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TMI Blog2018 (4) TMI 714X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the very schools they are accrued from, thus, subscribing to a charitable motive. Educational institutions may take more creative steps to qualify their objectives as an “educational purpose” that is more universal than the individual objectives set out in the memoranda of objectives of such institutions. For instance, a percentage of profits earned from a business activity indulged in by such an educational institution may be mandated towards fructifying the implementation the provisions of the Right to Education Act, 2009, particularly, to create a more sensitive learning environment for children with disabilities in implementation of the provisions in the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, or have a system to analyze the ratio of inflow of money over progressive assessment years as opposed to how much of this money is channeled back into the growth and maintenance of such educational purpose, in order to put in place a visible system of accountability. This is an observation, to ensure that the purpose for which section 10(23C)(vi) of the Act was introduced, is adequately fulfilled and not disadvant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , also referred to as agreement ). In terms of the agreement, the parties jointly agree to manage the school where the Assessee has a significant say and control in the management of these schools. 3. The main object of DPS Society as detailed in their memorandum of association is as follows: (i) to establish progressive schools or other educational institutions in Delhi or outside Delhi, open to all without any distinction of race or creed or caste or special status with a view. (ii) to impart sound and liberal education to boys and girls during their impressionable years - a type of education that will lay stress on character building, team work, esprit de corps, physical development and will infuse in school children a spirit of adventure, fair play and justice. (iii) to develop among its students a feeling of pride in Indian culture and to produce citizens who will be truly Indian and will rise above social, communal, religious or provincial prejudices. 4. The Assessee had been enjoying exemption, in respect of its income under section 10(22) of the Act since assessment year 1977-78 till assessment year 2007-08. In view of the change in law Section 10(22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e maintained in respect of such business. Clearly, the scope of sub-section (4A) is more beneficial to a trust or institution than was the scope of subsection (4A) as originally enacted. In fact, it seems to us that the substituted sub-section (4A) gives a trust or institution a greater benefit than was given by section 13(1)(bb). As it stands, all that it requires for the business income of a trust or institution to be exempt is that the business should be incidental to the attainment of objectives of the trust or institution. A business whose income is utilised by the trust or the institution for the purposes of achieving the objectives of the trust or the institution is, surely, a business which is incidental to the attainment of the objectives of the trust. 7. As far as the maintenance of separate books of account is concerned (as required by Section 10 (2) (vi)), Mr. Syali, learned counsel for the assessee argues that the such mandate was complied as it maintained a separate account styled the Secretary s Office in which the receipts towards reimbursement to the assessee for common expenses from various schools with which it had entered into agreement to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in its schools. 10. In the appeals, the revenue primarily contended the impugned orders of the ITAT whereby, the ITAT deleted the additions of various amounts for the assessment years of 1998-1999, 1999-2000, 2000-2001, 2001-2002, 2003-2004 and 2005-2006, made respectively by the Assessing Officer, holding that the income received by the assessee in each such case as a franchisee fee was exempt under section 10(23C)(vi) of the Act and that the provisions of section 11(4A) of the Act were not applicable to any of these cases. The generic facts that lead to filing of these appeals are that returns were filed by the assessee declaring income as Nil , for the abovementioned assessment years, however assessment was framed by the AO under Section 143(3) at an income of varying values, for each of the assessment years. The CIT(A) allowed the assessee s appeals and deleted the sums brought to tax, by the Assessing Officer, against which the revenue went in appeal before the ITAT, which upheld the order passed by the CIT(A). Subsequently, a notice under section 148 was issued to the assessee on the ground that in the respective assessment year, the AO had treated the franchisee fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs of the AO are extracted below: On a bare perusal of the provisions of the said section it is clear that profit and gains of the business shall not be eligible for exemption us 11(1), (2), (3) and (3A) unless such business is incidental to the attainment of the object of the trust and separate books of account are maintained by such trust in respect of such business. A business can be described as a continuous exercise of an activity. It is done on a systematic basis with the object of making profit. It involves repletion of the activity done with some real, substantial, systematic and organized conduct with a set purpose. It is business activity which is capable of producing profit and deriving income. It involves commercial exploitation of the properties. No single factor is decisive as it is the overall circumstances which are important to define business. In the present case the society is engaged continuously in granting licenses to permit opening of school by other society bodies at various places. Consideration are being charged in lieu of permission use its name. There is a provision for increasing the same on an annual basis. Number of such satellite schools have in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ools cannot be considered as a falling within the sphere of incidental to attainment of objects of the society. This is purely a commercial pursuit. The act of giving licenses to use the name of Delhi Public School against financial consideration does not fall within the ambit of activity incidental to attainment the object of the society. It is purely a commercial and independent activity with profit motive and cannot be related with aims and objects of charitable nature. In view of these facts it is clear that the society has itself engaged during the year into a business activity of earning maintenance charges and workshop fee in respect of which no separate books of account are maintained as is required u/s 11(4A) of the IT Act, 1961 and this activity is not incidental to attainment of the objects of the trust. Therefore, amount of ₹ 1,49,92,288 being profit and gains of such business activities is not covered under the exceptions provided u/s 11(4A) of IT Act and therefore is not found eligible for exemption us 11 of the IT Act. Against this order, the assessee filed an appeal before the CIT(A) who confirmed the AO s order. The assessee approached the Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be achieved through this agreement for establishing satellite schools is not educational. Apart from the above, the prescribed authority having satisfied itself that the assessee exists for educational purposes and not for the purpose of profit, has thought it fit to approve the assessee for the purpose of applicability of provisions of sec. 10(23C)(vi) of the Act. The Hon'ble AP High Court in the case of Governing. Body of Rangaraya Medical College Vs ITO reported in 117 ITR 284 (AP) had anoccasion to consider the meaning of the expression, for the purposes of profit , in the context of the applicability of exemption provisions. The Hon'ble High Court had held that where a society exists for educational purposes but some surplus arises from the societies operations, it cannot be said that the institution was run for the purpose of profit so long as no person or individual was entitled to any portion of the said profit and the said profit was utilized for the purposes and for the promotion of the objects of the institution. In the present case, it is not the complaint of the AO that the receipts from satellite schools had been utilized for distribution to any individual. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atory and non-maintenance of separate books of account shall not prove fatal to the claim of the assessee for exemption u/s 11. As already observed, a separate set of books of accounts were' maintained by the assessee showing the receipts towards reimbursement of the expenses from the various other schools. 16. In view of the above, we are of the view that revenue authorities were not justified in bringing to tax the amount received by the assessee from the satellite schools. The addition is therefore directed to be deleted. In the case of the Assessee for some previous assessment years and later years, the revenue authorities had held that the amounts received were business income, and brought them to tax. The CIT (A) followed the ITAT s earliest order and held that the franchisee fees received by the Assessee was not liable to tax. 14. Aggrieved by these orders, the revenue filed an appeal before the ITAT which relied upon its previous order in the case of assessee for AY 2001-2002 and deleted the amounts brought to tax by the AO. The ITAT held that the said income amounts received by the assessee as franchisee fee was exempt 10(23C)(vi) of the Act, and prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llected in furtherance of a business activity, without complying with the legislative requirement of maintaining separate books of account. It was lastly submitted that the assessee concededly was subjected to service tax and was paying it. She relied on the findings of the Customs Excise and Service tax Appellate Tribunal (CESTAT) in its order, in support of her submission. 18. Mr. Syali, for the assessee relied on the submissions made in support of the writ petition. He submitted that there was evidence to establish that the accounts relating to the Secretary s office was nothing but reflection of the separate audited books of account maintained by the DPS society. It was urged that the CIT (A) and the ITAT had taken note of these books, the accounts for which were separately audited and duly reflected in Schedule XIII of the Balance sheet filed along with the income tax returns. Therefore, the statutory requirements were fulfilled. 19. Learned counsel emphasized that even if it were assumed, for the sake of argument that the assessee was not maintaining books of account, nevertheless, the purpose for which it provided the service to the satellite schools could not be ignor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any income received by any person on behalf of- . (iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad)and which may be approved by the prescribed authority; or Provided also that nothing contained in sub-clause (iv) or sub-clause (v) [or sub-clause (vi) or sub-clause (via)] shall apply in relation to any income of the fund or trust or institution [or any university or other educational institution or any hospital or other medical institution], being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business Provided also that where the total income, of the fund or trust or institution or any university ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt, by citing, inter alia, Aditanar Educational Institution v. Additional Commissioner of Income Tax (1997) 224 ITR 310, and American Hotel and Lodging Assn. Educational Institute v. CBDT (supra), focused on the requirements that were germane to qualify for exemption under the erstwhile section 10(22) and the subsequent section 10(23C)(vi) of the Act, namely that: the activities of the educational institution should be incidental to the attainment of its objectives and separate books of account should be maintained by it in respect of such business; primarily to highlight that even if an educational institution indulges in a profit making activity, that does not necessarily subsume the larger educational/ charitable purpose of the organization, in the following words: Now we entirely agree with the learned Judges who decided these two cases that activity involved in carrying out the charitable purpose must not be motivated by a profit objective but it must be undertaken for the purpose of advancement or carrying out of the charitable purpose. But we find it difficult to accept their thesis that whenever an activity is carried on which yields profit, the inference must ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes and becomes an institution for the purpose of making profit. (2) The predominant object test must be applied-the purpose of education should not be submerged by a profit making motive. (3) A distinction must be drawn between the making of a surplus and an institution being carried on for profit . No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit. (4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes. (5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons. The determining test to qualify for exemption under section 10(23C)(vi), hence, lies in the final motivation on which the institution functions, regardless of what extraneous profit it may accrue in the pursuit of the same. This was amply highlighted in Aditanar Educational Institution (supra) as follows: We may state that the language of Section 10(22) of the Act is plain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 26. As can be seen from the present income tax appeals, the prescribed authority has examined the assessee s application for exemption under Section 10(23C)(vi) in light of the recent audits of the assessee s accounts. Although DPS Society, in the earlier years had been granted exemption under section 10(23C)(vi), that itself does not cause for a res judicata principle, as examination of the Assessee s audited accounts may be done afresh by the prescribed authority, corresponding to the specific assessment year, as prescribed in the second proviso to section 10(23C)(vi) as follows: Provided further that the prescribed authority, before approving any fund or trust or institution or 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 instit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date the motive of an educational purpose that the Assessee aims through its business activities and substantiate its contentions in that regard. On review of the assessee s audited accounts, it can be observed that the surpluses accrued by DPS Society are being fed back into the maintenance and management of the DPS schools themselves. This, reaffirms the Assessee s argument that the usage of the gains arising out of its agreements are incidental to its educational purpose outlined by its objective of the Assessee. 30. The interpretation of section 10(23C)(vi) is one that requires fulfillment of a two pronged test: firstly, that any business activity if carried out by the educational institution applying for exemption should be incidental to their educational purpose, and secondly, that proper accounts of such business activity ought to be maintained, as highlighted above in Queen s Educational Society (supra). This was also mentioned in Venu Charitable Society and Ors (supra) as follows: 18. The incidental carrying on of commercial activities is subject to certain conditions stipulated under the seventh proviso to Section 10 (23C). They are- (a) The business should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I The assessee will apply its income or accumulate for application wholly and exclusively to the objects for which it is established. The society as in the past has applied its income wholly and exclusively to the object for which it was established. Never in the past has there been violation in respect of application of income by the society. II The assessee will not invest or deposit its funds (other than voluntary contributions received and maintained in the form of jewellery, furniture etc.) for any period during the previous years relevant to the assessment years mentioned above otherwise than in any one or more of the forms or modes specified in subsection (5) of section 11. Complied with III This order will not apply in relation to any income being profits and gains of business unless the business is incidental to the attainment of objectives of the assessee and separate books of accounts are maintained in respect of such business. The society has not carried on or engaged itself in any business. It was only in furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, subscribing to a charitable motive. However, the educational institutions may take more creative steps to qualify their objectives as an educational purpose that is more universal than the individual objectives set out in the memoranda of objectives of such institutions. For instance, a percentage of profits earned from a business activity indulged in by such an educational institution may be mandated towards fructifying the implementation the provisions of the Right to Education Act, 2009, particularly, to create a more sensitive learning environment for children with disabilities in implementation of the provisions in the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, or have a system to analyze the ratio of inflow of money over progressive assessment years as opposed to how much of this money is channeled back into the growth and maintenance of such educational purpose, in order to put in place a visible system of accountability. This is an observation, to ensure that the purpose for which section 10(23C)(vi) of the Act was introduced, is adequately fulfilled and not disadvantageously circumvented by vested parties. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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