IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CWP No. 6031 of 2009 Date of Decision: January 29, 2010 Pinegrove International Charitable Trust …Petitioner Versus Union of India and others …Respondents CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE JASWANT SINGH Present: Mr. Sanjay Bansal, Senior Advocate, with Mr. Prashant Bansal, Advocate, Mr. Ravi Shankar, Advocate, Mr. Pankaj Jain, Advocate, Mr. Akshay Bhan, Advocate, Mr. N.L. Sharda, Advocate, Ms. Radhika Suri, Advocate, Mr. Ravish Sood, Advocate, Mr. Vishal Gupta, Advocate, Mr. Sunish Bindlish, 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. 1.1 This order shall dispose of a bunch2 of petitions as the issues raised in all these cases are common. Civil Writ Petition No. 6031 of 2009 has been treated as a lead case. However, the facts of all the cases in brief shall also be referred to after noticing facts in detail in the lead CWP No. 6031 of 2009 case. FACTS IN THE LEAD CASE 2.1 Like all other petitions, CWP No. 6031 of 2009 has also been filed under Article 226 of the Constitution with the prayer for quashing order dated 30.3.2009 (P-1). The impugned order passed by the Chief Commissioner of Income Tax, Chandigarh-respondent No. 2, has withdrawn the exemption granted under Section 10(23C)(vi) of the Income-tax Act, 1961 (for brevity, ‘the Act’) read with Rule 2CA of the Income-tax Rules, 1961 (for brevity, ‘the Rules), from the Assessment Year 2000-01 onwards. The exemption was granted to the petitioners, vide order dated 31.5.2007/4.6.2007 (P-2), which has now been withdrawn. 2.2 Brief facts of the case may first be noticed. The petitioner- society is running a school solely for educational purposes. It has also claimed that its purpose is not to make profit and it is being regularly assessed by the Assessing Officer at ‘Nil’ income on account of exemption from payment of income tax had been granted, vide order dated 31.5.2007 (P-2) by respondent No. 2. The Income Tax Officer, vide letter dated 31.12.2008/6.1.2009 (P-3) informed the petitioner- society that as per the provisions of the Act, approval in terms of Section 10(23C) of the Act could only be granted to a University or educational institution; and not to a Society/Trust. Therefore, seeking to comply with the provisions of the statute a list of institutions being run by the petitioner-society was requisitioned so that the exemption, which had been granted, could be amended. 2.3 The petitioner-society in response to the letter dated 2 CWP No. 6031 of 2009 3.12.2008/6.1.2009 (P-3) filed a reply giving details of excess of income over expenditure before depreciation and capital expenditure incurred by the school run by it from the Assessment Year 2006-07 as had been asked for and submitted that the phraseology of the provisions of Section 10 (23C)(vi) of the Act, namely, “Other educational Institution” would encompass the educational institutions run by a society registered under the Societies Registration Act, 1860 (for brevity, ‘the 1860 Act’), inasmuch as, the term 'educational institution' or 'institution' has nowhere been defined in the Act. It was submitted that the educational institution run by the society could only be regarded as one falling within the ambit of 'other educational institution' and, therefore, it would fall within the provisions of Section 10(23C) of the Act (P-4). It has also been submitted that without affording an opportunity of hearing, show cause notice dated 11.3.2009 (P-5), was issued to the petitioner-society, inter-alia, stating as to why exemption granted to it be not withdrawn and reliance in that regard was placed on the judgment of Uttrakhand High Court rendered in the case of CIT v. M/s Queens Educational Society, (2009) 177 Taxman 326. 2.4 On 30.3.2009 (P-6), the petitioner-society furnished reply to the show cause notice reiterating the stand taken in its earlier reply dated 31.12.2008 (P-3), where reliance was placed on a judgment of Hon’ble the Supreme Court in the case of Aditanar Educational Institution v. Additional Commissioner of Income-tax, [1997] 224 ITR 310. It was further submitted that a running institution is bound to have either surplus or deficit income and expenditure account. If there is a surplus of income over expenditure then it does not necessarily imply that the society is 3 CWP No. 6031 of 2009 running into profit. It was also pointed out that the provisions of Sections 11, 12A and 10(23C)(vi) of the Act have been enacted keeping in view that the society must be generating surplus and as per proviso 85% of the income has to be applied during the year for charitable purposes. In case there is constant deficit in the society, it is bound to close down for want of funds. In case of charitable organizations, it is the receipt and application of total funds, whether of revenue nature or of capital nature, which is to be considered and not the incidental surplus generated as excess of income over expenditure. It was further submitted that the activity of imparting education is a charitable activity as defined in Section 2(15) of the Act. A proviso was also added in Section 2(15) by an amendment vide Finance Act, 2008, which stipulates that the advancement of any other object of general public utility was not to be a charitable purpose if it involved carrying on any activity in the nature of trade, commerce or business and any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration irrespective of the nature of use or application or retention of income from such activity. The Central Board of Direct Taxes (for brevity, ‘the CBDT’) vide circular dated 19.12.2008, has clarified that the newly added proviso was not to apply in respect of first three limbs of Section 2(15) i.e. relief to the poor, education or medical relief and it would constitute charitable purpose even if it incidentally involved carrying on of commercial activity. In response to the detailed reply (P- 6) submitted by the petitioner-society, the Chief Commissioner of Income Tax-respondent No. 2, vide order dated 30.3.2009 (P-1) withdrew the exemption. 4 CWP No. 6031 of 2009 2.5 It is pertinent to notice that after grant of exemption vide order dated 31.5.2007/4.6.2007 (P-2), assessments in respect of Assessment Years, namely, 2000-01 upto 2007-08 have been framed under Section 143(3) of the Act. The petitioner-society has urged that withdrawal of exemption by respondent No. 2 is without application of mind and without evaluating the character and objects of the society on the basis of which exemption had been earlier granted, vide order dated 31.5.2007/4.6.2007 (P-2), under Section 12AA of the Act by treating the petitioner as a charitable institution. Earlier exemption was granted to the petitioner society under Section 80GT and 12AA of the Act after being satisfied that the petitioner-society is an institution solely existing for charitable purposes and not for profits. The operative part of the order passed by the Chief Commissioner reads as under:- “4. I have considered the submissions of the assessee. The decisions quoted in support of its contention are not relevant and are distinguishable on facts as well as issues. It is clear that the ratio of the decision of Hon’ble Uttarakhand High Court is squarely applicable in this case. 5. The Hon’ble Supreme Court has held, in the case of Aditanar Educational Institution etc. vs. Addl. Commissioner of Income Tax [224 ITR 310 (SC)], that in the case of an educational institution, after meeting the expenditure, if any surplus results incidentally, then the institution will not cease to be one existing solely for educational purposes. 6. The crucial condition is that surplus should result only incidentally and should not be aimed for. If substantial 5 CWP No. 6031 of 2009 profits are earned in one year if (it?) would be duty of the institution to lower its fees for the subsequent year so that such profits are not intentionally generated. If, however, profits continue year after year then it cannot be said that the surplus is arising incidentally. 7. In the present case, the profits are substantial and are arising year after year and, therefore, the decision of the Apex Court in the case of Aditanar Education Institution vs. Addl. Commissioner of Income Tax as well as the decision of the Hon’ble Uttrakhand High Court is applicable. 8. Exemption u/s 10(23C)(vi) is not available to the assessee under the law in view of the above facts and circumstances and, therefore, exemption already granted vide order dated 04.06.2007 is hereby withdrawn. 9. The assessee is at liberty to reduce the fees being charged and price of its services and apply afresh, in which case the application will be duly considered on merits.” BRIEF FACTS OF CONNECTED CASES: CWP No. 7113 of 2009 3.1 Indo Global Education Foundation-petitioner Society is running four colleges for educational purposes. On 27.2.2007/ 5.3.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act read with Rule 2CA of the Rules from Assessment Year 2003-04 onwards (P- 2). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005- 6 CWP No. 6031 of 2009 06, 2006-07 and 2007-08, the Chief Commissioner of Income-tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-1). CWP No. 7857 of 2009 3.2 Shri Raghu Nath Rai Memorial Educational and Charitable Trust-petitioner is running ten colleges for educational purposes. On 21.8.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2006-07 onwards (P-2). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 27.3.2009 withdrawing the exemption (P-1). CWP No. 9504 of 2009 3.3 Sikh Educational Society-petitioner has claimed that its main objects are to impart to the youths an education that will make them intelligent, patriotic and useful citizens of India by establishing, maintaining and managing educational institutions viz. Colleges and Schools or by taking over the control and management of the existing institutions. On 7.3.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10 (23C)(vi) of the Act from Assessment Year 2007-08 onwards (P-3). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005- 06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the 7 CWP No. 6031 of 2009 exemption (P-6). CWP No. 6834 of 2009 3.4 Sanjay Gandhi Educational Society-petitioner has claimed that its main object is to establish and run educational institutions in order to provide education to different sections of society, especially orphans, handicapped, children of destitute mothers/widows, weaker sections of society, economically weaker sections of society and other Backward Classes, Scheduled Castes and Scheduled Tribes and other deserving children and to do all such other things as are incidental or conducive to the attainment of its aims and objects. On 27.8.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2007-08 onwards (P-3). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-6). CWP No. 9777 of 2009 3.5 Kandi Friends Educational Trust-petitioner has claimed that its main objects are to impart technical, management and job-oriented Pharmacy education so as to help the youth to seek job and self-employed occupation as also to raise infrastructure to impart such education as has been denied to the Backward Classes, Scheduled Castes, Scheduled Tribes and economically backward communities. Further to do all such other things as are incidental or conducive to the attainment of the aforementioned aims and objects. On 30.5.2007, it was granted 8 CWP No. 6031 of 2009 exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2002-03 onwards (P-3). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-6). CWP No. 7422 of 2009 3.6 Rayat Educational and Research Trust-petitioner has claimed that for the last more than eight years it is engaged in the activity of providing education by running various courses and is affiliated to various universities/authorities. On 29.12.2006, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act effective from the Assessment Year 2002-03 onwards (P-5). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-6). It has been held by the Chief Commissioner that the aggregate gross profits of the petitioner in the last three years is 31.08% excluding depreciation, which is only a notional deduction. According to the Chief Commissioner it is the income before depreciation which is the indicator of profit margin as well as the pricing of services done by the petitioner- assessee. It has also been observed that it would be duty of the institution to lower its fees for the subsequent year so that such profits are not 9 CWP No. 6031 of 2009 intentionally generated. Accordingly, liberty has been granted to the petitioner to reduce the fees being charged and price of its services and apply afresh. CWP No. 7391 of 2009 3.7 St. Stephen’s Educational Society-petitioner has claimed that it has been engaged for the last twenty five years in the activity of providing education through a school in the name of St. Stephen’s School, Sector 45, Chandigarh, which is affiliated with the Central Board of Secondary Education, New Delhi. It has further been asserted that the petitioner’s Society is an educational institution existing solely for educational purposes and not for the purposes of earning profit. On 2.4.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2003-04 onwards (P-3). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-6). CWP No. 7346 of 2009 3.8 Gian Jyoti Educational Society-petitioner has claimed that it is an educational institution existing solely for educational purposes and not for the purposes of earning profit. It has been running Gian Jyoti Public School and Gian Jyoti Institute of Management and Technology. On 20.2.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the 10 CWP No. 6031 of 2009 Act from Assessment Year 2004-05 onwards (P-5). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-9). CWP No. 7082 of 2009 3.9 St. Joseph’s Educational and Charitable Trust-petitioner has claimed that it has been engaged for the last more than twenty years in the activity of providing education through a school in the name of St. Joseph’s School, Sector 37-B, Chandigarh, which is affiliated with the Central Board of Secondary Education, New Delhi. It has further been asserted that the petitioner is an educational institution existing solely for educational purposes and not for the purposes of earning profit. On 21.6.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2002-03 onwards (P-2). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-5). CWP No. 7065 of 2009 3.10 Shishu Niketan Model School-petitioner has claimed that it has been engaged for the last more than 40 years in the activity of providing education through schools at Chandigarh, Panchkula and 11 CWP No. 6031 of 2009 Mohali, which are affiliated with the Central Board of Secondary Education, New Delhi. It has further been asserted that the petitioner is an educational institution existing solely for educational purposes and not for the purposes of earning profit. On 4.6.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2002-03 onwards (P-3). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-5). CWP No. 7042 of 2009 3.11 Shivalik Educational Society-petitioner has claimed that it has been engaged for the last more than 35 years in the activity of providing education through four schools, which are affiliated with the All India Central Board of Secondary Education, New Delhi. It has further been asserted that the petitioner is an educational institution existing solely for educational purposes and not for the purposes of earning profit. On 19.6.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10 (23C)(vi) of the Act from Assessment Year 2005-06 onwards (P-3 Colly). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005- 06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-6). CWP No. 7031 of 2009 12 CWP No. 6031 of 2009 3.12 Sant Educational and Welfare Society-petitioner has claimed that it has been engaged for the last more than 15 years in the activity of providing education through a school in the name of Sahibzada Ajit Singh Academy, Simran Nagar, Roopnagar, Punjab, which is affiliated with the Central Board of Secondary Education, New Delhi. It has further been asserted that the petitioner is an educational institution existing solely for educational purposes and not for the purposes of earning profit. On 16.8.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10 (23C)(vi) of the Act from Assessment Year 2007-08 onwards (P-3). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005- 06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-6). CWP No. 7030 of 2009 3.13 St. Peter’s Educational Society-petitioner has claimed that it has been engaged for the last more than 20 years in the activity of providing education through a school in the name of St. Peters School, Sector 37-B, Chandigarh, which is affiliated with the Central Board of Secondary Education, New Delhi. It has further been asserted that the petitioner is an educational institution existing solely for educational purposes and not for the purposes of earning profit. On 19.2.2007, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2003-04 onwards (P-3). Upon review of the 13 CWP No. 6031 of 2009 aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 31.3.2009 withdrawing the exemption (P-6). CWP No. 5649 of 2009 3.14 Baba Banda Singh Bahadur Education Trust-petitioner has claimed that it has been engaged in the activity of providing education. On 24.1.2008, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) of the Act from Assessment Year 2007-08 onwards. Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Financial Years 2005-06, 2006-07 and 2007-08, the Chief Commissioner of Income Tax, Chandigarh, passed the impugned order dated 27.3.2009 withdrawing the exemption (P-2). CWP No. 5562 of 2009 3.15 Gulab Devi Memorial Hospital Trust-petitioner has claimed that it has been engaged in the activity of providing education. On 7.10.2005, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10(23C)(vi) & (via) of the Act from Assessment Years 2005-06 to 2007-08. Upon review of the aforementioned order and after considering the details of income/expenditure statements for the Assessment Years 2002-03 to 2006-07, the Chief Commissioner of Income Tax, Ludhiana, passed the impugned order dated 23.3.2009 withdrawing the exemption (P-3). In para 2 of the order it has been observed that during the course of 14 CWP No. 6031 of 2009 assessment proceedings in respect of Assessment Year 2006-07 the Assessing Officer noticed that the petitioner-Trust is not functioning as per the objects mentioned in the Trust Deed as it is not existing solely for purpose of education/medical services and there is an element of profit involved. This is evident from the surplus on account of fees etc. charged for the services rendered. After referring to the show cause notice dated 13.1.2009, reply submitted by the petitioner and various judgments, the Chief Commissioner came to the conclusion that the total surplus of the petitioner is ranging from 18.59% to 28.66% in the last five years, which cannot be regarded as merely incidental to the main purposes. The surpluses/profits generated are systematic and substantial. The Chief Commissioner also negated the plea of the petitioner that the surplus has been accumulated for further creation of infrastructure. It has been held by the Chief Commissioner that the petitioner is generating continuously surplus income year after year. CWP No. 3727 of 2009 3.16 Khalsa College-petitioner has claimed that it has been running various educational institutions in Jalandhar in the State of Punjab. On 25.3.2008, it was granted exemption from payment of income tax by the Chief Commissioner of Income Tax, under Section 10 (23C)(vi) & (via) of the Act read with Rule 2CA of the Rules from Assessment Year 2005-06 onwards (P-7). Upon review of the aforementioned order and after considering the details of income/expenditure statements for the year ending on 31.3.2004, 31.3.2005 and 31.3.2006, the Chief Commissioner of Income Tax, Ludhiana, passed the impugned order dated 3.2.2009 withdrawing the 15 CWP No. 6031 of 2009 exemption (P-10). In para 2 of the order it has been observed that during the course of assessment proceedings in respect of Assessment Year 2006-07 the Assessing Officer noticed that the petitioner-Trust is not functioning as per the objects mentioned in the Trust Deed as it is not existing solely for purpose of education/medical services and there is an element of profit involved. This is evident from the surplus on account of fees etc. charged for the services rendered. After referring to the show cause notice dated 15.1.2009, reply submitted by the petitioner and various judgments, the Chief Commissioner came to the conclusion that the total surplus of the petitioner is ranging from 17.86% to 71.30% in the last three years, which cannot be regarded as merely incidental to the main