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Madhya Pradesh High Court · body

2011 DIGILAW 400 (MP)

Little Angels Shiksha Samiti v. Union Of India

2011-03-30

B.K.DUBE, S.K.GANGELE

body2011
Judgment Gangele, J. ( 1. ) THE petitioners have filed this petition against the order Annexure-P/1, dated 18-2-2008, by which the application of the petitioners filed under Section 10(23C)(vi) of the Income Tax Act, 1961 has been rejected. ( 2. ) THE petitioner-society is a society registered with the Registrar of Firms and Societies under the M.P. Society Registration Act, 1973. It has been running a school named as Little Angles High School at Gudi Guda Ka Naka, Gwalior. As per the society, its sole activity is running a school named as Little Angels High School. THE school has been providing education to the children upto 12th standard. THE education institutions were granted exemption under Section 10(22) of the Income Tax Act, 1961 (here in after referred to as the 'Act of 1961'). On 1-4-1999, Section 10(22) of the Act of 1961 was omitted and it was replaced by Section 10(23C) which contains exemption provisions for educational institutions were not required to file return of the income upto the assessment year 2002-2003. With effect from 1-4-2003, it was made mandatory to file return for educational institutions where aggregate annual receipts exceeds Rs.1 crore in accordance with Section 139 (4C) of the Act of 1961. As per the society it had been filing returns voluntarily and in the year 2004-2005 and 2005-2006, the annual receipts of the petitioners-society were exceeded of Rs.1 Crore, hence, the application for exemption was filed and the exemption was granted. The petitioner No.1 filed an application seeking exemption under Section 10 (23C)(vi) of the Act of 1961 for the assessment year of 2007-2008 accounting period 1-4-2006 to 31-3-2007. The Chief Commissioner of Income Tax vide letter dated 7-2-2008 sought certain clarifications from the petitioner No.1-society in regard to exemption. It has been mentioned in the tetter that two objects of the society, namely, " *********** appear to be non-educational and they are independent to other objects of the society, hence, the petitioner- society was directed to explain its claim to the effect that the society exists solely for educational purposes. It has been mentioned in the tetter that two objects of the society, namely, " *********** appear to be non-educational and they are independent to other objects of the society, hence, the petitioner- society was directed to explain its claim to the effect that the society exists solely for educational purposes. The petitioner-society submitted its reply on 12-2-2008, which has been filed as Annexure-P/7 along with the petition, and mentioned that the society was not engaged in any business activity except providing education to the children and it had not advanced any loan or advance to the members of office bearers of the society during the year 2007-2008. It has further been stated that on 26-3-2007 the object clause of the society had been amended by deleting sub-clause 3 (c) and 3 (d). Thereafter vide impugned order Annexure-P/1, dated 18-2-2008, the application of the petitioners-society has been rejected. ( 3. ) THE respondents in the return have contended that the order passed by the authority is in accordance with law. From the objects of the petitioner- society specially objects No. (c) and (d) after scrutiny were found contrary to educational purposes. It has further been contended by the respondents that as per Section 10(23C) (vi) of the Act 1961, the educational institution has to fulfill the conditions that the educational institution exists solely for education purpose and it does not exist for the purpose of profit. While considering the object clause of the petitioner-society, the authority came to the conclusion that petitioner-society does not exist solely for educational purpose, hence, the authority has rejected the application of petitioner-society. ( 4. ) LEARNED Senior Counsel appearing on behalf of the petitioners has contended that the impugned order passed by the authority is against the law and against the provisions of Section 23(c) of the Act of 1961. It has further been submitted that the objects mentioned in the memorandum of association of the society are correlated with the education and the petitioner- society exists solely for the purpose of education. It has not entered into any business in the relevant period, neither it diversified its fund for any other purposes. LEARNED counsel further contended that the application of the petitioner-society has been rejected at threshold without considering the activities of the society. It has not entered into any business in the relevant period, neither it diversified its fund for any other purposes. LEARNED counsel further contended that the application of the petitioner-society has been rejected at threshold without considering the activities of the society. LEARNED counsel further submitted that for the previous year specially 2003-2004 to 2005-2006, the application of the petitioner- society was accepted and the petitioner was granted exemption, however, for the accounting period i.e. 1-4-2006 to 31-3-2007 on the same basis, the application has been rejected, which is against the principle of inconsistency. In support of her contentions, learned Senior Counsel relied on the following judgments :- i) (1999) 7 SCC 120 (Dr. Preeti Shrivastava and Anr. Vs. State of M.P.); ii) (2008) 10 SCC 509 (American Hotel and Lodging Association Educational Institute Vs. Central Board of Direct Taxes and Ors.); iii) (19920 193 ITR 321 (M/s Radhasoami Satsang Vs. CIT); iv) (2008) 300 ITR 75 (Delhi) (Director of Income Tax (Exemptions) Escorts Cardiac Disease Hospital Society); and v) (1980) 2 SCC 31 (Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association). Contrary to this, learned Senior Counsel appearing on behalf of the respondents No.2 and 3/Department has contended that the objects particularly c and d of the petitioner society are contrary to the object of the educational purpose and as per the provisions of Section 10(23C) (vi) of the Act of 1961, it is obligatory on the part of the authority to examine the record and object of the society and the authority has objectively examined the objects and came to the conclusion that the petitioner-society does not exist solely for educational purpose, hence, the application has rightly been rejected and there is no illegality in the impugned order. In support of his contentions, learned Senior Counsel relied on the following judgments :- i) (1976) 1 SCC 254 [(1975) 101 ITR .234 (SC)] (Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore); and ii) (1987) 65 CTR (Raj) 46 (Commissioner of Income Tax Vs. Maharaja Sawai Mansinghji Museum Trust) ( 5. ) EXEMPTIONS were granted to educational institutions under Section 10(20) of the Act of 1961. Section 10(20) stood omitted by the Finance Act (No.2), 1998 w.e.f. 1-4-1999 and it was replaced by Section 10(23C), which contains exemption provisions for educational institutions. Maharaja Sawai Mansinghji Museum Trust) ( 5. ) EXEMPTIONS were granted to educational institutions under Section 10(20) of the Act of 1961. Section 10(20) stood omitted by the Finance Act (No.2), 1998 w.e.f. 1-4-1999 and it was replaced by Section 10(23C), which contains exemption provisions for educational institutions. By Section 139(4C) w.e.f. 1-4-2003, it was made mandatory to file returns for educational institutions, where the aggregate annual receipts exceeded Rs.1 Crore. The petitioner-society applied for approval before the prescribed authority in terms of Section 10(23C)(vi) of the Act of 1961 and that application has been rejected by the prescribed authority on the ground that the petitioner-society does not exist solely for educational purpose. The relevant provisions of Section 10(23C)(vi) is as under :- "10. Incomes not included in total income.? In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included? (23-C) any income received by any person on behalf of? (i)-(v) * * * (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iii-ab) or sub-clause (iii-ad) and which may be approved by the prescribed authority; or" ( 6. ) THE aforesaid provision has been interpreted by the Hon'ble Supreme Court in the case of American Hotel and Lodging Association Educational Institute Vs. Central Board of Direct Taxes and others, reported in (2008) 10 SCC 509 , has held as under :- "34. At the outset, we need to examine the scope of Section 10(22), which is the predecessor of Section 10(23-C)(vi), without the provisos. 35. Actual existence of the educational institution was the precondition of the application for initial approval under Section 10(22). On grant of approval under Section 10(22), Sections 11 and 13 did not apply. Therefore, earlier prior to 1-4-1999 when exemption was given to the appellant, there was no assessment nor demand. Section 10(22) had an automatic effect. Once an applicant institution came within the phrase "exists solely for educational purposes and not for profit" no other conditions like application of income were required to be complied with. THE prescribed authority was only required to examine the nature, activities and genuineness of the institution. THE above phrase was the only requirement for initial approval. Once an applicant institution came within the phrase "exists solely for educational purposes and not for profit" no other conditions like application of income were required to be complied with. THE prescribed authority was only required to examine the nature, activities and genuineness of the institution. THE above phrase was the only requirement for initial approval. THE mere existence of profit/surplus did not disqualify the institution if the sole purpose of its existence was not profit-making but educational activities as Section 10(22) by its very nature contemplated income of such institution to be exempted. Under Section 10(22) the test was restricted to the character of the recipient of income viz. Whether it had the character of educational institution in India, its character outside India was irrelevant for deciding whether its income would be exempt under Section 10(22). 36. THE moot question in Section 10(22) was whether the activities of the applicant came within the definition of "income of educational institution". Under Section 10(22) one had to closely analyse the activities of the institute, the objects of the institute and its source of income and its utilisation. Even if one of the objects enabled the institute to undertake commercial activity, the institute would not be entitled to approval under Section 10(22). THE said section inter alia excludes the income of the educational institute from the total income. 37. In CIT v. Surat Art Silk Cloth Manufacturers' Assn. it has been held by this Court that test of predominant object of the activity is to be seen whether it exists solely for education and not to earn profit. However, the purpose would not lose its character merely because some profit arises from the activity. That, it is not possible to carry on educational activity in such a way that the expenditure exactly balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realisation but would reflect unsound principles of management. 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 the balance of income is applied wholly and exclusively to the objects for which the applicant is established. 38. 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 the balance of income is applied wholly and exclusively to the objects for which the applicant is established. 38. In deciding the character of the recipient, it is not necessary to look at the profits of each year, but to consider the nature of the activities undertaken in India. If the Indian activity has no correlation with education, exemption has to be denied (see judgment of this Court in Oxford University Press). Therefore, the character of the recipient of income must have character of educational institution in India to be ascertained from the nature of the activities. If after meeting expenditure, surplus remains incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes. In other words, existence of surplus from the activity will not mean absence of educational purpose (see judgment of this Court in Aditanar Educational Institution v. CIT). THE test is ?the nature of activity. If the activity like running a printing press takes place it is not educational. But whether the income/profit has been applied for non-educational purpose has to be decided only at the end of the financial year. 39. In Oxford University Press this Court found that the applicant was a branch of Oxford Press which was part of Oxford University but its activity in India was restricted to publishing books, journals, periodicals, etc. THE Tribunal held that because Oxford Press is part of the university its income was exempt under Section 10(22) as it stood at the relevant time. It is in this context that the words "existing solely for educational purposes and not for the purposes of profit" in Section 10(22), which words also find place in Section 10(23-C) (vi), came for consideration. This Court held that location of the university is not relevant, what is relevant is ? whether there is imparting of education in India. Therefore, the test formulated by this Court to decide the character of the recipient of income under Section 10(22) is whether there is in fact existence of an activity which is in the nature of "imparting of education in India". whether there is imparting of education in India. Therefore, the test formulated by this Court to decide the character of the recipient of income under Section 10(22) is whether there is in fact existence of an activity which is in the nature of "imparting of education in India". This is how the words "in India" have come into judgment and not by incorporation from Section 11(1)(a) of the 1961 Act, as contended on behalf of the Department. 40. We shall now consider the effect of insertion of provisos to Section 10(23-C)(vi) vide the Finance (No.2) Act, 1998. Section 10(23- C) (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 (23-C) (vi). THE problem arises with the insertion of the provisos to Section 10(23-C)(vi). With the insertion of the provisos to Section 10 (23-C) (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 approval from the PA, in terms of Section 10(23-C)(vi) by making an application in the standardised form as mentioned in the first proviso to that section. That condition of obtaining approval from the PA 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 provisions. With the insertion of the first proviso, the PA is required to vet the application. This vetting process is stipulated by the second proviso. 41. It is important to note that the second proviso also indicates the powers and duties of the PA. While considering the approval application in the second proviso, the PA 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 PA. Under the third proviso, the PA 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. 42. Earlier that power was not there with the PA. Under the third proviso, the PA 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. 42. Under the twelfth proviso, the PA 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 12-AA 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 of fund or educational institution is established. THE idea underlying the twelfth proviso is to provide guidance to the PA 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 Hon'ble Supreme Court further in the case of Sole Trustee, Loka Shikshana Trust Vs. Commissioner of Income-Tax, Mysore, reported in (1975) 101 ITR 234, has held as under in regard to the word "education" used under Section 2(15) of the Act of 1961 :- "The sense in which the word "education" has been used in section 2(15) in the systematic instruction, schooling or training given to the young is preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word "education" has not been used in that wide and extended sense, accordingly to which every acquisition of further knowledge constitutes education. According to this wide and extended sense, travelling is education, because as a result of travelling you acquire fresh knowledge. Likewise, if you read newspapers and magazines, see pictures, visit art galleries, museums and zoos, you thereby add to your knowledge. Again, when you grow up and have dealings with other people, some of whom are not straight, you learn by experience and thus add to you knowledge of the ways of the world. I you are not careful, your wallet is liable to be stolen or you are liable to be cheated by some unscrupulous person. Again, when you grow up and have dealings with other people, some of whom are not straight, you learn by experience and thus add to you knowledge of the ways of the world. I you are not careful, your wallet is liable to be stolen or you are liable to be cheated by some unscrupulous person. The thief who removes your wallet and the swindler who cheats you teach you a lesson and in the process make you wiser though poorer. If you visit a night club, you get acquainted with and add to your knowledge about some of the not much revealed realities and mysteries of life. All this in a way is education in the great school of life. But that is not the sense in which the word education" is Used in clause (15) of section 2. What education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by normal schooling" ( 7. ) FROM the aforesaid judgment of the Hon'ble Supreme Court, the word "education" used in Clause 15 of Section 2 of the Act of 1961 means the process of training and developing the knowledge, skill, mind and character of the students by normal schooling. In our opinion, the aforesaid meaning of the word "education", the educational purposes mentioned in Section 10(23C)(vi) of the Act of 1961 can be applied. Following were the objects of the petitioner-institution at the time of submissions of the application. The Hindi and English translation both are as under :- The English translation of all the objects of the Petitioner institution are as under :- "a) establishment of a School in Gwalior for the intellectual development of the children; b) to conduct the classes and activities for all the levels of study and education in Gwalior; c) To manage/maintain a library, reading room, and conduct classes of stitching, embroidery, weaving, centre for adult education and education in the field of entertainment arts etc. d) To make necessary arrangements for the over all development and growth of children when required." ( 8. d) To make necessary arrangements for the over all development and growth of children when required." ( 8. ) THE authority in its impugned order has held that the clause (c) and (d) of the objects of the institution are non educational in nature and the society can apply its income to any of the objects mentioned in the memorandum in its discretion, hence, the society is not existing solely for education purpose. Clause (c) of the objects is to manage and maintain a library, reading room and conduct classes of stitching, embroidery, weaving and schooling, adult education and education in the field of entertainment arts. THE petitioner-society has filed the instructions issued by the Board of Secondary Education in regard to practical examinations for home science and in the aforesaid instructions, stitching, embroidery, weaving subjects have been mentioned. THE adult education is also a part of education. If the petitioner society introduced the aforesaid object, in our opinion, it cannot be said that the object of the petitioner society was not of educational purpose. Clause (d) of the object is to make necessary arrangement for the complete development of the children. This object is also in consonance with the modern concept of education because the education is not only to impart education through book reading, it also includes sports activities and other recreational activities, dance, theater and even though having education tour within the country and abroad, so the children can develop their overall talent. It cannot be said that the object is not for educational purpose. Apart from this, from the audited accounts of the society, it is clear that the petitioner society has not used the amount and income for any other business activities. In such circumstances, rejecting the application of the petitioner society at threshold is arbitrary and illegal. It is also a fact that for prior two years, the petitioner society was granted exemption and after the year 2006-2007, the petitioner-society has deleted the clause (c) and (d) in its memorandum of association. In such circumstances, in our opinion, the order passed by the authority is illegal and against the provisions of Section 10(23C)(vi) of the Act 1961. ( 9. ) CONSEQUENTLY, the petition of the petitioners is allowed. The impugned order Annexure-P/1, dated 18-2-2008 is hereby quashed. In such circumstances, in our opinion, the order passed by the authority is illegal and against the provisions of Section 10(23C)(vi) of the Act 1961. ( 9. ) CONSEQUENTLY, the petition of the petitioners is allowed. The impugned order Annexure-P/1, dated 18-2-2008 is hereby quashed. The application filed by the petitioner for grant of approval under Section 10(23C)(vi) of the Act of 1961 is hereby accepted. ( 10. ) LOOKING to the facts of the case, there shall be no order as to costs.