2018 (4) TMI 714 - HC - Income Tax

Claim for exemption under section 10(23C)(vi) - Assessee s activities including charging a franchisee fee could not be regarded as a charitable activity within the meaning of section 2(15) - Held that - The assessee fulfilled the requirements under section 10(23C)(vi) of the Act to qualify for exemption; DPS Society is maintaining its eleven schools and the 120 satellite schools in furtherance of the education joint venture agreements with an educational purpose that also qualifies as a charitable purpose within the meaning of section 2(15) of the Act and is not in contravention of section 11(4A) of the Act. This court feels compelled to observe that Section 10(23C)(vi) ought to be interpreted meticulously, on a case-to-case basis. The larger objective of an educational/ charitable purpose of the institution and its manifestation can only be subjectively adjudged; for instance, in the present situation, the balance sheets of the assessee demonstrate how the profits are utilized for the growth and maintenance of the very schools they are accrued from, thus, subscribing to a charitable motive. Educational institutions may take more creative steps to qualify their objectives as an educational purpose that is more universal than the individual objectives set out in the memoranda of objectives of such institutions. For instance, a percentage of profits earned from a business activity indulged in by such an educational institution may be mandated towards fructifying the implementation the provisions of the Right to Education Act, 2009, particularly, to create a more sensitive learning environment for children with disabilities in implementation of the provisions in the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, or have a system to analyze the ratio of inflow of money over progressive assessment years as opposed to how much of this money is channeled back into the growth and maintenance of such educational purpose, in order to put in place a visible system of accountability. This is an observation, to ensure that the purpose for which section 10(23C)(vi) of the Act was introduced, is adequately fulfilled and not disadvantageously circumvented by vested parties. For the foregoing reasons, the writ petition has to succeed. - Decided in favour of assessee.

Issues Involved:
1. Whether the franchisee fee received by the Assessee from satellite schools is exempt under section 10(23C)(vi) of the Income Tax Act.
2. Whether the income received by the Assessee from satellite schools constitutes business income subject to section 11(4A) of the Act.
3. Whether the ITAT's orders are perverse in law for holding that the provisions of Section 11(4A) were not attracted when the Assessee claimed under section 11 of the Act.

Detailed Analysis:

Issue 1: Exemption under Section 10(23C)(vi)
The Assessee, a society registered under the Societies Registration Act, 1860, operates 11 schools and has agreements with other societies to open schools under the "Delhi Public School" name. The Assessee applied for exemption under Section 10(23C)(vi) of the Income Tax Act for AY 2008-09 onwards, which was rejected by the DGIT on the grounds that the franchisee fee received from satellite schools amounted to a "business activity" with a profit motive.

The Assessee contended that even if the activity was construed as business, it was incidental to its educational objectives, and the receipts were ploughed back into pursuing these objectives. The ITAT upheld this view, stating that the Assessee's activities were not business but were integral to its educational purpose, and thus, the income was exempt under Section 10(23C)(vi).

Issue 2: Business Income under Section 11(4A)
The revenue argued that the franchisee fee was business income and not exempt under Section 11(4A) due to the lack of separate books of accounts. The Assessee maintained that it complied with this requirement by maintaining a separate account styled the "Secretary’s Office," where receipts from various schools were duly accounted for.

The ITAT found that the Assessee maintained separate accounts for the receipts towards reimbursement of expenses from the satellite schools, fulfilling the statutory requirements. The ITAT also noted that the Assessee's activities were educational and not for profit, as the surpluses were used for the maintenance and management of the schools.

Issue 3: ITAT's Orders and Section 11(4A)
The revenue contended that the ITAT's orders were perverse, arguing that the Assessee's activities constituted a business with profit motives and did not maintain separate books of accounts as required under Section 11(4A). The ITAT, however, consistently held that the Assessee's activities were educational and not for profit, and the accounts maintained were sufficient compliance with the statutory requirements.

The court upheld the ITAT's findings, emphasizing that the Assessee's activities were incidental to its educational objectives and the surpluses were used for educational purposes. The court reiterated that a mere surplus does not imply a profit motive if the dominant purpose remains educational.

Conclusion:
The court concluded that the Assessee fulfilled the requirements under Section 10(23C)(vi) for exemption, as its activities were educational and not for profit. The Assessee maintained separate accounts for its receipts, and the surpluses were used for the maintenance and management of the schools. The court allowed the Assessee's writ petition and dismissed the revenue's appeals, holding that the Assessee's income from satellite schools was exempt under Section 10(23C)(vi) and not subject to Section 11(4A).

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