Tests must be applied to determine if an institution exists solely for educational purposes and not for profit. High Court remands the approval u/s 10(23C) for application of tests as laid down by the Supreme Court
ABCAUS Case Law Citation:
ABCAUS 2267 (2018) (03) HC
Important Case Laws Cited/relied upon by the parties
American Hotel and Lodging Association Educational Institute Vs. Central Board of Direct Taxes and others (2008) 10 SCC 509
Queen’s Educational Society vs. Commissioner of Income Tax (2015) 8 SCC 47
Petitioner was a registered Society, duly registered under the Societies Registration Act, 1860. As stated in the Memorandum of Association, the Society existed for educational purpose amongst other ancillary objects. It was involved in running of an educational institution for students of nursery upto Class XII, which was affiliated to the CBSC and except for the said institution. The Petitioner was not running any other educational institution or pursuing any other activity and there was no other source of receipts for the petitioner society.
The Society applied for grant of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 (the Act).
However, the Commissioner of Income Tax (CIT) rejected the Application for grant of exemption on the ground that the Society had disproportionate fee structure which was devised to earn maximum money for the purpose of expansion of the institution and the expansion of institution may not fall into the ambit of charitable activity.
The matter travelled to the High Court. The Single Judge relying upon the judgments of the Hon’ble Apex Court and various High Courts and allowed the writ petition by quashing the impugned order and directed the CIT to grant exemption for the relevant assessment year.
The Revenue filed a Special Appeal challenging the order of the Single judge.
The contention was that the application for exemption was not moved by the educational institution but the Society. It was further reiterate that the Society had various other objects i.e. Society’s objects embraced running of educational institution as only one of their objects, therefore, the benefit under Section 10 (23C)(vi) may not be available.
The Division Bench of the Hon’ble High Court expressed its disagreement with the Single Judge who straightway after quashing the order, directed grant of exemption.
The Division Bench opined that in the light of the judgment of the Hon’ble Supreme Court, the fact that imparting education results in making a profit does not lead to an inference that it becomes an activity for profit. If after meeting expenditure, a surplus arises incidentally from the activities carried out by the educational institution, it does not cease to be one existing solely for educational purposes. The final test would be 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 Division Bench noticed that after the Single Judge set aside the order of the
CIT, the tests laid down by the Supreme Court were still remaining to be applied to the facts. It was only after applying the tests laid down by the Hon’ble Apex Court that the correct position would emerge as to whether the provisions of Section 10(23C)(vi) of the Act are fulfilled or not. Therefore, the Single Judge should not have straightway granted exemption without directing reconsideration of the matter.
With respect to the contention that the
The Hon’ble High Court held that the income tax is levied on the total income of a person and we have already noticed the definition of the word ‘person’. The word ‘person’ is defined to include a juristic person. The writ petitioner was a society registered under the Societies Registration Act, which clothed it with juristic personality and, therefore, rendered it a person within the meaning of the Act.
Further, it was observed that the objects of the Society included multiple objects such as eradication of untouchability, dealing with environmental pollution, plantation, AIDS Education, achievement of communal harmony, over all local development, promotion of fruit bearing trees and plantation etc. However it was observed that it was the case for the society that the it was only running one Institution and there was no other Institution, which was being run by it and, in fact, even it had a case that there was no other activity. However, The CIT noted the different objects, which could be undertaken by the Society which included objects other than education. Thus, the CIT found that the assessee institution should exist solely for educational purpose, which was not the case of the assessee Society.
However the Hon’ble High Court opined that though under the Memorandum of objects, there were various objects, other than education. What Section 10(23C)(6) of the Act actually does contemplate is that income received by any person on behalf of the Institution, which was an educational institution and that Institution should exist solely for educational purpose and not for the purpose of profit, other than those mentioned in Clauses (iiiab) & (iiiad). It is also to be approved by the Prescribed Authority. Therefore, the requirement of law must be that the educational institution is to exist solely for educational purpose and it should not exist for the purpose of profit.
According to the Hon’ble High Court the underlying object appears to be that the words ‘existing solely’ are to be understood in the context of the words ‘not for the purpose of profit’. In other words, it is only meant for educational institutions, which exist solely for the purpose of imparting education. This is contra-distinguished from an educational institution, which exists for the purpose of making profits.
Accordingly, the Appeal was allowed partly upholding the quashing of the order, but the portion directing exemption to be granted under Section 10(23C)(vi) was set aside. The CIT was directed to consider and take a decision afresh in the light of the observations made and also the judgment of the Hon’ble Apex Court.
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