2017 (5) TMI 430 - HC - Income Tax

Denying exemption under Sections 11 and 12 - whether the activities carried out by the Assessee fall under the 4th limb i.e., the advancement of any other object of General Public Utility of the definition of the term charitable purpose under Section 2(15) of the Act and not under the 2nd limb education ? - Held that - The ITAT came to the erroneous conclusion that merely because the Assessee had generated profits out of the activity of publishing and selling of school text books it ceased carrying on the activity of education. The ITAT failed to address the issue in the background of the setting up of the Assessee, its control and management and the sources of its income and the pattern of its expenditure. The ITAT failed to notice that the surplus amount was again ploughed back into the main activity of education . The question to be asked was whether the activity of the Assessee contributed to the training and development of the knowledge, skill, mind and character of students? In the considered view of the Court, the answer to that question had to be, in the facts and circumstances outlined above, in the affirmative. The Court, accordingly, concludes that the ITAT was incorrect in setting aside the order passed by the CIT (A) and in denying exemption to the Assessee under Section 11 and Section 12 of the Act. The ITAT erred in holding that the activities carried out by the Assessee fell under the 4th limb of Section 2 (15) of the Act, i.e., the advancement of any other object of general public utility and that its activities were not solely for purpose of advancement of education . Questions (i) and (ii) framed by the Court are, therefore, answered in the negative, i.e., in favour of the Assessee and against the Revenue. Consistency - Held that - On the issue of consistency, the Court notes that in the present case, continuously from AYs 1971-72 till 2005-06, exemption had been granted to the Assessee under Sections 11 and 12 of the Act. When for AYs 1975-76 and 1976-77 the AO sought to take a different view, the ITAT reversed that view and the decision of the ITAT was not challenged further by the Revenue. Apart from the fact that the Assessee was earning more profits from its essential activity of education, there was no change in the circumstances concerning the said activity since AY 2005-06 to warrant a different approach in the AYs in question. - Decided in favour of the Assessee

Issues Involved:
1. Denial of exemption under Sections 11 and 12 of the Income Tax Act.
2. Classification of activities under Section 2(15) of the Income Tax Act.
3. Re-examination of issues already decided in favor of the Assessee for previous assessment years.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Sections 11 and 12 of the Income Tax Act:

The Assessee, a society registered under the Societies Registration Act, 1860, and set up by the Ministry of Education, Government of India, was engaged in printing and distributing textbooks at subsidized rates. The Assessee was registered as a charitable organization under Section 12A(a) of the Income Tax Act since 1973, and its income was exempt from tax under Section 11 for AYs 1971-72 to 2005-06. However, for AYs 2006-07 to 2009-10, the AO denied the exemption, treating the Assessee's activities as business activities due to the profit margins involved.

The CIT (A) reversed the AO's decision, stating that the Assessee's activities were within its aims and objectives and that earning a surplus did not disqualify it from being a charitable organization. The ITAT, however, upheld the AO's view, leading to the present appeals.

2. Classification of Activities under Section 2(15) of the Income Tax Act:

The ITAT held that the Assessee's activities fell under the fourth limb of Section 2(15) of the Act, i.e., "the advancement of any other object of general public utility," rather than "education." The ITAT reasoned that the Assessee's profit margins indicated a business activity. The Assessee argued that its activities were solely for educational purposes, citing the Supreme Court's decision in Sole Trustee, Loka Shikshana Trust v. CIT, which defined "education" as systematic instruction and training.

The High Court agreed with the Assessee, stating that the preparation and distribution of textbooks contributed to the educational process. The Court referred to the Supreme Court's decision in Assam State Text Book Production and Publication Corporation Limited v. CIT, which held that similar activities by a state-controlled corporation were educational and not business activities.

3. Re-examination of Issues Already Decided:

The ITAT re-examined the issue of the Assessee's eligibility for exemption, despite a previous favorable decision for AYs 1975-76 and 1976-77. The Assessee argued that the rule of consistency should apply, as there had been no change in its activities since its inception. The High Court supported this view, citing the Supreme Court's decisions in Parashuram Pottery Works Ltd. v. Income Tax Officer and Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, which emphasized the importance of consistency in tax matters.

Conclusion:

The High Court concluded that the ITAT was incorrect in denying the exemption to the Assessee under Sections 11 and 12 of the Act. The Court held that the Assessee's activities were solely for educational purposes and that the rule of consistency should apply, given the long history of exemption granted to the Assessee. The Court set aside the ITAT's order and allowed the appeals in favor of the Assessee.

← Previous Next →