2018 (8) TMI 713 - AT - Income Tax

Rejection of application for registration u/s 10(23C)(vi) - educational university - non-commencement of activity - examination of of application of funds while considering the application for registration - The assessee is formed in pursuance to Special Act of the Legislative Assembly of Odisha. - Held that - It is a settled position that while collecting the amount applied towards objects under third proviso to section 10(23C)(vi), both the revenue application as well as application in capital field are to be taken into consideration. Once the entire amount applied during the year is taken into consideration, it cannot be held by any stretch of imagination that the application for educational purposes during the year under consideration was less than 85% of income. We agree that the assessee has not violated the provisions of third proviso to section 10(23C)(vi) of the Act. Thus, we find that apart from surmises, conjectures and erroneous inference of fact, no positive reason could be cited by the learned Pr. CCIT to deny the approval under section 10(23C)(vi) of the Act to the assessee University, which was created by the Special Act of the Legislature solely for the purpose of education. Pr. CCIT directed to grant approval u/s.10(23C)(vi) - Decided in favor of assessee.

Issues Involved:
1. Rejection of the application for registration under section 10(23C)(vi) of the Income Tax Act.
2. Assumption that the assessee has not commenced activities.
3. Examination of the 85% application of funds.
4. Legitimacy of inter-charity grants between Xavier Institute of Management and Xavier University.

Issue-Wise Detailed Analysis:

1. Rejection of the application for registration under section 10(23C)(vi) of the Income Tax Act:
The primary issue in the appeal was whether the Pr. CCIT was justified in rejecting the approval u/s.10(23C)(vi) of the Income Tax Act. The Pr. CCIT observed that Xavier University Odisha, formed by an enactment of the Government of Odisha, did not commence any educational activities during the financial year 2013-14. The income and expenditure shown in the university's accounts were actually those of Xavier Institute of Management, Bhubaneswar (XIMB), transferred through journal entries. The Pr. CCIT concluded that the university did not exist solely for educational purposes and thus was not eligible for exemption.

2. Assumption that the assessee has not commenced activities:
The Pr. CCIT noted that during the financial year 2013-14, none of the schools under Xavier University had commenced activities. The income shown was transferred from XIMB, and no independent educational activities were carried out by the university. The assessee argued that the university was formed solely for educational purposes as per the Special Act of the Legislative Assembly of Odisha and that the sponsoring body, XIMB, was responsible for initiating educational activities. The fees credited were from students of the university, and the expenditure was related to educational activities.

3. Examination of the 85% application of funds:
The Pr. CCIT observed that the university applied only 81.69% of its income towards its educational objectives, which was below the prescribed limit of 85%. The assessee contended that the interest income of ?83,61,613/- was duly accounted for in the books and credited under specific fund accounts as per statutory requirements. The assessee also pointed out that capital expenditure of ?24,73,09,298/- was incurred for developing university infrastructure, which should be considered in calculating the application of funds.

4. Legitimacy of inter-charity grants between Xavier Institute of Management and Xavier University:
The Pr. CCIT questioned the legitimacy of the income and expenditure transfer from XIMB to the university. The assessee clarified that XIMB, as the sponsoring body, supported the university in its initial phase by collecting fees and incurring related educational expenses. The university's assessment for the year 2014-15 accepted the fees and expenditure as actual income and expenditure of the university.

Conclusion:
The tribunal found that the Pr. CCIT's refusal to grant approval was based on erroneous inferences and surmises. The university was created by a Special Act solely for educational purposes, and the income and expenditure were related to its educational activities. The tribunal directed the Pr. CCIT to grant approval u/s.10(23C)(vi) of the Act to the university, allowing the assessee's appeal. The appeal was allowed, and the order was pronounced on 10/08/2018.

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