2016 (9) TMI 1193 - HC - Income Tax

Application for approval under section 10(23C) rejected - Held that - It can thus be seen that generating certain surplus after carrying out educational activities by itself would not indicate that the institution did not exist for educational purposes but for the purposes of making profit. Whether the surplus so generated was utilized for the purposes of educational activities also would be a relevant consideration. Be that as it may, when the petitioner contends that the Commissioner had not taken into account correct figures and was thus misguided into coming to the conclusion that the petitioner had generated sizeable profit, it would be appropriate to request the Commissioner to reconsider the issue with the assistance of the petitioner. Before doing so, we may dispose of two peripheral grounds. First is regarding charging of fees higher than what was prescribed by the fee regulatory committee. On this issue also, the petitioner s stand has been that no excess fee was charged. It was only collection of form application money which gave a wrong picture. Even this aspect, it would be open for the petitioner to point out to the Commissioner upon remand. The last objection of the Commissioner is regarding non-filing of the audit report as required under the 10th Proviso to section 10(23C). This proviso provides that where the total income of the trust or institution referred to in clause (vi) besides others without giving effect to the exemption clauses exceeds the tax exemption limit such trust or the institution shall get its accounts audited and furnish the same alongwith return of income. This requirement obviously would arise at the time of filing of the return and not at the time of filing of application for approval and was therefore, wrongly invoked by the Commissioner for rejecting the application. In case of American Hotel and Lodging Association Educational Institute vs. Central Board of Direct Taxes and others reported in 2008 (5) TMI 17 - SUPREME COURT OF INDIA the Supreme Court had occasion to examine these provisions and held that the threshold conditions are actually existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application. Various provisos under section 10(23C) for requirements and the same of the provisos were seen as laying down monitoring conditions in order to make the section workable. In case of Queen s Educational Society (2015 (3) TMI 619 - SUPREME COURT ) it was observed that if the activities of the institution are not genuine or are not being carried in accordance with the conditions subject to approval, the exemption must forthwith be withdrawn. If the case of the Commissioner was that the petitioner did not fulfill the requirements of the third proviso, it has not been elaborated in the impugned order. However, we leave this question also open. In view of above discussion, the impugned order is set aside. The proceedings are placed back before the Commissioner for fresh consideration and disposal in accordance with law. The petitioner will have opportunity to place additional material and made submissions before the Commissioner before final order is passed, which shall be done bearing in mind the observations made by the Supreme Court in case of Queen s Educational Society ( 2015 (3) TMI 619 - SUPREME COURT ) and other decisions cited therein preferably by 31.12.2016.

Summary

Issues Involved:
1. Accumulated surplus and its impact on the institution's non-profit status.
2. Charging of fees higher than prescribed by the fee regulatory committee.
3. Non-filing of the audit report as required under the proviso to section 10(23C).

Detailed Analysis:

Issue 1: Accumulated Surplus and Non-Profit Status
The petitioner, a University established under the Gujarat Act No. 19 of 2005, challenged the rejection of its application for approval under section 10(23C) of the Income Tax Act, 1961. The Chief Commissioner of Income Tax had doubts about granting the application due to high profit percentages (80.35%, 67.37%, and 58.91% for assessment years 2008-09, 2009-10, and 2010-11 respectively). The Commissioner concluded that the institution did not exist solely for educational purposes but for profit, citing sizeable accumulated surpluses. The petitioner argued that the surplus was a result of donations for infrastructure and was used solely for educational purposes, referencing the Supreme Court judgment in Queen's Educational Society vs. Commissioner of Income Tax, which states that incidental surplus from educational activities does not imply a profit motive. The court found that generating surplus does not necessarily indicate profit-making if it is utilized for educational purposes. The Commissioner was requested to reconsider the issue with the petitioner's assistance.

Issue 2: Charging of Fees Higher than Prescribed
The Chief Commissioner also noted that the University charged fees exceeding the amounts set by the fee regulatory committee. The petitioner contended that no excess fees were charged and that the perceived excess was due to the collection of form application money. The court allowed the petitioner to present this clarification to the Commissioner upon remand.

Issue 3: Non-Filing of the Audit Report
The Commissioner rejected the application on the grounds that the petitioner did not file the audit report as required under the 10th proviso to section 10(23C). The petitioner argued that this requirement arises at the time of filing the return, not at the application stage. The court agreed, referencing the Supreme Court's decision in American Hotel and Lodging Association Educational Institute vs. Central Board of Direct Taxes, which clarified that audit report requirements are monitoring conditions applicable at the return filing stage. The court concluded that the Commissioner wrongly invoked this requirement for rejecting the application.

Conclusion:
The court set aside the impugned order and remanded the matter back to the Commissioner for fresh consideration, allowing the petitioner to submit additional material and make further submissions. The final order should be passed considering the Supreme Court's observations in Queen's Educational Society and other relevant decisions, preferably by 31.12.2016. The petition was disposed of accordingly.