*THE HON’BLE SRI JUSTICE V.V.S.RAO AND * THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + W.P.Nos.21248, 21251, 21257, 21266, 2327, 2331, 2333, 7335, 9697, 12254, 12374, 12946, 6508, 15418, 15870 OF 2010 W.P.Nos.21248 OF 2010: % Dated 11-11-2010 # M/S. New Noble Educational Society, Flat No.201, Sai Asram Apartments, Ravindranagar Colony, Habsiguda, Hyderabad rep., by its General Secretary Smt. K. Anasuya. …. Petitioner Vs. $ The Chief Commissioner of Income-tax – 1, Income Tax Towers, A.C. Guards, Hyderabad and another. …. Respondents ! Counsel for the Petitioner: Sri K. Vasantkumar ^ Counsel for the Respondents: Sri J.V. Prasad, Senior Standing Counsel for Income-tax <GIST: > HEAD NOTE: ? Cases referred [1] (2008)301 ITR 86 (SC) 2 (1997)224 ITR 310 (SC) 3 (2010)327 ITR 73 (P &H) 4 (1993) 201 ITR 939 5 Judgment of APHC DB in R.C. No.35 of 1996 dated 29.09.2010 6 (1988) 169 ITR 379 (RAJ) 7 (2001) 247 ITR 658 (SC) 8 (2010) 327 ITR 121 (Bombay) 9 (1980) 12 ITR page 1 (SC 10 (2002) 8 SCC 481 (SC) 11 (2003)6 SCC 697 12 (2009) 315 ITR 48 (Allahabad) 13 (2000) 1 ALT 256 (Andhra Pradesh) 14 (2001)6 ALT 539 15 2003 (6) ALT 62 (DB) 16 AIR 1957 SC 699 17 AIR 2003 SC 355 18 (1975) 101 ITR 234(SC 19 (1996) 217 ITR 746)(S.C) THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN W.P.Nos.21248, 21251, 21257, 21266, 2327, 2331, 2333, 7335, 9697, 12254, 12374, 12946, 6508, 15418, 15870 OF 2010 COMMON ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan) In this batch of writ petitions rejection by the 1st respondent, of the applications submitted by the petitioners for grant of approval under Section 10(23C)(vi) of the Income Tax Act (hereinafter called the “Act”), is under challenge as being illegal and arbitrary. A consequential direction is sought to the Chief Commissioner of Income Tax to grant approval, under Section 10(23C)(vi) of the Act, to the petitioner–societies from the year 2009-2010 onwards. While Sri K. Vasantkumar, Sri Y.Ratnakar, Sri A.V. Krishna Koundinya, Sri C.V. Narasimham and Sri Ch. Pushyam Kiran put forth their submissions on behalf of the petitioner – societies, the impugned orders were sought to be sustained, on behalf of the Income Tax Department, by Sri J.V. Prasad, Learned Senior Standing Counsel. To enable Counsel on either side to focus on the issues which arise for consideration in this batch of Writ Petitions, and with their consent, the following questions were framed as necessitating adjudication:- (1) Whether 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 being eligible for approval, under Section 10(23C)(vi) of the Act? (2) Whether registration, under Section 43 of A.P. Act No.30 of 1987, is a condition precedent for seeking approval under Section 10(23C)(vi) of the Income Tax Act, 1961? (3) Whether the certificate issued by the Commissioner of Endowments, as the appropriate authority under Section 43 of A.P. Act No.30 of 1987, is conclusive proof of an assessee being a charitable institution existing solely for the purpose of education? (4) Even in case the assessee produces a certificate of registration under Section 43 of A.P. Act No.30 of 1987 can the Commissioner of Income Tax refuse approval/sanction under Section 10(23C)(vi) of the Income Tax Act, 1961? Question No.1: It is contended, on behalf of the petitioners, that Section 10(23-C) (vi) of the Act makes a distinction between the educational institution and the society/educational agency running it; approval, under Section 10(23C)(vi), is sought only for the educational institution, and not for the society/educational agency; Section 10(23-C)(vi) places emphasis on receipts and, since the amounts are received by the petitioner – societies on behalf of the educational institution, it is only the objects of the educational institution which should be taken into consideration, and not that of the society; the society, which runs the educational institution, is entitled to pursue objects other than those relating exclusively for educational purposes; at the stage of grant of approval, under Section 10(23C)(vi), only the objects of the society are required to be examined, and not the manner of application of funds by it; the words ‘solely’ in Section 10(23C)(vi) is redundant; and the other objects of the petitioners are also ancillary to “education”. On the other hand, Learned Senior Standing Counsel would submit that it is immaterial whether the society pursues all its objects as enumerated in its trust deed; even if an object is not pursued in real terms in a particular year, the society can pursue it in any other year as it has the mandate under the objects mentioned in its trust deed; such objects of a trust fall foul of the conditions specified in Section 10(23C) (vi); exemption is granted to a society and not to any limb of a society engaged in a particular activity; it is, therefore, necessary that all the aims and objects mentioned in the trust deed are exclusively for education, and not for any other purpose; the clauses in the trust deed should not be ambiguous allowing the society a wide scope to indulge in any other activity which are strictly not for promotion of education; in its instruction No.1112 dated 29.10.1977, the CBDT had explicitly prohibited spending of “surplus” of an educational institution for non- educational purposes; violation thereof implied that the society did not exist solely for educational purposes; even if no amount is spent for non-educational purposes, the society would not be entitled for exemption under the Act if its existence is not solely for educational purposes; the surplus, which societies seeking approval make, should again be ploughed back for educational purposes, and not utilized for any other object; and diversion of funds to achieve objects, which are not solely for educational purposes, would disentitle the society from being granted approval. In view of the prohibition under Section 20-A of the A.P. Education Act, denying individuals the right to establish educational institutions, it is only Societies/ associations/Trusts which can establish educational institutions in the State of Andhra Pradesh. In view of Section 10(23-C) (iiiad) of the Act, read with Rule 2 BC(1) of the Income-tax Rules, 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. On the other hand, 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. Section 10(22), prior to its omission by the Finance Act, 1998 with effect from 1.4.1999, excluded the income of an educational institution, existing solely for educational purposes and not for the purposes of profit, from the “total income”. Except that approval is now required to be obtained from the prescribed authority, Section 10(23C) (vi) is analogous to Section 10(22). 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[1]). An educational society, running an educational institution solely for educational purposes and not for the purpose of profit, must be regarded as 'other educational institution' under Section 10(23-C)(vi) of the Act. It would be unreal and hyper-technical to hold that the assessee-society 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 assessee has come into existence is to impart education at the level of colleges and schools, such an educational society should be regarded as an 'educational institution'. (Aditanar Educational Institution v. Additional Commissioner of Income-tax[2]). 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[3]). The distinction sought to be made between the society, and the educational institution run by it, does not, therefore, merit acceptance. In order 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[4]). In deciding the character of the recipient of the income, it is necessary to consider the nature of the activities undertaken. If the activity has no co-relation to education, exemption has to be denied. The recipient of the income must have the character of an educational institution to be ascertained from its objects. (Aditanar Educational Institution2). 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[5]; Commissioner of Income Tax v. Maharaja Sawai Mansinghji Museum Trust[6]). In using the said expression, the legislature has made it clear that it intends to exempt the income of the institutions established solely for educational purposes and not for commercial activities. (Oxford University Press v. CIT[7]). This requirement would militate against an institution pursuing objects other than education. (Vanita Vishram Trust v. Commissioner of Income- tax[8]). 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 Hotel & Lodging Association Educational Institute1). 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 the assessee be entitled for exemption under Section 10(23-C) (vi) of the Act. (Gurukul Ghatkeswar of Hyderabad5). 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 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 Press7). 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. (ACIT v. Surat Art Silk Manufacturers Association[9]; American Hotel & Lodging Association Educational Institute1). 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 Foundation v. State of Karnataka[10]). 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 Association9; American Hotel & Lodging Association Educational Institute1; Pinegrove International Charitable Trust3). Profits/surplus cannot be diverted for any other use or purpose, and cannot be used for personal gain or for any other business or enterprise. (Islamic Academy of Education v. State of Karnataka[11]). 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 Association9; American Hotel & Lodging Association Educational Institute1; Pinegrove International Charitable Trust3). 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 Institution2). It is useful, in this context, to refer to some of the provisos to Section 10(23-C)(vi) of the Act. The first proviso requires the applicant to obtain initial approval from the prescribed authority, in terms of Section 10(23C)(vi), by making an application in the standardized form. The second proviso not only requires the prescribed authority to vet the application, but also indicates his powers and duties. While considering the application the prescribed authority is empowered to call for such documents, including annual accounts or other information from the applicant, as are necessary to verify the genuineness of the activities of the applicant institution. Under the third proviso, 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 Hotel & Lodging Association Educational Institute1). 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 School v. Union of India[12]). 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 Trust3). 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 Trust8). 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 School12). 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 Trust8). 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 Trust3). 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 proviso, has to be given by every applicant. If the pre-requisite condition, of actual existence of the educational institution, is fulfilled then the question of compliance with the requirements, contemplated by various provisos, would arise. Only if the educational institution actually exists for educational purposes alone should it be permitted to operate subject to the monitoring conditions to be stipulated by the prescribed authority. (American Hotel & Lodging Association Educational Institute1; Pinegrove International Charitable Trust3). Compliance of the monitoring conditions/requirements under the third proviso, 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, can be stipulated as conditions by the prescribed authority subject to which approval may be granted, provided they are not in conflict with the provisions of the Act. While imposing conditions, subject to which approval is granted, the prescribed authority may insist on a certain percentage of the accounting income to be utilized/applied for imparting education. Similarly, the prescribed authority may grant approval on such terms and conditions as it deems fit in cases where the institution applies for initial approval for the first time. The prescribed authority must give an opportunity to the applicant- institution to comply with the monitoring conditions which have been stipulated for the first time by the third proviso. However, after grant of approval, if it is brought to the notice of the prescribed authority that the conditions, on which approval was given, are breached or that circumstances mentioned in the thirteenth proviso exists, then the prescribed authority can withdraw the approval earlier given by following the procedure mentioned in that proviso. Stipulation of monitoring conditions is different from compliance of those conditions. Compliance or non-compliance can only be gauged at the assessment stage, 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. (American Hotel & Lodging Association Educational Institute1; Vanita Vishram Trust8). We, accordingly, hold that 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. However, 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. Question No.1 is answered accordingly. Question Nos.2, 3 and 4: As these questions are inter-linked, and inter-connected with each other, it is convenient to examine all of them together. Learned counsel for the petitioners would submit that, while the petitioners are societies running educational institutions and are not making profit, they are not charitable institutions; the Income Tax Act does not require registration, under the Andhra Pradesh Charitable and Hindu Religious Institutions & Endowments Act, 1987, (hereinafter referred to A.P. Act 30 of 1987), as a condition precedent for grant of approval; such a requirement is conspicuously absent in the provisos to Section 10(23C)(vi); the Act is a complete code in itself and other Acts, including A.P. Act 30/87, cannot form the basis for denying the petitioners the benefit of approval; provisions of one Act should not be either linked to or considered with reference to the provisions of another enactment; the objects and reasons, and the various provisions, of A.P. Act 30/87 only regulate and protect the property of charitable institutions; the petitioners’ activities are not prohibited under any law much less A.P. Act 30/87; non-registration under A.P. Act 30/87 does not result in discontinuance of the petitioners’ activities; and the penal provision prescribed therein is only to comply with the requirements of registration. On the other hand Sri J.V. Prasad, Learned Senior Standing Counsel, would submit that most of the petitioner – societies are registered under Section 12 of the Act as charitable institutions; an applicant is not entitled for approval under Section 10(23C)(vi) if they violate the provisions of any other law; a legal entity, carrying on a legal activity, is bound to follow all laws enacted by the Legislature; A.P. Act 30/87 was enacted to regulate charitable institutions in the State; while the said Act applies both to registered and unregistered charitable institutions, it requires all charitable institutions to be registered thereunder; the Commissioner of Endowments has confirmed that educational institutions, though running on no profit basis, required registration under Section 43 of A.P. Act 30 of 1987; registration of charitable institution is obligatory in terms of Section 44; the petitioners’ endeavour was to remain out of the purview of the various regulatory provisions of A.P. Act 30/87; and failure to register is not merely technical. A.P. Act 30 of 1987 (which repealed the earlier A.P. Act 17 of 1966) was enacted with a view to consolidate and amend the law relating to the administration and governance of Charitable and Hindu Religious Institutions and Endowments in the State of Andhra Pradesh. This Act came into force with effect from 23-5-1987. Section 1(3)(a) thereof stipulates that the said Act is applicable to all public charitable institutions whether registered or not in accordance with the provisions of the Act. The expression "public charitable institutions" is defined, in the Explanation thereto, to include every charitable institution the administration of which is for the time being, amongst others, carried on by a society. 'Charitable institution', in terms of Section 2(4) of A.P. Act 30 of 1987, means any establishment, undertaking, organisation or association formed for a charitable purpose. A. P. Act 30 of 1987 is applicable to all charitable institutions regardless of religion. (Parsi Zoroastrian Anjuman of Secunderabad and Hyderabad v. Deputy Commissioner, Endowments[13]). 'Charitable purpose', under Section 2(5) of A.P. Act 30 of 1987, brings within its ambit, amongst others, education also. To find out the object for which a society has been established, the provisions of Section 2(5) of A.P. Act 30 of 1987, which only exclude those 'exclusively of a religious nature’, also has a role to play. (Commissioner of Endowments v. All India Sai Seva Samaj[14]). Application of the provisions of A.P. Act 30 of 1987 to all public charitable institutions, whether registered or not in accordance with the provisions of the Act, continues to be the same as in the repealed A.P. Act 17 of 1966. Chapter IV of A.P. Act 30 of 1987 relates to registration of charitable institutions. Section 43 relates to registration of charitable institutions and, under sub-section (1) thereof, the trustee or other person in charge of the management of every charitable institution is required to make an application for its registration to the concerned Assistant Commissioner. Under Section 43(5), on receipt of the application, the Assistant Commissioner shall, after making such enquiry as he thinks fit and after hearing any person having interest in the institution, pass an order directing its registration, and to grant a certificate of registration containing the particulars furnished in the application with the alterations, if any, made by him as a result of his enquiry. Section 43(6) requires the particulars relating to every institution, contained in the certificate of registration, to be entered in the “Register of Institutions and Endowments" maintained by the Assistant Commissioner. One copy thereof is required to be furnished to the Deputy Commissioner, and another to the Commissioner. Under Section 43 (11) where any trustee or other person fails to apply for registration of a charitable institution, within the time specified, he shall be punishable with fine which may extend to one thousand rupees. Section 44 relates to the power of the Commissioner to have the institution registered and, thereunder, where any trustee or other person in charge of the management of a charitable institution fails to apply for registration of the