2015 (11) TMI 413 - HC - Income Tax

Registration under Section 10 (23C)(vi) denied - as per revenue the petitioner has several objects and was not running the institute solely for educational purposes - Held that - A categorical assertion has been made that the petitioner is only running an educational institution and is not carrying on any other activity. This fact has not been denied by the respondents in their counter affidavit. The finding given by the Commissioner that the petitioner-society does not exist solely for educational purposes is based on no reasoning. No finding has been given on this aspect. In our opinion, this finding is perverse. Mere fact that the petitioner is making profit does not indicate that it is carrying on the activity solely for the purpose of making a profit and that it ceases to be for an educational purpose. In our opinion, the predominant test as given by the Supreme Court in American Hotel (2008 (5) TMI 17 - SUPREME COURT OF INDIA) and Queen s Educational Society (2015 (3) TMI 619 - SUPREME COURT ) has to be considered. Further, we find that the Commissioner has considered the profit before applying the depreciation, which is incorrect. The authority is required to consider the profit after allowing depreciation and is also further required to consider the investment made by the petitioner in the creation of fixed assets. These investments of capital nature are required to be considered while calculating the money spent by them in the educational activity. Further, the fact that the petitioner is generating profit or is carrying on commercial activity and is making a huge expenditure in advertisement is a fact, which is not required to be considered at the stage of considering the application for grant of registration. These factors would come into play under the 3rd and 13th proviso at the stage of considering the return and making the assessment. Further, expenditure on advertisement made does not necessarily means that the activity of the petitioner is commercial in nature or is being done with the intention to earn more profit. Such finding given by the authority is patently erroneous. - Decided in favour of assessee.

Issues Involved:
1. Whether the petitioner society exists solely for educational purposes.
2. Whether the petitioner society has a profit motive.
3. Whether the petitioner society's expenditure on advertisement indicates commercial activity.
4. Whether the petitioner society's loans/advances to interested persons violate the provisions of Section 10(23C) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Solely for Educational Purposes:
The petitioner, a registered society, established an educational institution in 2001-02, affiliated with Dr. Bhim Rao Ambedkar University, Agra. For the assessment year 2007-08, the Assessing Officer disallowed the exemption under Section 10(23C)(iiiad) of the Income Tax Act, as the petitioner's income exceeded Rs. 10 crores, necessitating registration under Section 10(23C)(vi). The petitioner's application for registration under Section 10(23C)(vi) for the assessment year 2008-09 was rejected, and subsequent writ petitions were filed. The Supreme Court in American Hotel and Lodging Association Educational Institution vs. CBDT held that the authority must consider the nature and genuineness of the activities of the institution. The Court emphasized that the existence of other objects in the society does not negate its sole educational purpose if the institution is not profit-driven. The High Court found the Commissioner's conclusion that the petitioner does not exist solely for educational purposes to be unsupported and perverse.

2. Profit Motive:
The Commissioner rejected the petitioner's application on the grounds of profit generation, suggesting a profit motive. However, the Supreme Court in Queen's Educational Society vs. Commissioner of Income-Tax clarified that the mere generation of surplus does not imply a profit motive if the primary objective is educational. The High Court reiterated that the predominant object test must be applied, and the existence of profit does not disqualify the institution if the primary purpose is education. The High Court criticized the Commissioner for considering profit before depreciation and emphasized the need to account for investments in fixed assets when assessing profit.

3. Commercial Activity through Advertisement:
The Commissioner cited the petitioner's significant expenditure on advertisement as indicative of commercial activity. The High Court found this reasoning erroneous, noting that advertisement expenditure does not inherently imply a commercial intent. Such factors should be considered during the assessment stage under the 3rd and 13th provisos, not at the registration stage.

4. Loans/Advances to Interested Persons:
The Commissioner also pointed to loans/advances made by the petitioner as a violation of the 3rd and 13th provisos to Section 10(23C). The Delhi High Court in Director of Income-Tax (Exemption) vs. ACME Educational Society ruled that interest-free temporary loans between societies with similar objects do not constitute an "investment" or "deposit" and do not violate the Act. The High Court found the Commissioner's reliance on this ground to be unfounded.

Conclusion:
The High Court quashed the impugned orders by the Commissioner of Income Tax, Ghaziabad, and allowed the writ petitions. The matter was remitted back to the competent authority to be decided afresh in light of the Supreme Court's principles in American Hotel and Queen's Educational Society, and other relevant decisions. The competent authority is directed to pass a new order within three months, considering the observations made and after providing an opportunity for a hearing.

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