-1- AFR Court No.37 Civil Misc.Writ Petition No. 455 of 2014 Manas Sewa Samiti ..... Petitioner Versus Chief Commissioner of ...... Respondent Income Tax and another And Civil Misc. Writ Petition No. 609 of 2013 Manas Sewa Samiti ...... Petitioner's Versus Union of India and another ...... Respondents And Civil Misc. Writ Petition No. 18 of 2012 Manas Sewa Samiti ....... Petitioner's Versus Chief Commissioner of ....... Respondents Income-Tax and another Hon'ble Tarun Agarwala, J. Hon'ble Vinod Kumar Misra, J. (Per: Tarun Agarwala, J.) 1. petitioner is Society registered under Societies Registration Act. petitioner has various objects. One such object is to establish educational institution. In year 2001-02, petitioner established educational institution in -2- name and style of Institute of Information Management and Technology at Ramghat road at Aligarh. This institution is affiliated to Dr. Bhim Rao Ambedkar University, Agra. Prior to assessment year 2007-08, total receipts was below monetary limit of Rs. 10 crores. As such, petitioner fell under Section 10 (23C) (iii ad) of Income Tax Act (hereinafter referred to as Act). returns were filed accordingly which were accepted by department and petitioner- society was declared non taxable. 2. For assessment year 2007-08, petitioner filed its return showing income of Rs.86,81,911/-, which was not accepted. Assessing Officer found that income of petitioner was above Rs.10 crores and, accordingly, disallowed exemption claimed by petitioner under Section 10 (23C) (iiiad) of Act on ground that registration was required to be obtained under Section 10(23C) (vi) of Act. order of Assessing Officer was confirmed by Income Tax Appellate Tribunal. It is contended that appeal is pending before High Court, under Section 260A of Act. 3. Notwithstanding aforesaid, petitioner applied for registration under Section 10 (23C)(vi) of Act for assessment year 2008-09. said -3- application was rejected on ground that petitioner has several objects and was not running institute solely for educational purposes. Writ Petition No. 692 of 2010 was filed, which was allowed by judgment dated 17.5.2013 and matter was remitted to authority to pass fresh order in accordance with observation made therein. Pursuant to direction of Court, Chief Commissioner of Income Tax, Ghaziabad at Kanpur passed impugned order dated 19.9.2013 again rejecting application for registration. petitioner, being aggrieved, has filed present writ petition. 4. application of petitioner was rejected on following grounds: (i) applicant society does not exist solely for educational purpose; (ii) assessee society is generating profits over years which establish profit motive of assessee society; (iii) assessee has made huge expenditure on advertisement like commercial activity to promote business activities to earn more and more profits; (iv) assessee has made huge loans/advances to interested persons/concerns in violation of 3rd and 13th proviso to section 10(23C). -4- 5. Similarly, for assessment year 2010-11, application of petitioner was rejected by authority by order dated 21.9.2011, against which, writ petition No.18 of 2012 was filed. For assessment year 2011-12, petitioner's application was rejected by order dated 21.9.2011, against which writ petition No.609 of 2013 was filed. Since issue raised is common, all writ petitions are decided together. 6. In this backdrop, we have heard Shri S.D.Singh, learned Sr. Advocate along with Shri Rahul Agarwal for petitioner and Shri Ashok Kumar along with Sri Ashish Agarwal for Income Tax Department. 7. Registration is granted under Section 10 (23C) (vi) of Act. relevant portion is extracted hereunder: "10. In computing total income of previous year of any person, any income falling within any of following causes shall not be included .... (23C) Any income received any 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 (iiiab) or sub-clause -5- (iiiad) and which may be approved by prescribed authority. First, second, third, thirteenth and fourteenth Proviso of Section 10 (23C) reads as under: "First Proviso: - Provided that 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 (via) shall make application in prescribed form and manner to prescribed authority for purpose of grant of exemption, or continuance thereof, under sub- clause (iv) or sub-clause (v) or sub-clause (via): Second Proviso: - Provided further that prescribed authority, before approving any fund or trust or institution or any hospital or other medial institution, under sub- clause (iv) or sub-clause (vi) or sub-clause (via), may call for such documents (including audited annual accounts) or information from fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as case may be, as it thinks necessary in order to satisfy itself about genuineness of activities of such fund or trust or institution or -6- any university or other educational institution or any hospital or other medical institution, as case may be, and prescribed authority may also make such inquiries as it deems necessary in this behalf: Third Proviso: - Provided also that 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 (via). Thirteenth Proviso: - Provided also that where fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) is notified by Central Government or is approved by prescribed authority, as case may be, 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 (via), is approved by prescribed authority and subsequently that Government or 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 provisions contained in clause (a) of third -7- proviso;or (B) invested or deposited its funds in accordance with provisions contained in clause (b) of third proviso;or (ii) 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 conditions subject to which it was notified or approved, it may at at any time after giving reasonable opportunity of showing cause against proposed action to concerned fund or institution or trust or any university or other educational institution or any hospital or other medical institution, rescind notification or, by order, withdraw approval, as case may be, and forward copy of order rescinding notification or withdrawing approval to such fund or institution or trust or any university or other educational institution or any hospital or other medical institution and to Assessing Officer: Fourteenth Proviso provided also that in case fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in first proviso makes application on or after -8- 1st day of June, 2006 for purposes of grant of exemption or continuance thereof, such application shall be made on or before 30th day of September of relevant assessment year from which exemption is sought." 8. aforesaid provision was analysed by Supreme Court in American Hotel and Lodging Association Educational Institution Vs. CBDT (2008) 301 ITR 86 (SC) holding that if petitioner fulfills threshold conditions of educational institute under Section 10(23C) (vi) of Act, authority, in such eventuality, could not reject application. Supreme Court held : In American Hotel & Lodging Association, Educational Institute vs. CBDT 2008 (301) ITR 86 SC, Supreme Court analysed provision and found that second proviso lays down powers and duties of prescribed authority for vetting application for approval and that prescribed authority was empowered to call for documents including annual accounts or information to check genuineness of activities of institution. Under third proviso, prescribed authority, while judging genuineness of activities of applicant was required to ascertain whether applicant applies its income wholly -9- and exclusively for objects for which it was constituted or established. Supreme Court held that there was difference between stipulation of conditions and compliance therewith. threshold conditions are actual existence of educational institution and approval of prescribed authority. It is only if pre- conditions of actual existence of educational institution is fulfilled that question of compliance with stipulations set out in provisos would arise. Supreme Court held:- "We shall now consider effect of insertion of provisos to Section 10(23C)(vi) vide Finance (No.2) Act, 1998. Section 10(23C)(vi) is analogous to Section 10(22). To that extent, judgments of this Court as applicable to Section 10(22) would equally apply to Section 10(23C)(vi). problem arises with insertion of provisos to Section 10(23C)(vi). With insertion of provisos to Section 10(23C)(vi) applicant who seeks approval has not only to show that it is institution existing solely for educational purposes which was also requirement under Section 10 (22) but it has now to obtain initial approval from prescribed authority, in terms of Section 10(23C)(vi) by making application in standardized form as mentioned in first -10- proviso to that section. That condition of obtaining approval from prescribed authority 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 insertion of first proviso, prescribed authority is required to vet application. This vetting process is stipulated by second proviso. It is important to note that second proviso also indicates powers and duties of prescribed authority. While considering approval application in second proviso, prescribed authority is empowered before giving approval to call for such documents including annual accounts or information from applicant to check genuineness of activities of applicant institution. Earlier that power was not there with prescribed authority. Under third proviso, prescribed authority has to ascertain while judging genuineness of activities of applicant institution as to whether applicant applies its income wholly and exclusively to objects for which it is constituted/established. Under twelfth proviso, prescribed authority is required to examine -11- cases where applicant does not apply its income during year of receipt and accumulates it but makes payment therefrom to any trust or institution registered under section 12AA or to any fund or trust or institution or university or other educational institution and to that extent proviso states that such payment shall not be treated as application of income to objects for which such trust or fund or educational institution is established. idea underlying twelfth proviso is to provide guidance to prescribed authority as to meaning of words 'application of income to objects for which institution is established'. Therefore, twelfth proviso is matter of detail. most relevant proviso for deciding this appeal is thirteenth proviso. Under that proviso, circumstances are given under which prescribed authority is empowered to withdraw approval earlier granted. Under that proviso, if prescribed authority is satisfied that trust, fund, university or other educational institution etc. has not applied its income in accordance with third proviso or if it finds that such institution, trust or fund etc. has not invested/deposited its funds in accordance with third proviso or that activities of such fund or institution or trust etc. are not genuine or that its activities are not being carried out in -12- accordance with conditions subject to which approval is granted then prescribed authority is empowered to withdraw approval earlier granted after complying with procedure mentioned therein." In instant case, it is not disputed that petitioner society is running educational institution. Merely because there are other objects of society does not mean that educational institution is not existing solely for educational purpose. emphasis of word "solely" is in relation to educational institution, which is running not for purpose of making profit and is not in relation to objects of society. 9. Supreme Court categorically held that authority was required to consider nature and genuineness of activities of applicant institution. conditions set out in third proviso was not to be tested at stage of approval since required facts would take place in future. requirement mentioned in third proviso could only be tested when assessment proceedings were being made and, authority, at that stage, would consider requirement provided in third proviso. At stage of registration, authority is only required to examine nature, activity and genuineness of institution. mere existence -13- that there is some profit does not disqualify applicant if sole purpose of existence was not profit making but educational activities. authority was required to find out predominant object of activity and see whether institution exists solely for education and not to earn profit. 10. Based on aforesaid judgment of Supreme Court, various decisions have been passed by this Court in Allahabad Young Men's Christian Association Vs. Chief Commissioner of Income Tax and others, (2015) 371 ITR 23 (All), Simpkins School Vs. Director General of Income- Tax(Investigation) And Others, (2014) 367 ITR 335 (All), Sunbeam Academy Educational Society Vs. Chief Commissioner of Income-Tax And Others, (2014) 365 ITR 378 (All). Delhi High Court in Director of Income-Tax (Exemption) Vs. ACME Educational Society, (2010) 326 ITR 146 (Delhi) held that advancing of interest free temporary loan by one society to another society having similar objects is neither investment nor deposit and, therefore such loan given does not violate provisions of Section 13(1) (d) read with section 11(5) of Act. 11. Supreme Court in Queen's Educational Society Vs. Commissioner of Income-Tax, (2015) 372 ITR 699 (SC) reiterated principles -14- enunciated in American Hotel (Supra) and held that mere fact that educational institution makes surplus does not lead to conclusion that it ceases to exist solely for educational purposes and becomes institution for purpose of making profit. Supreme Court held that predominant object must be applied. 12. It will be noticed that section has three requirements- (a) educational institution must exist solely for educational purposes, (b) it should not be for purposes of profit, and (c) aggregate annual receipts of such institution should not exceed amount or annual receipts as may be prescribed. Such prescription is to be found in rule 2CA being amount of Rs. 1 crore. 13. In light of aforesaid, categorical assertion has been made that petitioner is only running educational institution and is not carrying on any other activity. This fact has not been denied by respondents in their counter affidavit. finding given by Commissioner that petitioner-society does not exist solely for educational purposes is based on no reasoning. No finding has been given on this aspect. In our opinion, this finding is perverse. 14. Further, mere fact that petitioner is making profit does not indicate that it is carrying on -15- activity solely for purpose of making profit and that it ceases to be for educational purpose. In our opinion, predominant test as given by Supreme Court in American Hotel (Supra) and Queen's Educational Society (Supra) has to be considered. Further, we find that Commissioner has considered profit before applying depreciation, which is incorrect. authority is required to consider profit after allowing depreciation and is also further required to consider investment made by petitioner in creation of fixed assets. These investments of capital nature are required to be considered while calculating money spent by them in educational activity. Further, fact that petitioner is generating profit or is carrying on commercial activity and is making huge expenditure in advertisement is fact, which is not required to be considered at stage of considering application for grant of registration. These factors would come into play under 3rd and 13th proviso at stage of considering return and making assessment. Further, expenditure on advertisement made does not necessarily means that activity of petitioner is commercial in nature or is being done with intention to earn more profit. Such finding given by authority is patently erroneous. We also find that issue relating to loans and -16- advance is covered by decision of Delhi High Court in ACME Educational Society (Supra). 15. In light of aforesaid, impugned orders passed by Commissioner Income Tax, Ghaziabad cannot be sustained and are quashed. All writ petitions are allowed. matter is remitted back to competent authority to decide matter afresh in light of observation made above and in light of principles enunciated by Supreme Court in case of American Hotel (Supra) and Queen's Educational Society (Supra) and other decisions of this Court as stated aforesaid. order shall be passed by competent court within three months from date of production of certified copy of this order after giving opportunity of hearing. Dt. 02.11.2015 MAA/- (Vinod Kumar Misra,J.) (Tarun Agarwala,J.) Manas Sewa Samiti v. Chief Commissioner of Income Tax and another