Andhra Pradesh H.C : Whether the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and being eligible for approval, under section 10(23C)( vi) of the Act

High Court Of Andhra Pradesh

New Noble Educational Society vs. CCIT

Section : 10(23C)(vi)

V.V.S. Rao And Ramesh Ranganathan, JJ.

Writ Petition Nos. 2327, 2331, 2333, 6508, 7335, 9697, 12254, 12374, 12946, 15418, 15870, 21248, 21251, 21257 And 21266 Of 2010

November 11, 2010

JUDGMENT

Ramesh Ranganathan, J. – In this batch of writ petitions rejection by the first respondent, of the applications submitted by the petitioners for grant of approval under section 10(23C)( vi) of the Income-tax Act, 1961 (hereinafter called “the Act”), is under challenge as being illegal and arbitrary. A consequential direction is sought to the Chief Commissioner of Income-tax to grant approval, under section 10(23C)(vi) of the Act, to the petitioner-societies from the year 2009-10 onwards.

2. While Sri K. Vasantkumar, Sri Y. Ratnakar, Sri A.V. Krishna Koundinya, Sri C.V. Narasimham and Sri Ch. Pushyam Kiran put forth their submissions on behalf of the petitioner-societies, the impugned orders were sought to be sustained, on behalf of the Income-tax Department, by Sri J.V. Prasad, learned senior standing counsel.

3. To enable counsel on either side to focus on the issues which arise for consideration in this batch of writ petitions, and with their consent, the following questions were framed as necessitating adjudication :

“1.Whether the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and being eligible for approval, under section 10(23C)( vi) of the Act?

2.Whether registration, under section 43 of the A.P. Act No. 30 of 1987, is a condition precedent for seeking approval under section 10(23C)(vi) of the Income-tax Act, 1961 ?

3.Whether the certificate issued by the Commissioner of Endowments, as the appropriate authority under section 43 of the A.P. Act No. 30 of 1987, is conclusive proof of an assessee being a charitable institution existing solely for the purpose of education ?

4.Even in case the assessee produces a certificate of registration under section 43 of the A.P. Act No. 30 of 1987 can the Commissioner of Income-tax refuse approval/sanction under section 10(23C)(vi) of the Income-tax Act, 1961 ?”

Question No. 1

4. It is contended, on behalf of the petitioners, that section 10(23C)( vi) of the Act makes a distinction between the educational institution and the society/educational agency running it; approval, under section 10(23C)( vi), is sought only for the educational institution, and not for the society/educational agency; section 10(23C)(vi) places emphasis on receipts and, since the amounts are received by the petitioner-societies on behalf of the educational institution, it is only the objects of the educational institution which should be taken into consideration, and not that of the society ; the society, which runs the educational institution, is entitled to pursue objects other than those relating exclusively for educational purposes; at the stage of grant of approval, under section 10(23C)(vi), only the objects of the society are required to be examined, and not the manner of application of funds by it; the words “solely” in section 10(23C)(vi ) is redundant; and the other objects of the petitioners are also ancillary to “education”.

5. On the other hand, learned senior standing counsel would submit that it is immaterial whether the society pursues all its objects as enumerated in its trust deed; even if an object is not pursued in real terms in a particular year, the society can pursue it in any other year as it has the mandate under the objects mentioned in its trust deed; such objects of a trust fall foul of the conditions specified in section 10(23C)(vi); exemption is granted to a society and not to any limb of a society engaged in a particular activity; it is, therefore, necessary that all the aims and objects mentioned in the trust deed are exclusively for education, and not for any other purpose; the clauses in the trust deed should not be ambiguous allowing the society a wide scope to indulge in any other activity which are strictly not for promotion of education; in its Instruction No. 1112, dated 29-10-1977, the Central Board of Direct Taxes had explicitly prohibited spending of “surplus” of an educational institution for non-educational purposes; violation thereof implied that the society did not exist solely for educational purposes; even if no amount is spent for non-educational purposes, the society would not be entitled for exemption under the Act if its existence is not solely for educational purposes; the surplus, which societies seeking approval make, should again be ploughed back for educational purposes, and not utilized for any other object ; and diversion of funds to achieve objects, which are not solely for educational purposes, would disentitle the society from being granted approval.

6. In view of the prohibition under section 20A of the A.P. Education Act, denying individuals the right to establish educational institutions, it is only societies/associations/trusts which can establish educational institutions in the State of Andhra Pradesh. In view of section 10(23C)(iiiad) of the Act, read with rule 2BC(1) of the Income-tax Rules, the income received by a person (i.e., the educational agency-society/trust), on behalf of an educational institution existing solely for educational purposes and not for the purpose of profit, shall not be included in their total income if the aggregate annual receipts of such an educational institution do not exceed Rs. one crore. On the other hand, where the annual receipts of an educational institution exceeds Rs. one crore, the benefit of exclusion from the total income is available not under sub-clause (iiiad) but under sub-clause (vi) of section 10(23C) where under approval is also required to be obtained from the prescribed authority.

7. Section 10(22), prior to its omission by the Finance Act, 1998 with effect from 1-4-1999, excluded the income of an educational institution, existing solely for educational purposes and not for the purposes of profit, from the “total income”. Except that approval is now required to be obtained from the prescribed authority, section 10(23C)(vi) is analogous to section 10(22). To that extent judicial pronouncements, made in the context of section 10(22), would equally apply to section 10(23C)(vi) of the Act. – American Hotel & Lodging Association Educational Institute v. CBDT [2008] 301 ITR 86/ 170 Taxman 306 (SC).

8. An educational society, running an educational institution solely for educational purposes and not for the purpose of profit, must be regarded as “other educational institution” under section 10(23C)(vi) of the Act. It would be unreal and hyper-technical to hold that the assessee-society is only a financing body and will not come within the scope of “other educational institution”. If, in substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the level of colleges and schools, such an educational society should be regarded as an “educational institution”.—Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310 / 90 Taxman 528 (SC). 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. (Pine-grove International Charitable Trust v. Union of India [2010] 327 ITR 73 / 188 Taxman 402 (Punj. & Har.). The distinction sought to be made between the society, and the educational institution run by it, does not, therefore, merit acceptance.

9. In order to be eligible for exemption, under section 10(23C)(vi) of the Act, it is necessary that there must exist an educational institution. Secondly, such institution must exist solely for educational purposes and, thirdly, the institution should not exist for the purpose of profit.—CIT v. Sorabji Nusserwanji Parekh [1993] 201 ITR 939/ 66 Taxman 411 (Guj.). In deciding the character of the recipient of the income, it is necessary to consider the nature of the activities undertaken. If the activity has no co-relation to education, exemption has to be denied. The recipient of the income must have the character of an educational institution to be ascertained from its objects. —Aditanar Educational Institution’s case (supra). The emphasis in section 10(23C)(vi) is on the word “solely”. “Solely” means exclusively and not primarily.—CIT v. Gurukul Ghatkeswar Trust [2011] 332 ITR 611 (AP); CIT v. Maharaja Sawai Mansinghji Museum Trust [1987] 33 Taxman 279 /[1988] 169 ITR 379 (Raj.). In using the said expression, the Legislature has made it clear that it intends to exempt the income of the institutions established solely for educational purposes and not for commercial activities.—Oxford University Press v. CIT [2001] 247 ITR 658 / 115 Taxman 69 (SC). This requirement would militate against an institution pursuing the objects other than education. – Vanita Vishram Trust v. Chief CIT [2010] 327 ITR 121 / 192 Taxman 389 (Bom.). Even if one of the objects enables the institution to undertake commercial activities, it would not be entitled for approval under section 10(23C)(vi) of the Act.—American Hotel & Lodging Association Educational Institute’s case (supra). It is only if the objects reveal that the very being of the assessee-society, as an educational institution, is exclusively for educational purposes and not for profit, the assessee would be entitled for exemption under section 10(23C)(vi) of the Act.—Gurukul Ghatkeswar Trust’s case (supra)

10. In the case of a dispute whether the claim of the assessee to be exempted from tax is admissible or not, it is necessary for the assessee to establish that it is part of an institution which is engaged solely for educational purposes and not for the purposes of profit, and the income in respect of which exemption is claimed is a part of the income of the institution.—Oxford University Press’ case (supra). The activities of the institution, its objects, its source of income and its utilization, must be analysed by the prescribed authority to ascertain whether it exists solely for education and not for profit, and it is his duty to ascertain whether the income is applied wholly and exclusively for the educational objects for which the applicant is established. (Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1979] 2 Taxman 501 /[1980] 121 ITR 1 (SC) and American Hotel & Lodging Association Educational Institute’s case (supra).

11. The object of establishing an educational institution should not be to make profit. There can, however, be a reasonable revenue surplus which may be used by the educational institution for the purpose of development of education and expansion of the institution.—T.M.A. Pai Foundation v. State of Karnataka [2002] 8 SCC 481. It is not possible to carry on educational activity in such a way that the expenditure exactly balances the income, and there is no resultant profit.—Surat Art Silk Cloth Mfrs. Association’s case (supra); American Hotel & Lodging Association Educational Institute’s case (supra); Pinegrove International Charitable Trust’s case (supra). Profits/surplus cannot be diverted for any other use or purpose, and cannot be used for personal gain or for any other business or enterprise.—Islamic Academy of Education v. State of Karnataka [2003] 6 SCC 697. The test of predominant object of the activity is to be seen, whether it exists solely for education and not to earn profit.—Surat Art Silk Cloth Manufacturers Association’s case (supra ); American Hotel and Lodging Association Educational Institute’s case (supra ); Pinegrove International Charitable Trust’s case (supra). The decisive test is whether, on an overall view of the matter, the object is to carry on educational activities or to make profit. Aditanar Educational Institution’s case (supra).

12. It is useful, in this context, to refer to some of the provisos to section 10(23C)(vi) of the Act. The first proviso requires the applicant to obtain initial approval from the prescribed authority, in terms of section 10(23C)(vi), by making an application in the standardized form. The second proviso not only requires the prescribed authority to vet the application, but also indicates his powers and duties. While considering the application the prescribed authority is empowered to call for such documents, including annual accounts or other information from the applicant, as are necessary to verify the genuineness of the activities of the applicant-institution. Under the third proviso, the prescribed authority has to ascertain, while examining the genuineness of the activities of the institution, whether the applicant applies its income wholly and exclusively to the objects for which it is established. The applicant has not only to impart, but must also apply its income exclusively for the purposes of education.—American Hotel & Lodging Association Educational Institute’s case (supra ). The applicant must also adhere to the conditions in Form 56D (rule 2CA). One of the conditions is that the assessee will have to submit its audited accounts and balance-sheets for the last three years, along with a note on the examination of accounts, on the activities as reflected in the accounts, and in the annual reports with special reference to appropriation of income in furtherance of the objects of the educational institution. From the audited accounts it can be ascertained whether the funds were utilized for the expansion of the educational institution/activity or for personal profit.—City Montessori School ( Regd.) v. Union of India [2009] 315 ITR 48/[2010] 191 Taxman 208 (All.). The words “not for the purposes of profit” accompanying the words “existing solely for educational purposes” has to be read and interpreted keeping in view the third proviso to section 10(23C)(vi) which prescribes the methodology for utilization and accumulation of income at the hands of the educational institution. As a result 85 per cent of the income has to be applied by the educational society for the purpose of education. Capital expenditure, if incurred, for the attainment of such objects has to be deducted from the gross receipts/income. The word “wholly” in the third proviso refers to the quantum of expenditure and the word “exclusively” refers to the motive, object or the purpose of expenditure.—Pinegrove International Charitable Trust’s case (supra). The third proviso indicates that accumulation of income by an educational institution, governed by sub-clause (vi), is not a disabling factor as long as the purpose of accumulation is the application of the income wholly and exclusively for the purpose of education.—Vanita Vishram Trust’s case (supra). That the third proviso to section 10(23C)(vi) permits investment and deposits, of its surplus, in a fund means that the institution can have deposits on which it may earn interest.—City Montessori School (Regd.) ‘s case (supra).

13. It is evident, from the provisos to section 10(23C)(vi), that there is a difference between stipulation of conditions and compliance therewith.—Vanita Vishram Trust’s case (supra). At the initial stage, when an application for exemption is submitted by an educational institution, the scope of inquiry is restricted only to ascertain the genuineness of the activities of such an institution. Such an inquiry may even extend to an examination of the accounts of the institution, application of its income to the object and purposes of education and other cognate aspects. Once, on the basis of the genuineness of the activities of an educational institution, approval is granted for exemption then the monitoring provisions would come into play.—Pinegrove International Charitable Trust’s case (supra).

14. The threshold conditions are aimed at discovering the actual existence of an educational institution and approval of the prescribed authority for which an application in the standardized form, in terms of the first proviso, has to be given by every applicant. If the pre-requisite condition, of actual existence of the educational institution, is fulfilled then the question of compliance with the requirements, contemplated by various provisos, would arise. Only if the educational institution actually exists for educational purposes alone should it be permitted to operate subject to the monitoring conditions to be stipulated by the prescribed authority.—American Hotel and Lodging Association Educational Institute’s case (supra) and Pinegrove International Charitable Trust’s case (supra).

15. Compliance with the monitoring conditions/requirements under the third proviso, 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, can be stipulated as conditions by the prescribed authority subject to which approval may be granted, provided they are not in conflict with the provisions of the Act. While imposing conditions, subject to which approval is granted, the prescribed authority may insist on a certain percentage of the accounting income to be utilized/applied for imparting education. Similarly, the prescribed authority may grant approval on such terms and conditions as it deems fit in cases where the institution applies for initial approval for the first time. The prescribed authority must give an opportunity to the applicant-institution to comply with the monitoring conditions which have been stipulated for the first time by the third proviso. However, after grant of approval, if it is brought to the notice of the prescribed authority that the conditions, on which approval was given, are breached or that 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. Stipulation of monitoring conditions is different from compliance with those conditions. Compliance or non-compliance can only be gauged at the assessment stage, as availability of exemption has to be evaluated every year in order to find out whether the institution existed during the relevant year solely for educational purposes, and not for profit.—American Hotel and Lodging Association Educational Institute’s case (supra) and Vanita Vishram Trust’s case (supra).

16. We, accordingly, hold that in cases where approval, under section 10(23C)(vi) of the Act, is initially sought, the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and as being eligible for approval, under section 10(23C)(vi) of the Act. In addition, an application in the prescribed proforma should be submitted to the prescribed authority within the time stipulated and the specified documents should be enclosed thereto. However, in cases where an application is submitted, seeking renewal of the exemption granted earlier, the prescribed authority shall, in addition to the conditions aforementioned, also examine whether the income of the applicant-society has been applied solely for the purposes of education in terms of section 10(23C)(vi) of the Act, the provisos thereunder, the Income-tax Rules, and the documents enclosed to the application submitted in Form 56D.

17. Question No. 1 is answered accordingly.

Question Nos. 2, 3 and 4

18. As these questions are inter-linked, and inter-connected with each other, it is convenient to examine all of them together.

19. Learned counsel for the petitioners would submit that, while the petitioners are societies running educational institutions and are not making profit, they are not charitable institutions; the Income-tax Act does not require registration, under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987, (hereinafter referred to the A.P. Act 30 of 1987), as a condition precedent for grant of approval; such a requirement is conspicuously absent in the provisos to section 10(23C)(vi); the Act is a complete code in itself and other Acts, including the A.P. Act 30 of 1987, cannot form the basis for denying the petitioners the benefit of approval; the provisions of one Act should not be either linked to or considered with reference to the provisions of another enactment; the objects and reasons, and the various provisions of the A.P. Act 30 of 1987 only regulate and protect the property of charitable institutions; the petitioners’ activities are not prohibited under any law much less the A.P. Act 30 of 1987; non-registration under the A.P. Act 30 of 1987 does not result in discontinuance of the petitioners’ activities; and the penal provision prescribed therein is only to comply with the requirements of registration.

20. On the other hand Sri J.V. Prasad, learned senior standing counsel, would submit that most of the petitioner-societies are registered under section 12 of the Act as charitable institutions; an applicant is not entitled for approval under section 10(23C)(vi) if they violate the provisions of any other law; a legal entity, carrying on a legal activity, is bound to follow all laws enacted by the Legislature; the A.P. Act 30 of 1987 was enacted to regulate charitable institutions in the State; while the said Act applies both to registered and unregistered charitable institutions, it requires all charitable institutions to be registered thereunder; the Commissioner of Endowments has confirmed that educational institutions, though running on no profit basis, required registration under section 43 of the A.P. Act 30 of 1987; registration of charitable institution is obligatory in terms of section 44; the petitioners’ endeavour was to remain out of the purview of the various regulatory provisions of the A.P. Act 30 of 1987; and failure to register is not merely technical

21. A.P. Act 30 of 1987 (which repealed the earlier A.P. Act 17 of 1966) was enacted with a view to consolidate and amend the law relating to the administration and governance of charitable and hindu religious institutions and endowments in the State of Andhra Pradesh. This Act came into force with effect from 23-5-1987. Section 1(3)(a ) thereof stipulates that the said Act is applicable to all public charitable institutions whether registered or not in accordance with the provisions of the Act. The expression “public charitable institutions” is defined, in the Explanation thereto, to include every charitable institution the administration of which is for the time being, amongst others, carried on by a society. “Charitable institution”, in terms of section 2(4) of A.P. Act 30 of 1987, means any establishment, undertaking, organisation or association formed for a charitable purpose. A.P. Act 30 of 1987 is applicable to all charitable institutions regardless of religion.—Parsi Zoroastrian Anjuman of Secunderabad & Hyderabad v. Deputy Commissioner of Endowments [2000] 1 ALT 256 (AP). “Charitable purpose”, under section 2(5) of A. P. Act 30 of 1987, brings within its ambit, amongst others, education also. To find out the object for which a society has been established, the provisions of section 2(5) of A.P. Act 30 of 1987, which only exclude those “exclusively of a religious nature”, also has a role to play. (Commissioner of Endowments v. All India Sai Seva Samaj [2001] 6 ALT 539.

22. Application of the provisions of A.P. Act 30 of 1987 to all public charitable institutions, whether registered or not in accordance with the provisions of the Act, continues to be the same as in the repealed A.P. Act 17 of 1966. Chapter IV of A.P. Act 30 of 1987 relates to registration of charitable institutions. Section 43 relates to registration of charitable institutions and, under sub-section (1) thereof, the trustee or other person in charge of the management of every charitable institution is required to make an application for its registration to the concerned Assistant Commissioner. Under section 43(5), on receipt of the application, the Assistant Commissioner shall, after making such enquiry as he thinks fit and after hearing any person having interest in the institution, pass an order directing its registration, and to grant a certificate of registration containing the particulars furnished in the application with the alterations, if any, made by him as a result of his enquiry. Section 43(6) requires the particulars relating to every institution, contained in the certificate of registration, to be entered in the Register of Institutions and Endowments maintained by the Assistant Commissioner. One copy thereof is required to be furnished to the Deputy Commissioner, and another to the Commissioner. Under section 43(11) where any trustee or other person fails to apply for registration of a charitable institution, within the time specified, he shall be punishable with fine which may extend to one thousand rupees. Section 44 relates to the power of the Commissioner to have the institution registered and, thereunder, where any trustee or other person in charge of the management of a charitable institution fails to apply for registration of the institution, the Commissioner shall give notice to the trustee, or the other person, to make an application in that regard within a specified period and, if he fails to make such an application within the period specified, the Commissioner is empowered to have the charitable institution registered after following the prescribed procedure.

23. On a conjoint reading of the Explanation to section 1(3)(a), section 2(4) and 2(5) of A.P. Act 30 of 1987 it is evident that a society running an educational institution in the State of Andhra Pradesh is a public charitable institution. The submission that, in the absence of registration, the provisions of A.P. Act 30 of 1987 are not applicable is not tenable. The provisions of A.P. Act 30 of 1987 apply to all public charitable institutions whether registered or not in accordance with the provisions of the Act. A public charitable institution is required, in law, to conduct the management of its affairs strictly in accordance with the provisions of A.P. Act 30 of 1987. Registration under A.P. Act 30 of 1987 would also ensure that the activities of the educational agency are monitored by the State agencies. Section 58 of A.P. Act 30 of 1987 relates to accounts and audit and, under sub-section (2)(a) thereof, the accounts of every charitable institution the annual income of which, as calculated for the purpose of section 65 for the financial year immediately preceding, exceeds rupees one lakh, shall be subject to concurrent audit by an agency specified by the Government, and the audit shall take place as and when expenditure is incurred. The mere fact that the authorities failed to act in the matter to get the institution registered under the provisions of the Act is of no legal consequence.—Secretary to Government, Revenue ( Endowments) Department of AP v. Sri Swamy Ayyappa Co-operative Housing Societies Ltd. [2003] 6 ALT 62 (AP).

24. Imparting of education is regarded as an activity that is charitable in nature. Education has so far not been regarded as a trade or business where profit is the motive.—State of Bombay v. R.M.D. Chamarbaugwala AIR 1957 SC 699; T.M.A. Pai Foundation’s case (supra); Islamic Academy of Education’s case (supra). Section 2(15) of the Income-tax Act defines “charitable purpose” to include “education”. The sense in which the word “education” has been used in section 2(15) is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word “education”, in section 2(15), has not been used in that wide and extended sense according to which every acquisition of further knowledge constitutes education. What education connotes, in that clause, is the process of training and developing the knowledge, skill, mind and character of students by formal schooling.—Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC). This definition of “education” is wide enough to cover the case of an “educational institution” as, under section 10(23C)(vi), the “educational institution” must exist “solely” for educational purposes. Maharaja Sawai Mansinghji Museum Trust’s case (supra). The element of imparting education to students or the element of normal schooling where there are teachers and taught must be present so as to fall within the sweep of section 10(23C)(vi) of the Act. Such an institution may, incidentally, take up other activities for the benefit of students or in furtherance of their education. It may invest its funds or it may provide scholarships or other financial assistance which may be helpful to the students in pursuing their studies. Such incidental activities alone, in the absence of the actual activity of imparting education by normal schooling or normal conduct of classes, would not suffice for the purpose of qualifying the institution for the benefit of section 10(23C)(vi).— Sorabji Nusserwanji Parekh’s case (supra). Section 2(15) is wider in terms than section 10(23C)(vi) of the Act. If the assessee’s case does not fall within section 2(15), it is difficult to put it in section 10(23C)(vi) of the Act.—Maharaja Sawai Mansinghji Museum Trust’s case (supra). As “education” falls within the scope of “charitable purpose” both under section 2(5) of A.P. Act 30 of 1987 and section 2(15) of the Income-tax Act and, inasmuch as A.P. Act 30 of 1987 requires all charitable institutions in the State of A.P. to be registered, the Chief Commissioner was justified in holding that the petitioner-societies should have registered themselves under the provisions of A.P. Act 30 of 1987, as failure to so hold would have resulted in one arm of the law being utilized to defeat another arm of the law which would not only be opposed to public policy, but would also bring the law into ridicule.—Biharial Jaiswal v. CIT [1996] 217 ITR 746/84 Taxman 836 (SC).

25. The question, which next requires examination, is whether failure to so register would necessitate rejection of the petitioner’s application, for approval under section 10(23C)(vi), at the threshold or whether the Chief Commissioner ought to have granted approval subject also to the condition that the petitioners register themselves as a charitable institution under A.P. Act 30 of 1987. As noted hereinabove the Chief Commissioner is statutorily bound, under section 10(23C)(vi), the first and second provisos thereunder and rule 2CA of the Rules, to satisfy himself that the objects of the society are such that the existence of the educational institution is solely for educational purposes, and not for the purpose of profit. Even in cases where a society is registered as a charitable institution under A. P. Act 30 of 1987, the Chief Commissioner is not absolved of his statutory duty to verify the statutorily prescribed documents, and to satisfy himself that the applicant-society is not only a charitable institution but also that its charitable objects are exclusively for educational purposes and for no other. Since the statutory provisions of the Income-tax Act, referred to hereinabove, prescribe this as a threshold examination requirement, satisfaction of which alone would require the Chief Commissioner to grant approval, in cases where the Chief Commissioner is satisfied, after examination of the records, that the applicant exists solely for educational purposes and not for the purposes of profit, and the application is made in the stipulated form accompanied by all the documents specified under the Act and the Rules, he would not be justified in denying approval merely on the ground that the applicants did not register themselves as charitable institutions under A. P. Act 30 of 1987. As noted hereinabove, whether or not a charitable institution is registered under the said Act, the provisions of A. P. Act 30 of 1987 are applicable to all public charitable institutions in the State of A.P. Further, while failure to register themselves under A. P. Act 30 of 1987 may attract the penal provisions therein, the said Act does not prohibit public charitable institutions from carrying on their activities even though they are not registered under the Act. Consequently, while the Chief Commissioner is bound to satisfy himself that the applicant is a charitable institution existing solely for the purposes of education, he is also entitled to prescribe registration, under A. P. Act 30 of 1987, within a specified period as a condition subject to which approval may be granted in as much as registration, as a charitable institution, under A.P. Act 30 of 1987 would be one of the factors to show that the society concerned exists for the charitable purpose of carrying on educational activities.

26. We, accordingly, hold that the certificate signed by the Commissioner of Endowments, as the appropriate authority under section 43 of the A. P. Act No. 30 of 1987, is but one of the factors, and not conclusive proof, of an assessee under the Income-tax Act being a charitable institution existing solely for the purposes of education. Even in case the assessee produces a certificate of registration under section 43 of A.P. Act No. 30 of 1987, the Chief Commissioner has to independently examine the objects of the applicant-society, their application seeking approval under section 10(23C)(vi), and the prescribed documents enclosed thereto, and satisfy himself, in the light of the provisions of section 10(23C)(vi), the provisos thereto, rule 2CA and Form 56D, that the existence of the educational institution is solely for the purposes of education and not for the purpose of profit and, only if he is so satisfied, to grant approval. Registration under section 43 of the A. P. Act 30 of 1987 is not a condition precedent for seeking approval under section 10(23C)(vi) of the Act. The Chief Commissioner can, however, prescribe registration under A. P. Act 30 of 1987 as a condition subject to which approval is granted under section 10(23C)(vi) of the Act. Question Nos. 2, 3 and 4 are answered accordingly.

27. In all the writ petitions, which form part of this batch, the common ground of rejection, of the applications seeking approval under section 10(23C)(vi) of the Act, is that the applicant-societies are not registered under A. P. Act 30 of 1987. While this is the only reason for rejection in W.P. Nos. 6508, 7335, 9697 and 15418 of 2010, in the other writ petitions there are other reasons also for which the applications were rejected. It is, therefore, necessary to deal with them separately.

W. P. Nos. 12374, 21248, 21251, 21257 and 21266 of 2010

28. In W. P. No. 12374 of 2010 the objects of the petitioner-society include “to maintain unity among members of the society”, “to organize sports, games and cultural activities”, and “to solve problems of the members on social grounds”. In W. P. No. 21248 of 2010 the objects of the petitioner-society include “providing employment among educated people”. In W. P. No. 21251 of 2010 the objects of the petitioner-society include “promotion of the economic and educational needs of Christians in particular and others in general”. In W. P. No. 21257 of 2010 the objects of the applicant-society include “to strive for the upliftment of socially, economically and educationally weaker sections of the society in general and of the Christian community in particular”, and “to meet all the above aims and objectives for the Christian minority community”. In W. P. No. 21266 of 2010 the objects of the petitioner-society include “to establish associate organizations, such as orphanages, hostels for needy students, home for the aged and disabled, hospitals for the poor etc.”

29. The objects in the aforesaid writ petitions were held by the prescribed authority as non-educational in nature. The amendments carried out during the financial year, and intimated to the Registrar thereafter, were held inapplicable for the financial year 2008-09, relevant to the assessment year 2009-10, for which approval was sought.

30. If there are several objects of a society some of which relate to “education”, and others which do not, and the trustees or the managers, in their discretion, are entitled to apply the income or property to any of those objects, the institution would not be eligible to be regarded as one existing solely for educational purposes, and no part of its income would be exempt from tax. In other words, where the main objects are distributive, each and everyone of them must relate to “education” in order that the institution may be held entitled for the benefits under section 10(23C)(vi) of the Act. But if the primary or dominant purpose of an institution is “educational”, another object which is merely ancillary or incidental to the primary or dominant purpose would not disentitle the institution from the benefit. The test which has, therefore, to be applied is whether the object, which is said to be non-educational, is the main or primary object of the institution or it is ancillary or incidental to the dominant or primary object which is “educational”.—Surat Art Silk Cloth Manufacturers Association’s case (supra). The test is the genuineness of the purpose tested by the obligation created to spend the money exclusively on “education”. If that obligation is there, the income becomes entitled to exemption.—Sole Trustee, Loka Shikshana Trust’s case (supra).

31. Objects of a society, such as maintaining unity among members, solving problems of members of social grounds, providing employment, promoting economic needs, and upliftment of the socially and economically weaker sections of the society, cannot be characterized as those whereby the educational institution can be said to exist solely for the purposes of education. Even if the applicants have not applied their income to achieve these non- educational objects, they would still be disentitled to the benefit of being exempted under section 10(23C)(vi) of the Act, as the exemption thereunder is available only to educational institution whose existence is solely for the purposes of education. The aforesaid objects are neither integrally connected with, nor are they ancillary or incidental to, the primary object of “education”.

32. The A. P. Societies Registration Act, 2001 (AP Act 35 of 2001) repealed the Societies Registration Act in its application to the Andhra area of the State of Andhra Pradesh and the A. P. (Telangana Area) Public Societies Registration Act, 1350 fasli. Section 8 of A. P. Act 35 of 2001 relates to amendment of the memorandum and bye-laws of a society. Under sub-section (1) thereof a society, by a special resolution, may alter the provisions of the memorandum with respect to a change of its objects. Under sub-section (3), any alteration of the memorandum of the society shall not be valid unless such alteration is registered under the Act. Under section 8(4), if any alteration of the memorandum is filed, and if they are not contrary to the provisions of the Act, the Registrar shall register the same, and certify registration of such alteration within thirty days from the date of receipt of the resolution. This certificate is conclusive evidence that all the requirements of the Act, with respect to the alteration and the certification thereof, have been complied with and, henceforth, the memorandum, as so altered, shall be the memorandum of the society. On a conjoint reading of sub-sections (3) and (4) of section 8, it is only when the amendment to the objects of the society is intimated to the Registrar and the Registrar, on being satisfied that the amendment is not contrary to the provisions of the Act, registers and certifies such an alteration, would it be a valid alteration under the Act. It is only from the date the Registrar certifies the alteration that the amendment, to the objects of the society, comes into force.

33. The existence of an educational institution, solely for the purposes of education, is a pre-condition for grant of approval and, as the objects aforementioned are not for educational purposes, the Chief Commissioner cannot be faulted for rejecting the applications seeking approval under section 10(23C)(vi) of the Act. As the validity of the impugned orders must be upheld, on the ground that the objects of the petitioner-societies include those for non-educational purposes, we see no reason to quash the orders impugned in these writ petitions even though we are satisfied that the applications, in these writ petitions, ought not to have been rejected on the ground of non-registration under A. P. Act 30 of 1987.

W. P. No. 12946 of 2010

34. The objects of the petitioner-society included “to publish journals, magazines, or other media for diffusion of useful knowledge for promotion of education”. The petitioner-society contended that this object was also for the purposes of education, and formed part of their educational activity; and, in the process of running an educational institution, it was necessary to publish journals and magazines for providing knowledge to students and other teaching staff. The first respondent held that the activity of publishing journals, magazines, or other media for diffusion of useful knowledge for promotion of education was, per se, not an activity “solely for the purpose of education” more so when the activity was not restricted specifically for the benefit of students and teaching staff of the educational institution run by the applicant-society.

35. Publication of journals, magazines, or other media for diffusion of useful knowledge for promotion of education is incidental and ancillary to the primary object of the society i.e., to run an educational institution. It is the applicant’s case that publication of journals and magazines is to provide knowledge to students and the teaching staff. Inasmuch as the petitioner is an educational institution, the mere fact that the object of publication of journals and magazines for promotion of education is not restricted, in so many words, only for the benefit of students and teaching staff is of no significance. It is not even the case of the prescribed authority that publication of these journals and magazines was for anyone else. The prescribed authority was, therefore, not justified in rejecting the application on this ground.

W. P. No. 15870 of 2010

36. The objects of the petitioner-society included “to conduct seminars, symposiums, workshops and invite experts from India and abroad to improve the quality of education and to support students to elevate themselves to international standards”. This object was held not to be “solely educational” in nature. On a perusal of the receipts and payments account of the society, for the financial year 2007-08, the first respondent found that Rs. 50 lakhs was advanced to another society by name M/s. Jackson Educational Society. The first respondent held that the memorandum of association did not indicate that the aforesaid object was restricted only to the students of the educational institution run by the petitioner-society; advance of Rs. 50,00,000 represented an interest-free temporary loan given to another society; the funds of the society had, therefore, not been applied wholly and exclusively to the objects for which the society was established; it was in violation of the third proviso to section 10(23C) of the Act; and such diversion of funds could not be treated as application of income to the objects of the society as has been clarified under the twelfth proviso to section 10(23C) of the Act.

37. The aforesaid object, which the prescribed authority held not to be for the purposes of education, is incidental and ancillary to the primary object of carrying on educational activities by the educational institution. The Chief Commissioner was, therefore, not justified in rejecting the petitioner’s application on this ground.

38. The other ground of rejection is that Rs. 50,00,000 was advanced to a sister educational society. It is contended, on behalf of the petitioners, that the other society is also an educational institution; and the temporary advance was, in any event, returned during the very same financial year. Under the twelfth proviso to section 10(23C)(vi ) of the Act, the prescribed authority is required to examine cases where an applicant does not apply its income during the year of receipt and accumulates it but makes payment therefrom to any other educational institution and, to that extent, the proviso states that such payment shall not be treated as application of income to the objects for which such educational institution is established. The idea underlying the twelfth proviso is to provide guidance to the prescribed authority as to the meaning of the words “application of income to the objects for which the institution is established”.—American Hotel and Lodging Association Educational Institute’s case (supra ).

39. In view of the twelfth proviso to section 10(23C)(vi) of the Act, money advanced to another educational institution cannot be treated as application of income to the objects for which the petitioner-society is established; such a transaction would only mean that the funds of the applicant-society has not been utilized solely for the purposes of education; and the petitioner-society would, therefore, be disentitled from being granted approval by the prescribed authority under section 10(23C)(vi) of the Act. The prescribed authority cannot be faulted in rejecting the petitioner’s application on this ground.

40. As the impugned order of rejection must be upheld on this ground, it matters little that the prescribed authority ought not to have rejected the application on the grounds of non-registration under the A. P. Act 30 of 1987 or on the erroneous premise that the objects included those which were not educational in nature.

W. P. Nos. 2327, 2331 and 2333 of 2010

41. In W. P. No. 2327 of 2010 the first respondent, on a perusal of the audited accounts of the petitioner-society, for the financial year 2008-09, found that Rs. 80,000 was claimed as rent paid to the secretary of the society; such payment was also made to him during the financial year 2007-08; these payments partook of the nature of payments referred to in section 13(1)(c) of the Act; and the certificate appended to the memorandum of association of the society, that the office bearers were not paid from the funds of the association, was false.

42. In W. P. No. 2331 of 2010 the first respondent, on a perusal of the audited accounts of the petitioner-society for the financial year 2008-09, relevant to the assessment year 2009-10, found that Rs. 1,08,000 was shown as rent paid to the secretary and correspondent of the society from out of the total rental expenditure of Rs. 2,82,000; similarly, during the financial year 2007-08, rent of Rs. 4,32,000 was paid to the secretary and other members of the society; there was a drastic fall in rental expenditure during the financial year 2008-09 as compared to the expenditure under this head for the financial year 2007-08; no additions were shown under this head in the depreciation schedule for the financial year 2008-09 which could probably explain the decrease in the rental expenditure in the financial year 2008-09; while the gross receipts during the financial year 2008-09 was Rs. 2,75,72,966, the gross receipts for the financial year 2007-08 was Rs. 95,51,384; considering the increase in gross receipts in the financial year 2008-09, over the gross receipts during the immediately preceding financial year, reduction in the quantum of expenditure was not comprehensible; payment of rent to office bearers indicated that the members of the society had personally benefited; such payment was in violation of the two basic conditions of section 10(23C)(vi) of the Act; and the certificate appended to the memorandum of association, that the office bearers were not paid from the funds of the association, was false.

43. In W. P. No. 2333 of 2010 the first respondent, on a perusal of the balance-sheet of the petitioner-society as on March 31, 2009, found that Rs. 19,39,338 and Rs. 20,23,735.95 respectively were shown as rental advance to the general secretary and treasurer of the society respectively; the odd figures suggested the existence of running accounts in their names, from which withdrawals were made; payment to the office bearers of the society was in violation of the basic conditions under section 10(23C)(vi ); and the certificate appended to the memorandum of association, that the office bearers were not paid from the funds of the association, was false.

44. It is only in cases where any part of the income, or the property of a charitable institution, is used, directly or indirectly, for the benefit of the person referred to in section 13(3) of the Act that the provisions of section 13(1)(c) would be attracted. Under section 13(2) the income or property of the institution shall, for the purposes of section 13(1)(a), be deemed to have been used or applied for the benefit of a person referred to in section 13(3) if any one of clauses (a) to (h) of section 13(2) are applicable. The person, referred to in section 13(3), would be benefited only if the amount paid to him constitutes a benefit to him or if clauses (a) to (h) of section 13(2) are attracted. In these three writ petitions it is only if the rent paid is more than the prevailing market rates that the recipient of the rent/rental advance can be said to have benefited thereby. These objections do not find mention in the show-cause notices issued earlier by the first respondent. It is the petitioner’s case that this objection was never put to them at any stage from the date of filing of the application till the date of its disposal; had they been given an opportunity they would have explained that the rent paid by the society was much less than the prevailing market rate, and just because one of the recipients was a member of the society, such payment did not constitute any personal benefit to such member so as to be in violation of section 13(1)(c) of the Act. It is, therefore, evident that the petitioners have been denied the opportunity of establishing, before the prescribed authority, that the provisions of section 13(1)(c) are not attracted. Whether or not the amount paid as rent is more than the prevailing market rates is a matter which necessitates examination by the prescribed authority, after giving the petitioner-assessees an opportunity of being heard. It is made clear that in case the prescribed authority, after causing necessary enquiry in this regard, is satisfied that the provisions of section 13(1)(c) are attracted, the petitioners would not be entitled for approval under section 10(23C)(vi) of the Act.

W. P. No. 12254 of 2010

45. The following amounts were advanced to the secretary of the petitioner- society.

Financial year

Lessor deposit (Rs.)

Other advances (Rs.)

2005-06

10,00,000

12,49,993

2006-07

10,00,000

1,73,555

2007-08

10,00,000

7,97,294

2008-09

10,00,000

7,58,523

46. The first respondent held that these payments indicated that the funds of the society had been applied for the benefit of the secretary of the society, and fell within the ambit of section 13(2)(a) and 13(2)(g) of the Act; Rs. 10,00,000 paid to the secretary of the society was an interest-free deposit and attracted section 13(2)(a); the amounts appearing in the name of the secretary under “other advances” were in the nature of “staff advance” which was availed of by him for the purpose of medical treatment of his son and mother; the society had diverted its funds for the personal benefit of the secretary; the provisions of section 13(2)(g) were applicable to these payments; column No. 17, of the application in Form 56D, was answered in the negative which was blatantly wrong; and the certificate appended to the memorandum of association, that the office bearers were not paid from the funds of the association, was not correct.

47. In the show-cause notice issued earlier, the petitioner was informed that the interest-free advance paid to the secretary of the society was in violation of section 13(2)(a) and 13(2)( g) of the Act. In the affidavit, filed in support of the writ petition, it is stated that the interest-free advance of Rs. 10,00,000 was given on humanitarian grounds for the purpose of treatment, of the son of the secretary of the society who suffered from a congenital heart disease, at the All India Institute of Medical Sciences, New Delhi.

48. Section 13(1)(c ) of the Act is attracted when any part of the income or property of the educational institution is used or applied, directly or indirectly, for the benefit of any person referred to in section 13(3). The income or property shall, for the purposes of section 13(1)(c), be deemed to have been used or applied for the benefit of a person referred to in section 13(3), (a) if any part of the income or property of the institution is, or continues to be, lent to any person referred to in section 13(3) for any period during the previous year without either adequate security or adequate interest or both; (c ) any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3), out of the resources of the institution, for services rendered by that person to such institution, and the amount so paid is in excess of what may be reasonably paid for such services ; and (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in section 13(3). Under section 13(3)(cc) of the Act, the persons referred to in section 13(1)(c) include any trustee of the trust or manager of the institution. The amount given as interest-free advance was to the secretary of the society, [a person who falls within the ambit of section 13(3)(cc) of the Act], and since, on a conjoint reading of section 13(1)(a ) with section 13(2)(a) and 13(2)(g) of the Act, a part of the income or property of the educational institution had been used for the benefit of such a person, it is evident that the provisions of section 13(1)(c) of the Act are attracted. The order of the prescribed authority, in rejecting the petitioner’s application under section 10(23C)(vi) on this ground, does not, therefore, necessitate interference. Since the order of the prescribed authority, rejecting the petitioner’s application, must be upheld on this ground, it matters little that he ought not have rejected the petitioner’s application for non-registration under A. P. Act 30 of 1987.

49. For the aforesaid reasons, W. P. Nos. 12254, 12374, 15870, 21248, 21251, 21257 and 21266 of 2010 are dismissed. The impugned orders of rejection passed in all the other writ petitions, which form part of this batch, are set aside, and the writ petitions are disposed of remanding the matter to the Chief Commissioner of Income-tax who shall pass orders afresh prescribing, if he considers it appropriate, registration under A. P. Act 30 of 1987 as a condition for granting approval under section 10(23C)(vi) of the Act. In addition, in W. P. Nos. 2327, 2331 and 2333 of 2010, the prescribed authority shall, after giving the petitioners therein an opportunity of being heard, determine whether or not the provisions of section 13(1)(c) of the Act are attracted. If, after further enquiry in this regard, the prescribed authority is satisfied that the petitioner-societies have violated the provisions of section 13(1)(c) of the Act, it is open to him to reject the said applications seeking his approval under section 10(23C)(vi) of the Act. No costs.

[Citation : 334 ITR 303]

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