2018 (2) TMI 54 - AT - Income Tax

Grant of approval u/s 10(23C)(vi) - Held that - It is pertinent to note that the main objects of the trust are to encourage backward and discarded people towards education and social development works, helping children by providing education and livelihood to them etc. The same was at no point amended by the assessee. Also the trust runs a college that helps in enhancing the future of students by providing the education and making available the diploma courses in Polytechnic and Engineering which are duly approved by AICTE. Hence all objects are in consideration for granting the approval u/s 10(23C)(vi) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Cancellation of approval under section 10(23C)(vi) of the Income Tax Act, 1961.
2. Allegation of the institution existing for profit rather than solely for educational purposes.
3. Adequacy of opportunity of hearing and principles of natural justice.

Detailed Analysis:

1. Cancellation of approval under section 10(23C)(vi):
The Chief Commissioner of Income Tax (CCIT) canceled the approval under section 10(23C)(vi) on the grounds that the institution's activities were purely commercial and aimed at generating surplus, which was invested in school infrastructure. The CCIT relied on the Uttarakhand High Court's judgment in CIT vs. Queen’s Education Society, which stated that educational institutions should not exist for profit to qualify for exemption under section 10(23C)(vi).

2. Allegation of the institution existing for profit:
The CCIT observed that the institution's objects included activities beyond education, implying a commercial nature. However, the assessee argued that the institution's primary purpose was educational, offering diploma courses approved by AICTE, and any surplus was reinvested in educational infrastructure. The assessee cited the Supreme Court's judgment, which overruled the Uttarakhand High Court's decision, emphasizing that merely earning a profit does not disqualify an institution from exemption if the profit is applied wholly and exclusively to educational purposes.

3. Adequacy of opportunity of hearing and principles of natural justice:
The assessee contended that the CCIT's order was passed without granting adequate opportunity of hearing, recording incorrect facts, and without providing an opportunity for cross-examination, thus violating principles of natural justice. The Tribunal noted that the Supreme Court's judgment in American Hotel and Lodging Association Educational Institute provided a framework for determining whether an institution exists solely for educational purposes, which the CCIT failed to consider adequately.

Tribunal's Decision:
The Tribunal, after hearing both parties and reviewing the records, concluded that the CCIT's reliance on the Uttarakhand High Court judgment was misplaced as it had been overruled by the Supreme Court. The Supreme Court had clarified that the predominant nature of the activity should be educational, and incidental surplus does not change the institution's character if it is reinvested in educational purposes. The Tribunal found that the assessee's institution met these criteria and thus allowed the appeal, reinstating the approval under section 10(23C)(vi).

Conclusion:
The appeal of the assessee was allowed, and the cancellation of approval under section 10(23C)(vi) was overturned. The Tribunal emphasized that educational institutions can generate surplus as long as it is reinvested in educational purposes, aligning with the Supreme Court's interpretation. The decision reinforced the importance of adhering to principles of natural justice in administrative proceedings.