M/S QUEEN'S EDUCATIONAL SOCIETY Vs. COMMR.OF INCOME TAX
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 5167 of 2008, Judgment Date: Mar 16, 2015
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5167 OF 2008
M/S. QUEEN'S EDUCATIONAL SOCIETY ...APPELLANT
VERSUS
COMMISSIONER OF INCOME TAX ...RESPONDENT
WITH
C.A. NO.5168 OF 2008
C.A. NO.8962 OF 2010
C.A. NO.909 OF 2011
CIVIL APPEAL NO. 2919 OF 2015
[ARISING OUT OF SLP (CIVIL) NO.3804 OF 2011]
CIVIL APPEAL NO. 2920 OF 2015
[ARISING OUT OF SLP (CIVIL) NO.5381 OF 2011]
CIVIL APPEAL NO. 2921 OF 2015
[ARISING OUT OF SLP (CIVIL) NO.5383 OF 2011]
CIVIL APPEAL NO. 2922 OF 2015
[ARISING OUT OF SLP (CIVIL) NO.5530 OF 2011]
CIVIL APPEAL NO. 2923 OF 2015
[ARISING OUT OF SLP (CIVIL) NO.19945 OF 2012]
J U D G M E N T
R.F.Nariman, J.
1. Leave granted in the special leave petitions.
2. The present appeals relate to a common judgment dated 24th September,
2007 passed by the High Court of Uttarakhand, Nainital in two income tax
appeals, and a judgment of the Punjab and Haryana High Court dated 29th
January, 2010 in Pine Grove International Charitable Trust v. Union of
India - (2010) 327 ITR 273 . Various other appeals (excepting Civil Appeal
No.8962 of 2010) are filed by the Union of India/ Central Board of Direct
Taxes in cases where the aforesaid judgment in Pine Grove has been
followed.
3. The facts necessary to understand the controversy in the two income
tax appeals before the Uttarakhand High Court, Nainital, may be gleaned
from the facts of one of them, namely, the Queen's Educational Society
case. The appellant filed its return for assessment years 2000-2001 and
2001-2002 showing a net surplus of Rs.6,58,862/- and Rs.7,82,632/-
respectively. Since the appellant was established with the sole object of
imparting education, it claimed exemption under Section 10(23C) (iiiad) of
the Income Tax Act, 1961. The Assessing Officer vide its order dated 20th
February, 2003 rejected the exemption claimed by the appellant. The CIT
(Appeals) by its order dated 28th March, 2003 allowed the appellant's
appeal, and the ITAT, Delhi, by its judgment dated 7th July, 2006 passed an
order dismissing the appeal preferred by the revenue. In a reference to
the High Court under Section 260A of the Income Tax Act, the High Court
vide the impugned judgment set aside the judgment of the ITAT and affirmed
the order of the Assessing Officer.
4. These appeals from the Uttarakhand High Court, Nainital, concern
themselves with the provision of Section 10(23C) (iiiad) of the Act:
"Section 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-
(iii-ad) any university or other educational institution existing solely
for educational purposes and not for purposes of profit if the aggregate
annual receipts of such university or educational institution do not exceed
the amount of annual receipts as may be prescribed"
5. It will be noticed that 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.
6. The said Section was inserted by Finance Act No.2 of 1998 with effect
from 1st April, 1999. Prior thereto, the Income Tax Act had a
corresponding Section, namely, Section 10(22) which was as follows:-
"Section 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-
(22) any income of a university or other educational institution, existing
solely for educational purposes and not for purposes of profit"
7. We have heard learned counsel for the assessees as well as learned
counsel for the revenue. The assessees argue that the impugned judgment is
contrary to the law laid down by at least three Supreme Court judgments.
Further, the wrong test has been adopted and followed, which is a test laid
down by the Assessing Officer and not by any Supreme Court judgment -
namely, that whenever a profit/surplus is made by an educational
institution, it ceases to exist solely for educational purposes and becomes
a profit making enterprise. In support of the Punjab and Haryana High Court
judgment under appeal, counsel for the assessees argued that since the sole
basis for not granting them exemption for the assessment years under
question was the following of the Uttarakhand High Court judgment, if the
said judgment is found to be incorrect, they are bound to succeed. For
that reason, the revenue's appeal against the Punjab and Haryana High Court
judgment should be dismissed. Counsel for the revenue, on the other hand,
attempted to support the Uttarakhand High Court judgment by stating that
the Section does not contemplate the making of large profits. If an
educational institution in fact makes large profits then even though it may
plough such profits back into the purchase of assets for education, yet
such institution cannot be said to be existing solely for educational
purposes. It would then become an institution which would really be for
profit.
8. In CIT v. Surat Art Silk Cloth Manufacturers' Assn., (1980) 121 ITR
1, this Court while construing the definition of "charitable purpose" in
Section 2(15) of the Income Tax Act held:
"17. The next question that arises is as to what is the meaning of the
expression "activity for profit". Every trust or institution must have a
purpose for which it is established and every purpose must for its
accomplishment involve the carrying on of an activity. The activity must,
however, be for profit in order to attract the exclusionary clause and the
question therefore is when can an activity be said to be one for profit?
The answer to the question obviously depends on the correct connotation of
the preposition "for". This preposition has many shades of meaning but when
used with the active participle of a verb it means "for the purpose of" and
connotes the end with reference to which something is done. It is not
therefore enough that as a matter of fact an activity results in profit but
it must be carried on with the object of earning profit. Profit-making must
be the end to which the activity must be directed or in other words, the
predominant object of the activity must be making a profit. Where an
activity is not pervaded by profit motive but is carried on primarily for
serving the charitable purpose, it would not be correct to describe it as
an activity for profit. But where, on the other hand, an activity is
carried on with the predominant object of earning profit, it would be an
activity for profit, though it may be carried on in advancement of the
charitable purpose of the trust or institution. Where an activity is
carried on as a matter of advancement of the charitable purpose or for the
purpose of carrying out the charitable purpose, it would not be incorrect
to say as a matter of plain English grammar that the charitable purpose
involves the carrying on of such activity, but the predominant object of
such activity must be to subserve the charitable purpose and not to earn
profit. The charitable purpose should not be submerged by the profit making
motive; the latter should not masquerade under the guise of the former. The
purpose of the trust, as pointed out by one of us (Pathak,J.) in
Dharmadeepti v. CIT [(1978) 3 SCC 499 : 1978 SCC (Tax) 193] must be
'"essentially charitable in nature" and it must not be a cover for carrying
on an activity which has profit making as its predominant object. This
interpretation of the exclusionary clause in Section 2 clause (15) derives
considerable support from the speech made by the Finance Minister while
introducing that provision. The Finance Minister explained the reason for
introducing this exclusionary clause in the following words:
"The definition of 'charitable purpose' in that clause is at present so
widely worded that it can be taken advantage of even by commercial concerns
which, while ostensibly serving a public purpose, get fully paid for the
benefits provided by them namely, the newspaper industry which while
running its concern on commercial lines can claim that by circulating
newspapers it was improving the general knowledge of the public. In order
to prevent the misuse of this definition in such cases, the Select
Committee felt that the words 'not involving the carrying on of any
activity for profit' should be added to the definition."
It is obvious that the exclusionary clause was added with a view to
overcoming the decision of the Privy Council in the Tribune case [AIR 1939
PC 208 : In Re the Trustees of the Tribune, (1939) 7 ITR 415] where it was
held that the object of supplying the community with an organ of educated
public opinion by publication of a newspaper was an object of general
public utility and hence charitable in character, even though the activity
of publication of the newspaper was carried on commercial lines with the
object of earning profit. The publication of the newspaper was an activity
engaged in by the trust for the purpose of carrying out its charitable
purpose and on the facts it was clearly an activity which had profit making
as its predominant object, but even so it was held by the Judicial
Committee that since the purpose served was an object of general public
utility, it was a charitable purpose. It is clear from the speech of the
Finance Minister that it was with a view to setting at naught this decision
that the exclusionary clause was added in the definition of "charitable
purpose". The test which has, therefore, now to be applied is whether the
predominant object of the activity involved in carrying out the object of
general public utility is to subserve the charitable purpose or to earn
profit. Where profit making is the predominant object of the activity, the
purpose, though an object of general public utility, would cease to be a
charitable purpose. But where the predominant object of the activity is to
carry out the charitable purpose and not to earn profit, it would not lose
its character of a charitable purpose merely because some profit arises
from the activity. The exclusionary clause does not require that the
activity must be carried on in such a manner that it does not result in any
profit. It would indeed be difficult for persons in charge of a trust or
institution to so carry on the activity that the expenditure balances the
income and there is no resulting profit. That would not only be difficult
of practical realisation but would also reflect unsound principle of
management. We, therefore, agree with Beg, J., when he said in Sole
Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 :
(1975) 101 ITR 234] that "if the profits must necessarily feed a charitable
purpose under the terms of the trust, the mere fact that the activities of
the trust yield profit will not alter the charitable character of the
trust. The test now is, more clearly than in the past, the genuineness of
the purpose tested by the obligation created to spend the money exclusively
or essentially on charity". The learned Judge also added that the
restrictive condition "that the purpose should not involve the carrying on
of any activity for profit would be satisfied if profit making is not the
real object" (emphasis supplied). We wholly endorse these observations.
The application of this test may be illustrated by taking a simple
example. Suppose the Gandhi Peace Foundation which has been established for
propagation of Gandhian thought and philosophy, which would admittedly be
an object of general public utility, undertakes publication of a monthly
journal for the purpose of carrying out this charitable object and charges
a small price which is more than the cost of the publication and leaves a
little profit, would it deprive the Gandhi Peace Foundation of its
charitable character? The pricing of the monthly journal would undoubtedly
be made in such a manner that it leaves some profit for the Gandhi Peace
Foundation, as, indeed, would be done by any prudent and wise management,
but that cannot have the effect of polluting the charitable character of
the purpose, because the predominant object of the activity of publication
of the monthly journal would be to carry out the charitable purpose by
propagating Gandhian thought and philosophy and not to make profit or in
other words, profit making would not be the driving force behind this
activity. But it is possible that in a given case the degree or extent of
profit making may be of such a nature as to reasonably lead to the
inference that the real object of the activity is profit making and not
serving the charitable purpose. If, for example, in the illustration given
by us, it is found that the publication of the monthly journal is carried
on wholly on commercial lines and the pricing of the monthly journal is
made on the same basis on which it would be made by a commercial
organisation leaving a large margin of profit, it might be difficult to
resist the inference that the activity of publication of the journal is
carried on for profit and the purpose is non-charitable. We may take by way
of illustration another example given by Krishna Iyer, J., in the Indian
Chamber of Commerce case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101
ITR 796] where a blood bank collects blood on payment and supplies blood
for a higher price on commercial basis. Undoubtedly, in such a case, the
blood bank would be serving an object of general public utility but since
it advances the charitable object by sale of blood as an activity carried
on with the object of making profit, it would be difficult to call its
purpose charitable. Ordinarily there should be no difficulty in determining
whether the predominant object of an activity is advancement of a
charitable purpose or profit making. But cases are bound to arise in
practice which may be on the borderline and in such cases the solution of
the problem whether the purpose is charitable or not may involve much
refinement and present real difficulty.
There is, however, one comment which is necessary to be made whilst we are
on this point and that arises out of certain observations made by this
Court in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 : 1976
SCC (Tax) 14 : (1975) 101 ITR 234] as well as Indian Chamber of Commerce
case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796] . It was
said by Khanna, J. in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC
254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234] :
"[I]f the activity of a trust consists of carrying on a business and there
are no restrictions on its making profit, the court would be well justified
in assuming in the absence of some indication to the contrary that the
object of the trust involves the carrying on of an activity for profit."
And to the same effect, observed Krishna Iyer, J. in the Indian Chamber of
Commerce case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796]
when he said:
"An undertaking by a business organisation is ordinarily assumed to be for
profit unless expressly or by necessary implication or by eloquent
surrounding circumstances the making of profit stands loudly negatived ....
A pragmatic condition, written or unwritten, proved by a prescription of
profits or by long years, of invariable practice or spelt from some strong
surrounding circumstances indicative of anti-profit motivation - such a
condition will qualify for charitable purpose."
Now we entirely agree with the learned Judges who decided these two cases
that activity involved in carrying out the charitable purpose must not be
motivated by a profit objective but it must be undertaken for the purpose
of advancement or carrying out of the charitable purpose. But we find it
difficult to accept their thesis that whenever an activity is carried on
which yields profit, the inference must necessarily be drawn, in the
absence of some indication to the contrary, that the activity is for profit
and the charitable purpose involves the carrying on of an activity for
profit. We do not think the Court would be justified in drawing any such
inference merely because the activity results in profit. It is in our
opinion not at all necessary that there must be a provision in the
constitution of the trust or institution that the activity shall be carried
on no profit no loss basis or that profit shall be proscribed. Even if
there is no such express provision, the nature of the charitable purpose,
the manner in which the activity for advancing the charitable purpose is
being carried on and the surrounding circumstances may clearly indicate
that the activity is not propelled by a dominant profit motive. What is
necessary to be considered is whether having regard to all the facts and
circumstances of the case, the dominant object of the activity is profit
making or carrying out a charitable purpose. If it is the former, the
purpose would not be a charitable purpose, but, if it is the latter, the
charitable character of the purpose would not be lost.
9. Coming closer to the section at hand, in Aditanar Educational
Institution v. Additional Commissioner of Income Tax, (1997) 224 ITR 310,
this Court while construing the predecessor Section, namely, Section 10(22)
of the Income Tax act, held:
"The High Court has made an observation that any income which has a direct
relation or incidental to the running of the institution as such would
qualify for exemption. We may state that the language of Section 10(22) of
the Act is plain and clear and the availability of the exemption should be
evaluated each year to find out whether the institution existed during the
relevant year solely for educational purposes and not for the purposes of
profit. After meeting the expenditure, if any surplus results incidentally
from the activity lawfully carried on by the educational institution, it
will not cease to be one existing solely for educational purposes since the
object is not one to make profit. The decisive or acid test is whether on
an overall view of the matter, the object is to make profit. In evaluating
or appraising the above, one should also bear in mind the
distinction/difference between the corpus, the objects and the powers of
the concerned entity."
10. In American Hotel & Lodging Assn. Educational Institute v. CBDT,
(2008) 301 ITR 86, this Court dealt with Section 10(23C)(vi) as follows:
"29. In CIT v. Surat Art Silk Cloth Manufacturers' Assn. [(1980) 2 SCC 31 :
1980 SCC (Tax) 170 : (1980) 121 ITR 1] 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.
30. 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 [(2001) 3 SCC 359 : (2001) 247 ITR 658] ). 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 Institutionv. CIT [(1997) 3
SCC 346 : (1997) 224 ITR 310] ). 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.
32. 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 initial 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 provision. With the
insertion of the first proviso, the PA is required to vet the application.
This vetting process is stipulated by the second proviso. 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 or 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 most relevant proviso for deciding this appeal is the
thirteenth proviso. Under that proviso, the circumstances are given under
which the PA is empowered to withdraw the approval earlier granted. Under
that proviso, if the PA is satisfied that the trust, fund, university or
other educational institution, etc. has not applied its income in
accordance with the third proviso or if it finds that such institution,
trust or fund, etc. has not invested/deposited its funds in accordance with
the third proviso or that the activities of such fund or institution or
trust, etc. are not genuine or that its activities are not being carried
out in accordance with the conditions subject to which approval is granted
then the PA is empowered to withdraw the approval earlier granted after
complying with the procedure mentioned therein.
33. Having analysed the provisos to Section 10(23-C)(vi) one finds that
there is a difference between stipulation of conditions and compliance
therewith. The threshold conditions are actual existence of an educational
institution and approval of the prescribed authority for which every
applicant has to move an application in the standardised form in terms of
the first proviso. It is only if the prerequisite condition of actual
existence of the educational institution is fulfilled that the question of
compliance with requirements in the provisos would arise. We find merit in
the contention advanced on behalf of the appellant that the third proviso
contains monitoring conditions/requirements like application, accumulation,
deployment of income in specified assets whose compliance depends on events
that have not taken place on the date of the application for initial
approval.
34. To make the section with the proviso workable we are of the view that
the monitoring conditions in the third proviso like application/utilisation
of income, pattern of investments to be made, etc. could be stipulated as
conditions by the PA subject to which approval could be granted."
11. Thus, the law common to Section 10(23C) (iiiad) and (vi) may be
summed up as follows:
Where an educational institution carries on the activity of education
primarily for educating persons, the fact that it makes a surplus does not
lead to the conclusion that it ceases to exist solely for educational
purposes and becomes an institution for the purpose of making profit.
The predominant object test must be applied - the purpose of education
should not be submerged by a profit making motive.
A distinction must be drawn between the making of a surplus and an
institution being carried on "for profit". No inference arises that
merely because imparting education results in making a profit, it becomes
an activity for profit.
If after meeting expenditure, a surplus arises incidentally from the
activity carried on by the educational institution, it will not be cease to
be one existing solely for educational purposes.
The ultimate test is whether on an overall view of the matter in the
concerned assessment year the object is to make profit as opposed to
educating persons.
12. The Uttarakhand High Court in the impugned judgment dated 24th
September, 2007 quoted the ITAT order in paragraph 7 as follows:
"The ITAT while granting exemption under Section 10(23C) (iiiad)
recorded the following reasons:
"During the years relevant for asstt. Year 2000-01 and 2001-02, the excess
of income over expenditure stood at Rs.6,58,862/- and Rs.7,82,632/-
respectively. It was also noticed that the appellant society had made
investment in fixed assets including building at Rs.9,52,010/- in F.Y. 1999-
2000 and Rs.8,47,742/- in FY 2000-01 relevant for Asstt. Years 2000-01 and
2001-02 respectively. Thus, if the amount of investment into fixed assets
such as building, furniture and fixture etc. were also kept in view, there
was hardly any surplus left..... The assessee society is undoubtedly
engaged in imparting education and has to maintain a teaching and non
teaching staff and has to pay for their salaries and other incidental
expenses. It, therefore, becomes necessary to charge certain fee from the
students for meeting all these expenses. The charging of fee is incidental
to the prominent objective of the trust i.e. imparting education. The
trust was initially running the school in a rented building and the
surplus, i.e. the excess of the receipts over expenditure.
In the year under appeal (and in the earlier appeals) has enabled the
appellant to acquire its own property, acquire computers, library books,
sports equipments etc. for the benefit of the students. And more
importantly the members of the society have not utilized any part of the
surplus for their own benefit. The AO wrongly interpreted the resultant
surplus as the main objective of the assessee trust. As held above, profit
is only incidental to the main object of spreading education. If there is
no surplus out of the difference between receipts and outgoings, the trust
will not be able to achieve the objectives. Any education institution
cannot be run in rented premises for all the times and without necessary
equipment and without paying to the staff engaged in imparting education.
The assessee is not getting any financial aid/assistance from the
Government or other philanthropic agency and, therefore, to achieve the
objective, it has to raise its own funds. But such surplus would not come
within the ambit of denying exemption u/s 10(23C) (iiiad) of the Act."
13. Having set out the ITAT order, the Uttarakhand High Court held:
"Thus, in view of the established fact relating to earned profit, we do not
agree with the reasoning given by the ITAT for granting exemption."
14. Having said this, the impugned judgment goes on to quote Aditanar
Educational Institution v. CIT. as follows:-
"After meeting the expenditure, if any surplus result incidentally from the
activity lawfully carried on by the educational institution, it will not
cease to be one existing solely for educational purpose since the object is
not one to make profit. The decisive or acid test is whether on an overall
view of the matter, the object is to make profit. In evaluating or
appraising the above, one should also bear in mind the distinction
difference between the corpus, the objects and powers of the concerned
entity.
If one looks at the object clause, there are other noble and pious
objects but assessee society has done nothing to achieve the other objects
except pursuing main object of providing education and earning profit.
Further, with profit earned the society has strengthened or enhanced its
capacity to earn more rather than to fulfill other noble objects for the
cause of poor and needy people or advancement of religious purpose.
Therefore, the law laid down by the Apex Court has rightly been
applied and exemption has also rightly been refused by the Assessing
Officer in the facts and circumstances of the case."
15. It is clear that the High Court did not apply its mind independently.
What has been copied is one paragraph from the Supreme Court judgment in
Aditanar followed by a paragraph of faulty reasoning by the Assessing
Officer and the said faulty reasoning of the Assessing Officer has been
wrongly said to be the law laid down by the Apex Court.
16. Further, the Supreme Court Judgment in Municipal Corpn. of Delhi v.
Children Book Trust and Safdarjung Enclave Educational Society, (1992) 3
SCC 390 has then been followed. The aforesaid judgment dealt with a
property tax provision, namely, Section 115 (4) of the Delhi Municipal
Corporation Act, 1957. Three questions were raised in the said judgment as
follows:-
"56. In the present case, the questions which arise for our determination
are:
(i) Whether the society or body is occupying and using the land and
building for a charitable purpose within the meaning of sub-section (4)?
(ii) What is the meaning of the expression "supported wholly or in part by
voluntary contribution"?
(iii) Whether any trade or business is carried on in the premises within
the meaning of sub-section (5)?"
17. In answering question one, the Court held that School Education would
only come within an exemption if it involved public benefit. Having so
held, the Court stated:
"78. The rulings arising out of Income Tax Act may not be of great help
because in the Income Tax Act "charitable purpose" includes the relief of
the poor, education, medical relief and the advancement of any other object
of general public utility. The advancement of any other object of general
public utility is not found under the Delhi Municipal Corporation Act. In
other words, the definition is narrower in scope. This is our answer to
question No. 1."
18. Secondly, the extracted portion from the said judgment in the
judgment of the Uttarakhand High Court concerned itself with question two,
namely, whether the educational society is supported wholly or in part by
voluntary contributions. It is part of paragraph 80 of the said judgment.
If the sentences after the quoted portion are also set out, it becomes
clear that the passage relied upon by the High Court has absolutely nothing
to do with the present case. The entirety of the passage is now set out
hereinbelow:
"82. ...In other words, what we want to stress is, where a society or body
is making systematic profit, even though that profit is utilised only for
charitable purposes, yet it cannot be said that it could claim exemption.
If, merely qualitative test is applied to societies, even schools which are
run on commercial basis making profits would go out of the purview of
taxation and could demand exemption. Thus, the test, according to us, must
be whether the society could survive without receiving voluntary
contributions, even though it may have some income by the activities of the
society. The word "part" mean an appreciable amount and not an
insignificant one. The "part" in other words, must be substantial part.
What is substantial would depend upon the facts and circumstances of each
case."
19. It is clear, therefore, that the Uttarakhand High Court has erred by
quoting a non existent passage from an applicable judgment, namely,
Aditanar and quoting a portion of a property tax judgment which expressly
stated that rulings arising out of the Income Tax Act would not be
applicable. Quite apart from this, it also went on to further quote from a
portion of the said property tax judgment which was rendered in the context
of whether an educational society is supported wholly or in part by
voluntary contributions, something which is completely foreign to Section
10(23C) (iiiad). The final conclusion that if a surplus is made by an
educational society and ploughed back to construct its own premises would
fall foul of Section 10(23C) is to ignore the language of the Section and
to ignore the tests laid down in the Surat Art Silk Cloth case, Aditanar
case and the American Hotel and Lodging case. It is clear that when a
surplus is ploughed back for educational purposes, the educational
institution exists solely for educational purposes and not for purposes of
profit. In fact, in S.RM.M.CT.M. Tiruppani Trust v. Commissioner of Income
Tax, (1998) 2 SCC 584, this Court in the context of benefit claimed under
Section 11 of the Act held:
"9. In the present case, the assessee is not claiming any benefit under
Section 11(2) as it cannot; because in respect of this assessment year, the
assessee has not complied with the conditions laid down in Section 11(2).
The assessee, however, is entitled to claim the benefit of Section
11(1)(a). In the present case, the assessee has applied Rs 8 lakhs for
charitable purposes in India by purchasing a building which is to be
utilised as a hospital. This income, therefore, is entitled to an exemption
under Section 11(1). In addition, under Section 11(1)(a), the assessee can
accumulate 25% of its total income pertaining to the relevant assessment
year and claim exemption in respect thereof. Section 11(1)(a) does not
require investment of this limited accumulation in government securities.
The balance income of Rs 1,64,210.03 constitutes less than 25% of the
income for Assessment Year 1970-71. Therefore, the assessee is entitled to
accumulate this income and claim exemption from income tax under Section
11(1)(a)."
We set aside the judgment of the Uttarakhand High Court dated 24th
September, 2007. The reasoning of the ITAT (set aside by the High Court)
is more in consonance with the law laid down by this Court, and we approve
its decision.
20. Revenue's appeals from the Punjab and Haryana High Court concern
themselves with Sections 10(23C) (vi). A large number of writ petitions
were heard in Civil Writ Petition No. 6031 of 2009 and disposed of on 29th
January, 2010. By various impugned orders passed, the Chief, CIT,
Chandigarh withdrew exemptions granted under Section 10(23C) (vi) of the
Income Tax Act read with Rule 2CA of Income Tax Rules, 1961, for various
assessment years. The operative part of the order passed by the Chief, CIT
in these cases is the same and reads as follows:
"4. I have considered the submissions of the assessee. The decisions quoted
in support of its contention are not relevant and are distinguishable on
facts as well as issues. It is clear that the ratio of the decision of
Hon'ble Uttarakhand High Court is squarely applicable in this case.
5. The Hon'ble Supreme Court has held, in the case of Aditanar Educational
Institution etc. v. Addl. Commissioner of Income Tax [224 ITR 310 (SC)],
that in the case of an educational institution, after meeting the
expenditure, if any surplus results incidentally, then the institution will
not cease to be one existing solely for educational purposes.
6. The crucial condition is that surplus should result only incidentally
and should not be aimed for. If substantial profits are earned in one year
if (it)?would be duty of the institution to lower its fees for the
subsequent year so that such profits are not intentionally generated. If,
however, profits continue year after year than it cannot be said that the
surplus is arising incidentally.
7. In the present ease, the profits are substantial and are arising year
alter year and therefore, the decision of the Apex Court in the case
of Aditanar Education Institution v. Addl. Commissioner of Income Tax as
well as the decision of the Hon'ble Uttrakhand High Court is applicable.
8. Exemption u/s 10(23C)(vi) is not available to the assessee under the law
in view of the above facts and circumstances and therefore, exemption
already granted vide order dated 4th June, 2007 is hereby withdrawn.
9. The assessee is at liberty to reduce the fees being charged and price of
its services and apply afresh, in which case the application will be duly
considered on merits."
21. It is these orders that were set aside by the judgment of the Punjab
and Haryana High Court impugned by the Revenue before us.
22. Section 10(23C)(vi) read with the 3rd and 13th provisos thereto and
Section 11(5) of the Income Tax Act are as follows:-
"Section 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-
(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
Provided also that the fund or trust or institution [or any university or
other educational institution or any hospital or other medical institution]
referred to in sub-clause (iv) or sub-clause (v)[or sub-clause (vi) or sub-
clause (vi-a)]-[(a) applies its income, or accumulates it for
application, wholly and exclusively to the objects for which it is
established and in a case where more than fifteen per cent of its income is
accumulated on or after the 1st day of April, 2002, the period of the
accumulation of the amount exceeding fifteen per cent of its income shall
in no case exceed five years; and;].
[(b) does not invest or deposit its funds, other than-
(i) any assets held by the fund, trust or institution [or any university or
other educational institution or any hospital or other medical institution]
where such assets form part of the corpus of the fund, trust or
institution [or any university or other educational institution or any
hospital or other medical institution] as on the 1st day of June, 1973;
[(i-a) any asset, being equity shares of a public company, held by any
university or other educational institution or any hospital or other
medical institution where such assets form part of the corpus of any
university or other educational institution or any hospital or other
medical institution as on the 1st day of June, 1998;]
(ii) any assets (being debentures issued by, or on behalf of, any company
or corporation), acquired by the fund, trust or institution [or any
university or other educational institution or any hospital or other
medical institution] before the 1st day of March, 1983;
(iii) any accretion to the shares, forming part of the corpus mentioned in
sub-clause (i)[and sub-clause (i-a)], by way of bonus shares allotted to
the fund, trust or institution[or any university or other educational
institution or any hospital or other medical institution];
(iv) voluntary contributions received and maintained in the form of
jewellery, furniture or any other article as the Board may, by notification
in the Official Gazette, specify,
for any period during the previous year otherwise than in any one or more
of the forms or modes specified in sub-section (5) of Section 11:
Provided also that where the fund or institution referred to in sub-
clause (iv) or trust or institution referred to in sub-clause (v) is
notified by the Central Government or any university or other educational
institution referred to in sub-clause (vi) or any hospital or other medical
institution referred to in sub-clause (vi-a), is approved by the prescribed
authority and subsequently that Government or the prescribed authority is
satisfied that-
(i) such fund or institution or trust or any university or other
educational institution or any hospital or other medical institution has
not,-
(A) applied its income in accordance with the provisions contained in
clause (a) of the third proviso; or
(B) invested or deposited its funds in accordance with the provisions
contained in clause(b) of the third proviso; or
(ii) the activities of such fund or institution or trust or any university
or other educational institution or any hospital or other medical
institution,-
(A) are not genuine; or
(B) are not being carried out in accordance with all or any of the
conditions subject to which it was notified or approved,
it may, at any time after giving a reasonable opportunity of showing cause
against the proposed action to the concerned fund or institution or trust
or any university or other educational institution or any hospital or other
medical institution, rescind the notification or, by order, withdraw the
approval, as the case may be, and forward a copy of the order rescinding
the notification or withdrawing the approval to such fund or institution or
trust or any university or other educational institution or any hospital or
other medical institution and to the Assessing Officer;]
Section 11. Income from property held for charitable or religious purposes.-
(5) The forms and modes of investing or depositing the money referred to
in clause (b) of sub-section (2) shall be the following, namely:-
(i) investment in savings certificates as defined in clause (c) of Section
2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any
other securities or certificates issued by the Central Government under the
Small Savings Schemes of that Government;
(ii) deposit in any account with the Post Office Savings Bank;
(iii) deposit in any account with a scheduled bank or a cooperative society
engaged in carrying on the business of banking (including a cooperative
land mortgage bank or a cooperative land development bank).
Explanation.-In this clause, "scheduled bank" means the State Bank of India
constituted under the State Bank of India Act, 1955 (23 of 1955), a
subsidiary bank as defined in the State Bank of India (Subsidiary Banks)
Act, 1959 (38 of 1959), a corresponding new bank constituted under Section
3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970 (5 of 1970), or under Section 3 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank
being a bank included in the Second Schedule to the Reserve Bank of India
Act, 1934 (2 of 1934);
(iv) investment in units of the Unit Trust of India established under the
Unit Trust of India Act, 1963 (52 of 1963);
(v) investment in any security for money created and issued by the Central
Government or a State Government;
(vi) investment in debentures issued by, or on behalf of, any company or
corporation both the principal whereof and the interest whereon are fully
and unconditionally guaranteed by the Central Government or by a State
Government;
(vii) investment or deposit in any public sector company:
[Provided that where an investment or deposit in any public sector company
has been made and such public sector company ceases to be a public sector
company,-
(A) such investment made in the shares of such company shall be deemed to
be an investment made under this clause for a period of three years from
the date on which such public sector company ceases to be a public sector
company;
(B) such other investment or deposit shall be deemed to be an investment or
deposit made under this clause for the period up to the date on which such
investment or deposit becomes repayable by such company;].
(viii) deposits with or investment in any bonds issued by a financial
corporation which is engaged in providing long-term finance for industrial
development in India and [which is eligible for deduction under clause
(viii) of sub-section (1) of Section 36];
(ix) deposits with or investment in any bonds issued by a public company
formed and registered in India with the main object of carrying on the
business of providing long-term finance for construction or purchase of
houses in India for residential purposes and[which is eligible for
deduction under clause (viii) of sub-section (1) of Section 36];
[(ix-a) deposits with or investment in any bonds issued by a public company
formed and registered in India with the main object of carrying on the
business of providing long-term finance for urban infrastructure in India.
Explanation.-For the purposes of this clause,-
(a) "long-term finance" means any loan or advance where the terms under
which moneys are loaned or advanced provide for repayment along with
interest thereof during a period of not less than five years;
(b) "public company" shall have the meaning assigned to it in Section 3 of
the Companies Act, 1956;
(c) "urban infrastructure" means a project for providing potable water
supply, sanitation and sewerage, drainage, solid waste management, roads,
bridges and flyovers or urban transport;].
(x) investment in immovable property.
Explanation.-"Immovable property" does not include any machinery or plant
(other than machinery or plant installed in a building for the convenient
occupation of the building) even though attached to, or permanently
fastened to, anything attached to the earth;
(xi) deposits with the Industrial Development Bank of India established
under the Industrial Development Bank of India Act, 1964 (18 of 1964);
(xii) any other form or mode of investment or deposit as may be
prescribed."
23. The Punjab and Haryana High Court, by the impugned judgment dated
29th January, 2010 expressed its dissatisfaction with the view taken by the
Uttarakhand High Court in the case of Queen's Educational Society as
follows:
"8.8 We have not been able to persuade ourselves to accept the view
expressed by the Division Bench of the Uttrakhand High Court in the case
of Queens Educational Society (supra). There are variety of reasons to
support our opinion. Firstly, the scope of the third proviso was not under
consideration, inasmuch as, the case before the Uttrakhand High Court
pertained to Section 10(23C)(iiiad) of the Act. The third proviso to
Section 10(23C)(vi) is not applicable to the cases falling within the
purview of Section 10(23C)(iiiad). Secondly, the judgment rendered by the
Uttarkhand High Court runs contrary to the provisions of Section
10(23C)(vi) of the Act including the provisos thereunder. Section
10(23C)(vi) of the Act is equivalent to the provisions of Section 10(22)
existing earlier, which were introduced with effect from 1st April, 1999
and it ignores the speech of the Finance Minister made before the
introduction of the said provisions, namely. Section 10(23C) of the Act
[See observations in American Hotel and Lodging Association Educational
Institute's case (supra)]. Thirdly, the Uttrakhand High Court has not
appreciated correctly the ratio of the judgment rendered by Hon'ble the
Supreme Court in the case of Aditanar Educational Institution(supra) and
while applying the said judgment including the judgment which had been
rendered by Hon'ble the Supreme Court in the case of Children Book
Trust (supra), it lost sight of the amendment which had been carried out
with effect from 1st April, 1999 leading to the introduction of the
provisions of Section 10(23C) of the Act. Lastly, that view is not
consistent with the law laid down by Hon'ble the Supreme Court in American
Hotel and Lodging Association Educational Institute (surpa)."
It then summed up its conclusions as follows:
"8.13 From the aforesaid discussion, the following principles of law can
be summed up:-
(1) It is obligatory on the part of the Chief Commissioner of Income Tax or
the Director, which are the prescribed authorities, to comply with proviso
thirteen (un-numbered). Accordingly, it has to be ascertained whether the
educational institution has been applying its profit wholly and exclusively
to the object for which the institution is established. Merely because an
institution has earned profit would not be deciding factor to conclude that
the educational institution exists for profit.
(2) The provisions of Section 10(23C)(vi) of the Act are analogous to the
erstwhile Section 10(22) of the Act, as has been laid down by Hon'ble the
Supreme Court in the case of American Hotel and Lodging
Association (supra). To decide the entitlement of an institution for
exemption under Section 10(23C)(vi) of the Act, the test of predominant
object of the activity has to be applied by posing the question whether it
exists solely for education and not to earn profit [See 5-Judges
Constitution Bench judgment in the case of Surat Art Silk Cloth
Manufacturers Association (supra)]. It has to be borne in mind that merely
because profits have resulted from the activity of imparting education
would not result in change of character of the institution that it exists
solely for educational purpose. A workable solution has been provided by
Hon'ble the Supreme Court in para 33 of its judgment in American Hotel and
Lodging Association's case (supra). Thus, on an application made by an
institution, the prescribed authority can grant approval subject to such
terms and conditions as it may deems fit provided that they are not in
conflict with the provisions of the Act. The parameters of earning profit
beyond 15% and its investment wholly for educational purposes may be
expressly stipulated as per the statutory requirement. Thereafter the
Assessing Authority may ensure compliance of those conditions. The cases
where exemption has been granted earlier and the assessments are complete
with the finding that there is no contravention of the statutory
provisions, need not be reopened. However, alter grant of approval if it
comes to the notice of the prescribed authority that the conditions on
which approval was given, have been violated or the circumstances mentioned
in 13th proviso exists, then by following the procedure envisaged in 13th
proviso, the prescribed authority can withdraw the approval.
(3) The capital expenditure wholly and exclusively to the objects of
education is entitled to exemption and would not constitute part of the
total income.
(4) The educational institutions, which are registered as a Society, would
continue to retain their character as such and would be eligible to apply
for exemption under Section 10(23C)(vi) of the Act. [See para 8.7 of the
judgment-Aditanar Educational Institution case (supra)]
(5) Where more than 15% of income of an educational institution is
accumulated on or after 1st April, 2002, the period of accumulation of the
amount exceeding 15% is not permissible beyond five years, provided the
excess income has been applied or accumulated for application wholly and
exclusively for the purpose of education.
(6) The judgment of Uttrakhand High Court rendered in the case of Queens
Educational Society (supra) and the connected matters, is not applicable to
cases fall within the provision of Section 10(23C)(vi) of the Act. There
are various reasons, which have been discussed in para 8.8 of the judgment,
and the judgment of Allahabad High Court rendered in the case of City
Montessori School (supra) lays down the correct law."
And finally held:
"8.15 As a sequel to the aforesaid discussion, these petitions are
allowed and the impugned orders passed by the Chief Commissioner of Income
Tax withdrawing the exemption granted under Section 10(23C)(iv) of the Act
are hereby quashed. However, the revenue is at liberty to pass any fresh
orders, if such a necessity is felt after taking into consideration the
various propositions of law culled out by us in para 8.13 and various other
paras.
8.16 The writ petitions stand disposed of in the above terms."
24. The view of the Punjab and Haryana High Court has been followed by
the Delhi High Court in St. Lawrence Educational Society (Regd.) v.
Commissioner of Income Tax & Anr., (2011) 53 DTR (Del) 130. Also in Tolani
Education Society v. Deputy Director of Income Tax (Exemption) & Ors.,
(2013) 351 ITR 184, the Bombay High Court has expressed a view in line with
the Punjab and Haryana High Court view, following the judgments of this
Court in the Surat Art Silk Manufacturers Association Case and Aditanar
Educational Institution case as follows:
".....The fact that the Petitioner has a surplus of income over expenditure
for the three years in question, cannot by any stretch of logical reasoning
lead to the conclusion that the Petitioner does not exist solely for
educational purposes or, as that Chief Commissioner held that the
Petitioner exists for profit. The test to be applied is as to whether the
predominant nature of the activity is educational. In the present case, the
sole and dominant nature of the activity is education and the Petitioner
exists solely for the purposes of imparting education. An incidental
surplus which is generated, and which has resulted in additions to the
fixed assets is utilized as the balance-sheet would indicate towards
upgrading the facilities of the college including for the purchase of
library books and the improvement of infrastructure. With the advancement
of technology, no college or institution can afford to remain stagnant. The
Income-tax Act 1961 does not condition the grant of an exemption under
Section 10(23C) on the requirement that a college must maintain the status-
quo, as it were, in regard to its knowledge based infrastructure. Nor for
that matter is an educational institution prohibited from upgrading its
infrastructure on educational facilities save on the pain of losing the
benefit of the exemption under Section 10(23C). Imposing such a condition
which is not contained in the statute would lead to a perversion of the
basic purpose for which such exemptions have been granted to educational
institutions. Knowledge in contemporary times is technology driven.
Educational institutions have to modernise, upgrade and respond to the
changing ethos of education.
Education has to be responsive to a rapidly evolving society. The
provisions of Section 10(23C) cannot be interpreted regressively to deny
exemptions. So long as the institution exists solely for educational
purposes and not for profit, the test is met."
25. We approve the judgments of the Punjab and Haryana, Delhi and Bombay
High Courts. Since we have set aside the judgment of the Uttarakhand High
Court and since the Chief CIT's orders cancelling exemption which were set
aside by the Punjab and Haryana High Court were passed almost solely upon
the law declared by the Uttarakhand High Court, it is clear that these
orders cannot stand. Consequently, Revenue's appeals from the Punjab and
Haryana High Court's judgment dated 29.1.2010 and the judgments following
it are dismissed. We reiterate that the correct tests which have been
culled out in the three Supreme Court judgments stated above, namely, Surat
Art Silk Cloth, Aditanar, and American Hotel and Lodging, would all apply
to determine whether an educational institution exists solely for
educational purposes and not for purposes of profit. In addition, we
hasten to add that the 13th proviso to Section 10(23C) is of great
importance in that assessing authorities must continuously monitor from
assessment year to assessment year whether such institutions continue to
apply their income and invest or deposit their funds in accordance with the
law laid down. Further, it is of great importance that the activities of
such institutions be looked at carefully. If they are not genuine, or are
not being carried out in accordance with all or any of the conditions
subject to which approval has been given, such approval and exemption must
forthwith be withdrawn. All these cases are disposed of making it clear
that revenue is at liberty to pass fresh orders if such necessity is felt
after taking into consideration the various provisions of law contained in
Section 10(23C) read with Section 11 of the Income Tax Act.
26. We now come to Civil Appeal No.8962 of 2010. Vide a judgment dated
29th January, 2010, the Punjab and Haryana High Court dismissed CWP No.7268
of 2009 in the following terms:
"8. It is conceded position that the assessee-petitioner has filed the
application on 23.9.2008 seeking exemption under Section 10(23C)(vi) in
respect of assessment year 2008-09, which could have been filed during the
financial year 2007-08 i.e. on or before 31.3.2008. It is, thus, evident
that the application by the assessee petitioner has been filed after the
prescribed period and the Chief Commissioner of Income Tax has rightly
rejected the same being not maintainable.
9. As a sequel to the above discussion, we find no ground to interfere
with the impugned order passed by the Chief Commissioner of Income Tax.
There is no merit in the instant petition warranting its admission.
Accordingly, the writ petition fails and the same is dismissed."
27. These being the facts, we see no reason to interfere. This appeal
shall stand dismissed with no order as to costs.
............................................J.
(T.S. Thakur)
............................................J.
(R.F. Nariman)
New Delhi,
March 16, 2015.