2019 (7) TMI 361 - AT - Income Tax

Exemption u/s 10(23C) - assessee had obtained works contract from the Office of Commissioner of Social Welfare, Government of Karnataka to implement its scheme of conducting Vocational training courses - Educational institution or not - HELD THAT - We have noticed that the assessee is only executing the works contract given by Government of Karnataka. In our view, the reliance placed by the assessee in the case of Mudra Foundation for Communication Research Education 2016 (1) TMI 42 - GUJARAT HIGH COURT is not appropriate, since paragraph 16 of the order of High Court would make it clear that the assessee therein was awarding diplomas, certificates etc after providing training in communication, advertising and related subjects to equip them thoroughly to practice the art and profession of Communication in which they have been trained. The facts of the present case is quite different. Hence the claim of the assessee that it is running an educational institution within the meaning of sec.10(23C) is liable to be rejected. Accordingly we are of the view that the tax authorities are justified in rejecting the claim of exemption u/s 10(23C)(iiiab) and (iiiad). Disallowance u/s 40(a)(ia) - TDS u/s 194C - trust are covered for TDS or not - in earlier round ITAT has held that subcontract given to the franchisees would fall under the category of work defined in sec.194C - scope of provisions of sec.194C has been extended to include Association of persons only from 1st June, 2008 - HELD THAT - The explanatory memorandum makes it clear that the scope of sec.194C was extended to cover Association of Persons from 1st June 2008, since a large number of works contracts are executed by a number of Special Purpose Vehicles (SPVs) structured as Joint Ventures/Consortiums in the nature of Association of Persons. There is no dispute that the assessee is a trust and hence, in view of specific provisions of sec.194C, it shall be liable to deduct tax at source. It may be pertinent to note that the Trusts file their return of income under the category of Association of Persons only, meaning thereby, the category Association of Persons would encompass different forms of association, of which SPVs and Trusts are one of the forms of association. Since the provisions of sec.194C specifically include Trusts in the list of assessees liable to deduct tax at source, in our view, the assessee s claim to consider it under the category of SPVs is liable to be rejected. Accordingly we do not find any merit in this contention of the assessee. - appeals are dismissed

Summary

Issues Involved:
1. Claim of exemption under Section 10(23C) of the Income Tax Act.
2. Disallowance under Section 40(a)(ia) for non-deduction of tax at source under Section 194C.

Detailed Analysis:

1. Claim of Exemption under Section 10(23C):

The first issue pertains to the assessee's claim for exemption under Section 10(23C) of the Income Tax Act. The assessee argued that it is running an educational institution substantially financed by the Government, thus eligible for exemption under Section 10(23C)(iiiab). Alternatively, it claimed eligibility under Section 10(23C)(iiiad) as its gross receipts did not exceed the prescribed limits.

The respondent countered that the assessee had obtained a "works contract" from the Office of the Commissioner of Social Welfare, Government of Karnataka, to conduct vocational training courses. The assessee appointed franchisees to conduct these training programs, which, according to the respondent, disqualified it from being considered an "educational institution." The respondent relied on the Supreme Court's decision in Sole Trustee Lok Shiksana Trust vs. CIT, which defined "education" as systematic instruction leading to a degree or diploma, a criterion the assessee did not meet.

The Tribunal noted that Section 10(23C) uses the term "University or other educational institution," implying that both universities and educational institutions must provide systematic instruction. The Tribunal referred to the Supreme Court and various High Court rulings, which consistently held that mere coaching or vocational training does not constitute "education" under the Act. The Tribunal concluded that the assessee's activities, being vocational training conducted under a government contract, did not qualify as running an "educational institution." Thus, the claim for exemption under Section 10(23C) was rejected.

2. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax at Source under Section 194C:

The second issue involved the disallowance made under Section 40(a)(ia) for the assessee's failure to deduct tax at source under Section 194C on payments made to franchisees. The Tribunal had previously held that the subcontract given to franchisees constituted "work" under Section 194C, necessitating tax deduction at source.

The assessee contended that the provisions of Section 194C were extended to include "Association of Persons" (AOP) only from June 1, 2008, and since it was assessed as an AOP, the provisions should not apply to the years under consideration. The respondent argued that the assessee is a "trust" and trusts were already included in Section 194C.

The Tribunal clarified that the explanatory memorandum extending Section 194C to AOPs was intended for Special Purpose Vehicles (SPVs) structured as Joint Ventures/Consortiums. Trusts were already liable to deduct tax at source under Section 194C. Since the assessee is a trust, it falls under the specific provisions of Section 194C, and its claim to be considered under the category of SPVs was rejected. Therefore, the disallowance under Section 40(a)(ia) was upheld.

Conclusion:

In conclusion, the Tribunal dismissed all grounds of appeal, affirming the rejection of the claim for exemption under Section 10(23C) and the disallowance under Section 40(a)(ia) for non-deduction of tax at source under Section 194C. The order was pronounced in the Open Court on July 3, 2019.