2019 (3) TMI 212 - AT - Income Tax

Benefits of section 10(23C)(iiiad) - selling of books and uniform to the students of assessee - Not mentioned in the memorandum of association as it is incidental to the educational activities - Charitable activity - income of any university or other educational institutional - CIT(A) has held that the assessee did not work solely for educational purposes but for profit, on the basis that the assessee generated surplus - HELD THAT - From the plain reading of section 10(23C)(iiiad) of the Act, it is apparent that any income of any university or other educational institutional existing solely for educational purposes and not for the purpose of profit is totally exempt if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipt as may be prescribed. This means that there is no restriction on the generation of surplus u/s 10(23C)(iiiad). It can be said that any university or other educational institution can generate surplus. It is also noted that buying and selling of uniform and books to students of assessee, for educational purpose is not commercial activity. Because the assessee is engaged in providing primary and higher education to the poor students and working under the aims and objects of the society. It also engaged in sale and purchase of books and uniform to the students of the assessee school only, at cheaper rate than market prices, which is also a part of educational activity. Also, the assessee buys and sells only those books and uniforms which are related to the students only. It is entirely for the education of the students which is not beyond the aim and objective of the society. There is no need to specifically mentioned about the sale of uniforms and books in the memorandum of association as it is incidental to the educational activities which is object of the assessee. The purchase and sale of text books, stationery items and uniforms exclusively to the students studying in the school are not in the nature of commercialization since all these activities are essential requirements of the students. The sale and purchase of books and uniform to the students are not commercialized activities. It actually benefits the entire student community as it not only provides convenience but also promotes equality by ensuring that there is uniformity in the products being sold and used by the children. Therefore, it can be said that these activities are undertaken for the educational purposes only. The exemption u/s 10(23)(iiiad) of the Income Tax Act, 1961 should not be denied to the assessee as selling of books and uniform to the students of assessee is part of educational activity only. Impugned addition was made merely on the basis that surplus arises to the assessee during the year under consideration without appreciating that the surplus is merely 12% which is considered as legitimate for charitable purposes. Thus, the addition of ₹ 12,01,906/- is not tenable, hence, the same is deleted as such and accordingly the grounds raised by the assessee stand allowed. Since, quantum addition in dispute has been deleted, penalty in dispute does not survive in the eyes of law u/s. 271(1)(c) - Decided in favour of assessee

Summary

Issues Involved:
1. Denial of exemption under section 10(23C)(iiiad) of the Income Tax Act, 1961.
2. Enhancement of income by the CIT(A).
3. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 10(23C)(iiiad) of the Income Tax Act, 1961:

The primary contention was whether the assessee, a society running a school, was eligible for exemption under section 10(23C)(iiiad) of the Income Tax Act, 1961. The Assessing Officer (AO) denied the exemption, arguing that the purchase and sale of books and uniforms were not educational activities. The AO assessed the income at ?4,08,190/- as business income, while the CIT(A) enhanced it to ?12,01,906/-.

The Tribunal noted that the assessee is a registered society running a school and disclosed receipts of ?99,14,564/- with a surplus of ?12,01,906/-. The Tribunal emphasized that merely generating a surplus does not imply profit-making. It held that the surplus of 12.12% is legitimate for charitable purposes and does not disqualify the institution from exemption under section 10(23C)(iiiad). The Tribunal cited the Supreme Court's decision in Queen's Educational Society vs. CIT, which clarified that surplus ploughed back for educational purposes does not negate the institution's educational purpose.

2. Enhancement of Income by the CIT(A):

The CIT(A) enhanced the income from ?4,08,190/- to ?12,01,906/-, arguing that the entire surplus should be taxed as profit. The Tribunal disagreed, stating that the surplus does not equate to profit and the institution's activities, including the sale of books and uniforms to its students at lower rates, are part of its educational purpose. The Tribunal held that these activities are not commercial and do not disqualify the institution from exemption.

3. Levy of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:

The penalty under section 271(1)(c) was levied for alleged concealment of income or furnishing inaccurate particulars. Since the Tribunal deleted the quantum addition, it held that the penalty does not survive. The Tribunal emphasized that the mere generation of surplus does not imply concealment or furnishing inaccurate particulars.

Conclusion:

The Tribunal concluded that the assessee's activities, including the sale of books and uniforms, are part of its educational purpose and do not disqualify it from exemption under section 10(23C)(iiiad). It deleted the addition of ?12,01,906/- and the penalty under section 271(1)(c), allowing both appeals in favor of the assessee. The Tribunal's decision underscores that surplus generation within reasonable limits does not negate the educational purpose of an institution.

Order:

Both appeals of the assessee were allowed, and the order was pronounced on 26/02/2019.