2010 (5) TMI 102 - HC - Income Tax

Exemption u/s 10(23C)(vi) public charitable trust - CIT declined to grant approval to the Petitioner under Section 10(23C)(vi) - Until Assessment Year 2004-05 the Petitioner was allowed an exemption under Sections 10(22) and 10(23C)(vi) in addition to Section 11 - CIT rejected the applications submitted by the Petitioner by an order dated 28 March 2009. While rejecting the application the First Respondent held that the objects of the Trust permitted the construction of Ashrams for Gujarati Hindu women and hence the Trust existed for objects other than education. - The second ground on which the applications were rejected was that the Trust had a surplus in excess of twelve percent from its activities and that the balance sheet for three years showed that the surplus was invested in making additions to the assets and increasing Bank deposits. Held that the rejection of the approval by the First Respondent was manifestly misconceived. Only two reasons have weighed with the First Respondent in rejecting the approval both of which have been found to suffer from manifest error. In Aditanar Educational Institution (2008 -TMI - 5552 - SUPREME Court) the Supreme Court while construing the provisions of Section 10(22) held that the availability of exemption should be evaluated each year to find out whether the institution has existed during the relevant year solely for educational purposes and not for the purposes of profit. If after meeting the expenditure a surplus results incidentally from an 19 activity lawfully carried on by the educational institution the institution will not cease to be one existing solely for educational purposes since the object is not to make profit. CIT directed to grant the approval

Issues Involved:
1. Whether the Petitioner Trust exists solely for educational purposes.
2. Whether the existence of a surplus disqualifies the Trust from approval under Section 10(23C)(vi) of the Income Tax Act, 1961.

Detailed Analysis:

1. Existence Solely for Educational Purposes:
The Petitioner, a public charitable trust registered under the Bombay Public Trusts Act, 1950, has been conducting educational institutions since 1929 in Mumbai and since 1940 in Surat. The First Respondent, the Chief Commissioner of Income Tax, Mumbai, declined to grant approval under Section 10(23C)(vi) of the Income Tax Act, 1961, on the grounds that the Trust existed for varied objects and not solely for educational purposes. The Memorandum of Association of the Petitioner includes objects such as ameliorating the condition of Gujarati Hindu women and providing education. However, the Petitioner argued that its sole activity has been conducting educational institutions and that the existence of other objects in the Memorandum is irrelevant since no other activities have been carried out.

The Court noted that the Petitioner has only conducted educational activities for over eighty years, and the sole purpose of the Trust was to further the cause of education among women. The assessment orders and a Division Bench judgment confirmed that the Petitioner has been running educational institutions solely for educational purposes. The Court emphasized that the existence of varied objects in the Memorandum does not disqualify the Trust as long as it carries out only educational activities.

2. Existence of Surplus:
The First Respondent rejected the application also on the grounds that the Trust had a surplus of over twelve percent from its activities, which was invested in assets and bank deposits. The Petitioner contended that the surplus was used solely for educational purposes and that having a surplus does not imply that the Trust exists for profit.

The Court referred to the third proviso to Section 10(23C), which allows educational institutions to accumulate income for application to their objects, provided that accumulation exceeding fifteen percent does not exceed five years. The Court held that the existence of a surplus does not disqualify the Trust from approval under Section 10(23C)(vi) as long as the surplus is used for educational purposes. The Supreme Court's decision in Aditanar Educational Institution vs. Additional CIT was cited, which stated that incidental surplus from lawful educational activities does not imply that the institution exists for profit.

The Court distinguished the facts of the present case from the Uttarakhand High Court's decision in Commissioner of Income Tax vs. Queens' Educational Society, where the assessee was found to be enhancing income rather than solely providing education. The Court expressed reservations about the correctness of the Uttarakhand High Court's legal principles and noted that the Punjab and Haryana High Court also had reservations about the same.

Conclusion:
The Court concluded that the rejection of the approval by the First Respondent was manifestly misconceived. The Petitioner exists solely for educational purposes, and the existence of a surplus does not disqualify it from approval under Section 10(23C)(vi). The impugned order was set aside, and the First Respondent was directed to grant approval to the Petitioner for the relevant assessment years.

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