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IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 24th DAY OF FEBRUARY 2014 PRESENT THE HON’BLE MR.JUSTICE DILIP B.BHOSALE AND THE HON’BLE MR.JUSTICE B.MANOHAR I.T.A.NOS.299-300/2013 BETWEEN: Geetanjali Education Society, Rep. by its Secretary Smt.S.Nagarathna Murthy, No.848, 1st main, 1st block, HAL II stage, New Thippasandra, Geetanjali Layout, Bangalore-560 075. …APPELLANT (By Sri.A.Shankar, Adv.) AND: The Assistant Director of Income Tax, (Exemptions), Circle – 17(1), III floor, C R Buildings, Queens Road, Bangalore-560 001. ...RESPONDENT (By Sri.K.V.Aravind, Adv.) These appeals are filed under Section 260-A of I.T.Act, 1961, arising out of the order dated 28.02.2013 passed
in
ITA
No.714/Bang/2012
&
ITA
715/Bang/2012, for the Assessment years 2006-2007
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and 2007-2008, praying to formulate the substantial questions of law stated therein and allow the appeal and set aside the order passed by the ITAT, Bangalore, in ITA
No.714/Bang/2012
&
ITA
No.715/Bang/2012
dated 28.02.2013. These appeals coming on for hearing this day, DILIP B.BHOSALE J, delivered the following:PC: In these appeals, the appellant-Society has raised the following substantial questions of law for our consideration:(i)
Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that
the
appellant-Society
is
not
existing solely for educational purpose, merely because clauses 3(b) and 3(h) in their memorandum of objects are other than education, and even though they do not carry on those objects, still they are not eligible to claim exemption under Section 10(23C)(iiiad) of the Income Tax Act, 1961?
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(ii)
Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the
clauses
Memorandum
3(b)
and
of
3(h)
objects
in
the
are
not
connected with education and that the appellant is not existing solely for educational purpose so as to claim exemption under Section 10(23C)(iiiad) of the Act? 2. Briefly stated, the facts leading to these appeals are that the appellant is a Society registered under the Societies
Registration
Act,
1960
(for
short
‘the
Society’). The Society runs primary, middle and high school in the name of Geetanjali Vidyalaya (for short ‘the school’). They are not engaged in other activities except
running
the
school.
They
were
granted
registration under Section 12A of the Income Tax Act, 1961 (for short ‘the Act’).
In these appeals, we are
concerned with the Assessment Years 2006-07 and 2007-08.
The Society filed its return of income
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declaring it ‘Nil’, claiming exemption under Section 10(23C) (iiiad) of the Act. Their case was re-opened by issuing notice under Section 148 of the Act. Assessing
Officer
vide
order
dated
The
28.10.2010,
concluded the assessment for both the Assessment years under Section 143(3) r/w Section 147 of the Act determining
the
total
income
of
the
Society
at
Rs.23,90,710/- for the Assessment Year 2006-07 and Rs.37,72,420/-
for
the
Assessment
Year
2007-08
declaring their income excess over the expenditure holding that the Society is not existing solely for educational purpose, since it has included certain objects
in
its
Memorandum
not
connected
with
education and is, therefore, not entitled for exemption under Section 10(23C) (iiiad) of the Act.
The
order
of
the
Assessing
Officer
dated
28.10.2010 was carried in appeal by the Society before the Commissioner of Income Tax (Appeals) (for short
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‘the Appellate Authority’).
The Appellate Authority,
after considering the case of the Society vide order dated 14.03.2012 allowed the appeal for both the Assessment years holding that the Society had not carried on any activity other than the educational activity and granted exemption under Section 10(23C) (iiiad) of the Act. The order of the Appellate Authority was then carried by the Revenue in further appeal before the Appellate Tribunal. The Appellate Tribunal by the impugned order, allowed the appeal filed by the Revenue in
respect of the
Assessment years holding that the Society has included certain objects, not connected with education in its memorandum of objects and, therefore, it cannot be regarded
as
existing
solely
for
the
purposes
of
education. 3. It is against this backdrop, we have heard learned counsel for the parties for some time and with their assistance, gone through all the three orders and other materials placed before us.
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4. The Society is engaged in imparting education in the school run by them is not in dispute. It is also not in dispute that from the Assessment year 2008-09 onwards, the Society was granted registration under Section 12A of the Act. The objects of the Society on the basis of which, the Revenue claim that the Society during the relevant assessment year was not existing solely for education purpose, read thus:Clause 3(b): The Society will emphasis on establishment of Urnic, Religious and social institutions with job oriented courses and paramedical institutions; and Clause 3(h): To implement women and child welfare programs. 5. It is on the basis of these objects, it appears, the Tribunal held that the Society is engaged in the activities other than educational activity and hence not entitled to claim benefit under Section 10(23C)(iiiad) of the Act. Section 10(23C)(iiiad) of the Act, read thus:-
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10. 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 (23C) any income received by any person on behalf of (iiiad)
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 may be prescribed; 6. From bare perusal of this provision, it is clear that any income received by any person on behalf of the educational institution “existing” solely for educational purpose and not for purposes of profit and if its aggregate annual receipts do not exceed the amount of annual receipts as may be prescribed, it is entitled for exemption under this provision. The amount of annual
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receipts prescribed is admittedly Rs.1 crore vide Rule 2BC of the Income Tax Rules, 1962. 7. In the present cases, before we advert to the submissions advanced by learned counsel for the parties
and
record
our
reasons,
it
would
be
advantageous to state few admitted facts. The appellantSociety is an Educational Institution which runs the school.
The amount of annual receipts of the Society
did not exceed Rs.1 crore during both the Assessment Years i.e., 2006-07 and 2007-08. The Society did not have any other activity except running the school during both the Assessment years. In other words, it is not in dispute that except for conducting the school, the Society did not carry on any other activities right from inception, in particular, during the relevant Assessment Years (2006-07 & 2007-08). Even if it is accepted, that the objects of the Society as reflected in clause 3(b) and 3(h) of the Memorandum of Association are not related
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to education, admittedly, the society did not/is not involved in these activities. It is against these admitted facts,
we
would
now
proceeded
to
consider
the
submissions advanced on behalf of both sides placing reliance upon the judgments of the Supreme Court and other High Courts. 8. At the outset, we would like to consider the judgment of the Supreme Court in American Hotel and Lodging Association Educational Institution v. Central Board of Direct Taxes and others [(2008) 301 ITR 86 (SC)], on which, Mr.Aravind, learned counsel appearing for the Revenue placed heavy reliance to contend that mere existence of object/s in the Memorandum of Association not related to the education is sufficient to deny exemption/benefit under the provisions contained in Section 10(23C) (iiiad) of the Act. In American Hotel’s case,
the
Supreme
Court
was
dealing
with
the
provisions contained in Section 10(22) of the Act and the question, for our purpose, fell for its consideration
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was, whether the activities of the appellant-institute came within the definition of “income of educational institution”.
The following observations were heavily
relied upon by Mr.Aravind, learned counsel for the Revenue. “Under Section 10(22), one had to closely analyse the activities of the institute, the objects of the institute and its source of income and its utilization. Even if one of the objects enabled the institute to undertake commercial activity, the institute would not be entitled to approval under section 10(22). The said section, inter alia, excludes the income of the educational institute from the total income”. 9. It was submitted that mere existence of clause 3(b) and 3(h) in the Memorandum of Association, which enabled the Society to undertake other activities, not related to the educational activities is sufficient to deny exemption as claimed by them for both the assessment years. The Institution in American Hotel, according to
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memorandum of understanding, had several objects and it is in this backdrop, the following observations made by the Supreme Court are relevant for our purpose:“To make the section with the proviso workable we are of the view that the monitoring conditions in the third proviso like
application/utilization
of
income,
pattern of investments to be made, etc., could be stipulated as conditions by the prescribed authority subject to which the approval could be granted. For example, in marginal cases like the present case, where the appellant-institute was given exemption up to the financial year ending March 31, 1998 (assessment year 1998-99) and where an application is made on April 7, 1999, within seven days of the new dispensation coming into force, the prescribed authority can grant approval subject to such terms and conditions as it deems fit provided they are not in conflict with the provisions of the 1961 Act (including the abovementioned monitoring conditions).
While
imposing
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stipulations subject o which approval is granted, the prescribed authority may insist on certain percentage of accounting income to
be
utilized/applied
for
imparting
education in India. While making such stipulations, the prescribed authority has to examine the activities in India which the applicant has undertaken in its constitution, memorandum agreement
of
with
India/National
understanding the
Council.
Government In
this
and of case,
broadly the activities undertaken by the appellant are conducting classical education by providing course materials, designing courses,
conducting
exams,
granting
diplomas, supervising exams, all under the terms of an agreement entered into with institutions of the Government of India. Similarly, the prescribed authority may grant approvals on such terms and conditions as it deems fit in case where the institute applies for initial approval for the first time. prescribed
authority
must
give
The an
opportunity to the applicant-institute to comply with the monitoring conditions which
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have been stipulated for the first time by the third proviso. Therefore, cases where earlier the applicant has obtained exemption(s), as in this case, need not be reopened on the ground that the third proviso has not been complied with.
However, after grant of
approval, if it is brought to the notice of the prescribed
authority
that
conditions
on
which approval was given are breached or that the circumstances mentioned in the thirteenth proviso exists then the prescribed authority can withdraw the approval earlier given by following the procedure mentioned in that proviso.
The view we have taken,
namely, that the prescribed authority can stipulate
conditions
subject
to
which
approval may be granted finds support from sub-clause (ii) (B) in the thirteenth proviso”. 10. After making these observations, the Supreme Court set aside the order passed by the Central Board of Direct
Taxes
and
remitted
the
matter
for
fresh
consideration in accordance with law and while doing so, clarified that, in that case, the appellant had
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fulfilled, the threshold pre-condition of actual existence of an educational institution under Section 10(23C) (vi) and therefore, on that count, the Central Board of Direct Taxes, would not reject the approval application made by the appellant therein.
11. From bare perusal of the observations made by the Supreme Court in American Hotel’s case, what appears to us, is that the Assessing Officer while considering the case, such as one in hand, has to closely analyse activities of the Institute, objects of the Institute, its sources of income and utilization. In that case, the Supreme Court considered its activities as reflected in the paragraph quoted above and therefore, while remanding the matter, made it clear that the appellant had fulfilled the threshold pre-condition of actual existence of the educational institution under Section 10(23C) (vi) with further direction to the Central Board of Direct Taxes not to reject the approval
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application on that ground. Two of the objects in that case as reflected in the judgment were also to offer the National Council the lowest possible prices for the products and services sold to or utilized by the schools under the umbrella of the Government of India and so also to utilize Indian Authors whenever possible in the development of customized programmes. The Supreme Court, despite these objects/activities, held that the institution in American Hotel was involved only in educational activities, perhaps on the ground that it was not carrying on those activities.
for
12.
Sri. Shankar,
the
appellant
attention Court
in
Shikshan others
to
the
C P
the
Vidya
359
–vsITR
counsel
outset,
judgment
Society
(2013)
at
learned
of
Niketan Union 322
appearing
invited
Allahabad Inter of (All)
our High
College
India
and
(for short
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C
P
Vidyaniketan’)
and
submitted
that
after
considering the judgment of the Supreme Court in American Hotel, the High Court held that where it is not disputed that a society runs an educational institution and is not for the purposes of making profit, merely because the object of the Society is also to serve the church and the nation would not mean that the educational
institution
not
existing
solely
for
educational purpose. This observation was made by the High Court after referring to the judgments in
C P
Vidya Niketan and American Hotel. The Bombay High Court
in
Vanita
Vishram
Trust
–vs-
Chief
Commissioner of Income-Tax and another (2010) 327 ITR 121 (Bom) after considering the provision contained in Section 10(23C)(vi) of the Act observed that though the objects clause contained varied objects including
the
management
and
development
of
moveable and immoveable properties, the statement of fact before the Court, which was not disputed, was that
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the only activity carried out by the Trust ever since its inception was the conduct of educational institutions. The Institution, in that case, had a history of over 80 years during the course of which the only activity was of conducting educational institution. 13.
In the present case, it is not in dispute that
the society has been conducting the primary and secondary school in the State of Karnataka since 2002. Nor is there any dispute before us that save and except for conducting school, the society has carried on any other activities since then.
Without expressing any
opinion whether the object, as reflected in Clause 3(b) and 3(h) of the Memorandum of Association, are related to education, it is clear that save and except educational activity the assessee did not/do not carry on any other activity is the fact, which is not in dispute.
In other
words, though the activities as reflected in Clause 3(b) and 3(h), may constitute the purpose, other than the
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educational
purpose,
but,
during
the
relevant
assessment year, it is not the case of the revenue nor is there any material to show, that the society was running any activities other than the educational activity.
In this view of the matter, we are of the
considered opinion that the view taken by the Tribunal is not correct and deserves to be set aside. There are adequate safeguards that if the activities other than educational activities are undertaken by the society, exemption granted can be withdrawn. Merely, because there exists object, which is not related to educational activities, in our opinion, is not sufficient to deny the exemption/benefit of Section 10(23C)(iiiad) of the Act. In short, in the absence of any allegation or material against the society showing that they are involved in any other activities than the educational activities, in our opinion, it cannot be denied exemption under Section 10(23C)(iiiad). In the circumstances, we answer
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both the substantial questions of law in favour of the assessee and against the revenue.
14. The appeals are accordingly disposed of. Before we part, we observe that we have disposed of these appeals at the stage of admission. We have, by consent of the learned counsel for the parties, heard them on the substantial questions of law as formulated in the first paragraph of this judgment.
Sd/JUDGE
Sd/JUDGE Srl/Bkm.
