2010 (1) TMI 49 - HC - Income Tax

Scope of exemption u/s 10(23C)(vi) read with rule 2CA - other educational institution - held that - (1) Merely because an institution has earned profit would not be deciding factor to conclude that the educational institution exists for profit. (2) The provisions of Section 10(23C)(vi) of the Act are analogues to the erstwhile Section 10(22) of the Act - To decide the entitlement of an institution for exemption under Section 10(23C)(vi) of the Act, the test of predominant object of the activity has to be applied by posing the question whether it exists solely for education and not to earn - The cases where exemption has been granted earlier and the assessments are complete with the finding that there is no contravention of the statutory provisions, need not be reopened. However, after grant of approval if it comes to the notice of the prescribed authority that the conditions on which approval was given, have been violated or the circumstances mentioned in 13th proviso exists, then by following the procedure envisaged in 13th proviso, the prescribed authority can withdraw the approval. (3) The capital expenditure wholly and exclusively to the objects of education is entitled to exemption and would not constitute part of the total income. (4) The educational institutions, which are registered as a Society, would continue to retain their character as such and would be eligible to apply for exemption under Section 10 (23C)(vi) of the Act. (5) Where more than 15% of income of an educational institution is accumulated on or after 01.04.2002, the period of accumulation of the amount exceeding 15% is not permissible beyond five years, provided the excess income has been applied or accumulated for application wholly and exclusively for the purpose of education. (6) The judgment of Uttrakhand High Court rendered in the case of M/s Queens Educational Society and the connected matters, is not applicable to cases fall within the provisions of Section 10(23C)(vi) of the Act. There are various reasons, which have been discussed in para 8.8 of the judgment, and the judgment of Allahabad High Court rendered in the case of City Montessori School 2009 -TMI - 33744 - ALLAHABAD HIGH COURT lays down the correct law.

Summary

Issues Involved:
1. Whether an educational institution ceases to exist solely for educational purposes and not for profit if it generates surplus income over several years.
2. Whether capital expenditure should be deducted from gross income for the purpose of exemption under Section 10(23C)(vi).
3. Whether an institution registered as a Society under the Societies Registration Act, 1860, is eligible for exemption under Section 10(23C)(vi).

Detailed Analysis:

Issue 1: Surplus Income and Educational Purpose
The court examined whether generating surplus income over several years disqualifies an educational institution from being considered as existing solely for educational purposes. It was held that merely generating surplus does not imply that the institution exists for profit. The predominant object test, as laid down by the Supreme Court, must be applied to determine whether the institution's primary purpose is educational and not profit-making. The court referenced the Supreme Court's judgments in *American Hotel and Lodging Association* and *Aditanar Educational Institution*, emphasizing that surpluses used for educational purposes, such as infrastructure development, do not alter the institution's character as one existing solely for educational purposes.

Issue 2: Capital Expenditure Deduction
The court ruled that capital expenditure should be deducted from the gross income of educational institutions for the purpose of exemption under Section 10(23C)(vi). The methodology adopted by the Chief Commissioner, which did not deduct capital expenditure, was found to be contrary to the third proviso to Section 10(23C)(vi). The court clarified that the term "applies its income" includes capital expenditure for achieving the institution's educational objectives. This interpretation aligns with the Supreme Court's view in *S.R.M.M. CT. M. Tiruppani Trust* and *Divine Light Mission*.

Issue 3: Eligibility of Societies
The court addressed whether societies registered under the Societies Registration Act, 1860, qualify for exemption under Section 10(23C)(vi). It concluded that such societies retain their character as educational institutions and are eligible for exemption. This aligns with the Supreme Court's decision in *Aditanar Educational Institution*, which recognized educational societies as "other educational institutions" under Section 10(22), now analogous to Section 10(23C)(vi).

Conclusion:
The court quashed the orders of the Chief Commissioner of Income Tax withdrawing the exemptions granted under Section 10(23C)(vi), allowing the educational institutions to retain their exemptions. The revenue authorities were permitted to pass fresh orders if necessary, considering the principles laid down in the judgment.

Key Legal Principles Summarized:
1. Predominant Object Test: The primary purpose must be educational, not profit-making.
2. Capital Expenditure: Should be deducted from gross income for exemption purposes.
3. Society Registration: Societies registered under the 1860 Act are eligible for exemption under Section 10(23C)(vi).

Outcome:
The petitions were allowed, and the impugned orders were quashed, with liberty granted to the revenue to reassess based on the clarified legal principles.