Civil Writ Petition No.4155 of 2011. -1- **** IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Civil Writ Petition No.4155 of 2011 Date of decision: 3.10.2011 Sanatan Dharam Shiksha Samiti ...Petitioner Versus Chief Commissioner of Income Tax, Panchkula ...Respondent Civil Writ Petition No.4119 of 2011 Vaish Model Primary School Education Society ...Petitioner Versus Chief Commissioner of Income Tax, Panchkula ...Respondent CORAM: HON'BLE MR.JUSTICE HEMANT GUPTA HON'BLE MR.JUSTICE G.S.SANDHAWALIA Present: Mr. Sandeep Goyal, Advocate for the petitioner. Ms. Urvashi Dhugga, Sr. Standing Counsel for the respondent. **** G.S.SANDHAWALIA, J. This order will dispose of two Civil Writ Petitions No.4119 and 4155 of 2011 as facts and law involved in these petitions are common. However, the facts of Civil Writ Petition No.4155 of 2011 are being adverted to. The petitioners are aggrieved by the order dated 29.9.2010 whereby respondent dismissed their applications in Form 56-D for grant of exemption under Section 10(23C) (vi) of the Income Tax Act, 1961 Civil Writ Petition No.4155 of 2011. -2- **** (hereinafter referred to as “the Act”) for the assessment year 2009-10. The petitioner-assessee filed an application dated 27.9.2009 in Form 56-D seeking grant of exemption/approval under Section 10(23C) (vi) of the Act on the ground that it was a society registered on 16.9.1992 under the Society Registration Act, 1860 and for the last 18 years engaged in the activity of providing education and relied upon aims and objects mentioned in the Memorandum of Association to press forth the ground that it exists solely for education purposes and not for purposes of earning profit. Information was sought by the office of the Income Tax Officer from the petitioner society on 4.5.2010 whereby it was asked to furnish various information including activities undertaken by the petitioner society, list of trustees and copy of accounts etc. The said information was accordingly furnished on 17.5.2010 to the Income Tax Department and it was also brought to the notice of the said officer that the petitioner society was running two schools at Hansi and details of strength of students and ownership of lands and rooms was also given. Thereafter, fresh information was asked for on 20.9.2010 vide Annexure P-6 as to whether the society exists solely for education purposes or it has other activities also which were not related to education. The petitioner was also asked to explain the surplus for the last three assessment years i.e. 30.54%, 45.32% and 48.8%, and the petitioner was asked to analyse the above profit with respect to utility thereof. Accordingly, detailed reply was submitted on 22.9.2010 and stress was laid down that aims and objects of the society were mainly in the context of imparting education and for establishing schools, hostels, libraries, reading rooms and play grounds etc. And further that income was not to go to the members of the society in any manner rather the society exists solely for imparting education and falls Civil Writ Petition No.4155 of 2011. -3- **** within the ambit of Section 10(23C) (vi) of the Act. As far as the issue of surplus of the society and profit, explanation was given in the reply that percentage of surplus had been miscalculated by not excluding depreciation and adding capital expenditure incurred for the purpose of benefit of the society. This explanation was further elaborated in a representation dated 28.9.2010 and stress was laid down on Section 2(15) of the Act that education itself is a charitable purpose and the term is wide and extensive. Reliance was also placed on various judgments including given the one by the Division Bench of this Court on 29.1.2010 in Pinegrove International Charitable Trust Vs. Union of India (UOI) and others (2010) 327 ITR 73 (P&H) and also the judgment of the same Division Bench dated 29.1.2010 in Civil Writ Petition No.858 of 2009 (Kashatriya Sabha Maharana Partap Bhawan, Kurukshetra Vs. Union of India and another) whereby a number of writ petitions including the petitioners’ writ petition being Civil Writ Petitions No.8258 of 2009 for the assessment years 2005-06 to 2008-09 had been decided in favour of the assessee. Stress was again laid down on the fact that depreciation had not been applied for calculating the percentage of surplus and a chart was prepared wherein percentage of surplus was accordingly reduced after calculating depreciation. The respondent, however, vide order dated 29.9.2010 rejected the application of the petitioner and concluding portion of the impugned order is reproduced hereunder:- “In conclusion, it may be mentioned here that for the grant of exemption/approval u/s 10(23C)(vi), the basic requirement of sub-clause (vi) of clause (23C) of section 10 is that the educational institution seeking exemption should be existing solely for the purposes of education and not for the purposes Civil Writ Petition No.4155 of 2011. -4- **** of profit. Here the emphasis is laid on the word ‘solely’. Keeping in view the above facts, it is held that in the light of observation of the Supreme Court which were not taken note of in the case of Pinegrove International Charitable Trust case by the Hon’ble Punjab & Haryana High Court (C.W.P. No.6031 of 2009) order dated 29.1.2010 and the fact that the profits are held not to be incidental as they do not arise merely for one year but systematically, the educational institutions namely “S.D. Modern Public School & S.D. Modern Shishu Public School” do not satisfy the basic condition of existing solely for educational and not for profit as per section 10(23C)(vi) of I.T.Act, 1961, The approval sought cannot be granted and the application is dismissed.” The petitioner is, thus, aggrieved by the said order of the respondent whereby its application for exemption has been rejected and whereas the respondent has sought to distinguish the Division Bench judgement in Pinegrove International Charitable Trust’s case (supra) on the ground that the Division Bench judgment had not taken note of observations of the Hon’ble Supreme Court regarding profiteering in P.A.Inamdar and others V. State of Maharashtra and others (2005) 6 S.C.C. 537. Notice of motion being issued, respondent has also filed written reply through the same officer who has passed the impugned order justifying the said order and rejecting the applications on the ground that reasonable profit should ordinarily vary from 6% to 15% and in the present case surplus amounts to as high as 42.06%. After hearing the learned counsel for the parties, we find that Civil Writ Petition No.4155 of 2011. -5- **** the matter is squarely covered by the decision of the Division Bench of this Court in Pinegrove International Charitable Trust’s case (supra) wherein the provisions of Section 10(23C)(vi) of the Act were discussed and the following substantial questions of law were determined by the Division Bench:- “(A) Whether an educational institution would cease to exist ‘solely’ for educational purposes and not for purposes of profit merely because it has generated surplus income over a period of 4/5 years after meeting its expenditure? (B) Whether the amount spent on acquiring/constructing capital assets wholly and exclusively becomes part of the total income or its becomes entitled to exemption under Section 10 (23C(vi) of the Act? (C) Whether an institution registered as a Society under the Societies Registration Act, 1960, lose its character as an educational institution, eligible to apply for exemption under Section 10(23C)(vi) of the Act? After considering the case law on the subject, the Division Bench came to categorical conclusion after relying upon the judgment of Hon’ble Supreme Court in CIT (Addl.) v. Surat Art Silk Cloth Manufacturers Association, [1980] 121 ITR 1(SC) and Aditanar Educational Institution v.Additional Commissioner of Income-tax, [1997] 224 ITR 310 that the test of pre-dominant object of the activity is to be seen whether an institution exists solely for education and not to earn profit and would not only be difficult of practical realisation but would also reflect unsound principle of management. If no profit arises from the activity, it is not possible to carry on educational activity in such a way that Civil Writ Petition No.4155 of 2011. -6- **** the expenditure exactly balances the income and there is no resultant profit. In the present case, the petitioner had earlier approached this court for the assessment years 2005-06 to 2008-09 by way of Civil Writ Petition no.8258 of 2009 which was decided on 29.1.2010 along with Civil Writ Petition 858 of 2009 and this Court had quashed the order declining exemptions and left it open to the respondent to passed afresh order in the light of various propositions of law culled out by the Division Bench. The observations of respondent whereby it has sought to decline the case of the petitioner for the assessment year 2009-10 by placing reliance upon the judgment of the Hon’ble Supreme Court in P.A.Inamdar’s case (supra) would be of no help since the issue in the said case was not the issue under the Income Tax Act. The Hon’ble Supreme Court was only deciding the question of minority and non minority institutions, percentage of reservation/control over the said institutions, fixation of quota of admissions in respect of unaided institutions and fee structure etc. Therefore, the reasoning given by respondent is totally perverse and not sustainable. The respondent has only relied upon few observations made regarding fixation of fee while losing sight of the fact that what was the main issue that was being decided. The issue having been directly decided by the Division Bench of this Court, is binding upon the respondent. Respondent has also rejected the application of the petitioner on the ground that assessee’s aims and objects are not related to education purposes. The aims and objects of the assessee’s society are reproduced below:- “1) Arrangement for education and moral educational for Civil Writ Petition No.4155 of 2011. -7- **** young and Kinder Garten girls and boys. 2) Arrangement for imparting education to the students based upon Indian Culture and Philosophy. 3) Arranging for appropriate programmes for physical, mental, spiritual and moral education to the students. 4) Arrangement of schools, hostels, library, auditoriums and playgrounds for the students. Running a school in the name of S.D.Modern Public Secondary School at Hansi from Class 6th to Class Plus 2 for achieving objects at 1 to 4 mentioned aforesaid. 5) Purchase of land for running the school, raising building thereon and for promoting land in the premises of Sanatan Dharam Kanya High School Hansi and raising building thereon as per the terms and development work thereon on the various properties of society from time to time and repair thereof, changing structures as per requirement of the building, extension of the buildings and doing all related works from time to time. Selling the movable and immovable property of the society as per requirement and distribution of the money received and forming society etc. 6) On the land obtained from Sanatan Dharm Kanya High School, Hansi and building raised therein including its extension shall not be sold off nor given on rent or lease nor it will be used for residential purpose. 7. Providing free education and residence to poor children and helping them economically. 8. Providing scholarships to bright students. Civil Writ Petition No.4155 of 2011. -8- **** 9. Using the income and funds of the society for the objectives of the society. 10. Helping the working organisations as per objectives of the society. 11. Collecting the money from public and donations or the achieving of objects of the society. Obtaining grant and aids from Central Govt. State Govt., other Govt., semi Govt. And other organisations. 12. The income, funds and property of the society would be used for the purposes of society only and no member or office bearer of the society would take and dividend, bonus or benefit in direct or indirect manner. In case the society is wound up, then all the properties, receivables and payables of the society shall be passed on to a society who has similar aims and objects or would be passed on to central Govt. or Haryana State Govt. 13) As per Section 2 of the Societies Registration Act, 1860 (as amended by the Punjab Act, 1957), the working the society has been entrusted to the following founder members of the society whose names addresses, profession and designation are given hereunder. .........” A perusal of the above aims and objects goes to show that the society which was running two schools from class VI to +2 was devoted solely for the purpose of education and development work of the said society and as per clause (6) it was further provided that land shall not be sold off nor used for residential purposes. Thus the reasoning given by the Civil Writ Petition No.4155 of 2011. -9- **** respondent on this account is also perverse. The respondent has not taken into account that it has failed to record a finding that the accumulation of surplus of more than 15% of the income is accumulated on after the Ist day of April, 2002, the period of accumulation of the amount exceeding 15% of its income has not exceeded five years and, thus, the petitioner-assessee is not entitled for the said exemption. In view of above, both the writ petitions are allowed and the impugned orders declining the application for exemption under Section 10 (23C)(vi) of the Act are quashed. Respondent is directed to re-decide the said issue by keeping in mind the principles laid down in case Pinegrove International Charitable Trust’s case (supra) and the earlier order dated 29.1.2010 passed in Civil Writ Petition No.858 of 2009 and other connected petitions including the petitioner's writ petition being Civil Writ Petition No.8258 of 2009 for the assessment years 2005-06 to 2008-09. A photocopy of this order be placed on the file of the connected case. (G.S.SANDHAWALIA) Judge October 03, 2011 (HEMANT GUPTA) Pka Judge