Whether when assessee Trust exists only for medical education purpose, it loses entitlement to exemption under I-T Act once it is held that its admission procedures were not as per MCA regulations - NO: HC

THE issue before the Bench is - Whether when assessee Trust exists only for medical education purpose, it loses entitlement to exemption under I-T Act once it is held that its admission procedures were not as per MCA regulations. NO is the Bench's answer.

Facts of the case

Assessee, a public charitable educational Trust, registered under the provisions of the Rajasthan Public Trust Act, 1959, filed writ contending that the assessee Trust was established in the year 2006 solely for educational purpose and since its inception, was imparting education

in several of its institutions. It was further stated that the Trust applied for and was registered under the provisions of Section 12A(a) for availing exemption u/ss 11 and 12 thereof. The registration was granted on 13.2.2007 from the date of inception of the Trust i.e. 29.9.2006. It was then stated in the petition that on 9.1.2009, the Trust filed an application seeking exemption of its income u/s 10(23C)((vi). The application of the Trust was rejected by the order dated 27.1.2010, on the ground that the Trust was not satisfying the essential conditions for exemption u/s 10(23C). It was also pointed out in the writ petition that for the AY 2010-11 and onwards, the Trust has been granted approval u/s 10(23C)(vi). The order of rejection was challenged on several grounds. The main reason stressed for rejection was that the medical college run by the Trust was granted permission for the MBBS Medical Course with annual intake of 150 students, starting from the academic year 2008-09. Against the intake of 150 students for MBBS Course, 15% were made available for NRI / management quota, while 85% of the seats were available for open selection. The college admitted 16 students from a list prepared on the basis of private college Pre-Medical Test, 2008 held for BDS dental colleges of Rajasthan and further 101 students were admitted based on qualifying marks secured in 10+2 examination, through its own advertisement. It was pointed out that the Trust had violated the procedure of admission as laid down by the Government / Medical Council and, therefore, it had not qualified as an institute within the meaning of Section 10(23C)(vi) and (via). It was further stated that the HC held that the regulations prescribed by the Medical Council of India were mandatory and had to be complied with; and on account of violation by the Trust, the admission made against 85% seats by the college were held illegal. The Division Bench also concurred with the decision of the Single Judge and held the admissions as illegal.

It was held by the Single judge that since question of legality of the admissions made by the petitioner Trust was still a matter sub judice before the SC, of course, the Rajasthan HC has held against the petitioner Trust that such admissions were not made in accordance with law vide judgment of Single Judge as aforesaid and affirmed by the Division Bench, it cannot be said finally yet that petitioner has committed any such illegality & no such opinion could be formed by the CCIT so long as the matter was pending before the SC of India and was not decided against the petitioner Trust. Right to litigate a particular issue in the Court of Law is a legal right of any Institution or a Charitable Trust, who is seeking exemption from income tax for which sanction is required by the competent authority within the parameters like no profit motive, or object of education of the Trust etc. laid down u/s 10(23C) which are relevant and not the admission procedure undertaken by the petitioner Trust. Nexus between the profit motive and alleged illegal admission is too remote and cannot be presumed without any other adverse material on record against the assessee, for drawing such adverse inference. CCIT has denied the approval u/s 10(23C) on the basis that Trust was not satisfying essential condition for exemption u/s 10 (23C) (vi) and (via). As per the relevant clause, any income received by any person on behalf of any university or other educational purposes. Moreover, the income earned should be applied wholly and exclusively to the objects for which it is established, i.e. for educational purpose. In the institution's case, the HC had held that the admissions made for Academic Year 2008-2009 were illegal. The purpose of education would not be served, if the education was for students who had been illegally admitted. The purpose of education as contemplated in the section would be served only if the students had been legally admitted and not otherwise. The spending of funds on education of students who had been admitted illegally will not amount to application of income for the purpose of education. In the Trust's case, neither the condition regarding existence for the purpose of education nor the application of funds for the objects, were fulfilled. It was held that, if the alleged illegal admissions made by the petitioner Trust in the year 2008-09 could be a valid criteria or relevant consideration for denying approval under section 10(23C), such alleged illegal admissions continued in the subsequent years also as those students continued to be in the college for subsequent years also and the same authority on the same set of facts, once denied the approval and subsequently granted such approval for subsequent years. This incongruity in the two orders itself repels the argument of the Revenue. In the opinion of HC also, this ground alone as such could not be relevant and a valid basis for refusing the approval u/s 10(23C) to the petitioner Trust especially since the matter was still pending before the SC. Of course, the authority concerned was free to apply its mind and take into account the relevant consideration while deciding the case of petitioner Trust u/s 10(23C) as laid down in the provisions of Section 10(23C) itself and if there were other grounds made out of rejection of its case or say if SC also holds against the petitioner, the authority concerned may be justified in denying the exemption u/s 10(23C). Consequently, the writ petition was allowed.

Before HC, assailing the order so passed by the Single Judge, it was contended on behalf of Revenue that the Trust was not satisfying the essential condition for exemption u/s 10(23C)(vi) because the income received was exempted only if the institution was existing for educational purposes and as the Court had held that the admissions made for the academic year 2008-09 were illegal, CCIT was justified in rejecting the application. It was also submitted that as the issue with regard to violation by the Trust, of the admission process as laid down by the statutory body, had been held against the Trust by the Single Judge of this Court and upheld by the Division Bench, the entity which had violated the prescribed procedure of admission cannot qualify as an institution for grant of benefit of exemption. Assessee's counsel had contended that the mere fact that the Courts found some defects in the admission procedure adopted by the Trust, it cannot be a reason for the CCIT to come to a conclusion that the institution does not exist for educational purposes. It was submitted that by merely relying on the so-called defect in admission procedure in one of the institution being run by the Trust, the application could not had been rejected. It was further submitted that the judgment passed by the Division Bench was carried in appeal before the SC. In the case of Rajan Purohit Vs. Rajasthan University of Health Sciences, 7 Ors.: (2012) 10 SCC 770, SC had modified the judgment of the HC and had allowed the appeals to the extent indicated in the judgment and as such, even the basis indicated by the CCIT for rejection no longer exists as such.

Held that,

++ it would be seen that the CCIT was swayed by the fact that 'method of admission' was held illegal by this Court and, therefore, held that the institution did not qualify as an institution as envisaged in the section and as the provision was beneficial, the entity otherwise must be free of any defect. A plain reading of section 10(23C), would reveal that what is required for the purpose of seeking approval thereunder is that the University or other educational institution should exist 'solely for educational purposes and not for purposes of profit'. It is nowhere the case and / or finding of the CCIT that on account of the said defect in the admission procedure, the Trust ceased to exist solely for educational purposes and / or it existed for the purposes of profit. Further, it is not the case of the appellants that the students who were admitted were not imparted education in the college in which they were admitted and / or the admissions granted were fake or non-existent or that the income generated by admitting the said students was not used for the purpose of the Trust. The emphasis on part of the CCIT that the purpose of education would not be served if the education is for students who have been illegally admitted and the purpose of education as contemplated in the section would be served only if the students have been legally admitted and not otherwise, appears to be going beyond the requirements of the section. Of course, the requirement of an educational institution to provide admissions strictly in accordance with the prescribed rules, regulations and statute cannot be less emphasized, rather the same need to be adhered to in letter and spirit, but then, the said violation cannot lead to its losing the character as an entity existing solely for the purpose of education;

++ the SC in its judgment relating to the admissions at the college of the Trust, while partly allowing the appeal and modifying the judgment of HC, has held that there was no agreement between the College and the State Government to admit students into its MBBS course on the basis of RPMT 2008 and the finding of the HC in this regard is erroneous and the HC could not have directed the College to fill up its seats on the basis of merit of students as determined in RPMT 2008 as per the law laid down in T.M.A. Pai Foundation. Hence, the direction of the HC to fill up the seats by students selected or waitlisted in the RPMT 2008 is set aside. The admissions of 117 students to the MBBS course for the academic year 2008-2009 in the College were contrary to clause (2) of Regulation 5 of the MCI Regulations and were not within the right of the College under Article 19(1)(g) of the Constitution as explained by this Court in T.M.A. Pai Foundation and P.A. Inamdar. In exercise of our power under Article 142 of the Constitution, we direct that none of the 117 students who were otherwise eligible for admission to the MBBS course will be disturbed from pursuing their MBBS course, subject to the condition that they will each pay a sum of Rs.3 lakhs within a period of three months from today to the State Government and in the event of default, the students will not be permitted to take the final year examination and the admission of the defaulting students shall stand cancelled and the College will have no liability to repay the admission fee already paid. The amount so paid to the State Government shall be spent by the State Government for improvement of infrastructure and laboratories of the Government medical college of the State and for no other purpose. The College which was responsible for making the admissions in violation of clause (2) of Regulation 5 of the MCI Regulations will surrender 107 (117–10) MBBS seats to the State Government phase wise, not more than ten in any academic year beginning from the academic year 2012-2013 and these surrendered seats will be filled up by the students selected in RPMT or any other common entrance test conducted by the State Government of Rajasthan or its agency for admissions to the government colleges and the fees payable by the students admitted to the surrendered seats would be the same as that payable by the students of government colleges. The results of the students in the MBBS course held up on account of interim orders passed by the Court may now be published. The impugned judgment of the HC is modified accordingly and the appeals are allowed to the extent as indicated in this judgment. From the above, it is clear that the entire controversy was regarding procedure of admission and not the legality or character of the institution. In view of the above, we do not find any reason to interfere with the order passed by the Single Judge, who has left it to the CCIT to decide afresh the proceedings for assessment year 2008-09 and onwards till assessment year 2010-11 by passing fresh speaking order after affording opportunity of hearing to the petitioner-Trust. In the result, the special appeal filed by the appellants fails, and the same is, therefore, dismissed.