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TMI Blog2016 (1) TMI 1356X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(Asr)/2014 - - - Dated:- 1-1-2016 - Sh. A.D. Jain, Judicial Member And Sh. T.S. Kapoor, Accountant Member Appellant by:Sh. K.V.K. Singh, DR Respondent by:Sh.Vinamar Gupta, CA ORDER A.D. Jain, JM: This the Department s appeal for the assessment year 2010-11, against the order, dated 23.05.2014, passed by the ld. CIT(A), Jammu. The assessee has taken the following Grounds of Appeal: 1. Whether the ld. CIT(A) was right in allowing the exemption claimed by the assessee u/s 10(23C)(iiiad) of the I.T. Act, 1961, in respect of excess of income over expenditure. 2. Whether the ld. CIT(A) was right in allowing the exemption claimed by the assessee u/s 10(23C)(iiiad) of the I.T. Act, 1961, where the assessee does not have registration u/s 12AA of the Act. 3. Whether the ld. CIT(A) was right in not considering the income/expenditure statement of the assessee which clearly shows that the assessee has generated surplus profit out of total receipts and it has not spent all its receipts on its main aims and objects. 4. Whether the ld. CIT(A) was right in not considering the decision of Hon ble Uttrakhand High Court in the case of CIT vs. Queens Educ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed that the ld. CIT(A) had decided the issue in the assessee s own case for the AY 2009-10, vide appeal no. 155/11-12, dated 05.11.2012, in the favour of the assessee, but the department had not accepted the decision of the CIT(A) and had filed appeal before the ITAT, Amritsar. The AO also observed that after going through the accounts of the trust, it was seen that the assessee trust had generated surplus (profit) out of their total receipts and that it could not be accepted that the surplus generated was merely incidental. The surplus generated had been utilized by the trust for making investment in fixed assets/capital assets, the construction of building, etc., in order to generate larger surplus and not for the utilization of all the objects of the trust. The AO observed that in the case of Pinegrove International Charitable Trust vs. Union of India, the department had not accepted the decision of the Hon ble P H High Court and had filed SLP (C) no. 5381/2011 before the Hon ble Supreme Court; and that on a similar issue, in the case of CCIT, Amritsar vs. Ajanta Educational Centre, the department had filed Special Leave Petition SLP Civil No.4445/2011 before the Hon ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of education. The objects of the assessee trust are as under: 1. To undertake educational activities and for this purpose to construct, run and maintain school, colleges and educational centres. 2. To grant Scholarships, Stipends, Prizes, Rewards, Financial another assistance to students. 3. To establish Libraries and Book Banks for the benefit of the students. 4. To purchase and maintain play ground for the purpose of students. 5. To construct, maintain and run hostels for the benefit of students. 6. To conduct educational tours and debates for the expansion of knowledge and betterment of the students. 7. To publish literature of the betterment of the students. 8. To provide health services, medical aid of all sorts to the public and for this purpose establish, promote, support, maintain, help and run Nursing Home, Medical camps, hospitals, medical institutes etc. 9. To take over any other trust or society or organization carrying on the activities of imparting education or medical relief of the poor and whose objects are similar to the object of this trust. 10. To help and assist poor and deserving people in marriage. 11. To make donation to ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT(A), the AO has not shown, much less proved, the assessee to have carried out any of these other objects , beside education. Before us too, the ld. CIT(A) s observation in this regard remains unchallenged. The ld. CIT(A) has recorded, and rightly so, that these other objects are merely objectives on paper . The AO has not shown the assessee to have carried out any profit earning activity whereby the assessee can be alleged to be earning profit in the garb of such other objects . So, for all intents and purposes, the assessee exists solely for educational purposes. Moreover, as the ld. CIT(A) has correctly noted, in section 10(23)(iiiad), the comparison is between educational and profit purposes, rather than between educational and other ones. 12. In CIT vs. Geetha Bhavan Trust , 213 ITR 296 (Ker.) it has been held, dealing with section 10(22) of the Act, which provision preceded section 10(23C)(iiiad) on the statute and which, for our present purposes, is in pari materia with section 10(23C)(iiiad), that what is relevant is the source of the income derived from an educational institution existing solely for educational purposes. 13. In the present case, it remains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egrove International Charitable Trust vs. Union of India and Others (supra). In Pinegrove International Charitable Trust (supra), it was observed by the Hon ble Punjab Haryana High Court, that merely because there are surpluses in the hands of the educational institution, would not ipso facto lead to an inevitable conclusion that such an educational institution is existing for making profits and not solely for educational purposes., that, therefore, the interpretation of the department that there has to be a reasonable profit and then only an institution can only be said to be not existing solely for the purposes of profit, is a misconception of law., that there is a definite purpose behind the allowing of setting up educational institutions at the hands of private entrepreneurs including Trusts/Societies by the Government., that various other educational colleges, like Engineering colleges and Pharmacy colleges, etc. could not have been established for want of funds., that the Government, with a definite idea and object , opened this area of education for the private sector., that the Government, lacking funds, appears to have thought that the private sector could do this job ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. 6.4. The above position has been duly taken into consideration by the Ld. CIT(A) while rightly granting exemption u/s 10(23C)(iiiad) of the Act to the assessee. It has also correctly been taken into consideration that the assessee-trust was running a school in a remote area of Rajouri in J K State and was not carrying out any other activity, that the assessee had gross receipts from this activity, of less than ₹ 1 crore and had claimed exemption u/s 10(23)(iiiad), that the assessee was not getting Government funds and was running the institution out of its own surplus, which was to the tune of ₹ 28,34,859/- in the A.Y. 2009-10, i.e., the year under consideration, that this surplus was spent by the assessee-society for educational purposes and in construction of school building, that the AO had disallowed this surplus on the basis that the assessee had a few more objectives, which were other than the object of education, and that however, these objectives were incidental to the purposes of education, or purely for charity in the field of health and upliftment of the poor. 6.5. Before us, the department has not brought anything on record to prove that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view in favour of the assessee has to be adopted. That being so, there is no force in Ground no.4 on this score itself and the said Ground is liable to be rejected for this preliminary reason. 20. However, both Queens Educational Society (supra) and Pine Grove (supra) have since been considered and decided by the Hon ble Supreme Court. The ld. counsel for the assessee has placed on record a copy of the said Supreme Court judgment dated 16.3.2015, passed in Civil Appeal No.5167 of 2008, in the case of M/s. Queen s Educational Society vs. Commissioner of Income Tax and other connected cases. 21. In Queens Educational Society (supra), the Hon ble Supreme Court has held as follows: 11. Thus, the law common to Section 10(23C)(iiiad) and (vi) may be summed up as follows: Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit. The predominant object test must be applied - the purpose of education should not be submerged by a profit maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing education. If there is no surplus out of the difference between receipts and outgoings, the trust will not be able to achieve the objectives. Any education institution cannot be run in rented premises for all the times and without necessary equipment and without paying to the staff engaged in imparting education. The assessee is not getting any financial aid/assistance from the Government or other philanthropic agency and, therefore, to achieve the objective, it has to raise its own funds. But such surplus would not come within the ambit of denying exemption u/s 10(23C)(iiiad) of the Act. 13. Having set out the ITAT, order, the Uttarakhan High Court held : Thus, in view of the established fact relating to earned profit, we do not agree with the reasoning given by the ITAT for granting exemption. 14. Having said this, the impugned judgment goes on to quote Aditanar Educational Institution v. CIT, as follows: After meeting the expenditure, if any surplus result incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purpose since the object is not one to make profit. The decisiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity is not found under the Delhi Municipal Corporation Act. In other words, the definition is narrower in scope. This is our answer to question No. 1. 18. Secondly, the extracted portion from the said judgment in the judgment of the Uttarakhand High Court concerned itself with question two, namely, whether the educational society is supported wholly or in part by voluntary contributions. It is part of paragraph 80 of the said judgment. If the sentences after the quoted portion are also set out, it becomes clear that the passage relied upon by the High Court has absolutely nothing to do with the present case. The entirety of the passage is now set out hereinbelow: 82. ...In other words, what we want to stress is, where a society or body is making systematic profit, even though that profit is utilised only for charitable purposes, yet it cannot be said that it could claim exemption. If, merely qualitative test is applied to societies, even schools which are run on commercial basis making profits would go out of the purview of taxation and could demand exemption. Thus, the test, according to us, must be whether the society could survive without receiving voluntary contributio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s than 25% of the income for Assessment Year 1970-71. Therefore, the assessee is entitled to accumulate this income and claim exemption from income tax under Section 11(1)(a). We set aside the judgment of the Uttarakhand High Court dated 24th September, 2007. The reasoning of the ITAT (set aside by the High Court) is more in consonance with the law laid down by this Court, and we approve its decision. 20. Revenue's appeals from the Punjab and Haryana High Court concern themselves with Sections 10(23C) (vi). A large number of writ petitions were heard in Civil Writ Petition No. 6031 of 2009 and disposed of on 29th January, 2010. By various impugned orders passed, the Chief, CIT, Chandigarh withdrew exemptions granted under Section 10(23C) (vi) of the Income Tax Act read with Rule 2CA of Income Tax Rules, 1961, for various assessment years. The operative part of the order passed by the Chief, CIT in these cases is the same and reads as follows: 4. I have considered the submissions of the assessee. The decisions quoted in support of its contention are not relevant and are distinguishable on facts as well as issues. It is clear that the ratio of the decision of Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 established and in a case where more than fifteen per cent of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and;]. [(b) does not invest or deposit its funds, other than- (i) any assets held by the fund, trust or institution [or any university or other educational institution or any hospital or other medical institution] where such assets form part of the corpus of the fund, trust or institution [or any university or other educational institution or any hospital or other medical institution] as on the 1st day of June, 1973; [(i-a) any asset, being equity shares of a public company, held by any university or other educational institution or any hospital or other medical institution where such assets form part of the corpus of any university or other educational institution or any hospital or other medical insti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order rescinding the notification or withdrawing the approval to such fund or institution or trust or any university or other educational institution or any hospital or other medical institution and to the Assessing Officer;] Section 11. Income from property held for charitable or religious purposes.- (5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely:- (i) investment in savings certificates as defined in clause (c) of Section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government; (ii) deposit in any account with the Post Office Savings Bank; (iii) deposit in any account with a scheduled bank or a cooperative society engaged in carrying on the business of banking (including a cooperative land mortgage bank or a cooperative land development bank). Explanation.-In this clause, scheduled bank means the State Bank of India constituted under theState Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes of this clause,- (a) long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years; (b) public company shall have the meaning assigned to it in Section 3 of the Companies Act, 1956; (c) urban infrastructure means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;]. (x) investment in immovable property. Explanation.- Immovable property does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth; (xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964); (xii) any other form or mode of investment or deposit as may be prescribed. 23. The Punjab and Haryana High Court, by the impugned judgment dated 29th January, 2010 expressed its dissatisfaction with the view taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed profit would not be deciding factor to conclude that the educational institution exists for profit. (2) The provisions of Section 10(23C)(vi) of the Act are analogous to the erstwhile Section 10(22) of the Act, as has been laid down by Hon'ble the Supreme Court in the case of American Hotel and Lodging Association (supra). To decide the entitlement of an institution for exemption underSection 10(23C)(vi) of the Act, the test of predominant object of the activity has to be applied by posing the question whether it exists solely for education and not to earn profit [See 5-Judges Constitution Bench judgment in the case of Surat Art Silk Cloth Manufacturers Association (supra)]. It has to be borne in mind that merely because profits have resulted from the activity of imparting education would not result in change of character of the institution that it exists solely for educational purpose. A workable solution has been provided by Hon'ble the Supreme Court in para 33 of its judgment in American Hotel and Lodging Association's case (supra). Thus, on an application made by an institution, the prescribed authority can grant approval subject to such terms and conditions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the various propositions of law culled out by us in para 8.13 and various other paras. 8.16 The writ petitions stand disposed of in the above terms. 24. The view of the Punjab and Haryana High Court has been followed by the Delhi High Court inSt. Lawrence Educational Society (Regd.) v. Commissioner of Income Tax Anr., (2011) 53 DTR (Del) 130. Also in Tolani Education Society v. Deputy Director of Income Tax (Exemption) Ors., (2013) 351 ITR 184, the Bombay High Court has expressed a view in line with the Punjab and Haryana High Court view, following the judgments of this Court in the Surat Art Silk Manufacturers Association Case and Aditanar Educational Institution case as follows: .....The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that the Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is education an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reat importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that revenue is at liberty to pass fresh orders if such necessity is felt after taking into consideration the various provisions of law contained in Section 10(23C) read with Section 11 of the Income Tax Act. 22. Thus, the Hon ble Supreme Court has set aside Queen s Educational Society (supra) rendered by the Hon ble Uttarakhand High Court, whereas Pine Grove (supra) decided by the Hon ble Punjab Haryana High Court stands approved. 23. Therefore, respectfully following the aforesaid decision of the Hon ble Supreme Court the case of M/s. Queen s Educational Society , the grievance of the Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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