M/S THE AUGUSTINIAN SOCIETY,BANGALORE vs. ASST.DIT, BANGALORE

This appeal by the assessee is directed against the order dated 29.04.2015 of the CIT(Appeals)-14, LTU, Bangalore relating to assessment year 2007-08.

The assessee, a charitable trust, is engaged in the activities of running educational institution, medical facility for the poor and social centres for women and children. It filed its return of income for the AY 2007-08 on 06.10.2007 declaring NIL taxable income, after claiming accumulation of amount u/s. 11(2) in Form 10. During the year, the assessee had voluntary contribution amounting to Rs.1,63,59,419. The case was selected for scrutiny and notice u/s. 143(2) was issued on the assessee on 10.06.2008.

During the year, the assessee claimed an amount of Rs.30,58,591 as income exempt u/s. 10(23C)(iiiad). It was submitted by the assessee before the Assessing Officer that since the income was received from school activities which is less than Rs.1 crore, the claim made by the assessee has to be accepted. The AO held that the gross receipt of the assessee as a trust exceeds Rs.1 crore and hence the assessee’s claim was not acceptable. The AO held that approval of CCIT has to be obtained by the assessee as per section 10(23C)(iiiad) and even otherwise, the proviso allows the exemption only to the assessee whose objectives are solely for educational purpose. The AO observed that the objectives from (a) to (r) of the Memorandum of Association, the objects viz., (e), (f), (g), (h), (i) and (k) etc. indicated that the assessee is not existing solely or exclusively for the objectives of education only, hence the assessee’s claim for exemption of Rs.30,58,581 u/s. 10(23C)(iiiad) was disallowed.

Aggrieved, the assessee preferred appeal before the CIT(Appeals).

Before the CIT(Appeals), the ld. AR contended that the AO ought to have appreciated that an assessable “entity” or a person like a Trust or a Society is quite distinct and separate from the educational “institution” or a “school” run or operated by it and the said “entity” or a person may have multi-varied objectives or income from different sources; but if a particular income is from an educational institution which exists solely for educational purposes and not for purposes of profit, then the income would be entitled to exemption provided that such income is directly relatable to the educational activity. It was argued that the AO ought to have appreciated that the gross receipts from the educational institution viz., school does not exceed Rs. 1 crore and consequently the order from the Chief Commissioner of Income Tax exempting the claim made u/s. 10(23C)(iiiad) would not be required having regard to the provisions of section 10(23C)(iiiad) of the Act.

The CIT(Appeals) held that section 10(23C) is a later avatar of section 10(22) which prevailed up to 31.03.1999. In both the erstwhile section 10(22) and in the new section 10(23C)(iiiad)/(vi) the eligibility condition is that the institution should have been existing solely for education and not for profit. The judicial decision given in the context of section 10(22) regarding exclusive existence for educational purposes, therefore, can be relied upon even in the context of section 10(23C)(iiiad)/(vi). The Hon’ble Andhra Pradesh High Court in the case of CIT vs Gurukul Ghatkeswar Trust 332 ITR 611 and the Hon’ble Orissa High Court in the case of Xavier Institute of Management vs State of Orissa and Ors.66 DTR 169 held that for claiming exemption u/s 10(22) the institution must exist solely for purposes of education. It was held that if the trust had other objects apart from the object of running educational institutions, it was not entitled for exemption u/s 10(22). Respectfully following these decisions, the CIT(A) rejected the differentiation sought to be made by the assessee between the school as an “institution” and the assessee Society as a separate entity. The CIT(A) was of the view that the assessee is to be viewed in totality as the institution exists for educational purposes. Thus, the assessee’s claim was rejected.

Aggrieved, the assessee is in appeal before us. We find that the assessee is engaged in the activities of running educational institution, medical facilities for the poor and social centre for women and children. The short point for consideration is, whether the assessee is entitled to exemption of Rs.30,58,581 u/s. 10(23C)(iiiad) of the Act in respect of receipts on account of income from school run by the assessee, as the gross receipts from the school did not exceed Rs.1 crore.

The ld. AR for the assessee submitted that an entity like a society or trust may have multiple objects or income from different sources, but particular income is from educational institution which exists solely for educational purpose and not for the purpose of profit, then the income would be entitled to exemption provided that such income is directly relatable to the educational activity. He relied on the decision in the case of Educational Institute of American Hotel & Motel Association v. CIT, 229 ITR 113, 187 (AAR).

The ld. AR for the assessee further submitted that if the educational institution exists solely for educational purposes and not for purposes of profit, the fact that the recipient or the owner of the income is a person other than the educational institution would not affect the position. Nor would the fact that the person has or can have income from sources not falling under Section 10(22) would be relevant for deciding whether the income of such person from an educational institution would or would not be exempt. Reliance was placed on the following decisions:-

It was submitted that the exemption u/s 10(22A) is also available for trusts or societies running a hospital. Both Sections 10(22) and 10(22A) are analogous as pointed out by the Lordships of the Kerala High Court in CIT Vs Sree Narayana Chandrika Trust (1995) 212 ITR 456 (Kerala) as under:-

The ld. AR further submitted that the fact that an institution may not itself be a hospital, but was only running a hospital would not lose the benefit of exemption U/s 10(22A) as held in DIT (E) Vs AMM Medical Foundation (2002) 257 ITR 292 (Mad), following the rationale of the decision in CIT Vs AMM Arunachalam Educational Society (2000) 243 ITR 229 (Mad) and Aditanar Educational Institution Vs CIT (AddI) (1997) 224 ITR 310 (SC). It was contended that the decision in the case of DIT(E) Vs AMM Hospitals and Medical Benefit Society (2003)- 262 ITR 241 (Mad) also supports the case of the assessee.

The ld. AR for the assessee submitted that as the provisions of Section 10 (23C) (iiiae) and Section 10(23C)(iiiad) are analogous or similar to the provisions of Sections 10(22) and I0(22A), the case laws enunciated as above constitute the settled law on this issue and the assessee is well entitled to the exemption under section 10(23C)(iiiad) of the Act.

The ld. DR, on the other hand, argued that the assessee is not solely an educational institution and the objects of the assessee as seen from the Memorandum of Association is also for providing medical relief and social activities for the upliftment of women and children, hence the assessee has to be viewed in totality as an institution which does not exist solely for educational purposes. Therefore, exemption of income from running the school being not less than 1 Crore cannot be availed by the assessee.

We have heard both the parties. In the case of CIT v. Children’s Education Society, 358 ITR 373 (Karn), the Hon’ble jurisdictional High Court dealt with two substantial questions of law which are as follows:-

Their Lordships of the Hon’ble High Court of Karnataka have held as follows:-

Here "any person" refers to the assessee and "on behalf of" refers to such institutions. It may be an university, it may be an educational institution, it may be a hospital or other institutions of similar nature. As all such institutions are independent entities and they generate income and when that income is received by the assessee, it becomes the income in the hands of the assessee and it is such income which is sought to be excluded while computing the total income of the assessee under section 10. The test prescribed under the aforesaid provision is not the income of the educational institution. It is the aggregate annual receipts of such educational institution that is prescribed at Rs. 1 crore. Therefore, irrespective of the expenditure incurred by those institutions, the exemption is based on the total receipts. Even if the word "aggregate" has to be understood as suggested by the Revenue as the annual receipts of such educational institutions put together, probably, the said provision regarding exemption would be of no use at all. Especially, if the society is running a medial college or any engineering college or other professional courses, then the annual receipt of each institution would run to a few crores and, therefore, the very object of granting exemption to such genuine institution would be lost. Therefore, the words "aggregate annual receipt" has to be understood with the context in which it is used and the purpose for which the said provision was inserted, keeping in mind, the scheme of the Act. Therefore, if an assessee is running several educational institutions, if any of them is wholly or substantially financed by the Government, then the income from such educational institution received by the assessee is not included while computing his total income. Similarly, income from each educational institution if they are not receiving any aid from the Government wholly or substantially in respect of which the aggregate annual receipt do not exceed Rs. 1 crore received by the assessee, is also not included while computing annual total income of the assessee.”

The Hon’ble jurisdictional High Court in the case of CIT v. Children’s Education Society (supra) dealt with a case where the institution was solely for educational purposes and the society/institution was running various schools and colleges. However, in the present case before us, the facts are slightly different inasmuch as the society is engaged in the activities involving education, medical and social relief to the under-privileged, i.e., it is not engaged solely in educational activities. The fact is that the society runs the school for which the gross income is less than Rs.1 crore. Applying the ratio of the decision in the case of CIT v. Children’s Education Society (supra) to the facts of the present case, we are of the opinion that on a stand alone basis, the educational institution which is run under the society is entitled to the benefit u/s. 10(23c)(iiiad). However, it is imperative on the part of the society to maintain separate accounts so that the educational institution is identified as one of the objects for which the society is formed. In short, the identity of educational institution being established separately and the accounts of the institution being maintained regularly, it would be sufficient for the assessee to claim exemption u/s. 10(23c)(iiiad) of the Act in case the gross receipt is less than Rs.1 crore and the approval of CCIT is not necessary for the same. Therefore, we hold that the assessee is entitled to exemption u/s. 10(23c)(iiiad) of the Act with respect to income derived from educational institution.

The next issue is with respect to denial of carry forward of the deficit being the excess application of income to be set-off against income from property held under trust in the future.

The CIT(Appeals) relying on the decision in the case of CIT v. Indian National Theatre Trust (2008) 305 ITR 149 and ITO v. Trustees of Sri Satya Sai Trust (33 ITD 320) held that deficit cannot be allowed to be carried forward for set off in future years when surplus income is available.

Aggrieved, the assessee is in appeal before us.