2018 (2) TMI 108 - AT - Income Tax

Denying the exemption u/s 10(23C) - appellant was not existing only for education purpose - AO had come to conclusion that the appellant existed for only for profit motive as accorded to him, it derived profit of more than 26% - Held that - Hon ble Apex Court Visvesvaraya Technological University Vs. ACIT 2014 (2) TMI 658 - KARNATAKA HIGH COURT so long as the surplus generated is not far in excess of what has been held to be reasonable i.e from 6 to 15%, the institution would not cease to be institution exists solely for education purpose and not for the purpose of profit. In the present case, after providing for the depreciation, the surplus would be around 18% of the gross receipts which is not far in excess of 15%. Therefore we hold that the appellant exist solely for the educational purpose and not for the purpose of profit, and therefore is entitled for exemption of its income under clause (vi) of section 10(23C). - Decided in favour of assessee Calculation of carry forward of income to subsequent years - Held that - This issue is covered in favour of the assessee by the decision of the co-ordinate bench in the case of Jyothy Charitable Trust 2015 (11) TMI 1295 - ITAT BANGALORE . Deduction of twenty-five per cent was held to be allowable not on total income as computed under the IT Act. Any amount or expenditure, which was application of income, is not to be considered for determining twenty five per cent to be accumulated.

Issues Involved:

1. Denial of exemption under Section 11 of the Income Tax Act.
2. Determination of whether the appellant exists solely for educational purposes or for profit.
3. Calculation of accumulation under Section 11(1)(a) of the Income Tax Act.
4. Denial of alternate exemption under Section 10(23C)(vi) of the Income Tax Act.
5. Calculation of carry forward of excess income over expenditure.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11 of the Income Tax Act:

The appellant, a society registered under the Karnataka Societies Registration Act, aimed at promoting and imparting education, filed a return of income for the assessment year 2012-13 declaring nil income. The Assessing Officer (AO) completed the assessment at a total income of ?1,37,93,610, denying the exemption claimed under Section 11 of the Income Tax Act. The AO concluded that the appellant existed for profit-making purposes rather than for charitable purposes, as evidenced by the substantial surplus generated. This decision was based on the observation that the appellant was making systematic profits year after year, thus ceasing to exist solely for educational purposes.

2. Determination of Whether the Appellant Exists Solely for Educational Purposes or for Profit:

The AO's decision was supported by the Hon'ble Karnataka High Court's judgment in the case of Visvesvaraya Technological University Vs. ACIT, which held that an institution making substantial profits over a period cannot be considered as existing solely for educational purposes. The appellant argued that the surplus was reasonable and after accounting for depreciation, it was only 18% of the gross receipts. The Tribunal referred to the Hon'ble Supreme Court's decision in Queen's Educational Society Vs. CIT, which clarified that an educational institution making a surplus does not necessarily indicate a profit-making motive. The predominant object test must be applied to determine whether the purpose of education is submerged by a profit-making motive.

3. Calculation of Accumulation under Section 11(1)(a) of the Income Tax Act:

The AO had not allowed the carry forward of excess income over expenditure on the gross income but on the net income. The Tribunal referred to the Special Bench Mumbai's decision in the case of Bai Sonabai Hirji Agiary Trust Vs. ITO, which held that for the purpose of computing accumulation of income under Section 11(1)(a), the gross receipts should be considered, not the net receipts after deducting revenue expenditure. The Tribunal concluded that the appellant was entitled to accumulate 15% of the gross receipts for application in future years.

4. Denial of Alternate Exemption under Section 10(23C)(vi) of the Income Tax Act:

The AO denied the alternate exemption under Section 10(23C)(vi) on the grounds that the appellant was not existing solely for educational purposes. The Tribunal, however, held that the appellant existed solely for educational purposes and not for profit, as the surplus generated was not far in excess of what has been held to be reasonable (6 to 15%). Therefore, the appellant was entitled to exemption under Section 10(23C)(vi).

5. Calculation of Carry Forward of Excess Income Over Expenditure:

The Tribunal referred to the decision of the co-ordinate bench in the case of Jyothy Charitable Trust Vs. DCIT, which held that the accumulation of income for application in future should be calculated on the gross receipts, not on the net receipts after deducting revenue expenditure. The Tribunal concluded that the appellant was entitled to accumulate 15% of the gross receipts for application in future years.

Conclusion:

The Tribunal allowed the appeal filed by the appellant, holding that the appellant existed solely for educational purposes and not for profit, and was entitled to exemption under Section 11 and Section 10(23C)(vi) of the Income Tax Act. The Tribunal also held that the accumulation of income for application in future should be calculated on the gross receipts. The appeal was allowed in favor of the appellant.

← Previous Next →