Tuesday, 17 November 2015

Whether exemption u/s 10(23C)(vi) can be denied to a Society running only educational institution on mere pretext that it is making profit - NO: HC

THE issue is - Whether exemption u/s 10(23C)(vi) can be denied to a Society running only educational institution on mere pretext that it is making profit. NO is the answer.
Facts of the case
The Assessee is a Society registered under the Societies Registration Act. One of its objects is to establish an educational institution. In the year 2001-02, the Assessee established an educational institution. Prior to the assessment year 2007-08, the total receipts were below the monetary limit of Rs. 10 crores. Assessee society was declared non-taxable. For the assessment year 2007-08, Assessing Officer found that the income of the Assessee was above Rs.10 crores and, accordingly, disallowed the exemption claimed by the Assessee under Section 10 (23C)(iiiad) on the ground that the registration was required to be obtained under Section 10(23C)(vi). The order of the Assessing Officer was confirmed by the Income Tax Appellate Tribunal.

The Assessee applied for registration under Section 10 (23C)(vi) for the assessment year 2008-09. The said application was rejected on the ground that the Assessee has several objects and was not running the institute solely for educational purposes. Writ Petition was filed which was allowed and the matter was remitted to the authority to pass a fresh order in accordance with the observation made therein. Pursuant to the direction of the Court, the Chief Commissioner of Income Tax passed the impugned order again rejecting the application for registration.

Having heard the parties, the Tribunal held that,

++ Supreme Court in American Hotel and Lodging Association Educational Institution Vs. CBDT = 2008-TIOL-115-SC-IT held that if the Assessee fulfills the threshold conditions of an educational institute under Section 10(23C) (vi), the authority, in such an eventuality, could not reject the application. The Supreme Court categorically held that the authority was required to consider the nature and genuineness of the activities of the applicant institution. The conditions set out in the third proviso were not to be tested at the stage of approval since the required facts would take place in future. The requirement mentioned in the third proviso could only be tested when assessment proceedings were being made and, the authority, at that stage, would consider the requirement provided in the third proviso. At the stage of registration, the authority is only required to examine the nature, activity and genuineness of the institution. The mere existence that there is some profit does not disqualify the applicant if the sole purpose of existence was not profit making but educational activities. The authority was required to find out the predominant object of the activity and see whether the institution exists solely for education and not to earn profit;

++ the section has three requirements- (a) the educational institution must exist solely for educational purposes, (b) it should not be for purposes of profit, and (c) the aggregate annual receipts of such institution should not exceed the amount or annual receipts as may be prescribed. Such prescription is to be found in rule 2CA being an amount of Rs. 1 crore;

++ a categorical assertion has been made that the Assessee is only running an educational institution and is not carrying on any other activity. This fact has not been denied by the respondents in their counter affidavit. The finding given by the Commissioner that the Assessee-society does not exist solely for educational purposes is based on no reasoning. No finding has been given on this aspect;

++ the mere fact that the Assessee is making profit does not indicate that it is carrying on the activity solely for the purpose of making a profit and that it ceases to be for an educational purpose. The predominant test as given by the Supreme Court in American Hotel and Queen's Educational Society has to be considered. The Commissioner has considered the profit before applying the depreciation, which is incorrect. The authority is required to consider the profit after allowing depreciation and is also further required to consider the investment made by the Assessee in the creation of fixed assets. These investments of capital nature are required to be considered while calculating the money spent by them in the educational activity. Further, the fact that the Assessee is generating profit or is carrying on commercial activity and is making a huge expenditure in advertisement is a fact, which is not required to be considered at the stage of considering the application for grant of registration. These factors would come into play under the 3rd and 13th proviso at the stage of considering the return and making the assessment. Further, expenditure on advertisement made does not necessarily means that the activity of the Assessee is commercial in nature or is being done with the intention to earn more profit. Such finding given by the authority is patently erroneous. We also find that the issue relating to the loans and advance is covered by a decision of Delhi High Court in ACME Educational Society;

++ matter remitted back to the competent authority to decide the matter afresh in the light of the observation made above and in the light of the principles enunciated by the Supreme Court in case of American Hotel and Queen's Educational Society.

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