Educational institutions may take more creative steps to qualify their objectives as an “educational purpose” than objectives set out in the memorandum-High Court
ABCAUS Case Law Citation:
ABCAUS 2281 (2018) (04) HC
Important Case Laws Cited/relied upon by the parties
ACIT v. Thanthi Trust 247 ITR 785
Commissioner of Income Tax v. Gujarat Maritime Board 295 ITR 561
American Hotel & Lodging Association Educational lnstitute v. Central Board of Direct Taxes & Ors(2008) 301 ITR 86
Queens Educational Society v Commissioner of Income Tax (2015)] 372 (ITR) 699 (SC),
The assessee was aggrieved by the rejection by the DGIT of its application grant of exemption u/s , as a charitable organization.
The assessee was a society registered under the Societies Registration Act, 1860 with the Registrar of Societies. It has established 11 schools and has also permitted societies/organizations/ trusts with similar objects to open schools under the name of “Delhi Public School”, in and outside India. 120 schools were functioning under that name in and outside India as on the relevant date. The arrangement for opening schools by other societies was through execution of an “education joint venture agreement” (agreement). In terms of the agreement, the parties jointly agreed to manage the school where the Assessee had a significant say and control in the management of these schools.
The Assessee had been enjoying exemption, in respect of its income under section 10(22) of the Income Tax Act, 1961 (the Act). Section 10(22) of the Act was substituted by Section 10(23C)(vi) with effect from 1stApril, 1999 and the assessee applied requesting for approval of exemption, under Section 10(23C)(vi).
The Director of Income Tax, rejected the assessee’s application under Section 10(23C)(vi) of the Act seeking exemption, on the grounds that, inter alia, the franchisee fee received by it from the satellite schools in lieu of its name, logo and motto amounts to a “business activity” with a profit motive and certain clauses of the assessee’s Memorandum of Association were not in conformity with its objectives.
The Assessee filed the instant writ petition before the Hon’ble High Court against the rejection.
The assessee contended that even if the activity of entering into agreement were to be construed as business activity, it is incidental to the attainment of its object, and that it would be entitled to exemption under section 10(23C)(vi) of the Act. It was urged that considering that the receipts from such activity were ploughed back for pursuing the objects of the Assessee which entitled it to claim the exemption.
As regard to the maintenance of separate books of account as required by Section 10(2)(vi)), it was submitted that this was duly 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 provide services were duly accounted for and incorporated. Therefore, the statutory requirements were fulfilled. It was urged that in assessment proceedings 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. Thus, the Assessee contended, there was sufficient compliance with the meaning of section 11(4A) of the Act. Similarly, it was submitted that clauses of the memorandum of association, which were alleged to not be in conformity with the objects of the Assessee, were undertaken in furtherance of DPS Society’s objectives.
It was also 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 ignored. The underlying purpose was education and to improve its quality in schools that were not managed by the society. This assured the students and those availing of education provided by those schools, the same standard and quality or excellence assured in DPS schools, which did not merely represent “brand” value, but were known for the level of educational attainment of their pupils. Aware of that aspirational value, the DPS society entered into agreements whereby their teachers and education administrators trained teachers in the satellite schools and their management about the DPS methods. The services provided therefore, had a direct nexus with education and fell within the dominant purpose of the DPS society’s objects.
The Hon’ble High Court observed that multitude of authorities had analyzed the exemption permitted under Section 10(23C)(vi), which broadly concluded that if the educational institution merely acquires a profit surplus from running its institution, that alone would not belie its larger education purpose.
It was noted that as following the law laid down by the Hon’ble Supreme Court, the determining test to qualify for exemption under section 10(23C)(vi), lies in the final motivation on which the institution functions, regardless of what extraneous profit it may accrue in the pursuit of the same.
The Hon’ble High Court opined that the critical test has a conspicuous qualitative value; the of the objectives of the organization are to be determined not merely by the memorandum of objectives of the institution, but, also from the design of how the profits are being directed and utilized and if such application of profits uphold the “charitable purpose” of the organization (as postulated in section 2(15) of the Act) or if the objectives are marred by a profit making motive that emerges more as a business activity rather than an educational purpose. Section 10(23C)(vi) of the Act while guiding the manner of this determination also, provides a certain amount of discretion to the authority assessing the compliance to these conditions for ascertaining whether the requirements of the provision are met with. Such scrutiny is to be carried out every year, irrespective of any preceding pattern in the assessment of the previous years.
The Hon’ble High Court found that assertions of the DGIT that the Assessee was carrying out a business activity and no separate books of accounts were maintained was not substantiated. The memorandum of association and the joint venture agreements with the satellite schools validated the motive of an educational purpose. 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 schools themselves. This, reaffirmed the Assessee’s argument that the usage of the gains arising out of its agreements were incidental to its educational purpose outlined by its objective of the Assessee.
The Hon’ble High Court observed that the DGIT by a notification, under section 10(23C)(vi) had issued certain conditions which were also duly fulfilled by the Assessee as under:
| Sl. No. | Condition | Compliance |
| 1. |
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. |
| 2. |
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 |
| 3. |
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 furtherance of this object that the society had been and is assisting the other schools to set up their institutions to be run on the model of the schools run by the society. Imparting of education is not the business of the society. What the society receives is towards reimbursement of its expenses from such schools to whom the assistance has been given. This does not remotely amount to profit motive of the society. No members of the society get any monetary benefit from the society |
| 4. | The assesse will regularly file its Return of Income before the Income Tax Authority in accordance with the provisions of the Income Tax Act, 1961 | The society had been filing its return of income regularly since inception and continues to file its return and has filed its returns upto and including A. Y. 2007- 08 |
| 5. | That in the event of dissolution, its surplus and the assets will be given to charitable organization with similar objective and no part of the same will to any of the trusts of The Delhi Public School Society, DPS Staff Flats, F Block, East of Kailash, New Delhi. | Though there is no possibility of the dissolution of the society, however, in the event of dissolution, the funds will be given to charitable organization(s) with similar objective and no part of the same will be distributed to any of the trustees. |
In view of the above, the Hon’ble High Court concluded that the assessee fulfilled the requirements under section 10(23C)(vi) of the Act to qualify for exemption; DPS Society is maintaining its eleven schools and the 120 satellite schools in furtherance of the education joint venture agreements with an educational purpose that also qualifies as a “charitable purpose” within the meaning of section 2(15) of the Act and was not in contravention of section 11(4A) of the Act.
The Hon’ble High Court added that 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.
