2011 (10) TMI 287 - HC - Income Tax

Registration under 10(23C) - Application seeking grant of registration filed on 27.9.2009 in Form 56-D - petitioner society was running two schools at Hansi and details of strength of students and ownership of lands were given - surplus funds were generated after meeting expenditure - Revenue rejected application on the ground Schools to exist solely for the purposes of education and not for the purposes of profit - Held That - Revenue failed to show that accumulation exceeding more than 15% has exceeded the period of five years - If no profit arises from the activity, it is not possible to carry on educational activity in such a way that the expenditure exactly balances the income and there is no resultant profit. Orders declining registration are quashed and case remanded to decide on principles.

Summary

Issues:
1. Rejection of application for exemption under Section 10(23C) (vi) of the Income Tax Act, 1961.
2. Interpretation of the term 'solely for educational purposes' in the context of profit generation by educational institutions.
3. Consideration of surplus income and profit in determining eligibility for exemption.
4. Examination of aims and objects of the society to assess eligibility for exemption.

Issue 1: Rejection of Application for Exemption:
The petitioners filed applications seeking exemption under Section 10(23C) (vi) of the Income Tax Act, 1961, stating their society was registered for educational purposes. The Income Tax Department sought information on the society's activities and surplus percentages. Despite explanations and reliance on legal precedents, the respondent rejected the application, emphasizing the requirement that educational institutions exist 'solely' for education without profit motives.

Issue 2: Interpretation of 'Solely for Educational Purposes':
The judgment delves into the interpretation of the term 'solely for educational purposes' in the context of profit generation by educational institutions. It highlights the necessity of balancing income and expenditure, emphasizing that the absence of profit does not imply an exact balance between income and expenses. The court stresses that an institution's primary objective should be education, not profit-making, and rejects the notion that surplus income over several years automatically disqualifies an institution from exemption.

Issue 3: Surplus Income and Profit Consideration:
The court scrutinizes the calculation of surplus income, considering factors like depreciation and capital expenditure. It underscores that surplus accumulation exceeding 15% of income after 2002 for a limited period should not automatically disqualify an institution from exemption. The judgment emphasizes the need to assess the accumulation period and reasons for surplus income to determine eligibility for exemption under Section 10(23C) (vi).

Issue 4: Examination of Aims and Objects of the Society:
The judgment analyzes the aims and objects of the petitioner's society, emphasizing its dedication to educational activities and development work. The court notes specific provisions prohibiting the sale of land for residential purposes, indicating the society's commitment to educational objectives. The respondent's failure to consider these provisions while rejecting the application is deemed erroneous, leading to the quashing of the rejection orders.

In conclusion, the court allows both writ petitions, quashing the rejection of exemption applications. The respondent is directed to reconsider the issue in line with established legal principles and previous judgments, ensuring a fair assessment of the society's eligibility for exemption under Section 10(23C) (vi) of the Income Tax Act, 1961.