In a recent case Writ Tax no. 2053 of 2009   involving denial of registration of a society under section 10(23C)(vi) of Income Tax Act, 1961, Hon’ble Allahabad High Court has held that Merely because there were other objects of the society, it does not mean that the educational institution is not existing solely for educational purpose . The Court also reiterated the Hon’ble Supreme Court in that the prescribed authority is only required to examine the objects of the applicant as "exists solely for the educational purpose and not for profit" and other conditions like application of income is not to be examined at this stage.

Facts of the case:
Here, the petitioner, Allahabad Young Mens Christian Association   opposed the order of Chief Commissioner (CCIT) of Allahabad refusing registration of the society under section 10(23C)(vi) of the Income Tax Act. The petitioner had made an application in Form 56D read with Rule 2CA of the Income Tax Rules before the CCIT for exemption under Section 10(23C)(vi) alongwith copy of the Memorandum of Association, audit report, and other required documents. The petitioner was fulfilling all the requirements, and necessary documents were submitted, but CCIT had refused the exemption for the Assessment Year 2008-09 and onwards though, the registration was granted under Section 12AA vide letter dated 25.09.2008 w.e.f. 1.4.2007.

The Income Tax Department justified the impugned order by pointing out various discrepancies like the petitioner had given loan to its employees, which was not fulfilling the objects and many of these expenses were not for the purpose of the education, even though they might have served some other social objects. Surplus income shown by the petitioner was increasing and using for activities which were aimed at enhancing the income of the institution. The fee charged from the students was on a higher side and, in each year, there as an element of profit and thus the petitioner society was not existing solely for educational purpose and its main motive was to make the profit by charging higher fee from the students.  

The main issue before the Hon’ble Court was whether the assessee society was engaged in charitable/educational activities or not.

The Court deliberated over the question as above before it in detail and set aside the order of CCIT denying the approval with direction to the competent authority (CCIT) to reconsider the application denovo for exemption under Section 10(23C) (vi) for the Assessment Year 2008-09 and onwards strictly on merit.

The important excerpts of the judgment are as under:

……in the case of Director of Income Tax (Exemption) vs. Eternal Science of Man's Society (2007) 290 ITR 535 (Delhi), where it was held that:
"Accumulation of income is permissible for a plurality of purpose. The respondent-trust had accumulated its income for six different purposes. There was no controversy about five of the said objects being charitable in character. The criticism about the sixth object was that it permitted acquisition of property whether movable or otherwise for the achievement of other objects for which the trust/society had been established. The trust in question had been established in terms of a memorandum. It was not the case of the Revenue that any one of the objects out of the 22 objects enumerated therein was not a charitable object. If that be so, clause (f) permitting acquisition of movable or immovable property for achievement of one of those purposes would necessarily imply that the property was acquired for one of the charitable purpose stipulated in the memorandum."

In American Hotel & Lodging Association, Educational Institute vs. CBDT 2008 (301) ITR 86 SC, the Supreme Court analysed the provision and found that the second proviso lays down the powers and duties of the prescribed authority for vetting an application for approval and that the prescribed authority was empowered to call for the documents including annual accounts or information to check the genuineness of the activities of the institution. Under the third proviso, the prescribed authority, while judging the genuineness of the activities of the applicant was required to ascertain whether the applicant applies its income wholly and exclusively for the objects for which it was constituted or established. The Supreme Court held that there was a difference between stipulation of the conditions and compliance therewith. The threshold conditions are the actual existence of an educational institution and approval of the prescribed authority It is only if the pre-conditions of the actual existence of an educational institution is fulfilled that the question of compliance with the stipulations set out in the provisos would arise. The Supreme Court held:-  
"We shall now consider the effect of insertion of provisos to Section 10(23C)(vi) vide Finance Act, 1998. Section 10(23C)(vi) is analogous to Section 10(22). To that extent, the judgments of this Court as applicable to Section 10(22) would equally apply to Section 10(23C)(vi). The problem arises with the insertion of the provisos to Section 10(23C)(vi). With the insertion of the provisos to Section 10(23C)(vi) the applicant who seeks approval has not only to show that it is an institution existing solely for educational purposes [which was also the requirement under Section 10 (22)] but it has now to obtain initial approval from the prescribed authority, in terms of Section 10(23C)(vi) by making an application in the standardized form as mentioned in the first proviso to that section. That condition of obtaining approval from the prescribed authority came to be inserted because Section 10(22) was abused by some educational institutions/universities. This proviso was inserted along with other provisos because there was no monitoring mechanism to check abuse of exemption provision. With the insertion of the first proviso, the prescribed authority is required to vet the application. This vetting process is stipulated by the second proviso. It is important to note that the second proviso also indicates the powers and duties of the prescribed authority. While considering the approval application in the second proviso, the prescribed authority is empowered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the applicant institution. Earlier that power was not there with the prescribed authority. Under the third proviso, the prescribed authority has to ascertain while judging the genuineness of the activities of the applicant institution as to whether the applicant applies its income wholly and exclusively to the objects for which it is constituted/established. Under the twelfth proviso, the prescribed authority is required to examine cases where an applicant does not apply its income during the year of receipt and accumulates it but makes payment therefrom to any trust or institution registered under section 12AA or to any fund or trust or institution or university or other educational institution and to that extent the proviso states that such payment shall not be treated as application of income to the objects for which such trust or fund or educational institution is established. The idea underlying the twelfth proviso is to provide guidance to the prescribed authority as to the meaning of the words "application of income to the objects for which the institution is established". Therefore, the twelfth proviso is the matter of detail. The most relevant proviso for deciding this appeal is the thirteenth proviso. Under that proviso, the circumstances are given under which the prescribed authority is empowered to withdraw the approval earlier granted. Under that proviso, if the prescribed authority is satisfied that the trust, fund, university or other educational institution etc. has not applied its income in accordance with the third proviso or if it finds that such institution, trust or fund etc. has not invested/deposited its funds in accordance with the third 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 complying with the procedure mentioned therein."  

In the instant case, it is not disputed that the petitioner society is running an educational institution. Merely because there are other objects of the society does not mean that the educational institution is not existing solely for educational purpose. The emphasis of the word "solely" is in relation to the educational institution, which is running not for the purpose of making profit and is not in relation to the objects of the society.   In American Hotel & Lodging Association (supra) the authority is required to consider the nature and genuineness of the activities.

The third proviso only sets out the conditions, which must be adhered to by the institution and compliance therewith is not to be tested at the stage of approval since they require considerations of facts and findings, which takes place in future. The requirement mentioned in the third proviso can only be tested after the end of the previous year when income is ascertained and thereafter applied. Further, the Supreme Court held that the authority is only required to examine that the petitioner's institution comes within the phrase "exists solely for the educational purpose and not for profit". Other conditions like application of income is not to be examined at this stage. The authority is only required to examine the nature, activities and genuineness of the institution. The mere existence that there is some profit does not disqualify the petitioner if the sole purpose of existence was not profit making but educational activities. The authority has to find out the predominant object of the activity and see whether the institution exists solely for education and not to earn profit. Merely because some profit arises from its activity will not mean that the predominant object of the activity is to earn profit and that it is not an educational activity. In order to ascertain whether the institute is carried on with the object of making profit or not it is the duty of the prescribed authority to ascertain whether balance of income has been applied wholly and exclusively to the object for which the institution is not established and in deciding the character of the recipient it was not necessary to look at the profits of each year but to consider the nature and the activities undertaken.  

The Supreme Court held that the threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardised form in terms of the first proviso. If the prerequisite conditions of actual existence of the educational institution is fulfilled then the question of compliance with the requirements as spelt out in the other provisos would arise. At this stage, such considerations are not required.  

Download Full Text of the Judgment Click Here >>