2019 (3) TMI 912 - HC - Income Tax

Exemption u/s 10(23 C)(vi) denied - Charitable activity or not - Trust which is running a school was granted registration under Section 12 AA who took over petitioner a recognized Matriculation Higher Secondary School - petitioner did not establish his claim that the institution is being run solely for the purpose of education - since the institution had been generating surplus of over 15 to 20%, it cannot be an institution which is existing for not for profit purpose - HELD THAT - The petitioner s application dated 28.09.2013 clearly mentions that the school is being run solely for educational purposes. The school has been issued with recognition orders by the concerned authorities. It is further mentioned that all the funds generated by the institution have been utilized for the school development purpose only. When the applicant itself is an educational institution, namely, the school, this Court fails to understand as to why the respondent has been insisting that there should be a written memorandum containing the objects of the school. The object of the applicant can only be to run the school and nothing else. This has been made explicit in the application form itself. Of course, the educational agency for the applicant is a trust. But then, the school has been enjoying the status of an independent assessee. Since it is only the school that seeks exemption in terms of Section 10(23)(C)(vi)of the Income Tax Act, 1961, there is no need or necessity for the school to take recourse to invoke the provisions of the trust deed of the educational agency. The Malco Education Trust may have larger objects connected with education. The petitioner s school being an independent assessee has made it clear that it is being run for educational purposes alone. The petitioner can only make a positive assertion. If the authority is possessed of some material which may indicate that the petitioner is having some other activities also, then the application can be rejected on that ground. But, no such material has been projected in the impugned order. The approach of the respondent suffers from misdirection in law.the order impugned in this writ petition is set aside and the matter is remitted to the file of the respondent to pass orders afresh in accordance with law. The respondent shall issue a notice to the petitioner fixing the date for enquiry.

Summary

Issues:
1. Rejection of application for exemption under Section 10(23)(C)(vi) of the Income Tax Act, 1961.
2. Requirement of a written memorandum containing the objects of the school.
3. Consideration of surplus generation as a factor for determining "not for profit" status.

Analysis:
1. The petitioner, a recognized Matriculation Higher Secondary School, sought exemption under Section 10(23)(C)(vi) of the Income Tax Act, 1961. The application was rejected by the respondent based on two primary reasons. Firstly, the petitioner failed to establish that the institution is solely run for educational purposes. Secondly, the surplus generation of 15 to 20% led the respondent to believe that the school was not operating "not for profit." The respondent relied on a Karnataka High Court decision to support this stance.

2. The petitioner's application clearly stated that the school is operated solely for educational purposes. The institution received recognition orders from authorities, and all funds generated were utilized for school development. The petitioner emphasized that it was not engaged in any business activities. The court found it unnecessary for the school to provide a written memorandum detailing its objectives, as the primary purpose of the school was explicit in its application.

3. The court criticized the respondent's reliance on surplus generation as a basis for denying the exemption. It noted that as long as the surplus was reinvested in the school's development, it did not disqualify the institution as a "not for profit" entity. The court highlighted that unless there was evidence of diversion of surplus for non-educational purposes, the authority had no grounds to reject the application. The court deemed the respondent's approach as flawed and emphasized that the school's activities were primarily geared towards education.

4. The court set aside the impugned order and remitted the matter to the respondent for fresh consideration. The respondent was directed to conduct an inquiry, allowing the petitioner to submit all relevant documents supporting their application for exemption under Section 10(23)(C)(vi) of the Income Tax Act, 1961. The court instructed the respondent to issue a notice for the inquiry and make a decision in accordance with the law.

In conclusion, the court allowed the writ petition, emphasizing that the respondent's decision was based on misconceptions and directed a reevaluation of the petitioner's application for tax exemption.