2021 (6) TMI 873 - HC - Income Tax

Exemption u/s 10 (23C) (vi) - Denial of approval - HELD THAT - Approval has to granted if an educational institution satisfies the fundamental requirement of existence for educational purpose and does not exist solely for the purposes of the profit. Merely because an educational institution generates surplus is not a ground for disqualifying it from granting approval to it. Once an approval is granted, it is to be in force for a period of three years. As open for the prescribed authority to stipulate the conditions for ensuring there is no misuse by such an educational institution of the approval. Clause 51 of the Articles of Association clearly states that shareholders are not entitled to share the surplus of each year i.e., the excess of the income over the expenditure by way of dividend, bonus share. Surplus generated is not available for being declared either dividend or as a bonus share to the shareholders. Thus, there is no scope for inferring profit motive. Similarly, clause 52 which has been extracted above also indicates that there is no profit motive. Clauses 55 and 56 of the Articles of Association of the petitioner do not allow an interference of profit motive. These two clauses clearly indicate that the surplus generated by the petitioner is to be ploughed back. The Memorandum of Association of the petitioner also does not indicate the profit motive. The main object of the petitioner indicates that it is in the field of education. There are also indication that the petitioner had not otherwise indulged in any other activity to make profit and it was engaged only in the field of education in all the years of its existence since 1992. Denial of approval to the petitioner u/s 10 (23C)(iv) is not justified. The respondents ought to have granted approval but at the same time and laid down on strict conditions for the petitioner to comply with the said requirements. Therefore, the present writ petition deserves to be allowed. Since the petitioner had applied for exemption as early as 15.09.2010, though approached the wrong forum, it was incumbent on the part of the office of the Chief Commissioner of Income Tax-I to have either returned the application to the petitioner for a proper presentation or transferred to the 1st respondent immediately. On the other hand, the Income Tax Department took about three years for the application to be jostled from the office of the Chief Commissioner of Income Tax-I to the office of the 1st respondent. Since this Court has come to conclusion that the petitioner is entitled to approval, we direct the 1st respondent to issue Approval Certificate to the petitioner for the past period within a period of ninety (90) days from the date of receipt of this order. The 1st respondent may stipulate such stringent conditions in the approval as are necessary for an educational institution to operate so that the legitimate benefit of exemption under the aforesaid provision are not abused by the petitioner keeping the views expressed in American Hotel and Lodging Association Educational Institute Vs CBDT 2008 (5) TMI 17 - SUPREME COURT and the views expressed by the Hon'ble Supreme Court in Queens Educational Society Vs CIT 2015 (3) TMI 619 - SUPREME COURT . As found that the petitioner had deviated in any of the assessment years of the conditions that may be prescribed in the approval, the Assessing Officer may pass appropriate orders in respect of those assessments and complete the same within a period of ninety (90) days thereafter. The petitioner has complied with the requirements of such approval, appropriate orders may be passed to revise the assessment order by extending such benefits.

Issues Involved:
1. Validity of the rejection of the application for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961.
2. Whether the application was filed before the appropriate authority.
3. Whether the petitioner existed solely for educational purposes and not for profit.
4. Whether the presence of certain clauses in the Memorandum of Association disqualified the petitioner from exemption.
5. Whether the concept of deemed approval applies due to delay in processing the application.

Detailed Analysis:

1. Validity of the rejection of the application for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961:
The petitioner challenged the rejection of their application for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961. The application was initially filed on 16.09.2010 but was rejected by the Chief Commissioner of Income Tax-III, Chennai, citing several reasons. The court examined whether the rejection was justified based on the provided reasons and relevant legal precedents.

2. Whether the application was filed before the appropriate authority:
The petitioner filed the application before the Chief Commissioner of Income Tax-I, Chennai, based on a misinterpretation of Notification No.S.O.852 (E) dated 30.05.2007. The application was later transferred to the Chief Commissioner of Income Tax-III, Chennai. The court found that the delay in transferring the application was on the part of the Income Tax Department, which took three years to process the transfer. The court held that the department should have either returned the application for proper presentation or transferred it promptly, and the delay should not prejudice the petitioner.

3. Whether the petitioner existed solely for educational purposes and not for profit:
The court analyzed the petitioner’s Memorandum of Association and found that the primary object was to provide education. Clauses 51 and 52 of the Articles of Association clearly prohibited the distribution of surplus as dividends or bonuses, indicating no profit motive. The court referenced several Supreme Court judgments, including Queen's Educational Society Vs Commissioner of Income-tax, which established that generating a surplus does not disqualify an institution from being considered as existing solely for educational purposes.

4. Whether the presence of certain clauses in the Memorandum of Association disqualified the petitioner from exemption:
The court examined clauses 55 and 56 of the Memorandum of Association, which dealt with the distribution of assets upon winding up. The petitioner had undertaken to amend these clauses. The court found that these clauses did not indicate a profit motive and should not be grounds for denying exemption. The court held that the presence of such clauses alone, without evidence of profit-making activities, was insufficient to disqualify the petitioner.

5. Whether the concept of deemed approval applies due to delay in processing the application:
The petitioner argued that there should be a deemed approval due to the delay in processing the application beyond the stipulated 12 months. The court referenced the Allahabad High Court's decision in Society for the Promotion of Education, Allahabad Vs Commissioner of Income-tax, which was upheld by the Supreme Court. However, the court noted that the concept of deemed approval was not explicitly provided in Section 10(23C)(vi) or Section 12AA(2) of the Income Tax Act, unlike other statutory provisions. Therefore, the court did not accept the argument for deemed approval based on delay alone.

Conclusion:
The court concluded that the rejection of the application was not justified. The petitioner was found to exist solely for educational purposes and not for profit. The court directed the Chief Commissioner of Income Tax-III, Chennai, to issue an approval certificate to the petitioner within 90 days, subject to stringent conditions to ensure compliance with the educational purpose and prevent abuse of the exemption. The court also allowed for the assessment of compliance with these conditions in subsequent assessment years. The writ petition was allowed, and connected miscellaneous petitions were closed.

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