*THE HON’BLE SRI JUSTICE V.V.S.RAO AND * THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + WRIT PETITIN No.18107 OF 2010 % Dated 22 -12-2010 # M/s. Aurora Educational Society …. Petitioner Vs. $ The Chief Commissioner of Income Tax-I, Hyderabad and two others. …. Respondents ! Counsel for the Petitioner: Sri A.V. Krishna Kaundinya ^ Counsel for the Respondents: <GIST: > HEAD NOTE: [1] judgment in W.P. No.21248 of 2010 and batch dated 11.11.2010 2 judgment in W.P. No.26985 of 2010, dated 23.11.2010 3 (2008)301 ITR 86 (SC) 4 (1997)224 ITR 310 (SC) 5 (2010)327 ITR 73 (P &H) 6 (1993) 201 ITR 939 7 Judgment of APHC DB in R.C. No.35 of 1996 dated 29.09.2010 8 (1988) 169 ITR 379 (RAJ) 9 (2001) 247 ITR 658 (SC) 10 (2010) 327 ITR 121 (Bombay) 11 AIR 1957 SC 699 12 AIR 2003 SC 355 13 (2003)6 SCC 697 14 (1975) 101 ITR 234(SC 15 (1980) 12 ITR page 1 (SC 16 (2009) 315 ITR 48 (Allahabad) 17 (2009) 309 ITR 50 18 (2000) 1 ALT 256 (Andhra Pradesh) 19 (2001)6 ALT 539 20 2003 (6) ALT 62 (DB) 21 (1996) 217 ITR 746)(S.C 22 2004(5) ALD 180 (DB) 23 AIR 1955 S.C.425 THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITIN No.18107 OF 2010 ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan) The relief sought for in this writ petition is to declare the order of the 1st respondent dated 24.9.2009 as arbitrary and illegal, and consequently to direct the 1st respondent to grant approval in terms of Section 10(23C)(vi) of the Income Tax Act, 1961 (hereinafter called the “Act”). The objects of the petitioner, a society registered under the Andhra Pradesh (Telangana Areas) Public Societies Registration Act, 1350 with registration No.201 of 1989 dated 4.2.1989, were as under: (i) To start educational institutions, libraries and law colleges etc. (ii) To organize social services, and (iii) To do the needful for the poor children and students on social grounds Subsequently the objects are said to have been amended at the meeting held on 13.8.2009, and to have been registered with the Registrar of Societies. The objects, after amendment, are said to be as under: (a) To start educational institutions, libraries and law colleges etc. (b) To organize seminars, workshops, debates, camps and forums etc., to students; (c) To encourage educational activities among the students; (d) To open, run and continue primary, secondary and high schools for students and (e) To help poor people to study The petitioner claims to be running various educational institutions including P.G. Colleges, Engineering colleges etc., after obtaining necessary approval from the appropriate authorities. They also claim to have filed income tax returns seeking exemption under the Act contending that their existence is solely for educational purposes, and not for profit. The petitioner claims to have submitted an application on 31.5.2005 in Form-56-D seeking exemption for the assessment year 2004-05, along with all necessary enclosures, before the Director of Income Tax (Exemption) as their gross collections were likely to exceed Rs.1.00 Crore. They also claim to have filed another application in Form 56D on 26.3.2007, along with all necessary enclosures, seeking exemption from the assessment year 2004-05 onwards. It is their case that, on the oral request of the Director of Income Tax (Exemption), they once again filed another application in Form 56D on 24.9.2008 with all necessary enclosures. The 1st respondent passed order dated 24.9.2009 granting approval under Section 10(23C)(vi) of the Act from the assessment year 2009-10 onwards. The 1st respondent, by another order dated 24.9.2009, refused to entertain the application submitted by the petitioner in so far as it related to the assessment years 2004-05 to 2008-09 on the ground that it was beyond the period of limitation prescribed under the fourteenth proviso to Section 10(23C)(vi) of the Act. It is this order which is under challenge in this Writ Petition on the ground that the petitioner had submitted applications earlier on 31.5.2005 and 26.3.2007; the application dated 24.9.2008 was filed at the request of the 2nd/3rd respondent as the earlier applications filed by the petitioner was misplaced; the 1st respondent ought to have given them an opportunity of being heard before passing the impugned order, which would have enabled them to bring to his notice that they had filed the first application as early as on 31.5.2005; the 1st respondent failed to notice that the amendment, prescribing limitation for submitting an application under Section 10(23C)(vi), came into force only from 1.6.2006 whereas the petitioner had submitted their first application even prior thereto on 31.5.2005. In the counter affidavit filed by the 2nd respondent it is stated that, as per the records in their office, the petitioner did not file any application on 31.5.2005 seeking approval under Section 10(23C)(vi); and their claim that they did so was not evidenced by the records of their office. In so far as the petitioner’s claim to have filed another application on 26.3.2007 is concerned, the 2nd respondent would state that the inward register, pertaining to the period 1.4.2006 to 31.3.2007, was not readily traceable; and, as per their records, the petitioner did not file any application, in Form-56D, either on 31.5.2005 or 26.3.2007. In the counter affidavit, filed on behalf of the 1st respondent, it is stated that the petitioner’s application dated 24.9.2008 was rejected by order dated 24.9.2009 on the ground that the application was submitted beyond the time limit specified in the fourteenth proviso to Section 10(23C); the objects of the petitioner society, as amended on 13.8.2009, would be applicable only from the assessment year 2010-11; the petitioner did not furnish particulars of their having filed their return of income, with necessary evidence such as inward number, date of filing etc; and, as such, their claim that they existed solely for educational purposes, from the assessment year 2004-05 onwards, was not correct. In their rejoinder, the petitioner would submit that their primary object is to provide education without profit motive, their objects are all related to educational purposes only; they had amended their objects only at the instance of the authorities; in so far as the application dated 26.3.2007 is concerned, the 2nd respondent was taking inconsistent stands; the petitioner had filed their application on the said date, and had obtained acknowledgement in the office copy; and the 2nd respondent had given No.0316 to the application filed on 26.3.2007. The scope and amplitude of Section 10(23-C)(vi) of the Income Tax Act, the provisos thereunder and the rules and forms applicable thereto, which were the subject matter of examination in M/s. New Noble Educational Society v. The Chief Commissioner of Income-tax[1], and in M/s. RRM Educational Society, Hyderabad v. Chief Commissioner of Income-tax, Hyderabad[2], can, conveniently, be summarized as under: 1. As Section 20-A of the A.P. Education Act prohibits individuals from establishing educational institutions, it is only Societies/associations/Trusts which can establish educational institutions in the State of Andhra Pradesh. 2. Section 10(23-C) (iiiad) of the Act, read with Rule 2 BC(1) of the Income-tax Rules, stipulates that the income received by a person (i.e., the educational agency-society/trust), on behalf of an educational institution existing solely for educational purposes and not for the purpose of profit, shall not be included in their total income if the aggregate annual receipts of such an educational institution do not exceed Rs.One Crore. 3. Where the annual receipts of an educational institution exceeds Rs. One Crore, the benefit of exclusion from the total income is available not under sub-clause (iiiad) but under sub-clause (vi) of Section 10(23C) whereunder approval is also required to be obtained from the prescribed authority. 4. Except that approval is now required to be obtained from the prescribed authority, Section 10(23C)(vi) is analogous to Section 10(22) as it existed prior to its omission by the Finance Act, 1998 with effect from 1.4.1999. To that extent judicial pronouncements, made in the context of Section 10(22), would equally apply to Section 10(23C) (vi) of the Act. (American Hotel & Lodging Association Educational Institute v. Central Board of Direct Taxes[3]). 5. It would be unreal and hyper-technical to hold that an educational society, running an educational institution solely for educational purposes and not for the purpose of profit, is only a financing body and will not come within the scope of 'other educational institution'. If, in substance and reality, the sole purpose for which the society has come into existence is to impart education at the level of colleges and schools, it should be regarded as an 'educational institution'. (Aditanar Educational Institution v. Additional Commissioner of Income-tax[4]). 6. Educational institutions, which are registered as a Society, would continue to retain their character as such and would be eligible to apply for exemption under Section 10(23C)(vi) of the Act. (Pinegrove International Charitable Trust v. UOI[5]). 7. To be eligible for exemption, under Section 10(23C)(vi) of the Act, it is necessary that there must exist an educational institution. Secondly, such institution must exist solely for educational purposes and, thirdly, the institution should not exist for the purpose of profit. (Commissioner of Income Tax v. Sorabji Nusserwanji Parekh[6]). 8. The recipient of the income must have the character of an educational institution to be ascertained from its objects. If the activity has no co-relation to education, exemption has to be denied. (Aditanar Educational Institution4). 9. The emphasis in Section 10(23C)(vi) is on the word "solely". "Solely' means exclusively and not primarily. (Commissioner of Income-tax, Hyderabad v. Gurukul Ghatkeswar of Hyderabad[7]; Commissioner of Income Tax v. Maharaja Sawai Mansinghji Museum Trust[8]). In using the said expression, the legislature intends to exempt the income of institutions established solely for educational purposes, and not for commercial activities. (Oxford University Press v. CIT[9]). This requirement would militate against an institution pursuing objects other than education. (Vanita Vishram Trust v. Commissioner of Income-tax[10]). Even if one of the objects enables the institution to undertake commercial activities, it would not be entitled for approval under Section 10(23-C)(vi) of the Act. (American Hotel3). 10. It is only if the objects reveal that the very being of the assessee- society, as an educational institution, is exclusively for educational purposes and not for profit, would they be entitled for exemption under Section 10(23-C)(vi) of the Act. (Gurukul Ghatkeswar of Hyderabad7). 11. Imparting of education is regarded as an activity that is charitable in nature. “Education” is not regarded as a trade or business where profit is the motive. (State of Bombay v. R. M. D. Chamarbaugwala[11]; T.M.A. Pai Foundation v. State of Karnataka[12]; Islamic Academy of Education v. State of Karnataka[13]). 12. Section 2(15) of the Income Tax Act defines “charitable purpose” to include “education”. The sense in which the word "education" has been used in Section 2(15) is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word "education", in Section 2(15), has not been used in that wide and extended sense according to which every acquisition of further knowledge constitutes education. What education connotes, in that clause, is the process of training and developing the knowledge, skill, mind and character of students by formal schooling. (Sole Trustee, Loka Shikshana Trust v. C.I.T[14]). This definition of ‘education’ is wide enough to cover the case of an "educational institution" as, under Section 10(23-C)(vi), the "educational institution" must exist "solely" for educational purposes. (Maharaja Sawai Mansinghji Museum Trust8). 13. The element of imparting education to students, or the element of normal schooling where there are teachers and taught, must be present so as to fall within the sweep of Section 10(23-C)(vi) of the Act. Such an institution may, incidentally, take up other activities for the benefit of students or in furtherance of their education. It may invest its funds or it may provide scholarships or other financial assistance which may be helpful to the students in pursuing their studies. Such incidental activities alone, in the absence of the actual activity of imparting education by normal schooling or normal conduct of classes, would not suffice for the purpose of qualifying the institution for the benefit of Section 10(23-C)(vi). (Sorabji Nusserwanji Parekh6). 14. Section 2(15) is wider in terms than Section 10(23-C) (vi) of the Act. If the assessee's case does not fall within Section 2(15), it is difficult to put it in Section 10(23-C) (vi) of the Act. (Maharaja Sawai Mansinghji Museum Trust8). 15. If there are several objects of a society some of which relate to “education”, and others which do not, and the trustees or the managers, in their discretion, are entitled to apply the income or property to any of those objects, the institution would not be liable to be regarded as one existing solely for educational purposes, and no part of its income would be exempt from tax. 16. In other words, where the main objects are distributive, each and everyone of them must relate to “education” in order that the institution may be held entitled for the benefits under Section 10(23-C)(vi) of the Act. 17. If the dominant purpose of an institution is “educational”, another object which is merely ancillary or incidental to the dominant purpose would not disentitle the institution from the benefit. 18. The test which has, therefore, to be applied is whether the object, which is said to be non-educational, is the main object of the institution or it is ancillary or incidental to the dominant object which is “educational”. (ACIT v. Surat Art Silk Manufacturers Association[15]). The test is the genuineness of the purpose tested by the obligation created to spend the money exclusively on "education". If that obligation is there, the income becomes entitled to exemption. (Sole Trustee, Loka Shikshana Trust14). 19. On a conjoint reading of sub-sections (3) and (4) of Section 8 of the A.P. Societies Registration Act, 2001 it is only when the amendment to the objects of a society (educational agency) is intimated and the Registrar, on being satisfied that the amendment is not contrary to the provisions of the Act, registers and certifies such an alteration, would it be a valid alteration under the Act. It is only from the date the Registrar certifies the alteration that the amendment, to the objects of the society, comes into force. 20. In case of a dispute, whether the claim of the assessee to be exempted from tax is admissible or not, it is necessary for the assessee to establish that it is a part of an institution which is engaged solely for educational purposes and not for the purposes of profit, and the income in respect of which exemption is claimed is a part of the income of the institution. (Oxford University Press9). 21. The activities of the institution, its objects, its source of income and its utilization, must be analysed by the prescribed authority to ascertain whether it exists solely for education and not for profit, and it is his duty to ascertain whether the income is applied wholly and exclusively for the educational objects for which the applicant is established. (Surat Art Silk Manufacturers Association15; American Hotel 3). 22. The test of predominant object of the activity is to be seen, whether it exists solely for education and not to earn profit. (Surat Art Silk Cloth Manufacturers Association15; American Hotel3; Pinegrove International Charitable Trust5) . The decisive test is whether, on an overall view of the matter, the object is to carry on educational activities or to make profit. (Aditanar Educational Institution4). 23. While the object of establishing an educational institution should not be to make profit there can, however, be a reasonable revenue surplus which may be used by the educational institution for the purpose of development of education and expansion of the institution. (T.M.A. Pai Foundation12). 24. It is not possible to carry on educational activity in such a way that the expenditure exactly balances the income, and there is no resultant profit. (Surat Art Silk Cloth Manufacturers Association15; American Hotel3; Pinegrove International Charitable Trust5). 25. Profits/surplus, if any, can neither be diverted for any other use or purpose nor can it be used for personal gain or for any other business or enterprise. (Islamic Academy of Education13). 26. Under the third proviso to Section 10(23-C)(vi), the prescribed authority has to ascertain, while examining the genuineness of the activities of the institution, whether the applicant applies its income wholly and exclusively to the objects for which it is established. The applicant has not only to impart, but must also apply its income exclusively for the purposes of, education. (American Hotel3). 27. The words 'not for the purposes of profit' accompanying the words 'existing solely for educational purposes' has to be read and interpreted keeping in view the third proviso to Section 10(23C)(vi) which prescribes the methodology for utilization and accumulation of income at the hands of the educational institution. As a result 85% of the income has to be applied by the educational society for the purpose of education. Capital expenditure, if incurred, for the attainment of such objects has to be deducted from the gross receipts/income. The word 'wholly' in the third proviso refers to the quantum of expenditure and the word 'exclusively' refers to the motive, object or the purpose of expenditure. (Pinegrove International Charitable Trust5). 28. The third proviso indicates that accumulation of income by an educational institution, governed by sub-clause (vi), is not a disabling factor as long as the purpose of accumulation is the application of the income wholly and exclusively for the purpose of education. (Vanita Vishram Trust10). That the third proviso to Section 10(23C)(vi) permits investment and deposits, of its surplus, in a fund means that the institution can have deposits on which it may earn interest. (City Montessori School v. Union of India[16]). 29. The idea underlying the twelfth proviso to Section 10(23-C) is to provide guidance to the prescribed authority as to the meaning of the words "application of income to the objects for which the institution is established". (American Hotel3). 30. In view of the 12th proviso to Section 10(23-C) of the Act, money advanced to another educational institution cannot be treated as application of income to the objects for which the petitioner society is established; such a transaction would only mean that the funds of the applicant society have not been utilized solely for the purposes of education; and the applicant society would, therefore, be disentitled from being granted approval by the prescribed authority under Section 10(23-C)(vi) of the Act. 31. The provisions of Section 13(1)(c) would be attracted in cases where any part of the income, or the property, of a charitable institution is used, directly or indirectly, for the benefit of the person referred to in Section 13(3) of the Act. Under Section 13(2) the income or property of the institution shall, for the purposes of Section 13(1)(a), be deemed to have been used or applied for the benefit of a person referred to in Section 13(3) if any one of clauses (a) to (h) of Section 13(2) are applicable. The person, referred to in Section 13(3), would be benefited only if the amount paid to him constitutes a benefit to him or if clauses (a) to (h) of Section 13(2) are attracted. 32. It is only if the rent paid to the person, referred to in Section 13(3), is more than the prevailing market rates can the recipient of the rent/rental advance be said to have benefited thereby. 33. On a conjoint reading of Section 13(1)(a) with Section 13(2)(a) and 13(2)(g) of the Act, interest free advance given to the Secretary of a Society running an educational institution, (a person who falls within the ambit of Section 13(3)(cc) of the Income-tax Act), would amount to a part of the income or property of the educational institution being used for the benefit of such a person, and the provisions of Section 13(1)(c) of the Act would be attracted thereby. 34. The fourteenth proviso to Section 10(23C) of the Act, in its entirety, was inserted by the Finance Act, 2006 with effect from 1.6.2006 and, prior to its amendment by Finance Act, 2009, required an educational institution which makes an application, on or after the first day of June, 2006, for the purpose of grant of exemption or continuance thereof to make an application at any time during the financial year immediately preceding the assessment year. After its amendment by Finance Act, 2009, with retrospective effect from 1.4.2009, the fourteenth proviso to Section 10(23C) stipulates that where an educational institution, referred to in the first proviso, makes an application, on or after the first day of June, 2006, for the purpose of grant of exemption or continuance thereof, such application shall be made on or before the 30th day of September of the relevant assessment year for which the exemption is sought. 35. The fourteenth proviso to Section 10(23C) has been inserted, inter alia, to provide for a period of limitation for entertaining an application, under Section 10(23C)(vi) for grant of exemption, on or after the 1st of June, 2006. The legislature has, however, not made any provision for condonation of the delay in presenting such an application. 36. The prescribed authority, being a creature of the statute, cannot travel beyond the statutory provisions and does not have the jurisdiction to entertain an application filed under Section 10(23C)(vi) beyond the statutory period of limitation or to condone the delay in presenting the said application. (Ronald Educational and Charitable Trust v. Chief Commissioner, Income Tax[17]). 37. It is evident, from the provisos to Section 10(23C)(vi), that there is a difference between stipulation of conditions and compliance thereof. (Vanita Vishram Trust10). At the initial stage, when an application for exemption is submitted by an educational institution, the scope of inquiry is restricted only to ascertain the genuineness of the activities of such an institution. Such an inquiry may even extend to an examination of the accounts of the institution, application of its income to the object and purposes of education and other cognate aspects. Once, on the basis of the genuineness of the activities of an educational institution, approval is granted for exemption then the monitoring provisions would come into play. (Pinegrove International Charitable Trust5). 38. The applicant must also adhere to the conditions in Form No. 56D (Rule 2CA). One of the conditions is that the assessee will have to submit its audited accounts and balance-sheets for the last three years, along with a note on the examination of accounts, on the activities as reflected in the accounts, and in the annual reports with special reference to appropriation of income in furtherance of the objects of the educational institution. From the audited accounts it can be ascertained whether the funds were utilized for the expansion of the educational institution/activity or for personal profit. (City Montessori School16). 39. In cases where approval, under Section 10(23-C)(vi) of the Act, is initially sought, the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and as being eligible for approval, under Section 10(23-C)(vi) of the Act. In addition, an application in the prescribed proforma should be submitted to the prescribed authority within the time stipulated, and the specified documents should be enclosed thereto. 40. In cases where an application is submitted, seeking renewal of the exemption granted earlier, the prescribed authority shall, in addition to the conditions afore-mentioned, also examine whether the income of the applicant society has been applied solely for the purposes of education in terms of Section 10(23-C)(vi) of the Act, the provisos thereunder, the Income-tax Rules, and the documents enclosed to the application submitted in Form 56D. 41. The threshold conditions are aimed at discovering the actual existence of an educational institution and approval of the prescribed authority for which an application in the standardized form, in terms of the first