reason to hold that the assessee-Trust is notengaged in charitable activities. Furthermore, there was nofinding that the Trustees had applied the monies of the Trustfor their personal benefit or for any other purpose other thaneducation. The infrastructure facilities, which were providedby the assessee-Trust were also rightly taken note of by theTribunal. 19.With regard to the observation of the appellant thatonly two of the Trustees were authorized to administer theTrust, the same was held to be not a reason to reject the caseof the assessee-Trust and it is common that the day-to-dayactivities of a Trust cannot be entrusted to all 14 Trustees andtherefore, the President and Secretary of the Trust have toadminister the Trust and there is nothing wrong in such anarrangement made by the assessee. Furthermore, the Tribunal wasright in observing that if in any particular assessment year, ifthere was any error in the manner in which the funds of theTrust were administered, it would be open to the AssessingOfficer to examine the case and decide as to whether theassessee-Trust was entitled to the benefit of Section 11 of theAct for a particular assessment year or not. Thus, the Tribunalrightly held that the assessee-Trust was entitled toregistration under Section 12AA of the Act. 20.Thus, for the above reasons, we find that there is noerror in the order passed by the Tribunal by directing registration to be granted to the assessee-Trust under Section12AA of the Act. 21.In the result, the appeal, filed by the appellant-Revenue, is dismissed and the substantial question of law isanswered against the Revenue. No costs. Sd/-Assistant Registrar(CS-III) // True Copy// Sub Assistant Registrar abr To 1.The Income Tax Appellate Tribunal 'D' Bench, Chennai. 2.The Commissioner of Income-Tax,Salem. Pre-delivery Judgment made inT.C.A.No.619 of 2011 RLD(CO)SU(07/09/2021)