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W.P No.65306/2009 - 1 -
IN THE HIGH COURT OF KARNATAKA CIRCUIT BENCH AT DHARWAD
DATED THIS THE 07TH DAY OF AUGUST 2013
BEFORE THE HON’BLE MR.JUSTICE H.G.RAMESH WRIT PETITION No.65306 OF 2009 (T-IT)
BETWEEN:
SAVIKRUTHA CHARITABLE TRUST (R) “SAVIKRUTHA”, A.N.K. ROAD 4TH CROSS, VENKATESH NAGAR SHIMOGA-577 201 (REPRESENTED BY ITS SECRETARY SMT. VIJAYA K. SHETTY, AGED ABOUT 52 YEARS WIFE OF SRI B. KRISHNA SHETTY)
… PETITIONER
(BY SRI TATA KRISHNA FOR SRI RAGHURAMAN & SRI CHAITANYA, ADVOCATES)
AND
THE CHIEF COMMISSIONER OF INCOME TAX CENTRAL REVENUE BUILDING, NAVANAGAR HUBLI-580 025
… RESPONDENT
(BY SRI Y.V. RAVIRAJ, STANDING COUNSEL)
THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH AS FAR AS THE PETITIONER IS CONCERNED BY AN APPROPRIATE WRIT OR ORDER IN THE NATURE OF CERTIORARI OR OTHERWISE THE IMPUGNED ORDER UNDER SEC.10(23C)(VI) ISSUED BY THE RESPONDENT TO THE PETITIONER DATED, 30.7.09 ENCLOSED IN ANEXURE-A AND ETC.
THIS WRIT PETITION COMING ON FOR HEARING, THIS DAY, THE COURT MADE THE FOLLOWING:
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O R D E R
H.G.RAMESH, J.(Oral) :
This Writ Petition is directed against an order dtd. 30.07.2009 passed by the Chief Commissioner of Income Tax, Hubli, rejecting approval to the petitioner- Trust under Sec.10(23C)(vi) of the Income Tax Act, 1961 (‘the Act’) for the Financial year 2007-2008.
I have heard the learned counsel appearing for the parties and perused the impugned order at Annexure-A. The reasoning for rejecting the approval is at para 6 of the order which reads as follows : “6. Hence, It is clear from the above facts that the assessee trust is not carrying on any activities as per its objectives and not in the nature of charity but doing for profit. Though the income is applied for the objective of the trust to propagate education, the trustees are benefited from the assets of the trust. Hence, the application of income is not wholly and exclusively towards the objects of the assessee trust. Moreover, the assessee trust is irrevocable, as no provisions are provided for treatment of utilization of assets in the event of dissolution/winding of the trust as the trustees for life and are entitled to nominate their successors. The trustees have introduced their personal money in to the trust and in turn utilized their money through the trust apart from collection of compulsory donations, fees to acquire assets for their personal benefit and utilities. The building
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and other assets of the Trust situate on the lands owned in the names of the Trustees, where trust has no right or control over its assets, if the trustees rebut the trust. Hence, there is no dedication to the trust either by the settler or by the trustees. Therefore mere declaration of a trust and or execution of a deed is not enough to constitute a valid endowment. It is necessary for the validity of deed that the executor should divest himself of the property. Whether he had done so or not, is to be determined by his subsequent acts and conducts. The test of a bonfide or nominal endowment are how did the founder treat the property, how have the descendents treated it and how the income is endowed property been actually applied to the objects of dedications. (Gopal Jew Thakur Vs Provasim AIR, 1947 Orissa 85) Where there is no real dedication of property for the public religious or charitable purposes but only any attempt to create a perpetuity in favour of the settlor’s descendent the trust is void. (Reliance is placed on Shri Takurji Vs Sukdev Sing 1920, 42 All 494). Therefore, the assessee is imparting the education on the lines of business and no purpose of charity is being served. The assessee is having good profit from running schools on commercial lines. Hence, the assessee trust is not entitled for recognition u/s 10(23C)(vi) of the Act. Therefore, the approval under section 10(23C)(vi) of the I.T.Act cannot be granted to the assessee trust. Accordingly, the application of the trust for approval u/s 10(23)(vi) of the Act is hereby rejected.”
It is relevant to quote Sec.10(23C)(vi) of the Act which reads as follows: “Incomes not included in total income.
* * * * * * * * * * * * * * * (23C) any income received by any person on behalf of
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(i) * * * * * * * * * * * * *
(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or
(via) * * * * * * * * * * * * *”
What is required to be examined while granting approval under the above provision of law is as to whether the university or the educational institution is existing solely for educational purposes and not for purposes of profit. If the prescribed authority finds from the inquiry made by it, that the existence of the university or the educational institution is solely for educational purposes and not for purposes of profit, approval has to be granted subject to the university or the educational institution complying the conditions laid down under the Act and the conditions imposed by the prescribed authority. It is relevant to state that the object of the university or the educational institution seeking approval shall not be profiteering. What is also relevant to be examined at the stage of grant of approval
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is as to whether the entire income is aimed to be utilised for educational purposes or any income is aimed to be used for benefitting any private individuals, in any manner, whether directly or indirectly.
Creating any kind of assets from the income of the institution in the names of private individuals, whether they are connected to the institution or not, would clearly point to profit making. However, this will have to be examined at the appropriate stage.
What is the scope of an Enquiry by the prescribed authority for grant of Approval under Sec.10 (23-C)(vi) of the Act is explained by the Supreme Court in American Hotel & Lodging Assn. Educational Institute vs. CBDT [(2008) 10 SCC 509]. The following observations made therein are relevant: “40. We shall now consider the effect of insertion of provisos to Section 10(23-C)(vi) vide the Finance (No. 2) Act, 1998. Section 10(23-C)(vi) is analogous to Section 10(22). To that extent, the judgments of this Court as applicable to Section 10(22) would equally apply to Section 10(23-C)(vi). The problem arises with the insertion of the provisos to Section 10(23-C)(vi). With the insertion of the provisos to Section 10(23-C)(vi) the applicant who seeks
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approval has not only to show that it is an institution existing solely for educational purposes [which was also the requirement under Section 10(22)] but it has now to obtain initial approval from the PA, in terms of Section 10(23-C)(vi) by making an application in the standardised form as mentioned in the first proviso to that section. That condition of obtaining approval from the PA came to be inserted because Section 10(22) was abused by some educational institutions/universities. This proviso was inserted along with other provisos because there was no monitoring mechanism to check abuse of exemption provision. With the insertion of the first proviso, the PA is required to vet the application. This vetting process is stipulated by the second proviso. 41. It is important to note that the second proviso also indicates the powers and duties of the PA. While considering the approval application in the second proviso, the PA is empowered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the applicant institution. Earlier that power was not there with the PA. Under the third proviso, the PA has to ascertain while judging the genuineness of the activities of the applicant institution as to whether the applicant applies its income wholly and exclusively to the objects for which it is constituted/established. 42. Under the twelfth proviso, the PA is required to examine cases where an applicant does not apply its income during the year of receipt and accumulates it but makes payment therefrom to any trust or institution registered under Section 12- AA or to any fund or trust or institution or university or other educational institution and to that extent the proviso states that such payment shall not be treated as application of income to the objects for which such trust or fund or educational institution is established. The idea underlying the twelfth proviso is to provide guidance to the PA as to the meaning of the words “application of income to the objects for which the institution is
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established”. Therefore, the twelfth proviso is the matter of detail. 43. The most relevant proviso for deciding this appeal is the thirteenth proviso. Under that proviso, the circumstances are given under which the PA is empowered to withdraw the approval earlier granted. Under that proviso, if the PA is satisfied that the trust, fund, university or other educational institution, etc. has not applied its income in accordance with the third proviso or if it finds that such institution, trust or fund, etc. has not invested/deposited its funds in accordance with the third proviso or that the activities of such fund or institution or trust, etc. are not genuine or that its activities are not being carried out in accordance with the conditions subject to which approval is granted then the PA is empowered to withdraw the approval earlier granted after complying with the procedure mentioned therein. 44. Having analysed the provisos to Section 10(23-C)(vi) one finds that there is a difference between stipulation of conditions and compliance therewith. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardised form in terms of the first proviso. It is only if the prerequisite condition of actual existence of the educational institution is fulfilled that the question of compliance with requirements in the provisos would arise. We find merit in the contention advanced on behalf of the appellant that the third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval. 45. To make the section with the proviso workable we are of the view that the monitoring conditions in the third proviso like application/utilisation of income, pattern of investments to be made, etc. could be stipulated as
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conditions by the PA subject to which approval could be granted. ………………….. 46. ..………………………………………………… ……………………………………………......…..However, after grant of approval, if it is brought to the notice of the PA that conditions on which approval was given are breached or that circumstances mentioned in the thirteenth proviso exists then the PA can withdraw the approval earlier given by following the procedure mentioned in that proviso. The view we have taken, namely, that the PA can stipulate conditions subject to which approval may be granted finds support from sub-clause (ii)(B) in the thirteenth proviso. 48. Section 10(23-C)(vi) seeks to exempt income of institutions with laudable objects and activities such as universities, hospitals, etc. As stated above, stipulation of monitoring conditions is different from compliance with those conditions. Compliance or non-compliance can only be gauged at the assessment stage. 51. ……………………………………………………. ………………………………………………………………… Lastly, we may reiterate that there is a difference between stipulation by the PA of such terms and conditions, as it deems fit under the provisos, and the compliance with those conditions by the appellant. The compliance with 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.”
(Underlining supplied)
In my opinion, as no documents are referred to by the commissioner to come to the conclusion that the petitioner is running the school on commercial lines and
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for profit, the matter requires to be re-examined by the Chief Commissioner of Income Tax, Hubli, in accordance with law and in the light of the judgment of the Supreme Court referred to above. Accordingly, the impugned order dtd. 30.07.2009 is set aside. The matter is remitted to the Chief Commissioner of Income Tax, Hubli for re-consideration in accordance with law. All contentions of both the parties are kept open.
Petition allowed.
Sd/- JUDGE
BNS