Chief Commissioner Of Income Tax V. M/s J.b. Memorial Manas Academy Management Society

SPA/64/2018

AI Insights

The case involves the Chief Commissioner of Income Tax as the appellant and M/s J.B. Memorial Manas Academy Management Society as the respondent. The primary legal issue was the denial of tax exemption under Section 10(23C)(vi) of the Income Tax Act, 1961, to the respondent society, which runs an educational institution. The Income Tax Department rejected the exemption application on grounds that the society's objectives were not solely educational and that it had a disproportionate fee structure aimed at earning maximum money for expansion, which may not fall within the ambit of charitable activity. The learned Single Judge initially quashed this order and directed the grant of exemption, leading to the appeal by the Chief Commissioner of Income Tax.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 742796 (HC-UTTARAKHAND)
• Appeal Type: Others
• Pronouncement Date: 19-03-2018
• Assessment Year: misc
• Other Referred Cases: American Hotel & Lodging Association Educational Institute v. CBDT, Queen's Educational Society vs. Commissioner of Income Tax, Vanita Vishram Trust vs. Chief Commissioner of I.T., Neeraj Janhitkari Gramin Sewa Sansthan vs. CCIT, M/s Queen's Educational Society vs. Commissioner of Income Tax, Chief Commissioner of Income Tax vs. Maharani Luxmi Bai Memorial Educational Society
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: MOHIT MAULEKHI
• Assessee Lawyers: H M BHATIA
• Keywords: Charitable purpose; Delay condonation; Educational institution; Exemption; Profit
• Section: 12AA; 5; 4; 10(23C)(vi)

Judgement Text

"HIGH COURT OF UTTARAKHAND AT NAINITAL CLMA DELAY CONDONATION APPLICATION NO. 991 OF 2018 IN SPECIAL APPEAL No. 64 of 2018 Chief Commissioner of Income Tax ….Appellant. Versus M/s J.B. Memorial Manas Academy Management Society, Manas Mandir, Cant Road, Pithoragarh, Through its Secretary Smt. Kanchan Lata Pant. ….Respondent Mr. H.M. Bhatia, Advocate for the appellant. Mr. Mohit Maulekhi, Advocate for the respondent / writ petitioner. Dated: 19.03.2018 Coram: Hon’ble K.M. Joseph, C.J. Hon’ble Sharad Kumar Sharma, J. K .M. Joseph, C.J. (Oral) Heard Mr. H.M. Bhatia, learned counsel for the appellant and Mr. Mohit Maulkehi, learned counsel for the respondent writ petitioner on the Application for condonation of delay. 2. There is delay of 31 days in filing the present Special Appeal. 3. Having heard the learned counsel for the parties, we are of the view that the Application for condoantion of delay must be allowed. Accordingly, the Application for condonation of delay will stand allowed and the delay of 31 days will stand condoned. 4. Respondent in the writ petition is the appellant. Reliefs sought in the writ petition are as follows: “1. A writ, order or direction in the nature of certiorari quashing the impugned order dated 20.09.2013 (Annexure No. -01) passed by the respondent. 2. A writ, order or direction in the nature of mandamus directing the respondent for de-novo consideration of the application dated 20.09.2013 on full and correct facts and to grant to exemption u/s 10923C)(vi) of the I.T. Act, 1961 to the petitioner society.” 2 5. Briefly put, the case of the petitioner is as follows: Petitioner is a registered Society, duly registerd under the Societies Registration Act, 1860. The purpose and aim objects, as stated in the Memorandum of Association of the society clearly states that the petitioner Society exists for educational purpose amongst other ancillary objects. It is involved in running of an educational institution in the name of J.B. Memorial Manas Academy, Pithoragarh for students of nursery upto Class XII, which is affiliated to the CBSC and except for the said institution, there is no other source of receipts for the petitioner society. Petitioner is not running any other educational institution or pursuing any other activity except the one mentioned hereinbefore and as such is existing solely for the educational purpose and not for the purpose of profit. The petitioner Society applied for grant of exemption under Section 10(23C) (vi) of the Income Tax Act, 1961 (hereinafter referred to as the Act) for the Financial Year 2011-12 by filing Annexure-4 Application. Documents relating to the income / receipts were verified. Inspector of Income Tax submitted his report. According to the petitioner, although the petitioner is covered under Section 10(23C), by the order dated 20.09.2013 (Annexure-1), the appellant rejected the Application for grant of exemption. It is, inter alia, in fact stated that the petitioner obtained a copy of the Certificate of Registration under Section 12AA of the Act (Annexure-5). 6. Pleadings were exchanged. 7. The learned Single Judge reasoned that by the impugned order, the claim for exemption was rejected, inter alia, on the ground that the Society had disproportionate fee structure which was devised to earn maximum money for the purpose of expansion of the institution and the expansion of institution may not fall into the ambit of charitable activity. Thereafter, the learned Single Judge referred to the judgment of the Hon’ble Apex Court in the case of American Hotel & Lodging Association Educational Institute v. CBDT reported in (2008) 10 SCC 509 and, still further the judgment of the Hon’ble Apex Court in the case of Queen’s Educational Society vs. 3 Commissioner of Income Tax reported in (2015) 8 SCC 47. The learned Single Judge further referred to the judgments of the Bombay High Court in the case of Vanita Vishram Trust vs. Chief Commissioner of I.T. reported in 2010(327) ITR 121 and the Division Bench of the Allahabad High Court in the case of Neeraj Janhitkari Gramin Sewa Sansthan vs. CCIT reported in (2013) 36 Taxmann.com 105 (Allahabad). Thereafter, in Paragraph 7, the learned Single Judge proceeded to allow the writ petition and he quashed the impugned order and finally directed the appellant to grant exemption for the relevant assessment year. 8. We heard Mr. H.M. Bhatia, learned counsel for the appellant and also Mr. Mohit Maulekhi, learned counsel for the respondent / writ petitioner. 9. The contentions taken by the appellant are as follows: (i) The application was moved not by the educational institution, which is G.B. Memorial Manas Academy and the Society has moved the application. He would further reiterate that the Society has various other objects. In other words, Society’s objects embraced running of educational institution as only one of their objects, therefore, the benefit under Section 10 (23C)(vi) may not be available. 10. In fact, we notice from the impugned order that there are two reasons, which have been mentioned. It is stated in the order that a perusal of the objectives of the Society makes it clear that the objectives of the Society are multiple; it is after referring to as many as nine objects of the memorandum of objects of the Society. Thereafter, it is stated that in order to qualify for grant of exemption, under the provision, the assessee institution should exist ‘solely’ for educational purpose, which is not the case of the petitioner Society. Thereafter, the Officer has referred to the Accounts and, apparently, has found that the Assessee’s disproportionate fee structure is devised to earn maximum from fee simply to invest it for expansion of the institution, which may not fall within the ambit of charitable activity. Next, it is stated that the Society is also not registered under Section 4 12A of the Income Tax Act. Reference is made to the judgment of this Court in the case of M/s Queen’s Educational Society (supra), wherein it was held that the institution with fee structure so designed that it is earning exorbitant surplus year after year cannot be taken as a purely charitable activity. Though, the High Court was, in that case, dealing with exemption under Section 10(23C)(iiiad), the said test will apply for considering approval under Section 10(23C)(vi). Following the judgment of the jurisdictional High Court, the application was rejected. As far as the part relating to the Assessee’s fee structure being disproportionate and on that ground following the judgment of the jurisdictional High Court in Queen’s Educational Society (supra) is concerned, the matter must necessarily be considered in the light of the judgment of the Hon’ble Apex Court arising from the judgment of this Court, which is reported in (2015) 8 SCC 47. It is this judgment, which has also found favour with the learned Single Judge. The learned Single Judge has, after referring to the judgment, straightway after quashing the order, directed grant of exemption. We cannot agree with this course of action. In this regard, we must notice the law, which has been laid down by the Hon’ble Apex Court in the case of Queen’s Educational Society Vs. Commissioner of Income Tax reported in (2015) 8 SCC 47, as follows: “The law common to Section 10(23C) (iiiad) and (vi) may be summed up as follows: (i) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit. (ii) The predominant object test must be applied - the purpose of education should not be submerged by a profit making motive. (iii) A distinction must be drawn between the making of a surplus and an institution being carried on \"for profit\". No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit. 5 (iv) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes. (v) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons. The correct tests which have been culled out would apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profit. In addition, we hasten to add that the 13th proviso to Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that revenue is at liberty to pass fresh orders if such necessity is felt after taking into consideration the various provisions of law contained in Section 10(23C) read with Section 11 of the Income Tax Act.” 11. Therefore, the fact that imparting education results in making a profit does not lead to an inference that it becomes an activity for profit. If after meeting expenditure, a surplus arises incidentally from the activities carried out by the educational institution, it does not cease to be one existing solely for educational purposes. The final test would be whether on an overall view of the matter, in the concerned assessment year, the object is to make profit as opposed to educating persons. We are noticing these only to indicate that after the learned Single Judge set aside the order of the Officer, the tests are still remaining to be applied to the facts. It is only after applying the tests laid down by the Hon’ble Apex Court that the correct position would emerge as to whether the provisions of Section 10(23C)(vi) of the Act are fulfilled or not. Therefore, the 6 learned Single Judge should not have straightway granted exemption without directing reconsideration of the matter. 12. The learned counsel for the respondent/writ petitioner Mr. Mohit Maulkehi would, no doubt, draw our attention to Paragraph No. 44 of the judgment of the Hon’ble Apex Court in the case of American Hotel and Lodging Association Educational Institute Vs. Central Board of Direct Taxes and others reported in (2008) 10 SCC 509, which reads as follows: “44. Having analysed the provisos to Section 10(23C)(vi) one finds that there is a difference between stipulation of conditions and compliance thereof. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardized form in terms of the first proviso. It is only if the pre-requisite condition of actual existence of the educational institution is fulfilled that the question of compliance of requirements in the provisos would arise. We find merit in the contention advanced on behalf of the appellant that the third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval” 13. He would, therefore, contend that the only threshold requirement is the existence of an educational institution and the question pertinent to the applicability of the provisos would only apply at a later stage and this aspect must be borne by this Court and since there is an educational institution, and, according to him and as per the memorandum, the institution is not meant to make profit, there cannot be withholding of approval of Section 10(23C)(vi). 14. We notice the judgment of the Hon’ble Apex Court in American Hotel and Lodging Association Educational Institute v. CBDT reported in (2008) 10 SCC 509. This judgment is referred to in the later judgment of the Hon’ble Apex Court in the case of Queen’s Educational Society vs. Commissioner of Income Tax 7 reported in (2015) 8 SCC 47. We also notice that the judgment of this Court was set aside on the reasoning that it was not in accordance with the law laid down inter alia in the case of American Hotel and Lodging Education Institute (supra) (see Paragraph 19 of the judgment). 15. There remains the question, which is raised by the appellant, namely, that the Society has moved the Application and not the Institution. We notice in the first place that the impugned order does not recite this as a ground for rejection of the Application. In fact, Mr. Mohit Maulkehi, learned counsel for the respondent / writ petitioner, in this regard, would draw our attention to the judgment of this Court passed in Special Appeal No. 340 of 2015 (Chief Commissioner of Income Tax vs. Maharani Luxmi Bai Memorial Educational Society, decided on 29th July, 2015). Therein also, the contention is seen taken by the Revenue that the Institution must itself move the Application. Following is our discussion in regard to the same: “8. The word ‘person’ is undisputedly defined to include persons like the writ petitioner, which is a registered Society. Therefore, on a conjoint reading of Section 10(23C)(vi) of the Income Tax Act and also the definition of the word ‘person’, we would think that there is no merit in the contention of the learned counsel for the appellant. In this context, we also notice that Form 56D, which is the form prescribed under Section 10(23C)(vi), also refers in the first column to the educational institution and, at the second column, to the trust or society. It provides for the signing of the application obviously by the person, who is competent to certify the facts made in the application. When a society is running the educational institution, then, we would think that, both, for the reason that it is running the institution and also conceiving the impossibility of an institution as such de hors the society making an application, we would reject the contention. When an application is made by the society, it is being made on behalf of the institution. The society would be assessed, if it is denied the benefit of Section 10(23C)(vi), for running the institution and deriving an income out of it and it is the income from the educational institution 8 derived by the society, which is to be excluded from the total income under Section 10(23C)(vi). Therefore, we reject the said contention.” 16. Section 2(31) of the Act defines persons as follows: “(31) “person” includes— (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses;” 17. Section 10, which is in Chapter III, inter alia, comes under the heading ‘incomes, which do not form part of the total income’. It comes under the sub-heading ‘Incomes not included in total income’. It further proceeds to show that in computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included, and it is thereafter that Sub-Section (23C), which was inserted with effect from 01.04.1976 provided for any income received by any person on behalf of any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority. 18. It is to be noted that Section 4 is charging section under the Act. It reads as follows: “4. Charge of income-tax.—(1) Where any Central Act enacts that income-tax shall be charged for any 9 assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income- tax) of, this Act] in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income- tax shall be charged accordingly. (2) In respect of income chargeable under sub- section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.” 19. Thereafter, Section 5 defines ‘scope of the total income’. It, inter alia, provides that subject to the provisions of the Act, the total income of any previous year of a person who is a resident to include income, which is received or is deemed to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India; or accrues or arises to him outside India. Thus, the income tax is levied on the total income of a person and we have already noticed the definition of the word ‘person’. The word ‘person’ is defined to include a juristic person. The writ petitioner is a society, which is registered under the Societies Registration Act, which clothes it with juristic personality and, therefore, renders it a person within the meaning of the Act. 20. Viewed in this angle also, apparently it is that the appellant has not thought it fit to reject the Application on the ground that the Application has not been moved by the Institution. True it is that the proviso to Section 10(23C)(6), inter alia, contemplated that the Application is to be made by the Institution. It is, accordingly, that the Officer has also, in this context, found that in order to qualify for grant of exemption under Sub-Section (23C), the Institution should exist only for educational purpose, which is not the case of the writ petitioner Society. It is true that the objects of the Society include 10 objects such as eradication of untouchability, dealing with environmental pollution, plantation, AIDS Education, achievement of communal harmony, over all local development, promotion of fruit bearing trees and plantation in the hill areas. Here, we must notice that there is a definite case for the respondent / writ petitioner that the respondent/ writ petitioner is only running one Institution and there is no other Institution, which is being run by it and, in fact, even it has a case that there is no other activity. The Officer has proceeded to, however, notice the different objects, which could be undertaken by the Society. They included objects other than education. Thereafter, the Officer found that the assessee institution should exist solely for educational purpose, which is not the case of the assessee Society. It is true that under the Memorandum of objects, there are various objects, other than education. What Section 10(23C)(6) of the Act actually does contemplate is that income received by any person on behalf of the Institution, which is an educational institution and that Institution should exist solely for educational purpose and not for the purpose of profit, other than those mentioned in Clauses (iiiab) & (iiiad). It is also to be approved by the Prescribed Authority. Therefore, the requirement of law must be that the educational institution is to exist solely for educational purpose and it should not exist for the purpose of profit. Underlying object appears to be that the words ‘existing solely’ are to be understood in the context of the words ‘not for the purpose of profit’. In other words, it is only meant for educational institutions, which exist solely for the purpose of imparting education. This is contra-distinguished from an educational institution, which exists for the purpose of making profits. In the light of this, we would think that the Appeal must be partly allowed and the portion of the judgment directing exemption to be granted must be set aside, and instead a direction must be issued to the appellant to re- consider the matter in the light of the judgment of the Hon’ble Apex Court in the case of American Hotel & Lodging Association Educational Institute v. CBDT reported in (2008) 10 SCC 509 and also the judgment of the Hon’ble Apex Court in the case of Queen’s 11 Educational Society vs. Commissioner of Income Tax reported in (2015) 8 SCC 47. 21. Accordingly, the Appeal is allowed partly and while we uphold the quashing of the order, we set aside the portion directing exemption to be granted under Section 10(23C)(vi), instead we direct the appellant to consider and take a decision afresh in the light of the observations in this judgment and also the judgment of the Hon’ble Apex Court American Hotel & Lodging Association Educational Institute v. CBDT reported in (2008) 10 SCC 509, which was followed in the case of Queen’s Educational Society vs. Commissioner of Income Tax reported in (2015) 8 SCC 47. This must be done after giving opportunity to the writ petitioner and the process must be completed within a period of six weeks from the date of production of a certified copy of this judgment before the appellant. (Sharad Kumar Sharma, J.) (K.M. Joseph, C.J.) 19.03.2018 Rathour "