exemption - Whether the word 'aggregate annual receipts' of other educational institution is to be understood as clubbing of annual receipts of all educational institutions run by an assessee society - NO: HC

THE issues before the Bench are - Whether once an educational society has been incorporated under the Societies Registration Act, it assumes the character of a juridical person; Whether when the status of such society is described as an association of juridical person in the return of income, the question of treating the assessee as an association of persons does not arise; Whether the real test for application of exemption benefits u/s 10 is the assessee, who claiming these exemptions is running educational institutions solely for education purposes and not for purpose of profit; Whether the word “aggregate annual receipts” of other educational institution
is to be understood as clubbing of annual receipts of all educational institutions run by an assessee society and Whether such interpretation shall render the intention of the Legislature to separately treat the educational institutions wholly or substantially financed by the Government for the purpose of granting exemption as otiose. And the verdict goes in favour of the assesee.

Facts of the case

Assessee M/s. Children’s Education Society is a society registered under the Karnataka Societies Registration Act, 1960. The society was formed with the object of promoting, establishing and maintaining all types of educational institutions. The assessee society over the years has promoted several educational institutions from time to time. It is running as many as 28 educational institutions. The assessee filed the return claiming exemptions and allowances under several grounds, which were all rejected by the AO, and thereafter, confirmed by the CIT(A). On appeal, however, the Tribunal provided relief in toto to the assessee and upheld all the contentions of the assessee. Therefore, aggrieved with the orders of the Tribunal, the Revenue has filed this appeal before the High Court.

Status of artificial juridical person or association of persons

The assessee had filed returns of income claiming status of ‘artificial juridical person’. However, the assessee was assessed in the status of ‘association of persons’. The AO denied exemption u/s 10(23C) (iii)(ad) for the years from 2000-2001 to 2005-2006. The assessment order was confirmed by the CIT(A), but the Tribunal held the assessee as an association of juridical persons.

"Aggregate annual receipts" means clubbing of receipts of educational institutions

Clauses (iii)(ab), (iii)(ad) and Clause (vi) of section 10(23C) were introduced by the Finance (No.2) Act, 1998 with effect from 1.4.1999, as a substitute for Section 10(22) which was omitted by the said Act to stop the misuse of blanket exemption in respect of the educational and medical institutions. However, safeguards have been provided to ensure that the institutions genuinely serving the social cause, in either field are entitled to the existing benefit. This benefit is available only to income received by the assessee on behalf of other educational institution existing solely for educational purposes and not for the purposes of profit, provided the aggregate annual receipts of such educational institutions do not exceed the amount of annual receipts i.e., Rs 1 Crore. The AO considered the aggregate turnover of all the education institutions run by the assessee which was in excess of Rs 1 crore. However, as per the assessee, the turnover threshold had to be applied individually for each educational institution. The AO rejected this contention, however, on appeal the contention of the assessee was upheld by the Tribunal, which held that aggregate annual receipts means aggregate of each educational institution.

The Departmental Representative submitted that the ‘aggregate annual receipts’ means annual receipts of such educational institutions run by the assessee. As per the DR, in the event of an assessee running more than one educational institution and if the annual receipts exceeded more than a crore, then he has to seek approval.
On the other hand, the counsel for the assessee contended that any income received by any person on behalf of other educational institutions means the income from each of such educational institution run by the assessee. It was further submitted that since the aggregate annual receipts of such educational institution did not exceed the amount of annual receipts prescribed, namely, Rs.1 crore, the assessee was entitled to the benefit of Section 10. It was argued that the aggregate annual receipts does not mean that the annual receipts of all educational institutions have to be clubbed

Expenditure towards hostel building subsidy and notional interest

The assessee for the purpose of providing hostel facility to its students of all the educational institutions run by it, had entered into an agreement with the partners of M/s Oxford Girls Hostel. The hostel facility was to be constructed in the vicinity of the educational institutions of the assessee for the convenience of the students. Originally, it was agreed that the assessee would pay a monthly rent of Rs 21 lakhs for constructing a hostel facility of 70,000 square feet, but later this agreement was superseded by another agreement, in which it was agreed that the assessee had to pay only a reduced subsidy to the partners for providing the hostel facility. Therefore, it was contended that the said payment was to be treated as expenditure towards house building subsidy. However, both the AO and the CIT(A) rejected this contention on the ground that, subsidy was not a payment for the purposes of the object of the society, and at best, payment for acquiring enduring benefits. It was further observed that since there was no genuine motive for such large scale expenditure. Therefore, the AO treated this amount as income in the hands of the assessee.

However, on further appeal, the Tribunal held that hostel facility in close vicinity of the educational institution was an absolute necessity to ensure security of the students, especially girl students , and the subsidy given was only 35% of the total investment required to be made in the construction of the hostel facility. It was held that considering the benefits derived by the assessee-society from the said arrangement, it cannot be denied that the payment of the subsidy for running the hostel facility had resulted in furtherance of the object of the assessee-society only.

Donation received towards construction of hostel building

The assessee had received substantial amount of subsidy towards the construction of the hostel building under the head of building fund. The AO considered the same as revenue receipt and included it in the total income of the assessee society. The assessee contended that even if the addition was considered as income, that sum being an income of the society they were entitled to claim for exemption u/s 10(23C) . The AO rejected the contention and was confirmed by the CIT(A). However, the Tribunal held that the Building Fund was received specifically towards the corpus of the assessee-society for being applied in the construction of the building, the receipt is capital in nature and therefore it was credited directly to the corpus fund.

Expenditure on written down value loss of building

The assessee had claimed an extent of Rs. 2,63,73,226 on account of write off the lease hold properties. The assessee contend that the said amount represented application of the income of the assessee-society for educational purpose, and since the depreciation was allowed in respect of the said building as per section 32, the written down value was also written off as per section 32. However, the AO considered the same as capital loss, and disallowed the expenditure, which was confirmed by the CIT(A). However, the Tribunal held that the loss relating to the building written off was an expenditure allowable u/s 32(1)(iii).

Having heard the parties, the High Court held that,
Status of artificial juridical person or association of person

+ a reading of the aforesaid definition makes it clear that a ‘person’ includes an association of persons or body of individuals whether incorporated or not and also every artificial juridical person, not falling within any of the preceding sub-clause. Once a body/society is incorporated under a statute, it becomes juridical person. Under the terms of the Society Registration Act, 1860, any seven or more persons associated for any literary, scientific or charitable purpose, may by subscribing their names, to a memorandum of association and filing the same with the Registrar of Societies may form themselves into a Society under the Act;

+ once the society is formed, it would become a juridical person as opposed to natural persons. Business of the society is carried on in the name of the society and not in the name of the persons who form the said society. The properties of the society would vest in the name of the society managed by the governing body. The society so registered, may sue or be sued in the name of the president, chairman or principal secretary or the trustees as shall be determined by the rules and regulations of the society and in default of such determination, in the name of such persons as shall be appointed by the governing body for the occasion. Therefore the society would be an artificial juridical person other than the association of persons or body of individuals. Therefore the society while filing return is described the status as AJP. The Assessing Authority could not accept the said status and treated the assessee as AOP and has passed the order. Now the Tribunal has held that the assessee is to be treated as AJP. When the return is filed as AJP, the question of treating the assessee as AOP would not arise. Therefore the substantial question of law No.1 is answered in favour of the assessee and against the revenue;

"Aggregate annual receipts" means clubbing of receipts of educational institutions

+ firstly, if the word “aggregate annual receipts” of other educational institution is to be understood as clubbing of annual receipts of all educational institutions run by an assessee society, then it will also include the annual receipts of an educational institution which is wholly or substantially financed by the Government. If that was intention of the Legislature, they would not have introduced separate subclauses as (iii)(ab) and (iii)(ad). If such interpretation is placed, sub-clause (iii)(ab) becomes otiose. Therefore, it is not possible to place such an interpretation. If an assessee society is running several educational institutions, if some of them are wholly or substantially financed by the Government in terms of sub-clause (iii)(ab), the income on behalf of such educational institution received by the assessee is exempted from being computed the total income of the assessee. If the assessee is running other educational institutions which are not wholly or substantially financed by the Government, then the benefit of that exemption is also extended to the income derived from such educational institutions and received by the assessee under sub-clause (iii)(ad) reading with sub-clause (iii)(ad) along with Rule2BC;

+ Similarly relying on the judgment of the Apex Court in the case of ADITANAR EDUCATIONAL INSTITUTION vs. ADDITIONAL COMMISSIONER OF INCOME-TAX, it was contended the word “other educational institution” refers to the assessee society and not to the individual educational institution. If the intention of the Legislature was to club the annual receipts of all educational institutions run by the assessee society, they could have said so in clear terms. On contrary what is stated in the said Section is the aggregate annual receipts of such University or such educational institution referring to other educational institution. Other educational institution is to be understood with the context of the first word i.e., the University. Both in the University and any educational institutions, education is imparted. The University is a statutory body. But there are a number of educational institutions which are not run by a statutory authority which are imparting education, the word “other educational institution” has to be understood in the context of other than any University;

+ if so understood, all that it means is every educational institution existing solely for educational purpose and not for the purpose of profit, if the aggregate annual receipts of such educational institution exceeds Rs.1 crore, then the income from such educational institution received by the assessee is excluded from his total income. In an educational institution the amount are calculated periodically. It may be calculated under different heads. All such amount received constituted receipts and those receipts may be received throughout the year. Therefore, the word “annual” has been inserted. But to be eligible for exemption, aggregate of annual receipts should not exceed Rs.1 crore i.e. the total annual receipts of a year if it does not exceed Rs.1 crore, then the income derived from such educational institution in the hands of the assessee cannot be taken into consideration to compute the income of the assessee;

+ here “any person” refers to the assessee and “on behalf of” refers to such institutions. It may be an University, it may be an educational institution, it may be a hospital or other institutions of similar nature. As all such institutions are independent entity and they generate income and when that income is received by the assessee, it becomes the income in the hand of the assessee and it is such income which is sought to be excluded while computing the total income of the assessee under Section 10. The test prescribed under the aforesaid provision is not the income of the educational education. It is the aggregate annual receipts of such educational institution that is prescribed at Rs.1 crore. Therefore, irrespective of the expenditure incurred by those institutions, the exemption is based on the total receipts. Even if the word “aggregate” has to be understood as suggested by the Revenue as the annual receipts of such educational institutions put together, probably, the said provision regarding exemption would be of no use at all. Especially, if the society is running a medial college or any engineering college or other professional courses, then the annual receipt of each institution would run to few crores and therefore, the very object of granting exemption to such genuine institution would be lost. Therefore, the word “aggregate annual receipt” has to be understood with the context in which it is used and the purpose for which the said provision was inserted, keeping in mind, the Scheme of the Act. Therefore, if an assessee is running several educational institutions, if any of them is wholly or substantially financed by the Government, then the income from such educational institution received by the assessee is not included while computing his total income. Similarly, income from each educational institution if they are not receiving any aid from the Government wholly or substantially in respect of which the aggregate annual receipt do not exceed Rs.1 crore received by the assessee, is also not included while computing annual total income of the assessee;

+ the Clause (vi) makes it clear that if educational institution do not fall under either of those two categories and still such educational institutions are also entitled to the exemption, provided such institutions are approved by the prescribed authority. Therefore all these three provisions apply under three differed spheres. Otherwise, there was no necessity for the Legislature to introduce these three provisions. In that view of the matter, the finding recorded by the Tribunal that aggregate annual receipt of other educational institution means, total annual receipt of each educational institution, is correct and it does not call for any interference. Therefore the substantial questions of law No.2 and 3 is answered in favour of the assessee and against the revenue;

Expenditure towards hostel building subsidy and notional interest

+ the terms of the agreement makes it clear that the partnership firm has to provide accommodation only to the students studying in educational institution run by the society. Without the hostel facility the society cannot run this educational institution as the students are coming from all over the world and there is need to provide hostel accommodation near to the educational institution and more particularly, girl students. It is in that context, whatever money had been paid earlier, was sought to be adjusted as the subsidy amount thereby the partnership firm committed to provide hostel facility. Having regard to the nature of construction, the extent of construction, the responsibilities and the advantages, the payment of Rs.2.2 crores as subsidy cannot be sought to be a huge amount. The Tribunal rightly allowed the said amount as expenditure and deleted the additions made by the assessing authority. In that view of the matter, we do not see any error committed by the Tribunal. Consequently, the disallowance of the notional interest on the said amount would also fall to ground. Accordingly, the substantial questions of law No.4 and 5 are answered in favour of the assessee and against the revenue;

Donation received towards construction of hostel building

+ as is clear from the order passed by the Assessing Officer as well as the Commissioner, the benefit of exemption was not extended to the assessee because it failed to give particulars of the persons who gave the said donations. It is in that context the said amount were treated as income and brought to tax. The order of the appellate authority refers to the ledgers and accounts maintained showing the said advances. However, the particulars of the contents of the said books are not set out in the order of the appellate authority. Under these circumstances, if the said advances are received by the parents of the students whose children were studying in the schools and the same is properly accounted for under the heading of Building Fund/infrastructure fund and the said amount if it is utilized for construction of the building which in turn is used for imparting education, it would constitute charity. Therefore the society would be entitled to the benefit of exemption. But it is purely a question of fact. Therefore, the proper thing would be to set aside the finding and remand the matter back to the Assessing Authority, giving an opportunity to the assessee to produce the ledger books and other accounts showing the receipt of such payment and utilization of the said amount for the purpose of construction, so that on the aforesaid material, the Assessing Authority can pass suitable orders on merits. Therefore the substantial questions of law No.6, 8 and 10 is not answered, as the matter is remanded back to the Assessing Authority;

Expenditure on written down value loss of building

+ as is clear from Section 32(iii), in the case of building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year, the amount by which the moneys payable in respect of such building, machinery, plant or furniture together with the amount of scrap value, if any, fall short of the written down value thereof and if such deficiency is actually written off in the books of the assessee, the same shall be deducted. In the instant case, it is not in dispute that the assessee constructed a building on a leased property. It was treated as block asset and depreciation was allowed under Section 32(1) of the Act. However, in the mean while, the lease period was over. The said building was discarded, i.e., the building was surrendered to the lessor on the expiry of the lease period. On the date of the expiry of the lease period, the written down value was mentioned in the balance sheet. It is that amount claimed as deduction under clause (iii) of sub-section (1) of Section 32. As is clear from the aforesaid provisions, the assessee is entitled to the said deduction. The lower authority by misreading the provisions of law had denied the said benefit. In that view of the matter, there is no merit in the said contention. Accordingly, the said substantial question of law No.9 is answered in favour of the assessee and against the Revenue.