9911796707
TMI Blog2008 (5) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in India, mainly to comply with its obligations under various agreements with Government of India (Ministry of Tourism). Its branch provides a central focal point in India for Indian missions to avail of its educational courses. Its branch collects data from educational institutions/persons wishing to take the courses offered in the field of Hospitality and fees for the required course material which is thereafter remitted to USA. After collection of data and fees, the Head Office ("HO") sends course materials, examination papers etc. to the branch in India for onward transmission to the actual user. It is the case of the appellant that, it's Indian branch is the small office in which administrative work is done. Few employees attend to this work. The costs of running the branch office is met by deducting the same from the amounts remitted to the H.O. 5. Thus, the appellant is an Institution whose objects are known as "Statement of Purposes" in US. Under the Internal Revenue Code, 1954 in the U.S. it enjoys tax exemption status as an educational institution. It is governed by an elected Board of Trustees and it offers high quality educational and training resources to enhance t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement Diploma, offering a comprehensive certification and registration programme for Indians desiring to avail of education in the hospitality field in India. Under Clause 1(h) of the MoU, appellant is required to offer to the National Council in India, which is the apex body for hospitality management in India, lowest possible prices for its products/services to be utilized for Schools under the umbrella of GoI. Under Clause 2(b) of the said MoU, the National Council of Hospitality is obliged to utilize the appellant's courses in its current and future Hospitality Management Schools. 9. At this stage, it may be noted that the appellant got exemption under Section 10(22) up to the year ending 31.3.1998. The branch office accounts during the said period showed the gross amounts collected on the income side and the costs for running the branch were shown on the expenditure side. The difference between these figures represented what was receivable by the HO from the branch for the provision of course materials and other services provided by the HO. These accounts were accepted by the Department till 31.3.1998. 10. One more fact needs to be mentioned. Appellant h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts over payments was not treated as income/profit/surplus as appropriate costs incurred by the HO had not been taken into account therein because the purpose for which the accounts of the branch office were required to be made was only to establish how much money was owned to the HO and not to ascertain its income or surplus. In the said correspondence it was clarified that even the AO in assessment proceedings had accepted that the excess income over and above the expenditure shown in its account, could not be taken as appellant's income. In fact, the AO had called for information regarding the HO expenses for the year ending 31.3.1999 which had not been considered in the branch office accounts. 14. During the hearing before CBDT, appellant also furnished a certificate attested by the certified public accountant that Head Office expenses for the year ending 31.3.1999 amounted to US$.2,63,647. The appellant also pointed out to CBDT that even the assessing officer and CIT (appeals) have not deducted the aforestated sum of alleged surplus while computing the appellant's income allegedly chargeable to tax. 15. By its Order dated 12.10.2004, CBDT rejected appellant's appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if any, is determined and thereafter accumulated. One more example is given by the learned counsel. The requirement of investment/deposit of funds, referred to in the third proviso, can only be tested at the stage of investment which can only take place after profit/ surplus is established. Under the 13th proviso CBDT is empowered to withdraw the approval earlier granted. That proviso, according to learned counsel, also proceeds on the basis that the withdrawal will be for failure to comply with the terms of application or investment of funds or genuineness of activities and, therefore, implicit in that proviso is an alleged violation of application of surplus and/or investment which may result in a subsequent withdrawal. In short, according to learned counsel, at the stage of grant of approval the provisos dealing with items required to be monitored, as mentioned in the third proviso, are not to be considered by CBDT and in fact it would be impossible to ascertain compliance at the stage of approval. For all the above reasons, learned counsel urges that the scope of enquiry for grant of approval under Section 10(23C)(vi) is to consider only the nature, existence for non-pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to clause (a) of the third proviso to Section 10(23C)(vi) of the 1961 Act as done by the High Court in its impugned judgment. Learned counsel submits that the question as to whether application of income is required to be made in India or outside India, cannot be part of the decision-making process for grant of approval. The said requirement cannot be taken into account at the approval stage. In the alternative, it is urged that in any event the said requirement of application of income in India is not there in clause (a) of the third proviso. According to learned counsel, the plain words of the third proviso refer to the application of income to the objects for which the institute is established and the said proviso does not require application of income "in India". Therefore, it is urged that there is no valid reason given by the Department as to why the words "in India" should be read in the third proviso. Ultimately, according to learned counsel, the only test required to be applied must focus on the nature, activities and genuineness of the institution and not whether such institution applies its income in India. According to learned counsel, the Indian public obtains a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel, Section 10(22) was the predecessor section of the present Section 10(23C)(vi). Earlier, according to the learned counsel, when Section 10(22) existed, the PA was only required to examine the objects of the Institute and not the application of income which concept is now brought in vide Section 10(23C)(vi) read with the second, third and eleventh provisos w.e.f.1.4.1999. Therefore, according to the learned counsel, the PA has not only to examine at the stage of approval the nature of the Institution, its activities and its genuineness but also its accounts to ascertain whether the expenses incurred and the activities undertaken are in India. According to the learned counsel, "application of income" is the concept which is introduced for the first time by way of third proviso to Section 10(23C)(vi). It was not there earlier. The reason, according to the learned counsel, for insertion of the proviso to Section 10(23C)(vi) was that in the past when Section 10(22) stood alone several cases of misuse of funds by the funds not being deployed in India came to be detected. According to the learned counsel, in the past, prior to 1.4.1999, the PA used to examine only the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her conditions, which every applicant has to satisfy. One such condition is application of income. Learned counsel submits that in order to get exemption under Section 10 (23C)(vi) the applicant has to show that it is solely and exclusively an educational institution established solely for educational purposes and not for profit and since, in the present case, the appellant has earned surplus of Rs. 1,30,30,288.00/1.14 crores, which has been remitted to USA, it is clear that the appellant's institution does not exist solely for educational purposes and that it is profit earning institute like any other commercial institute and, therefore, it is not entitled to the benefit of exemption under the said Section 10(23C)(vi). Learned counsel submits that the appellant has failed to place before the PA the requisite material to show that it is carrying out educational activity even in USA and that the entire income generated by it, both in India and in USA, is spent solely on educational activity and not to earn profits and, therefore, no interference is called for in the present case. 24. Learned counsel submits that the appellant is claiming exemption under the Income Tax Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel submits that there is no dispute that certain huge amount of Rs. 1,30,30,288.00 has been remitted and that fact alone is conclusive circumstance to show that the appellant-institution is a commercial venture existing for profit and that it is not existing solely for educational purposes in India. Learned counsel urged that the third proviso brought in the concept of application of income vide the Finance Act, 1998 in order to bring about parity between universities and other educational institutions on one hand and public charitable trusts covered by Sections 11 and 12 under the 1961 Act. Therefore, according to the learned counsel, even at the stage of approval, the PA can take into account not only the nature, activities and genuineness of the Institute but also the manner in which the income derived in India is spent/utilized in India. Learned counsel submits that, in view of the Finance Act, 1998, the provisions of Section 11(1)(a) have got to be read into the provisions of Section 10(23C)(vi) and if so read the applicant-Institute is required to state in its application as to how it has utilized its Income in India in the year ending 31.3.1999. In this connection, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prescribed authority, before approving any university or other educational institution or any hospital or other medical institution, under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via), may call for such documents (including audited annual accounts) or information from the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, as it thinks necessary in order to satisfy itself about the genuineness of the activities of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, and the Central Government or the prescribed authority, as the case may be, may also make such inquiries as it deems necessary in this behalf: Provided also that the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via)- [(a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or sub-clause (vi) or sub-clause (via) shall not be denied in relation to voluntary contribution, other than voluntary contribution in cash or voluntary contribution of the nature referred to in clause (b) of the third proviso to this sub-clause, subject to the condition that such voluntary contribution is not held by the trust or institution or any university or other educational institution or any hospital or other medical institution, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1992, whichever is later: [Provided also that where the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) does not apply its income during the year of receipt and accumulates it, any payment or credit out of such accumulation to any trust or institution registered under section 12AA or to any fund or trust or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phasis supplied) 26. We may quote Section 10(22) of the 1961 Act, as it stood prior to 1.4.1999, which reads as follows: "10. Income not included in total income- In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- (22) any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit." 27. We also quote hereinbelow Section 11(1)(a) of the 1961 Act, which reads as follows: "11. Income from property held for charitable or religious purposes. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (a) income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property" 28. At the outse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture exactly balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realization but would reflect unsound principles of management. In order to ascertain whether the Institute is carried on with the object of making profit or not it is duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established. 32. In deciding the character of the recipient, it is not necessary to look at the profits of each year, but to consider the nature of the activities undertaken in India. If the Indian activity has no co-relation to education, exemption has to be denied. (see judgment of this Court in Oxford University Press [supra]). Therefore, the character of the recipient of income must have character of educational institution in India to be ascertained from the nature of the activities. If after meeting expenditure, surplus remains incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes. In other words, existence of surplus from the activity will not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal institutions/universities. This proviso was inserted along with other provisos because there was no monitoring mechanism to check abuse of exemption provision. With the insertion of the first proviso, the PA is required to vet the application. This vetting process is stipulated by the second proviso. It is important to note that the second proviso also indicates the powers and duties of the PA. While considering the approval application in the second proviso, the PA is empowered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the applicant institution. Earlier that power was not there with the PA. Under the third proviso, the PA has to ascertain while judging the genuineness of the activities of the applicant institution as to whether the applicant applies its income wholly and exclusively to the objects for which it is constituted/established. Under the twelfth proviso, the PA is required to examine cases where an applicant does not apply its income during the year of receipt and accumulates it but makes payment therefrom to any trust or institution registered und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; like application/utilization of income, pattern of investments to be made etc. could be stipulated as conditions by the PA subject to which approval could be granted. For example, in marginal cases like the present case, where appellant-Institute was given exemption up to financial year ending 31.3.1998 (assessment year 1998-99) and where an application is made on 7.4.1999, within seven days of the new dispensation coming into force, the PA can grant approval subject to such terms and conditions as it deems fit provided they are not in conflict with the provisions of the 1961 Act (including the abovementioned monitoring conditions). While imposing stipulations subject to which approval is granted, the PA may insist on certain percentage of accounting Income to be utilized/applied for imparting education in India. While making such stipulations, the PA has to examine the activities in India which the applicant has undertaken in its Constitution, MoUs. and Agreement with Government of India/National Council. In this case, broadly the activities undertaken by the appellant are - conducting classical education by providing course materials, designing courses, conducting exams, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Section 10(22) of the 1961 Act. The majority view, however, was that the University must carry on educational activities in India in order to satisfy Section 10(22). According to the majority view, some educational activity had to be carried on in India and since Oxford University Press carried on no educational activity in India, the exemption did not apply to the University. In other words, the majority judges held that "non-profit" qualification has to be tested against Indian activities and it is in this context that remarks regarding "in India" are made in the judgment of the majority at page nos. 672 and 684. 40. Moreover, it is important to note that, even after the Finance Act, 1998 w.e.f. 1.4.1999, the third proviso to Section 10(23C)(vi), which refers to monitoring conditions, confines the words "application of income" to the objects for which the Institution is established. The third proviso does not use the words "in India" in the matter of application or accumulation of income though in several other sections like Sections 10(20A), 10(22B) and 11(1)(a) etc., Parliament has used the words "in India". Therefore, for this one more reason, we cannot read in the words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it deems fit under the provisos, and the compliance of those conditions by the appellant. The compliance of the terms and conditions stipulated by the PA would be a matter of decision at the time of assessment as availability of exemption has to be evaluated every year in order to find out whether the institution existed during the relevant year solely for educational purposes and not for profit. 42. In the light of what is stated above, we set aside order dated 12.10.2004 passed by CBDT, we remit the matter to CBDT for fresh consideration in accordance with law. We may clarify that, in this case, appellant has fulfilled the threshold pre-condition of actual existence of an educational institution under section 10(23C)(vi) and, therefore, on that count CBDT will not reject the approval application dated 7.4.1999. 43. Before concluding, we may state that in this case the appellant had applied for exemption in Form 56D on 7.4.1999 seeking initial approval of exemption under Section 10(23C)(vi) for the accounting year ending 31.3.1999 (assessment year 1999-2000). That application was made under Rule 2CA of the Income-tax Rules, 1962. Under Rule 2CA, it is open to the PA to grant exe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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