Wp/26985/2010 Of M/S. R.r.m. Educational Society v. The Chief Commissioner Of Income -Tax

THE HON'BLE SRI JUSTICE V.V.S.RAOAND THE HON'BLE SRI JUSTICE RAMESH RANGANATHANW.P.No.26985 OF 2010 ORDER:(Per Hon’ble Sri Justice Ramesh Ranganathan) The relief sought for in this writ petition is to declare theproceedings of the 1[st] respondent – Chief Commissioner ofIncome Tax dated 26.5.2010 as illegal and arbitrary. Aconsequential direction is sought to the 1[st] respondent to grantapproval to the petitioner under Section 10(23C)(vi) of the IncomeTax Act, 1961 (hereinafter called “the Act”). The objects of the petitioner, a society registered under theAndhra Pradesh (Telangana Areas) Public Societies RegistrationAct, 1350 Fasli with Registration No.6402/99 dated 8.9.1999 are as follows: (i) To open, run and continue an institution for providing Higher, Technicaland Medical Education and Training to the student community of students topromote literacy and eradicate unemployment; (ii) To open, run and continue the Hostels for the poor students community;(iii) To organize seminars, workshops, debates, camps and forums etc., forpoor student community (iv) To encourage social, educational and literary activities among thestudents; (v) To open run and continue primary, secondary and High Schools forstudents, and (vi) to conduct cultural programmes, help for poor people of community fortheir study. The aforesaid objects are said to have been amended in themeeting held on 27.1.2010, and the amended objects registered with the Registrar of Societies on 24.8.2009. The objects, afteramendment, are as under: (a)To open, run continue an institution for providing Higher, Technicaland Medical Education and Training to the student community ofstudents to promote Literacy and Eradicate Unemployment andand Medical Education and Training to the student community ofstudents to promote Literacy and Eradicate Unemployment and (b)To open, run and continue primary, secondary and high schoolsfor students.for students. It is the petitioner’s case that they have been runningvarious educational institutions, including P.G. colleges,Engineering colleges etc., after obtaining necessary approval fromthe appropriate authorities; and they have been filing income taxreturns regularly claiming exemption under the Income Tax Act,1961 (hereinafter called the “Act”) on the ground that theirexistence is solely for educational purposes, and not for profit. They submitted an application in Form 56D, along with necessaryenclosures, on 27.5.2009 before the Director of Income Tax(Exemptions), seeking approval under Section 10(23C)(vi) of theAct. The Dy. Commissioner of Income Tax issued notice dated3.5.2010 informing the petitioner that, in view of the time limitprescribed under the fourteenth provision to Section 10(23C) of theAct, the application filed by them on 27.5.2009, in so far as itrelated to the assessment year 2008-09, was not in accordancewith the proviso and was beyond time; some of their objects werenon-educational in nature; inclusion of such objects indicated thatthe society did not exist solely for the purpose of education; and,as they were not registered under Section 43 of the A.P.Charitable and Hindu Religious Institutions and Endowments Act,1987 (A.P. Act 30 of 1987), their application was liable to berejected. The petitioner was asked to furnish details of the corpusfund deposit of Rs.35.00 lakhs appearing in the balance sheet on 31.3.2008. They were directed to appear before the 1[st] respondentfor hearing on 14.5.2010. The petitioner submitted their reply tothe show cause notice on 17.5.2010. However their applicationwas rejected by the 1[st] respondent by proceedings dated26.5.2010 on the ground that, in so far as the assessment year2008-09 was concerned, the application filed by them on 27.5.2009was beyond time; and, in so far as the assessment year 2009-10was concerned, some of their objects were non-educational, andthey were not registered under A.P. Act 30/87. It is this order ofthe 1[st] respondent dated 26.5.2010 which is under challenge in thiswrit petition. 31.3.2008. They were directed to appear before the 1[st] respondentfor hearing on 14.5.2010. The petitioner submitted their reply tothe show cause notice on 17.5.2010. However their applicationwas rejected by the 1[st] respondent by proceedings dated26.5.2010 on the ground that, in so far as the assessment year2008-09 was concerned, the application filed by them on 27.5.2009was beyond time; and, in so far as the assessment year 2009-10was concerned, some of their objects were non-educational, andthey were not registered under A.P. Act 30/87. It is this order ofthe 1[st] respondent dated 26.5.2010 which is under challenge in thiswrit petition. The order of the 1[st] respondent is under challenge on theground that he ought to have condoned the delay in filing theapplication in seeking approval by adopting a liberal approach; theonly activity carried on by the petitioner ever since their inceptionwas to conduct educational activities; and the 1[st] respondent oughtto have considered the amended objects as has been done in thecase of similarly placed institutions. Under the first proviso to Section 10(23C)(vi) of the Act,educational institutions are required to make an application, in theprescribed form and manner, to the prescribed authority for thepurpose of grant of exemption or continuance thereof. The secondproviso enables the prescribed authority, before approving anyeducational institution under sub-clause (vi), to call for suchdocuments including audited annual accounts or information fromthe educational institution, as it thinks necessary, in order tosatisfy itself about the genuineness of the activities of such educational institution. The second proviso also enables theprescribed authority to make such enquiries as it deemsnecessary. The fourteenth proviso to Section 10(23C) of the Act,in its entirety, was inserted by the Finance Act 2006 with effectfrom 1.6.2006 and, prior to its amendment by Finance Act, 2009,required an educational institution which makes an application, onor after the first day of June, 2006, for the purpose of grant ofexemption or continuance thereof to make an application at anytime during the financial year immediately preceding theassessment year. After its amendment by Finance Act, 2009, withretrospective effect from 1.4.2009, the fourteenth proviso toSection 10(23C) stipulates that where an educational institution,referred to in the first proviso, makes an application, on or afterthe first day of June, 2006, for the purpose of grant of exemptionor continuance thereof, such application shall be made on orbefore the 30[th] day of September of the relevant assessment yearfor which the exemption is sought. Admittedly the petitioner submitted their application, for theassessment year 2008-09, only on 27.5.2009. Even after theamendment to the fourteenth proviso, by Finance Act 2009, withretrospective effect from 1.4.2009, the application is required to bemade on or before the 30[th] day of September of the relevantassessment year and, as such, the application ought to have beenfiled on or before 30[th] of September 2008. Before the amendment,the fourteenth proviso required the application to be made in thefinancial year immediately preceding the assessment year, inwhich case the application for the assessment year 2008-09 oughtto have been made on or before 31.3.2008. No power is vested with the Chief CIT to entertain anapplication, filed under Section 10(23C)(vi), beyond the statutoryperiod by condoning the delay in presenting the application. In thiscontext, it is relevant to reproduce the Notes on Clauses to theFinance Bill, 2006 which reads thus:- “Providing a time-limit for application for grant of exemption orcontinuance of exemption for certain charitable and religionstrusts and institutions and certain educational and medicalinstitutions. No power is vested with the Chief CIT to entertain anapplication, filed under Section 10(23C)(vi), beyond the statutoryperiod by condoning the delay in presenting the application. In thiscontext, it is relevant to reproduce the Notes on Clauses to theFinance Bill, 2006 which reads thus:- “Providing a time-limit for application for grant of exemption orcontinuance of exemption for certain charitable and religionstrusts and institutions and certain educational and medicalinstitutions. Under the existing provisions contained in Sub-clauses (iv),(v), (vi) and (via) of Clause (23C) of Section 10, there is notime-limit for any university or other educational institution orany hospital or other institutions, or any fund or trust orinstitution specified therein to make an application for issue ornotification/grant of approval or continuance thereof. It is proposed to insert a new proviso in Clause (23C), so asto provide a time-limit for the purposes of making anapplication under the said sub-clause. Such application forgrant of exemption or continuance thereof under any of thesesub-clauses shall have to be filed at any time during thefinancial year immediately preceding the assessment yearfrom which such exemption is sought. Such applicationcannot be made for any earlier period. The proposedamendment shall apply only in respect of applications whichare made on or after 1st June, 2006. This amendment will take effect from 1st June, 2006.” The fourteenth proviso to Section 10(23C), has beeninserted by the Finance Act 2006, inter alia, to provide for a periodof limitation for entertaining applications, under Section 10(23C)(vi) for grant of exemption, on or after the 1[st] June, 2006. Thelegislature has, however, not made any provision for condonationof the delay in presenting such an application. The Chief CIT,being a creature of the statute, cannot travel beyond the statutory provisions, and could not, therefore, have condoned the delay inpresenting the application under Section 10(23C)(vi) beyond theperiod of limitation. (Roland Educational and Charitable Trust v.Chief Commissioner, Income Tax[[1]]). In as much as the Fourteenth proviso does not empower theChief Commissioner of Income Tax to condone the delay in filingthe application, the order passed by him, rejecting the petitioner’sapplication for the assessment year 2008-09 on the ground that itwas belated, cannot be faulted. In order to be eligible for exemption, under Section 10(23C)(vi) of the Act, it is necessary that there must exist an educationalinstitution. Secondly, such institution must exist solely foreducational purposes and, thirdly, the institution should not existfor the purpose of profit. (Commissioner of Income Tax v.Sorabji Nusserwanji Parekh[[2]]). In deciding the character of therecipient of the income, it is necessary to consider the nature ofthe activities undertaken. If the activity has no co-relation toeducation, exemption has to be denied. The recipient of theincome must have the character of an educational institution to beascertained from its objects. (Aditanar Educational Society v. ACIT[[3]]). The emphasis in Section 10(23C)(vi) is on the word"solely". "Solely' means exclusively and not primarily. (Commissioner of Income-tax, Hyderabad v. GurukulGhatkeswar of Hyderabad[[4]];Commissioner of Income Tax v.Maharaja Sawai Mansinghji Museum Trust[[5]]). In using theexpression, “solely”, the legislature has made it clear that it ACIT[[3]]). The emphasis in Section 10(23C)(vi) is on the word"solely". "Solely' means exclusively and not primarily. (Commissioner of Income-tax, Hyderabad v. GurukulGhatkeswar of Hyderabad[[4]];Commissioner of Income Tax v.Maharaja Sawai Mansinghji Museum Trust[[5]]). In using theexpression, “solely”, the legislature has made it clear that it intends to exempt the income of the institutions established solelyfor educational purposes and not for commercial activities.(Oxford University Press v. CIT[[6]]). This requirement wouldmilitate against an institution pursuing objects other thaneducation. (Vanita Vishram Trust v. Commissioner of Income-tax[[7]]). Even if one of the objects enables the institution toundertake commercial activities, it would not be entitled forapproval under Section 10(23-C)(vi) of the Act. (American Hotel& Lodging Association Educational Institute v. CBDT[[8]]). It isonly if the objects reveal that the very being of the assessee-society, as an educational institution, is exclusively for educationalpurposes and not for profit, would the assessee be entitled forexemption under Section 10(23-C)(vi) of the Act. (GurukulGhatkeswar of Hyderabad[4]). In case of a dispute, whether the claim of the assessee tobe exempted from tax is admissible or not, it is necessary for theassessee to establish that it is part of an institution which isengaged solely for educational purposes and not for the purposesof profit, and the income in respect of which exemption is claimedis a part of the income of the institution. (Oxford UniversityPress[6]). The activities of the institution, its objects, its source ofincome and its utilization, must be analysed by the prescribedauthority to ascertain whether it exists solely for education and notfor profit, and it is his duty to ascertain whether the income isapplied wholly and exclusively for the educational objects forwhich purpose the applicant is established. (ACIT v. Surat Art Silk Manufacturers Association[[9]];American Hotel[8]). The test of predominant object of the activity is to be seen,whether it exists solely for education and not to earn profit. (Addl.Commissioner of Income Tax v. Surat Art Silk ClothManufacturers Association[[10]];American Hotel[8]; PinegroveInternational Charitable Trust v. UOI[[11]]). The decisive test iswhether, on an overall view of the matter, the object is to carry oneducational activities or to make profit. (Aditanar EducationalInstitution[3]). If there are several objects of a society some of whichrelate to “education” and others which do not, and the trustees orthe managers in their discretion are entitled to apply the income orproperty to any of those objects, the institution would not be liableto be regarded as one existing solely for educational purposes,and no part of its income would be exempt from tax. In otherwords, where the main or primary objects are distributive, eachand everyone of the objects must relate to “education” in order thatthe institution may be held entitled for the benefits under Section10(23-C)(vi) of the Act. If the primary or dominant purpose of aninstitution is “educational”, another object which is merely ancillaryor incidental to the primary or dominant purpose would notdisentitle the institution from the benefit. The test which has,therefore, to be applied is whether the object, which is said to benon-educational, is the main or primary object of the institution orit is ancillary or incidental to the dominant or primary object which is “educational”. (Surat Art Silk Cloth Manufacturers Association[10]). The test is the genuineness of the purposetested by the obligation created to spend the money exclusively on"education". If that obligation is there, the income becomes entitledto exemption. (Sole Trustee, Loka Shikshana Trust v.C.I.T[[12]]). is “educational”. (Surat Art Silk Cloth Manufacturers Association[10]). The test is the genuineness of the purposetested by the obligation created to spend the money exclusively on"education". If that obligation is there, the income becomes entitledto exemption. (Sole Trustee, Loka Shikshana Trust v.C.I.T[[12]]). Under the third proviso to Section 10(23-C)(vi) theprescribed authority has to ascertain, while examining thegenuineness of the activities of the institution, whether theapplicant applies its income wholly and exclusively to the objectsfor which it is established. The applicant has not only to impart,but must also apply its income exclusively for the purposes of, education. (American Hotel[8]). The words 'not for the purposesof profit' accompanying the words 'existing solely foreducational purposes' has to be read and interpreted keeping inview the third proviso to Section 10(23C)(vi) which prescribes themethodology for utilization and accumulation of income at thehands of the educational institution. As a result 85% of the incomehas to be applied by the educational society for the purpose ofeducation. The third proviso requires the applicant society toapply its income, or accumulate it for application, wholly andexclusively, to the objects for which it is established. The word'wholly' refers to the quantum of expenditure and the word'exclusively' refers to the motive, object or the purpose ofexpenditure. (Pinegrove International Charitable Trust[11]; VanitaVishram Trust[7]). The threshold conditions are aimed at discovering the actualexistence of an educational institution and approval of theprescribed authority for which an application in the standardizedform, in terms of the first proviso, has to be given by everyapplicant. If the educational institution actually exists foreducational purposes alone should the prescribed authority permitit to operate. (American Hotel[8]; Pinegrove InternationalCharitable Trust[11]). The objects of the petitioner, as it originally stood, included “toeradicate unemployment”; “to encourage social activitiesamong the students” and to “help poor people of communityfor their study”. These objects do not relate solely to education.The sense in which the word "education" has been used, inSection 2(15) of the Income Tax Act, is the systematic instruction,schooling or training given to the young in preparation for the workof life. It also connotes the whole course of scholastic instructionwhich a person has received. The word "education", in Section2(15), has not been used in that wide and extended senseaccording to which every acquisition of further knowledgeconstitutes education. What education connotes, in that clause, isthe process of training and developing the knowledge, skill, mindand character of students by formal schooling. (Sole Trustee,Loka Shikshana Trust[12]). This definition of ‘education’ is wideenough to cover the case of an "educational institution" as, underSection 10(23-C)(vi), the "educational institution" must exist"solely" for educational purposes. (Maharaja Sawai MansinghjiMuseum Trust[5]). The element of imparting education to students, or the element of normal schooling where there are teachers andtaught, must be present so as to fall within the sweep of Section10(23-C)(vi) of the Act. Such an institution may, incidentally, takeup other activities for the benefit of students or in furtherance oftheir education. It may invest its funds or it may providescholarships or other financial assistance which may be helpful tothe students in pursuing their studies. Such incidental activitiesalone, in the absence of the actual activity of imparting educationby normal schooling or normal conduct of classes, would not besufficient for the purpose of qualifying the institution for the benefitof Section 10(23-C)(vi). (Sorabji Nusserwanji Parekh[2]). Section2(15) is wider in terms than Section 10(23-C) (vi) of the Act. If theassessee's case does not fall within Section 2(15), it is difficult toput it in Section 10(23-C) (vi) of the Act. (Maharaja SawaiMansinghji Museum Trust[5]). While the petitioner would contend that the objects wereamended on 27.1.2010, it defies reason as to how the said objectsamended on 27.1.2010 could have been registered, prior thereto,with the Registrar of Societies on 24.8.2009. The A.P. SocietiesRegistration Act, 2001 (AP Act 35 of 2001) repealed the SocietiesRegistration Act in its application to the Andhra Area of the Stateof Andhra Pradesh, and the A.P. (Telangana Area) PublicSocieties Registration Act, 1350 fasli. Section 8 of A.P. Act 35 of2001 relates to amendment of the memorandum and bye-laws of asociety. Under sub-section (1) thereof a society, by a specialresolution, may alter the provisions of the memorandum withrespect to a change of its objects. Under sub-section (3) any alteration of the memorandum of the society shall not be validunless such alteration is registered under the Act. Under Section8(4) if any alteration of the memorandum is filed, and if they arenot contrary to the provisions of the Act, the Registrar shallregister the same, and certify registration of such alteration withinthirty days from the date of receipt of the resolution. Thiscertificate is conclusive evidence that all the requirements of theAct, with respect to the alteration and the certification thereof,have been complied with and, henceforth, the memorandum, as soaltered, shall be the memorandum of the society. On a conjointreading of sub-sections (3) and (4) of Section 8, it is only when theamendment to the objects of the society is intimated to theRegistrar and the Registrar, on being satisfied that the amendmentis not contrary to the provisions of the Act, registers and certifiessuch an alteration would it be a valid alteration under the Act. It isonly from the date the Registrar certifies the alteration that theamendment, to the objects of the society, comes into force. The amended objects also included “eradicatingunemployment”. While this object may be charitable in nature, itis not solely for the purpose of education which is the requirementunder Section 10(23C)(vi) of the Act. The order of the 1[st]respondent, in rejecting the petitioner’s application for theassessment year 2009-10 on the ground that their objects werenon-educational, cannot be faulted. Even if the petitioner’scontention that registration under A.P. Act 30/87 is not a conditionprecedent, in view of the judgment of this Court in M/s. New NobleEducational Society v. The Chief Commissioner of Income- tax[[13]],is to be accepted, since the object of “eradicatingemployment” can neither be said to be integrally connected withor as being ancillary to, the object of providing education, the orderof the 1[st] respondent in rejecting the petitioner’s application forexemption under Section 10(23C)(vi) for the assessment year2009-10 cannot be faulted. The writ petition fails and is, accordingly, dismissed. However, in the circumstances, without costs. _____________ V.V.S.RAO, J ___________________________ RAMESH RANGANATHAN, J 23.11.2010 ASP tax[[13]],is to be accepted, since the object of “eradicatingemployment” can neither be said to be integrally connected withor as being ancillary to, the object of providing education, the orderof the 1[st] respondent in rejecting the petitioner’s application forexemption under Section 10(23C)(vi) for the assessment year2009-10 cannot be faulted. The writ petition fails and is, accordingly, dismissed. However, in the circumstances, without costs. _____________ V.V.S.RAO, J ___________________________ RAMESH RANGANATHAN, J 23.11.2010 ASP [1](2009) 309 ITR 50[2](1993) 201 ITR 939[3](1997) 224 ITR 310[4]Judgment of APHC DB in R.C. No.35 of 1996 dated 29.09.2010[5](1988) 169 ITR 379 (RAJ)[6](2001) 247 ITR 658 (SC)[7](2010) 327 ITR 121 (Bombay)[8](2008) 301 ITR 86 SC[9](1980) 121 ITR 1 (SC)[10](1980) 121 ITR 1(SC[11](2010)327 ITR 73 (P &H[12](1975) 101 ITR 234( SC[13]Judgment in W.P.No.21248 of 2010 and batch dated 11.11.2010[2](1993) 201 ITR 939[3](1997) 224 ITR 310[4]Judgment of APHC DB in R.C. No.35 of 1996 dated 29.09.2010[5](1988) 169 ITR 379 (RAJ)[6](2001) 247 ITR 658 (SC)[7](2010) 327 ITR 121 (Bombay)[8](2008) 301 ITR 86 SC[9](1980) 121 ITR 1 (SC)[10](1980) 121 ITR 1(SC[11](2010)327 ITR 73 (P &H[12](1975) 101 ITR 234( SC[13]Judgment in W.P.No.21248 of 2010 and batch dated 11.11.2010