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2014 (5) TMI 898 - HC - Income TaxRefusal to grant exemption u/s 10(23C)(vi) of the Act - Whether the generation of surplus by the petitioner would indicate that the assessee was also existing for the purposes of profit and whether the lapses on the part of the petitioner in awarding the contract for IT services to RJBAPL would amount to not applying the funds exclusively for the object for which the petitioner was established as contemplated under third proviso to Section 10(23C) of the Act Held that - A plain reading of Clause (vi) of Section 10(23C) of the Act indicates that exemption under the clause would be available to any educational institution existing solely for educational purposes and not for purposes of profit - Following COUNCIL FOR THE INDIAN SCHOOL CERTIFICATE EXAMINATIONS Versus DIRECTOR GENERAL OF INCOME TAX 2012 (3) TMI 289 - DELHI HIGH COURT the assessee is an educational institution for the purposes of Section 10(23C) of the Act - the essential question that arises is whether the assessee exists solely for educational purposes or also for the purposes of profit - the aims and objects, as well as the activities undertaken by the assessee, fall within the definition of charitable purposes u/s 2(15) of the Act. Any expenditure incurred by an assessee for computerisation and developing an IT enabled system for carrying on its activities would be application of its resources wholly and exclusively for its purposes - The exemption u/s 10(23C) of the Act is available provided that the income of the assessee is applied wholly and exclusively to the objects for which it is established - the contract entered into with the RJB-APL was for furthering the object for which the petitioner was established - the assessee has along with RJB-APL amicably determined the amount payable for the work done and recovered the balance - The reasonableness of the amount spent and the quality of the decisions of the management are not the subject matter in respect of which the satisfaction of the Prescribed Authority is required. The expression used in Section 37 of the Act, wholly or exclusively for the purposes of business and profession is similar in its import as the expression applied wholly and exclusively to the object for which it is established as occurring in Section 10(23C)(vi) of the Act - the tests as laid down by various decisions for determining whether an amount is expended wholly and exclusively for the purposes of the business would apply equally in determining whether the income is applied by the assessee wholly and exclusively for its objects - Section 10(23)(vi) of the Act was analogous to Section 10(22) and to that extent the law laid down with respect to the eligibility condition u/s 10(22) of the Act would be equally applicable in cases u/s 10(23)(vi) - the assesse would be entitled to the approval u/s 10(23C)(vi) of the Act, if it was found that the funds of the assesse had not been utilized for its objects during the relevant year or had otherwise not complied with the provisos to the Section 10(23C) of the Act, the approval would be revoked at the end of the relevant year - the assessee is entitled to an exemption and it would also be available to the assessee for the subsequent year(s) - denial of exemption u/s 10(23C)(vi) of the Act to an Institution which exists solely for educational purposes and not for profit, on account of noncompliance with the third proviso would be limited to the relevant years during which the proviso has been violated. Even if it is assumed that payment to RJB-APL violated the third proviso for Section 10(23C) of the Act, the exemption u/s 10(23C)(vi) of the Act can be denied only for the for the year(s) during which payments had been made by the petitioner to RJBAPL - the assessee by its nature of activity is otherwise entitled to exemption u/s 10(23C)(vi) of the Act, it is liable to be granted by the respondent for future years subject to conditions as contained in the third proviso to Section 10(23C) of the Act Decided in favour of Assessee.
Issues Involved:
1. Denial of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961. 2. Whether the petitioner exists solely for educational purposes and not for profit. 3. Examination of the genuineness of the petitioner's activities. 4. Application of funds for the object of the petitioner society. Detailed Analysis: 1. Denial of Exemption under Section 10(23C)(vi) of the Income Tax Act, 1961: The petitioner, a society registered under the Societies Registration Act, challenged the order dated 07.06.2012 by the DGIT(E) refusing to grant exemption under Section 10(23C)(vi) for AY 2008-09 onwards. The DGIT(E) had rejected the application on grounds that the petitioner was not an educational institution but an examination body, and also because it had systematically earned profits which were allegedly diverted in a clandestine manner. 2. Whether the Petitioner Exists Solely for Educational Purposes and Not for Profit: The petitioner argued that it is a society established to promote education, including conducting school examinations. It was previously exempt under Section 10(22) of the Act, and the criteria for exemption under Section 10(23C) are identical. The petitioner contended that the surplus generated was for future expansion and modernization, and the fee increase was necessary for these purposes. The respondent, however, argued that the petitioner was functioning for profit, citing the surplus income over expenditure and the steep hike in examination fees. 3. Examination of the Genuineness of the Petitioner's Activities: The respondent claimed that the activities of the petitioner were not genuine, as highlighted by the auditor's report which pointed out lapses in awarding a contract to RJB-APL for IT services. The auditor was unable to form an opinion on whether the accounts showed a true and fair view due to these lapses. The petitioner countered that the contract with RJB-APL was a commercial transaction for IT services, and despite complaints, they managed to recover a significant amount from RJB-APL. 4. Application of Funds for the Object of the Petitioner Society: The court analyzed whether the funds were applied solely for educational purposes. It was noted that the petitioner's objects and activities fall within "charitable purposes" under Section 2(15) of the Act. The court emphasized that generating surplus does not negate the educational purpose if the funds are utilized for furthering the organization's objects. The petitioner's surplus was justified for modernization and infrastructure building. The court held that the generation of surplus for such purposes does not exclude the petitioner from exemption under Section 10(23C)(vi). Conclusion: The court concluded that the petitioner exists solely for educational purposes and not for profit. The generation of surplus for modernization and infrastructure does not negate the educational purpose. The court also found that the activities of the petitioner were genuine and that any lapses in the contract with RJB-APL did not imply that funds were not used for educational purposes. The court allowed the writ petition, setting aside the DGIT(E)'s order and granting the exemption under Section 10(23C)(vi) for the relevant years, subject to compliance with the third proviso to Section 10(23C) of the Act.
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