COMMISSIONER OF INCOME TAX VIJ V. MSVIJAYA VANIEDN.TRUST CHOUDEPALLI

RC/46/1998

AI Insights

The case involves M/s. Vijaya Vani Educational Trust, which was assessed by the Income Tax Department for the years 1986-87 and 1987-88. The Trust was initially denied exemption under Section 11 of the Income Tax Act by the assessing officer, who considered it a non-charitable entity and noted violations of the Act. However, the appellate authorities reversed this decision, recognizing the Trust as a charitable entity and exempting its income under Section 10(22). The Revenue challenged these decisions, leading to the reference of several questions to the High Court regarding the Trust's charitable status and compliance with the Income Tax Act.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 682364 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 27-01-2012
• Assessment Year: misc
• Other Referred Cases: Aurora Educational Society v. Chief CIT, Yogaraj Charity Trust v/s. CIT New Delhi, CIT v. Gurukul Ghatkeswar Trust, CIT v. Sirpur Paper Mills Ltd., CIT v. Kamla Town Trust, Ahmedabad Rana Caste Assn. V. CIT, Gujarat, Priyadarshini Educational Academy v. DGIT (INV.), American Hotel and Lodging Association Educational Institute v. CBDDT, CIT v. Sorabji Nusserwanji Parekh, CIT v. Maharaja Sawai Mansinghji Museum Trust, CIT v. Vanita Vishram Trust, CIT v. Pinegrove International Charitable Trust, Commissioner of Endowments v. All India Sai Seva Samaj
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: SENIOR COUNSEL FOR INCOME TAX
• Keywords: Charitable Trust; Educational purposes; Trust deed amendment; Exemption under IT Act; Investment violations
• Section: 11; 13(2); 11(5); 2(15); 13(1)(c); 256(1); 10(22)

Judgement Text

"*HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA + R.C.NOs.46 OF 1998 AND 46 OF 2001 % 27.01.2012 1. R.C.No.46 of 1998 #Commissioner of Income-Tax, Vijayawada. ...PETITIONER VERSUS $M/s.Vijaya Vani Educational Trust, Chowdepalle ...RESPONDENT < GIST: > HEAD NOTE: !Counsel for Petitioner: Senior Counsel for Income Tax ^Counsel for Respondent: Sri J.V.Prasad Ms. Pushpan Kiran ? Cases referred 1. (2011) 339 ITR 333 (AP) 2. (2011) 332 ITR 611 (AP) 3. (2011) 334 ITR 256 (AP) 4. (1996) 217 ITR 699 (SC) 5. (1976) 103 ITR 777 (SC) 6. (1971) 82 ITR 704 : (1971) 3 SCC 475 7. (2011) 333 ITR 347 (AP) 8. (2011) 334 ITR 303 (AP) And one other case. THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA R.C.NOs.46 OF 1998 AND 46 OF 2001 COMMON ORDER: (Per the Hon’ble Sri Justice V.V.S.Rao) In R.C.No.46 of 1998 under Section 256 (1) of the Income Tax Act, 1961 (the Act), the Income Tax Appellate Tribunal, Hyderabad Bench ‘A’, Hyderabad, had referred the following six questions for the opinion of this Court. 1. Whether on the facts and in the circumstances of the case, the tribunal was right in holding after an overall appraisal of the clauses of the Trust Deed that the Trust was for charitable purposes within the meaning of s.2 (15) of the IT Act? 2. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the original infirmity in clause III (aims and objects of the association) of the Trust Deed stood rectified after the amendment to the clauses of the Trust Deed in October, 1989? 3. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the amendment of a Deed of a Codicil has a retrospective effect and consequently the benefits of S.11 were available to the Trust for the asstt. Years 1987-87 and 1987-88? 4. Whether on the facts and in the circumstances of the case, the Tribunal was not incorrect in law in not holding that the absolute discretion vested in the Trustees by virtue of the Trust Deed would disentitle the Trust for the benefits of S.11 of the I.T.Act in the light of the decision of Supreme Court in the case of Yogaraj charity Trust v/s. CIT New Delhi (103 ITR 777)? 5. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the income of the Trust is exempt u/s.10(22) of the IT Act in spite of the fact that the benefits of the Trust enure to the members of the Trust and consequently the Trust was not existing solely for educational purposes? 6. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the Trust was entitled to the benefits of S.11 of the IT Act in spite of the fact that there was violation of the provisions of S.11(5) of the IT Act and S.13(1)(c) of the IT Act? The background facts leading to this reference are these. M/s.Vijaya Vani Educational Trust, Chowdepalle in Chittoor District (hereafter, the assessee) is an association registered under the Societies Registration Act, 1860. It was constituted through a Memorandum of Association dated 11.06.1984. The assessee obtained registration under Section 12A of the Act from the CIT and availed benefits under Section 11 till 1985-86. But, for the assessment years 1986-87 and 1987-88, the assessing officer denied exemption. The reasons were three, namely (i) the association is not a public charitable trust; its objects are limited for the benefit of a few people; (ii) the association is running educational institution only for the purpose of commerce; and (iii) there is violation of provisions of Sections 11(5) of the Act, inasmuch as the assessee invested the monies in two organisations publishing “Maabadi”, “Patasala” and Vijaya Vani Printers and thereby infringed Section 13(1)(c) of the Act. The assessment was accordingly completed by the Assistant Commissioner of Income Tax, Tirupathi, treating the assessee as A.O.P. with maximum marginal rate. The assessee’s appeal before the CIT (A) was allowed. While cancelling the assessment for both the years, the appellate Commissioner directed the assessment officer to treat the assessee as charitable trust. In the Revenue appeal, the appellate Tribunal found that there was no violation of objects of the Trust and even if there is one, the same got rectified subsequently; the amounts invested in “Maabadi”, “Patasala” and Vijaya Vani Printers were not hit by provisions of Section 11(5) of the Act and that the income of the assessee was exempt under Section 10(22) of the Act because the only object of the assessee was running Educational Institutions. Being aggrieved, the Revenue sought the reference under Section 256(1). The Senior Counsel for Income Tax would submit that the assessee violated Section 11(5) and Section 13(1)(c) and therefore, became disentitled for the benefit under Section 10(22) of the Act. Nextly, he would submit that CIT (A) and the appellate Tribunal ignored the violations and allowed exemption under Section 10(22), which is erroneous and contrary to the law laid down by the Supreme Court. He placed strong reliance on a decision of this Court to which one of us (VVSR,J) is a member in Aurora Educational Society v. Chief CIT [1]. The Senior Counsel for the assessee made the following submissions. Question Nos.2 and 3 are academic, because as noticed by the CIT (A), the Memorandum of Association was amended; question No.6 is based on finding of fact, which is not challenged and therefore, it does not fall for consideration; the assessing officer did not give reasons in coming to the conclusion that the assessee violated Sections 11(5) and 13(1) (c); and that there is nothing in the Memorandum of Association to show that the assessee exists for profits. He would urge that there is also no finding in the assessment order to that effect. Even if Rule 3 of the Memorandum of Association initially restricted membership to the members of the family, it does not in any manner violate Sections 13(1)(c) and 13(2) of the Act. The investment, if any made in M/s. Vijaya Vani Printers, Maabadi and Patasala is incidental to the objects to the Trust and does not disentitle the assessee from claiming exemption, as it exists for the charitable purposes. He relied on CIT v. Gurukul Ghatkeswar Trust [2], CIT v. Sirpur Paper Mills Ltd. [3], CIT v. Kamla Town Trust [4], Yogiraj Charity Trust v. CIT [5], Ahmedabad Rana Caste Assn. V. CIT, Gujarat[6] and Priyadarshini Educational Adademy v. DGIT (INV.) [7]. In RC.No.46 of 2001, the following six questions are referred at the instance of the Revenue. The assessee is the same and the reference arose in relation to the assessment of income for the assessment year 1988-89. 1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding after an overall appraisal of the clauses of the Trust Deed that the Trust was for charitable purposes within the meaning of S.2(15) of the I.T.Act? 2. Whether on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the original infirmity in clause III (aims and objects of the association) of the Trust Deed stood rectified after the amendment to the clauses of the Trust Deed in Oct.1989? 3. Whether on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the amendment of the deed or a Codicil has a retrospective effect and consequently the benefits of S.11 were available to the Trust for the AY 1988-89? 4. Whether on the facts and in the circumstances of the case the Tribunal was not incorrect in law in not holding that the absolute discretion vested in the Trustees by virtue of the Trust deed would disentitle the trust for the benefits of S.11 of the I.T.Act in the light of the decision of Supreme Court in the case of Yogiraj Charity Trust v. CIT New Delhi (103 ITR 777)? 5. Whether on the facts and in the circumstances of the case the Tribunal is correct in law in holding that the Trust was entitled to the benefits of S.11 of the I.T. Act inspite of the fact that there was violation of the provisions of S.11(5) of the I.T.Act and S.13(1)(c) of the I.T.Act? 6. Whether on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the income of the Trust is exempt under S.10(22) of the I.T.Act in spite of the fact that the benefits of the Trust enure to the members of the Trust and consequently the Trust was not existing solely for educational purposes? The question that would arise for consideration is whether the assessee is a charitable institution that solely exists for the purpose of education. Incidentally, the question would also arise whether during assessment years 1986-87, 1987-88 and 1988-89, the assessee incurred any disqualification so as to deny their benefit under Section 11 of the Act. We considered these issues with reference to the order of the assessing officer, which appears to be the basis for the Revenue to seek the reference. The assessing officer issued notice under Section 148 on 27.10.1987 referring to a letter dated 30.09.1987 issued by the Commissioner of Income Tax, wherein it was opined that the assessee is not a public charitable trust; and its objects are limited for the benefit of a few people and the educational institution is only for the purpose of commerce. Influenced by this letter, the assessee was asked to show cause as to why their activities should not be treated as business. The following violations were pointed out. (i) The assessee exists for the benefit of a few people: A copy of the Memorandum of Association of the assessee is placed before us. Rule 3 of the Rules is to the effect that the membership of the Trust is restricted to the family members and their legal heirs and that the membership of the Trust shall be hereditary one. The assessee offered three-point explanation. First, the trustees are laymen and were not aware of the provisions of the Act while getting the Memorandum of Association prepared; secondly, the defects at the time of registration were rectified by passing a resolution in the Board Meeting and membership is open to all irrespective of caste, religion etc., and thirdly, based on the same Memorandum of Association, the CIT granted registration under Sections 12A and 8G of the Act. This explanation did not change the opinion of the assessing officer. He applied the maxim “ignorantia juris non excusat” (ignorance of law is no excuse) and denied exemption. (ii) Violations of all provisions of law: The denial of exemption under Section 11 was also based on the alleged violations of all provisions of law in one way or the other by the assessee. In the assessment order, the officer made a vague allegation that the assessee violated all provisions of law. One instance specifically mentioned therein is that in contravention of Section 11(5) of the Act, the assessee invested in Vijaya Vani Printers, Maabadi and Patasala in contravention of Sections 11, 12 and 13. (iii) The institution exists for commerce: The assessing officer probably emboldened by the letter of the CIT dated 30.09.1987 commented that the assessee’s educational institution exists for the purpose of commerce. He meant that it does not exist solely for education purpose as required under Section 10(22) of the Act and that it was making profit. It was also recorded that the contributions received by the assessee earmarked as corpus of the building donation fund as a Revenue receipt. As rightly contended by assessee’s counsel, the assessing officer does not give any clear finding regarding violation of Section 11(5) except making such a comment. Details therefor are not forthcoming in the assessment order. Insofar as the alleged violation of Section 13(1)(c) and 13(2) are concerned, the assessing officer no doubt took into consideration the fact that the funds of the assessee were invested in Vijaya Vani Printers, Maabadi and Patasala. These findings did not find favour with the CIT(A). The appellate Commissioner recorded the finding, which we may quote verbatim. (i) In re investment I also find considerable force in the counsel’s argument that the mistake, if any, was a bona fide one and could have been rectified. I am also of the opinion that the investments made towards ‘Maabadi’, ‘Patasala’ and Vijayavani Printers did not violate the provisions of section 11(5) of the I.T. Act, 1961. These amounts were spent for fulfilling the objects of the Trust. (ii) In re profit motive From the material brought to my notice that the appellant trust had been recognised for running Schools by the Indian Counsel of School Education of New Delhi shows that it is running Educational Institution and is not existing with the motive of profit. Even where the activities are benefiting a particular group of individual, the Supreme Court held that, the trust whose objectives are of general public utility is to be treated as a charitable trust. (iii) In re advances M/s. Vijaya Vani Printers, Maabadi and Patasala : The amounts advanced to Maabadi, Patasala and Vijayavani Printers were towards the fulfilment of the objects of the Trust as claimed by the Assessing officer in his order. Even otherwise, the appellant trust is exempt u/s.10(22). The CIT(A) indeed elaborately considered the various issues raised by the assessee and came to the conclusion that the assessee is exempt under Section 10(22) as it solely exists for the purpose of education. As noticed supra, this view was approved by the appellate Tribunal. The counsel for the assessee is right that question Nos.2 and 3 have become academic and question No.6 on which question No.1 depends is related to finding of fact recorded by the appellate Commissioner as well as the Tribunal. The finding of fact remains unchallenged. That takes us to the questions 4 and 5, which need to be considered together. The recent judgment of this Court in Aurora Educational Society of Bench consisting one of us (VVSR,J) considered various questions and aspects in relation to Section 10(23C), which was hitherto before its deletion was Section 10(22) of the Act. The Bench referred to another decision in New Noble Educational Society v. Chief CIT [8] wherein, the scope and amplitude of the said provision was summarised, in as many as 55 points. Some of these principles (not in the order as quoted below), inter alia, are as under. (1) Except that approval is now required to be obtained from the prescribed authority, section 10(23C)(vi) is analogous to section 10(22), as it existed prior to its omission by the Finance Act, 1998, with effect from April1, 1999. To that extent judicial pronouncements, made in the context of section 10(22), would equally apply to section 10(23C)(vi) of the Act (American Hotel and Lodging Association Educational Institute v. CBDDT [2008] 301 ITR 86 (SC)). (2) To be eligible for exemption, under section 10(23C)(vi) of the Act, it is necessary that there must exist an educational institution. Secondly, such institution must exist solely for educational purposes and, thirdly, the institution should not exist for the purpose of profit (CIT v. Sorabji Nusserwanji Parekh [1993] 201 ITR 939 (Guj)). (3) The emphasis in section 10(23C)(vi) is one the word “solely”. “Solely” means exclusively and not primarily (CIT v. Gurukul Ghatkeswar of Trust (R.C.No.35 of 1996, dated September 29, 2010) [2011] 332 ITR 611 (AP), CIT v. Maharaja Sawai Mansinghji Museum Trust [1988] 169 ITR 379 (Raj)). In using the said expression, the Legislature intends to exempt the income of institutions established solely for educational purposes, and not for commercial activities (Oxford University Press v. CIT [2001] 247 ITR 658 (SC)). This requirement would militate against an institution pursuing objects other than education (Vanita Vishram Trust v. CIT [2010] 327 ITR 121 (Bom)). Even if one of the objects enables the institution to undertake commercial activities, it would not be entitled for approval under section 10(23C)(vi) of the Act (American Hotel and Lodging Association Educational Institute). (4) Section 2(15) of the Income-tax Act defines “charitable purpose” to include “education”. The sense in which the word “education” has been used in section 2(15) is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word “education”, in section 2(15), has not been used in that wide and extended sense according to which every acquisition of further knowledge constitutes education. What education connotes, in that clause, is the process of training and developing the knowledge, skill, mind and character of students by formal schooling (Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC)). This definition of “education” is wide enough to cover the case of an “educational institution” as, under section 10(23C)(vi), the “educational institution” must exist “solely” for educational purposes (Maharaja Sawai Mansinghji Museum Trust). (5) The element of imparting education to students, or the element of normal schooling where there are teachers and taught, must be present so as to fall within the sweep of section 10(23C)(vi) of the Act. Such an institution may, incidentally, take up other activities for the benefit of students or in furtherance of their education. It may invest its funds or it may provide scholarships or other financial assistance which may be helpful to the students in pursuing their studies. Such incidental activities alone, in the absence of the actual activity of imparting education by normal schooling or normal conduct of classes, would not suffice for the purpose of qualifying the institution for the benefit of section 10(23C)(vi) (CIT v. Sorabji Nusserwanji Parekh [1993] 201 ITR 939 (Guj)). (6) Section 2(15) is wider in terms than section 10(23C)(vi) of the Act. If the assessee’s case does not fall within section 2(15), it is difficult to put it in section 10(23C)(vi) of the Act (Maharaja Sawai Mansinghji Museum Trust). (7) If the dominant purpose of an institution is “educational”, another object which is merely ancillary or incidental to the dominant purpose would not disentitle the institution from the benefit. (8) The test which has, therefore, to be applied is whether the object, which is said to be non-educational, is the main object of the institution or it is ancillary or incidental to the dominant object which is “educational” (Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC)). The test is the genuineness of the purpose tested by the obligation created to spend the money exclusively on “education”. If that obligation is there, the income becomes entitled to exemption (Sole Trustee, Loka Shikshana Trust). (9) The activities of the institution, its objects, its source of income and its utilisation, must be analysed by the prescribed authority to ascertain whether it exists solely for education and not for profit, and it is his duty to ascertain whether the income is applied wholly and exclusively for the educational objects for which the applicant is established (Surat Art Silk Cloth Manufacturers Association); (American Hotel and Lodging Association Educational Institute). (10) The test of predominant object of the activity is to be seen, whether it exists solely for education and not to earn profit (Surat Art Silk Cloth Manufacturers Association), (American Hotel and Lodging Association Educational Institute), Pinegrove International Charitable Trust). The decisive test is whether, on an overall view of the matter, the object is to carry on educational activities or to make profit (Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310 (SC)). (11) While the object of establishing an educational institution should not be to make profit there can, however, be a reasonable revenue surplus which may be used by the educational institution for the purpose of development of education and expansion of the institution (T. M. A. Pai Foundation v. State of Karnataka, AIR 2003 SC 355). (12) The words “not for the purpose of profit” accompanying the words “existing solely for educational purposes” has to be read and interpreted keeping in view the third proviso to section 10(23C)(vi) which prescribes the methodology for utilisation and accumulation of income at the hands of the educational institution. As a result 85 per cent of the income has to be applied by the educational society for the purpose of education. Capital expenditure, if incurred, for the attainment of such objects has to be deducted from the gross receipts/income. The word “wholly” in the third proviso refers to the quantum of expenditure and the work “exclusively” refers to the motive, object or the purpose of expenditure (Pinegrove International Charitable Trust). (13) The provisions of section 13(1)(c) would be attracted in cases where any part of the income, or the property, of a charitable institution is used, directly or indirectly, for the benefit of the person referred to in section 13(3) of the Act. Under Section 13(2), the income or property of the institution shall, for the purposes of section 13(1)(a), be deemed to have been used or applied for the benefit of a person referred to in section 13(3) if any one of clauses (a) to (h) of section 13(2) are applicable. The person, referred to in section 13(3), would be benefited only if the amount paid to him constitutes a benefit to him or if clauses (a) to (h) of section 13(2) are attracted. (14) The threshold conditions are aimed at discovering the actual existence of an educational institution and approval of the prescribed authority for which an application in the standardised form, in terms of the first proviso, has to be given by every applicant. If the pre-requisite condition, of actual existence of the educational institution, is fulfilled then the question of compliance with the requirements, contemplated by various provisos, would arise. Only if the educational institution actually exists for educational purposes alone should it be permitted to operate subject to the monitoring conditions to be stipulated by the prescribed authority (American Hotel and Lodging Association Educational Institute); (Pinegrove International Charitable Trust). (15) “Charitable purpose”, under section 2(5) of A. P. Act 30 of 1987, brings within its ambit, amongst others, education also. To find out the object for which a society has been established, the provisions of section 2(5) of A. P. Act 30 to 1987, which only excludes those “exclusively of a religious nature”, also has a role to play (Commissioner of Endowments v. All India Sai Seva Samaj [2001] 6 ALT 539)). After examining the factual background of this case referring to the above principles, we do not feel inclined to hold in favour of the Revenue. Further in Yogiraj Charity Trust, the Supreme Court held that, “if the primary or dominant purpose of a trust is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust from being a valid charity”. It was also held that “if the trustees are authorised to open and maintain commercial institutions and who gave uncontrolled discretion to the trustees to spend the whole of the trust fund on any of the non-charitable objects of the trust, the income of such trust would not be exempt from tax”. In the case on hand, running M/s. Vijaya Vani Printers, Maabadi and Patasala etc cannot be said to be commercial ventures as held by the CIT. To argue that the Trust exists for the benefit of few members cannot be accepted as there has been an amendment in the Memorandum of Association as noticed supra. The assessee herein was running educational institutions and to aid spreading of the education and update the syllabus and other related educational aspects, two magazines were started by the assessee or their sister concern. They are incidental and ancillary to the main activities of the Trust and therefore, the ratio in Yogiraj Charity Trust is not applicable. Question 4 therefore has to be answered in negative in favour of the assessee and against the Revenue and question 5 is answered in affirmative against the Revenue and in favour of the assessee. In the result, for the above reasons, questions 1, 2, 3 and 6 are answered in the affirmative in favour of the assessee and against the Revenue and question 4 in the negative and question 5 in the affirmative against the Revenue and in favour of the assessee. The two Referred Cases shall stand disposed of accordingly without any order as to costs. _______________ (V.V.S.RAO, J) ____________________ (B.N.RAO NALLA, J) 27th January 2012 Note: LR copy to be marked. B/o. RRB [1] (2011) 339 ITR 333 (AP) [2] (2011) 332 ITR 611 (AP) [3] (2011) 334 ITR 256 (AP) [4] (1996) 217 ITR 699 (SC) [5] (1976) 103 ITR 777 (SC) [6] (1971) 82 ITR 704 : (1971) 3 SCC 475 [7] (2011) 333 ITR 347 (AP) [8] (2011) 334 ITR 303 (AP) "