High Court Of Delhi
American Hotel & Lodging Association Educational Institute vs. CBDT & Ors.
Section 10(23C)(vi)
Asst. Year 1999-2000
Madan B. Lokur & Vipin Sanghi, JJ.
Writ Petn. No. 17978 of 2004
24th November, 2006
Counsel Appeared
J.D. Mistry, Vikas Dhawan & S.P. Das, for the Petitioner : R.D. Jolly & Rajiv Awasthi, for the Respondents
JUDGMENT
MADAN B. LOKUR, J. :
The petitioner is the branch office of a non-profit organization set up in America and carries on educational activities. It is aggrieved by an order dt. 12th Oct., 2004 passed by the Central Board of Direct Taxes (CBDT) rejecting its application dt. 7th April, 1999 for initial approval of exemption under s. 10(23C)(vi) of the IT Act, 1961 (for short the Act) for the asst. yr. 1999-2000. For convenience the petitioner is called the branch office, while the American organization is called the head office. The head office of the petitioner enjoys tax exemption in America as an educational institution under s. 501(c)(3) of the Internal Revenue Code of 1954. Sometime in 1993, it entered into a memorandum of understanding (MoU) with the National Council for Hotel Management and Catering Technology under the Ministry of Tourism of the Government of India for offering its courses and expertise with a view to improve the quality of hospitality, education and training in India. For the purposes of discharging its obligation under the MoU, the head office opened a liaison office at Bombay on or about 6th July, 1994 when it obtained approval from the RBI to do so. Thereafter, as its activities increased, it was permitted by the RBI by a letter dt. 10th Feb., 1995 to convert its liaison office into a branch office for the purpose of undertaking the following activities : (i) Research, reproduction, marketing, etc. in relation to educational services and resources. (ii) Provide educational services and resources to the target groups consisting of hospitality industry, training institutions and individuals.
4. With a view to clarifying its tax status in India, the head office filed an application on 27th June, 1995 with the Authority for Advance Rulings (AAR) constituted under Chapter IX-B of the Act. Although the head office sought a ruling from the Authority on several questions, it was noted by the Authority that the moot question is whether the activities of the applicant come within the definition of ‘income of educational institution’ under s. 10(22) of the Act. This provision reads as follows : “10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included : (1) to (21) xxxxx (22) any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit.” On a close analysis of the activities of the head office, the Authority concluded that it was carrying on purely educational activities or activities relating to provision of educational facilities. It was held that the applicant fulfils the conditions precedent to the applicability of s. 10(22) of the Act and that there was no profit motive in its activities. Under the circumstances, the Authority held that the applicant fulfils the conditions for grant of exemption under s. 10(22) of the Act and thus its income arising or accruing from its sources mentioned in the questions referred to it would not be taxable. The decision of the Authority is reported as Educational Institute of American Hotel & Motel Association, In re (1996) 132 CTR (AAR) 40 : (1996) 219 ITR 183 (AAR). Three facts are clear from the above and they are : (a) The American Hotel & Lodging Association Educational Institute, of which the petitioner is a branch office is an educational institution and is recognized as such in USA. (b) The head office carries on purely educational activities or activities relating to provision of educational facilities, without any profit motive. (c) The head office fulfils the requisite conditions and is entitled to the grant of exemption under s. 10(22) of the Act. Therefore, its income in India is not taxable.
7. With effect from 1st April, 1999, s. 10(22) of the Act was substituted by s. 10(23C)(vi) thereof. However, the substantive provision of s. 10(23C)(vi) remained the same as s. 10(22) of the Act. Sec. 10(23C)(vi) of the Act reads as follows : “10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included : (1) to (23BBE) xxxxx (i) to (v) xxxxx (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-cl. (iiiab) or sub-cl. (iiiad) and which may be approved by the prescribed authority, or (23C) any income received by any person on behalf of— (via) xxxxx” There are certain provisos to this, which we propose to consider a little later. In view of the change in law, the petitioner made an application on 7th April, 1999 to the CIT in Bombay in the prescribed Form 56D and requested for approval for the purposes of s. 10(23C)(vi) of the Act. For the asst. yr. 1999-2000, the petitioner had filed its return of income on 7th April, 1999 declaring its income as nil. The total receipts received by the petitioner were Rs. 1,54,01,487. On this, a deduction of Rs. 23,71,199 was claimed on account of expenses incurred and the remaining income over the said expenditure coming to about Rs. 1,30,30,288 was claimed as exempted under s. 10(23C)(vi) of the Act. The case was selected for scrutiny but during the assessment proceedings it was noticed that the assessee/petitioner was not authorised under the relevant provisions to claim the said exemption. In response, the petitioner stated that the application for approval of exemption under s. 10(23C)(vi) of the Act in Form 56D has already been moved on 7th April, 1999 and the same was pending before the concerned authority. At this stage, a further expenditure of Rs. 1,14,89,736 alleged to have been incurred by the head office, in respect of the branch office, was sought to be claimed as a deduction.
The AO and the CIT(A) in their respective assessment/appellate orders recorded concurrent findings and pointed out that the assessee had failed to produce any documentary evidence to substantiate its claim for further expenditure of Rs. 1,14,89,736 alleged to have been incurred by head office, in respect of branch office, although this claim was not raised initially and neither was this claim reflected in the relevant books of account nor were these expenses debited to the Income and Expenditure Account. Unfortunately, the application dt. 7th April, 1999 remained pending for a considerable period of time. During this period, there was some correspondence exchanged between the petitioner and the CBDT, the prescribed authority under s. 10(23C)(vi) of the Act. Eventually, the petitioner was given a letter dt. 13th Sept., 2002 in which it was stated by the respondents that the petitioner has not applied its accumulated income for the purpose of education in India, which is one of the primary conditions under s. 11 of the Act for being notified under s. 10(23C)(vi) thereof. The petitioner was asked to submit a clarification in this regard and explain why its application be not rejected in view of the above.
The petitioner sent its reply on 8th Oct., 2002 and the contents of this letter are of some significance. The petitioner explained that it is only a branch office of the American Educational Institution. It acts as a mere facilitating and a co-ordinating section—collecting the fees/charges for materials supplied by the head office. These receipts are collected for and on behalf of the head office and this amount is actually owed to the head office and is remitted after making some deductions for office expenses in India. According to the petitioner, the surplus is only the sum of funds available with the branch office which it owes to the head office and in that sense it is not a genuine surplus in the nature of income. The petitioner clarified that the terms of s. 10(23C)(vi) of the Act as well as the third proviso thereof do not require the income to be applied in India or accumulated for the application towards the objects of the institution in India. While this may be a requirement under the provisions of ss. 11(1) and (2) of the Act, s. 10(23C)(vi) thereof is independent and reading an application or accumulation for application of the income towards the objects of the institution in India would be against the legislative intent. As an alternative, it was stated that the surplus amounts are maintained by the petitioner with Dena Bank, Overseas Branch and are nvested in short-term deposits. To that extent, the requirement of the third proviso to s. 10(23C)(vi) of the Act is met. The petitioner also placed reliance upon the decision of the AAR in support of its case. Eventually, by the impugned order dt. 12th Oct., 2004, the application of the petitioner was rejected leading to the present writ petition. The respondents have filed a counter-affidavit in which it has been admitted that although basically the facts have remained the same throughout, the circumstances have not remained the same in the light of the changes in the legal and administrative framework. In other words, the issue that is required to be considered is really one of law, the facts being admitted and undisputed. For convenience, the operative portion of the impugned order dt. 12th Oct., 2004 is reproduced below :
12. As per s. 1(2) of the IT Act, 1961, it extends to whole of India. Third proviso to s. 10(23C)(vi) says that it ‘applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established…..’ The application of the income by the institutions under s. 10 (23C)(vi) should be within India. In the present case, the surplus is being expatriated outside India. Hence, the expatriation of funds cannot be treated as application of the income for the educational purposes by the applicant. The conditions as stipulated for grant of exemption under s. 10(23C)(vi) are neither verifiable nor enforceable in this case as the institution is established outside the territory of India. The discussion in the above paras clearly indicates that the applicant does not fulfil conditions stipulated under s. 10(23C)(vi). The applicant has not applied its income for the purpose of education in India and thereby does not fulfil the stipulated condition. The investment in one of the scheduled banks by the applicant has no relevance, as the surplus has not been utilised for the charitable purpose in India. The contention of the applicant that the surplus has been utilised for educational purposes in USA is not acceptable and is extra territorial. The utilisation of income of the assessee should be within the parameters of s. 11. The applicant is claiming exemption under the Indian IT Act. Therefore, the application of income and funds have to be in India. In view of the above facts, I am directed to say that the application in Form No. 56D dt. 7th April, 1999 filed by ‘Educational Institute of American Hotel and Motel Association, MI 48823, USA’ for initial approval of exemption under s. 10(23C)(vi) of the IT Act, 1961, for asst. yrs. 1999-2000 is rejected as the institution does not fulfil the conditions as prescribed under s. 10(23C)(vi) of the IT Act, 1961.”
We heard learned counsel for the parties on 1st, 4th and 5th Sept., 2006 when orders were reserved. We find no error in the view taken by the respondents. At the outset, we may notice a dichotomy in the stand taken by the petitioner. On the one hand it is contended (where convenient) that the head office and the branch office are one and the same entity. If so, any amounts received by the branch office in India are actually amounts received by the head office. Therefore, there is no question of any expatriation of the amounts to the head office; the head office is earning in India and taking its earnings (less domestic expenses) to USA. On the other hand, it is contended (where convenient) that the head office and the branch office are two different entities. If so, then the branch office has to stand on its own legs. In that event, the branch office is earning in India and taking its earnings to USA, without any reference to the head office. We are, however, proceeding on the basis that the head office and the branch office are really one entity, one subordinate to the other. The first question that needs to be answered is whether the amounts generated by the petitioner in India are its income or not. Learned counsel submitted that the petitioner is only a branch office of an American organization and has no independent status as such. It has been set up for the purposes of carrying on the educational activities of the head office situated in USA. For the convenience of Indian students and institutions, the petitioner collects the charges for course materials, etc. for and on behalf of the head office. It is against such receipts that the petitioner obtains course materials from the head office. Were this arrangement not made, the only alternative for the Indian students and institutions desirous of participating in the course would be to directly remit the amount for the course material to USA and then receive the course materials. It is that inconvenience which is sought to be avoided by the petitioner and that is why it acts essentially for the convenience of Indian students and institutions in India. In the words of the petitioner as mentioned in its letter dt. 8th Oct., 2002 : “Any customer (individual, industry/institutions) wanting to buy courses, materials makes a purchase request to the branch office. Proforma invoice is provided by the head office through fax on advise by the branch office. The proforma invoice indicates the charges inclusive of shipment. The customer on receipt of the proforma sends the payment to the branch office in Indian rupees at the prevailing rate. Branch office advises the head office to process shipment and also deposits the payment received into the QA22 account maintained by the branch office. Stamped receipt is issued for any payment received. Customer on arrival of shipment takes delivery of the consignment following the customs procedures. Any individual wanting to enrol for courses or professional certification fills up the application and sends the same to the branch office with the fees in equivalent Indian rupees. The branch office then processes the application with the head office and facilitates the provision of study text/guides and the conducting of exam, etc.”
19. According to the petitioner, the receipts arise from the following sources : (1) Course fees—which includes individual courses, group courses and institutional networking. (2) Training resources e.g. books, videos, CD- ROMs supplied. (3) Training programs i.e. seminars and workshops conducted.
20. It appears, as contended by learned counsel for the petitioner, that the cost incurred by the head office in respect of intellectual inputs and efforts are not passed on to the petitioner but are accounted for by the head office only. If this cost is passed on to the petitioner, perhaps it may not have any surplus as contended by its learned counsel and, therefore, it would have no income that is taxable in India. In other words, the petitioner merely acts as a post office for all intents and purposes vis-a-vis its relationship with the head office located in USA. Learned counsel for the petitioner is in error, we feel, in equating surplus with income. That cannot be so. We are of the opinion that the amount generated by the petitioner in India is its income. Any income generated by the petitioner may be income generated for and on behalf of the head office, nevertheless it is the income of the petitioner. Thereafter, the petitioner deducts administrative expenses incurred by it and the “surplus” is then remitted to the head office. What follows from this is that the petitioner generates income in India, but it may or may not have any surplus. If it does have some surplus, it remits the amount to America, otherwise not.
21. The next question that arises for our consideration is whether the income generated by the petitioner is required to be applied by it in India for obtaining approval from the prescribed authority under s. 10(23C)(vi) of the Act so as to enable it to compute its total income without including that amount. This question arises from the impugned order, which relies, inter alia, upon the third proviso to s. 10(23C)(vi) of the Act. This proviso reads as under : “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-cl. (iv) or sub-cl. (v) or sub-cl. (vi) or sub-cl. (via) (a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is 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 (b) does not invest or deposit its funds, other than— (i) any assets …… (ii) any asset, ….. (iii) any accretion …… (iv) voluntary contributions …… for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-s. (5) of s. 11.” According to learned counsel for the petitioner, the third proviso does not mention that the income generated is required to be applied in India. In fact, the words ‘in India’ are totally missing and the respondents have unnecessarily imported these into s. 10(23C)(vi) and the third proviso. We cannot agree with learned counsel. The fact of the matter is that exemption from payment of tax is being granted in India. It would appear irrational if exemption from tax is granted in India so that the amount can be applied outside India. Surely, Parliament could not have intended such a result to follow. From a pragmatic standpoint also, such an interpretation cannot be accepted. Take for instance a situation where the amount is applied in country X, say in South America. Obviously, the Revenue does not have any machinery to ensure that the amount is applied for educational purposes in that country. Is it, therefore, reasonable to expect the Revenue to nevertheless ensure that the amount is being applied in that country for educational purposes? The answer must clearly be in the negative. Consequently, it must be held that application of the income is required to be in India for the purposes of s. 10(23C)(vi) of the Act read with the third proviso thereto.
Learned counsel suggested that importing the words ‘in India’ in the third proviso is impermissible. That may be so, but similarly importing the words ‘anywhere in the world’ is equally impermissible. But that is not really the issue. The words ‘in India’ have necessarily to be read into the third proviso to make it workable and to keep it in conformity with the application of the Act. The respondents have rightly noted in the impugned order that the Act applies to the whole of India; it is not extraterritorial in operation. If we agree with learned counsel, then the Revenue would be given powers to apply the provisions of the Act even outside India; something that is not even postulated by Parliament. Consequently, whichever way we look at the issue, it is not possible to agree with learned counsel for the petitioner. The thrust of the contentions of learned counsel appears to be intended to persuade us to accept the view canvassed by Hon’ble Mr. Justice S.P. Bharucha in Oxford University Press vs. CIT (2001) 165 CTR (SC) 629 : (2001) 247 ITR 658 (SC). Unfortunately, that is the minority view and, therefore, we cannot accept it. We also find that that decision would not strictly be applicable in view of the difference in the language of the statute after the incorporation of s. 10(23C)(vi) of the Act and its third proviso. Nevertheless, we may note two significant propositions stated by Hon’ble Mr. Justice Y.K. Sabharwal concurring with Hon’ble Mr. Justice D.P. Mohapatra which, we believe, squarely apply to the facts of the present case. Firstly, relying upon K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) it was said that, “It is a well recognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. It is said that it is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even ‘do some violence’ to it, so as to achieve the obvious intention of the legislature and produce a rational construction.” Secondly, in the context of s. 10(22A) of the Act, it was said, “If the contention urged on behalf of the assessee is accepted, it would result in an university or other educational institution cl. (22) or hospital or other institution as contemplated by cl. (22A), without providing in India any educational or philanthropic activity, as the case may be, claiming the benefit of exemption on the ground that such a service is being provided in some part of the world though in India such body is engaged itself or through its branch in an activity akin to a business or profit making activity.”
25. It is well settled that when the object of a provision is to plug leakage and prevent evasion of tax, a construction which would defeat and obliterate it from the statute book should be eschewed. If two constructions are possible then the one that would preserve its workability and efficacy is to be preferred to one which will render it otiose [See State of Tamil Nadu vs. M.K. Kandaswami 1975 CTR (SC) 197 : AIR 1975 SC 1871]. The Courts will have to reject that construction which will defeat the plain intention of the legislature even though there may be some inexactitude in the language used [See Salmon vs. Duncombe (1886) 11 App Cas 627, 634 (PC), referred to in CIT vs. S. Teja Singh (1959) 35 ITR 408 (SC)]. When the scope of the words used is sought to be curtailed by construction, as it was pointed out in CIT vs. Shahzada Nand & Sons & Ors. (1966) 60 ITR 392 (SC) and we quote : “the approach suggested by Lord Coke in Heydon’s case (1584) 3 Rep. 7b yields better results : To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act; to consider according to Lord Coke : ‘1. What was the law before the Act was passed; 2. What was the mischief or defect for which the law had not provided; 3. What remedy Parliament has appointed; and 4. The reason of the remedy’.”
26. In view of the rule cited with approval in Shahzada Nand (supra), we may briefly examine the legislative history of the amended provision. The purpose, nature and import of the legislative amendment brought by the Finance Act, 1998 with the asst. yr. 1999-2000 has been explained in para 8 of CBDT Circular No. 772 dt. 23rd Dec., 1998 [(1999) 151 CTR (St) 9 : (1999) 235 ITR (St) 35]. The said paragarph is reproduced below : “8. Provisions relating to exempting the income of educational institutions, universities, hospitals and other medical institutions : 8.1 Under the provisions of cls. (22) and (22A) of s. 10 of the IT Act, before amendment, educational and medical institutions enjoyed a blanket exemption from income-tax if they existed solely for educational purposes and not for the purposes of profit. In the absence of any monitoring mechanism for checking the genuineness of their activities, these provisions have been misused. 8.2 The Act omits the aforesaid cls. (22) and (22A) from the statute. The exemption would, however, continue inrespect of any university or other educational institution, hospital or other medical institution which is wholly or substantially financed by the Government, under the new sub-cls. (iiiab) and (iiiac) inserted in s. 10(23C) of the IT Act by the Finance (No. 2) Act, 1998. 8.3
Further, under sub-cls. (iiiad) and (iiiae) in s. 10(23C), the income of other educational and medical institutions would also be exempt if their annual receipts are below a limit to be prescribed. The limit has since been prescribed at Rs. 1 crore, vide Notification No. SO 897(E), dt. 12th Oct., 1998. 8.4 The income of the remaining educational and medical institutions would be exempt if they are approved by the prescribed authority on application made by them under sub-cls. (vi) and (via) of s. 10(23C). This approval would be subject to their adherence to conditions similar to those specified for sub-cls. (iv) and (v) of s. 10(23C) regarding maintenance of accounts, expenditure and accumulation of funds and investment of funds in specified assets. The accumulated income is required to be invested in the modes specified in s. 11(5). These institutions are given time upto 30th March, 2001, to transfer their investments to specified securities. The rules and forms in this regard have since been notified, vide Notification No. SO 897(E), dt. 12th Oct., 1998. By this notification the CBDT has been designated as the prescribed authority for the purpose of approval under sub-cls. (vi) and (via) of s. 10(23C). 8.5
These amendments will take effect from 1st April, 1999, and will, accordingly, apply in relation to the asst. yr. 1999-2000 and subsequent years.
27. Circular No. 779 [(1999) 156 CTR (St) 17] also issued by the CBDT on 14th Sept., 1999, in cl. (vi) states as follows : “(vi) The provisions of cl. (23C) of s. 10 are rationalised so that the Central Government before notifying a fund, trust or institution may call for any information and may hold any enquiry so as to determine the genuineness of such fund, trust or institution. The second proviso to this clause has been substituted so as to empower the prescribed authority to call for information or to hold such enquiry as it deems fit before the university or other educational institution or a hospital is approved for exemption under cl. (23C) of s. 10.”
28. Reference may also be made to the speech made by the Finance Minister on 17th July, 1998 while replying to the debate after incorporating amendments to the Finance (No. 2) Bill, 1998 reported as (1998) 147 CTR (St) 9 : (1998) 232 ITR (St) 11 at 13. “In the Budget I had proposed that the blanket exemption available to educational and medical institutions would be withdrawn. The proposal stipulated that these institutions will have to file their returns of income and make an application after adhering to certain conditions which are similar to those prescribed for persons deriving income from property held for charitable or religious purposes. This proposal emanated from the background that a large number of educational and medical institutions exist as profitable commercial ventures but they continue to enjoy the exemption without filing their returns of income. However, the proposal invited large number of representations stating that this would impose hardship on small educational and medical institutions who will have to go to the ITO time and again to avail of the tax exemption with all attendent consequences. In response to these suggestions, I propose that all educational and medical institutions which are financed and managed by Government should continue to enjoy the benefit of exemption. Other institutions whose annual receipts do not exceed Rs. 1 crore, which is proposed to be prescribed in the rules, should also continue to avail of this exemption as in the past. But the remaining educational and medical institutions would be required to follow the same conditions as are prescribed for funds, institutions and trusts established for charitable purposes or for public religious purposes. Hence these institutions would be required to make an application to the prescribed authority for grant of exemption. To enable these institutions to shift their investments to specified investments, I propose to give them time upto March, 2001. I hope these proposals would be welcomed by the educational and medical institutions as they would ensure that only institutions that are actually running for philanthropic purposes and not for purposes of profit will be able to avail of the exemption without much inconvenience.”
It is, therefore, clear that Parliament amended the law by introducing s. 10(23C)(vi) and other consequential amendments while at the same time deleting s. 10(22) of the Act precisely to limit the exemption from taxation to only such educational institutions which fulfil the prescribed conditions with regard to application and accumulation of income. The final (alternative) contention of learned counsel for the petitioner was that the petitioner is entitled to exemption in view of the fact that it has invested its surplus fund in a short-term fixed deposit in the Dena Bank Overseas Branch in accordance with cl. (b) of the third proviso to s. 10 (23C) r/w s. 11(5) of the Act. We cannot accept this argument for the simple reason that cls. (a) and (b) of the third proviso are cumulative and not disjunctive. The petitioner does not satisfy the condition of cl. (a). Merely satisfying cl. (b) by itself is not enough. Under the circumstances, we see no reason to set aside the impugned order. The writ petition is dismissed. No costs.
[Citation : 289 ITR 46]
