2020 (4) TMI 371 - HC - Income Tax

Exemption u/s 11 denied - grant of approval under Section 10 (23C) (vi) denied - trustees were empowered to fix fees and charges to be collected from student was to be after taking into account the cost of running schools including future development of the institutions and that such fees will be fixed without an element of profit - HELD THAT - The fact that Clause 10 of the Trust Deed states that the fees and charges shall be fixed taking into account the cost of running including future development thereof though without an element of profit motive indicates that the actual intention of the trust is only to generate income by charging fees while admitting children s to their schools. The Deed of Trust has also not declared the source of fund for achieving the purpose. It merely stipulates the Trustees are authorised to borrow monies for the purposes of the trust with or without security from banks financial institutions or otherwise and also have the power to offer a security of any immovable or movable property or other security. The fact that there is no clause for providing free education for children coming from different social and educational backgrounds and the scholarship to under privileged children shows that there is only profit motive and the institutions are to be run only out of fees collected by admitting children s to their schools. Trust Deed also seems to indicate that the source of funds of the petitioner s trust is only from the school fees to be collected during these financial years. Therefore it cannot be construed that the petitioner s Trust s Schools were not for the purpose of profit. No merits in these writ petitions filed by the petitioner as well Since the schools run by the petitioner were directed to be closed pursuant to the above directions I do not find any merits in W.P. Presence of educational institution is sine qua non for grant of approval under Section 10 (23C) (vi) of the Income Tax Act 1961. The impugned order passed by the 1st respondent is therefore sustainable.

Summary

Issues:
Challenge to orders denying Section 10 (23C) benefit, Trust Deed interpretation, Profit motive assessment, Compliance with Income Tax Act provisions, Approval denial justification, Relevant legal precedents consideration.

Analysis:
1. Challenge to Denial of Section 10 (23C) Benefit:
The petitioner challenged three orders denying the benefit of Section 10 (23C) of the Income Tax Act, 1961. The petitioner, a registered Trust, sought exemption from income tax payment. The denial was based on the Trust Deed's clauses related to fee collection and future development plans.

2. Trust Deed Interpretation:
The Trust Deed, registered in 2009, underwent clarifications removing profit elements from fee collection. However, the authorities found the fee structure not in line with charitable objectives as per Section 2 (15) of the Income Tax Act, 1961. The Trust aimed to establish multiple schools, indicating a profit motive.

3. Assessment of Profit Motive:
Authorities rejected the application for exemption based on profit motives inferred from the Trust Deed's provisions. The petitioner argued that the dominant activity was education, not profit-making. Legal precedents were cited to support the educational institution's non-profit nature.

4. Compliance with Income Tax Act Provisions:
The petitioner contested the denial of approval under Section 10 (23C) despite being declared a Non-Charitable Trust by the 2nd respondent. The petitioner argued that this declaration should not automatically justify denial of Section 10 (23C) approval.

5. Justification for Approval Denial:
The respondents argued that the Trust Deed is crucial for determining charitable status under Sections 12AA and 10 (23C)(vi) of the Income Tax Act, 1961. They maintained that the impugned orders were well-reasoned and warranted no interference.

6. Consideration of Legal Precedents:
Legal precedents were extensively cited to support the petitioner's claim of non-profit educational activities. The petitioner emphasized the Supreme Court's decision in Queen's Educational Society case to argue against inferring profit motives from surplus income.

7. Final Judgment:
The High Court analyzed the Trust Deed's provisions, concluding that the petitioner's schools operated with a profit motive despite registered as a Charitable Trust. The Court found no merit in the writ petitions challenging the denial of Section 10 (23C) benefit. The closure of schools further weakened the petitioner's case, resulting in dismissal of the petitions. The Court upheld the sustainability of the impugned orders and dismissed all three writ petitions.