Reserved Judgment IN HIGH COURT OF UTTARAKHAND AT NAINITAL Writ Petition (M/S) No.377 of 2013 Mallikarjun School Society . Petitioner Versus Chief Commissioner of Income Tax Respondent Mr. Mohit Maulekhi, Adv. for petitioner. Mr. H.M. Bhatia, Standing Counsel, for respondent-Income Tax. Reserved on: 09.11.2017 Delivered on: 17.11.2017 Hon ble Rajiv Sharma , J. Petitioner is society, registered under Societies Registration Act 1860, vide registration Certificate No.514/2001 dated 28.12.2001. It was renewed vide renewal certificate dated 12.7.2007. Society had applied for renewal of its registration on 25.12.2012. main purpose, aim and object, as stated in Memorandum of Association of Society is to impart education along with ancillary objects. Petitioner has placed on record copy of Memorandum of Association vide Annexure No.3. It is running educational institution in name and style of Mallikarjun School . Petitioner society applied for exemption u/s 10(23C)(iv) of Income Tax Act, 1961 (hereinafter to be referred as Act ) on 20.9.2011. assessee was asked vide show cause notice dated 3.9.2012 to furnish information/documents. Petitioner supplied information, as asked for. 2. gist of reply filed by petitioner- Society was that surplus of Society was utilized for expansion/addition of school building. It was also 2 stated that building constitutes integral part of educational institution and addition to building would further advance object of Society. 3. case of petitioner Society was rejected by impugned order dated 13.09.2012 passed by respondent-Chief Commissioner of Income Tax. 4. Learned counsel for petitioner has argued that respondent authority has erred in law in giving findings against petitioner society. On other hand, learned counsel for respondent has justified impugned order. 5. Petitioner society was running 08 school buses to ferry students. case of petitioner society was rejected primarily on ground that assessee could not produce any evidence that buses were being used for school only. It was also stated while rejecting case of petitioner that other than imparting educational, tourism was also one of objects. 6. In rejoinder affidavit, petitioner society has averred that buses were procured and painted yellow as per requirement of law. 7. It is evident from combine reading of Memorandum of Association that Society has been primarily established to impart education. school is required to have necessary infrastructure to impart education in effective manner. Chief Commissioner of Income Tax has come to wrong conclusion that Society was making systematic profit. schools are required to invest in infrastructure including expansion of building etc. Every school is required to provide latest facilities to students and for this purpose, construction of new building is 3 essential. business earned by society is pumped again for raising infrastructure. 8. Learned counsel appearing on behalf of Revenue has also argued that Society could not file application. questions raised in this petition are no more res integra in view of law laid down by their Lordships of Hon. Apex Court in 2008 (10) SCC 509 in matter of American Hotel & Lodging Association Educational Institute v. CBDT . Their Lordships have held as under: - 30. In conclusion, learned counsel submits that there is no dispute that certain huge amount of Rs 1,30,30,288 has been remitted and that fact alone is conclusive circumstance to show that appellant Institution is commercial venture existing for profit and that it is not existing solely for educational purposes in India. learned counsel urged that third proviso brought in concept of application of income vide Finance Act, 1998 in order to bring about parity between universities and other educational institutions, on one hand, and public charitable trusts covered by Sections 11 and 12 under 1961 Act. Therefore, according to learned counsel, even at stage of approval, PA can take into account not only nature, activities and genuineness of Institute but also manner in which income derived in India is spent/utilised in India. learned counsel submits that in view of Finance Act, 1998, provisions of Section 11(1)(a) have got to be read into provisions of Section 10(23-C)(vi) and if so read applicant Institute is required to state in its application as to how it has utilised its income in India in year ending 31-3-1999. In this connection, learned counsel referred to Section 11(1)(a) which states that certain incomes shall not be included in total income of previous year of person in receipt of such income if such income is derived from property held under trust, wholly for charitable or religious purposes, to extent of which such income is applied to such purposes in India. learned counsel submits that under Section 10(23-C)(vi) as well as third proviso thereto, words in India are not there but to give purposive interpretation to said section court should read those words into Section 10(23-C)(vi) to stop shifting of income /profits accruing in India from being transferred to US. According to learned counsel, when appellant herein expatriated sum of Rs 1,30,30,288 or Rs 1.14 crores (approx.) after taking into account expenses incurred by HO to USA, it is clear that appellant Institution has failed to comply with requirements of Section 10(23- C)(vi) and, therefore, it is not entitled to approval. For aforestated reasons, according to learned counsel, no interference is called for in present case. 33. We also quote hereinbelow Section 11(1)(a) of 1961 Act, which reads as follows: 11. Income from property held for charitable or religious purposes. (1) Subject to provisions of Sections 60 to 63, following income shall not be included in total income of previous year of person in receipt of income (a) income derived from property held under trust wholly for charitable or religious purposes to extent to which such income 4 is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to extent to which income so accumulated or set apart is not in excess of fifteen per cent of income from such property; 38. In deciding character of recipient, it is not necessary to look at profits of each year, but to consider nature of activities undertaken in India. If Indian activity has no correlation with education, exemption has to be denied (see judgment of this Court in Oxford University Press1). Therefore, character of recipient of income must have character of educational institution in India to be ascertained from nature of activities. If after meeting expenditure, surplus remains incidentally from activity carried on by educational institution, it will not cease to be one existing solely for educational purposes. In other words, existence of surplus from activity will not mean absence of educational purpose (see judgment of this Court in Aditanar Educational Institution v. CIT4). test is nature of activity. If activity like running printing press takes place it is not educational. But whether income/profit has been applied for non- educational purpose has to be decided only at end of financial year. 39. In Oxford University Press1 this Court found that applicant was branch of Oxford Press which was part of Oxford University but its activity in India was restricted to publishing books, journals, periodicals, etc. Tribunal held that because Oxford Press is part of university its income was exempt under Section 10(22) as it stood at relevant time. It is in this context that words existing solely for educational purposes and not for purposes of profit in Section 10(22), which words also find place in Section 10(23-C)(vi), came for consideration. This Court held that location of university is not relevant, what is relevant is whether there is imparting of education in India. Therefore, test formulated by this Court to decide character of recipient of income under Section 10(22) is whether there is in fact existence of activity which is in nature of imparting of education in India . This is how words in India have come into judgment and not by incorporation from Section 11(1)(a) of 1961 Act, as contended on behalf of Department. 9. Their Lordships of Hon. Supreme Court in 2015 (8) SCC 47 in case of Queen s Educational Society v. Commissioner of Income Tax have held that dominant object is to be applied whether educational institution exists solely for educational purposes and not for purposes of profit. Their Lordships have also explained application of three requirements to seek exemption u/s 10(23-c)(vi) of Income Tax Act as under: - 5. It will be noticed that Section 10(23-C)(iii-ad) 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 of annual 5 receipts as may be prescribed. Such prescription is to be found in Rule 2- CA being amount of Rs 1 crore. 6. said Section 10(23-C)(iii-ad) was inserted by Finance Act 2 of 1998 with effect from 1-4-1999. Prior thereto, Income Tax Act had corresponding section, namely, Section 10(22) which was as follows: 10. Incomes not included in total income. In computing total income of previous year of any person, any income falling within any of following clauses shall not be included * * * (22) any income of university or other educational institution, existing solely for educational purposes and not for purposes of profit; . 11. Thus, law common to Sections 10(23-C)(iii-ad) and (vi) may be summed up as follows: (1) Where educational institution carries on activity of education primarily for educating persons, fact that it makes surplus does not lead to conclusion that it ceases to exist solely for educational purposes and becomes institution for purpose of making profit. (2) predominant object test must be applied purpose of education should not be submerged by profit-making motive. (3) distinction must be drawn between making of surplus and institution being carried on for profit . No inference arises that merely because imparting education results in making profit, it becomes activity for profit. (4) If after meeting expenditure, surplus arises incidentally from activity carried on by educational institution, it will not cease to be one existing solely for educational purposes. (5) ultimate test is whether on overall view of matter in assessment year concerned object is to make profit as opposed to educating persons. 23. Punjab and Haryana High Court, by impugned judgment dated 29-1-20102 expressed its dissatisfaction with view taken by Uttarakhand High Court in Queen s Educational Society1 as follows: (SCC OnLine P&H para 8.8) 8.8. We have not been able to persuade ourselves to accept view expressed by Division Bench of Uttarakhand High Court in Queen s Educational Society1. There are variety of reasons to support our opinion. Firstly, scope of third proviso was not under consideration, inasmuch as, case before Uttarakhand High Court pertained to Section 10(23-C)(iii-ad) of Act. third proviso to Section 10(23-C)(vi) is not applicable to cases falling within purview of Section 10(23-C)(iii-ad). Secondly, judgment rendered by Uttarakhand High Court runs contrary to provisions of Section 10(23-C)(vi) of Act including provisos thereunder. Section 10(23- C)(vi) of Act is equivalent to provisions of Section 10(22) existing earlier, which were introduced with effect from 1-4-1999 and it ignores speech of Finance Minister made before introduction of said provisions, namely, Section 10(23-C) of Act. (See observations in American Hotel & Lodging Assn. Educational Institute case9.) Thirdly, Uttarakhand High Court has not appreciated correctly ratio of judgment rendered by Hon ble Supreme Court in Aditanar Educational Institution8 and while applying said judgment including judgment which had been rendered by Hon ble Supreme Court in Children Book Trust11, it lost sight of amendment which had been carried out with effect from 1-4-1999 leading to introduction of provisions of Section 10(23-C) of Act. Lastly, that view is not consistent with law laid down by 6 Hon ble Supreme Court in American Hotel & Lodging Assn. Educational Institute9. It then summed up its conclusions as follows: (Pinegrove International Charitable Trust case2, SCC OnLine P&H para 8.13) 8.13. From aforesaid discussion, following principles of law can be summed up: (1) It is obligatory on part of Chief Commissioner of Income Tax or Director, which are prescribed authorities, to comply with proviso thirteen (un-numbered). Accordingly, it has to be ascertained whether educational institution has been applying its profit wholly and exclusively to object for which institution is established. Merely because institution has earned profit would not be deciding factor to conclude that educational institution exists for profit. (2) provisions of Section 10(23-C)(vi) of Act are analogous to erstwhile Section 10(22) of Act, as has been laid down by Hon ble Supreme Court in American Hotel & Lodging Assn.9 To decide entitlement of institution for exemption under Section 10(23-C)(vi) of Act, test of predominant object of activity has to be applied by posing question whether it exists solely for education and not to earn profit (see five-Judge Constitution Bench judgment in Surat Art Silk Cloth Manufacturers Assn.3). It has to be borne in mind that merely because profits have resulted from activity of imparting education would not result in change of character of institution that it exists solely for educational purpose. workable solution has been provided by Hon ble Supreme Court in para 33 of its judgment in American Hotel & Lodging Assn. case9. Thus, on application made by institution, prescribed authority can grant approval subject to such terms and conditions as it may deem fit provided that they are not in conflict with provisions of Act. parameters of earning profit beyond 15% and its investment wholly for educational purposes may be expressly stipulated as per statutory requirement. Thereafter assessing authority may ensure compliance with those conditions. cases where exemption has been granted earlier and assessments are complete with finding that there is no contravention of statutory provisions, need not be reopened. However, after grant of approval if it comes to notice of prescribed authority that conditions on which approval was given, have been violated or circumstances mentioned in 13th proviso exists, then by following procedure envisaged in 13th proviso, prescribed authority can withdraw approval. (3) capital expenditure wholly and exclusively to objects of education is entitled to exemption and would not constitute part of total income. (4) educational institutions, which are registered as Society, would continue to retain their character as such and would be eligible to apply for exemption under Section 10(23-C)(vi) of Act. (See para 8.7 of judgment in Aditanar Educational Institution case8.) (5) Where more than 15% of income of educational institution is accumulated on or after 1-4-2002, period of accumulation of amount exceeding 15% is not permissible beyond five years, provided excess income has been applied or accumulated for application wholly and exclusively for purpose of education. (6) judgment of Uttarakhand High Court rendered in Queen s Educational Society1 and connected matters, is not applicable to cases which fall within provisions of Section 10(23- C)(vi) of Act. There are various reasons, which have been discussed in para 8.8 of judgment, and judgment of 7 Allahabad High Court rendered in City Montessori School13 lays down correct law. And finally held: (SCC OnLine P&H paras 8.15 & 8.16) 8.15. As sequel to aforesaid discussion, these petitions are allowed and impugned orders passed by Chief Commissioner of Income Tax withdrawing exemption granted under Section 10(23- C)(iv) of Act are hereby quashed. However, Revenue is at liberty to pass any fresh orders, if such necessity is felt after taking into consideration various propositions of law culled out by us in para 8.13 and various other paras. 8.16. writ petitions stand disposed of in above terms. 24. view of Punjab and Haryana High Court has been followed by Delhi High Court in St. Lawrence Educational Society v. CIT14. Also in Tolani Education Society v. Director of Income Tax (Exemption)15, Bombay High Court has expressed view in line with Punjab and Haryana High Court s view, following judgments of this Court in Surat Art Silk Cloth Manufacturers Assn. case3 and Aditanar Educational Institution case8 as follows: (Tolani Education Society case15, SCC OnLine Bom para 13) 13. fact that petitioner has surplus of income over expenditure for three years in question, cannot by any stretch of logical reasoning lead to conclusion that petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that petitioner exists for profit. test to be applied is as to whether predominant nature of activity is educational. In present case, sole and dominant nature of activity is education and petitioner exists solely for purposes of imparting education. incidental surplus which is generated, and which has resulted in additions to fixed assets is utilised as balance sheet would indicate towards upgrading facilities of college including for purchase of library books and improvement of infrastructure. With advancement of technology, no college or institution can afford to remain stagnant. Income Tax Act, 1961 does not condition grant of exemption under Section 10(23-C) on requirement that college must maintain status quo, as it were, in regard to its knowledge-based infrastructure. Nor for that matter is educational institution prohibited from upgrading its infrastructure on educational facilities save on pain of losing benefit of exemption under Section 10(23-C). Imposing such condition which is not contained in statute would lead to perversion of 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 changing ethos of education. Education has to be responsive to rapidly evolving society. provisions of Section 10(23-C) cannot be interpreted regressively to deny exemptions. So long as institution exists solely for educational purposes and not for profit, test is met. 10. Division Bench of Bombay High Court in 2010 (327) ITR 121 in matter of Vanita Vishram Trust v. Chief Commissioner of I.T. has held that Trust is vested with primary object to provide education. Other objects mentioned in Trust are not relevant. Their Lordships have held as under: - 8 12. In so far aspect of surplus is concerned, one must in addition, advert to provision which has been made by Parliament in third proviso to Section 10(23C). By third proviso, it has been clarified that in case inter alia of Universities or other educational institutions which have applied its income or accumulated it for application wholly and exclusively to objects for which it is established and in case where fifteen per cent of income is accumulated on or after 1 April 2002, period of accumulation of amount exceeding fifteen per cent, shall in no case exceed five years. This provision would establish that Parliament did not regard accumulation of income by University or educational institution governed by subclause (vi) as disabling factor, so long as purpose of accumulation is application of income wholly and exclusively to objects for which institution has been established. Parliament has, however, prescribed that where more than fifteen per cent of income is accumulated after 1 April 2002, amount exceeding fifteen per cent shall not be accumulated for period in excess of five years. 13. For all these reasons, we are of view that rejection of approval by First Respondent was manifestly misconceived. Only two reasons have weighed with First Respondent in rejecting approval, both of which have been found to suffer from manifest error. In Aditanar Educational Institution (supra), Supreme Court, while construing provisions of Section 10(22), held that availability of exemption should be evaluated each year to find out whether institution has existed during relevant year solely for educational purposes and not for purposes of profit. If after meeting expenditure, surplus results incidentally from activity lawfully carried on by educational institution, institution will not cease to be one existing solely for educational purposes since object is not to make profit. decisive or acid test, Supreme Court observed, is whether on overall view of matter, object is to make profit. In evaluating or appraising issue, Supreme Court noted that one should bear in mind distinction between corpus, objects and powers of concerned entity. 14. First Respondent while rejecting applications of Petitioner has adverted to judgment of Uttarakhand High Court in Commissioner of Income Tax v. Queens' Educational Society MANU/UC/0174/2007 : (2009) 319 ITR 160 statement of facts as recited in judgment of High Court is to effect that assessee had profit of thirty per cent in Assessment Year 200001 and twenty seven per cent in Assessment Year 200102. assessee was conducting educational institution. Tribunal held that assessee was entitled to benefit of exemption under Section 10(23C). High Court observed that 'the law is well settled that if profit is proved by educational society then that will be income to Society as surplus amount remains in account books of society after meeting all expenses incurred towards imparting education'. reference was made to judgment of Supreme Court in Aditanar (supra). judgment of Supreme Court was, however, distinguished on ground that objects clause of assessee indicated that while there were other objects to be achieved, assessee had done nothing except to pursue main object of providing education and earning profit. Moreover, with profit earned, assessee had strengthened its capacity to earn more, rather than to undertake any other activities to fulfill other objects for which trust was constituted. Though Trust had made investment in fixed assets like furniture and buildings which may be connected with imparting of education this, High Court held, was with view to expanding institution and to earn more income. 9 15. If facts as they appear in judgment of Uttarakhand High Court are considered, case would be entirely distinguishable. judgment of High Court would indicate that assessee in that case was construed to be one which existed with object of enhancing income and of earning profits as opposed to provision of education. However, it would be necessary for this Court to observe that some of observations contained in judgment of Uttarakhand High Court may not be in conformity with law laid down by Supreme Court in Aditanar's case (supra). High Court took exception to conduct of assessee on ground that though it was entitled to pursue other 'noble and pious' objects, assessee had done nothing to achieve them and had only pursued main object of providing education and earning profit. Now, it must be appreciated that in order to obtain benefit of exemption under Section 10(23C)(vi), University or, as case may be, educational institution must exist solely for educational purposes and not for purposes of profit. requirement that institution must exist solely for educational purposes would militate against institution pursuing other objects. Consequently, High Court was, in our view and with due respect, not correct in holding as principle of law that benefit of exemption should be denied on ground that assessee has only pursued its main object of providing education and had not pursued other objects for which Trust was constituted. Were assessee to pursue other objects, it would clearly run afoul of subclause (vi). assessee must exist solely for educational purposes. In this view of matter, while we hold that facts of present case are distinguishable, we have also recorded our reservations about correctness of statement of legal principle in judgment of Uttarakhand High Court. attention of Court has also been drawn to fact that Division Bench of Punjab and Haryana High Court in Pinegrove International Charitable Trust v. Union of India CWP 6031 of 2009 decided on 29 January 2010 has also expressed reservation about view of Uttarakhand High Court in Queens' Educational Society (supra). 11. Division Bench of Allahabad High Court in (2013) 36 Taxmann.com 105 (Allahabad) in matter of Neeraj Janhitkari Gramin Sewa Sansthan v. CCIT has held that application was maintainable to seek exemption on behalf of society. Their Lordships have held as under: - 12. next question which now arises for consideration is whether application can be rejected on ground that memorandum of association of society provides for various other objects apart from educational activities. In this regard, argument of learned counsel for petitioner is that even though under unamended bye-laws of society, various other aims and objects were mentioned but according to application for approval and material on record, society is only carrying on educational activities. In this regard, specific assertion has been made in para 2 of application for approval. In para 7 of application, there is specific assertion that only source of income of society is nominal fees being charged from students and it has no other source of income. Learned counsel for petitioner has placed strong reliance on judgment of this Court in 10 case of C.P. Vidya Niketan Inter College Shikshan Society (supra). We find that there petitioner was society which had made application for approval under s. 10(23C)(vi) and its application for approval was rejected on ground that benefit of s. 10(23C)(vi) is available only to educational institution existing solely for purpose of imparting education, while application has been made by society having many activities that appear to be other than educational such as to make appropriate efforts for upliftment of public in social and cultural field etc. Therein, this Court had held that even though aims and objects of society may contain several objects but if it has been proved by material on record that society is not perusing any other activity apart from education then in such case, society will qualify for grant of approval under s. 10(23C)(vi) of Act. It was observed as under: In facts and circumstances, we are of opinion that as of now petitioner society running educational institution by name of C.P. Vidya Niketan Inter College at Kaimganj, District Farrukhabad imparts education to students from Class VI to XII, in absence of any allegation or material, object clause providing for other charitable activities, would not disentitle society from approval under s. 10(23C)(vi) of exemption. proviso added to s. 10(23C)(vi), specially provisos 2, 3, 12 and 13, give sufficient powers to check abuse of exemption. mere possibility, therefore, that society may in future pursue activities, which are not charitable, or closely connected with education for making profit, would not constitute grounds to reject approval under s. 10(23C)(vi). 13. Perusal of impugned order shows that pleading in this regard has not been taken into consideration. Further, in impugned orders, although, there is finding that society is having many objects other than educational, but there is no application of mind to assertion made by society that it is only pursuing educational activity and no other. In view of Division Bench decision of this Court in case of C.P. Vidya Niketan Inter College Shikshan Society (supra), in case, society is pursuing only educational objects and no other activity then application by such society for grant of approval under s. 10(23C)(vi) cannot be rejected on ground that its aims and objects contain several other objects apart from educational and application by such society is perfectly maintainable. 12. Accordingly, writ petition is allowed. Impugned order dated 13.9.2012 (Annexure No.1) passed by respondent is quashed and set aside. respondent is directed to grant exemption to petitioner-Society for relevant assessment year. No order as to costs. (Rajiv Sharma, J.) Rdang Mallikarjun School Society v. Chief Commissioner of Income-tax