The Commissioner Of Income Tax, Rohtak v. Jat Education Society, Rohtak

ITA No. 133 of 2014 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 133 of 2014 (O&M) Date of Decision: 17.9.2015 The Commissioner of Income Tax, Rohtak ....Appellant. Versus Jat Education Society, Rohtak ...Respondent. 1.Whether the Reporters of the local papers may be allowed to see the judgment?the judgment? 2.To be referred to the Reporters or not? Yes 3.Whether the judgment should be reported in the Digest? CORAM:-HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE RAMENDRA JAIN. PRESENT: Mr. Inderpreet Singh, Advocate for the appellant. Mr. Pankaj Jain, Senior Advocate with Mr. Madhur Sharma, Advocate, Mr. Divya Suri, Advocate, Mr. Deepanshu Jain, Advocate and Mr. Sachin Bhardwaj, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This order shall dispose of ITA Nos. 133 and 140 of 2014 as according to the learned counsel for the appellant, the issue involvedtherein is identical. For brevity, the facts are being taken from ITA No.133 of 2014. 2.ITA No. 133 of 2014 has been preferred by the revenueunder Section 260A of the Income Tax Act, 1961 (in short “the Act”)against the order dated 19.7.2013 (Annexure A-III) passed by the ITA No. 133 of 2014 Income Tax Appellate Tribunal, Delhi Bench 'D', New Delhi (hereinafterreferred to as “the Tribunal”) in ITA No. 2543/Del/2011, relating to theassessment year 2007-08, claiming the following substantial questionsof law:- a. Whether Hon'ble ITAT is justified in law indeleting the addition of Rs.21,04,921/- made bythe Assessing Officer by taxing the surplus asthe assessee society viz. The Jat EducationSociety, which is the parent body of all theinstitutions, has not been granted registrationu/s 12AA of the Act and thus was not eligible forexemption u/s 11; the Hon'ble ITAT on the otherhand did not specifically adjudicate on this issueand erroneously held that the society is coveredunder provision of Section 10(23C)(iiiab) of theAct? b. Whether Hon'ble ITAT is justified in law indeleting the addition of Rs.72,20,522/- made byAssessing Officer by withdrawing the exemptionu/s 10(23C)(iiiab) of the Act to one of institutesrun by the society viz. All India Jat HeroesMemorial College as this institute received grantof 45.95% of the gross aggregate receiptswhich fell far short of 'substantially' financed bythe Government; the Hon'ble ITAT allowed theexemption u/s 10(23C)(iiiab) by relying upon thejudgment of Hon'ble Karnataka High Court in ITA No. 133 of 2014 ITA No. 1133 of 2008 wherein the grant of34.33% was considered 'substantial' but theRevenue has not accepted this judgment andhas filed appeal against the order in Hon'bleSupreme Court? 3.An application bearing CM No. 26348-CI of 2014 was filedby the learned counsel for the revenue for framing additional substantialquestion of law. This Court vide order dated 27.11.2014 allowed the saidapplication and the additional substantial question of law was taken onrecord which is to the following effect:- ITA No. 133 of 2014 ITA No. 1133 of 2008 wherein the grant of34.33% was considered 'substantial' but theRevenue has not accepted this judgment andhas filed appeal against the order in Hon'bleSupreme Court? 3.An application bearing CM No. 26348-CI of 2014 was filedby the learned counsel for the revenue for framing additional substantialquestion of law. This Court vide order dated 27.11.2014 allowed the saidapplication and the additional substantial question of law was taken onrecord which is to the following effect:- c.Whether the Hon'ble ITAT is justified in law indeleting the addition of Rs.7,16,023/- enhancedby the Ld. CIT(A) by withdrawing the exemptionunder Section 10(23C)(iiiab) of the Act to AllIndia Jat Heroes Memorial College, aninstitution run by the assessee, by relying on anispofactoerroneousnon-contextualinterpretation of the definition of the term'Substantially financed by the Government' ofthe above section, by relying on unrelatedstatutory provisions of the Banking RegulationAct, 1949 and Section 40A(2)(a) of the IncomeTax Act wherein the interpretation is qua anabsolutely dis-similar fact of substantial interestof a person in a company or firm?deleting the addition of Rs.7,16,023/- enhancedby the Ld. CIT(A) by withdrawing the exemptionunder Section 10(23C)(iiiab) of the Act to AllIndia Jat Heroes Memorial College, aninstitution run by the assessee, by relying on anispofactoerroneousnon-contextualinterpretation of the definition of the term'Substantially financed by the Government' ofthe above section, by relying on unrelatedstatutory provisions of the Banking RegulationAct, 1949 and Section 40A(2)(a) of the IncomeTax Act wherein the interpretation is qua anabsolutely dis-similar fact of substantial interestof a person in a company or firm? 4.Put shortly, the facts necessary for adjudication of thepresent appeal as narrated therein are that the assessee filed its return on 31.10.2007 for the assessment year 2007-08 declaring nil income.The assessment was completed under Section 143(3) of the Act by theAssessing Officer vide order dated 29.12.2009 (Annexure A-I). Theassessee was granted registration under Section 12AA of the Act fromthe financial year 2008-09 and, therefore, for the assessment year 2007-08, the exemption under Section 11 of the Act was not applicable. Theassessee had claimed exemption under Section 10(23C)(iiiab) of the Acton the entire income as per the return of income. Accordingly, theassessee was assessed at an income of ` 93,25,443/-. Feelingaggrieved, the assessee filed an appeal before the Commissioner ofIncome Tax (Appeals) [for brevity “the CIT(A)”]. The CIT(A) vide orderdated 10.3.2011 (Annexure A-II) dismissed the appeal holding that theassessee was not eligible for exemption under Section 10(23C)(iiiab) ofthe Act. Still dissatisfied, the assessee filed an appeal before theTribunal who vide order dated 19.7.2013 (Annexure A-III) allowed theappeal by relying upon its earlier order in the case of the assessee forthe assessment years 2003-04 and 2004-05. The Tribunal further, interalia, held that the institution/society run by the assessee had receivedsubstantial Government aid for the purpose of claiming exemption underSection 10(23C)(iiiab) of the Act. Hence, the present appeals. 5.We have heard learned counsel for the parties and perused the record. 6.After hearing learned counsel for the parties, in our opinion,the issue that arises for consideration in these two appeals is whetherthe Institution/Society run by the assessee received substantialcontribution towards the corpus of the assessee or not so as to claimexemption under Section 10(23C)(iiiab) of the Act? 7.It would be expedient to reproduce clause (iiiab) of sub-section (23C) of Section 10 of the Act which reads thus:- “Income not included in total income. 5.We have heard learned counsel for the parties and perused the record. 6.After hearing learned counsel for the parties, in our opinion,the issue that arises for consideration in these two appeals is whetherthe Institution/Society run by the assessee received substantialcontribution towards the corpus of the assessee or not so as to claimexemption under Section 10(23C)(iiiab) of the Act? 7.It would be expedient to reproduce clause (iiiab) of sub-section (23C) of Section 10 of the Act which reads thus:- “Income not included in total income. 10.In computing the total income of a previous yearof any person, any income falling within any of thefollowing clauses shall not be included- (1) to (23BBC)XXXXXX(23C)(iiiab) Any university or other educationalinstitution existing solely for educational purposes andnot for purposes of profit, and which is wholly orsubstantially financed by the Government. (23D) onwards XXXXXX” 8.A plain reading of the said clause shows that any universityor other educational institution existing for educational purposes and notfor profit and is wholly or substantially financed by the Government isentitled to claim exemption from income tax under the Act. 9.Learned counsel for the assessee has relied upon thejudgments of the Karnataka High Court in Commissioner of Income Tax v. National Education Society, ITA No. 808 of 2009,Commissioner of Income Tax v. Indian Institute of Management(2011) 196 Taxman 276 (Kar.) against which Special Leave Petitionshave been dismissed by the Supreme Court and Commissioner ofIncome Tax v. Deshiya Vidya Shala Samithi, ITA No. 1133 of 2008decided on 8.2.2011 to urge that the assessee was substantiallyfinanced by the Government and was, therefore, entitled to benefit underSection 10(23C)(iiiab) of the Act. 10.The Karnataka High Court in Indian Institute of ITA No. 133 of 2014-6- Management's case (supra) applying its earlier decision in NationalEducation Society's case (supra) where there was financing of37.85% by the Government held the assessee to be entitled to eligiblefor exemption under Section 10(23C)(iiiab) of the Act with the followingobservations:- “3.Learned counsel for the appellant assailing theimpugned order contends that, admittedly, out of totalreceipt of ` 20.61 lakhs the grant from the CentralGovernment is only ` 7.80 lakhs which works out tohardly 37.85 per cent. It does not exceed 50 per centand, therefore, the assessee is not entitled toexemption. The Tribunal committed serious error ininterfering with the order of assessment and,therefore, he submits that case for interference ismade out. 4.This Court had an occasion to consider s. 10(23C)(iiiab) in the case of CIT vs. National EducationSociety (IT Appeal No. 808 of 2009), where it washeld as under:- “Para 4. The word 'substantial' has not beendefined under the IT Act. However, it has beenthe subject-matter of interpretation by variousCourts in various contexts. The authorities indeciding what constitutes a 'substantial' portionof the finance have taken note of the statutoryprovisions contained in the Banking RegulationAct, 1949, where a person who has the beneficial interest of more than 10 per cent ofthe total capital subscribed by all the partners ofthe firm has been held to be having substantialinterest. Similarly, 'substantial interest' has alsobeen defined in Explanation to s. 40A(2)(a) ofthe IT Act, where a person who is having votingpower of not less than 20 per cent in the case ofthe company, is deemed to have substantialinterest in the business of the company. “Para 4. The word 'substantial' has not beendefined under the IT Act. However, it has beenthe subject-matter of interpretation by variousCourts in various contexts. The authorities indeciding what constitutes a 'substantial' portionof the finance have taken note of the statutoryprovisions contained in the Banking RegulationAct, 1949, where a person who has the beneficial interest of more than 10 per cent ofthe total capital subscribed by all the partners ofthe firm has been held to be having substantialinterest. Similarly, 'substantial interest' has alsobeen defined in Explanation to s. 40A(2)(a) ofthe IT Act, where a person who is having votingpower of not less than 20 per cent in the case ofthe company, is deemed to have substantialinterest in the business of the company. Para 5. In the case of assessee itself, when thegrant was more than 50 per cent, exemptionhas been extended to the assessee. It is in thiscontext, in the absence of any definition for theword 'substantial' in the Act, what is to be seenis, what is the total receipts and from whatsource. In that context, we have to find outwhether the grant of 36.42 per cent of totalreceipts constitutes substantial finance by theGovernment.” 5.Applying the aforesaid law, in the instant case,the total income of the assessee from all sources isRs.20.61 lakhs. Out of which, a sum of Rs.7.80 lakhswhich represents only 37.85 per cent of the totalincome is financed by the Central Government, theother source of income being tuition fee, donations,etc. In that context, it is clear that this amount ofRs.7,80,000/- given as grant by the Central Government to this assessee constitutes substantialfinance by the Government. Accordingly, as rightlyheld by the authorities below the assessee qualifiesfor exemption under the aforesaid provision.” 11.In the present case, there has been financing by theGovernment when examined on individual institution basis to be rangingfrom 41% to 82% whereas when the percentage is taken for the societyas a whole then it comes to 44.52% and 45.15% for the two years. TheTribunal after appreciation of evidence held that the Government wassubstantially financing and interested in the management of therespondent-assessee and, therefore, were eligible for exemption underSection 10(23C)(iiiab) of the Act. The relevant findings of the Tribunalare as under:- “9.In the above decision, the Hon'ble Court hasconsidered 34.33% as substantial aid for the purposeof eligibility under the above said sections. In thepresent case, the percentage of grant if consideredindividually for each institution come out within therange of 41% to 82% as noted in the order of Ld. CIT(A) on pages 5 & 6. If the percentage is consideredfor the society as a whole even then the percentagecomes out at 44.52% and 45.15% in the two years.Therefore, from both angles, the percentage of grantsin aid with respect to total receipts are more than34.33% considered by the Hon'ble Karnataka HighCourt to be substantial. Therefore, following theabove judgment with respect to definition of substantial interest, we hold that the assessee/institutions were substantially financed/aided by theGovernment and hence are eligible for exemption u/s 10(23C)(iiiab).” 12. In view of the above, the Tribunal was right in holding thatthe aid given by the Government to the assessee constitutes substantialfinance by the Government which had entitled the assessee to claimexemption under Section 10(23C)(iiiab) of the Act. 13.No infirmity or perversity could be pointed out by the learnedcounsel for the revenue in the findings recorded by the Tribunal. Thesubstantial questions of law as claimed by the revenue are answeredaccordingly and consequently, finding no merit in the appeals, the sameare hereby dismissed. (AJAY KUMAR MITTAL)JUDGE September 17, 2015(RAMENDRA JAIN)gbsJUDGE