NEW AMAZING SHIKSHA SOCIETY,GHAZIABAD vs. ITO(EXEMPTION WARD), GHAZIABAD

PER H.S. SIDHU, JM

The Assessee has filed these appeals in respect of assessment year

2014-15 against the orders dated 29.9.2017 and 28.3.2018 passed by

the Ld. CIT(A), Ghaziabad in quantum as well as in penalty appeals.

Since the issues involved in these appeals are inter–connected, hence,

these appeals were heard together and are being disposed of by this

common order for the sake of convenience. We first deal with Assessee’s

Appeal No. 3550/Del/2018 (AY 2014-15).

2014-15) read as under:-

“1. That the Ld. CIT(A) has erred in law and on facts, while establishing that the appellant did not work solely for educational purpose merely because the incidental activities were taken by the appellant during the year. As such the order passed by the CIT(A) is bad in law and thus determining the income at Rs. 12,01,906/- may please be deleted.

2014-15) read as under:-

Assessee’s Appeal No. 3550/Del/2018 (AY 2014-15)

income was filed on 31.10.2007. The case of the assessee was selected

for scrutiny under CASS and statutory notice u/s. 143(2) of the Income

Tax Act, 1961 (in short “Act”) on 18.9.2015. Notice u/s. 142(1) of the

Act dated 11.7.2016. In response to the same, the AR of the assessee

attended the proceedings from time to time and furnished the required

details and information. The assessee is a society and is registered with

the Registrar of Society, Uttar Pradesh under Society Registration Act.

The assessee society has been claiming exemption u/s. 10(23C)(iiiad) of

the Act. Assessee society is running a school named New Amazing

Children Academy at Pratap Vihar, Ghaziabad. The assessee has filed the

copy of audit report and balance sheet, income and expenditure a/c.

During the year, assessee has disclosed total receipts of Rs. 99,14,564/-

against which expenditure of Rs. 87,13,000/- was claimed and surplus of

Rs. 12,01,906/- was shown and claimed as exempt u/s 10(23C)(iiiad) of

the Act. The total receipts includes sale of books at Rs. 14,19,339/- and

sale of dress at Rs. 2,13,300/- total to Rs. 16,32,639/-, against which

purchases of books, copies and uniform is shown at Rs. 12,24,454/-.

Thus, there is a profit of Rs. 4,08,185/-, which the assessee has claimed

exempt u/s. 10(23C)(iiiad) of the Income Tax Act, 1961. Accordingly, the

assessee was asked to explain as to why the profit of Rs. 4,08,185/- on

sale of books and uniform should not be taxed vide, questionnaire dated

19.7.2016 and in response to the same, the assessee filed the reply,

which was duly considered by the AO, who held that assessee has

claimed exemption u/s. 10(23C)(iiiad) of the Act. He held that the

purchase and sale of books and uniform is not educational activity.

Therefore, the assessee is not entitled for exemption u/s. 10(23C)(iiiad)

of the Act on profit of Rs. 4,08,185/- on sale and purchase of books and

uniform and the gross sale and purchase shall be deducted from the

gross receipts and from the gross expenses and the surplus of

Rs. 4,08,185/- is liable for tax at MMR as business income. Thus, the

profit arisen on sale of books and uniform worked out at Rs. 4,08,185/-,

vide order dated 21.11.2016 passed u/s. 143(3) of the I.T. Act, 1961 and

assessed the income of the assessee at Rs. 4,08,190/-.

appealed before the Ld. CIT(A), New Delhi, who vide his impugned order

dated 29.9.2017 has dismissed the appeal of the assessee by enhancing

the income from Rs. 4,08,190/- to Rs. 12,01,906/-. Aggrieved with the

impugned order, the Assessee is in appeal before the Tribunal.

law and on facts, while establishing that the assessee did not work solely

for educational purpose merely because the incidental activities were

taken by the assessee during the year. She further submitted that Ld.

CIT(A) has wrongly confirmed the addition made by the AO of Rs.

4,08,190/- and enhanced the addition to Rs. 12,01,906/-, as the belief

entertained by the Ld. CIT(A) that the entire surplus shown in the

income and expenditure should be the profit earned by the assessee

during the year, is not justifiable and illegal. It was further submitted that

Ld.CIT(A) has wrongly denied the exemption u/s. 10(23C)(iiiad) of the

Income Tax Act, 1961 without appreciating the facts and submission of 5

the assessee. It was further submitted that exemption u/s. 10(23C)(iiiad)

of the Act was denied merely because buying and selling of uniform and

books for educational purpose is not specifically mentioned in the

memorandum of association of the assessee. In view of above, she

requested that the order passed by the Ld. CIT(A) for not providing the

benefits of the section 10(23C)(iiiad) of the Act may please be quashed.

In support of her contention, she filed a Paper Book containing pages 1-

36 in which she has attached the Audit Report and Balance Sheet of the

FY 2013-14; computation and ITR of the AY 2014-15; relevant copy of

written submissions filed before AO dated 21.11.2016; copy of written

submissions filed before CIT(A) dated 7.9.2017; copy of Memorandum;

English Translation of the objectives at page no. 1 of Memorandum; copy

of written submissions filed before CIT(A) dated 11.9.2017; copy of

written submissions filed before CIT(A) dated 27.9.2017 and registration

u/s. 12AA of the Act dated 26.5.2017. She also filed a letter dated

23.1.2019 stating therein that the assessee is an educational institution

and had claimed exemption u/s. 10(23C)(iiiad) of the Act, for the AY

2014-15 as total receipts for the year under consideration was less than 1

Crore and thus, entire surplus of Rs. 12,01,906/- is not taxable as per

provision of law and in this regard, she attached the utilization of

surplus generated during AY 2014-15, over the years alognwith

supporting documents. She also filed the copy of the Income Tax

Department Circular No. 11/2008 dated 19.12.2008 stipulating therein

the Definition of ‘Charitable purpose’ under section 2(15) of the Income

Tax Act. In support of her contention she also filed another Paper Book

containing pages 1-310 in which she has attached the copy of judicial

pronouncements covering the case of the assessee viz. St. Lawrence

Educational Society (Regd.) vs. CIT (2013) 353 ITR 320 (Delhi); CIT vs.

Surat Art Silk Clothes Manufacturers Association (1980) 121 ITR 1

(SC); IILM Foundation vs. ADIT, ITA No. 1142/Del/2011, dated of

pronouncement on 8.11.2017 (ITAT, Delhi). Pinegrove International

Charitable Trust vs. UOI 188 taxmann 402 (2010) (P&H); Queen’s

Educational Society vs. CIT (2015) 372 ITR 699 (SC); Hosiarpur

Improvement Trust vs. ITO, ITA Nos. 497/Asr/2013 for AY 2009-10 Date

of pronouncement 10.9.2015 ITAT Amritsar; Association of school

Vendors and Ors. vs. Central Board of Secondary Education and Ors.

WP(C) No. 7414/2017 Date of Pronouncement 21.2.2018, Hon’ble Delhi

High Court and CIT vs. Delhi Kannada Education Society (2000) 246 ITR

731 (Hon’ble Delhi High Court.) In view of above, she requested to allow

the appeal of the assessee.

and also relied upon the case laws relied upon by the Ld. CIT(A). He

submitted that assessee stated to be engaged in establishment and

management of primary and higher education institutions. However, it

was observed during the year that assessee is engaged in sale and

purchase of books and uniform constituting around 16% of total receipts

and involving gross profit of 4% on such sales. He further submitted that

such a state of affairs establishes that educational institution did not work 7

solely for educational purposes but for profit only. It was further

submitted by him that buying and selling of uniform and earning of profit

thereon, by no means can be held to be educational activity. He further

submitted that it is not one of the stated objectives of the society and

placed the reliance on the decision of Hon’ble Supreme Court of India in

the case of Aditanar Educational Institution vs Addl. CIT 224 ITR 310 (SC)

wherein the Hon'ble Court has held that the availability of the exemption

should be evaluated each year to find out whether institution existed

during the relevant year solely for educational purposes and not for the

purpose of profit. Thus, in this case, during the year under consideration,

the assessee failed to establish that it existed solely for education and not

for profit thus is not eligible for benefit for provision of section u/s

10(23C)(iiiad). He further submitted that the assessee was given and

enhancement notice u/s 251(2) of the Act on 15.09.2017 as to why the

income of the assessee should not be enhanced, withdrawing exemption

granted by AO u/s 10(23C)(iiiad) as the activities undertaken by the

assessee were beyond aim and objectives and were purely commercial in

nature and in response to the same the assessee replied that the word

solely for educational purposes includes activities such as sale of books

and uniform. Therefore, he submitted that assessee has gone beyond the

mandate given by the memorandum of association and activities of the

assessee during the year have not been solely for the purpose of

education, makes it ineligible for the benefits of section 10(23C)(iiiad) of

the Act. Therefore, he stated that the entire profit earned during the year

i.e. Rs. 12,01,906/- was chargeable to tax and therefore, Ld. CIT(A) has

held that the income of the assessee as assessed by the AO Rs.

4,08,190 was rightly enhanced to Rs. 12,01,906/- which does not need

any interference. Hence, he requested to uphold the order of the Ld.

CIT(A) and dismiss the appeal of the assessee.

the impugned order. I note that the assessee is a society, registered

under Society Registration Act and has been claiming exemption u/s

10(23C)(iiiad) of the Income Tax Act, 1961. The Assessee is running a

school namely New Amazing Children Academy recognized under U.P.

state Board and income tax return for A.Y. 2014-15 was filed on

26-12-2014 declaring Nil income. Notice u/s 143(2) of the Act was issued

on 18-09-2015 and further Notice u/s 142(1) dated 11-07-2016 was

issued. During the concerned year, the assessee has disclosed total

receipts of Rs.99,14,564/- which is less than Rs.1 crore against which

expenditure of Rs. 87,13,000/- is claimed and surplus of Rs. 12,01,906/-

is shown and claimed exemption u/s 10(23C)(iiiad) of the Income Tax

Act, 1961. The total receipts include sale of books of Rs.14,19,339/- and

sale of dress of Rs.2,13,300/- totaling Rs.16,32,639/- against which

expenses on books, copies & uniforms amounts to Rs.12,24,454/-. I

further note that the AO alleged that the purchase and sale of books and

uniforms are not educational activity and made alleged addition of

Rs.4,08,185/- by considering the surplus generated as business income.

Aggrieved with the order of AO, Assessee preferred appeal before the Ld.

CIT(A) and Ld. CIT(A) in his impugned order has held that the assessee

did not work solely for educational purposes but for profit, merely on the

basis that the assessee generated surplus during the year under

consideration and enhanced the addition from Rs.4,08,185/- to

Rs.12,01,906/- (i.e. alleged that the entire surplus made during the year

is chargeable to tax). I further note that surplus arises does not amounts

to profit earned, hence, exemption u/s 10(23)(iiiad) of the Income Tax

Act, 1961 should not be denied merely on the basis of the same. It is

also noted that the assessee has generated the surplus of Rs.12,01,906/-

(i.e. only 12.12% of total receipts) during the year under consideration.

Merely because there is a surplus, i.e., excess of receipts over

expenditure, it cannot be said that it is the profit earned by the assessee

during the year. It 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. The surplus in books of accounts of assessee

for year under consideration is merely 12.12%. (i.e. Surplus -

Rs.12,01,906.17 and Total Income - Rs.99,14,564.00) which is less than

15% and considered legitimate for charitable purpose. Therefore, it can

be concluded that the institution is existing for the educational purpose

and not for the purpose of profit. It is noted that the assessee is engaged

in providing education to children, to open schools/ colleges. The assessee

also sells the uniforms and books only to the students of the school of the

appellant, not to outsiders, at lower rates compared to market rates. No

implication arises that merely because imparting education and selling

uniforms and books results in making a surplus, it becomes an activity for

profit. It would not lose its character of an educational purpose merely

because some surplus arises from the activity. Further, it does not

require that the activity must be carried on in such a manner that it does

not result in any profit. Moreover, the assessee used the surplus

generated for educational purpose. Therefore, it cannot be said that the

educational institution ceases to exist solely for the educational purposes

and becomes an institution only for the purpose of making profit. I

further note that section 10(22) explains any income of a university or

other educational institution, existing solely for educational purposes and

not for purposes of profit and whereas new section 10(23C)(iiiad)

provides Any income of a university or other educational institution,

existing solely for educational purposes and not for purposes of profit if

the aggregate annual receipts of such university or educational institution

do not exceed Rs. 1 crore. Therefore, the intent of the law while

introducing section 10(23C)(iiiad) and section 10(23C)(vi) is same as

behind section 10(22), therefore all the judgement passed u/s 10(22)

shall be applicable to section 10(23C) subject to similar facts. To support

my aforesaid view, I draw support from the judgement in the case of

Queen's Educational Society Vs Commissioner of Income-tax 120151 372

ITR 699 of the Hon’ble Supreme Court wherein, it has been held as

under:-

“…..11.Thus, the law common to Section 10(23C) (iiiad) and (vi) may he 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 educational institution, it will not be ceases to be one existing solely for educational purposes.

(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 American Hotel and Lodging case. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit”…….

8.1 Further, the dispute in the case of the assessee relates to the

applicability of the provisions of section 10(23C)(iiiad) of the Act. This

section reads as under: -

"Any income received by any person on behalf of any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed."

8.2 Thus, from the plain reading of section 10(23C)(iiiad) of the Act, it

is apparent that any income of any university or other educational

institutional existing solely for educational purposes and not for the

purpose of profit is totally exempt if the aggregate annual receipts of such

university or educational institution do not exceed the amount of annual

receipt as may be prescribed. This means that there is no restriction on

the generation of surplus u/s 10(23C)(iiiad). It can be said that any

university or other educational institution can generate surplus.

Therefore, so long as the purpose of the institution does not involve

carrying on of educational activity for profit, the requirement of condition

given under section 10(23C)(iiiad) could be met if the activity of the

educational institution is carried out not for the purpose of profit. 13

8.3 It is also noted that buying and selling of uniform and books to

students of assessee, for educational purpose is not commercial activity.

Because the assessee is engaged in providing primary and higher

education to the poor students and working under the aims and objects of

the society. It also engaged in sale and purchase of books and uniform to

the students of the assessee school only, at cheaper rate than market

prices, which is also a part of educational activity. Also, the assessee buys

and sells only those books and uniforms which are related to the students

only. It is entirely for the education of the students which is not beyond

the aim and objective of the society. There is no need to specifically

mentioned about the sale of uniforms and books in the memorandum of

association as it is incidental to the educational activities which is object

of the assessee. It is noted that the purchase and sale of text books,

stationery items and uniforms exclusively to the students studying in the

school are not in the nature of commercialization since all these activities

are essential requirements of the students. The sale and purchase of

books and uniform to the students are not commercialized activities. It

actually benefits the entire student community as it not only provides

convenience but also promotes equality by ensuring that there is

uniformity in the products being sold and used by the children. Therefore,

it can be said that these activities are undertaken for the educational

purposes only. My aforesaid view is fortified by the following decision of

the Hon'ble Delhi High Court in case of Association of School Vendors &

Ors vs. Central Board of Secondary Education & Ors, WP(C)

No.7414/2017, Date of Pronouncement: 21/02/2018, wherein the Hon’ble

High Court has observed as under:-

"39. In my considered opinion, the use of the

school buildings for purposes of education, would

put a corresponding duty on the school

management to ensure that the students are

provided with all necessary facilities so as to help

them pursue education in the school. The

availability of books, both NCERT and non NCERT,

stationery items and uniform in the School

premises would only add to the convenience of

the parents and the students. The admitted case

of the parties is that the aforesaid items in the

school shops would be available only to the

students of the school and not to outsiders and,

therefore, I see no element of commercialization

in sale of these essential items in the school

shops. If the sale of books and uniform in the

school shops without any coercion on the

students/parents to buy the same from these

shops, is treated as "commercialization”, there is

no reason as to why even the sale of food items in

canteen facilities would also not be treated as

"commercialization”. Such an interpretation would

lead to a wholly absurd situation where on the

analogy sought to be propounded by the

Respondents, a request for prohibition of sale of

food items may also be raised. This, in my

opinion, cannot be the intent of the provisions in

the bye-laws or the Rules, relied on by

Respondents, while prohibiting commercialization

in schools. The term "commercialization” in

schools, would thus mean only carrying out of

activities wholly unconnected with education. The

availability of uniform, non-NCERT reference

books or even food items for sale only to the

students o f the school, in my opinion, does not

fall in the category of and cannot at all be

considered as "commercialization.

8.4 Keeping in view of the facts and circumstances of the case and

respectfully following the precedents, as aforesaid, I am of the

considered view that the exemption u/s 10(23)(iiiad) of the Income Tax

Act, 1961 should not be denied to the assessee as selling of books and

uniform to the students of assessee is part of educational activity only.

Moreover, the impugned addition was made merely on the basis that

surplus arises to the assessee during the year under consideration without

appreciating that the surplus is merely 12% which is considered as

legitimate for charitable purposes. Thus, the addition of Rs.12,01,906/- is

not tenable, hence, the same is deleted as such and accordingly the

grounds raised by the assessee stand allowed. In the result, the ITA No.

3550/Del/2018 stands allowed.

deleted the quantum addition in dispute, in the preceding paras of this

order, hence, the penalty in dispute does not survive in the eyes of law

u/s. 271(1)© of the Act. Therefore, the same is deleted and grounds

raised by the assessee stand allowed. In the result, this appeal of the

assessee is also allowed.

Order pronounced on 26/02/2019. Sd/- (H.S. SIDHU] JUDICIAL MEMBER

Date: 26/02/2019 "SRBHATNAGAR" Copy forwarded to: - 1. Appellant - 2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches