THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN W.P.Nos.9450 and 9462 of 2008 COMMON ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan) The orders passed by the Chief Commissioner of Income Tax, Hyderabad – III, under Section 10(23C)(vi) of the Income Tax Act, 1961, are under challenge in these two writ petitions. The petitioner in W.P. No.9450 of 2008 is a Trust. For the assessment years 2004-05 to 2006-07 the Chief Commissioner, by his order dated 28.2.2006, granted them exemption under Section 10(23C)(vi) of the Income Tax Act (hereinafter referred to as the “Act”). Seeking a similar exemption, for the assessment years 2007-08 to 2011-12, the petitioner submitted an application to the 1st respondent on 12.03.2007. The Chief Commissioner rejected the petitioner’s request, for renewal of exemption, by his order dated 26.3.2008 holding that the settlor had changed the trustees four times between 2000 and 2004; in the supplementary deeds he had styled himself as ‘appointer’; in that capacity he had appointed three new trustees, and had accepted the resignation of the existing trustees; Clause 34, of the original trust deed dated 8.8.2000, conferred power to appoint new or additional trustees, within the limit of the permitted maximum number, in the continuing trustees; the said power had been usurped by the settlor styling himself as the ‘appointor’; the settlor had reserved the right to transfer the trust assets, to any other trust, unto himself; paragraphs 14 and 26 of the trust deed provided that two of the trustees would operate the bank accounts and any decision, regarding disposal of the corpus of the trust properties or investment out of the trust fund, had to be taken with the consent of the chairman of the trust i.e., the settlor; all these factors showed that the settlor alone was running the affairs of the educational institution, and there was no genuine trust in existence; the trust had objects which were not educational; clause 4 of the trust deed was proof in this regard; in the supplementary deed the aims and objects were enlarged to include opening and running of homes for elders, orphanages etc., which is also non-educational; the CBDT, in its instructions dated 29.10.1997, had explained that, if the surplus of an educational institution can be used for non-educational purposes, it cannot be said that the institution existed solely for educational purposes; though this instruction was issued in the context of the provisions of Section 10(22), the same would apply to the provisions of Section 10 (23C)(vi) also; in the present case the trustees had the discretion to apply the surplus for non-educational purposes; and, hence, the claim under Section 10(23C)(vi) of the Act had to fail. In W.P. No.9462 of 2008 the petitioner – society had applied to the Chief Commissioner of Income Tax seeking exemption for the assessment years 2004-05 to 2006-07. The Chief Commissioner, by his order dated 28.2.2006, had granted exemption. The petitioner submitted an application dated 7.3.2007 to the 1st respondent seeking renewal of exemption, under Section 10(23C)(vi) of the Act, for the assessment years 2007-08 to 2011- 12. The 1st respondent, vide proceedings dated 25.3.2008, rejected the application holding that there was a mismatch between the aims and objects of the society, and the conduct of its actual activity; the aims and objects of the society, as amended/modified from time to time, included non-educational and religious purposes also; the trustees had the discretion to apply the income of the trust for non-educational and religious purposes; the only source of income of the society was the educational institution run by it; the CBDT, in its instructions dated 29.10.1977, had explained that if the surplus of an institution can be used for non-educational purposes, it could not be said that the institution existed solely for educational purposes, and that such institutions would not be eligible for exemption under Section 10(23C)(vi); since the provisions of Section 10(23C)(vi) are similar to Section 10(22), the same logic would hold good in the context of the provisions of Section 10(23C)(vi) also; and, since the petitioner society had the discretion to apply its income for non-educational purposes, it did not qualify for exemption under Section 10(23C) (vi) of the Act. Smt. K. Neeraja, Learned Counsel for the petitioners, would submit that the petitioners had merely sought renewal of the exemption granted earlier; there was neither any change in the facts relating to the petitioner’s aims, objects and activity nor was there any change in the legal position after the Chief Commissioner had granted exemption earlier; in the absence of any change, the 1st respondent was not justified in rejecting the renewal application; the finding recorded by the 1st respondent, that the trusts were not genuine, is not tenable; the allegation that the settlor was acting unilaterally is also without factual basis; the petitioners had not carried on any non-educational activity in any of the years; the entire surplus income was spent only for education, and nothing else; and, as long as application of income was on the educational objects of the society, the petitioners could not be deprived of exemption, under Section 10(23C)(vi) of the Act, in respect of their income from educational activities. It is necessary to note that the previous Chief Commissioner, in his orders dated 28.2.2006, had granted conditional exemption to both the petitioners – societies. These conditions included that the assessees would apply their income exclusively for the objects for which they were established; they would not invest or deposit their funds, (other than voluntary contributions received and maintained in the form of jewellery, furniture etc), for any period during the previous years relevant to the assessment years otherwise than in any one or more of the forms or modes specified in Section 11(5) of the Act; the exemption would not apply to any income, being profits and gains of business, unless the business was for attainment of the objects of the assessee, and separate books of accounts were maintained in respect of such business; the assessees should regularly file their return of income before the authorities in accordance with the provisions of the Act; and, in the event of dissolution, the surplus and assets should be given to a charitable organization with similar objects. 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[1]). 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 Society v. ACIT[2]). 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[3]; Commissioner of Income Tax v. Maharaja Sawai Mansinghji Museum Trust[4]). In using the expression, “solely”, 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[5]). This requirement would militate against an institution pursuing objects other than education. (Vanita Vishram Trust v. Commissioner of Income- tax[6]). 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 Institute v. CBDT[7]). 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 Hyderabad3). 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 Press5). 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 purpose the applicant is established. (ACIT v. Surat Art Silk Manufacturers Association[8]; American Hotel7). The test of predominant object of the activity is to be seen, whether it exists solely for education and not to earn profit. (Addl. Commissioner of Income Tax v. Surat Art Silk Cloth Manufacturers Association[9]; American Hotel7; Pinegrove International Charitable Trust v. UOI[10]). 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). 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. In other words, where the main or primary objects are distributive, each and everyone of the objects 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. If the primary or dominant purpose of an institution is “educational”, another object which is merely ancillary or incidental to the primary or dominant purpose would not disentitle the institution from the benefit. The test which has, therefore, to be applied is whether the object, which is said to be non-educational, is the main or primary object of the institution or it is ancillary or incidental to the dominant or primary object which is “educational”. (Surat Art Silk Cloth Manufacturers Association9). 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 Trust v. C.I.T[11]). 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 Hotel7). 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. The third proviso requires the applicant society to apply its income, or accumulate it for application, wholly and exclusively, to the objects for which it is established. The word 'wholly' refers to the quantum of expenditure and the word 'exclusively' refers to the motive, object or the purpose of expenditure. (Pinegrove International Charitable Trust10; Vanita Vishram Trust6). 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 educational institution actually exists for educational purposes alone should the prescribed authority permit it to operate. (American Hotel7; Pinegrove International Charitable Trust10). Under the thirteenth proviso to Section 10(23-C)(vi) of the Act, circumstances are given under which the prescribed authority is empowered to withdraw the approval earlier granted. Under that proviso, if the prescribed authority is satisfied that the trust, fund, or other educational institution etc. has not applied its income in accordance with the third proviso or if it finds that such institution, trust or fund etc. has not invested/deposited its funds in accordance with the third proviso or that the activities of such fund or institution or trust etc. are not genuine or that its activities are not being carried on in accordance with the conditions subject to which approval is granted then the prescribed authority is empowered to withdraw the approval earlier granted, after complying with the procedure mentioned therein. (American Hotel7) . It is obligatory on the part of the prescribed authority, while exercising power under the un-numbered thirteenth proviso, to consider whether the expenditure incurred is on the object of education or not. (Pinegrove International Charitable Trust10). The earlier orders of the Chief Commissioner dated 28.2.2006 make no reference to any examination having been carried out by him to ascertain whether or not the objects of the societies concerned were solely for the purpose of education, and not for the purpose of making profit. The mere fact that exemption was granted earlier would not result in automatic renewal of exemption for the subsequent period unless the prescribed authority i.e., the Chief Commissioner of Income Tax is satisfied that the trust is genuine, and its existence is solely for educational purposes, and not for the purpose of profit. The objects of the petitioner-society, in W.P. No.9462 of 2008, include “to promote self-help and mutual help among the members and students”; “to run a library for the general use among the members”; and “to promote mutual goodwill and understanding among the members, foster brotherly feeling among the members”. Likewise the objects of the petitioner-society, in W.P. No.9450 of 2008, include “opening and running of homes for the elders, orphans etc.” The aforesaid objects do not relate to education. The sense in which the word "education" has been used, in Section 2(15) of the Income Tax Act, 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 Trust11). 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 Trust4). 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 be sufficient for the purpose of qualifying the institution for the benefit of Section 10(23-C)(vi). (Sorabji Nusserwanji Parekh1). 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 Trust4). The submission that the entire surplus income of the educational institution has been spent only for educational activities and nothing else, is of no consequence in as much as the petitioners-societies’ non-educational objects would enable them, at their discretion, to apply the funds of the society for such non-educational objects also. Since the basic requirement of Section 10(23-C)(vi) of the Act is that the educational institution must exist solely for the purpose of education, and not for the purpose of profit, inclusion of non-educational objects in the memorandum of association/bye-laws of the society would disentitle them from claiming the benefit of exemption under Section 10(23-C)(vi) of the Act. The aforestated objects cannot be characterized as ancillary or incidental to, or to be integrally connected with, the object of imparting education. Since the petitioners also have non-educational objects, as part of their objects, the Chief Commissioner of Income Tax cannot be faulted for refusing to grant exemption under Section 10(23-C)(vi) of the Act. In addition, in W.P. No.9450 of 2008, the Chief Commissioner, on a detailed analysis of various clauses of the trust deed and the material placed before him, has held that the trust is not genuine. The reasons assigned by the Chief Commissioner in this regard are well founded and do not call for interference. Viewed from any angle the challenge to the orders, impugned in these writ petitions, must fail. Both the writ petitions are, accordingly, dismissed. However, in the circumstances, without costs. ______________ V.V.S.RAO, J ____________________________ RAMESH RANGANATHAN,J Date: 15.11.2010 MRKR/ASP [1] (1993) 201 ITR 939 [2] (1997) 224 ITR 310 [3] Judgment of APHC DB in R.C. No.35 of 1996 dated 29.09.2010 [4] (1988) 169 ITR 379 (RAJ) [5] (2001) 247 ITR 658 (SC) [6] (2010) 327 ITR 121 (Bombay) [7] (2008) 301 ITR 86 SC [8] (1980) 121 ITR 1 (SC) [9] (1980) 121 ITR 1(SC [10] (2010)327 ITR 73 (P &H [11] (1975) 101 ITR 234( SC