IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CWP No. 858 of 2009 Date of Decision: January 29, 2010 Kashatriya Sabha Maharana Partap Bhawan, Kurukshetra …Petitioner Versus Union of India and another …Respondents CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE JASWANT SINGH Present: Mr. K.L. Goyal, Senior Advocate, with Mr. Sandeep Goyal, Advocate, Mr. Ravi Shankar, Advocate, Mr. S.K. Mukhi, Advocate, Mr. Pankaj Jain, Advocate, Mr. Akshay Bhan, Advocate, and Mr. Rohit Sud, Advocate, Ms. Radhika Suri, Advocate, for the petitioner(s). Mr. S.K. Garg Narwana, Advocate, Ms. Urvashi Dhugga, Advocate, Mr. Rajesh Sethi, Advocate, and Mr. Vivek Sethi, Advocate, for the revenue. 1. To be referred to the Reporters or not? Yes 2. Whether the judgment should be reported in the Digest? Yes M.M. KUMAR, J. 1. This order shall dispose of a bunch2 of petitions as the issues raised are common. The facts of all the cases in brief have been referred. It is, however, pertinent to mention that all the issues in this bunch of petitions are common to the decision rendered today by us in another bunch of petitions titled as Pinegrove International Charitable Trust v. Union of India and others (C.W.P. No. 6031 of 2009) and 20 other petitions. The only difference is that in those cases exemption granted under Section 10(23C)(vi) of the Income-tax Act, CWP No. 858 of 2009 1961 (for brevity, ‘the Act’) was withdrawn whereas in this bunch, the exemption has not been granted. However, in sum and substance the controversy is substantively the same as the grounds of withdrawal and non-grant of exemption are identical. Accordingly, first the facts of all these cases be noticed. 2. FACTS 2.1 CWP No. 20574 of 2008 2.1.1 Amir Education Society, Faridabad-petitioner has challenged order dated 30.9.2008 (P-8) passed by the Chief Commissioner of Income Tax, Panchkula, rejecting the application for grant of approval for exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2008-09 to 2010- 11. The petitioner is a Society registered under the Societies Registration Act, 1860. The petitioner-Society was formed with the object of establishing a progressive School at Faridabad with a view to impart education. It has been claimed that the founder members had given their agricultural land, total measuring 65 Kanals 15 Marlas, on lease for a period of 30 years on nominal lease rent of Rs. 1 per year for the exclusive use of a school, namely, Modern Delhi Public School. On the aforesaid land the construction of school building was to be made. The construction of the school building was started in the financial year 2007-08, however, the school started functioning from the financial year 2006-07 itself in a building taken on rent from Haryana Urban Development Authority in Sector 21-C, Faridabad. On 22.12.2007, the petitioner-Society applied for grant of exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2008-09 onwards in the prescribed Form 56-D. A notice of hearing dated 14.8.2008 was issued to the petitioner-Society. It was directed to furnish certain clarifications/information as also copy of the audit report for the assessment year 2008-09. 2.1.2 The case of the petitioner-Society for grant of exemption in respect 2 CWP No. 858 of 2009 of assessment years 2008-09 to 2010-11 was taken up by the Chief Commissioner of Income Tax, Panchkula. The Chief Commissioner, vide the impugned order dated 30.9.2008, rejected the claim of the petitioner-Society. At the outset it has been observed by the Chief Commissioner of Income Tax that out of the 11 members of the petitioner-Society, 9 members belongs to one Girdhar family, who control and manage the affairs of the petitioner-Society. However, none of them is a outstanding educationist. All the key posts in the petitioner-Society are manned by the male members of the Girdhar family. 2.1.3 Some discrepancies regarding unsecured loans advanced to two members, namely, Sarvshri Amir Chand and Davinder Kumar have been noticed. It has been found that there was vast difference in the amounts of loan shown in the balance sheets as on 31.3.2007. The Chief Commissioner of Income Tax also considered the report of the Commissioner of Income Tax, Faridabad, dated 11.9.2008, who has pointed out that the discrepancies in the balances of the President and Vice-President of the petitioner-Society as on 31.3.2007 was not a clerical error but similar discrepancies were also noticed during the assessment year 2006-07. It has further been noticed that the assessee-petitioner has not filed copy of Form No. 10BB and the balance sheet as on 31.3.2008. 2.1.4 In para 8 of the impugned order, the Chief Commissioner has also noticed shortcomings with regard to expenditure of Rs. 79,29,132/- by the petitioner-Society under the head of Charge of Land Use, which are stated to have been paid by Shri Amir Chand to the Municipal Corporation in respect of the land lease to the Society but the same have been accounted in the books of accounts of the Society. 2.1.5 It has further been found that in the balance sheet and income & expenditure account of the school for the year ending 31.3.2007, the repairs of the school building have been shown whereas there was no building. On account 3 CWP No. 858 of 2009 of rent, a substantial amount of Rs. 53.87 lacs has been debited in the income and expenditure account of the school out of the total expenditure (including depreciation) of Rs. 1.35 crores in the year ending 31.3.2007. 2.1.6 The Chief Commissioner has also referred to the objects of the petitioner-Society, as contained various paras of the Memorandum of Association and came to the conclusion that the same are repugnant to the condition prescribed in clause (b) of the un-numbered third proviso of Section 10 (23C) of the Act as the petitioner-Society has power to invest/deposit its funds in forms or modes other than those specified in Section 11(5) of the Act. 2.1.7 It has also been found that there is intermingling of the accounts of the members of the Girdhar family and of the petitioner-Society. The assets of the petitioner-Society can very easily be reverted back to Shri Amir Chand or his other family members. Shri Amir Chand, Shri Davinder Kumar and his son have advanced substantial loans to the petitioner-Society. Though it is shown that they are not carrying any interest but it is immaterial since all the assets of the Society are under their control. 2.1.8 In para 13 of the impugned order, it has been specifically noticed that as per Rule 7 of the Rules and Regulations of the petitioner-Society, any donor of Rs. 51,000/- and above can nominate one pupil for admission to a school belonging to the Society. Accordingly, it has been inferred that this clause gives an unfair advantage to the rich vis-à-vis poor as far as admissions in the school are concerned. This also shows that educational institution of the petitioner-Society is guided by commercial considerations. 2.1.9 After considering all the aforementioned aspects, the Chief Commissioner of Income Tax finally reached the conclusion that the activities of the petitioner-Society cannot be regarded as genuine and the condition for grant of exemption under Section 10(23C)(vi) of the Act i.e. ‘the educational 4 CWP No. 858 of 2009 institution should be existing solely for educational purposes and not for the purposes of profit’ is not satisfied in the instant case. Thus, he has rejected the claim of the petitioner-Society. 2.2 CWP No. 858 of 2009 2.2.1 Kshatriya Sabha, Kurukshetra-petitioner has challenged order dated 25.4.2008 (P-4) passed by the Chief Commissioner of Income Tax, Panchkula, rejecting the application for grant of approval for exemption under Section 10 (23C)(vi) of the Act in respect of assessment years 2007-08, 2008-09 and 2009- 10. The petitioner is a Society registered under the Societies Registration Act, 1860. It has been running two schools at Kurukshetra, which are affiliated to Central Board of School Education, New Delhi. It is claimed that the petitioner- Society’s educational institution is existing solely for educational purposes and not for the purpose of profit. On 30.1.2007, the petitioner-Society applied for grant of exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2007-08, 2008-09 and 2009-10. 2.2.2 The Commissioner of Income-tax, Karnal, was asked to furnish a report, who in turn forwarded the detailed report of the Assessing Officer, vide letter dated 22.2.2008. The Assessing Officer did not recommend the case of the petitioner-Society for exemption under Section 10(23C)(vi) of the Act, inter alia, on the ground that a portion of the income of the assessee has been applied for purposes other than educational purposes, which is not exempted under Section 10(23C) and is taxable. The Assessing Officer also pointed out that the kitchen expenses, which were related to purposes other than the educational purposes, during the assessment years 2003-04 to 2007-08 had been debited in the income and expenditure account of the assessee. It was also reported that additions of Rs. 1,50,468/- in respect of assessment year 2003-04 and Rs. 1,48,409/- in respect of assessment year 2004-05 have been made while completing the 5 CWP No. 858 of 2009 assessments under Section 143(3) of the Act. It was also mentioned by the Assessing Officer in his report that the aims and objects of the assessee-petitioner are to improve the social status of their community and the kitchen expenses referred to above were, in fact, incurred on the members of the petitioner- Society/donors, who visited Kurukshetra, therefore, the same have been used for their hospitality. The Commissioner of Income-tax, Karnal, vide his letter dated 2.4.2008, also endorsed the views expressed by the Assessing Officer holding that the activities and objects of the petitioner-Society are not solely for educational purposes. 2.2.3 Thereafter, an opportunity of being heard was afforded to the assessee-petitioner asking it to explain as to how it was eligible for exemption under Section 10(23C)(vi) of the Act. It was also asked to furnish copies of Form No. 10BB for the assessment year 2007-08, balance sheets of the school and Society as on 31.3.2007 and income and expenditure account for the financial year 2006-07. On 10.4.2008, the petitioner-Society filed its written submissions as well as the documents called for. The assessee-petitioner took the plea that it had filed an appeal before the Commissioner of Income Tax (Appeals), Karnal, against the additions made by the Assessing Officer for the assessment year 2004-05, who deleted the same vide order dated 3.3.2008. On being asked to do so, the Commissioner of Income-tax, Karnal, again forwarded another comprehensive report of the Assessing Officer, vide letter dated 15.4.2008, stating that detailed facts and reasons had been given by the Assessing officer for making the additions under Section 143(3) in respect of assessment year 2003-04 and 2004-05 and that the assessee has not furnished correct facts of its activities before the CIT(A). 2.2.4 On 17.4.2008, the assessee-petitioner was again asked to explain its 6 CWP No. 858 of 2009 position. Simultaneously, the Commissioner of Income-tax, Karnal, was asked to send his further report and specific comments as to whether the assessee- petitioner qualifies for grant of exemption under Section 10(23C)(vi) as also to intimate whether any appeal has been preferred against the order of the CIT (A). 2.2.5 On 21.4.2008, Commissioner of Income-tax, Karnal, again sent his report to the effect that the assessee-petitioner’s case is of misapplication of funds for non-educational purposes and not for the attainment of the declared objects, therefore, it did not qualify for exemption. On 23.4.2008, the assessee- petitioner again filed its written submissions reiterating that the CIT (A) has deleted the additions made by the Assessing Officer for the assessment year 2004-05. 2.2.6 In the aforementioned factual premise, the Chief Commissioner of Income-tax, Panchkula, proceeded to decide the claim of the petitioner-Society for grant of exemption under Section 10(23C)(vi) of the Act and in para 13 of the impugned order held as under:- “13. It is seen that these factually specific and categorical findings of the Assessing Officer have not been plausibly rebutted by the assessee inspite of the two opportunities of being heard given to it. A perusal of the enclosures with the report of the Assessing Officer also reveals that apart from kitchen expenses, certain function expenses have also been debited by the assessee in its books of accounts on a regular basis. The assessee has also not come forward with any details as to for which specific functions/ceremonies of the School these expenses have been incurred. The AO has reported that similar types of expenses are being debited in the accounts in the subsequent years also. In a nutshell, from the facts brought out 7 CWP No. 858 of 2009 on record, it is seen that the income of the Society/School is not being utilized exclusively for educational purposes and it is, therefore, clear that the educational institution run by the Society is not existing solely for educational purposes. The basic requirement of the sub-clause (vi) of clause (23C) of Section 10 is therefore, not fulfilled by the assessee applicant. The application of the assessee for the grant of exemption/approval u/s 10(23C)(vi) is, therefore, hereby rejected.” 2.2.7 It is, however, relevant and pertinent to mention here that against the order passed by the CIT (Appeal), dated 3.3.2008 (P-2) and appeal by the revenue was filed before the Income Tax Appellate Tribunal, Chandigarh Bench (A), which has been dismissed by the Tribunal vide its order dated 20.10.2008 (P-3). 2.3 CWP No. 2721 of 2009 2.3.1 Sanathan Dharam Adarsh Vidayala, Gurgaon-petitioner has challenged order dated 13.1.2009 (P-6) passed by the Chief Commissioner of Income Tax, Panchkula, rejecting the application for grant of approval for exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2008-09, 2009-10 and 2010-11. The petitioner is an educational institution registered as Society under the Societies Registration Act, 1860. It has been running two schools. The main object of the petitioner-Society is to manage schools and to do such things as are incidental thereto. The petitioner-Society was granted exemption under Section 10(23C)(vi) of the Act in respect of assessment years 1999-2000 to 2001-02 and 2002-03 to 2004-05 vide orders dated 11.10.2006 and 5.5.2006 respectively. It is claimed that on 14.3.2005, the petitioner-Society applied for grant of exemption under Section 10(23C)(vi) of 8 CWP No. 858 of 2009 the Act in respect of assessment years 2005-06 to 2007-08 in the prescribed Form 56-D, however, no orders were passed on the aforementioned application. It has further been asserted that on 20.2.2008, the petitioner-Society filed application in Form 56D for grant of exemption under Section 10(23C)(vi) of the Act in respect of assessment year 2008-09 to 2010-11. On 16.10.2008, it filed information sought by the Chief Commissioner of Income Tax, Panchkula, while holding camp office held at Gurgaon on 14.10.2008. 2.3.2 The case of the petitioner-Society for grant of exemption in respect of assessment years 2008-09 to 2010-11 was taken up by the Chief Commissioner of Income Tax, Panchkula. The Chief Commissioner, vide the impugned order dated 13.1.2009, rejected the claim of the petitioner-Society primarily on the ground that the educational institution being run by the petitioner-Society is generating substantial surplus year after year, which has ranged from 33.84% to 39.36% in the last four years. Even after reducing depreciation, the surplus/excess of income over expenditure in all these years is found to be quite high reaching upto 30.48% in the financial year 2006-07. The Chief Commissioner noticed the income and expenditure accounts of the petitioner Society for the last four years starting from the year ending on 31.3.2005 upto 31.3.2008 and found that the surpluses/profits generated by the educational institutions cannot be regarded as merely incidental and the same are systematic and substantial. The Chief Commissioner after relying upon the judgment of the Uttrakhand High Court rendered in the case of CIT v. M/s Queens Educational Society, (2009) 177 Taxman 326, came to the conclusion that the petitioner-Society is consistently and systematically generating profits and surpluses year after year and merely because it is making some capital expenditure for the assets of the schools out of this income, is not enough to 9 CWP No. 858 of 2009 claim exemption. 2.3.3 The other ground for rejecting the claim of the petitioner-Society for grant of exemption is evident from perusal of para 14 of the impugned order. The Chief Commissioner has noticed that the petitioner-Society had not filed the audit reports in Form No. 10BB for the assessment years 2006-07 to 2008-09, which are required to be filed mandatorily along with the returns of income under un-numbered tenth proviso of Section 10(23C) of the Act. Laying stress on the word ‘solely’, which appears in Section 10(23C)(vi) of the Act, the Chief Commissioner has given a finding that it cannot be said that the petitioner- Society and the educational institution run by it are existing solely for the purpose of education and not for the purpose of profit. 2.4 CWP No. 4954 of 2009 2.4.1 The Maharaja Aggarsain Public School Society, Kurukshetra- petitioner has challenged order dated 3.11.2009 (P-4) passed by the Chief Commissioner of Income Tax, Panchkula, rejecting the application for grant of approval for exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2008-09 onwards. The petitioner is a charitable Society established in 1981 and registered under the Societies Registration Act, 1860. It has been running a co-educational English Medium Public School upto +2 standard at Kurukshetra, which is affiliated to Central Board of School Education, New Delhi. The main object of the petitioner-Society is to educate the rural children with the latest and modern techniques of educational practices. The petitioner-Society was granted exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2004-05 and 2005-06 to 2007-08 vide orders dated 4.9.2006 and 29.10.2007 respectively. It is claimed that the petitioner- Society’s educational institution is existing solely for educational purposes and not for the purpose of profit. On 19.2.2008, the petitioner-Society applied for 10 CWP No. 858 of 2009 grant of exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2008-09 onwards in the prescribed Form 56-D. 2.4.2 The case of the petitioner-Society was taken up by the Chief Commissioner of Income Tax, Panchkula and on 16.10.2008 the petitioner- Society filed its written submissions. The Chief Commissioner, vide the impugned order dated 3.11.2008, rejected the claim of the petitioner-Society primarily on the ground that the educational institution being run by the petitioner-Society is generating substantial surplus year after year and the excess of income over expenditure after excluding depreciation was 34.83% during the year ending 31.3.2008. The Chief Commissioner noticed the income and expenditure accounts of the petitioner Society for the last five years starting from the year ending on 31.3.2004 and upto 31.3.2008 and found that without considering depreciation the actual surplus of the educational institution in question has ranged from 32.02% to 42.35% during those years. It has been further pointed out that even if the depreciation is taken into account, the surplus/excess of income over expenditure in all these years is very high and ranges from 26.22% to 35.24% and after incurring the capital expenditure the assessee-petitioner is retaining substantial surplus in its books of accounts year after year. The Chief Commissioner after relying upon the judgment of the Uttrakhand High Court rendered in the case of M/s Queens Educational Society (supra) came to the conclusion that the petitioner-Society is consistently and systematically generating profits and surpluses year after year and merely because it is making some capital expenditure for the assets of the schools out of this income, is not enough to claim exemption. Laying stress on the word ‘solely’, which appears in Section 10(23C)(vi) of the Act, the Chief Commissioner has given a finding that it cannot be said that the petitioner- 11 CWP No. 858 of 2009 Society and the educational institution run by it are existing solely for the purpose of education and not for the purpose of profit. 2.5 CWP No. 6343 of 2009 2.5.1 Lord Jesus Education Society, Gurgaon-petitioner has challenged order dated 3.11.2008 (P-5) passed by the Chief Commissioner of Income Tax, Panchkula, rejecting the application for grant of approval for exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2008-09 to 2010- 11. The petitioner is a Society registered under the Societies Registration Act, 1860. The main object of the petitioner-Society is to start, maintain or otherwise manage schools, hostel, libraries, reading rooms, or other centers of similar nature. The petitioner-Society’s aim is to help, encourage and assist in spreading education for all classes of citizens of India and service to humanity. It has been running three schools for imparting education. The petitioner-Society was granted exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2002-03 to 2004-05 and 2005-06 to 2007-08 vide orders dated 4.5.2006 and 30.5.2007 respectively. It is claimed that on 19.12.2007, the petitioner- Society applied for grant of exemption under Section 10(23C)(vi) of the Act in respect of assessment years 2008-09 to 2010-11 in the prescribed Form 56-D. A show cause notice dated 14.8.2008 was issued to the petitioner-Society. It was directed to furnish complete details of loan transactions and to clarify as to whether the funds of the institution have been invested in modes specified under Section 11(5) of the Act. The petitioner-Society was further required to explain the reasons for not filing the audit reports in Form 10BB in respect of assessment years 2006-07 to 2008-09 along with the return of income of these years. On 8.9.2008, the petitioner-Society furnished the required information. 2.5.2 The case of the petitioner-Society for grant of exemption in respect of assessment years 2008-09 to 2010-11 was taken up by the Chief 12 CWP No. 858 of 2009 Commissioner of Income Tax, Panchkula. The Chief Commissioner, vide the impugned order dated 3.11.2008, rejected the claim of the petitioner-Society. It has been observed by the Chief Commissioner of Income Tax that report of the Commissioner of Income Tax, Faridabad, dated 15.9.2008, was received to the effect that the petitioner-Society has lent a very substantial amount of several lacs of rupees to Shri Ashok Sardana, a Governing Body member, which was not in accordance with the provisions of Section 11(5) of the Act. The CIT, Faridabad, did not recommend the case of the petitioner-Society for approval under Section 10(23C)(vi) of the Act. It has further been noticed that the audit reports in form No. 10BB were not filed along with the respective returns by the petitioner-Society. 2.5.3 With regard to advancement of loan to Shri Ashok Sardana, the stand taken by the petitioner-Society in its reply dated 8.9.2008 was that in the year 2001 they decided to shift the Preparatory School to another building to make available the rooms for XI and XII classes. Since no premises in the vicinity of the school were available and the authorities did not allow running of the school in a residential area, therefore, a loan of Rs. 5,50,000/- was given to Shri Ashok Sardana on 1.6.2001 for construction. It was further stated that interest @ 14.5% has been charged on the said loan. The balance of the loan as on 31.3.2007 was Rs. 4,46,456/-. 2.5.4 After considering the aforementioned reply, in para 8 of the impugned order the Chief Commissioner of Income Tax came to the conclusion that if a building was required for the purposes of the school then as to why the same was not acquired or constructed in the name of the school or of the Society itself and what was the necessity to advance the loan in the name of the Trustee. It has, thus, been found that the funds of the petitioner-Society have not been 13 CWP No. 858 of 2009 utilised/invested in terms of clause (b) of the un-numbered third proviso of clause (23C) of Section 10 of the Act. The petitioner-Society has also not complied with the provisions of Section 11(5) of the Act. The Chief Commissioner has further opined