RAO PAHLAD SINGH EDUCATION SOCIETY,HARYANA vs. CIT(E), CHANDIGARH, CHANDIGARH

The assessee society received approval from the Chief Commissioner of Income Tax, Haryana, Panchkula, for A.Y. 2014-15 onwards under section 10(23C)(vi) and (via) of the Act, vide order(APB 57-59) dt. 14/07/2015. On 28/08/2021, an application was filed by the assessee in Form No. 10A in view of Clause (i) of the first proviso to Secton 10(23C)(vi) of the Act before the ld. PCIT, for grant of approval. Alongwith the application, the assessee filed a copy of the previous approval (APB pages 57-59), a copy of the Memorandum of Association and Bye Laws of the assessee society (APB pages 1-26 and 71A- 71W) and a copy of the financial statements alongwith audit reports for three assessment years, i.e. A.Ys 2018-19, 2019-20 and 2020-21 (APB 184-198 and Pages 72-101). Vide order (APB pages 60-62) dt. 24/09/2021, approval under section 10(23C)(vi) of the Act was granted by the ld. PCIT or CIT.

On 08/01/2021, return of income (APB pages 72-101) was filed for F.Y. 2019-20, relevant to A.Y. 2020-21, declaring NIL income. Notice (APB pages 673-680) dt. 29/06/2021 was issued under section 143(2) of the Act.

The chief contention of the assessee is that the approval gratned has wrongly been cancelled by invoking the provisions of the 15th Proviso to Clause 23C of Section 10 of the Act, though the same was not applicable.

The Ld. DR, on the other hand has placed strong reliance on the impugned order in this regard.

It is seen that the order dt. 24/09/2021 was granted to the assessee in view of Clause 1 of the first proviso to Section 10(23C)(vi) of the Act, whereunder is mentioned the requirement of making of an application in the prescribed form and manner to the Chief Commissioner or Commissioner for grant of such approval. As mentioned, alongwith such application, the assessee filed copies of the previous approval, the Memorandum of Association and Bye Laws of the assessee society and Financial statements, alongwith audit report, for three assessment years, i.e. A.Y-s 2018-19 to 2020-21.

The previous approval was granted under the second proviso to Section 10(23C)(vi) of the Act. While granting that approval, which was provision, the competent authority undisputedly examined the financial statements, which categorically stated that there were security deposits in the names of the members of the assessee society and the company which owned the land of the school. In the face of such facts, which undisputedly have not undergone any change, it has been held in ‘St. Peters Education Society Vs. PCIT reported in 225 DTR (Chd Trib) 185’, that once at the time of grant of initial approval, on due examination of the facts, which had not under gone any change from those that existed at the time of grant of initial approval, the withdrawal of approval was not warranted. Apropos the applicability or otherwise of Explanation 2(a) of the 15th 9. Proviso to Section 10(23C) of the Act, as brought in by the Finance Act, 2022, with effect from 01/04/2022, admittedly, the impugned order has been passed by invoking Explanation 2 of the 15th proviso to Section 10(23C)(vi) of the Act. The relevant provisions first. The unamended 15th proviso (which was amended by Finance Act 2007, 10. w.e.f 01/06/2007 by the Finance Act, 2019, with effect from 1/09/2019) reads as follows: "Provided also that where the fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) is notified by the Central Government or is approved by the prescribed authority, as the case may be, or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), is approved by the prescribed authority and subsequently that Government or the prescribed authority is satisfied that- (i) such fund or institution or trust or any university or other educational institution or any hospital or other medical institution has not- (A) applied its income in accordance with the provisions contained in clause (a) of the third proviso; or (B) invested or deposited its funds in accordance with the provisions contained in clause (b) of the third proviso; or (ii) the activities of such fund or institution or trust or any university or other educational institution or any hospital or other medical institution- (A) are not genuine; or (B) are not being carried out in accordance with all or any of the conditions subject to which it was notified or approved; or (iii) such fund or institution or trust or any university or other educational institution or any hospital or other medical institution has not complied with the requirement of any other law for the time being in force, and the order, direction or decree, by whatever name called, holding that such non- compliance has occurred, has either not been disputed or has attained finality, it may, at any time after giving a reasonable opportunity of showing cause against the proposed action to the concerned fund or institution or trust or any university or other educational institution or any hospital or other medical institution, rescind the notification or, by order, withdraw the approval, as the case may be, and forward a copy of the order rescinding the notification or withdrawing the approval to such fund or institution or trust or any university or other educational institution or any hospital or other medical institution and to the Assessing Officer:" The amended 15th proviso, which substituted the afore quoted earlier 15th 11. proviso, was brought in by the Finance Act, 2022, w.e.f 01/04/2022. It reads as follows: Provided also that where the fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) is approved or provisionally approved under the said clause and subsequently— (a) the Principal Commissioner or Commissioner has noticed occurrence of one or more specified violations during any previous year; or (b) the Principal Commissioner or Commissioner has received a reference from the Assessing Officer under the second proviso to sub-section (3) of section 143 for any previous year; or (c) such case has been selected in accordance with the risk management strategy, formulated by the Board from time to time, for any previous year, the Principal Commissioner or Commissioner, shall,— (i) call for such documents or information from the fund or institution or trust or any university or other educational institution or any hospital or other medical institution, or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence of any specified violation; (ii) pass an order in writing cancelling the approval of such fund or institution or trust or any university or other educational institution or any hospital or other medical institution, on or before the specified date, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violation has taken place; (iii) pass an order in writing refusing to cancel the approval of such fund or institution or trust or any university or other educational institution or any hospital or other medical institution, on or before the specified date, if he is not satisfied about the occurrence of one or more specified violations; (iv) forward a copy of the order under clause (ii) or clause (iii), as the case may be, to the Assessing Officer and such fund or institution or trust or any university or other educational institution or any hospital or other medical institution. Explanation 1.—For the purposes of this proviso, "specified date" shall mean the day on which the period of six months, calculated from the end of the quarter in which the first notice is issued by the Principal Commissioner or Commissioner, on or after the 1st day of April, 2022, calling for any document or information, or for making any inquiry, under clause (i) expires. Explanation 2.—For the purposes of this proviso, the following shall mean "specified violation",— (a) where any income of the fund or institution or trust or any university or other educational institution or any hospital or other medical institution has been applied other than for the objects for which it is established; or (b) the fund or institution or trust or any university or other educational institution or any hospital or other medical institution has income from profits and gains of business, which is not incidental to the attainment of its objectives or separate books of account are not maintained by it in respect of the business which is incidental to the attainment of its objectives; or (c) any activity of the fund or institution or trust or any university or other educational institution or any hospital or other medical institution,— (A) is not genuine; or (B) is not being carried out in accordance with all or any of the conditions subject to which it was notified or approved; or (d) the fund or institution or trust or any university or other educational institution or any hospital or other medical institution has not complied with the requirement of any other law for the time being in force, and the order, direction or decree, by whatever name called, holding that such non- compliance has occurred, has either not been disputed or has 50[attained finality;

Beside, even dealing with the findings recorded by the ld. CIT(A) on merits, it is seen that otherwise also, the ld. CIT(E) has gone wrong in observing that there was a specified violation as explained by Explanation 2(a) to the 15th proviso. It was on this basis that the approval was cancelled. This conclusion has been based on the observation that income of the society has been transferred to some of its members for acquiring shares of the company which owned the land of the school, in their own names, in order to acquire two parcels of land in Gurugram, by the respective companies and not transferred in the name of the society; that these parcels of land have been taken on lease by the society and it is the society which is paying the lease rental; that security deposits given to members are long term deposits and are interest free; and that therefore, the society’s income has been applied for purpose other than its object.

Apropos interest free security deposits, which is the other issue taken up by the ld. CIT(E), in para 5.1 of the impugned order, the assessee has the following various security deposits, against land and building used for the purpose of society, i.e. education:

The society maintains that the said sum of Rs. 49,22,50,610/- has been paid for acquisition of two school sites and buildings in Gurugram, Haryana by purchasing the shares of the following entities, in the name of members of the society:

The society maintains that it has run the school named RPS International School, Sector-89, Gurugram at this site since the academic session 2018-19; that the fees received, amounting to Rs. 45.35 cores, in this school are being collected by the society and applied for the purpose of education; that this has not been called in question either in the assessment proceedings, or by the ld. CIT(E). The details of the fess collected have been tabulated as follows:

Concerning of share of Dhaulagiri Projects Ltd., the submission of the society is that it has acquired land measuring over 155 acres situated at South City-II, Sector-50, Gurugram, for a total consideration of Rs. 11,49,61,000/- through the members of the society, as under:

As against the above two acquisitions, the amounts given to and utilized by the members of the society are as per the following details:

There is a school called RPS International School, Sector 50, Gurugram, started by the society at the said site from academic session 2018-19, from which session, fees received by school have been collected by the society and applied for the purpose of education. The total amount of Rs. 26.65 crores was collected as fees of academic sessions 2018-19 to 2020-21, and the following are the details thereof,:

It, thus, seen that the land for the two sites was acquired by the society for setting up of educational society having requisite permission / approval. In regard therewith, it cannot be said that the funds were applied for objects which were not the objects of the society. Admittedly, education is the object for which the society was established and it is education for which the funds have been applied. Too, it is not disputed that the acquisition of the site was during the A.Ys 2018-19 and 2017-18. Equal monthly installment amounting to Rs. 7,19,39,820/- were paid by the society for RPS International School, Gurugram during the year and no further amount was paid for such purposes. Then, it does not stand disputed that the society, instead of adopting the conveyance deed method, so as to save a hefty sum of approximately Rs. 5 crores, representing 7% registration fees of the total consideration paid for the acquisition of the land, totaling to Rs. 71.50 crores, acquired the share of these companies. This methodology is well within the four corners of the law. It cannot be held otherwise.

Further, the fees of the two schools have been included in the receipt of the society, both in the assessment order for A.Y. 2020-21, and by the ld. CIT(E) also. This being so, funds invested by the society for the acquisition of the schools have wrongly been doubted to arrive at an erroneous conclusion against the society. It is important to note that undisputedly, the cost of acquisition hitherto paid, of the two schools, is far less than the receipt from the two schools, for less than the grossed up receipt from these two schools, turning it into a catch 22 situation, which the Revenue cannot be permitted to maintain. Undisputedly, the schools are being acquired for the objects of the society by way of acquiring the shares in the name of the members of the society. The benefit for such transaction in-dubitably enures for the benefit of the society only and not for the members in personam. This being so, the ld. CIT(E) has erred in drawing inference adverse to the assessee by observing that there is no clause in its bye laws that immovable property can be purchased by the members of the society in their own names on behalf of the society.

Then, the society obviously needs to save money, in order that it can be utilized for the objects of the society. This cannot be, and has not been, called into question. Still, the ld. CIT(E) goes on to observe that it was not acceptable that despite having revenue of over 100 crores, the property was not acquired in its own name by the society, so as to save Rs. 500/- cores and that the actual intention was only of diverting its money to its members, so as to enable them to acquire shares of another company in their own names. Again, it remains established on record that the properties were acquired for the objects of the society and they were used for running schools. Therefore, it cannot be said that saving money was not towards utilization thereof for the object of the society i.e. education and, thus, not in the interest of the society.

In this regard, evidently, the ld. CIT(E) has gone wrong in observing that “ shareholders of company would enjoy the appreciation in land value in their individual capacity and no benefit would accrue to the appellant society.” As discussed, there is no material on record to attract such a finding. The ld. CIT(E) herself has not brought even any allegation against the society, much less any conclusion to that effect, that the properties under discussion were being exploited for personal benefit by the members of the society. On the contrary, as discussed hereinabove in detail, the properties have been utilized by the society for the very object of its establishment, i.e. education and to no other end whatsoever. The observation of the ld. CIT(E), therefore, is but a result of mere conjectures and surmises, which is not permissible in law.

On this aspect, in ‘CIT(E) Vs. Ambala Public Education Society’ 100 taxmann.com 131(P&H), correctly relied on on behalf of the society, it has been held, in similar facts, that where the factum of the society running the School as per its aims and objects was not in dispute, where the wife of the secretary was teaching in the school, for which, she was being paid salary, on the basis of requisite qualification having been acquired, where the aims & objects and the genuineness of the activity of the society had not been doubted and rather, it had been the finding of the AO for the relevant assessment year, that the income earned by the society had been utilized for educational purposes, there was no ground to reject the application filed under section 12A of the Act, simply due to the fact that the Secretary of the society was getting lease rent for the land given to the societ,y or that the secretary’s wife was being paid salary for teaching in the school. In ‘Kendriya Academy Vidhyalaya Shiksha Samiti Vs. ACIT’, 182 TTJ 154 (Jaipur Trib) it has been held that where properties were held in the individual names of the members of the society, it is the reason for this situation, which needs to be examined, i.e. whether there are any regulatory reasons for registering the property in the name of the society, or whether the properties have been held in a fiduciary capacity for the benefit of the society, or in a personal capacity, and whether there are any benefits available to the individual members, in terms of utilization, exploitation, disposition, etc. It was held that merely by stating that the properties have been registered in the name of independent member and it is he who has derived, or will derive the benefit thereof, would not be sufficient to deny the exemption. It was held that it also requires verification as to whether the claim of the assessee that it is the beneficial owner of the said property and the right to dispose them also lies with the society, is correct. It was held that it is the substance of the transaction, rather than the form, that should be examined in the specific pattern relating to each of the transactions of investment in immovable property, in order to determine the true capacity of the property holder an the nature of the direct / indirect or proximate or remote benefit accruing, or to accrue to the individual members, if any. In ‘CIT Vs. Sunbeam English School’ 361 ITR 325 (P&H), the jurisdictional Hon’ble Punjab and Haryana High Court dismissed the appeal of the Department, upholding the findings of the Tribunal that the Civil Court had examined the entire matter and had found that the property was purchased from the funds of the society and it was also recorded in the name of the society, and on the basis of such examination the Civil Court found that the purchaser of the property was the society and that Smt Bharti Madhok, Director of the society had wrongly been mentioned as purchaser thereof, which mistake was corrected by the Civil Court. The Tribunal had also observed that property stood mortgaged with the bank on due permission from the Court, granted on scrutiny of the bonafides and the genuineness of the transaction, by the Court. It was also taken note of that the banks ordinarily did not create a charge over the property without due diligence having been carried out by enquiring into the title over the property, the funds and source of the purchase of the property held by the mortgagor. The Hon’ble High Court observed that the Tribunal was also justified in holding that the assessee society had not violated any of the conditions of the provisions of Sections 11 and 10(23C)(vi) of the Act, and that it had, further correctly, been held that the funds of the society were not utilized for any purpose other than the object of the society.

Apropos ‘New Nobel Educational Society Vs. CCIT’, 448 ITR 594 (SC), on which, vehement reliance has been sought to be placed on behalf of the Department, the same aids the case of the assessee, rather than that of the Department. Therein, their Lordships have held that an Educational institution must, for the propose of Section 10(23C) of the Act, exist solely for educational activity and not for profit. Undisputedly, the fact that the society before us exists only for the object of educational activity is not in question at the hands of the ld. CIT(E). It is not engaging in any activity of profit which is unrelated to education. It is providing its premises or infrastructure to other entities, trusts, societies, etc., for the purpose of conducting workshops, seminars or even educational courses, in which, outsiders are permitted to enroll. Had it been otherwise, obviously, in keeping with ‘New Noble Educational Society’ the income derived from such activity could not have been characterized as either part of educational or incidental to imparting education. The object of the society has nowhere been held to be profit-oriented, so as to disentitle it from the approval granted under section 10(23C). It is not under challenge that it is in the course of providing education only that surplus is generated. Then, it is nowhere in question that while considering an application for approval under section 10(23C),the Commissioner, beside examining the object of the institution, can call for audited accounts or other such documents for recording satisfaction about the genuineness of the object sought to be achieved.

In view of the above discussion we hold that the Ld. CIT(E) has erred in cancelling the approval correctly granted to the society under section 10(23C)(vi), by invoking the 15th proviso to Section 10(23C) of the Act.

The parties were not called upon to address arguments on any other issue.

In the result, appeal of the Assessee is allowed.