2011 (7) TMI 422 - HC - Income Tax

Approval - Under Section 10(23C)(vi) - The petitioner had stated before the respondent (and his counsel also made a statement before us during arguments) that even if the petitioner society states some other activities as per its object clause, the surplus arising from the educational activity will not be utilized for any other purpose, but solely for educational purpose - The respondent has denied exemption to the petitioner society merely on suspicion that it may deviate from it in future. The income of the petitioner society had been assessed at NIL under Section 11 of the Act till the assessment year 2001-02. For the assessment year 2003-04 and 2004-05, the assessment has been completed under Section 143(3) of the Act vide assessment order dated 28.2.2006 and 24.11.2006 respectively and the total income has been assessed at NIL under Section 11 of the Act. Though for the assessment year 2002-03 the AO had passed orders dated 22.3.2005, denying exemption under Section 11 of the Act to the petitioner, this order was set aside by CIT(A) in appeal holding that the petitioner was entitled to exemption under Section 11 of the Act - Therefore, remit the matter to the respondent for fresh adjudication in accordance with law - It will be also open to the respondent to incorporate conditions while passing the order and call upon the petitioner society to furnish an undertaking or affidavit that they would not breach any of those conditions - The writ petition is accordingly disposed of.

Issues Involved:
1. Whether the petitioner society was established solely for educational purposes.
2. Interpretation of the term "education" under Section 10(23C)(vi) of the Income Tax Act, 1961.
3. The periodicity of approval under Section 10(23C)(vi) of the Income Tax Act, 1961.
4. Impact of amendments to the Memorandum of Association on the eligibility for exemption.
5. Applicability and interpretation of Supreme Court judgments on similar issues.
6. Compliance with the conditions stipulated under Section 10(23C)(vi) and the power of the prescribed authority to withdraw approval.

Detailed Analysis:

1. Solely Established for Educational Purposes:
The impugned order dated 26th September 2008 dismissed the petitioner's application under Section 10(23C)(vi) on the grounds that the society was not solely established for educational purposes. The order highlighted two main objects of the petitioner: (a) establishing hostels for students preparing for competitive exams, and (b) establishing reading rooms or libraries for research in spiritualism, yoga, cultures, traditions, folk arts, and various schools of philosophy. These activities were deemed non-educational.

2. Interpretation of "Education":
The term "education" was given a restrictive meaning, connoting the process of training and developing knowledge, skills, mind, or character of students through formal schooling or university education. This interpretation was supported by the precedent set in Sole Trustee Loka Shiskhana Trust vs. Commissioner of Income Tax, (1975) 101 ITR 234 (SC).

3. Periodicity of Approval:
The court noted that approval under Section 10(23C)(vi) is not a one-time approval but must be obtained periodically. Hence, earlier approvals granted were deemed inconsequential for the current application.

4. Amendments to Memorandum of Association:
The petitioner argued that they had amended their Memorandum of Association to delete non-educational clauses as required by the Income Tax Officer (Exemptions) for DGIT (E) in a letter dated 16th March 2004. The amendments were confirmed on 2nd February 2004, and subsequent approvals were granted based on these amendments. The court found that the impugned order failed to consider the effect of these amendments.

5. Applicability of Supreme Court Judgments:
The petitioner relied on the Supreme Court decision in American Hotel & Lodging Association Educational Institute Vs. Central Board of Direct Taxes & Ors., (2008) 301 ITR 86 (SC), which discussed the insertion of provisos to Section 10(23C)(vi) by the Finance Act (No.2), 1998. The judgment clarified that the applicant must show existence solely for educational purposes and obtain initial approval from the prescribed authority. The court also referred to Digember Jain Society for Child Welfare vs. Director General of Income Tax (Exemption), Writ Petition (Civil) No. 5311/2008, which reiterated that the threshold conditions for approval are the actual existence of an educational institution and approval from the prescribed authority.

6. Compliance with Conditions and Withdrawal of Approval:
The Supreme Court in American Hotel & Lodging Association Educational Institute held that the prescribed authority could impose conditions for approval and monitor compliance. If conditions are breached, the authority can withdraw the approval following the procedure mentioned in the proviso. The court noted that the petitioner society had been granted exemptions in the past and had complied with the conditions stipulated under Section 10(23C)(vi).

Conclusion:
The High Court allowed the writ petition, quashing the order dated 26th September 2008, and remitted the matter to the respondent for fresh adjudication in accordance with the law. The court noted that the respondent could incorporate conditions in the new order and require the petitioner society to furnish an undertaking or affidavit to ensure compliance with those conditions. The writ petition was disposed of without any orders as to costs.

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