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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Exemptions), Mumbai [in short CIT(E)], in appeal No. CIT(E)/U/s.10(23C)(vi & via)/16-17 vide order dated 28.09.2016.
2. The only issue in this appeal of assessee is against the order of CIT(Exemptions) rejecting the assessee’s claim of exemption under section 10(23)(vi) & (via) of the Act. For this assessee has raised the following grounds: - “1. On the facts and in law, the Hon. CIT (Exemptions) erred in holding the appellant not entitled for exemption under section 10(23C)(vi) & (via) of the Income Tax Act, 1961.
2. On facts and in law, the Hon. CIT (Exemptions) erred in not appreciating that the appellant was only running a school providing education to students upto class Xth and therefore existed solely for education purposes and denial of exemption sought under section 10(23C)(vi) & (via) was not justified by law.”
3. Briefly stated facts are that the assessee is a trust engaged in running educational institutions i.e. two schools providing education upto 10th class at Virar, Dist. Palghar. The assessee had applied for approval u/s 10(23C)(vi) of the Act by filing application in form no. 56D before the CIT (Exemption) Mumbai. The same stood rejected. Aggrieved assessee preferred appeal before Tribunal.
We have heard rival contentions and gone through facts and circumstances of the case. We find that CIT(E) has denied the approval for the reason that objects of the assessee trust did not relate to education and therefore the assessee trust was not eligible for approval u/s 10(23C)(vi) of the Act. The objects of the assessee trust as per the memorandum of association dated 21.05.2005 are as under:-
“1. To start, establish conduct maintain and manage educational institutions, libraries and reading rooms with a view to increase the educational level and to build up ideal citizens.
Promote educational propagation by means of lectures, seminar, exhibitions, publications and oilier means.
3. To join or associate with any other organization or society having aims and objects similar to the objects of the Association either in part or in whole in furtherance of the objects of the Association.
4. To encourage and facilities, directly or indirectly, the study of educational problems in India and other friendly countries and the removal of these problems particularly illiteracy.
5. To try to raise the status and dignity of under section teaching profession.
6 To collect flint/s by means offers from students and parents subscriptions, donations and contributions and other lawful means and spend them in furtherance of the objects of the Association.
7. To acquire, purchase. to take on loans or otherwise, land or building and all other property movable and immovable which the Association for the purpose thereof may think proper to acquire.
8. To do all other lawful things as are incidental and ancillary to the attainment of the above objects.
To amend, modify, substitute or add any new abject for promotion of the public good.”
The assessee contested that denial of approval u/s 10(23C)(vi) of the Act is not justified to for the reason that the CBDT has already issued a circular vide no. 14 of 2015 dated 17.08.2015 wherein it is explained that the scope of enquiry at time of granting of approval by the prescribed authority is limited to being satisfied that the institution existed during the relevant year solely for educational purposes and not for profit. The circular prescribes that once this criteria is satisfied, the threshold pre- condition stands satisfied and denial of approval u/s 10(23C)(vi) of the Act is not justifiable. The said circular also provides that approval could be granted subject to terms and conditions within the frameworks of various provisos to sec. 10 of the Act. The circular also states that it could not be justifiable to deny the approval on grounds with regards to events that have not taken place on the date of application. The order of the CIT (E) is in direct contradiction to the CBDT circular cited above which is binding on him. It is not disputed by the CIT (E) that the appellant trust does not carry on any other activity apart from providing education till class 10th in the schools run by the trust. The CIT (E) has based his denial on events that have not taken place in the year of application. The denial of exemption is therefore in-appropriate.
We have gone through the directions provided in the CBDT circular no, 14 of 2015 dated 17.08.2015 which are based upon the directions of the Hon. Supreme Court in the case of American hotel & Lodging Association Educational Institute vs. CBDT & Ors. (2008) 301 ITR 86 (SC). We find that CIT(E) has relied upon the decision in the case of New Noble Educational Society & Ors vs. Chief CIT & Anr, 334 ITR 303 (AP) to deny the approval. However, we find that the said decision actually does not support the Revenue. After going through this decision, we noted that Para nos. 13 & 14 of the decision categorically state that at the initial approval level, the scope of enquiry is to be restricted only to ascertain the genuineness of activities of the institution. The CBDT circular has clarified the issue regarding grant of exemption as under:-
Sub: Clarification on certain issues related to grant of approval and claim of exemption u/s 10(23C)(vi) of the Income-tax Act, 1961.
Sub-clause (vi) of clause (23C) of Sec 10 of the Income-tax Act, 1961 ('Act') prescribes that income of any university or other educational institutions, existing solely for educational purposes and not for purposes of profit. shall he exempt from tax if such entities are approved by the prescribed authorities. Such approval is not required in cases Oi university or educational institutions wholly or substantially financed by the Government [sub-clause (iiiab)] or if their aggregate annual receipts do not exceed Rs. 1 crore [sub-clause (iiiad) r.w. rule 2BC]. Thus, while granting approval to entities covered under sub-clause (vi). the prescribed authority has to ensure that the applicant institution must exist "solely for educational purposes and not for purposes of profit". There are several Provisos to clause (23C) of section 10 and prescribe, inter cilia, various monitoring conditions subject to fulfillment of which only, the exemption can he availed.
These monitoring conditions include mode and manner of application of funds, maintenance and audit of books of accounts in certain situations ac. Some other Provisos prescribe the manner of making application u/s 10(23C)(vi) and the circumstances when an approval granted earlier can be withdrawn.
Representations have been received seeking clarification on certain issues related to operation of section 10(23C)(vi). These have been examined by the Board and following clarifications are made -
Scope of enquiry while granting approval- 1.1 Clarification has been sought on the scope of enquiry that can be made by the prescribed authority while granting approval u/s 10(23C)(vi), i.e., whether it would be sufficient for the prescribed authority to consider the nature, existence for non-profit purposes and genuineness of the applicant institution or the conditions prescribed under various Provisos are also required to be considered at the stage of granting approval.
1.2 In this connection, attention is drawn to the decision of Hon'ble Supreme Court in case of American Hotel and Lodging Association Educational Institute vs. CBDT [301 ITR 86] (2008) in which it has been held that at the time of granting approval u/s 10(23C)(vi), the prescribed authority is to be satisfied that the institution existed during the relevant year solely for educational purposes and not for profit. Once the prescribed authority is satisfied about fulfillment of this criteria i.e. the threshold pre- condition of actual existence of all institution under section 10(23C)(vi), it would not be justifiable, in denying approval on grounds, especially where the compliance depends on events that have not taken place on the date on which the application for grant of approval has been made.
1.3 However, the prescribed authority is eligible to grant approval u/s 10(23C)(vi), subject to such terms and conditions as deemed necessary including those falling within the framework of various Provisos to the said clause of section 10. It has also been clarified in the said judgment that the compliance of prescribed conditions can be gauged while monitoring the case and in case of any breach thereof, the approval can be withdrawn. It is, therefore, clarified that the principle laid down by the Apex Court in American Hotels case (supra) must be followed while considering the applications tiled seeking approval for exemption u/s 10(23 C)(vi).
Necessity for registration u/s 12AA while seeking approval /claiming exemption u/s 10(23C)(vi)
2.1 Section 10(23C)(vi) does not prescribe any stipulation which makes registration u/s 12AA a mandatory pre or post condition. In fact, provisions of section 11 and 10(23C) are two parallel regimes and operate independently in their respective realms although some of the compliance criteria may be common to both. Hence obtaining prior registration before granting approval u/s 10(23C) cannot be insisted upon.
2.2 However, in case of a trust or an institution having obtained registration u/s 12AA as well as approval under section 10(23C)(vi), if registration is withdrawn at some point of time due to certain adverse findings, the withdrawal of approval u/s 10(23C)(vi) shall not be automatic but will depend upon whether these adverse findings also impact the conditions necessary to keep approval u/s 10(23C)(vi) alive.
Generation of surplus out of gross receipts A doubt has been raised whether generation of surplus out of gross receipts would necessarily 'breach' the threshold condition that the educational institution should exist “solely for educational purpose and not for the purpose of profit'. Perusal of prescribed provisions clearly reveal that mere generation of Surplus cannot be a basis for rejection of application u/s 10(23C)(vi) on the ground that it amounts to an activity of the nature of profit making. In fact, the third Proviso to the said clause clearly provides that accumulation of income is permissible subject to the manner prescribed therein provided such accumulation is to he applied “wholly and exclusively to the objects/or which ills established". Hence, it is clarified that mere generation of surplus by educational institution from year to year cannot be a basis for rejection of application u/s 10(23C)(vi) if it is used for educational purposes unless the accumulation is contrary to the manner prescribed under law.
4. Collection of amounts under different heads of fee from students- It has been brought to the notice that collection of small amounts from students by way of application fee, examination lee, fee for issuing transfer certificate, subscription fee for library etc. is being treated by some Assessing Officers as profit making activity resulting in denial of exemption u/s 10(23C)(vi). Collection of small and reasonable amounts under different heads of fee, which are essentially in the nature of fee connected with imparting education and do not violate any Central or Sate regulation does not, in general, represent a profit making activity. Hence. there is no justification for treating the charging of small amounts under different heads of fee as profit making activity unless the amount in the nature of 'capitation fee’ is charged directly or indirectly.
5. Impact of extraordinary powers of the Managing Trustees to appoint Trustees to appoint remove or nominate other trustees.
5.1 Doubt has been expressed whether extraordinary powers to the Managing Trustees to appoint or remove other trustees and also to nominate their successor affect the nature of charitable activity of the trust and whether in such an eventually, exemption can be denied.
5.2 There is no provision under the Act which calls for denial of exemption merely on account of appointment or removal of trustees. Although answer to such a situation would normally depend on the factual implication of such arrangement, the same should generally not be a ground for denying exemption unless the nature of activities of the trust or institution get changed or modified or no longer remain to exist ‘solely for educational purpose and not for purpose of profit’. Hence denial of exemption would bot be justifiable only on the ground of induction of new trustees or removal of existing ones.
6 Field authorities are advised to keep the above position in mind while dealing with the matters of approval/ exemption under section 10(23C)(vi). Similar principles would also apply to cases covered under section 10(23C) (via) of the Act.”
When going through the order of CIT(E), it is noticed that none of the above condition/ scope of enquiry for rejection of approval under section 10(23C)(via) was considered by him and hence, we remand this appeal back to the file of CIT(E) for fresh consideration the issue in entirety. The order of CIT(E) is set aside.
In the result, the appeal of assessee is allowed for statistical purposes.
Order pronounced in the open court on 09-10-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 09-10-2018 kao kI ga[- .