Case: American Hotel &amp; Lodging Assn. Educational Institute Vs. Central Board of Direct Taxes &amp; Others

3. Briefly, the facts are as follows.4. The claim of the appellant is that is it is a non-profit organization set up in USA and has been granted tax exemption as an educational institute in that country. Appellant has a branch office in India, mainly to comply with its obligation under various agreements with Government of India (Minister of Tourism). Its branch provides a central focal point in India for Indian missions to avail of its educational courses. Its branch collects data from educational institutions/persons wishing to take the courses offered in the field of Hospitality and fees for the required course material which is thereafter remitted to USA. After collection of data and fees, the Head Office ("HO") sends course materials, examination papers etc. to the branch in India for onward transmission to the actual user. Its is the case of the appellant that, its Indian branch is the small office in which administrative work is done. Few employees attend to this work. The costs of running the branch office is met by deducting the same from the amounts remitted to the H.O.5. Thus, the appellant is an Institution whose objects are known as "Statement of Purposes" in US. Under the Internal Revenue Code, 1954 in the U.S. it enjoys tam exemption status as an educational institution. It is governed by an elected Board of Trustees and it offers high quality educational and training resources to enhance the professionalism of the hospitality industry worldwide.6. In 1993, the National Council of Hostel Management and Catering Technology, the apex Indian body overseeing hostel management and catering education under the Ministry of Tourism, signed MoU with the Educational Institute ("EI", for short) under which approval was granted to use courses, resources and expertise of the appellant in India with a view to improve the quality of hospitality education and training in India. Consequently, the appellant opened a liaison office in Mumbai in July 1994 with the approval of Reserve Bank of India ("RBI", for short). Subsequently, in February 1995 the liaison office was upgraded to a branch office with the approval of the Ministry of Finance, Gol, and the RBI.7. According to the MoU, the appellant has to fulfill the followingInstitute will:(a) provide a full and complete, world-recognised curriculum for all hospitality education programs in India;(b) make available for reproduction in India the texts, course materials, and software programs utilised in the Institutes Hospitality Management Diploma;(c) provide a comprehensive faculty development program to upgrade the professionalism and instructional ability of those teaching hospitality management courses in India;(d) offer a comprehensive certification and registration program to upgrade the professionalism and instructional ability of those teaching hospitality management courses in India;(e) develop an accreditation system to permit the National Council to qualify and recognise proprietary schools;(f) develop through grant support, an entrance test to identify individuals best qualified to enter the hospitality industry;(g) establish an office in India to implement and co-ordinate the Institutes activities;(h) offer the National Council the lowest possible prices for the products and services sold to or utilised by the schools under the umbrella of the Government of India;(i) utilise Indian authors whenever possible in the development of coustomised programs.Thus, in accordance with the terms of the said MoU, the appellant is responsible, inter alia, for providing a full and complete curriculum, recognized throughout the worldwide, for all hospitality educational programmes in India, making available text books, course materials and software programmes utilized in the appellants Hospitality Management Diploma, offering a comprehensive certification and registration programme for Indians desiring to avail of education in the hospitality field in India. Under Clause 1(h) of the MoU, appellant is required to offer to the National Council in India, which is the appex body for hospitality management in India, lowest possible prices for its products/services to be utilized for Schools under the umbrella of Gol. Under Clause 2(b) of the said MoU, the National Council of Hospitality is obliged to utilize the appellants courses in its current and future Hospitality Management Schools.9. At this stage, it may be noted that the appellant got exemption under Section 10(22) up to the year ending 31.3.1998. The branch office accounts during the said period showed the gross amounts collected on the income side and the costs for running the branch were shown on the expenditure side. The difference between these figures represented what was receivable by the HO from the branch for the provision of course material and other services provided by the HO. These accounts were accepted by the Department till 31.3.1998.10. One more fact needs to be mentioned. Appellant herein had also moved the AAR under Section 245Q(1) of the 1961 Act for a ruling from the Authority on the followingWhether the applicant would be entitled to exemption under Section 10(22) of the Income-tax Act, 1961, in respect of its various amounts of income from the following sources in India:(a) Conducting various courses and certification programmes in hospitality management and aperations.(b) Providing educational and training materials.(c) Conducting seminars, workshops and other programmes.(d) Providing training, course materials and instructional resources to the in-house faculty of various institutions.(ii) Whether the applicant would be entitled to exemption under Section 11 of the Income-tax Act, 1961By its decision dated 14.2.96 the Authority held, after reviewing the objects and Agreements with Gol, that the appellant was entitled to exemption from tax under Section 10(22) of the 1961 Act. It was held that the appellant was an educational institution in terms of Section 10(22) of the 1961 Act. This decision of the Authority was accepted by the Department. It was not challenged by the Department before this Court. Thus, the Department had accepted that the appellants income was exempt from tax under Section 10(22) of the 1961 Act inasmuch as no assessments were made and/or no demands for income-tax was raised for all years prior to the assessment year 1999-2000 (corresponding to the accounting year ending 31.3.1999).12. Section 10(22) Stood omitted by Finance Act, 1998 w.e.f. 1.4.1999. On 7.4.1999, i.e., within seven days, appellant herein made an application to CBDT (the Prescribed Authority for initial approval in terms of the first proviso to Section 10(23C) (vi) of the 1961 Act. The appellant applied for initial approval in the prescribed standarised form under rule 2CA of the Income-tax Rules, 1962 i.e. Form No.56D (See: page No. 62 of the civil appeal paper book).13. Over the next 5½ years CBDT did not pass any order on the appellants application. During this period certain queries were put to the appellant which were replied to by the appellant by various letters. The important point to be noted is that by the said letters appellant clarified its position regarding the type of accounts required and maintained by its branch in India under which excess of receipts costs incurred by the HO and not been taken into account therein because the purpose for which the accounts of the branch office were required to be made was only to establish how much money was owned to the HO and not to ascertain its income or surplus. In the said correspondence it was clarified that even the AO in assessment proceedings had accepted that the excess income over and above the expenditure shown in its account, could not be taken as appellants income. In fact, the AO had called for information regarding the HO expense for the year ending 31.3.1999 which had not been considered in the branch office accounts.14. During the hearing before CBDT, appellant also furnished a certificate attested by the certified public accountant that Head Office expenses for the year ending 31.3.1999 amounted to US$.2,63,647. The appellant also pointed out to CBDT that even the assessing officer and CIT (appeals) have not deducted the aforestated sum of alleged surplus while computing the appellant"s income allegedly chargeable to tax.15. By its Order dated 12.10.2004, CBDT rejected appellants application holding that "there is a surplus repatriated outside India and, therefore, appellant has not applied its income for the purpose of education in India".16. The said Order dated 12.10.2004 was challenged by the appellant in the Delhi High Court vide Writ Petition No. 17978/04. By the impugned judgment dated 24.11.2006, the Delhi High Court held that the gross receipts collected by the appellants branch office in India is "income" chargeable to tax. It further held that since the gross receipts constituted "income" chargeable to tax such "income" was required to be applied to educational purposes in India and since the appellant had failded to do so CBDT was right in rejecting the application dated 7.4.99. In this connection, the Delhi High Court placed reliance on the third proviso to Section 10(23C)(vi) as well as the decision of this Court in the case of Oxford University Press v. Commissioner of Income-tax reported in (2001) 247 ITR 658 SC.

Reasoning:
27. Actual existence of the educational institution was the pre-condition of the application for initial approval under Section 10(22). On grant of approval under Section 10(22), Sections 11 and 13 did not apply. Therefore, earlier prior to 1.4.1999 when exemption was given to the appellant, there was no assessment nor demand. Section 10(22) had an automatic effect. Once an applicant-institution came within the phrase "exists solely for educational purposes and not for profit" no other conditions like application of income were required to be complied with. The Prescribed Authority was only required to examine the nature, activities and genuineness of the Institution. The above phrase was the only requirement for initial approval. The mere existence of profit/surplus did not disqualify the institution if the sole purpose of its existence was not profit/surplus did not disqualify the institution if the sole purpose of its existence was not profit-making but educational activities as Section 10(22) by its very nature contemplated income of such institution to be exempted. Under Section 10(22) the test was restricted to the character of the recipient of income, viz., whether it had the character of educational institution in India, its character outside India was irrelevant for deciding whether its income would be exempt under Section 10(22).28. The moot question in Section 10(22) was-whetherthe activities of the applicant came within the definition of "income of educationalinstitution". Under Section 10(22) one had to closely analyse the activities of the Institute, the objects of the Institute and its source of income and its utilization. Even if one of the objects enabled the Institute to undertake commercial activity, the institute would not be entitled to approval under Section 10(22). The said section inter alia excludes the income of the educational institute from the Total Income.In deciding the character of the recipient, it is not necessary to look at the profits of each year, but to consider the nature of the activities undertaken in India. If the Indian activity has no co-relation to education, exemption has to be denied. (see judgment of this Court in Oxford University Press [supra]). Therefore, the character of the recipient of income must have character of educational institution in India to be ascertained from the nature of the activities. If after meeting expenditure, surplus remains incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes. In other words, existence of surplus from the activity will not mean absence of educational purpose (see judgment of this Court in Aditanar Educational Institution v. ACIT, (1997) 224 ITR 310 ). The test is - the nature of activity. If the activity like running a printing press takes place it is not educational. But whether the income/profit has been applied for non-educational purpose has to be decided only at the end of the financial year.Having analysed the provisos to Section 10(23C)(vi) one finds that there is a difference between stipulation of conditions and compliance thereof. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardized form in terms of the first proviso. It is only if the pre-requisite condition of actual existence of the educational institution is fulfilled that the question of compliance of requirements in the provisos would arise. We find merit in the contention advanced on behalf of the appellant that the third proviso contains monitoring conditions/requirements 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.34. To make the section with the proviso workable we are of the view that the Monitoring Conditions in the third proviso like application/utilization of income, pattern of investments to be made etc. could be stipulated as conditions by the PA subject to which approval could be granted. For example, in marginal cases like the present case, where appellant-Institute was given exemption up to financial year ending 31.3.1998 (assessment year 1998-99) and where an application is made on 7.4.1999, within seven days of the new dispensation coming into force, the PA can grant approval subject to such terms and conditions of the 1961 Act (including the abovementioned monitoring conditions). While imposing stipulations subject to which approval is granted, the PA may insist on certain percentage of accounting Income to be utilized/applied for imparting education in India. While making such stipulations, the PA has to examine the activities in India which the applicant has undertaken in its Constitution, MoUs. and Agreement with Government of India/National Council. In this case, broadly the activities undertaken by the appellant are - conducting classical education by providing course materials, designing courses, conducting exams, granting diplomas, supervising exams, all under the terms of an Agreement entered into with Institutions of the Government of India. Similarly, the PA may grant approvals on such terms and conditions a it deems fit in case where the Institute applies for initial approval for the first time. The PA must give an opportunity to the applicant-institute to comply with the monitoring conditions which have been stipulated for the first time by the third proviso. Therefore, cases where earlier the applicant has obtained exemption (s), as in this case, need not be re-opened on the ground that the third proviso has not been complied with. However, after grant of approval, if it is brought to the notice of the PA that conditions on which approval was given are breached or that circumstances mentioned in the thirteenth proviso exists then the PA can withdraw the approval earlier given by following the procedure mentioned in that proviso. The view we have taken, namely, that the PA can stipulate conditions subject to which approval may be granted finds support from sub-clause (ii) (B) in the thirteenth proviso.Section 10(23C)(vi) seeks to exempt income of institutions with laudable objects and activities such as universities, hospitals etc.. As stated above, stipulation of monitoring conditions is different from compliance of those conditions. Compliance or non-compliance can only be gauged at the assessment stage.Moreover, it is important to note that, even after the Finance Act, 1998 w.e.f. 1.4.1999. the third proviso to Section 10(23C)(vi), which refers to monitoring conditions, confines the words "application o income" to the objects for which the Institution is established. The third proviso does not use the words "in India" in the matter of application or accumulation of income though in several other sections like Sections 10(20A), 10(22B) and 11(1)(a) etc., Parliament has used the words "in India". Therefore, for this one more reason, we cannot read in the words "in India" into the third proviso that the educational institution has to apply its income wholly and exclusively to the objects for which it is established. Therefore, the plain words of the third proviso do not require application of income to be in India. Our judgment should not be understood to mean that the applicant has not to impart educational activities in India. If the applicant wants exemption under Section 10(23C)(vi) it has to impart education in India and only then it would be entitled to claim initial approval under that section. That is the reason for our saying that the "non-profit" qualification has to be tested against Indian activities. Our conclusion is that impartation of education must be in India if applicant desires exemption under Section 10(23C)(vi) and that excess/deficit of income over expenditure will not decide whether the applicant exists for profit or not.39 For the sake of clarity, we may reiterate that items such as application of income or accumulation of income or investment in specified assets indicated in clauses (a) and (b) in the third proviso are a part of compliance/monitoring conditions. As stated, however, there is a difference between application/utilization of income and outward remittance of income out of India. As discussed above, with the insertion of the provisos in Section 10(23C)(vi) of the 1961 Act, it is open to the PA to stipulate, while granting approval, that the approval is being given subject to utilization/application of certain percentage of income, in the accounting sense, towards impartation of education in India. Such exercise would be based on estimation. There is a difference between accounting income and taxable income. At the stage of Section 10, we are concerned with the accounting income. Therefore, it is open to the PA, if it deems fit, to stipulate that certain percentage of accounting income would be utilized for impartation of education in India. Therefore, in our view, it is always open to the PA to impose such terms and conditions as it deems fit. The interpretation we have given is based on harmonious construction of the provisos inserted in Section 10(23C)(vi) by the Finance Act, 1998. Lastly, we may reiterate that there is a difference between stipulation by the PA of such terms and conditions, as it deems fit under the provisos, and the compliance of those conditions by the appellant. The compliance of the terms and conditions stipulated by the PA would be a matter of decision at the time of assessment 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.Before concluding, we may state that in this case the appellant had applied for exemption in Form 56D on 7.4.1999 seeking initial approval of exemption under Section 10(23C)(vi) for the accounting year ending 31.3.1999 (assessment year 1999-2000). That application was made under Rule 2CA of the Income-tax Rules, 1962. Under Rule 2CA, it is open to the PA to grant exemption up to 3 years. We are not concerned with the controversy as to whether the PA should grant initial approval for the accounting year ending 31.3.1999 or for three year. Suffice it to state that, one of the points which arises for determination in this case is whether the matter should be remitted to the Chief Commissioner/Director General or whether it should be remitted to CBDT Because we are informed that today the PA is the chief Commissioner/Director General and not the CBDT.In this case, the initial approval application in Form 56D was dated 7.4.1999. It was dismissed by CBDT on 12.10.2004 (after 5½ years), therefore, in terms of Rule 2CA(1A) we are required to remit this matter to CBDT for fresh consideration in the light of the law discussed hereinabove.