ACIT, FARIDABAD vs. M/S UTHAN EDUCATIONAL SOCIETY,, FARIDABAD

PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER :

(Uthan Educational Society) during the year under consideration, was running an educational institute by the name of “Manav Rachna College of Engineering”.

For the year under consideration, the return of income was filed at Nil. The case was selected for scrutiny and during the course of assessment proceedings the AO proceeded to examine the assessee’s claim of exemption u/s 11 of the Act. The AO examined the aims and objects of the society and made inquiries with respect to two different sets of Memorandum of Association/Rules. The AO also carried out verification of income and expenditure account and investment in fixed assets for the immediately preceding four assessment years and came to the conclusion that the activities of the society were not in accordance with the provisions of sections 2(15), 11, 12 and 13 of the Act. The AO opined that the activities of the society were that of ‘business of education’ under the garb of charitable activity. The AO determined the total taxable income at Rs. 4,39,10,330/- in the status of AOP. This entailed disallowance of corpus amounting to Rs. 3,46,46,000/-, disallowance of Rs. 90,67,879/- out of interest and disallowance of excess of income over expenditure at Rs. 1,96,455/-.

(Uthan Educational Society) 2.1 Aggrieved, the assessee approached the Ld. CIT (Appeals) who allowed the assessee’s appeal and directed the AO to accept the returned income at Nil.

2.2 Now, the department has approached the ITAT and has challenged the action of the Ld. CIT (Appeals) by raising the following grounds of appeal:-

“1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in holding that the society is legitimately eligible u/s 11 to 13 of the Income Tax Act, 1961 even though the society was carrying on the business of education as education for the society was only commercial activity and not the core activity of charity so as to disentitle it under chapter III of the Income Tax Act, 1961 and deserve it to be assessee under chapter IV-D of the Income Tax Act, 1961.

2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 3,46,46,000/- made by the Assessing Officer on account of corpus donation as general donation disregarding the fact that it was donation and not corpus donation with no specific purpose, neither the receipts saying anything regarding voluntary contributions, there was only one receipt book being maintained for the purpose of donation as well as corpus with no distinctive receipt

(Uthan Educational Society) book number for the corpus donation. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 90,67,879/- made by the Assessing Officer on account of interest expenses disregarding the fact that the assets had not been put to use in respect of which interest of Rs. 90,67,879/- was paid.”

Departmental Representative submitted that the assessee had violated provisions of section 2(15), 11, 12 and 13 of the Act as it was charging fees from the students. The Ld. Sr. Departmental Representative read out extensively from the assessment order and submitted that in view of findings of the AO, the order of the Ld. CIT (Appeals) should be set aside and that of the AO restored. The Ld. Sr. Departmental Representative also submitted that the department has filed additional ground of appeal which reads as under:-

(Uthan Educational Society) “On the facts and in the circumstances of the case, the Ld. CIT (A) has erred on facts and in law in holding that the Society is legitimately eligible u/s 11 of the Income Tax Act, ignoring the fact that ‘registration u/s 12AA was granted by the CIT, Faridabad on 30.09.2004 w.e.f. 09.06.2004, and thereafter, the assessee amended its memorandum of association on 24.03.2007, but no fresh application was made for 12AA registration’. Under these circumstances, since the 12AA registration dated 30.09.2004 would not apply after 24.03.2007, and no fresh registration was obtained following the amendment, the claims under section 11-13 of the Act, for the year under consideration are not admissible at all.”

3.1 The Ld. Sr. DR submitted that the registration u/s 12AA was granted to the assessee with effect from 09.06.2004 and, thereafter, the assessee had amended its Memorandum of Association on 20.04.2007 but no fresh application was made for 12AA registration. The Ld. Sr. DR submitted that since, subsequent to the amendment in the Memorandum of Association, no fresh registration was obtained, the assessee’s claim u/s 11, 12 and 13 were not admissible at all.

(Uthan Educational Society) 4. In response, the Ld. Authorised Representative, at the outset, submitted that the additional ground being raised by the department did not have the necessary approval of the higher authorities and submitted that it was filed by the AO on his own behalf. Our attention was drawn to the covering letter as well as the additional ground filed on behalf of the department and it was submitted that the additional ground did not have the necessary approval. The Ld. Authorised Representative also submitted that the amended Memorandum had been duly considered by the Ld. CIT (Appeals) and was discussed and pages 14,15 and 16 of the impugned order.

4.1 Coming to the merits of the department’s appeal, the Ld. Authorised Representative submitted that the benefit of exemption under section 11 had been allowed to the assessee’s society in assessment years 2005-06, 2006-07 and from assessment year 2009-10 to assessment year 2014-15. The Ld. Authorised Representative further submitted that the benefit was denied only in assessment year 2007-08, that is the present appeal, and assessment year 2008-09. It was further submitted that the assessee’s appeal in assessment year 2008-09 was allowed by the Ld. CIT (A) and the department had not filed any appeal against the order of the Ld. CIT (A) before the ITAT and, thus, this was the only year in which the department was in appeal before the ITAT. The Ld. Authorised Representative also furnished a chart depicting the position of assessments for the different assessment years. The chart is reproduced below for a ready reference:-

Chart showing benefit allowed for earlier & subsequent years. In the case of M/s. Uthan Educational Society for AY 2007-08 AY ASSESSMENT BENEFIT APPEAL TO APPEAL IN DATE OF U/S ALLWED CIT(A) ITAT ORDER 2005-06 143(3) ALLOWED 13.08.2007 2006-07 143(3) ALLOWED 28.11.2008 2007-08 143(3) NOT APPEAL PENDING 30.12.2009 ALLOWED DISMISSED 2008-09 143(3) NOT APPEAL NO APPEAL 31.12.2010

ALLOWED ALLOWED 2009-10 143(3) ALLOWED 21.12.2011 2010-11 143(3) ALLOWED 15.05.2012 2011-12 143(3) ALLOWED 04.06.2013 2012-13 143(3) ALLOWED 2008-09 153A(1)(b) ALLOWED 29.03.2016 2009-10 153A(1)(b) ALLOWED 29.03.2016 2010-11 153A(1)(b) ALLOWED 29.03.2016 2011-12 153A(1)(b) ALLOWED 29.03.2016 2012-13 153A(1)(b) ALLOWED 29.03.2016

(Uthan Educational Society) 2013-14 153A(1)(b) ALLOWED 29.03.2016 2014-15 153B(1)(b)/143(3) ALLOWED 29.03.2016 4.2 The Ld. Authorised Representative placed extensive reliance on the findings recorded by the Ld. CIT (A) while giving relief to the assessee and submitted that the Ld. CIT (A) had given relief to the assessee after due consideration of the facts and proper analysis of the settled judicial precedents, especially the judgment of the Hon’ble Apex Court in the case of Queen’s Educational Society vs. CIT reported in 372 ITR 699 (SC). The Ld. Authorised Representative also submitted that in view of the principle of consistency and there being no change in the facts and circumstances of the case as available on record from assessment year 2005-06 to assessment year 2014-15, the benefit of exemption

(Uthan Educational Society) without proper authorization from the competent authority.

Accordingly, we dismiss the additional ground as un-admitted.

5.1 Coming to the merits of the issue, it is undisputed that the society is primarily an educational institution with the aims and objects relating to education. Further, it also has various other aims and objects but the same also relate to education. The main objection of the AO against the assessee society is that the activities of the society are in the nature of business activity. The AO has referred to Clause 4(viii) of the objects clause which authorize the society to purchase, take on lease or exchange, or hire properties - movable and immovable for the purpose of the society and to improve, develop, manage, sell, lease, mortgage or dispose of any part of the property of the society. It is the opinion of the AO that leasing, hiring, selling and mortgaging etc. is not an allowable activity in terms of sections 11 to 13 of the Act as they were commercial activities. Similarly, the AO has referred to Clauses 4(iii), (ix), (x) which provide for providing all types of consultancy and accreditation services. The AO has also referred to object clause 4(xxv) regarding publishing of books, magazines, newspapers etc. which, as per the AO, is not a charitable activity and is a business

(Uthan Educational Society) activity. The AO has also referred to object clause 4(xl) which provides for donating or contributing corpus funds or giving loans in the form of cash/ movable property/immovable property to any other persons, individuals, trusts, societies, AOP etc. involved in similar objects. The AO was of the opinion that such kind of powers can be given only on the occasion of dissolution of trust and not before that. The AO has also noted that the society was making systematic profit year after year and was involved in expansion of its present strength. The AO was of the view that in view of the activities of the society vis a vis the aims and objects, the provisions of section 2(15), 11, 12 and 13 of the Act were clearly violated.

5.2 A perusal of the order of the Ld. CIT (A) shows that the Ld. CIT (A) has noted the assessee society was granted certificate for deduction u/s 80G of the Act initially on 16.12.2004 and subsequently on 14.05.2007 thus, underlying the fact that the issue of charitable nature of activity had been duly deliberated upon by a superior authority of the AO for the period 01.04.2007 to 31.03.2010 and, thus, the same was applicable for assessment year 2007-08, that is year under reference also. The Ld. CIT (A) has also noted that the assessee was enjoying registration u/s 12AA of the (Uthan Educational Society) Act since 2004 and the issue of genuineness of the objects of the assessee society had been considered by the AO’s superior at the time of grant of registration u/s 12AA. The Ld. CIT (A) has also noted that the AO, in the present case, had no jurisdiction to either adjudicate or review the orders of the higher authorities as per the administrative decorum of propriety as envisaged in sections 116 to 119 of the Act. The Ld. CIT (A) has noted that the AO has misled herself in preceding to examine the exemption u/s 11 of the Act and has noted it as being preposterous and unwarranted specially because the AO was not able to place any material on record so as to establish that the society was carrying on the business of education so as to disentitles it under Chapter 3 (iv) of the Act and make it liable to be assessed under Chapter IV D of the Act. The Ld. CIT (A) has noted that the AO’s opinion that education for the society was a commercial activity was entirely unfounded and misdirected without there being any supportive evidences being brought on record for arriving at such a conclusion. The Ld. Sr. DR appearing on behalf of the department could not point out any factual or legal infirmity in this finding of the Ld. CIT (A) even during the course of proceedings before us.

(Uthan Educational Society) 5.3 We further note that from assessment year 2005-06 to assessment year 2014-15, the department has not accepted the claim of exemption u/s 11 only on two occasions viz. A.Y. 2007-08 which is the subject matter of appeal before us and assessment year 2008-09 in which the Ld. CIT (A) had allowed the assessee’s appeal and the department had not preferred any appeal before the ITAT. We note that in all other assessment years, the assessments have either been completed u/s 143(3) of the Act or u/s 153 of the Act and in all the years the department has allowed the claim of exemption u/s 11 to the assessee. Although the Ld. Sr. DR has argued vehemently against the action of Ld. CIT (A) in allowing exemption to the assessee, he could not point out any material difference in the facts pertaining to this year under appeal as compared to other assessment years falling within the period AY 2005-06 to assessment year 2014-15. Although the principle of res judicata is said to not apply in income tax proceedings, the Hon'ble Delhi High Court in the case of CIT vs. Dalmia Promoters Developers (P) Ltd reported in 281 ITR 346 (Del) has held that for rejecting the view taken in earlier assessment years, there must be material change in the fact, situation or in law. In Radhasoami

(Uthan Educational Society) Satsang's case reported in 193 ITR 321 (SC), the Hon’ble Apex Court declared that although the principles of res judicata do not apply to income-tax proceedings, each assessment year being a unit by itself, yet in cases, where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it may not be appropriate to allow that position to be changed in a subsequent year. Their Lordships extracted with approval the following passage from Hoystead v. Commissioner of Taxation [1926] AC 155 (PC):

“Parties are not permitted to begin fresh litigations because of the view they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle.”

(Uthan Educational Society) 5.4 The Hon’ble Apex Court in Radhasoami Satsang (supra) reiterated the following observation made by it in Parashuram Pottery Works Co. Ltd. v. ITO reported in (1977) SCR (2) 92:

“At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.”

5.5 Following the above decisions, The Hon’ble Delhi High Court has in A.R.J. Security Printers' case reported in 264 ITR 276 (Del) and Commissioner of Income-tax v. Neo Poly Pack P. Ltd. reported in 245 ITR 492 (Del), held that even when the doctrine of res judicata does not apply to income-tax proceedings, where an issue has been decided consistently in a particular manner for earlier assessment years, the same view should prevail even during the subsequent years unless there is a material change in the facts. The law is therefore fairly well settled. For rejecting the view taken for the earlier assessment years, there must be a material change in the fact situation. There is no gainsaying that the previous view will

(Uthan Educational Society) have no application even in cases where the law itself has undergone a change but before an earlier view can be upset or digressed from one of the two must be demonstrated namely a change in the fact situation or a material change in law whether enacted or declared by the Hon’ble Supreme Court. Therefore, on the facts of the assessee’s case, in the absence of a change in facts or any additional input there was no compelling reason for taking a different view and the view taken for the earlier assessment years continues to be applicable even for the year under consideration.

Hence, it is our considered opinion that the Assessing Officer's action was not justified from this angle and we also hold that the Ld. CIT (A) was patently correct in rejecting the view taken by the AO.

5.6 We also find that the Assessing Officer, while disallowing the assessee’s claim of exemption u/s 11, had placed reliance on the judgment of the Hon’ble High Court of Uttarakhand in the case of Queens Education Society vs. CIT and had drawn support from this judgment for the proposition that continued generation of surplus over the years would indicate that there was a profit motive and (Uthan Educational Society) that the activities of the society were not charitable. However, this judgment of the Hon’ble Uttarakhand High Court was rendered with reference to provision of section 10 (23C) of the Act and not with reference to Sections 11 to 13 of the Income Tax Act. It is also to be noted that this judgment of the Uttarakhand High Court was subsequently over-turned by the Hon’ble Apex Court in Queens Education Society vs. CIT reported in 327 ITR 699 (SC). The relevant observations of the Hon’ble Apex Court are as under:-

“(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.

(Uthan Educational Society) (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.

(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.

(6) The correct tests which have been culled out in the three Supreme Court judgments, namely, Surat Art Silk Cloth 121 ITR 1 (SC), Aditanar 224 ITR 310 (SC), and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profit.

(7) In addition, we hasten to add that the 13th proviso to Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that revenue is at liberty to pass fresh orders if such necessity is felt after taking into

(Uthan Educational Society) consideration the various provisions of law contained in Section 10(23C) read with Section 11 of the Income Tax Act.”

5.7 Thus, considering the overall factual matrix of the case as well as the settled judicial precedent in this regard and duly noting the fact that the AO could not demonstrate by cogent evidence that the assessee society was carrying out activities which were commercial in nature and also after duly considering the fact that the assessee has been continuously enjoying the benefit of exemption u/s 11 of the Act from assessment year 2005-06 to assessment year 2014-15 barring the present year under appeal, we have no hesitation in holding that the Ld. CIT (A) has rightly adjudicated the issue in favour of the assessee. Accordingly, we dismiss the grounds raised by the department.

(Order pronounced in the open court on 18th July, 2018).