HIGH COURT OF ORISSA: CUTTACK W.P.(C) No.2467 of 2011 In the matter of an application under Articles 226 and 227 of the Constitution of India. -------- Xavier’s Institute of Management, A Society registered under the Societies Registration Act, 1860, represented through its Director Mr.Joseph Puliparamisil, AT : Xavier Square, Bhubaneswar-751013 Dist : Khurda … Petitioner -Versus- State of Orissa and others … Opp. Parties For Petitioner : Mr. B.K. Mahanti, Senior Advocate For Opp. Parties : Mr. A. Mohapatra, Senior Standing Counsel ------- P R E S E N T: THE HONOURABLE THE CHIEF JUSTICE SHRI.V.GOPALA GOWDA AND THE HONOURABLE SHRI JUSTICE B.N.MAHAPATRA Date of Judgement: 24.11.2011 B.N. Mahapatra, J. This Writ Petition has been filed challenging the order dated 25.01.2008 passed under Annexure-1 by Opposite Party No.1-Chief Commissioner of Income Tax, Bhubaneswar (for short, ‘CCIT’) refusing approval under Section 10(23C) (vi) of the Income Tax Act, 1961 (for short, ‘IT Act’) for the financial year 2006-07 on the ground that the said order has been passed illegally, arbitrarily, without application of mind and in violation of provisions of the I.T. Act. In Annexure-1 the CCIT has refused to grant approval under Section 10(23C)(vi) of the I.T. Act on the ground that the petitioner-institution is not existing solely for educational purpose and it is engaged in business which is not incidental to the attainment of its objective of education and also no separate books of accounts are maintained in respect of its business. Further challenge has been made by the petitioner to the order dated 22.12.2010 (Annexure-1/H) passed by the CCIT rejecting the petition made under Section 154 of the IT Act on the ground that the same has been passed without hearing the petitioner which amounts to violation of the principles of natural justice. 2. Petitioner’s case in a nutshell is as follows: Petitioner is a Society registered under the Registration of Societies Act, 1860 on 06.03.1987. Some educationalists, philanthropists along with President of Orissa Jesuit Society, Professor, Director and Administrator of XLRI, Jamsedpur with an object to establish a Business School (for short ‘B School’) joined together with a view to impart education on business management. The State of Orissa allotted land measuring Ac.20.0 acres and funds of Rs.2.14 crores. The said Society from the aforesaid fund coupled with other donations built the Xavier Institute of Management, Bhubaneswar (for short ‘XIMB’) to impart B School education to educate and train the efficient and able Manager to man and manage industries, organisations and other organizations such as medical college for Doctors, Engineering College for Engineers and Law College for Lawyers. Apart from class room interaction, the students in non-classes or in classes are encouraged to analyse, anticipate, innovate and otherwise prepare themselves for better career through the qualified 2 able faculties. The Institute prepares its own curriculum/courses of study, which is approved by All India Council of Technical Education (for short ‘AICTE’) and has built up a reference library with books/periodicals/journals, research and other publications, planned education in the class room, seminar and other types of trainings by lectures and Socratic method of discussions holding examinations and awarding Diploma and Post-Graduate Degrees as well as Certificates to the successful candidates. In course of time, it has been found that ‘B’ Schools are good source to produce able managers in the field of business, finance, human resources, systems and operation management and other fields of social science for which every year the business and other management houses come to the campus to conduct interviews and recruit promising students for which the petitioner institute is a catalyst. 3. The institute admits the eligible students from every strata of the society and even from the under-privileged groups where 50% seats are reserved for students from State with the help of bank finance to educate students. The institute has very able faculties who are involved in every aspect of education in the above fields and as a part of practical training it trains the students to make them to take up their career effectively to serve the Nation in their different capacities and it has also its objects in clauses (a) to (i) in paragraph ‘B’ of its Memorandum of Association. The institute with the above objects admit students after holding entrance test at Post Graduate level. 4. Within a very short span of its inception various other reputed Organisations approved the institute and assigned it to prepare 3 programmes to be undertaken, researches to be conducted, to transfer knowledge to those persons and to provide on spot training to the class of people for whom they were conducting programmes or researches. The institute conducts core courses and elective courses which are broadly divided into three categories such as (i) development and social entrepreneurship, (ii) rural business development, and (iii) rural finance. 5. The petitioner created a Centre for Development Research & Training (for short, ‘CENDERET’) in the institute as much as it created departments for disciplines to educate the students and appointed non- faculty staff and had opened Zonal Centres in different parts of the State where such trainings are undertaken. Depending on the person and the manner and their object, the petitioner institute through its academic faculties had to receive fees, incurred expenses, prepare projects and in some cases debited the expenses either to the projects or to the institute, but all the fees and expenses are recorded, audited by reputed internal and statutory auditors and full disclosure were made not only for admission fees and tuition fees of the students but also of those classes of others who paid for their projects and with the help of the petitioner upgraded their knowledge which broadly came under the concept of imparting education. 6. For the purpose of Accountancy in respect of the receipts, the petitioner puts them into a broad head of training and consultancy. The petitioner also for most of the years, receives the grants and donations unrelated to any specific assignments. Since the financial year 1987-88, 4 the heads of income were recorded under the heads students’ fee, training and consultancy, grants and donations, other income. 7. Since the petitioner institute is a charitable institution under Section 2(15) of the IT Act and was receiving donations, it applied for necessary registration under the Act which has been granted and the registration is still subsisting. The petitioner also applied for Section 80G certificate which enabled a donor a deduction of the amount from its total income. The petitioner is registered under the Foreign Contribution (Regulation) Act, 1976 under the Ministry of Home Affairs with effect from 13.09.2001. The Memorandum of Association of the petitioner provides in paragraph ‘L’ that no portion of the income shall be distributed among its members by way of profit dividends or bonus. Those who donated were exempted from tax and those who advanced money for the aforesaid reasons deducted taxes at source either voluntarily or being compelled by the Department. Petitioner for the assessment year 2009-10 applied for Nil deduction certificate under Section 197 of the IT Act and was granted on 19.03.2009. Subsequent application for the assessment year, 2010-11 was filed but no action was taken, possibly for the reason for non- approval by the authority in Annexure-1. 8. After the registration was granted under Section 12A of the IT Act, the petitioner has been submitting returns for the assessment years from 1990-91 to 2010-11. Assessment for the assessment years 2004-05, 2005-06 and 2006-07 were completed under Section 143(1) of the IT Act and refunds wherever due were given along with interest. In the assessment order passed under Section 143(3) for the assessment year 5 2004-05 the Assessing Officer held that the petitioner is a charitable institution under Section 2(15) of the IT Act and treated its income exempted under Sections 11 and 12 of the IT Act as charitable educational institution. 9. While the assessment was being completed it was suggested that the petitioner might make an application under Section 10 (23C)(vi) of the IT Act before the appropriate authority, in view of the Taxation Laws Amendment Bill 2006, as its gross receipts were more than rupees one crore. But the Assessing Officer allowed the benefit without any approval by the authority. The petitioner without verifying its veracity applied to the concerned authority on 25.01.2007, which is in the statutory form and gave requisite information to justify its activities to indicate that it is an educational institution existing solely for educational purposes and not for purposes of profit. The said approved authority gave a hearing, and as required by the said approved authority various details were filed before it. After hearing the petitioner, the CCIT passed the impugned order under Annexure-1 holding that the petitioner is imparting education in Post Graduate level, but the receipts which have been made under head training and consultancy which the petitioner explained to be incidental to education and caters solely to the institute’s main object for educational purposes is not correct for the reasons stated in the said order. 10. On receipt of the impugned order under Annexure-1, the petitioner filed a petition under Section 154 of the IT Act before the CCIT on 16.12.2010 which was within time to revise the order passed under 6 Annexure-1 on the ground that the CCIT while passing the order has made a mistake in considering the main and subsidiary objects of the institute and the nature and genuineness of the activities of the petitioner as the execution of the projects was a part of practical training for ‘B’ School as the curriculum of the said School. Learned authority without hearing the petition rejected the same ex parte on 22.12.2010 holding that there is no mistake apparent on the face of the record. 11. As a consequence of erroneous order passed under Annexure-1, the petitioner shall be prejudiced as the assessing authority has started making assessment for the years that were not time barred by reopening assessments and taking up the pending assessment being influenced by the order passed under Annexure-1. The assessments already completed for the assessment years 2005-06 and 2007-08 are pending in appeals. The Assessing Officer has issued notices under Sections 142(1) and 143(2) of the IT Act for making assessment for the assessment year 2009-10. Hence, the writ petition. 12. Mr. B.K. Mahanti, learned Senior Advocate appearing for the petitioner submitted that the object of establishing educational institution is not to make profit. Imparting education in the case of the petitioner is charitable in nature. The charitable nature of the occupation of establishing and running an educational institution has been recognized by the Hon’ble Supreme Court in the cases of T.M.A. Pai Foundation and other vs. State of Karnataka and others, AIR 2003 SC 355 and Unni Krishnan, J.P. and others vs. State of Andhra Pradesh and others, AIR 1993 SC 2178. However, the Authority having completely lost sight of the 7 aforesaid aspects, passed the impugned order without considering the main objects and the nature of the alleged other activities undertaken by the petitioner. Short duration management development programmes, feasibility study and research activities and training as conducted by the petitioner cannot by any means be construed to be taxable under the Act even though the petitioner earns some amounts out of such programmes after meeting all the expenditures. The surplus is spent for the purpose of student’s education without distributing among the members. The Opposite Party No.1 was in error in not following the judgment of the Hon’ble Supreme Court in the case of American Hotel & Lodging Association Educational Institute vs. CBDT, (2008) 301 ITR 86 (SC) and Additional Commissioner of Income Tax vs. Surat Art Silk Cloth Manufacturers’ Association, (1980) 121 ITR 1, wherein the principles of main and subsidiary objects are explained. 13. Mr. Mahanti, learned Senior Advocate further contended that the order under Annexure-1 is a nullity as the prescribed authority misunderstood the relevant provisions of law. Opposite Party No.1 misconstruing his powers under proviso (1) to Section 10(23C)(vi) of the I.T. Act, passed the impugned order. Further the prescribed authority has also misunderstood the English word “solely” for educational purposes. Ascribing a narrow meaning to the word “education” and relying on the principle decided in Sole Trustee, Lok Shikshan Trust vs. CIT, Mysore, AIR 1976 SC 10, which was beneficial to the Revenue, the prescribed authority treated the income from the petitioner’s activities from “consultancy and training” and “grants and donations” imparted as part 8 of its courses of study as non-educational activities. The interpretation given to the word ‘education’ by the prescribed authority is contrary to the principles of interpretation of fiscal statute. Thus, the order impugned in this writ petition is irrational. Taking judicial notice of many factors without confrontation, the prescribed authority rejected many papers without assigning any reason. For every project there were separate agreements and there were separate ledger accounts for training and consultancy and grants and donations. Opposite Party No.1 rejected most of the explanations offered by the petitioner high-handedly. The authorized officer misunderstanding the accountancy principles held that no separate account is maintained and no proper accounting system has been adopted by the petitioner. He has also disposed of the petition filed under Section 154 C of the I.T. Act without giving opportunity of hearing to the petitioner which is required under laws as declared by the Hon’ble Supreme Court in the case of Sahara India (Firm), Lucknow vs. Commissioner of Income Tax, Central-I and Another, (2008) 14 SCC 151. 14. The finding of fact is vitiated on many grounds, particularly by placing reliance on irrelevant materials, excluding relevant law as well as on complete ignorance of latest judgments. The prescribed authority committed grave error of law and procedure as his order was hit by per incuriam rule and by rule of res-judicata. He has also misunderstood his power under Section 10(23C)(vi) of the I.T. Act to grant continuance of the benefit to the institution, which is already registered under Section 12A of the said Act. On the point of per-incuriam rule, Mr. Mahanti, learned Senior Advocate relied on the judgment of the Hon’ble Supreme Court in 9 the case of Punjab Land Development and Reclamation Corporation Ltd., Chandigarh vs. Presiding Officer, Labour Court, Chandigarh and others (1990) 3 SCC 682; Government of Andhra Pradesh and Another vs. B.Satyanarayan Rao and others (2000) 4 SCC 262; and State of Orissa vs. Nalinikanta Muduli, (2004) 7 SCC 19. While canvassing the argument on the rule of res-judicata, Mr. Mahanti submitted that when the set of Memorandum of Association of the petitioner-institution in its entirety was registered under Section 12A of the I.T. Act holding that the petitioner institute is existing for charitable purpose of imparting education under Section 2(15) of the said Act and certificate under Section 80G was granted, the prescribed authority was precluded from reopening the same issue. In support of his contention, Mr. Mahanti, learned Senior Advocate relied upon the decisions of the Hon’ble Supreme Court in the cases of Bharat Sanchar Nigam Limited and Another vs. Union of India and others, (2006) 3 SCC 1; M/s. Radhasoami Satsang, Saomi Bag, Agra vs. Commissioner of Income Tax, (1992) 193 ITR 321, Director of I.T. vs. Escorts, (2008) 300 ITR 75 (Delhi) and Sardar Kehar Singh (1992) 195 ITR 769 (Raj) .In the impugned order, the prescribed authority has taken into consideration some irrelevant materials and has not followed the guidelines laid down in the case of American Hotel Case (supra), which on principle follows Surat Art Silk (1980) 2 SCC 31. 15. Placing reliance on the judgment of the Hon’ble Supreme Court in the case of Ujjambai, AIR 1962 SC 1621, Mr. Mahanti submitted that orders which are ex facie nullity are not protected as they are orders passed without jurisdiction. It was further argued placing reliance on 10 Animiscc, 1969 (1) ALLER 208 (HL) that such an order can be challenged in a court. The aggrieved party is entitled to protection of a court where the authority by reason of misconstruction or omission of the law or for any other reason uses his discretion to counter the policy. Reliance was also placed in the case of R (Electrocal Commissioner) vs. West Minister Mag Ct., (Lord Brown), (2011) 1 ALL ER 1, Padfield vs. Minister of Agriculture Fisheries and Food, (1968) 1 ALL ER 694 : (1968) AC 997 and the decision in Tower Hamlets London BC vs. Chetnik Developments Ltd., (1988) 1 ALLER 691 and the judgment of the Hon’ble Supreme Court in the case of Akhil Bharatiya Upbhokta Congress vs. State of Madhya Pradesh and others, (2011) 5 SCC 29. 16. In the petitioner’s case, policy behind the law is to encourage establishment of educational institutions by non-government organizations and entities and to keep them under control and discourage spurious ones. They must be understood by reading the history, so that such institutions are not only encouraged but also controlled. The institutes which are registered under Section 12-A of the I.T. Act are not to be treated as new ones. 17. In any event the words “Education” and “incidental” are not defined under the Statute. But the prescribed authority has chosen narrower interpretation as against the wider meaning of “education”. Learned authority created an ambiguity deliberately in the language employed where under the rules of statutory interpretation, the provisions must be construed in a manner that benefits the assessee. Placing reliance on the decision of the Hon’ble Supreme Court in Surat Art Silk 11 (supra), it was submitted that an adverse decision might have serious repercussion on large number of public trusts in the country. Further, placing reliance upon the judgment of the Hon’ble Supreme Court in T.M.A. Pai Foundation (supra), Mr. Mahanti submitted that the Hon’ble Supreme Court recognized the right to establish and maintain “educational institutions”. Education is a recognised head of charity. Therefore, those who are not within the special categories carved out in Articles 29(1)/30(1) have their right to establish and maintain inter alia educational institutions. The right was inter alia conceded to establish private educational institution, in contradiction to Government institutions. It was further submitted by Mr. Mahanti that in the aforesaid case, the Hon’ble Supreme Court further held that while other private educational institutions impart education their right cannot be taken away for their choice in the matter of (i) selection of students, (ii) fixation of fees and (iii) affiliation and recognition to be available to them. The Hon’ble Supreme Court following the decision in Unnikrishnan, AIR 1993 SC 2178 : (1993) 1 SCC 645 held that they are of necessity in the present day context as it is not possible to do without them because the Government is not in a position to meet the demand. 18. Mr. Mahanti submitted that to teach the students, the petitioner has to rely on model projects prepared by past practices or experiences of business corporate or create artificial models and spend its own money. But a management institute, having able faculties in many disciplines, may be approached for consultancies and training and entered into agreements, sanctioned budgets etc. The petitioner 12 maintains separate books of account for each project. In M/s. Dharmaposhanam Company, Kerala vs. Commissioner of Income Tax, Kerala, (1978) 3 SCC 414, the Hon’ble Supreme Court held that the limiting condition does not apply to educational institute. A citizen has a fundamental right for education for a medical, engineering or other professional degree. 19. The prescribed authority is not justified to apply the rule of interpretation for claim of exemption and also the principle of interpretation of fiscal laws to be construed strictly so long as the provision is free from ambiguity and strict interpretation rules are not applicable in machinery provision. In support of his contentions, Mr. Mahanti further relied upon the judgments of the Supreme Court in CIT V. Naga Rills Ltd., (1973) 89 ITR 236 (SC); CED v. R. Kanakasabai and others, (1973) 89 ITR 251 (SC); CIT v. Kulivalley, (1970) 77 ITR 578 and Radha Kishan Bhatia vs. Union of India and others, AIR 1965 SC 1072. The educational institutions are not defined either in 1922 or 1961 Act. Learned prescribed authority following Lokshikan construed the meaning of education in a narrow sense even though the Supreme Court did not agree with the view in Surat Art’s case, 1980 (2) SCC 31. The Supreme Court in State of Orissa v. Mamata Mohanty, (2011) 3 SCC 436, recognized education as the process of systematic instruction which a person has received. 20. The objects as delineated in Pr. 3E, 3F, 3G & 3H which are really common and solely for the purpose of education need not be clinically pure without contamination of anything else. It is submitted 13 that when the law considering other educational institution existing solely for education had consistently permitted businesses earlier even as a primary object permits educational institution to be exempted at different times, the learned prescribed authority is silent about the objective of the petitioner-institution stated in paragraphs A & B of its objects and silent about its courses of study which are covered under clause-3B(d) (e)(f) of the objects. 21. The petitioner institution maintains separate accounts such as CENDERET-FCR Books of Account, CENDERET-General Books of Account, Education Unit Books of Account. The day to day financial transactions are recorded in (a) Day Book Bank Book, Cash Book & Journal Book, (b) General Ledger, (c) Project’ activity wise Ledger, (d) Separate computerised (Customized) pay roll package & (e) Separate Computerized (Customized) fee collection package at the end of each financial year financial statements viz. Income & Expenditure Account and balance sheet are prepared for each set of books. The individual statements are consolidated to generate a complete set for the institute as a whole on which auditor signs after being approved by the Governing Body of the Institute. Prescribed authority is not justified to describe some of the activities of the petitioner-institute as business activities giving a restricted meaning to the word “Education” taking into consideration the magnitude of expenses and that the petitioner can meet its expenses from receipt from fees for admission and tuition as these reasons are irrelevant. Not the magnitude of expenses but gross receipt is the criteria for approval. The magnitude of expenses and the 14 meeting of the expenses for running the educational institution are not relevant nor provided under Section 10(23C) (vi), and proviso (i), (ii) and (iii) to said Section. The prescribed authority created a self created policy for a subjective satisfaction without objective standard. Opposite Party No.1 is silent if profits are earned from activities alleged are in the nature of business and application of those incomes, but avoided as they are not necessary. 22. Soon after the passing of the impugned order, assessment for the assessment year 2005-2006 was reopened u/s. 147 and the assessment for the assessment year 2007-2008 was completed. Assessment for the assessment years 2006-2007, 2009-2010 and 2010- 2011 are pending for assessment. In the order under Annexure-1 the CCIT relied on Lok Shikshan (supra) the ratio of which decision was disapproved by a larger bench and not being aware of the legal meaning of the word “incidental as decided by the Supreme Court in Thanti Trust 247 ITR 785, 795 has resulted in error apparent on the record as indicated in the Boards circular (Annexure-7 of the rejoinder), and the petitioner filed a petition u/s. 154 of the I.T. Act which was disposed of without hearing the petitioner. 23. The order under Section 154 of the I.T. Act was passed in violation of the principle of natural justice as no opportunity of hearing was given to the petitioner. In support of his contention Mr. Mahanti relied upon the judgments in Rupa Ashoka Hurra v. Ashok Hurra and another, (1999) 2 SCC 103 approved in Bharat Sanchar, 2006 (3) SCC 1, Maneka Gandhi, (1978) 1 SCC 248 and S.L. Kapoor, (1980) 4 SCC 379. 15 Reliance was also placed in Mercury