2017 (11) TMI 1740 - HC - Income Tax

Charitable activity - approval under s. 10(23C)(vi) rejected - educational institution - Held that - We are of the opinion that as of now the petitioner society running educational institution which imparts education to students from Class VI to XII, in the absence of any allegation or material, the object clause providing for other charitable activities, would not disentitle the society from approval under s. 10(23C)(vi) of exemption. The proviso added to s. 10(23C)(vi), specially provisos 2, 3, 12 and 13, give sufficient powers to check the abuse of the exemption. The mere possibility, therefore, that the society may in future pursue activities, which are not charitable, or closely connected with education for making profit, would not constitute the grounds to reject the approval under s. 10(23C)(vi). Perusal of the impugned order shows that the pleading in this regard has not been taken into consideration. Further, in the impugned orders, although, there is a finding that the society is having many objects other than educational, but there is no application of mind to the assertion made by the society that it is only pursuing the educational activity and no other. In view of case of C.P. Vidya Niketan Inter College Shikshan Society (2013 (7) TMI 367 - ALLAHABAD HIGH COURT), in case, the society is pursuing only educational objects and no other activity then the application by such a society for grant of approval under s. 10(23C)(vi) cannot be rejected on the ground that its aims and objects contain several other objects apart from educational and application by such a society is perfectly maintainable. The respondent-Chief Commissioner of Income Tax is directed to grant exemption to the petitioner-Society for the relevant assessment year - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the petitioner society qualifies for exemption under Section 10(23C)(iv) of the Income Tax Act, 1961.
2. Whether the society's fee structure and surplus generation disqualify it from being considered a charitable institution.
3. The applicability of legal precedents and principles established by higher courts regarding educational institutions and profit-making.

Issue-wise Detailed Analysis:

1. Qualification for Exemption under Section 10(23C)(iv):
The petitioner society, registered under the Societies Registration Act 1860, sought exemption under Section 10(23C)(iv) of the Income Tax Act, 1961. The application was rejected on the grounds that the society had a disproportionate fee structure aimed at earning maximum money for expansion, which was perceived as not falling within the ambit of charitable activity. The court highlighted that the primary purpose of the society is to impart education, and other ancillary objects should be overlooked in favor of the main object.

2. Fee Structure and Surplus Generation:
The court referred to the Supreme Court's judgment in "American Hotel & Lodging Association Educational Institute v. CBDT," which clarified that the existence of surplus from educational activities does not disqualify an institution from being considered as existing solely for educational purposes. The test is the nature of the activity, and if the surplus is incidental to the educational purpose, it does not negate the institution's charitable status. The court also cited "Queen’s Educational Society v. Commissioner of Income Tax," emphasizing that the dominant object test must be applied to determine whether the institution exists solely for educational purposes and not for profit.

3. Legal Precedents and Principles:
The court extensively discussed various legal precedents:
- In "American Hotel & Lodging Association Educational Institute v. CBDT," it was held that the nature of activities and the application of income in India are crucial in determining the character of the institution.
- "Queen’s Educational Society v. Commissioner of Income Tax" established that the predominant object test should be applied, and merely making a surplus does not imply the institution is profit-oriented.
- The Punjab and Haryana High Court in "Pinegrove International Charitable Trust v. Union of India" and the Bombay High Court in "Vanita Vishram Trust v. Chief Commissioner of I.T." both reiterated that educational institutions can generate surplus as long as it is applied towards educational purposes and not for profit-making.

The court concluded that the petitioner society's application for exemption was wrongly rejected by the respondent. The impugned order dated 20.09.2013 was quashed, and the respondent was directed to grant exemption to the petitioner society for the relevant assessment year. The court emphasized that the society's primary purpose of imparting education and the incidental generation of surplus for infrastructure development do not disqualify it from exemption under Section 10(23C)(iv) of the Income Tax Act.