2013 (2) TMI 268 - HC - Income Tax

Benefit of Section 10(23C)(iiiab) denied - institution substantially funded by government must receive at least 75% of its receipts from government grants - benefit of Section 11 was granted - Held that - As decided in Educational Institution v/s. Additional CIT 1997 (2) TMI 3 - SUPREME COURT the decisive or acid test is whether on an overall view of the matter, the object is to make a profit. A surplus may arise in the activity of the trust after meeting the expenditure incurred for conducting educational activities was held not to dis-entitle the trust for the benefit of the provisions of Section 10(23C). The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that the Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is education and the Petitioner exists solely for the purposes of imparting education. An incidental surplus which is generated, and which has resulted in additions to the fixed assets is utilized as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant. The Income-tax Act 1961 does not condition the grant of an exemption under Section 10(23C) on the requirement that a college must maintain the status-quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption under Section 10(23C). Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions. The provisions of Section 10(23C) cannot be interpreted regressively to deny exemptions. So long as the institution exists solely for educational purposes and not for profit, the test is met. Direct that the CIT(A) shall, in determining whether the Petitioner should be granted an exemption under Clause (iiiab) do so, without being influenced by any observations contained in the impugned order of the Chief Commissioner of Income-tax which, to the extent that it holds that the Petitioner does not exist for educational purposes and that it exists for the purposes of profit is quashed and set aside - in the event that the Petitioner is held not to be entitled to the benefit of an exemption under Section 10(23C) (iiiab), the Petitioner would in that event be entitled to the benefit of an exemption under Clause (vi) of Section 10(23C).

Summary

Issues Involved:

1. Eligibility for exemption under Section 10(23C)(vi) of the Income Tax Act.
2. Determination of whether the institution is substantially financed by the government.
3. Assessment of whether the institution exists solely for educational purposes and not for profit.

Detailed Analysis:

1. Eligibility for Exemption under Section 10(23C)(vi):

The Petitioner, a public trust and a registered society, applied for exemption under Section 10(23C)(vi) for the Assessment Year 2011-12. The Chief Commissioner of Income-tax rejected this application on the grounds that the Petitioner received substantial government grants, thus falling under Section 10(23C)(iiiab) instead of (vi). The Chief Commissioner also concluded that the Petitioner did not exist solely for educational purposes and was profit-oriented.

2. Determination of Whether the Institution is Substantially Financed by the Government:

The Chief Commissioner noted that the Petitioner received significant financial aid from the State Government and the University Grants Commission. The grants formed a substantial part of the Petitioner's total receipts: 56% for 2008-09, 63% for 2009-10, 52% for 2010-11, and 58% for 2011-12. Based on this, the Chief Commissioner concluded that the Petitioner should be governed by Section 10(23C)(iiiab) rather than (vi).

3. Assessment of Whether the Institution Exists Solely for Educational Purposes and Not for Profit:

The Chief Commissioner scrutinized the Petitioner's income and expenditure, noting various fees collected (e.g., Air Rifle shooting, Gymkhana fee, Development Fund) and concluded that these indicated a profit motive. The Chief Commissioner also pointed to the increase in asset base and generation of surplus as evidence of profit orientation.

Court's Analysis and Findings:

The Court emphasized that the primary test is whether the institution's predominant objective is educational and not profit-making. Referring to the Supreme Court's judgment in Surat Art Silk Cloth Manufacturers Association, the Court reiterated that incidental profits do not negate the educational purpose if the primary objective is not profit-making.

The Court examined the Petitioner's financial records and found that:

- The Petitioner had a consistent deficit in expenditure over income, excluding government grants.
- Fees collected were in accordance with university regulations and were utilized for educational purposes.
- Surpluses generated were reinvested in essential educational infrastructure, such as library books and electronic equipment.

The Court concluded that the Chief Commissioner erred in holding that the Petitioner did not exist solely for educational purposes. The Court quashed the Chief Commissioner's order to the extent it denied the exemption under Section 10(23C)(vi) on the grounds of profit orientation.

Conclusion:

The Court directed that the CIT(A) should determine the Petitioner's eligibility for exemption under Section 10(23C)(iiiab) without being influenced by the Chief Commissioner's observations. If the Petitioner is not entitled to exemption under Clause (iiiab), they should be granted exemption under Clause (vi). The Court made the rule absolute, with no order as to costs.