2015 (8) TMI 848 - HC - Income Tax

Exemption under Section 10(23C)(vi) denied - Whether an educational institution would cease to exist solely for educational purposes and not for purposes of profit merely because it has generated surplus income over a period of 4/5 years after meeting its expenditure? - Held that - The impugned order cannot be justified solely on the ground that in view of a clause which provided that the Trust could run a business, it would be debarred as such from registration on the ground that it was not existing solely for educational purposes. That merely a conferment of power to do business would not debar the right for consideration to the trust without any finding being recorded that the predominant object of the Trust was to do business. Thus, respondent no. 1 misdirected itself by rejecting the application on this ground without coming to any conclusion that the trust was carrying on any other activity as per clause (i). It is also a matter of fact, as noticed, now that the trust has already also deleted the objectionable clause and which has also been noticed in the subsequent assessment made in the assessment order dated 21.12.2012 for the year 2010-11. - Decided in favour of assessee.

Issues Involved:
1. Rejection of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961.
2. Interpretation of "solely for educational purposes" and "not for purposes of profit".
3. Legality of a trust carrying out business activities under its objectives.
4. Application of the predominant object test for charitable trusts.
5. Compliance with the provisions of Section 10(23C)(vi) and related judicial precedents.

Detailed Analysis:

1. Rejection of Exemption under Section 10(23C)(vi):
The petitioner challenged the order dated 17.09.2012, where the Chief Commissioner of Income Tax rejected the application for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961. The primary reason for rejection was the perceived intention of the petitioner-trust to carry out business activities, which was deemed impermissible for a charitable organization.

2. Interpretation of "Solely for Educational Purposes" and "Not for Purposes of Profit":
The respondent argued that for an institution to qualify for exemption, it must exist solely for educational purposes and not for profit. They relied on the Division Bench's observations in Pine Grove International Charitable Trust vs. Union of India, which emphasized that even if one of the objects enables commercial activities, the exemption cannot be granted.

3. Legality of a Trust Carrying Out Business Activities:
The petitioner contended that the trust was established for educational purposes, running a school, and was regularly assessed to income tax. They argued that a clause allowing the trust to carry out other business should not bar it from exemption if the predominant purpose was educational. The petitioner also highlighted that an objectionable clause allowing business activities had been deleted in a supplementary trust deed.

4. Application of the Predominant Object Test:
The court examined the predominant object test, which assesses whether the primary purpose of the institution is educational rather than profit-making. The court referred to several Supreme Court judgments, including Aditanar Educational Institution vs. Additional Commissioner of Income Tax and American Hotel and Lodging Association Educational Institute v. CBDT, which clarified that merely generating surplus does not disqualify an institution from being considered as existing solely for educational purposes.

5. Compliance with Provisions of Section 10(23C)(vi) and Related Judicial Precedents:
The court reiterated the principles laid down in Pine Grove's case, which were upheld by the Supreme Court in Queen's Educational Society vs. CIT. It emphasized that the predominant object test must be applied, and incidental profits do not change the institution's educational character. The court also noted that the prescribed authority could impose conditions to ensure compliance with the statutory requirements.

Conclusion:
The court concluded that the rejection of the petitioner's application solely based on a clause allowing business activities was unjustified. The predominant object of the trust was educational, and there was no finding that the trust was actually carrying out business activities. The court quashed the impugned order and directed the competent authority to reconsider the application in light of the observations made, ensuring that the trust's primary purpose remains educational.

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