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TMI Blog2011 (11) TMI 811X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of its business. Further challenge has been made by the petitioner to the order dated 22.12.2010 (Annexure-1/H) passed by the CCIT rejecting the petition made under Section 154 of the IT Act on the ground that the same has been passed without hearing the petitioner which amounts to violation of the principles of natural justice. 2. Petitioner s case in a nutshell is as follows: Petitioner is a Society registered under the Registration of Societies Act, 1860 on 06.03.1987. Some educationalists, philanthropists along with President of Orissa Jesuit Society, Professor, Director and Administrator of XLRI, Jamsedpur with an object to establish a Business School (for short B School ) joined together with a view to impart education on business management. The State of Orissa allotted land measuring Ac.20.0 acres and funds of ₹ 2.14 crores. The said Society from the aforesaid fund coupled with other donations built the Xavier Institute of Management, Bhubaneswar (for short XIMB ) to impart B School education to educate and train the efficient and able Manager to man and manage industries, organisations and other organizations such as medical college for Doctors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) rural finance. 5. The petitioner created a Centre for Development Research Training (for short, CENDERET ) in the institute as much as it created departments for disciplines to educate the students and appointed nonfaculty staff and had opened Zonal Centres in different parts of the State where such trainings are undertaken. Depending on the person and the manner and their object, the petitioner institute through its academic faculties had to receive fees, incurred expenses, prepare projects and in some cases debited the expenses either to the projects or to the institute, but all the fees and expenses are recorded, audited by reputed internal and statutory auditors and full disclosure were made not only for admission fees and tuition fees of the students but also of those classes of others who paid for their projects and with the help of the petitioner upgraded their knowledge which broadly came under the concept of imparting education. 6. For the purpose of Accountancy in respect of the receipts, the petitioner puts them into a broad head of training and consultancy. The petitioner also for most of the years, receives the grants and donations unrelated to any specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erifying its veracity applied to the concerned authority on 25.01.2007, which is in the statutory form and gave requisite information to justify its activities to indicate that it is an educational institution existing solely for educational purposes and not for purposes of profit. The said approved authority gave a hearing, and as required by the said approved authority various details were filed before it. After hearing the petitioner, the CCIT passed the impugned order under Annexure-1 holding that the petitioner is imparting education in Post Graduate level, but the receipts which have been made under head training and consultancy which the petitioner explained to be incidental to education and caters solely to the institute s main object for educational purposes is not correct for the reasons stated in the said order. 10. On receipt of the impugned order under Annexure-1, the petitioner filed a petition under Section 154 of the IT Act before the CCIT on 16.12.2010 which was within time to revise the order passed under Annexure-1 on the ground that the CCIT while passing the order has made a mistake in considering the main and subsidiary objects of the institute and the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Association, (1980) 121 ITR 1, wherein the principles of main and subsidiary objects are explained. 13. Mr. Mahanti, learned Senior Advocate further contended that the order under Annexure-1 is a nullity as the prescribed authority misunderstood the relevant provisions of law. Opposite Party No.1 misconstruing his powers under proviso (1) to Section 10(23C)(vi) of the I.T. Act, passed the impugned order. Further the prescribed authority has also misunderstood the English word solely for educational purposes. Ascribing a narrow meaning to the word education and relying on the principle decided in Sole Trustee, Lok Shikshan Trust vs. CIT, Mysore, AIR 1976 SC 10, which was beneficial to the Revenue, the prescribed authority treated the income from the petitioner s activities from consultancy and training and grants and donations imparted as part of its courses of study as non-educational activities. The interpretation given to the word education by the prescribed authority is contrary to the principles of interpretation of fiscal statute. Thus, the order impugned in this writ petition is irrational. Taking judicial notice of many factors without confrontation, the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nigam Limited and Another vs. Union of India and others, (2006) 3 SCC 1; M/s. Radhasoami Satsang, Saomi Bag, Agra vs. Commissioner of Income Tax, (1992) 193 ITR 321, Director of I.T. vs. Escorts, (2008) 300 ITR 75 (Delhi) and Sardar Kehar Singh (1992) 195 ITR 769 (Raj) .In the impugned order, the prescribed authority has taken into consideration some irrelevant materials and has not followed the guidelines laid down in the case of American Hotel Case (supra), which on principle follows Surat Art Silk (1980) 2 SCC 31. 15. Placing reliance on the judgment of the Hon ble Supreme Court in the case of Ujjambai, AIR 1962 SC 1621, Mr. Mahanti submitted that orders which are ex facie nullity are not protected as they are orders passed without jurisdiction. It was further argued placing reliance on Animiscc, 1969 (1) ALLER 208 (HL) that such an order can be challenged in a court. The aggrieved party is entitled to protection of a court where the authority by reason of misconstruction or omission of the law or for any other reason uses his discretion to counter the policy. Reliance was also placed in the case of R (Electrocal Commissioner) vs. West Minister Mag Ct., (Lord Brown), (2011) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnan, AIR 1993 SC 2178 : (1993) 1 SCC 645 held that they are of necessity in the present day context as it is not possible to do without them because the Government is not in a position to meet the demand. 18. Mr. Mahanti submitted that to teach the students, the petitioner has to rely on model projects prepared by past practices or experiences of business corporate or create artificial models and spend its own money. But a management institute, having able faculties in many disciplines, may be approached for consultancies and training and entered into agreements, sanctioned budgets etc. The petitioner maintains separate books of account for each project. In M/s. Dharmaposhanam Company, Kerala vs. Commissioner of Income Tax, Kerala, (1978) 3 SCC 414, the Hon ble Supreme Court held that the limiting condition does not apply to educational institute. A citizen has a fundamental right for education for a medical, engineering or other professional degree. 19. The prescribed authority is not justified to apply the rule of interpretation for claim of exemption and also the principle of interpretation of fiscal laws to be construed strictly so long as the provision is free from ambi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a restricted meaning to the word Education taking into consideration the magnitude of expenses and that the petitioner can meet its expenses from receipt from fees for admission and tuition as these reasons are irrelevant. Not the magnitude of expenses but gross receipt is the criteria for approval. The magnitude of expenses and the meeting of the expenses for running the educational institution are not relevant nor provided under Section 10(23C) (vi), and proviso (i), (ii) and (iii) to said Section. The prescribed authority created a self created policy for a subjective satisfaction without objective standard. Opposite Party No.1 is silent if profits are earned from activities alleged are in the nature of business and application of those incomes, but avoided as they are not necessary. 22. Soon after the passing of the impugned order, assessment for the assessment year 2005-2006 was reopened u/s. 147 and the assessment for the assessment year 2007-2008 was completed. Assessment for the assessment years 2006-2007, 2009-2010 and 2010- 2011 are pending for assessment. In the order under Annexure-1 the CCIT relied on Lok Shikshan (supra) the ratio of which decision was disapp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having objects of general public utility) shall apply. It was held that the test is the nature of activity. The prescribed authority may grant exemption under section 10(23C) (vi) putting the stipulation to the effect that subject to fulfilment of the stipulation, approval be given than denying the approval. This Court in the case of S.J. Charitable Trust v. Chief Commissioner of Income Tax in W.P.(C) No.11811 of 2010 judgment of which was pronounced on 26.7.2010, placed reliance on the judgment of the Hon ble Supreme Court in the case of American Hotel (supra), while considering the order of rejection of the petition filed by the petitioner u/s. 10(23C)(vi) of the Act, 1961 and remanded the matter to the Chief Commissioner, Income Tax. 25. Mr. Mahanti, further submitted that in the matter of judicial review, when an authority decides the matter relying on many materials, some of which are treated as irrelevant, the review court has to quash it as it cannot know as to what extent the mind of the authority was influenced by the irrelevant materials. Placing reliance on the judgments in the case of AG vs. De Keysore Hotel, (1920) AC 508 and Burma Shell, (1965) AC, Mr Mahanti submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... void its conflict. The Courts have prescribed limits, so that there is no existence of arbitrary powers and unfettered discretion. The authority must use his discretion, based on the policy and objects of the governing law. 28. Placing reliance in the case of Egyptian Salt, AIR 1931 PC 182, Deucher vs. Gaslight Coke Company, 1925 AC 69, Mr. Mahanti submitted that the MoA like any other document must be read fairly and its import derived from a reasonable interpretation of the language which it implies. Decision in Bell Houses vs. City Wall, (1966) 2 ALL ER 674, indicates the modern practice which waters down the ultra vires doctrine as regards the Companies dealings with third parties provided the dealings are honest. 29. It was further submitted that over a period of time, management has become a distinct profession along side the traditional liberal professions, i.e. medicine, law and church. B School is in contrast to a University degree in humanities for instance, history, politics, economics, anthropology, sociology, etc. where such need for translating knowledge into specific skills does not arise at all. The Management theories and practices in vogue some 20 years a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Training (for short, CENDERET), a wing of the petitioner-institution is headed by an independent faculty member. It has separate staff and structure and also several zonal centres are operating in various parts of the States under CENDERET. Various faculty members of the institution, who are regularly associated in teaching activities, are also involved in execution/implementation of these programs/projects or training programs as per the requirement and the nature of each project. Perusal of some of the project proposals shows that the agreements are sometimes entered directly for CENDERET. The nature of the activities has to be understood in the overall context of the present economic and management scenario in the country and world at large. A very large number of projects/programs are undertaken by the Government as well as the private organizations or international organizations in various stages of business expansion. In the above context, the role of a business management institute like that of the petitioner-institution has to be understood. The various programs/projects/ trainings etc. undertaken by the institute are in the nature of business suitable for such an institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducational activities. 34. Placing reliance on the judgments in the cases of Commissioner of Income Tax vs. Sorabji Nusserwanji Parekh, (1993) 201 ITR 939, Aditanar Educational Institution vs. Additional Commissioner of Income Tax, (1997) 224 ITR 310 and judgment of Andhra Pradesh High Court in the case of Commissioner of Income-Tax, Hyderabad vs. Gurukul Ghatkeswar of Hyderabad in R.C. No.35 of 1996 dated 29.09.2010, Commissioner of Income Tax vs. Maharaja Sawai Mansinghji Museum Trust, (1988) 169 ITR 379(RAJ), Oxford University Press vs. CIT, (2001) 247 ITR 658, Vanita Vishram Trust vs. Commissioner of Income Tax, (2010) 327 ITR 121 (Bombay) and American Hotel Lodging Association Educational Institute (supra), Mr. Mohapatra, contended that since the petitioner-institution does not exist solely for the educational purposes and the nature of activities undertaken by it amounts to carrying on business, it is not entitled for exemption and the CCIT has rightly rejected its application made under Section 10(23C)(vi) of the Act. 35. The stand of the petitioner that the entire surplus income of the educational institution has been spent for educational activities and nothing else, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and bright students) and another part where the institute receives grants and donations and fees for training and consultancy to take up projects/programs as a business venture. The learned authority failed to appreciate that the later activities and experience improve quality of the former and the later is taken up to aid and assist the former. Therefore, the reasoning given by opposite party No.1 is fallacious. 40. Opposite party no.1 is not justified to say that the income from trainings and consultancies as well as grants and donations are not necessary to meet its expenses for teaching. Such observation is without materials and the result of non-application of mind. This statement can only happen if a person does not look to the object clauses, in (A), (B) with Sub-clauses (a) to (f) and paragraphs C to N which are powers to achieve (A) and (B). 41. Opposite party No.1 has not taken into consideration the fact stated in paragraph 3(a) of the writ petition, where the petitioner asserts that the State of Orissa allotted lands measuring 20 Acres and a fund of ₹ 2.14 Crores and joined in incorporating the society. 42. The object of giving training is to expose t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd legal contentions advanced by learned Senior Counsel and Standing Counsel for the parties, the questions which fall for consideration by this Court are as follows: (i) Whether the petitioner-Xavier Institute of Management, Bhubaneswar is existing solely for educational purpose and not for purpose of profit so as to the income received by it shall not be included in computing its total income for the financial year 2006-07 and thereby it is eligible for exemption ? (ii) Whether the petitioner-Xavier Institute of Management, Bhubaneswar is engaged in business and the same is incidental to the attainment of its object of education? (iii) Whether the CCIT is justified in not granting approval under Section 10(23C)(vi) of the I.T. Act for the financial year 2006-07 ? (iv) Whether the CCIT is justified in holding that the application for rectification made under Section 154 of the I.T. Act to revise the order under Section 10(23-C)(vi) for the financial year 2006-07 is not entertainable? 46. Since question Nos.(i), (ii) and (iii) are interlinked, they are dealt with together. 47. To deal with the aforesaid three questions, it is necessary to know what is contemplated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms necessary in that behalf. The third proviso provides that the income of a university or educational institution should be applied or accumulated for application wholly and exclusively to the objects for which it is established. Clause (b) of the third proviso states that the cash must be invested or deposited in one or more of the forms or modes specified in sub-section (5) of Section 11. The seventh proviso to section 10(23C) provides that nothing contained in sub-clause (vi) shall apply in relation to any income of the university or educational 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. The 12th proviso provides that where the other educational institution 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 institutions or any university or other educational institution or hospital or other medical institutions shall not be treated as application of income to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust, fund, University or other educational institution etc. had not applied its income in accordance with the 3rd proviso or if it finds that such institution, trust or fund etc. has not invested/deposited its funds in accordance with the 3rd proviso or that the activities of such fund or institution or trust etc. are not genuine or that its activities are not being carried out in accordance with the conditions subject to which approval is granted then the prescribed authority is empowered to withdraw the approval earlier granted after applying with the procedure mentioned therein. 51. In the above case the Hon ble Supreme Court further held that it is only if the prerequisite condition of actual existence of the educational institution is fulfilled, the question of compliance with requirements in the provisos would arise. To make the section with the proviso workable, monitoring conditions in the third proviso like application/utilization of income, pattern of investments to be made, etc., could be stipulated as conditions by the prescribed authority subject to which approval could be granted. While imposing stipulations subject to which approval is granted, the prescribed aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he character of an educational institution to be ascertained from its objects. 55. At this juncture, it is necessary to know the objects of the association. As per the Memorandum of Association (MoA), the following are the objects of the Institute: 3(A) Teach : To conduct research in the fields of management, social, economic, industrial, rural, scientific and to diffuse knowledge through instruction, lectures, seminars, conferences, publications and consultancies with a view to contribute to the orderly growth and development of Orissa and the Country. (B) Establish : To own, conduct, equip and carry on the administration and Management of the Xavier Institute of Management, Bhubaneswar:- (a) To provide for training in management and related subjects to persons from industries in both the public and private sectors, public systems, institutions, bodies and associations both public and voluntary connected with industry, rural development and social uplift of all kinds, and to individuals in such a way as to equip them to practise the art and profession of management in which they have trained, or, in appropriate cases, to instruct others in the practice of management; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Xavier Institute of Management, Bhubaneswar. (G) Gift-Trusts : (a) To take or to receive any gift, whether moneys or property, movable or immovable or donations in the form of debentures, stocks or shares in any company or society, whether incorporated or not or whether by gift of the person living or by legacy, bequest, will or foundation, for any of the objects of the Association, and moreover to take such steps for the securing of such contributions to the funds of the Associations, as may from time to time be deemed expedient; (b) . (H) Alienate : (a) To alienate by way of sale, mortgage, lease, release, loan, charge, hypothecation, pledge, exchange, hiring out, gift or otherwise, with or without security, the properties or funds of the Association or any portion or portions thereof including the making or giving of subscriptions, contributions or assistance pecuniary or otherwise to institutions, bodies or persons as from time to time may seem necessary or appropriate in furtherance of the objects of the Association. (b) . (c) If, on winding up or dissolution of the Association, there shall remain, after satisfaction or all its debts and liabilities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eys or required for the objects of the Association and for the purposes mentioned therein. Clause 3 (M)(a) states to deposit all moneys credited to the fund in such banks or to invest them in such manner as the Association decides . This is nothing but business activity. 57. The learned prescribed authority on perusal of the account for the financial years 2003-04 and 2004-05 observed that the investments have been made in the share market by the institute and thus, the provisions of sub-clause (b) of the third proviso to Section 10(23C)(vi) of the I.T. Act are not adhered to by the institution. The learned prescribed authority further observed that Clause-3(H)(c) which provides for disposal of assets, on winding up or dissolution of the association, is not as per the spirit of requirement of Section 10(23C)(vi) of the I.T. Act. According to him, such a provision allows for passing of the assets of the institution to any person/organization (not among the members of the society) as per the decision of three-fifth of members present and voting. 58. The prescribed authority has extracted various heads of income and expenditure of the petitioner-institution in different financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribed authority there is significant income from Training and Consultancy and Grants and Donations for development work and other income for various years. Similarly, there is heavy expenses incurred under the head Training and Consultancy , Grants and Donations and Administrative Expenses . The finding of CCIT on the basis of the details of various heads of income submitted before him during the course of hearing revealed that these incomes were received for undertaking various programs/projects/ studies etc. by the institute from various Private or Government or International Organizations or various foreign agencies. Training and Consultancy includes projects for Coromondal Fertilizers, UNIDO, IFS Training Program, NFFWP, Deogarh, UNCEF, CALPI-LSM Training Program, Vedanta Alumina, PDW Consultancy, Tata Tele Services, ONGC, Sterlite Energy Pvt. Ltd., LST-II, NFI OPEPA Study, Sambalpur Bastralaya, UNDP, UNCEF Ankur Program etc. In the grants and donations, the projects are (1) Sustainable Livelihood Option for Rural People, (2) Panchayatiraj Empowerment of Tribal People, (3) Mapping Ensuring Food Security, (4) UFSAI-XISS Joint Research Program, (5) Self Reliance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the institute have been made, which are later adjusted by the book entry in the various heads. According to prescribed authority, a very large amount of money has been spent for the purpose other than education. While examining the accounts of the petitioner for the financial year 2006-07, for which application under Section 10(23C)(vi) of the I.T. Act has been filed, prescribed authority noticed that expenditure of ₹ 99,87,108/- for training and consultancy and ₹ 4,79,32,652/- for grants and donations have been made. The income under these two heads was ₹ 1,42,06,188/- and ₹ 4,66,39,648/- respectively. Apart from this, various expenditures incurred on this project and programs are merged in the administrative expenses and personal cost forming part of over all expenditure of the institute. These income and expenditure of financial year 2006-07 follow the same pattern and nature of income and expenditure of earlier years. Therefore, the learned prescribed authority came to the conclusion that they are related to the business of the institute which is not incidental to education and for which no separate books of account are maintained. 62. Factual dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired under second proviso to Section 10(23-C) of the I.T. Act. The CCIT also examined various provisions of clauses of MoA. The Prescribed Authority on perusal of accounts for the financial years 2003-04 and 2004-05 noticed that investments have been made in the share market by the institute and the provisions of sub-clause (b) of the third proviso to Section 10(23-C) of the I.T. Act are not adhered to by the Institution. No separate books of account is maintained by the petitioner-institution. According to the Prescribed Authority, a very large amount of money has been spent for the purpose other than education. The Prescribed Authority also came to the conclusion that for the financial year 2006-07 in which application under Section 10(23-C)(vi) of the I.T. Act has been filed, a significant amount of receipt and expenditure are related to the business of the Institution which is not incidental to education and for which no separate books of account are maintained. Therefore, law laid down in the American Hotel Lodging Association Educational Institute s case (supra) has no application to the case of the assessee-petitioner. 65. The facts of the case of the petitioner-assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not mean that such liberal construction should be made doing violence to the plain meaning of such exemption provisions of the Act, which would defeat the object and intent of the Act. 71. One of the major arguments of the petitioner is that materials have been utilized without confronting the same to the assessee. There are basically two types of materials, i.e., (i) material furnished by the assessee and (ii) material collected behind back of the assessee. It is the latter type of material which needs confrontation, because he is unaware of it. The position is entirely different where inference is drawn on the materials furnished by the assessee which is an admitted fact. In the instant case, CCIT, the fact finding authority has drawn inference from the materials/copy of the accounts furnished by the petitioner-assessee. Therefore, there is no substance in the above said plea of the petitioner. 72. For the reasons stated in the preceding paragraphs, we are of the view that the CCIT is justified in not granting approval under Section 10(23C)(vi) of the I.T. Act for the financial year 2006-07. 73. Question No.(iv) is with regard to validity of the order passed under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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