2010 (3) TMI 946 - HC - Income Tax

whether the object of the institution is to make profit and whether the activities of the institution are in terms of the purpose for which it is established, education and education only.? Held that - What is relevant is purpose and administration of the institution only for education and nothing more or nothing less or else. It has to be noted that on the facts of the case before the Uttarakhand High Court, it was a case falling under section 10(23C)(iiiad) where annual receipt does not exceed ₹ 1 crore. Secondly, going by the accounts, prima facie, we are of the view that there is no question of generation of profit though there is accumulation of surplus, but in case the accumulation of surplus is within the parameters, the petitioner is entitled to succeed. In this context, the contention of the learned counsel for the petitioner that going by annexure P-6, there is no accumulation of income has also to be considered. Still further, the contention that the amount of ₹ 15,45,000 which is paid to Ganesh Rice Mill is only return of loan availed of and not distribution of profit to the author of the trust, has also to be examined. According to the petitioner, M/s. Ganesh Rice Mill is not an author of the trust or a contributor to the trust, but only is an unsecured creditor. As has been rightly pointed out by the learned standing counsel, these are the questions of fact which are to be gone into by the Commissioner since, according to the learned standing counsel, there appears to be a situation of manipulation of accounts, whereby the loan has been credited as the capital initially and, thereafter, on return has been shown as repayment of loan. Thus, on an overall view of the situation both on facts and law the matter requires reconsideration by the Chief Commissioner of Income-tax. Matter remitted back

Issues Involved:
1. Approval under section 10(23C)(vi) of the Income-tax Act, 1961.
2. Accumulation of income by the petitioner institution.
3. Interpretation of "profit" in the context of educational institutions.
4. Applicability of judicial precedents.

Issue-wise Detailed Analysis:

1. Approval under section 10(23C)(vi) of the Income-tax Act, 1961:
The primary issue in this case revolves around the guiding principles under section 10(23C)(vi) of the Income-tax Act, 1961, which govern the approval of educational institutions by the Chief Commissioner of Income-tax. The petitioner, a registered trust, sought exemption under this section, which exempts the income of educational institutions existing solely for educational purposes and not for profit. The Department declined the approval, leading to the writ petition.

2. Accumulation of income by the petitioner institution:
The Commissioner was not satisfied with the explanation for the accumulation of income by the petitioner and some financial transactions, noting that the trust had accumulated significant income during the financial years 2003-04 to 2006-07. The Commissioner treated this accumulation as profit, which led to the denial of approval. The court noted that the Commissioner did not properly consider the capital expenditure of the trust and whether the accumulation of income would disqualify the petitioner under section 10(23C)(vi).

3. Interpretation of "profit" in the context of educational institutions:
The court emphasized that generating surplus and accumulating income do not automatically disqualify an institution from the benefits of section 10(23C). The legislative intent is to distinguish between surplus and profit, with the former being permissible if utilized for educational purposes. The court referred to the Supreme Court's decision in Aditanar Educational Institution v. Addl. CIT, which clarified that surplus used for the educational institution itself does not negate its status as an institution existing solely for educational purposes.

4. Applicability of judicial precedents:
The court observed that the authority was confused by the decision of the Uttarakhand High Court in CIT v. Queens' Educational Society and CIT v. St. Pauls Sr. Secondary School. The Uttarakhand High Court's decision was based on a different context, specifically section 10(23C)(iiiad), where annual receipts do not exceed Rs. 1 crore. The court also referred to the Supreme Court's decision in American Hotel and Lodging Association Educational Institute v. CBDT, which reiterated that the predominant object of the activity should be solely for education and not for profit.

Conclusion:
The court concluded that the Chief Commissioner misinterpreted the law by equating accumulation of surplus with profit-making. It noted that the petitioner's institution exists solely for educational purposes and that the accumulation of income, within permissible limits, does not disqualify it from exemption under section 10(23C)(vi). The court set aside the impugned order and remitted the matter back to the Chief Commissioner for reconsideration, directing that the matter be resolved within four months. The court also highlighted the need to examine specific financial transactions, such as the payment to Ganesh Rice Mill, to ensure they are not distributions of profit.

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