2009 (10) TMI 61 - HC - Income Tax

Exemption u/s 10(23C) - petitioner claims that it is a charitable society and is, thus, entitled to exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 - Modern School in various cities like Faridabad, Noida, Vaishali and a school under the name Delhi International Happy School held that - a society or a trust or other similar body running educational institutions solely for educational purposes and having the overall object of not to make any profit can be regarded as other educational institution even if some surplus arises from its activities - the petitioner society has mainly been formed with the objective of carrying out educational activity - even if the petitioner society states some other activities as per its object clause, the surplus arising from the educational activity will not be utilized for any other purpose, but solely for educational purpose exemption u/s 10(23C)(vi) allowed

Issues Involved:
1. Eligibility for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961.
2. Interpretation and application of the third proviso to Section 10(23C)(vi).
3. Examination of the petitioner society's objectives and activities.
4. Conditions for granting exemption and monitoring compliance.

Detailed Analysis:

1. Eligibility for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961:
The petitioner, Digember Jain Society for Child Welfare (Regd.), sought a writ of certiorari to quash the order dated 28.4.2008, which denied them exemption under Section 10(23C)(vi) of the Income Tax Act. The society, established in 1969 and registered under the Societies Registration Act, 1860, runs several educational institutions and claims to be a charitable society entitled to the exemption. The petitioner had previously been granted exemptions under Section 10(22) and Section 10(23C)(vi) until the assessment year 2001-02. However, with amendments effective from 1.6.2007, the petitioner's application for continuation of exemption was refused, leading to the current petition.

2. Interpretation and application of the third proviso to Section 10(23C)(vi):
The impugned order denied exemption based on the petitioner's Memorandum of Association, which included multiple objects beyond education. The respondent argued that the society did not exist solely for educational purposes, as required by Section 10(23C)(vi). The Supreme Court's judgment in American Hotel & Lodging Association Educational Institute v. CBDT clarified that the third proviso to Section 10(23C)(vi) introduced monitoring conditions to prevent abuse of the exemption provision. These conditions include the application and accumulation of income solely for the objects for which the institution was established and compliance with specified investment patterns.

3. Examination of the petitioner society's objectives and activities:
The petitioner society's primary activity is running educational institutions, and it has not deviated from this objective. The respondent's refusal was based on the potential for future deviation due to the society's multiple objects. The Supreme Court in Aditanar Educational Foundation v. Additional Commissioner of Income Tax held that a society running educational institutions solely for educational purposes and not for profit can be regarded as an educational institution, even if some surplus arises from its activities. The petitioner's income had been assessed at NIL under Section 11 of the Act for several years, indicating compliance with the educational purpose requirement.

4. Conditions for granting exemption and monitoring compliance:
The Supreme Court in American Hotel & Lodging Association Educational Institute suggested that the prescribed authority could grant approval with stipulations to ensure compliance with the third proviso. The petitioner society offered an undertaking that any surplus from educational activities would be used solely for educational purposes, addressing the respondent's concerns. The court concluded that the petitioner met the threshold conditions for exemption and that any future non-compliance could be addressed through the monitoring conditions stipulated by the third proviso.

Judgment:
The court quashed the impugned order dated 28.4.2008 and issued a writ of mandamus directing the respondent to grant exemption to the petitioner society under Section 10(23C)(vi) of the Act. The exemption is subject to conditions in terms of the third proviso and an affidavit of undertaking by the petitioner that surplus funds will be used solely for educational purposes. No costs were awarded.

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