2018 (2) TMI 1733 - AT - Income Tax

Rejection of application u/s 10(23C)(vi) - generation of surpluses out of receipt - excess generated by the applicant is being parked in FDRs - predominant object of the applicant university - Held that - The argument that as per the statutory provisions, the university is not entitled to expend the money on any other activity and that since it is a government organization, hence, surplus cannot be utilized by the trust members for their personal use or that the surplus ultimately have to be spent on educational activity only, in our view, at this stage is of no help to the applicant university. While granting approval under the relevant provisions of section 10(23C)(vi) of the Act, the Commissioner has to see the activities of the assessee as on date vis-a-vis the accounts and other relevant information. As on date, the applicant university is engaged in the profit making and has accumulated surplus running into thousands of crores of rupees. Though, imparting technical education, is the need of the hour for which the applicant university has been established, but instead of performing its activity in real sense, it has got involved itself in huge profit making. Under the circumstances, it cannot be said that the applicant university is doing activities in the course of fulfillment of its objects. We, therefore, do not find any infirmity in the order of CIT (E) in denying the approval to the assessee-applicant. - Decided against assessee

Issues Involved:
1. Non-filing of income tax returns and audited balance sheets.
2. Eligibility for exemption under Section 10(23C)(vi) of the Income Tax Act.
3. Examination of the applicant's activities for profit-making versus educational purposes.
4. Accumulation of surplus funds and their utilization.
5. Genuineness of the applicant's activities.
6. Comparison with private educational institutions.
7. Legal precedents and their applicability.

Detailed Analysis:

1. Non-filing of Income Tax Returns and Audited Balance Sheets:
The Commissioner of Income Tax (Exemptions) [CIT(E)] noted that the applicant had not filed any income tax returns or audited balance sheets for the last three years, which are mandatory requirements under Section 10(23C)(vi) of the Income Tax Act. This deficiency led to the initial rejection of the application for exemption.

2. Eligibility for Exemption under Section 10(23C)(vi):
The CIT(E) observed that the applicant had previously claimed exemption under Section 10(23C)(iiiab), asserting it was substantially financed by the government. However, the applicant did not file returns during this period. The CIT(E) found that the applicant was intermittently receiving grants from the Punjab Government, not on a regular basis, and thus was not substantially financed by the government. Consequently, the applicant was not entitled to exemption under Section 10(23C)(iiiab) from 1.4.2005, leading them to seek approval under Section 10(23C)(vi).

3. Examination of the Applicant's Activities for Profit-Making versus Educational Purposes:
The CIT(E) raised concerns about the applicant generating substantial surpluses and parking them in Fixed Deposit Receipts (FDRs), generating significant interest income. The surplus funds, including unutilized grants, were not being redeployed into educational activities. The CIT(E) compared the applicant's fee structure and operations to those of private institutions like Lovely Professional University, concluding that the applicant was operating on commercial principles and not solely for educational purposes.

4. Accumulation of Surplus Funds and Their Utilization:
The financial data revealed that the applicant had been generating and accumulating substantial surpluses, which were parked in FDRs. For instance, as of 31.3.2016, the FDRs amounted to ?1042.95 crores. The CIT(E) noted that only a small portion of funds was being utilized for educational purposes, with the majority being invested in FDRs and generating interest income. This accumulation and lack of utilization raised doubts about the genuineness of the applicant's educational activities.

5. Genuineness of the Applicant's Activities:
The CIT(E) and auditors raised serious concerns about the financial activities of the applicant, including the delegation of distance education to private players without proper oversight. The auditors highlighted issues such as the lack of information on services provided by coordinators and facilitators, potential revenue leakage, and non-utilization of grants for their intended purposes. These factors cast doubt on the genuineness of the applicant's activities.

6. Comparison with Private Educational Institutions:
The CIT(E) compared the applicant's operations to those of private institutions like Lovely Professional University, which operate on a profit-making basis and pay taxes on their income. The applicant's fee structure and generation of surpluses were found to be similar to those of private institutions, undermining the claim that the applicant was operating solely for educational purposes.

7. Legal Precedents and Their Applicability:
The applicant relied on legal precedents, including the decisions in 'Pinegrove International Charitable Trust Vs. Union of India' and 'Queen Educational Society Vs. CIT,' which established that the mere generation of surpluses does not disqualify an institution from exemption if the predominant object is educational. However, the Tribunal found that the applicant failed to meet the parameters set by these precedents. The predominant object of the applicant appeared to be profit-making, as evidenced by the accumulation of surpluses and interest income.

Conclusion:
The Tribunal upheld the CIT(E)'s decision to reject the application for exemption under Section 10(23C)(vi) of the Income Tax Act. The applicant failed to demonstrate that it existed solely for educational purposes and not for profit. The accumulation of surpluses, lack of utilization of funds for educational activities, and the comparison with private institutions indicated that the applicant's activities were profit-oriented. The appeal of the applicant was dismissed.

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