2018 (2) TMI 1347 - HC - Income Tax

Exemption u/s 10(23C)(iv) denied - proof of charitable activities - Petitioner society was running 08 school buses to ferry the students - case of the petitioner society was rejected primarily on the ground that the assessee could not produce any evidence that buses were being used for the school only - Held that - It is evident from a combine reading of Memorandum of Association that the Society has been primarily established to impart education. The school is required to have necessary infrastructure to impart education in an effective manner. The Chief Commissioner of Income Tax has come to a wrong conclusion that the Society was making systematic profit. The schools are required to invest in the infrastructure including expansion of building etc. Every school is required to provide latest facilities to the students and for this purpose, the construction of new building is essential. The business earned by the society is pumped again for raising the infrastructure. The respondent is directed to grant exemption to the petitioner-Society for the relevant assessment year - Decided in favour of assessee

Issues Involved:
1. Registration and renewal of the petitioner society.
2. Application for exemption under Section 10(23C)(iv) of the Income Tax Act, 1961.
3. Grounds for rejection of the exemption application.
4. Legal arguments and precedents regarding exemption eligibility.
5. Final judgment and directions.

Issue-wise Detailed Analysis:

1. Registration and Renewal of the Petitioner Society:
The petitioner is a society registered under the Societies Registration Act, 1860, with registration Certificate No.514/2001 dated 28.12.2001, renewed on 12.7.2007. The society applied for further renewal on 25.12.2012. Its main purpose, as stated in the Memorandum of Association, is to impart education, operating under the name 'Mallikarjun School'.

2. Application for Exemption under Section 10(23C)(iv) of the Income Tax Act, 1961:
The petitioner society applied for exemption under Section 10(23C)(iv) on 20.9.2011. The Income Tax department issued a show cause notice on 3.9.2012, to which the petitioner responded by providing the requested information. The society argued that its surplus was used for the expansion and addition of the school building, which is integral to its educational purpose.

3. Grounds for Rejection of the Exemption Application:
The Chief Commissioner of Income Tax rejected the application on 13.09.2012, primarily on the grounds that the society could not provide evidence that its school buses were used exclusively for school purposes and that tourism was also one of its objects. The petitioner countered by stating that the buses were painted yellow as per legal requirements and were used solely for school purposes.

4. Legal Arguments and Precedents Regarding Exemption Eligibility:
The petitioner argued that the respondent authority erred in law by concluding that the society was making systematic profits. The court referred to several legal precedents, including:
- American Hotel & Lodging Association Educational Institute v. CBDT: Emphasized that the nature, activities, and genuineness of the institution and the application of income in India are crucial for exemption eligibility.
- Queen’s Educational Society v. Commissioner of Income Tax: Highlighted that the dominant objective test should be applied to determine if an educational institution exists solely for educational purposes and not for profit.
- Vanita Vishram Trust v. Chief Commissioner of I.T.: Clarified that the primary object of providing education should prevail, and other objects mentioned in the trust are not relevant if they are not pursued.
- Neeraj Janhitkari Gramin Sewa Sansthan v. CCIT: Asserted that a society's application for exemption cannot be rejected solely based on having multiple objects if it is proven that the society is only pursuing educational activities.

5. Final Judgment and Directions:
The court concluded that the Chief Commissioner of Income Tax wrongly concluded that the society was making systematic profits. It emphasized that schools must invest in infrastructure to provide modern facilities to students. The court quashed the impugned order dated 13.9.2012, directed the respondent to grant exemption to the petitioner society for the relevant assessment year, and did not impose any costs.

Conclusion:
The court's detailed analysis established that the petitioner society's primary objective was educational, and any surplus generated was reinvested in educational infrastructure. The rejection of the exemption application was found to be legally flawed, leading to the quashing of the impugned order and the granting of the requested exemption.

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