THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 23.05.2014
+ W.P.(C) 2184/2013
COUNCIL FOR THE INDIAN SCHOOL,
CERTIFICATE EXAMINATIONS ..... Petitioner
versus
DIRECTOR GENERAL OF INCOME TAX ..... Respondent
Advocates who appeared in this case:
For the Petitioner : Mr M.P. Rastogi with Mr K.N. Ahuja.
For the Respondent : Mr Sanjeev Sabharwal, Sr. Standing Counsel
with Ms Ruchi Bhatia, Jr. Standing Counsel.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. The present writ petition has been filed under Article 226/227 of the
Constitution of India, by the Council for the Indian School Certificate
Examinations. The petitioner has challenged the order dated 07.06.2012
(hereinafter referred to as "impugned order") passed by the Director
General of Income Tax (Exemptions), (hereinafter referred to as
"DGIT(E)"), refusing to grant exemption under Section 10(23C)(vi) of the
Income Tax Act, 1961 (hereinafter referred to as "the Act") for the AY
2008-09 onwards, to the petitioner.
W.P.(C) 2184/2013 Page 1 of 41
2. The Petitioner is a society registered under the Societies Registration
Act XXI of 1860, (Punjab Amendment) Act, 1957 as extended to the Union
Territory of Delhi. The petitioner is recognised and listed as a body
conducting public examinations under the Delhi School Education Act,
1973.
3. The Petitioner had applied for the approval under Section
10(23C)(vi) of the Act for AY 1999-2000 to 2001-02 to Central Board of
Direct Taxes (hereinafter referred to as "CBDT"). The CBDT, by order
dated 31.10.2006, rejected the Petitioner's application holding that the
Petitioner was not an educational institution but was an examination body
which conducts examinations for ICSC and ISC and therefore, could not be
granted the exemption as an educational institution under Section
10(23C)(vi) of the Act.
4. The Petitioner states that it had also filed applications for approval
under Section 10(23C)(vi) of the Act for AY 2002-03 to 2004-05 and 2005-
06 to 2007-08 which have not been disposed of so far.
5. The Petitioner had filed an application for approval under Section
10(23C)(vi) of the Act, for the AY 2008-09 to 2010-11, with the
Respondent on 23.11.2007. By an order dated 08.10.2008, the respondent
dismissed the application on the ground that the Petitioner is not an
educational institution but an examination body conducting examinations
for ISCE and ISC.
6. The petitioner filed a writ petition being W.P.(C) No. 4716/2010 in
this court challenging the said order dated 08.10.2008. The said writ
W.P.(C) 2184/2013 Page 2 of 41
petition was disposed of by an order dated 20.03.2012, passed by a division
bench of this court, whereby it was held that the petitioner is an educational
institution as contemplated under Section 10(23C)(vi) of the Act and the
matter was remanded to the respondent to pass an order in accordance with
law.
7. In compliance of the order of this Court dated 20.03.2012, the
Respondent considered the matter and passed the impugned order dated
07.06.2012, whereby the respondent declined to grant the approval under
section 10(23C)(vi) of the Act, inter alia, on the ground that the petitioner
had failed to justify its claim that it did not exist for the purposes of profit.
The respondent further held that the petitioner had conducted its affairs in a
systematic manner to earn profits and the same were diverted in a
clandestine manner. The Respondent further noticed that the Auditor had in
its report, in respect of the Balance sheet of the petitioner relevant for the
Financial Year 2008-09 (AY 2009-10), pointed out that there were lapses
while awarding the contract to M/s Ratan J. Batliboi Architects Pvt. Ltd.
(hereinafter referred to as "RJB-APL") for installing IT enabled services
and was thus unable to form an opinion on whether the accounts showed a
true and fair view.
Submissions of the Petitioner
8. The Petitioner submits that it is a society established to promote
education which includes the promotion of science, literature, the fine arts
and the diffusion of useful knowledge by conducting school examinations.
W.P.(C) 2184/2013 Page 3 of 41
9. Petitioner stated that up to the AY 1998-99, the income of the
Petitioner was exempt under Section 10(22) of the Act, which fact was
within the knowledge of the Revenue (Income Tax Officer) as intimated by
the petitioner by letter dated 31.05.1999 in compliance to query letter dated
21.05.1999, during the registration proceedings under Section 12A of the
Act. No assessments were made and/or no demands for income tax were
raised for any of the years prior to the AY 1999-2000. The petitioner
further submitted that the criteria for exemption under Section 10(22) of the
Act, as existing prior to 01.04.1999 was identical to the criteria for
exemption under section 10(23C) of the Act. Therefore, the petitioner ought
to be granted the said exemption.
10. Petitioner stated that Rule 3 of the Rules and Regulations of the
Petitioner allows the application of the income solely for the promotion of
its object as set-forth in the Memorandum and also prohibits the transfer of
income and property of the petitioner society, directly or indirectly, by way
of profit, dividend and bonus to the persons, who at any time are or have
been members of the petitioner society and also prohibits the payment of
remuneration to its members. Petitioner further stated that none of the
portion of its income was spent for other than its objects.
11. Petitioner contended that the Petitioner is an unaided organization
and for the purpose of development and expansion, it has to create its own
resources. Prior to the Financial Year 2008-09, i.e. AY 2009-10, there was
a constant fee charged for some years, but from AY 2009-10, in order to
create the resources as required for future expansion, modernization,
development and construction of the building, the Petitioner increased the
W.P.(C) 2184/2013 Page 4 of 41
fee and the fee remained constant till the Financial Year 2011-12, i.e. AY
2012-13, but after considering the sufficiency of available resources and the
future requirement of funds, the Petitioner from April 2012 had reduced the
fee to a great extent and the surplus in various years cannot be made basis
for refusal of approval under Section 10(23C)(vi) of the Act.
12. The Petitioner further contended that awarding the contract to RJB-
APL in the financial year 2008-09 by agreement dated 05.09.2008, for
installing IT enabled services was a commercial transaction and the work
was awarded for development, implementation and maintenance of e-
enabled system for registration, examination of answer sheets, development
of software for facilities management services etc. RJB-APL had
maintained their website, collated and disseminated the results of ICSC and
ISC for 2009 and had started e-registration and development of related
software but on account of various complaints received from school
principals about the system not working properly, further payments were
not released and RJB-APL also stopped working on development of
software with effect from December 2009. The petitioner thereafter
demanded a refund of the amount paid to RJB-APL and ultimately
succeeded in receiving back `8,24,50,000/-, on 31.08.2012, in full and
final settlement of its claims.
Submissions of the Respondent
13. The respondent supported the impugned order dated 07.06.2012 and
contended that the petitioner was functioning for profit purposes in the garb
of education and, therefore, was not entitled to any exemption. The
W.P.(C) 2184/2013 Page 5 of 41
activities of the petitioner were not genuine and the same were purely on
commercial basis. According to the revenue, the surplus of income over
expenditure in the range of 24% to 28% for AY 2005-06 to AY 2008-09,
and thereafter 67.87% in AY 2009-10, 71.56% in AY 2010-11 and 69.56%
in AY 2011-12, showed that the Petitioner was being run for generation of
profit in a systematic and calculated manner year after year and the huge
surplus of the petitioner has not been applied towards the achievement of
the objectives of the petitioner, which are merely paper clauses. It was
submitted that the main object of the Petitioner was to conduct
examinations and to award certificates and the petitioner was charging fees
as "Registration & Affiliation charges", "Examination charges",
"Eligibility Charges Class XI", "Recheck Charges", etc. for the same.
14. The respondent asserted that the steep hike in the examination fee
from ` 460/- to `2100/- per student, further indicated that the petitioner was
only a profit making organisation and the subsequent roll back of the fee
was an afterthought to get the continued exemption. The learned counsel
for the revenue also referred to following table:
Capital
Expenditures %
(Out of Surplus
Expenditures Capital Accumulation Total over
Gross after Expenditu of earlier expenditure total
A.Y. Receipts Depreciation res years) for the year Surplus receipts
2005-06 116683397 80262907 2599265 0 82862172 33821225 28.99
2006-07 123250764 92591390 521783 0 93113173 30137591 24.45
2007-08 129095657 91641050 4273554 0 95914604 33181053 25.70
2008-09 141636868 98157116 3472575 0 101629691 40007177 28.25
2009-10 426161552 136933674 0 6220613 136933674 289227878 67.87
2010-11 539294674 153385804 0 21233060 153385804 385908870 71.56
2011-12 589269733 179346521 0 26669123 179346521 409923212 69.56
W.P.(C) 2184/2013 Page 6 of 41
It was contended that the above table had been prepared after excluding the
component of depreciation and including the capital expenditure incurred
over the years. This according to the learned counsel indicated the cash
flows for the relevant assessment years and substantiated the view of the
Prescribed Authority (respondent) that the petitioner was being run to
generate surplus and not for the object for which it was established.
15. The respondent also contended that the auditor of the petitioner in
his report for the Financial Year 2008-09, had advised investigation of the
petitioner's financial affairs. He also contended that the petitioner entering
into agreement with RJB-APL without enquiry reflected its recklessness, as
RJB-APL was an architect and not competent to undertake the assignment
of software development, which fact has not been disputed by the
Petitioner.
16. The respondent further contended that, the fact that the Petitioner had
been previously granted exemption under Section 10(22) or 10(23C)(vi) of
the Act, does not guarantee that the exemption will apply mechanically for
all subsequent assessment years. All proceedings under the Act are
independent of each other. According to the procedure provided by the
second proviso to the Section 10(23C) of the Act, the Prescribed Authority,
after examining the objects and genuineness of the activities of such
trust/society, has to satisfy himself as to whether the applicant deserves the
approval under Section 10(23C) of the Act.
17. We have heard the learned counsel for the parties.
W.P.(C) 2184/2013 Page 7 of 41
18. The approval under Section 10(23C)(vi) of the Act has been denied
to the petitioner for two reasons. First of all, the respondent has concluded
that the surplus generated by the petitioner from its activities indicates that
the activities of the petitioner are in the nature of business and for the
purposes of generating profit. Accordingly, the respondent has held that
the petitioner did not qualify the test of existing only for the purpose of
education and not for profit. Secondly, the respondent has concluded that
the activities of the petitioner were not genuine in view of the fact that the
petitioner had released payments amounting to `1838.67 lacs to RJB-APL.
The respondent also took note of the observations of the auditor whereby
the auditors had concluded that the petitioner had not followed the "General
Business Practices" in awarding the contract to RJB-APL. The auditor had
also found various lapses in monitoring the execution of the contract by
RJB-APL and had concluded that in view of the said lapses as well as in
view of the fact that the work done by RJB-APL had not been verified and
certified by an IT expert, they were unable to form an opinion as to whether
the accounts of the petitioner reflected a true and fair picture. In view of
the observations made by the auditor, the respondent concluded that the
activities of the petitioner were not genuine. The relevant extract of the
impugned order indicating the aforesaid reasons for rejection of the
application filed by the petitioner are quoted below:-
"9. In view of the discussion held in forgoing paragraph
of this order, the applicant's claim for exemption u/s 10(23C)
(vi) for the AY 2008-09 and onwards is rejected on the
following grounds:-
W.P.(C) 2184/2013 Page 8 of 41
(i) The generation of huge surplus year after year clearly
established that the applicant is in the business of education
like any other entrepreneurs and service providers by
collecting huge fees from their clients who in this particular
case are students of the schools affiliated with the applicant
Council. Therefore it is held that the applicant Council is
existing for the purpose of profits.
(ii) Activities of the applicant Council are not genuine as the
Statutory Auditors of the Council have raised various
objections and pointed out various irregularities, as stated
above, in their Audit report for the A Y 2009-10 and 2010-11
on the Agreement amount to Rs 3980.65 lacs made by the
Council with Ratan J. Batliboi Architects P Ltd., Mumbai and
releasing of payments amounting to Rs. 1838.67 lacs to RJB-
APL. The objection raised and irregularities pointed out by
the Auditors' clearly establishes that the funds of the Council
are not being used prudently for the purpose of its Objects."
19. The principal controversy that needs to be considered is, whether in
the facts of the present case the generation of surplus by the petitioner
would indicate that the petitioner was also existing for the purposes of
profit. The second question that needs to be addressed is whether the lapses
on the part of the petitioner in awarding the contract for IT services to RJB-
APL would amount to not applying the funds exclusively for the object for
which the petitioner was established as contemplated under third proviso to
Section 10(23C) of the Act.
20. Before proceeding further it would be necessary to refer to the
provisions of Section 10(23C) of the Act. The relevant extract of the said
provisions are quoted below:-
"(23C) any income received by any person on behalf of--
xxxx xxxx xxxx xxxx xxxx
W.P.(C) 2184/2013 Page 9 of 41
(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 (iiiad) and which may be approved by the
prescribed authority; or
xxxx xxxx xxxx xxxx xxxx
Provided 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 (via) shall make an
application in the prescribed form and manner to the
prescribed authority for the purpose of grant of the exemption,
or continuance thereof, under sub-clause (iv) or sub-clause (v)
or sub-clause (vi) or sub-clause (via):
Provided further that the prescribed authority, before
approving any fund or trust or institution or any university or
other educational institution or any hospital or other medical
institution, under sub-clause (iv) or sub-clause (v) or sub-
clause (vi) or sub-clause (via), may call for such documents
(including audited annual accounts) or information from the
fund or trust or institution or any university or other
educational institution or any hospital or other medical
institution, as the case may be, as it thinks necessary in order
to satisfy itself about the genuineness of the activities of such
fund or trust or institution or any university or other
educational institution or any hospital or other medical
institution, as the case may be, and the prescribed authority
may also make such inquiries as it deems necessary in this
behalf:
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 (via)-
(a) applies its income, or accumulates it for application,
wholly and exclusively to the objects for which it is
W.P.(C) 2184/2013 Page 10 of 41
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
xxxx xxxx xxxx xxxx xxxx
Provided also that the exemption under sub-clause (iv)
or sub-clause (v) shall not be denied in relation to any funds
invested or deposited before the 1st day of April, 1989,
otherwise than in any one or more of the forms or modes
specified in sub-section (5) of section 11 if such funds do not
continue to remain so invested or deposited after the 30th day
of March, 1993:
Provided also that the exemption under sub-clause (vi)
or sub-clause (via) shall not be denied in relation to any funds
invested or deposited before the 1st day of June, 1998,
otherwise than in any one or more of the forms or modes
specified in sub-section (5) of section 11 if such funds do not
continue to remain so invested or deposited after the 30th day
of March, 2001.
Provided also that the exemption under sub-clause (iv)
or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall
not be denied in relation to voluntary contribution, other than
voluntary contribution in cash or voluntary contribution of the
nature referred to in clause (b) of the third proviso to this sub-
clause, subject to the condition that such voluntary
contribution is not held by the trust or institution or any
university or other educational institution or any hospital or
other medical institution, otherwise than in any one or more of
the forms or modes specified in sub-section (5) of section 11,
after the expiry of one year from the end of the previous year
in which such asset is acquired or the 31st day of March, 1992,
whichever is later:
Provided also that nothing contained in sub-clause (iv)
or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall
W.P.(C) 2184/2013 Page 11 of 41
apply in relation to any income of the fund or trust or
institution or any university or other educational institution or
any hospital or other medical institution, being profits and
gains of business, unless the business is incidental to the
attainment of its objectives and separate books of account are
maintained by it in respect of such business:
Provided also that any notification issued by the Central
Government under sub-clause (iv) or sub-clause (v), before the
date on which the Taxation Laws (Amendment) Bill, 2006
receives the assent of the President, shall, at any one time,
have effect for such assessment year or years, not exceeding
three assessment years" (including an assessment year or years
commencing before the date on which such notification is
issued) as may be specified in the notification:
Provided also that where an application under the first
proviso is made on or after the date on which the Taxation
Laws (Amendment) Bill, 2006 receives the assent of the
President, every notification under sub-clause (iv) or sub-
clause (v) shall be issued or approval under sub-clause (iv) or
sub-clause (v) or sub-clause (vi) or sub-clause (via) shall be
granted or an order rejecting the application shall be passed
within the period of twelve months from the end of the month
in which such application was received:
Provided also that where the total income, of 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 (via), without giving effect to the provisions of the said
sub-clauses, exceeds the maximum amount which is not
chargeable to tax in any previous year, such trust or institution
or any university or other educational institution or any
hospital or other medical institution shall get its accounts
audited in respect of that year by an accountant as defined in
the Explanation below sub-section (2) of section 288 and
furnish along with the return of income for the relevant
assessment year, the report of such audit in the prescribed form
W.P.(C) 2184/2013 Page 12 of 41
duly signed and verified by such accountant and setting forth
such particulars as may be prescribed:
Provided also that any amount of donation received by
the fund or institution in terms of clause (d) of sub-section (2)
of section 80G in respect of which accounts of income and
expenditure have not been rendered to the authority prescribed
under clause (v) of sub-section (5C) of that section, in the
manner specified in that clause, or which has been utilised for
purposes other than providing relief to the victims of earth
quake in Gujarat or which remains unutilised in terms of sub-
section (5C) of section 80G and not transferred to the Prime
Minister's National Relief Fund on or before the 31st day of
March, 2004, shall be deemed to be the income of the previous
year and shall accordingly be charged to tax:
Provided also that where 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 (via)
does not apply its income during the year of receipt and
accumulates it, any payment or credit out of such
accumulation to any trust or institution registered under
section 12AA or to any 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 not be
treated as application of income to the objects for which such
fund or trust or institution or university or educational
institution or hospital or other medical institution, as the case
may be, is established:
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 is
approved by the prescribed authority, as the 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 the prescribed
W.P.(C) 2184/2013 Page 13 of 41
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:
Provided also that in case the fund or trust or institution
or any university or other educational institution or any
hospital or other medical institution referred to in the first
proviso makes an application on or after the 1st day of June,
2006 for the purposes of grant of exemption or continuance
W.P.(C) 2184/2013 Page 14 of 41
thereof, such application shall be made on or before the 30th
day of September of the relevant assessment year from which
the exemption is sought:
Provided also that any anonymous donation referred to
in section 115BBC on which tax is payable in accordance with
the provisions of the said section shall be included in the total
income:
Provided also that all pending applications, on which no
notification has been issued under sub-clause (iv) or sub-
clause (v) before the 1st day of June, 2007, shall stand
transferred on that day to the prescribed authority and the
prescribed authority may proceed with such applications under
those sub-clauses from the stage at which they were on that
day;"
21. A plain reading of Clause (vi) of Section 10(23C) of the Act
indicates that exemption under the said clause would be available to any
educational institution "existing solely for educational purposes and not for
purposes of profit.". The question whether the petitioner is an educational
institution is no longer res integra. This Court by order dated 20.03.2012 in
W.P.(C) No.4716/2010 has already held that the petitioner is an educational
institution for the purposes of Section 10(23C) of the Act. Therefore, the
essential question that arises is whether the petitioner exists solely for
educational purposes or also for the purposes of profit. In order to answer
this question, it would be necessary to consider the activities carried on by
the petitioner.
22. The petitioner is a registered society and is engaged in ensuring high
standards of education imparted through the medium of schools. The
petitioner has 1750 schools which are affiliated to it and provide education
from nursery to twelfth standard. It selects the courses, syllabus, books and
W.P.(C) 2184/2013 Page 15 of 41
literature for different standards to be studied by the students in order to
maintain a uniform standard throughout India. The petitioner is recognized
and listed as a body conducting public examinations under the Delhi School
Education Act, 1973. It conducts examinations (ICSE and ISC) of the
students who have completed their studies and awards certificates to the
successful students. The petitioner, in order to maintain the standard of
education and to make the teachers aware of the latest developments in the
education field, from time to time undertakes, supports and promotes study
and research and also holds training conferences and seminars for the
teachers.
23. The petitioner owes its genesis to Inter-State Board for Anglo Indian
Education which was set up in 1935. The said Board looked after the work
and standard of Anglo Indian schools preparing the students for "Overseas
School Certificate" examination conducted by the University of
Cambridge. In 1958, the Inter-State Board for Anglo Indian Education set
up a council for the Indian School Certificate Examination and on
19.12.1967, the council was registered as a society under the Societies
Registration Act XXI of 1860, (Punjab Amendment) Act, 1957 as extended
to the Union Territory of Delhi.
24. It is also necessary to advert to the objects of the petitioner society.
The aims and objects of the Petitioner contained in Clause 3 of its
Memorandum of Association are as under:
"3. The object of the Society is educational, and includes the
promotion of science, literature, the fine arts and the diffusion
of useful knowledge by conducting School examinations
W.P.(C) 2184/2013 Page 16 of 41
through the medium of English. The Society exists solely for
educational purposes and not for purposes of profit.
(a) For the object aforesaid or in furtherance thereof:
(i) to conduct examinations and award certificates for
the time being in co-operation with the University
of Cambridge, Local Examinations Syndicate and
to frame regulations for the conduct of its
examinations and to modify, alter or cancel such
regulations.
(ii) to publish books, periodicals, magazines and any
other literature.
(iii) to hold seminars, courses, educational workshops,
for in-service training of teachers.
(iv) to enter into arrangements with any Government or
authority whether Union, State, Municipal, Local
or otherwise that may seem to be conducive to the
object of the Society or to obtain from any such
Government or authority such rights, concessions,
and privileges as the society may thing desirable
and to obtain and carry out, exercise and comply
with any such arrangements, rights, privileges, and
concessions.
(v) to accept donations, gifts movable and immovable
and to raise money fees or otherwise.
(vi) to borrow and raise funds, with or without security
in any manner the Society may think fit and to
repay the same.
(vii) to purchase, take on lease for exchange, hire or
otherwise acquire, for and on behalf of the Society,
properties movable and immovable and rights or
privileges as they may think fit.
(viii) to sell, exchange, lease, borrow by mortgaging
properties of the Society, mortgage, gift, dispose
of, turn to account, or otherwise deal with, all or
any part of the properties and rights of the Society
as they may think necessary and convenient.
(ix) to hire and to employ secretaries, clerks, servants,
examiners and moderators and others and to pay
W.P.(C) 2184/2013 Page 17 of 41
them such salaries, wages and fees and honoraria
as the Society may decide from time to time.
(x) to frame and establish Provident Fund, Gratuity
and Pension Schemes for the employees of the
Society, as the Society may decide from time to
time.
(b) To do or cause to be done all such lawful things which
are incidental or conducive to the attainment of the above
object."
25. The rules and by laws of the petitioner also proscribe distribution of
any surplus and it is specified that funds/surpluses of the petitioner would
be utilised solely for its objects. The relevant clause of the Rules and
Regulations is as under:
"3. The income and property of the Society, whencesoever
derived, shall be applied solely for the promotion of its object
as set forth in the Memorandum.
No portion of the income or property aforesaid shall be paid or
transferred, directly or indirectly, by way of dividend, bonus or
otherwise by way of profit, to persons who at any time are, or
have been members of the Society or to any one or more of
them or to any persons claiming through any one or more of
them provided that:
(a) No remuneration or other benefit in money or
money's worth shall be given by the Society to
any of its members whether officers or servants of
the Society or not, except payment of out-of-
pocket expenses, reasonable and proper interest
on money lent, or reasonable and proper rent on
premises lent to the society.
(b) No member shall be appointed to any office,
under the Society, which is remunerated by
salary, fees or in any other manner not accepted
by clause (a).
W.P.(C) 2184/2013 Page 18 of 41
(c) Nothing in this clause shall prevent the payment
by the Society in good faith of reasonable
remuneration to any of its officers or servants (not
being members) or to any persons (not being
members), in return for any services actually
rendered to the Society."
26. It is apparent from the above narrative that the aims and objects, as
well as the activities undertaken by the petitioner, fall within the definition
of "charitable purposes" under section 2(15) of the Act. Even though , the
objects and by laws of the petitioner are clear and unambiguous, the
respondent has come to a conclusion that the petitioner is being run for
generation of profit. This conclusion has been arrived at only for the reason
that the petitioner has been generating surplus from its activities.
Petitioner's main source of funds is from charging fees from schools for
registration and affiliation and fees charged from the students who are
enrolled to take the exams conducted by the petitioner. The petitioner had
been charging a uniform fee for several years prior to the Financial Year
2008-09. It is contended by the petitioner that it increased the fees in the
Financial Year 2008-09 in order to create resources for construction of the
petitioner's office building at Saket, New Delhi, introducing computer
technology (which entailed purchases of computer and development of
software) and purchase of other assets. The petitioner submitted that it was
also required to incur expenditure for renovation and repair, as well as
requisition of other movable and immovable properties. The petitioner
envisaged that substantial expenditure would be required to modernise the
activities of the petitioner. The petitioner also pointed out that in the
subsequent years i.e. from Financial Year 2012-13, the petitioner has
W.P.(C) 2184/2013 Page 19 of 41
reduced the examination fee, since it had accumulated the necessary funds
for its purposes.
27. In the above facts, the issue to be addressed is whether generation of
surplus by the petitioner can be construed to mean that the petitioner is not
existing solely for educational purposes but also for the purposes of profit.
28. In our view, the fact that the petitioner had generated certain profits
would not dilute the purposes for which the petitioner has been established.
There is no dispute that the activity carried on by the petitioner is solely in
the field of education. It is also important to note that there is no
distribution of the surplus accumulated by the petitioner. It is now well
settled that a provision of service in the nature of charity would not cease to
be charitable only because it entails receiving a charge for the same. The
nature of the activity carried on by an entity would be the predominant
factor to determine whether the purpose of the organization is charitable. It
is not necessary that a charitable activity entails giving or providing a
service and receiving nothing in return. Collection of a charge for providing
education would, nonetheless, be charitable provided, the funds collected
are also utilised for the preservation of the charitable organization or for
furtherance of its objects. In the present case, the petitioner has provided
an explanation for the surpluses being accumulated. In our view, if the
surpluses have been generated for the purposes of modernising the
activities and building of the necessary infrastructure to serve the object of
the organisation, it would be erroneous to construe that the generation of
surpluses have in any manner negated or diluted the object of the
organization. In the present case, the petitioner has been existing solely for
educational purposes. Generation of profit and its distribution is not the
W.P.(C) 2184/2013 Page 20 of 41
object of the petitioner society. The fact, that surpluses have been generated
in order to build the infrastructure for modernising the operation, is clearly
in the nature of furthering the objects of the society rather than diluting
them. In our view, the conclusion of the respondent that the increase in the
fees for generating surplus would by itself exclude the petitioner from the
ambit of Section 10(23C)(vi) of the Act is clearly erroneous. Generation of
profit or surplus by an organization cannot be construed to mean that the
purpose of the organization is generation of profit/surplus, as long as the
surpluses generated are accumulated/utilized only for educational purposes.
The same would not disable the petitioner from claiming exemption under
Section 10(23C)(vi) of the Act.
29. As stated earlier, the predominant object of the activity conducted by
the petitioner would be the determinative test, merely because profit is
generated, it would not dilute the object for which the petitioner has been
established. The Supreme Court in the case of Addl. Commissioner of
Income Tax v. Surat Art Silk Cloth Manufacturers Association: (1980)
121 ITR (SC) applied the test of predominant object while considering
whether any surplus generated by an organisation established for charitable
purposes, would disable the said organisation from claiming that it was
established for charitable purposes. The relevant extract of the decision
reads as under:-
"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
W.P.(C) 2184/2013 Page 21 of 41
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 realization but would also reflect unsound principle of
management."
30. In the case of Aditanar Educational Institution v. Addl. CIT:
(1997) 224 ITR 310 (SC) the Supreme Court has observed as under:-
"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."
31. The predominant object test as explained in Surat Art Silk Cloth
Manufacturers Association (supra) has also been applied by the Supreme
Court in American Hotel and Lodging Association vs CBDT: [2008] 301
ITR 86 with respect to exemption under Section 10(23C)(vi) of the Act.
The Court reiterated the said principle as under:
"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
W.P.(C) 2184/2013 Page 22 of 41
India. If the Indian activity has no co-relation to
education, exemption has to be denied (see the
judgment of this court in Oxford University Press [
2001] 247 ITR 658 [ supra]). Therefore, the character
of the recipient of income must have character of
educational institution in India to be ascertained from
the nature of 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 the
judgment of this court in Aditanar Educational
Institution v. Addl. CIT [1997] 224 ITR 310."
32. The respondent has relied upon the decision of the High Court of
Uttrakhand in Commissioner of Income Tax v. Queens' Educational
Society: (2009) 319 ITR 160 (Uttaranchal), whereby the Court had set
aside the decision of the ITAT by holding that the assesee was not entitled
to exemption under Section 10(23C)(iiiad) of the Act. The Court held that
the surplus generated by the educational society would become income of
the society which was exigible to tax.
33. In our opinion, this view would not be applicable in the present case.
The Punjab and Haryana High Court in the case of Pinegrove International
Charitable Trust v. Union of India: (2010) 327 ITR 73 (P&H) had
considered the above mentioned decision of the Uttarakhand High Court
and held as under:-
"(2) The provisions of Section 10(23C)(vi) of the Act are
analogues 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 [2008] 301 ITR 86.
W.P.(C) 2184/2013 Page 23 of 41
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 [1980] 121 ITR 1(SC)).
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
[2008] 301 ITR 86. 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 with 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, after 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 -
W.P.(C) 2184/2013 Page 24 of 41
Aditanar Educational Institution case [1997] 224 ITR 310
(SC))
(5) Where more than 15% of income of an educational
institution is accumulated on or after April 1, 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 [2009] 319 ITR 160 and
the connected matters, is not applicable to cases fall within
the provisions 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 [2009] 315
ITR 48 lays down the correct law."
34. This Court in the case of St. Lawrence Educational Society v.
Commissioner of Income Tax: (2013) 353 ITR 325 (Del.) referred to the
above decisions and accepted the view of the Punjab and Haryana High
Court in Pinegrove International Charitable Trust (supra). This Court
concluded held as under:-
"8. In view of the aforesaid decisions, the opinion expressed
by the respondent that the educational institutions seeking
exemption should not generate any quantitative surplus is
legally untenable and incorrect. The Chief Commissioner has
erred in assuming that for exemption there should not be any
surplus, otherwise the institution society exists for profit and
not charity i.e. education in the present case. In view of the
aforesaid judgments of the Supreme Court, Bombay High
Court and Punjab and Haryana High Court, reasoning
inscribed by the competent authority solely on the foundation
that there has been some surplus profit is unjustified.
W.P.(C) 2184/2013 Page 25 of 41
9. In the result, we allow the writ petition and set aside the
order passed by the competent authority and remit the matter
to the said authority for fresh adjudication in accordance with
law in the light of the aforesaid decisions."
35. In view of the above, the conclusion of the respondent that the
petitioner was not entitled to exemption under Section 10(23C)(vi) of the
Act since it had generated a surplus is not sustainable.
36. The next question that needs to be considered is, whether the finding
of the respondent that the activities of the petitioner are not genuine is
erroneous. By virtue of the second proviso of Section 10(23C) of the Act,
the Prescribed Authority (the respondent) is entitled to call for such
information as it thinks necessary to satisfy itself that the activities of the
fund or an institution are genuine. The respondent had called for
information, including the financial records of the petitioner and had
discovered that Auditor had expressed reservations with respect to the final
accounts of the petitioner for the Financial Year 2008-09 and 2009-10. The
controversy relates to a contract entered into by the petitioner with RJB-
APL for modernising and installing IT enabled services for conduct of the
activities of the petitioner. The petitioner had entered into an agreement, on
26.09.2008, with RJB-APL for that purpose. The total cost for the project
was agreed at `3980.65/- lacs and aggregate amount paid to RJB-APL on
account of invoices raised was `16,36,41,250/-. The auditors had raised
serious objections with respect to this contract. A perusal of the
observations made by auditors indicates that the objections were,
essentially, three fold. First of all, the auditors had made observations to the
effect that the petitioner had not specified in detail the list of deliverables
W.P.(C) 2184/2013 Page 26 of 41
and schedule of works which were required to be performed by RJB-APL.
Secondly, the auditor had pointed out procedural lapses with respect to
obtaining the authority for entering into the contract with RJB-APL and
thirdly, the auditor had stated that they were unable to ascertain the nature
and quantum of work since the same had not been verified and certified by
an independent IT expert. On the basis of these observations, the
respondent had held that the activities of the petitioner were not genuine.
37. In the present case, the fact that the petitioner conducts the
examination for class 10th and 12th students with respect to schools that are
affiliated with the petitioner is indisputable. The nature of the predominant
activity, therefore, cannot be questioned. There is no doubt about the
genuineness of this activity of the petitioner, thus the conclusion drawn by
the respondent that the activities of the petitioner were not genuine merely
because a contract entered into by the petitioner has been brought into
question, is not warranted. It is also not the respondent's case that the
petitioner carries on any activity other than for educational purpose.
However, the observations made by the auditor raise a separate question
with respect to the application of the funds of the petitioner company.
38. In view of the above, the question that needs to be addressed is
whether the petitioner would be disentitled to the exemption under Section
10(23C)(vi) of the Act on account of falling foul of the third proviso to
Section 10(23C). In order to address this controversy, it is necessary to
consider whether the amounts released by the petitioner to RJB-APL can be
construed to have been applied for the purposes other than its objects. And
if so, whether the same would disentitle the petitioner from claiming
W.P.(C) 2184/2013 Page 27 of 41
exemption under Section 10(23C)(vi) of the Act altogether or whether the
same would disqualify the petitioner for claiming exemption for AY 2009-
10 i.e. the year in which the payments had been made to RJB-APL.
39. The petitioner explained that the work of modernization was allotted
to RJB-APL after the petitioner had obtained quotations from three parties,
viz., M/s Wipro, M/s TYC World Softinfrastructure Pvt. Ltd. and RJB-
APL. The scope of work to be carried out by the parties was evaluated and
RJB-APL was found to be more suitable. Thereafter, a formal agreement
was entered into on 05.09.2008. It was pointed out that RJB-APL had
commenced the work and also submitted monthly status reports. Initially,
RJB-APL had made presentations and based on the demonstrations an
interactive website had been developed. It is stated that there were several
modules that had been worked on by RJB-APL. The petitioner has also
drawn our attention to a letter dated 30.10.2009 addressed by RJB-APL to
the executive committee of the petitioner, wherein the overview of work
performed from the date of execution of the agreement had been
summarized. The work claimed to be done by the RJB-APL is quoted
below:-.
" Development of general scope and concept of the
project under the direction of Mr. Guil Vaz through an
iterative process of demonstration through multiple
presentations by us to Mr. Vaz. Select presentations
were then made by Mr. Vaz to the Executive
Committee. Areas discussed, researched and worked on
to concept stage include the following.
Design of the portal presentation and user interface
Determination of user profiles and access rights for
each category of users
W.P.(C) 2184/2013 Page 28 of 41
Interactive statistical analysis of results across
various parameters and user category
Rights management
E-training and tutorials
On-line submission of school projects
Document management
School affiliation and appraisals
Archival of school affiliation documents
Examination papers
Anonymity process for examinations
Student registration process -- on-line, off-line and
physical forms
Question bank
Examiner's registration and appraisal
Intelligent off-line forms for all portal interactions
ERP for Council employees through portal
Calendar and news events
Duration: September 2008 to February 28, 2009
Development of Mister Plan
Detailed development for modules where
information available from CISCE
Scope of works as detailed on May 26, 2009
Infrastructure requirements
Requirements of various stakeholders
Regulatory and compliance requirements
Data security processes
Time lines
Training requirements for Council staff and other
stakeholders
Escalation and resolution processes
Duration: On-going from November 2008
Security management structuring for user
management, audit trail, archiving, overall system.
Database design initially on "Oracle" and subsequent
transfer to MS SQL under the guidance of Mr. Guil
Vaz. The change was recommended because Mr. Vaz
did not approve the purchase of "Oracle" by the
W.P.(C) 2184/2013 Page 29 of 41
Council on account of its high price and after
considering that MS SQL was available on lease and
rent.
Design and selection of infrastructure:
Definition of process
Determination of parameters
Peak and average loads
Up-time
Response time
Security
Integrity
Determination of hardware and third-party software
requirements based on above parameters
Vendor selection and commercial negotiations
Recommendations to CISCE
Duration: First exercise in March 2009; second
exercise in May 2009
Results dissemination for 2009 ICSE and ISC
examinations through channels as instructed by the
Council.
Leased and set up hardware infrastructure for results
dissemination
Manner of results dissemination as follows
CISCE web portal
10.6 million hits in first hour
25 million hits on the full day
No down time on any of the 6 servers deployed
Automated SMS system
42,080 results disseminated by SMS on the day of
the results
Automated e-mail system to pre-registered
students
Duration: March 2009 to May 2009
Results and data information dissemination to all school
Principals including selection of and contracting with e-
mail system vendor
Created accounts of 1,494 Principals
W.P.(C) 2184/2013 Page 30 of 41
Generated letters containing the log-in details for all
above Principals
886 Principals activated their e-mail account
Supported the Principals on call for log-in issues
4452 reports comprising tabulation sheet,
comparison tables and Council annual statistics
2009 were delivered to the Principals on the day
of the results
Duration: On an expedited basis from April 17, 2009
to May 19, 2009
Readied on-line, interactive statistical analysis module
for Council and Principals based on various parameters:
Geographical distribution
School
Subject
Year
Duration: April 2009
Conversion of the static website to an interactive web
portal with capabilities of addressing all areas and
activities as determined in the general scope and concept
detailed above
Duration: From February 2009 and April 2009
E-registration of students by schools
Based on analysis of existing work flows as
provided by CISCE and directions from Mr. Guil
Vaz
Demonstration of working prototype in March
2009
Modified in June 2009 for transfer from "Oracle"
to "MS SQL"
Process modified in August 2009; broken in to 5
stages to enable use without continuous
connectivity, thereby easing use in remote areas
Designed to permit administration staff with only
limited computer knowledge to operate the
system
W.P.(C) 2184/2013 Page 31 of 41
Simultaneously deployed at over 1,600 ICSE
schools and over 750 ISC schools on August 20,
2009
Deployment on leased infrastructure
continues in the absence of required
investments by CISCE
Patratu School of Economics in Jharkhand
reported full completion as early September 1,
2009
Support provided to schools through e-mail and
telephone
About 1500 e-mails received directly from
schools
About 1500 calls received by a team of up to
5 persons at our offices
Statistics of data successfully registered
First month 1,76,158 students data
Within two months 1,88,782 students data
was uploaded and 98% of the schools (1611
ICSE schools) had completed the process
Duration: November 2008 and continuing pending
transfer to CISCE."
40. The petitioner submitted that RJB-APL had raised invoices
aggregating a sum of `16,36,41,250/- which were paid by the petitioner.
The petitioner had also paid service tax and the payments made to RJB-
APL were subject to Tax Deducted at Source. In view of the objections
raised by the auditor as well as several complaints received from affiliated
schools, further payments to RJB-APL were withheld. This resulted in
disputes arising between the petitioner and RJB-APL which were
subsequently settled and in terms of the same RJB-APL had refunded a sum
of `8,24,50,000/- to the petitioner.
41. Indisputably, any expenditure incurred by an assessee for
computerisation and developing an IT enabled system for carrying on its
W.P.(C) 2184/2013 Page 32 of 41
activities would be application of its resources wholly and exclusively for
its purposes. The exemption under Section 10(23C) of the Act is available
provided that the income of the assessee is applied "wholly and exclusively
to the objects for which it is established". And, it cannot be disputed that
the contract entered into with the RJB-APL was for furthering the object for
which the petitioner was established. Introducing computerization in the
functioning of the petitioner, including providing an interface with the
schools which are affiliated with the petitioner, as well as the students
enrolled with the petitioner, was considered necessary and it cannot be
contended that any sum spent towards the modernising and computerization
would not be towards the object of the petitioner society. The problem
essentially arises on account of the apprehension that the contract awarded
to RJB-APL entailed payments in excess of the value received by the
petitioner. It is also suggested that RJB-APL had been chosen in a non-
transparent manner and the concerned persons who were in charge of the
affairs of the petitioner society were derelict in not evaluating the work
performed by RJB-APL. In our opinion, clear distinction must be drawn
between inefficient utilization of funds and utilization of funds for objects
other than that for which a society has been established. Merely, because
the funds of the petitioner may not have been utilized in the best possible
manner cannot lead to a conclusion that they have not been applied to the
object for which the petitioner has been established. It is not essential that
all decisions made by the management of a society yield optimum results.
A management of a society which is either negligent or has not performed
its functions diligently with the requisite skill may be guilty of
mismanaging the affairs of the society. But it would be quite another thing
W.P.(C) 2184/2013 Page 33 of 41
to state that the funds have not been deployed wholly and exclusively for its
objects. A well managed society may use its funds optimally, while a
society that it is not as well managed may deploy its funds inefficiently but
the same would not be synonymous with the funds been deployed for
purposes other than its objects. There is no other stated object for which
the funds of the petitioner society have been deployed. The contract entered
into with RJB-APL may not be the best decision from the standpoint of the
Prescribed Authority and perhaps in the opinion of the Prescribed
Authority, the petitioner society may have ended up paying more than the
value of services received. But the same cannot be read to mean that the
resources of the petitioner have been deployed for purposes other than for
its objects. The words "wholly and exclusively to the object for which it has
been established" must be read to mean that the income should not be
applied for any purpose other than the object for which the institution has
been established. Thus, the application of funds must be for carrying on the
purpose for which the petitioner has been established and not for any other
purpose. In the present case, the assessee entered into the contract with
RJB-APL for development, implementation and maintenance of an e-
enabled system for managing registration of schools/students, examination
of answer sheets, collating of results etc. RJB-APL had, undisputedly,
developed and maintained a website of the petitioner, developed software
for assisting in the activities carried on by the petitioner. The results of
ICSC and ISC for the year 2009 was collated and disseminated by use of
the e-enabled services developed and implemented by RJB-APL. The
registration of schools/students was carried out, during the relevant period,
through the system developed and implemented by RJB-APL. However, in
W.P.(C) 2184/2013 Page 34 of 41
view of the complaints received, the contract with RJB-APL was
terminated and the amount payable to it for the work already done was
determined and agreed between the assessee and RJB-APL and the balance
was refunded by RJB-APL. The amount incurred by the petitioner for
modernization and computerization cannot be stated to be for the purposes
other than the object as specified in the petitioner's charter. The same
cannot be mistaken to be deployed for any other purpose. Thus, in our
view, any irregularity in the manner in which the contract had been entered
into with RJB-APL would not be sufficient for a conclusion that the
respondent had not deployed its funds for the purposes of its objects.
42. As noticed earlier, the assessee has along with RJB-APL amicably
determined the amount payable for the work done and recovered the
balance. The question whether the decision to set up an e-enabled system
was necessary or the amount settled between the assessee and the service
provider is reasonable, is not required to be considered by the Prescribed
Authority. The reasonableness of the amount spent and the quality of the
decisions of the management are not the subject matter in respect of which
the satisfaction of the Prescribed Authority is required. Although, the
Prescribed Authority can examine whether the expenditure is real, the
question whether the same was necessary or should have been incurred is
not within the scope of the subjective satisfaction of the Prescribed
Authority. The manner in which the affairs of the assessee are conducted,
including determining which expenditure to incur and to what extent, is
entirely within the discretion of the assessee. The Supreme Court in the
case of Sassoon J. David & Co. Pvt. Ltd. v Commissioner of Income Tax:
W.P.(C) 2184/2013 Page 35 of 41
[1979] 118 ITR 261 considered the expression "wholly and exclusively" in
the context of Section 10(2)(xv) of the Indian Income Tax Act 1922
(corresponding to section 37 of the Act ) and held as under:
"It has to be observed here that the expression "wholly and
exclusively" used in s. 10(2)(xv) of the Act does not mean
"necessarily". Ordinarily, it is for the assesee to decide whether
any expenditure should be incurred in the course of his or its
business. Such expenditure may be incurred voluntarily and
without any necessity and if it is incurred for promoting the
business and to earn profits, the assessee can claim deduction
under s. 10(2)(xv) of the Act even though there was no
compelling necessity to incur such expenditure."
43. The expression used in Section 37 of the Act: "wholly or exclusively
for the purposes of business and profession" is similar in its import as the
expression "applied wholly and exclusively to the object for which it is
established" as occurring in Section 10(23C)(vi) of the Act. Therefore, the
tests as laid down by various decisions for determining whether an amount
is expended wholly and exclusively for the purposes of the business would
apply equally in determining whether the income is applied by the assessee
wholly and exclusively for its objects.
44. We may also observe that although, it has been suggested that the
contract with RJB-APLL was only a conduit for diverting the funds of the
petitioner, the same is not borne out by the material on record. In order to
sustain an allegation of this nature, the respondent would also have to go a
step further to show that the funds paid by the petitioner to RJB-APL found
their way to any member/members or in their benefit. This would indicate
that RJB-APL had been used as a conduit by the petitioner for distributing
W.P.(C) 2184/2013 Page 36 of 41
its surplus and the income of the petitioner was not applied for its objects.
However, in absence of any such evidence, it would not be possible to
conclude that the income of the petitioner was not applied "wholly and
exclsusively" to the objects for which it was established.
45. In view of the above discussion, it is not necessary to consider
whether the exemption under section 10(23C)(vi) of the Act could be
denied to the petitioner only for the relevant year during which payments
were released to RJB-APL and could not be denied altogether. However, as
we have heard the learned counsel on the issue, we consider it appropriate
to examine the position where an assesse is found to be non compliant with
the provisos to Section 10(23C) of the Act.
46. Section 10(22) of the Act, which was the applicable provision for the
exemptions prior to introduction of Section 10(23C)(vi) of the Act,
provided for exemption in respect of income of a university or other
educational institution, existing solely for educational purpose and not for
purpose of profit. Under Section 10(22) of the Act, if the income of the
institution was derived in the course of carrying out an activity for
educational purposes, the same was exempt and the assesse was not
required to prove the application of income so derived. By virtue of the
Finance (No.2) Act, 1998, Section 10(22) was omitted with effect from
01.04.1999 and the said provision was replaced by Section 10(23C)(vi).
The CBDT in its circular No. 772 dated 23.12.1998 [(1999) 235 ITR (St.)
35], explained the object for insertion of clause (vi) to Section 10(23C) of
the Act. The circular explained that Section 10(23C) of the Act was
introduced, as the earlier provision (Section 10(22)) did not contain any
W.P.(C) 2184/2013 Page 37 of 41
mechanism for monitoring and in absence of the same, the exemption
provision was being misused. With the introduction of 10(23C), prior
approval is required from the prescribed authority by making an application
for the same and the assesse would have to comply with the conditions
imposed by the provisos to Section 10(23C) of the Act. The Supreme Court
considered the scheme of Section 10(22) and Section 10(23C) of the Act in
the case of American Hotel & Lodging Association (supra) and explained
that under Section 10(22) of the Act, once an approval had been granted the
exemption was automatic and Section 11 and Section 13 of the Act did not
apply. Thus, there would be neither assessment nor demand in cases where
approval under Section 10(22) of the Act had been granted to an assessee.
In the event an institution fell within the expression: "exists solely for
educational purposes and not for profit", the institution was entitled to
avail the exemption under Section 10(22) of the Act and there were no
other conditions that were required to be complied with. The Supreme
Court observed that:
"The mere existence of profit/surplus did not disqualify the
institution if the sole purpose of its existence was not profit-
making but educational activities as section 10(22) by its very
nature contemplated income of such institution to be
exempted. Under section 10(22) the test was restricted to the
character of the recipient of income, viz., whether it had the
character of educational institution in India, its character
outside India was irrelevant for deciding whether its income
would be exempt under section 10(22)."
47. The Court further held that Section 10(23)(vi) of the Act was
analogous to Section 10(22) and to that extent the law laid down with
respect to the eligibility condition under Section 10(22) of the Act would be
W.P.(C) 2184/2013 Page 38 of 41
equally applicable in cases under Section 10(23)(vi). The Court further
analyzed the scheme of Section 10(23)(vi) of the Act and provisos thereto
and held as under:-
"Having analysed the provisos to section 10(23C)(vi) one
finds that there is a difference between stipulation of
conditions and compliance thereof. 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 standardized form
in terms of the first proviso. It is only if the pre-requisite
condition of actual existence of the educational institution is
fulfilled that the question of compliance of 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."
48. If one applies the above principle to the facts of the present case then
the petitioner would be entitled to an approval under Section 10(23C)(vi) of
the Act at the threshold. However, that would not absolve the petitioner
from complying with the provisos to Section 10(23C) of the Act. The
petitioner would be obliged to apply the funds solely for its objects and if
the third proviso to Section 10(23C) of the Act was violated then the
approval granted to the petitioner would be liable to be revoked. The stage
of grant of approval and the stage for examining whether the third proviso
to Section 10(23C) of the Act are complied with are different. Whereas, the
exemption is liable to be granted at the beginning of the relevant year, the
question whether the third proviso has been complied with would have to
be viewed at the end of the relevant year. In American Hotel & Lodging
W.P.(C) 2184/2013 Page 39 of 41
Association (supra) the Supreme Court evolved a mechanism whereby the
scheme of Section 10(23C) of the Act could be fully implemented: the
Prescribed Authority, would issue an approval to the eligible institution,
albeit with a condition that the institution would comply with the third
proviso to Section 10(23C) of the Act. In the event it was found that the
assesse was non compliant with the third proviso to Section 10(23C) of the
Act, the approval would be revoked under the thirteenth proviso to Section
10(23C) of the Act.
49. Following the aforesaid principle, the assesse would be entitled to the
approval under section 10(23C)(vi) of the Act, however if it was found that
the funds of the assesse had not been utilized for its objects during the
relevant year or had otherwise not complied with the provisos to the
Section 10(23C) of the Act, the approval would be revoked at the end of the
relevant year. Since, by virtue of its nature, the petitioner is entitled to an
exemption, the same would also be available to the petitioner for the
subsequent year(s). However the question whether the exemption is liable
to be revoked would have to be considered at the end of the year after
reviewing whether the petitioner had complied with the conditions
imposed, inter alia, by the third proviso to Section 10(23C) of the Act. It is
obvious from the aforesaid scheme that denial of exemption under section
10(23C)(vi) of the Act to an Institution which exists solely for educational
purposes and not for profit, on account of non compliance with the third
proviso would be limited to the relevant years during which the proviso has
been violated.
W.P.(C) 2184/2013 Page 40 of 41
50. In view of the above, even if it is assumed that payment to RJB-APL
violated the third proviso for Section 10(23C) of the Act, the exemption
under section 10(23C)(vi) of the Act can be denied only for the for the
year(s) during which payments had been made by the petitioner to RJB-
APL. Since the assessee by its nature of activity is otherwise entitled to
exemption under Section 10(23C)(vi) of the Act, the same is liable to be
granted by the respondent for future years subject to conditions as
contained in the third proviso to Section 10(23C) of the Act.
51. The writ petition is allowed in the aforesaid terms.
VIBHU BAKHRU, J
S. RAVINDRA BHAT, J
MAY 23, 2014
RK
W.P.(C) 2184/2013 Page 41 of 41
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