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TMI Blog2021 (6) TMI 873X X X X Extracts X X X X X X X X Extracts X X X X ..... is no scope for inferring profit motive. Similarly, clause 52 which has been extracted above also indicates that there is no profit motive. Clauses 55 and 56 of the Articles of Association of the petitioner do not allow an interference of profit motive. These two clauses clearly indicate that the surplus generated by the petitioner is to be ploughed back. The Memorandum of Association of the petitioner also does not indicate the profit motive. The main object of the petitioner indicates that it is in the field of education. There are also indication that the petitioner had not otherwise indulged in any other activity to make profit and it was engaged only in the field of education in all the years of its existence since 1992. Denial of approval to the petitioner u/s 10 (23C)(iv) is not justified. The respondents ought to have granted approval but at the same time and laid down on strict conditions for the petitioner to comply with the said requirements. Therefore, the present writ petition deserves to be allowed. Since the petitioner had applied for exemption as early as 15.09.2010, though approached the wrong forum, it was incumbent on the part of the office of the Chi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder a bonafide impression that the application was to be filed in terms of Clause 8 of the said notification as Clause 3 to Notification No.S.O.852 (E) dated 30.05.2007 applied only to Charitable Institutions. The application was eventually transferred to the 1st respondent/Chief Commissioner of Income Tax-III, Chennai pursuant to which a Show Cause Notice dated 20.12.2013 was issued to the petitioner. The aforesaid Show Cause Notice called upon the petitioner to show cause as to why the application filed by the petitioner should not be rejected for the following five reasons:- Whereas during the course of consideration of your application seeking exemption u/s 10(23C)(vi) of the Income-tax Act, 1961, for the year 31.03.2010, filed in Form No.56 D on 16.9.2010 before the Commissioner of Income tax-I, Chennai and transferred and received in the office of Director of Income tax(Exemptions) Chennai on 21.12.2012, as well as the report dated 18.12.2013 of Director of Income tax(Exemptions) Chennai, you are required to show cause as to why the application may not be rejected for the following reasons: 1. The application in form No.56D was not filed on 16.09.2010 before the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first reason stated in the Show Cause Notice that application was not filed on 16.09.2010 before the prescribed authority within the meaning of Notification No.S.O.852 (E) dated 30.05.2007 is concerned, it is submitted that the application was based on the understanding of the aforesaid notification and therefore there is no justification in not considering the application in time by the authorities under the Act. 6. It is submitted by the learned counsel for the petitioner that even if the application had been wrongly filed, it was an internal issue to be sorted out by either calling upon the petitioner to re-present the application before the appropriate authority or in the alternative to transfer it to the jurisdictional officer for disposing the application filed by the petitioner on 16.09.2010. However, the respondents took three precious years to transfer application only to issue Show Cause Notice on 20.12.2013. 7. It is further submitted that the application was filed as early as 16.09.2010 and therefore it was incumbent on the part of the Department to have transferred the file to the jurisdictional office of the 1st respondent even if the petitioner had wrongly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abad High Court in Society for the Promotion of Education, Allahabad (Referred to supra) was questioned and a reference was made to the Division Bench of the Allahabad High Court by an order dated 05.08.2013 and the Full Bench of the Allahabad High Court has answered the issue against the assessee by its order in Commissioner of Income-tax Vs Muzafar Nagar Development Authority, 372 ITR 209 on 05.02.2015 , the decision of the Division Bench of the Allahabad High Court rendered on 03.04.2008 in Society for the Promotion of Education, Allahabad Vs Commissioner of Income-tax, Central, Kanpur, 372 ITR 222 was upheld by the Hon'ble Supreme Court in Commissioner of Income-tax, Kanpur Vs Society for Promotion of Education, Allahabad by its order dated 16.02.2016, 382 ITR 6. 11. The learned counsel for the petitioner further submits that the Karnataka High Court in Director of Income-tax (Exemptions) Vs ST. Ann's Education Society, 425 ITR 642 and Kerala High Court in Commissioner of Income-tax, Cochin Vs TBI Education Trust, 96 Taxmann.Com 356 have also discussed the implication of the above development and has granted relief to the institutions and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself will not determine whether the Educational Institutions is entitled or dis-entitled for approval under the aforesaid provision of the Income Tax Act, 1961. It is further submitted that surplus generated by educational institutions like the petitioner was only incidental and such surplus cannot be construed as profit. 15. It is further submitted that clause 51 52 of the Articles of Association of the petitioner's company clearly prohibited the petitioner's company from distributing surplus generated in any year by way of dividend or bonus shares implying surplus generated by the educational institutions was to be only ploughed back for educational purpose and therefore the petitioner was entitled to approval under the aforesaid provisions. 16. As far as the 3rd objection in the Show Cause Notice dated 20.12.2013 is concerned, it is submitted that the petitioner cannot be said to be existing for education purpose of making profit based on clause 55 56 of the Memorandum of Association. It is submitted that the petitioner has given an undertaking before the 1st respondent that both the clauses would be amended and therefore the presence of such clauses need no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the educational purposes and was incorporated for the purposes of profit and therefore did not satisfy the requirements of Section 10(23C)(vi) of the Income Tax Act, 1961. 21. Rebutting the other submission of the learned counsel for the petitioner, the learned senior standing counsel for the respondents/Income Tax Department further submitted that the petitioner has several verticals and the object clause of the petitioner's company was decisive to whether the petitioner was entitled to approval under Section 10(23C)(vi) of the Income Tax Act, 1961. In this connection, the learned counsel for the petitioner places reliance on the following three decisions:- (i) Sir Shadilal Sugar General Mills Ltd and another Vs CIT, (1987) 168 ITR 705 (SC) (ii) Sheila Christian Charitable Trust, (2013) 32 Taxman.com 242. (iii) CIT Vs Karimangalam Onriya Pengal Amaipu, (2013) 32 Taxman.com (iv) B.S.Abdur Rahman Institute Vs The Chief Commissioner of Income Tax in W.P.No.34102 of 2015, 787 Taxman 336. 22. She further submits that undertaking to delete the clauses from the Articles Association is not sufficient and therefore the relevant clause as it stood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring, embroidery and doll making. 2. To establish and run all types of recreational centres for all round development of students and others. 3. To carry on the business of forwarding agents, establishing and maintain transport services and so on and make transport facilities available to all those connected with any of our institutions/projects/company. 4. To establish, erect, build, manage canteen, refreshment stalls and fast food centres. 5. To impart education and training in acting, direction, photography and music related to film industry and video industry. 6. To buy, sell act as marketing Agents for the products produced by the training centres, educational institutions, employment-related projects, social welfare agencies. 7. To carry on the business of printers, engravers, publishers, book-printers and book-sellers, stationers, art journalists, manufacturers and distributors of and dealers in engravings, prints, pictures, drawings, painting, journals, magazines and any written, engraved, painted or printed production in all their branches and aspects. 8. To carry on and do the business as land developers, township developers, satellite t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of this rule, Chief Commissioner or Director General means the Chief Commissioner or Director General whom the Central Board of Direct Taxes may, authorise to act as prescribed authority, for the purposes of sub-clause (vi) or subclause (vi-a) of clause (23-C) of Section 10, in relation to any university or other educational institution or any hospital or other medical institution. 30. The petitioner had earlier approached the Chief Commissioner of Income Tax-I on a mis-reading of the content of Notification No. S.O.852 (E) dated 20.5.2007 on 16.9.2010 for grant of recognition/approval under Section 10(23C)(vi) of the Income Tax Act, 1961. 31. The application was thereafter transferred to the 1st respondent belatedly. The 1st respondent who is the jurisdictional authority as far as the petitioner is concerned for grant of recognition/approval under Section 10(23C)(vi) of the Income Tax Act, 1961. The 1st respondent thereafter issued show cause notice dated 20.12.2013. The 1st respondent has rejected the application of the petitioner vide impugned order which is now put to test before this Court. 32. Relevant part of Section 10(23 C) (vi) of the Income Tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital or other medical institution, as the case may be, and the compliance of such requirements under any other law for the time being in force by such 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 are material for the purpose of achieving its objects and the prescribed authority 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation 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 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 any notification issued by the Central Government under sub-clause (iv) or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the 31st day of March, 2004 shall be deemed to be the income of the previous year and shall accordingly be charged to tax: Provided also that any amount credited or paid out of income of any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via), to any trust or institution registered under section 12AA, being voluntary contribution made with a specific direction that they shall form part of the corpus of the trust or institution shall not be treated as application of income to the objects for which such fund or trust or institution or university or educational institution or hospital or other medical institution, as the case may be, is established: Provided also that for the purposes of determining the amount of application under item (a) of the third proviso, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head Profits and gains of business or profession : Provided also t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred, has either not been disputed or has attained finality, it may, at any time after giving a reasonable opportunity of showing cause against the proposed action to the concerned fund or institution or trust or any university or other educational institution or any hospital or other medical institution, rescind the notification or, by order, withdraw the approval, as the case may be, and forward a copy of the 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: Provided also that in case the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in the first proviso makes an application on or after the 1st day of June, 2006 for the purposes of grant of exemption or continuance thereof, such application shall be made on or before the 30th day of September of the relevant assessment year from which the exemption is sought : Provided also that any anonymous donation referred to in section 115BBC on which tax is payable in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 months and is to be rejected notwithstanding the fact that the Gujarat High Court in Society for Promotion of Education, Allahabad Vs CIT 372 ITR 222 and its affirmation by the Hon ble Supreme Court. 34. The said decision was rendered in the context of Section 12AA (2) of the Income Tax Act, 1961 in Society for Promotion of Education, Allahabad Vs CIT 372 ITR 222. 35. Though the said decision has been upheld by the Hon'ble Supreme Court in CIT Vs Society for Promotion of Education, Allahabad [2016] 382 ITR 6, it has to be noted that the attention of the Hon'ble Supreme Court was not drawn to the reference made to the Full Bench of the Allahabad High Court wherein the ratio of the Allahabad High Court in Society for Promotion of Education, Allahabad Vs CIT 372 ITR 222 was doubted. 36. The attention of the Hon ble Supreme Court was also not brought to the contra view of the Allahabad High Court in Commissioner of Income Tax VsMuzfar Nagar Development Authority, [2015] 372 ITR 209 on a reference from a Full Bench of the Allahabad High Court, wherein it has answered as follows:- i. Non disposal of an application for registration, by granting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 10 (23C)(vi) of the Income Tax Act, 1961 merely prescribes a period of 12 months within which an order granting or rejecting application for approval shall be passed by the prescribed authority. 40. Section 12 AA (2) of the Income Tax Act, 1961 prescribes a maximum period of six months for considering application. Both the provisions merely prescribes the period within which these application for registration/recognition/approvals have to be considered and disposed. 41. Concept of deemed registration or recognition is absent in both these provision unlike in some of the other statutory enactments and the rules made thereunder. For instances, under Rule 174 of erstwhile Central Excise Rules, 1944 as it stood prior to Central Excise Rules, 2002, there was a concept of deemed registration. If an application for registration of a factory was not considered by the jurisdictional authority within a period of sixty days, registration was deemed to have been granted 42. A similar provision for a deemed registration is available under Rule 9(5)b) of the respective Goods and Service Tax Rule 2017. Rule 9(5)(b) of the Central Goods Service Tax Rules, 2017 which is parimateria wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitution is fulfilled that the question of compliance with requirements in the provisos would arise. We find merit in the contention advanced on behalf of the appellant that the third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval. 48. The Court in Para 51 further held as under:- 51. For the sake of clarity, we may reiterate that items such as application of income or accumulation of income or investment in specified assets indicated in clauses (a) and (b) in the third proviso are a part of compliance/monitoring conditions. As stated, however, there is a difference between application/utilisation of income and outward remittance of income out of India. As discussed above, with the insertion of the provisos in Section 10(23-C)(vi) of the 1961 Act, it is open to the PA to stipulate, while granting approval, that the approval is being given subject to utilisation/application of certain percentage of income, in the accounting sense, towards impartation of education in India. Such exerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit did not alter the charitable character of the assessee. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out a charitable purpose. 52. The Hon ble Supreme Court in Queen's Educational Society Vs CIT, (2015) 8 SCC 47 summarised the law common to Sections 10(23-C)(iii-ad) and (vi) as follows:- (1) 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. (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 maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficers or servants of Company or not, except payment of out-of-pocket expenses, reasonable and proper interest on money lent, or reasonable and proper rent on premises let to the Company . 56. Clause 51 of the Articles of Association clearly states that shareholders are not entitled to share the surplus of each year i.e., the excess of the income over the expenditure by way of dividend, bonus share. Thus, it is clear that surplus generated is not available for being declared either dividend or as a bonus share to the shareholders. Thus, there is no scope for inferring profit motive. Similarly, clause 52 which has been extracted above also indicates that there is no profit motive. 57. Clauses 55 and 56 of the Articles of Association of the petitioner do not allow an interference of profit motive. These two clauses clearly indicate that the surplus generated by the petitioner is to be ploughed back. Thus, there is no profit motive. They read as under:- WINDING UP 55. If the Company is wound up the surplus assets are more than sufficient to repay the whole of the paid-up capital the excess shall be distributed among the members in proportion to the capital paid up ..... 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