M/S SANT SHRI MAHESH MUNI JI BOREWALE EDUCATIONAL WELFARE ,MOGA vs. COMM. OF INCOME TAX ( EXAMPTION), CHANDIGARH

In the Income-Tax Appellate Tribunal, Amritsar Bench, Amritsar

Before : Shri Laliet Kumar, Judicial Member And Dr. Mitha Lal Meena, Accountant Member

ITA No.227/Asr/2017 Assessment Year - 2016-17

V.S. CIT (Exmp.) M/s. Sant Shri Mahesh Muni Ji Borewale Eductional Welfare Chandigarh Society, Purane wala road, Village Mehna, Distt. -Moga PAN:AAABS3855K (Respondent) (Appellant)

Appellant by Sh. Ashwani Kumar, & Sh. Bhavesh Singhal, C.A. Respondent by Sh. J.S. Kahlon, D.R.

Date of Hearing 13.07.2021 Date of Pronouncement 16.08.2021

ORDER Per Laliet Kumar, J.M.

This appeal filed by the assessee is against the order of ld. CIT(Exemption), dated

28.02.2017.

Grounds of Appeal

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e. f. A. Y. 2016-17.The action of the CIT is illegal, unjustified &arbitrary and against the facts of the case.

Brief Facts

b) To work for education institutions and to spread education facilities in the rural, backward, semi-urban and other areas

c) To control, maintain and run any school, educational institutions of any kind and knowledge like nursing, computers, technology, education and management etc.

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d) To establish construct, maintain, manage & supervise hospitals relief and rehabilitation centres and many other ancillary voluntary services carried on by the Society.

e) To establish orphanages, old age homes, leprosy rehabilitation center, homes for widows, aged, helpless and people of weaker sections, to come out with deliverance from the fallen condition.

f) To receive donations, funds and grants in cash or in kind from government Punjab education Board, charitable trusts, general Public for running/development of school(s) or college(s)

g) To acquire by purchase, take on lease, hire of gift nr otherwise and hold any moveable(s), immoveable(s) properties or any right or privileges that may be deemed necessary or useful for the advancement of the objects of the society.

h) The society shall have power to receive, hold and possess any property including securities or any kind and to construct and maintain any building, to manage, transfer or otherwise dispose of or deal in any property of school or society and to enter into contract for or in connection with the purpose of the society to raise money and funds. The society has power to take loan from bank, financial institution for attainment of its main objects. The society shall also the power of frame rules & by laws under its connection.

i) To do all such other lawful acts, deeds and things as are incidental and conductive to the attainment of the objects or any of them

j) To apply the income and properties of the society for the fulfillment of its objects and not to pay any portion thereof by way of profit or dividend or bonus to any members of the society.

k) To do all acts things necessary to facilitate the charitable, social, culture, educational, vocational & economic development of the society.

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various information and the matter was fixed for 20.02.2017. The Appellant was asked to prove the following documents/ clarification by CIT(E) a. Details of property vested in the society, as envisaged u/s 11 of the I. T. Act, income Ji·o111 which is sought to be exempted. b. Details of voluntary contributions received by the society, as envisaged u/s 12 of the I.T. Act and whether any specific direction has been received by the persons making voluntarycontributions.

c. Tile originals of MOA/Bye-laws of the society along with the Registration Certificate. d. Copies of Bank Statements through which activities are being propagated highlighting the receipts and the different items of expenditure that are being claimed. e. Details of salary paid explaining whether the same are guided by lite TDS provisions or not corroborating the salaries paid through bank accounts. f. Details of all educational institutions run by the society alongwith their date of incorporation and details of affiliation obtained from the Education Board etc. g. Details of the Donations received or intended to be received and documentary evidence as regards to Grants received. h. Donation received under FCRA longwith relevant details such as copy of the return for i. FCRA and the copy of specified bank account. · j. A note on activities of the society. k. Details of corpus fund and whether the same are with any written specific directions.

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l. Details regarding charitable activities being conducted by the society clarifying the specific limb us 2(15) of the I.T.Act under which the activity is being pursued.

m. Receipts and payment accounts of the society for the last 3 years. n. Any exemption which is already being claimed by the society under tile Income tax Act, 1961 and the same have been availed while fling its ITR in earlier years. o. Whether any grants have been received by the society stating whether the grants so received (if any) have. been utilized for tie purpose for which the same are received. p. Details of fees structure of the school &school receipts and explain how the same being shown in Bank accounts alongwith comparative fee structure including that of Government schools. How this facet is covered by the established definition of Education.

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other receipts. In compliance thereof the assessee has submitted the details of the amount of admission fees and monthly fees totaling to Rs.99,10,400/- excluding transport fees. 6. The CIT(E) in paragraph 6.4 had mentioned as under:- 7. The CIT(E) while examining the other issues of the assessee, in paragraph 7.2 and 7.3 and 8 as held as under:- 8. That on the basis of above said discussion, the CIT(E) has rejected the application for registration u/s 12AA of Income Tax Act 1961. 9. Feeling aggrieved by the order passed by the CIT exemption the assessee is in appeal before us on the grounds mentioned hereinabove. 10. It was the contention of the ld. AR that for the purposes of registration u/s 12AA it was necessary for the CIT(E) to examine the objects of the assessee and to find out whether the objects of the assessee are charitable nor not. It was further submitted that after satisfying himself about the object of the assessee, the CIT(E) was duty bound to examine the genuineness of the activities of the assessee. 11. In the present case, it was submitted by the ld. Ar that the CIT(E) has not disputed the charitable nature of the object of the assessee society. The only objection made by the CIT(E) was that the assessee had entered into a frenchise agreement with M/s Zee Learn Ltd. is placed which according to him tantamounts to the society being engaged ibn activities other than charitable activity as per provisions of section 2(15) of the Act. Ld.AR submitted that the main object of the appellant society is to impart education to children and is at present engaged in the same purpose by way of setting up and running of a school in rural area of Punjab. Merely because the Appellant society has entered into a franchise agreement with M/s Zee Learn Ltd. with the basic purpose of improving the quality of education cannot be termed to

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be running of any business. 12. The ld. AR relied upon the decision of Delhi High Court in the matter of DIT vs. Delhi Public School Society 403 ITR 49 (Del). It was submitted that in that case the DPS Society was receiving the franchise charges from the affiliated schools on the basis of the franchises agreement for using logo moto etc. However, Delhi High Court on examination of the facts of the case had found that maintaining the schools in furtherance of educational purposes is a charitable activity u/s 2(15) of the Act. 13. The ld. AR had also submitted that the assessee is not involved into any other activities other than running the schools as is clear from balance sheet and income and expenditure account of the assessee. 14. On the other hand the ld. AR for the revenue relied upon the order passed by the CIT exemption. It was submitted that payment of franchise fees to the Zee Learn Ltd. with the obligation to advertise, is a commercial activities. It was further submitted that the assessee was also generating surplus by charging higher fees and therefore the activities of the assessee cannot be termed as charitable in nature. We have heard the rival contentions of the parties and perused the 15. material on record. From the perusal of the order passed by the CIT exemption it is clear that the CIT exemption has denied the registration to the assessee society on the basis of the franchise agreement entered between the assessee and that of theZee Learn Ltd. however the running of the school, duly affiliated with the central board of secondary education, has not been denied by the CIT exemption, while rejecting the application for registration of the assessee. 16. In our considered opinion, the law is fairly settled by the decision of the

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honorableSupreme Court in the matter of AnandaSocial & Educational Trust2020] 114 taxmann.com 693 (SC), wherein it was held as under:-

“3.The Franchisor has designed and developed a

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program know how on School management which includes the knowledge and expertise in conducting the SCHOOL, the process, practice, techniques, procedures relating to floor lay out drawing and architectural designs along with the instructional methodology and teaching resources in line with the curriculum guidelines from NCERT (National Council for Educational Research and I raining) for CBSE (Central Board for Secondary Education) and CISCE (Council for Indian School Certificate Examination Board) for ICSE (Indian Certificate of School Examination)respectively for primary, secondary, and senior secondary classes under the brand name “MOUNT LITERA ZEE SCHOOL”.

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travel and other expenditure of visiting team sent by the Franchisor shall be borne by the SCHOOL in accordance with the Franchisor’s travel rules.”

“23. Likewise, the test to determine the predominant objective was highlighted earlier, in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC), by the application of which it was to be adjudged whether the institution existed solely for education and not for profit. This point was re-iterated in Venu Charitable Society (supra) 246 Taxman 396 (Delhi) as follows: "18. The incidental carrying on of commercial activities is subject to certain conditions stipulated under the seventh proviso to Section 10 (23C). They are- (a) The business should be incidental to the attainment of the objectives of the entity and (b) Separate books of account should be maintained in respect of such business." 24. In Queen's Educational Society (supra), the Supreme Court went on to summarize the law that arises under Section 10(23C) as follows: "11. Thus, the law common to Section 10(23C) (iiiad) and (vi) may be summed up as follows: (1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit. (2) The predominant object test must be applied-the purpose of education should not be submerged by a profit making motive. (3) A distinction must be drawn between the making of a surplus and an institution being carried on "for profit". No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit. (4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes.

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(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons." The determining test to qualify for exemption under section 10(23C)(vi), hence, lies in the final motivation on which the institution functions, regardless of what extraneous profit it may accrue in the pursuit of the same. This was amply highlighted in Aditanar Educational Institution (supra) as follows: "We may state that the language of Section 10(22) of the Act is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for the purposes of profit. 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." 25. This critical test therefore has a conspicuous qualitative value; the of the objectives of the organization are to be determined not merely by the memorandum of objectives of the institution, but, also from the design of how the profits are being directed and utilized and if such application of profits uphold the "charitable purpose" of the organization (as postulated in section 2(15) of the Act) or if the objectives are marred by a profit making motive that emerges more as a business activity rather than an educational purpose. Section 10(23C)(vi) of the Act while guiding the manner of this determination also, provides a certain amount of discretion to the authority assessing the compliance to these conditions for ascertaining whether the requirements of the provision are met with. Such scrutiny is to be carried out every year, irrespective of any preceding pattern in the assessment of the previous years. This point was highlighted in American Hotel and Lodging Assn. Educational Institute (supra) as follows: "Therefore, in our view, it is always open to the PA to impose such terms and conditions as it deems fit. The interpretation we have given is based on harmonious construction of the provisos inserted in Section 10(23C)(vi) by the Finance Act, 1998. Lastly, we may reiterate that there is a difference between stipulation by the Prescribed Authority (PA) of such terms and conditions, as it deems fit under the provisos, and the compliance of those conditions by the appellant. The compliance of the terms and conditions stipulated by the PA would be a matter of decision at the time of assessment 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." 26. As can be seen from the present income tax appeals, the prescribed authority has examined the assessee's application for exemption under Section 10(23C)(vi) in light of the recent audits of the assessee's accounts. Although DPS Society, in the earlier years had been granted exemption under section 10(23C)(vi), that

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itself does not cause for a res judicata principle, as examination of the Assessee's audited accounts may be done afresh by the prescribed authority, corresponding to the specific assessment year, as prescribed in the second proviso to section 10(23C)(vi) as follows: "…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." 27. Despite this stipulation, the prescribed authority will still have to apply the determinative test of assessing whether the business is incidental to the attainment of the objectives of the entity and whether separate books of account are being maintained in respect of such business, even if the profits received by the assessee as such increase exponentially, if the assessee qualifies this test, they will still be eligible for exemption under section 10(23C)(vi) of the Act. 28. In light of the decisive test for determining eligibility for exemption under section 10(23C)(vi) of the Act, it is apparent that the assertion of the DGIT that the Assessee's activities including charging a franchisee fee could not be regarded as a charitable activity within the meaning of section 2(15) of the Act, and thus, inapplicable for exemption under section 10(23C)(vi) of the Act, has not been adequately substantiated, despite examination of the assessee's audited accounts. The DGIT asserted that the Assessee is carrying out a business activity for profit motives by entering into franchise agreements, whereby, it has opened and is running around 120 schools, and that these charges were received by the Assessee for using the name of DelhiPublicSchool by the satellite schools in and outside India and no separate books of accounts were maintained by the Assessee for the business activity as required under section 11(4A) of the Act. This is prima facie not correct, because the assessee has maintained, accounts audited in detail for financial years 2000-2001, 2003-04, 3004-05 and 2005-06. That aspect has been found by the ITAT for those assessment years. Such accounts have been maintained in compliance to what is required under the seventh proviso to Section 10(23C)(vi) and section 11(4A) of the Act. 29. Furthermore, the memorandum of association of DPS Society, as well as the joint venture agreements entered into by DPS Society with the satellite schools validate the motive of an educational purpose that the Assessee aims through its business activities and substantiate its contentions in that regard. On review of the assessee's audited accounts, it can be observed that the surpluses accrued by DPS Society are being fed back into the maintenance and

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management of the DPS schools themselves. This, reaffirms the Assessee's argument that the usage of the gains arising out of its agreements are incidental to its educational purpose outlined by its objective of the Assessee. 30. The interpretation of section 10(23C)(vi) is one that requires fulfillment of a two pronged test: firstly, that any business activity if carried out by the educational institution applying for exemption should be incidental to their educational purpose, and secondly, that proper accounts of such business activity ought to be maintained, as highlighted above in Queen's Educational Society (supra). This was also mentioned in Venu Charitable Society and Ors (supra) as follows: "18. The incidental carrying on of commercial activities is subject to certain conditions stipulated under the seventh proviso to Section 10 (23C). They are- (a) The business should be incidental to the attainment of the objectives of the entity and (b) Separate books of account should be maintained in respect of such business. The memorandum of the petitioner's society clearly states its main objective is to render comprehensive eye care services inclusive of all forms of ophthalmic services. All other activities are incidental to carrying out of this purpose. The petitioner does not carry out any other business but only collaborates with other trusts and institutions. It has maintained its books of account as well. So the conditions have been met with. Exemption under the provisions mentioned above will be granted if the main objective of the society is relief of poor, education, medical relief and carrying on of a business with a view to fulfill these objects would not deprive them from such exemption. This was stated in CIT v. Rao Charitable Trust (1976) 102 ITR 474." 31. The authorities in the form of case law referred to above also reiterate that a mere incurrence of (surplus) profit does not automatically presuppose a business activity that invalidates the exemption under section 10(23C)(vi); the same has to be tested on whether such profits are being utilized within the meaning of the larger charitable purpose as defined in section 2(15) of the Act or not. On scrutiny, it can be observed that the accounts marked the heading "Secretary's Account", detail the heads of income and expenditure that cater to the various requirements of running and maintaining the satellite schools. Thus, arguendo if it were held that the objected activity were indeed commercial in nature, nevertheless, the realization of profit by the assessee is through an activity incidental to the dominant educational purpose that its memorandum of association sets out, and is in turn being channeled back into the maintenance and management of the same schools, thus, fulfilling the objectives the Assessee has set out in its memorandum of objectives. 32. ====================================================================== ==========

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charitable. The predominant and sole purpose of the assessee’s activities are imparting of education after affiliation with the CBSE. In the light of the above we deem it appropriate to direct the CIT(E) to grant registration to the assessee from the date of application. 21. In the result, the appeal of the assessee is allowed.

Order pronounced in the Open Court on 16/08/2021.

Sd/- Sd/- (Dr. Mitha Lal Meena) (Laliet Kumar) Accountant Member Judicial member Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order

Sr. Private Secretary Income Tax Appellate Tribunal Agra Bench, Agra