Printing and distribution of text books is connected to education and not advancement of any other object of General Public Utility of the definition of the term charitable purpose u/s 2 (15) – Delhi High Court
ABCAUS Case Law Citation:
ABCAUS 1239 (2017) (05) HC
The Grievance:
The appellant assessee was aggrieved by the common order passed by the Income Tax Appellate Tribunal (‘ITAT’) confirming the order of the Assessing Officer (‘AO’)disallowing the benefit of exemption u/s 11 of the Income tax Act, 1961 (‘the Act’) to the assessee.
The Question framed for determination:
(i) Whether ITAT was correct in law and on facts in setting aside the order passed by CIT (A) and thereby denying exemption to the Assessee under Sections 11 and 12 of the Income Tax Act?
(ii) Whether the ITAT was correct in law and on facts in holding that the activities carried out by the Assessee fall under the 4th limb i.e., “the advancement of any other object of General Public Utility” of the definition of the term “charitable purpose” under Section 2 (15) of the Act and not under the 2nd limb “education”?
(iii) Whether ITAT could re-examine the issue already decided by it vide order dated 30.09.1980 in favour of the Assessee for AY 1975- 76 and 1976-77, without referring the same to the large Bench particularly when there is no change in the activities carried out by the Assessee throughout these years?
Assessment Year : 2006-07, 2007-08, 2008-09 and 2009-10
Date/Month of Pronouncement: May, 2017
Important Case Laws Cited relied upon:
Sole Trustee Loka Shikshana Trust v. Commissioner of Income Tax ; ACIT v. Surat City Gymkhana (2008) 300 ITR 214 (SC) ; ACIT v. Surat Art Silk Cloth Manufacturers Association (1980) 2 SCC 31 ; Aditanar Education Institution v. ACIT (1997) 3 SCC 346 ; ACIT v. Thanthi Trust (2001) 247 ITR 785 (SC) ; Oxford University Press v. Commissioner of Income Tax (2001) 247 ITR 658 (SC) ; Nachimuthu Industrial Association v. CIT (1999) 235 ITR 190 (SC) ; Assam Text Book Production & Publication Corporation Limited v. CIT (2009) 319 ITR 317 (SC) ; CIT v. Rajasthan State Text Book Board (2000) 244 CTR 667 (Raj) ; Secondary Board of Education v. ITO (1972) 86 ITR 408 (Ori) ; Hiralal Bhagwati v. CIT (2000) 246 ITR 188 (Guj) ; Institution of Chartered Accountants of India v. Director General of Income Tax (Exemptions) (2012) 347 ITR 99 (Del) ; Parashuram Pottery Works Ltd. v. Income Tax Officer (1977) 106 ITR 1 (SC)
Brief Facts of the Case:
The appellant assessee was a society registered under the Societies Registration Act, 1860 since 1970. It was set up by the Government to ensure timely supply of prescribed text books at fair prices to school students and to improve the quality of primary and secondary school education in schools.
The assessee was engaged in printing and publication of text books for Class I to VIII of Government Schools, Municipal Corporation of Delhi (‘MCD’) schools, New Delhi Municipal Council (‘NDMC’) Schools and Delhi Cantonment Schools. The books were provided at subsidized rates by the Assessee. There was nominal profit to school students and wholesale dealers. The Assessee was also distributing free books, reading material and school bags to needy students.
The Assessee was attached to the Directorate of Education, GNCTD. Its activities are administered by the Board of Directors (‘BoD’) comprising of seven officers of the Directorate of Education in an ex-officio capacity and two members nominated by the Lieutenant Governor of Delhi. The Director of Education was the Chairman of the Assessee Society.
The Assessee was registered as charitable under Section 12A(a) of the Act since 1973 and continuously from AY 1971-72 to AY 2005-06 the assessee enjoyed the benefit of exemption.
However, for AY 2006-07, the AO called upon the Assessee to explain why the activity of publication and sale/purchase of books should not be treated as business activity. Secondly, the assessee was asked whether it was maintaining books of accounts as mandated by Section 11(4A) of the Act. The approach of the AO was to consider the Assessee as a ‘General Public Utility.’ Referring to the decision of the Supreme Court, the AO observed that since the assessee was earning huge profit margins of about 35.15%, the activity of publication and sale of books could not be said to be a ‘charitable activity’. Accordingly, the AO treated the income from the sale and publication of books as taxable for each of the AYs in question.
Aggrieved by the above order, the assessee filed appeals before the CIT (A) who reversed the AO‟s decision.
However, for the subsequent AYs, the AO continued to deny the exemption The CIT(A) by the corresponding orders allowed the assessee’s appeals and restored the exemption.
Aggrieved by the above orders of the CIT (A), the Revenue went in appeal before the ITAT which by a common order allowed the appeals of the Revenue by denying exemption to the assessee. ITAT held that activity of the Assessee was prima facie in the nature of a business activity of sale and purchase of books. The books had been sold at a huge profit margin about 40% which showed that the Assessee was engaged in the activities of earning profit. Also, it observed that the Assessee had made accumulation in excess and “without specifying any purpose” and “was not wholly for the charitable purpose. Accordingly, it was held that the activities of the Assessee society are in the nature of business and not charitable purpose.
Contentions of the appellant Assessee:
It was contended that the assessee’s income was derived from activity that constituted ‘charitable purpose’ which included ‘education’. It was submitted that the ITAT had erred in affirming the view of the AO that the income was from ’trade, commerce or business’ and therefore, within the ambit of ‘general public utility’.
It was submitted that once the registration of a trust under Section 12A of the Act is given, the AO could not thereafter make a further probe into the purposes of the entity.
Also, that the rule of consistency should also apply as from AY 1974-75 till 2005-06, exemption had been granted to the Appellant and with absolutely no change of circumstances there was no occasion for a different approach to be taken for the AYs in question.
Observations made by the High Court:
Whether printing and distribution of text books amounted to ‘education’?
The Court first considered the question of the interpretation placed on the word “education‟ as occurring in Section 2(15) of the Act. It was observed that the exclusive activity of the assessee was the publication and printing of text books and their distribution to Government schools and schools of the MCD, NDMC, etc. This activity had continued uninterruptedly since the time of its inception, i.e., from AY 1971-72 onwards. The fact that the assessee was a non-profit organisation was not in dispute. Its essential activities were administered by the BODs comprising of officers of the Government of India as well as GNCTD, in its ex officio capacity. The textbooks are provided by the Assessee to the students at subsidized rates. Even the textbooks books, reading materials and school bags were being distributed free to deserving students. The essential activity of the Assessee was connected with „education‟ and nothing else.
Hon’ble Delhi High Court opined that the preparation and distribution of text books certainly contributes to the process of training and development of the mind and the character of students. There does not have to be a physical school for an institution to be eligible for exemption. What is important is the activity. It has to be intrinsically connected to ‘education’.
Referring to the Hon’ble Supreme Court judgment, the Court observed that the in the said case where facts were quite identical, the Apex Court disagreeing with the High Court held that the aim of the assessee was to implement the State’s policy on education.
Hon’ble Delhi High Court took note of the following views expressed by the Hon’ble Supreme Court and High Courts:
Rajasthan High Court in Rajasthan State Text Book Board Concurred by Supreme Court in Assam State Text Book ….
“It is not disputed before us that the aims and objects of the Tamil Nadu Text Book Society and those of the Respondent-Assessee are almost identical. It is also not shown to us that the surplus amount, if any, of the Respondent-Assessee, is used for any other purpose or distributed to other members. The Commissioner of Income-tax (Appeals) as well as the Tribunal have noticed that even if some amount remains surplus, that is utilised only for the purposes of education. Thus, having regard to the concurrent findings of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal and also taking note of the letter of the Central Board of Direct Taxes itself, it is not possible for us to say that the order of the Tribunal is erroneous in any way. In this way, no question of law arises for consideration much less a substantial question of law.”
Supreme Court in Assam State Text Book Production and Publication Corporation Limited
“Following the judgement of the Rajasthan High Court, we are of the view that, in this case, the High Court, in its impugned judgement, has not considered the historical background in which the Corporation came to be constituted; secondly, the High Court ought to have considered the source of funding, the share-holding pattern and aspects, such as return on Investment; thirdly, it has not considered the letters issued by C.B.D.T. which are referred to in the judgement of the Rajasthan High Court granting benefit of exemption to various Board/Societies in the country under Section 10(22) of the Act; fourthly, it has failed to consider the judgements mentioned hereinabove; and lastly, it has failed to consider the letter of the Central Government dated 9th July, 1973, to the effect that all Statecontrolled Educational Committee(s)/Board(s) have been constituted to implement the educational policy of the State(s); consequently, they should be treated as educational institution.”
Institute of Chartered Accountants of India v. DGIT – Delhi High Court
“…….whether the Petitioner-Institute could be denied exemption in view of the proviso to Section 2 (15) of the Act since it was engaged in activity of „advancement of any other object of general public utility.‟ Although the Court held that the Petitioner could not be recognized as an educational institute, it accepted the plea that the Petitioner there was engaged in advancement of any other object of the general public utility. The Court concluded that merely because there was profit generated as a result of the activity it could not be concluded that the „institute‟ should be disentitled to exemption. It was held that “a very narrow view had been taken that the Institute was holding coaching classes and that this amounted to business” and that therefore, „the question whether the Institute carried on business had not been examined with proper perspective.”
CIT vs . M.P. Rajya Pathya Pustak Nigam- Madhya Pradesh High Court
“From a perusal of the aforesaid decisions, it is lucid that for the entitlement for getting exemption for the assessment year, it is required to see the activities of the Assessee. That is the acid test. If the income/profit is applied for non-educational purposes, it is decided only at the end of the financial year. It is to be seen whether the Assessee is engaged in any kind of educational activities. The authorities which we have referred to above have laid down the criteria under what circumstances an Assessee can claim exemption being involved in educational purposes and how the income is spent”
Council for the Indian School Certificate Examinations v. Director General of Income-Tax (Exemptions)
“It is, therefore, clear that courts have laid emphasis on the activity undertaken, while construing or deciding whether or not a particular institution can be regarded as an educational institution. The courts have repeatedly held that the holding of classes is not mandatory for an institution to qualify and to be treated as an educational institution. If the activity undertaken and engaged is educational, it is sufficient.”
Hon’ble Delhi High Court observed that the what ITAT had held was contrary to the settled law as explained in the above decisions. The ITAT came to the erroneous conclusion that merely because the assessee had generated profits out of the activity of publishing and selling of school text books it ceased carrying on the activity of ‘education.’ The ITAT failed to address the issue in the background of the setting up of the assessee, its control and management and the sources of its income and the pattern of its expenditure. The ITAT failed to notice that the surplus amount was again ploughed back into the main activity of ‘education’. The question to be asked was whether the activity of the Assessee contributed to the training and development of the knowledge, skill, mind and character of students? The Court opined that the answer to that above question had to be, in the facts and circumstances outlined above, in the affirmative.
Consistency:
Hon’ble Delhi High Court also observed the following decisions of the Hon’ble Supreme Court and various High Courts:
Parashuram Pottery Works Ltd-Supreme Court
We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
“On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter – and if there was no change it was in support of the Assessee – we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken.”
Radhasoami Satsang Saomi Bagh v. CIT-Supreme Court (extract from Hoystead v. Commissioner of Taxation 1926 AC 155 (PC))
“Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the Plaintiff and traversable by the Defendant, has not been traversed. In that case also a Defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.”
CIT v. Excel Industries-Supreme Court
“It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the Assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sake of it.”
Held:
It was held that the ITAT was incorrect in setting aside the order passed by the CIT (A) and in denying exemption to the assessee under Section 11 and Section 12 of the Act.
It was further held that the ITAT erred in holding that the activities carried out by the assessee fell under the 4th limb of Section 2 (15) of the Act, i.e., ‘the advancement of any other object of general public utility’ and that its activities were not solely for purpose of advancement of ‘education’. Thus questions (i) (ii) and (iii) framed by the Court were answered in the negative, i.e., in favour of the assessee and against the Revenue.
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