Wp/9450/2008 Of Gujjala Raghunatha Reddy Educational Trust, By v. The Chief Commissioner Of Income Tax

THE HON'BLE SRI JUSTICE V.V.S.RAOANDTHE HON'BLE SRI JUSTICE RAMESH RANGANATHAN W.P.Nos.9450 and 9462 of 2008 COMMON ORDER:(Per Hon’ble Sri Justice Ramesh Ranganathan) The orders passed by the Chief Commissioner of IncomeTax, Hyderabad – III, under Section 10(23C)(vi) of the Income TaxAct, 1961, are under challenge in these two writ petitions. The petitioner in W.P. No.9450 of 2008 is a Trust. For theassessment years 2004-05 to 2006-07 the Chief Commissioner,by his order dated 28.2.2006, granted them exemption underSection 10(23C)(vi) of the Income Tax Act (hereinafter referred toas the “Act”). Seeking a similar exemption, for the assessmentyears 2007-08 to 2011-12, the petitioner submitted an applicationto the 1[st] respondent on 12.03.2007. The Chief Commissionerrejected the petitioner’s request, for renewal of exemption, by hisorder dated 26.3.2008 holding that the settlor had changed thetrustees four times between 2000 and 2004; in the supplementarydeeds he had styled himself as ‘appointer’; in that capacity he hadappointed three new trustees, and had accepted the resignation ofthe existing trustees; Clause 34, of the original trust deed dated8.8.2000, conferred power to appoint new or additional trustees,within the limit of the permitted maximum number, in thecontinuing trustees; the said power had been usurped by thesettlor styling himself as the ‘appointor’; the settlor had reservedthe right to transfer the trust assets, to any other trust, untohimself; paragraphs 14 and 26 of the trust deed provided that two of the trustees would operate the bank accounts and any decision,regarding disposal of the corpus of the trust properties orinvestment out of the trust fund, had to be taken with the consentof the chairman of the trust i.e., the settlor; all these factorsshowed that the settlor alone was running the affairs of theeducational institution, and there was no genuine trust inexistence; the trust had objects which were not educational;clause 4 of the trust deed was proof in this regard; in thesupplementary deed the aims and objects were enlarged to includeopening and running of homes for elders, orphanages etc., whichis also non-educational; the CBDT, in its instructions dated29.10.1997, had explained that, if the surplus of an educationalinstitution can be used for non-educational purposes, it cannot besaid that the institution existed solely for educational purposes;though this instruction was issued in the context of the provisionsof Section 10(22), the same would apply to the provisions ofSection 10 (23C)(vi) also; in the present case the trustees had thediscretion to apply the surplus for non-educational purposes; and,hence, the claim under Section 10(23C)(vi) of the Act had to fail. In W.P. No.9462 of 2008 the petitioner – society had appliedto the Chief Commissioner of Income Tax seeking exemption forthe assessment years 2004-05 to 2006-07. The ChiefCommissioner, by his order dated 28.2.2006, had grantedexemption. The petitioner submitted an application dated 7.3.2007to the 1[st] respondent seeking renewal of exemption, under Section10(23C)(vi) of the Act, for the assessment years 2007-08 to 2011-12. The 1[st] respondent, vide proceedings dated 25.3.2008,rejected the application holding that there was a mismatch In W.P. No.9462 of 2008 the petitioner – society had appliedto the Chief Commissioner of Income Tax seeking exemption forthe assessment years 2004-05 to 2006-07. The ChiefCommissioner, by his order dated 28.2.2006, had grantedexemption. The petitioner submitted an application dated 7.3.2007to the 1[st] respondent seeking renewal of exemption, under Section10(23C)(vi) of the Act, for the assessment years 2007-08 to 2011-12. The 1[st] respondent, vide proceedings dated 25.3.2008,rejected the application holding that there was a mismatch between the aims and objects of the society, and the conduct of itsactual activity; the aims and objects of the society, asamended/modified from time to time, included non-educational andreligious purposes also; the trustees had the discretion to applythe income of the trust for non-educational and religious purposes;the only source of income of the society was the educationalinstitution run by it; the CBDT, in its instructions dated 29.10.1977,had explained that if the surplus of an institution can be used fornon-educational purposes, it could not be said that the institutionexisted solely for educational purposes, and that such institutionswould not be eligible for exemption under Section 10(23C)(vi);since the provisions of Section 10(23C)(vi) are similar to Section10(22), the same logic would hold good in the context of theprovisions of Section 10(23C)(vi) also; and, since the petitionersociety had the discretion to apply its income for non-educationalpurposes, it did not qualify for exemption under Section 10(23C)(vi) of the Act. Smt. K. Neeraja, Learned Counsel for the petitioners, wouldsubmit that the petitioners had merely sought renewal of theexemption granted earlier; there was neither any change in thefacts relating to the petitioner’s aims, objects and activity nor wasthere any change in the legal position after the ChiefCommissioner had granted exemption earlier; in the absence ofany change, the 1[st] respondent was not justified in rejecting therenewal application; the finding recorded by the 1[st] respondent,that the trusts were not genuine, is not tenable; the allegation thatthe settlor was acting unilaterally is also without factual basis; thepetitioners had not carried on any non-educational activity in any of the years; the entire surplus income was spent only foreducation, and nothing else; and, as long as application of incomewas on the educational objects of the society, the petitioners couldnot be deprived of exemption, under Section 10(23C)(vi) of theAct, in respect of their income from educational activities. It is necessary to note that the previous ChiefCommissioner, in his orders dated 28.2.2006, had grantedconditional exemption to both the petitioners – societies. Theseconditions included that the assessees would apply their incomeexclusively for the objects for which they were established; theywould not invest or deposit their funds, (other than voluntarycontributions received and maintained in the form of jewellery,furniture etc), for any period during the previous years relevant tothe assessment years otherwise than in any one or more of theforms or modes specified in Section 11(5) of the Act; theexemption would not apply to any income, being profits and gainsof business, unless the business was for attainment of the objectsof the assessee, and separate books of accounts were maintainedin respect of such business; the assessees should regularly filetheir return of income before the authorities in accordance with theprovisions of the Act; and, in the event of dissolution, the surplusand assets should be given to a charitable organization withsimilar objects. 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 for 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 for educational purposes and, thirdly, the institution should not existfor the purpose of profit. (Commissioner of Income Tax v.Sorabji Nusserwanji Parekh[[1]]). 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[[2]]). 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[[3]];Commissioner of Income Tax v.Maharaja Sawai Mansinghji Museum Trust[[4]]). In using theexpression, “solely”, the legislature has made it clear that itintends to exempt the income of the institutions established solelyfor educational purposes and not for commercial activities.(Oxford University Press v. CIT[[5]]). This requirement wouldmilitate against an institution pursuing objects other thaneducation. (Vanita Vishram Trust v. Commissioner of Income-tax[[6]]). 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[[7]]). 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 for exemption under Section 10(23-C)(vi) of the Act. (GurukulGhatkeswar of Hyderabad[3]). 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[5]). 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 ArtSilk Manufacturers Association[[8]];American Hotel[7]). 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[[9]];American Hotel[7]; PinegroveInternational Charitable Trust v. UOI[[10]]). The decisive test iswhether, on an overall view of the matter, the object is to carry oneducational activities or to make profit. (Aditanar EducationalInstitution[2]). If there are several objects of a society some of which 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[[9]];American Hotel[7]; PinegroveInternational Charitable Trust v. UOI[[10]]). The decisive test iswhether, on an overall view of the matter, the object is to carry oneducational activities or to make profit. (Aditanar EducationalInstitution[2]). If there are several objects of a society some of which relate 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 whichis “educational”. (Surat Art Silk Cloth ManufacturersAssociation[9]). The test is the genuineness of the purpose testedby 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[[11]]). 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[7]). The words 'not for the purposesof profit' accompanying the words 'existing solely for educationalpurposes' has to be read and interpreted keeping in view the thirdproviso to Section 10(23C)(vi) which prescribes the methodologyfor utilization and accumulation of income at the hands of theeducational institution. As a result 85% of the income has to beapplied by the educational society for the purpose of education. The third proviso requires the applicant society to apply itsincome, or accumulate it for application, wholly and exclusively, tothe objects for which it is established. The word 'wholly' refers tothe quantum of expenditure and the word 'exclusively' refers to themotive, object or the purpose of expenditure. (PinegroveInternational Charitable Trust[10]; Vanita Vishram Trust[6]). 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[7]; Pinegrove InternationalCharitable Trust[10]). Under the thirteenth proviso to Section10(23-C)(vi) of the Act, circumstances are given under which theprescribed authority is empowered to withdraw the approval earliergranted. Under that proviso, if the prescribed authority is satisfiedthat the trust, fund, or other educational institution etc. has not 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[7]; Pinegrove InternationalCharitable Trust[10]). Under the thirteenth proviso to Section10(23-C)(vi) of the Act, circumstances are given under which theprescribed authority is empowered to withdraw the approval earliergranted. Under that proviso, if the prescribed authority is satisfiedthat the trust, fund, or other educational institution etc. has not applied its income in accordance with the third proviso or if it findsthat such institution, trust or fund etc. has not invested/depositedits funds in accordance with the third proviso or that the activitiesof such fund or institution or trust etc. are not genuine or that itsactivities are not being carried on in accordance with theconditions subject to which approval is granted then the prescribedauthority is empowered to withdraw the approval earlier granted,after complying with the procedure mentioned therein. (AmericanHotel[7]) . It is obligatory on the part of the prescribed authority,while exercising power under the un-numbered thirteenth proviso,to consider whether the expenditure incurred is on the object ofeducation or not. (Pinegrove International Charitable Trust[10]). The earlier orders of the Chief Commissioner dated28.2.2006 make no reference to any examination having beencarried out by him to ascertain whether or not the objects of thesocieties concerned were solely for the purpose of education, andnot for the purpose of making profit. The mere fact that exemptionwas granted earlier would not result in automatic renewal ofexemption for the subsequent period unless the prescribedauthority i.e., the Chief Commissioner of Income Tax is satisfiedthat the trust is genuine, and its existence is solely for educationalpurposes, and not for the purpose of profit. The objects of the petitioner-society, in W.P. No.9462 of2008, include “to promote self-help and mutual help among themembers and students”; “to run a library for the general useamong the members”; and “to promote mutual goodwill andunderstanding among the members, foster brotherly feeling amongthe members”. Likewise the objects of the petitioner-society, in W.P. No.9450 of 2008, include “opening and running of homes forthe elders, orphans etc.” The aforesaid objects do not relate toeducation. The sense in which the word "education" has beenused, in Section 2(15) of the Income Tax Act, is the systematicinstruction, schooling or training given to the young in preparationfor the work of life. It also connotes the whole course of scholasticinstruction which a person has received. The word "education", inSection 2(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[11]). 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 Mansinghji Museum Trust[4]). 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[1]). Section 2(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[4]). The submission that the entire surplus income of theeducational institution has been spent only for educationalactivities and nothing else, is of no consequence in as much asthe petitioners-societies’ non-educational objects would enablethem, at their discretion, to apply the funds of the society for suchnon-educational objects also. Since the basic requirement ofSection 10(23-C)(vi) of the Act is that the educational institutionmust exist solely for the purpose of education, and not for thepurpose of profit, inclusion of non-educational objects in thememorandum of association/bye-laws of the society woulddisentitle them from claiming the benefit of exemption underSection 10(23-C)(vi) of the Act. The aforestated objects cannot becharacterized as ancillary or incidental to, or to be integrallyconnected with, the object of imparting education. Since thepetitioners also have non-educational objects, as part of theirobjects, the Chief Commissioner of Income Tax cannot be faultedfor refusing to grant exemption under Section 10(23-C)(vi) of theAct. In addition, in W.P. No.9450 of 2008, the ChiefCommissioner, on a detailed analysis of various clauses of thetrust deed and the material placed before him, has held that thetrust is not genuine. The reasons assigned by the ChiefCommissioner in this regard are well founded and do not call forinterference. Viewed from any angle the challenge to the orders, impugned in these writ petitions, must fail. Both the writ petitionsare, accordingly, dismissed. However, in the circumstances,without costs. ______________ V.V.S.RAO, J Date: 15.11.2010 ____________________________ RAMESH RANGANATHAN,J MRKR/ASP [1](1993) 201 ITR 939[2](1997) 224 ITR 310[3]Judgment of APHC DB in R.C. 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