Gopal

‘Charitable Purpose’ includes relief of the poor, education, medical relief and the advancement of any object of general public utility. [Section 2(15)]. The Finance Act (No. 2), 2009 has added two more limbs to the definition with retrospective effect from Assessment Year 2009-10 i.e. "preservation of environment (including watersheds, forest and wildlife) and preservation of monuments or places or objects of artistic or historic interest", thus taking such activities outside the term "advancement of any other object of general public utility". Where predominant object of the activity is to carry out charitable purpose, it would not lose its character of charitable purpose, merely because some profit arises from such activity. The Finance Act 2009, has amended the definition of ‘charitable purpose’ to provide that ‘advancement of any other object of general public utility’ will not be considered as ‘charitable purpose’ if it involves carrying on of any activity in the nature of trade, commerce, or business or any activity of rendering any service in relation to any trade, commerce or business for any fee, cess or other consideration irrespective of nature of use or application or retention of the income from such activity.A retrospective amendment is now made in the Finance Act, 2010 with effect from A.Y. 2009-10, to the effect that if the aggregate value of the receipts from such activities is not more than Rs .10,00,000 during the year, such purpose would still be a charitable. The monetary limit of Rs. 10,00,000 has now been enhanced to Rs. 25,00,000 (A.Y. 2012-13 i.e. w.e.f. 1st April, 2011). The effect of this amendment would therefore be that in a particular year, an object of the trust may be regarded as a charitable purpose, but in a subsequent year or an earlier year, it may not be so regarded depending upon the amount of receipts from such activity.

INCOME OF THE TRUST

Income derived from property under trust subject to sections 60 to 63 wholly for charitable or religious purposes is exempt to the extent such income is applied on the objects of the trust in India, during the previous year. The trust must apply at least 85% of such income on the objects in such cases balance 15% will deemed to be accumulated for the purpose of charity and exempt.[Section 11(2)]. If the amount applied by the trust is less than 85%, the shortfall in application is not taxable in the following cases —

1. Income is accumulated up to 5 years (10 years if income is accumulated before 1-4-2001) and the purpose of accumulation is specified to the AO in Form No. 10. If accumulated amount could not be applied due to order/ injunction of the court, such period will be excluded. The time limit for filing Form No. 10 is the same as time limit for filing return u/s 139(1) (Rule 17). However in the case of CIT vs. Nagpur Hotel Owners Association [247 ITR 201 SC] the Hon’ble Supreme Court has held that in the absence of reference to time limit in the section itself, such form can be submitted any time before the completion of assessment.

1.1 The income accumulated must be applied for the specified purpose within the period of accumulation as per application in Form 10. Till the accumulated amount is applied, it must be invested as specified in Section 11(5). This requirement of Section 11(5) is applicable also to those trusts who are claiming exemption under clauses (iv), (v), (vi) and (via) of Section 10(23C).From A.Y. 2003-04, if the accumulated income is credited/ paid to any trust registered u/s 12AA or referred to in sub-clause (iv), (v), (vi) or (via) of 10(23C), it shall not be treated as application of income.1.2 In the case of dissolution of the trust, the AO may allow the application of income in the year in which it is dissolved by way of transfer of the accumulation to other trust

registered u/s. 12 AA or institution referred to in Section 10(23C). [2nd proviso to Section 11(3A)].1.3 If there is violation of any of the conditions relating to accumulation of income, such income will be deemed to be income of the previous year in which the conditions are violated or the previous year immediately following the expiry of the period of accumulation. However, with the permission of the AO, u/s. 11(3A) accumulated amount, if could not be applied for the purpose during the specified period, can be applied on other objects of the trust as permitted by AO.2. Where due to reason that whole or any part of the income has not been received during the year, the amount can be applied in the year of receipt or in the following year. However, intimation in writing must be sent to AO before the expiry of time allowed u/s. 139(1) for furnishing the return. In case the amount is not applied, it will be deemed to be the income of previous year immediately following year of receipt. [Explanation 2 to Section 11(1)].

1. If due to any other reason, income is not applied during the previous year, such income can be applied in the following previous year. However intimation in writing must be sent to AO before the expiry of time allowed u/s. 139(1) for furnishing the return. If such income is not applied, it shall be deemed to be the income of previous year immediately following the year in which such income was derived [Explanation 2 to Section 11(1)].

2. In the case of CIT vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom), the Bombay High Court held that income derived from the trust property is to be computed on commercial principles. Accordingly, adjustment of expenses incurred by the trust for charitable purpose in the earlier years against the income earned by the trust in the subsequent year will have to regard as application of income of the trust in the subsequent year. The High Court has also held that the depreciation debited in the books should be treated as expenditure for this purpose. The concept of commercial income necessarily envisages deduction of depreciation on assets of the Trust. Section 11 provides that the income of the trust is to be computed on commercial basis i.e. as per normal accounting principles. Normal Accounting principles clearly provide for deducting depreciation to arrive at income.

3. In the case of CIT vs. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439, the Rajasthan High Court has considered the Circular dated 24th Jan, 1973 of CBDT where CBDT has considered the question to whether "where a trust incurs a debt for the purpose of the trust, the repayment of the debt would amount to an application of income for the purpose of trust." According to said circular, if the trust wants to spend more money on charitable and religious purpose, then, in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year & the repayment of the said loan amount of the income of the subsequent year would amount to application of income for charitable & religious purpose under section 11(1)(a) of the Act. Also in recent decision of 2009 in the case of DDIT (E) vs. Govindu Naicker Estate (Mad) 227 CTR 283 it was held that repayment of loan is to be treated as application under Section 11.

4. Income can be applied by a trust outside of india with a specific permission from CBDT as follows:

1. Charities established on or before 1-4-1952 for charitable purpose outside india2. Charities established after 1-4-1952 for international welfare in which India is

interested.

REGISTRATION

The trust shall make an application to the Commissioner for registration u/s 12A in Form 10A within one year of creation of trust in such cases registration can be granted from the date of creation of trust. In case of delay, the registration could be granted from inception if Commissioner was satisfied with the reasons of delay. Otherwise, the registration would be granted from 1st day of financial year in which application is made. W.e.f. 1-6-2007 Commissioner’s power of condonation has now been withdrawn. Every order granting or rejecting registration has to be passed within 6 months from the end of the month in which application is made. The Commissioner can revoke the registration granted to the trust after giving an opportunity of being heard. The appeal against the order u/s 12AA can be made to Appellate Tribunal. The income of the following Institutions are exempt u/s 10.

Sub-section Trust or Institution

10(23C)(i) The Prime Minister’s National Relief Fund

10(23C)(ii) The Prime Minister’s Fund (Promotion of Folk Art)

10(23C)(iii) The Prime Minister’s Aid to Students Fund

10(23C)(iiia) The National Foundation for Communal Harmony

10(23C)(iiiab) Educational Institution wholly or substantially financed by the Government

10(23C)(iiiac) Medical Institution wholly or substantially financed by the Government

10(23C)(iiiad) Educational Institution — Annual receipts do not exceed 1 crore rupees

10(23C)(iiiae) Medical Institution — Annual receipts do not exceed 1 crore rupees

10(23C)(iv)** Institution of National importance notified by the Govt.

10(23C)(v)** Trust or Institution notified by the Central Government as for charitable purposes

10(23C)(vi)** Educational Institution other than those mentioned in sub-clauses (iiiab) & (iiiad) and approved by prescribed Authority

10(23C)(via)**

Medical Institution other than those mentioned in sub-clauses (iiiac) & (iiiae) and approved by prescribed Authority.

** Subject to the condition of application of income to the extent of 85% of the income. Further, Investment of the Accumulation has also to be in accordance with provisions of Section 11(5) of the Act. In respect of other institutions listed above, these conditions do not apply.Charities registered for Charitable purpose u/s 12A or u/s 10(23C) may apply for recognition u/s 80G(5). Charities shall be existing for charitable purpose and not for religious purpose. The charity shall be registered under general law governing charities such as Bombay Public Trust Act, 1950 or Society Registration Act, 1860 or Company’s Act, 1956 under section 25. Upon getting this recognition any donation paid to such charities will be eligible for deduction in the hands of the donor.Recognition u/s 80G(5) is governed by rule 11AA and such recognition could be granted upto a period of five years. This position of law has undergone change w.e.f. 1.10.2009. The registration valid and subsisting as on 1.10.2009 will continue to be so recognized in perpetuity. Commissioner of Income Tax has power to recall this recognition after giving opportunity of being heard to charity whose recognition is proposed to be withdrawn. CANCELLATION OF REGISTRATION

Section 12AA(3) provides for cancellation of registration of a charitable trust, where the Commissioner is satisfied that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust. The Tribunal, in the case of Bharati Vidyapeeth vs. ITO 119 TTJ (Pune) 261, had held that his provision does not empower a commissioner to cancel registration granted under Section 12A before the insertion of Section 12AA. The ratio of this decision is being reversed, by extending the right to cancel registration even to trusts registered under Section 12A. Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard. This provision comes into effect from 1st June, 2010.

AUDITWhere total income before the exemptions u/ss. 11 and 12 of the trust exceeds the maximum amount not chargeable to tax; i.e., Rs. 1,80,000 (A.Y. 2012-13) (w.e.f. 1/4/2011), in order to get exemption u/ss. 11 and 12, the accounts have to be audited by an accountant as defined in explanation below sub-section 2 of Section 288, who will give his report in Form 10B.If the income of the trust/institution referred to in clause (iv), (v), (vi) or (via) of Sec.10(23C) without giving effect to the provisions of these clauses exceeds the maximum amount not chargeable to tax, such trusts will have to get their accounts audited by the accountant as defined in Explanation below sub-section (2) of Section 288. (As provided in the Taxation (Amendment) Act, 2006) in form 10BB.INVESTMENTSAll investments of the trust must be in forms and modes provided in Section 11(5), which are as under —

1. Investment in Government savings certificates/other securities/certificates issued by the Central Government under Small Savings Scheme;

2. Deposit in any account with the Post Office Saving Bank;3. Deposit in any account with a scheduled/co-operative society engaged in carrying on the

business of banking (including co-operative land mortgage bank or a co-operative land development bank);

4. Investment in units of the Unit Trust of India;5. Investment in any security of the Central/State Government;6. Investment in debentures whose principal and interest are fully and unconditionally

guaranteed by Central/State Government;7. Investment or deposit in any public sector company (PSC); Shares of PSC may be

retained for three years and other investments or deposits till its maturity or PSC ceases to be a PSC;

8. Deposits with or investment in any bonds issued by

1. an approved financial corporation which is engaged in providing, long-term finance for industrial development in India;

2. a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes,

3. public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India;

1. Investment in immovable property;2. Deposit with the Industrial Development Bank of India;3. Any other prescribed form or mode of investment or deposit (Please refer Rule 17C).

1. Units issued under any scheme of the mutual fund referred to in clause (23D) of Section 10 of the Income-tax Act, 1961;

2. Any transfer of deposits to the Public Account of India;

3. Deposits made with an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both;

4. Equity shares of a depository as defined in clause (e) of sub-section (1) of Section 2 of the Depositories Act, 1996 (22 of 1996).

However, this provision will not apply to:

1. Any asset held as part of the corpus as on 1-6-1973 and any accretion thereto by way of bonus shares.

2. Any debentures acquired before 1-3-1983. If debentures acquired between 28-2-1983 and 25-7-1991, exemption is denied only in respect of income from such debentures, provided debentures are disinvested by 31-3-1992.

If investment is in contravention of the above provisions, it can be brought in its conformity within a period of 1 (one) year from the end of the previous year.CORPUS DONATIONWhere a trust receives voluntary contributions (Act 2(24 (iia)) made with a specific direction that they will form part of the corpus, such donation will not be included in the total income of the trust. [Section 11(1)(d) r.w.s. 12].BUSINESS INCOMESection 11(4A) provides that tax exemption will not apply in relation to any income of a trust being profits and gains of the business unless the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained by such trust in respect of such business. ICAI has expressed the view that running of hospital by a trust is a business activity. Therefore, if gross receipts from business exceeds Rs. 60 lakhs, the accounts should be audited u/s 44AB.CAPITAL GAINSWhere a capital asset is transferred and entire net consideration is utilised to acquire a new capital asset, the whole of capital gains is deemed to have been applied for charitable/religious purposes. If part of the net consideration is used to acquire a new capital asset, then the capital gains equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset, will be deemed to have been applied for charitable/religious purposes [Section 11(1A)]. Also refer Instruction 883 dt. 24.9.1975.TDSThe trust is required to deduct tax at source u/Chapter XVIIB as per the provisions of the Act. The trust is may obtain certificate from the AO u/s 197 so that it can receive income without deduction of tax at source.EXEMPTION U/S 11 NOT TO APPLY IN CERTAIN CASES (SECTION 13)Section 13(1)(a) — Trust for private religious purposes.Section 13(1)(b) — Trust established for the benefit of any particular religious community or caste.Section 13(1)(c) — Income of the trust is applied directly or indirectly for the benefit of persons referred to in sub-section (3).Section 13(1)(d) — Funds are invested otherwise than in any form or modes specified in 11(5).MISCELLANEOUS POINTS

1. If whole or part of the relevant income is not exempt u/s 11 or 12 by virtue of provisions contained in clauses 13(1)(c) and (d), the tax will be charged at maximum marginal rate. [Proviso to Section 164].

2. New Section 115BBC — The anonymous donations as aforesaid will be taxed @ 30% (plus Surcharge and Education Cess), except in the following two situations:

1. The trust or institution is established wholly for religious purposes; and2. If it is for both religious and charitable purposes, unless the donation is specifically for

the educational or medical institution run by such trust.

Anonymous donation means any voluntary contribution where a person receiving such donation does not maintain record of identity indicating the name and address of person making such contribution.

1. Filing of return [Sec. 139(4A)] on or before 30th September.2. Filing of return by the institutions referred to in clauses 21, 22B, 23A, 23B, sub-clauses a and b

of clause 24 of Section 10 and sub-clauses (iv), (v), (vi), (via) of clause 23C [Section 139(4C)].3. Application for grant of approval or continuance thereof, wherever required in Section 10(23C),

shall be filed by 30th September of the relevant assessment year for the assessment year from which exemption is sought (e.g. for A.Y. 2010-11, it should be filed on or before 30-9-2010, Finance Act ( No. 2) of 2009, with effect from 1-4-2009). The Taxation (Amendment) Act, 2006, has replaced the present system of obtaining approval periodically in case the annual receipts are more than Rs. 1 crore by a one-time approval u/s 10(23C). This approval shall be granted or rejected within a period of 12 months from the end of the month in which such application is received.

4. Penalty of Rs. 100/- per day for failure to furnish return under sub-sections 4A and 4C of Section 139 [Section 272A(2)]. Similarly penalty of Rs 100 per day can be levied for delay in submitting Audit Report in Form 10B/10BB (272A)(2)(g)

5. 13B [Electoral Trust]: The Finance Act (No. 2) of 2009 has recognized the concept of electoral trust for tax purposes. The salient features are

1. approved by CBDT as per scheme notified by Central Government 2. Donations received are exempt from tax if:

1. 95% of donations received plus surplus brought forward earlier years is distributed to registered political parties.

2. trust functions as per rules framed by Central Government.

1. Any charitable trust, desirous of receiving any foreign contribution from a foreign source, is required to obtain registration u/s. 6(1) of Foreign Contribution (Regulation) Act, 1976 (FCRA). Any such association which is not registered or which has been denied registration, can receive foreign contribution only after obtaining prior permission from Home Ministry of the Central Government under Section 6(1A) of (FCRA) Act.

IMPORTANT CIRCULARS OF CBDT

1. Instruction 883 dt. 24-9-1975 – Fixed Deposit exceeding 6 months is also a capital asset.2. No. 5-P (LXX, 6) dt. 19-6-1968 — The income of the trust is to be computed in the commercial

sense; i.e., "book income". Even when the trust derives income from property, or dividends, such income will be computed on actual commercial basis and not under provisions relating to income from house property or income from other sources.

3. No. 100 dt. 24-1-1973 — The repayment of loans originally taken to fulfil any of the objects of the trust is also considered as an application. The loan given by an educational trust is also an application for charitable purpose.

4. No. 566 dt. 17-7-1990 — Indira Vikas Patras and Kisan Vikas Patras are permitted investments u/s 11(5)(i).

Income Tax Appellate Tribunal - AhmedabadCharotar Education Society, ... vs Department Of Income Tax on 24 June, 2011IN THE INCOME TAX APPELLATE TRIBUNAL'D' BENCH - AHMEDABAD(BEFORE S/SHRI BHAVNESH SAINI, JM AND A. N. PAHUJA, AM)VadodaraA. Y.: 2007-08 ITA No.3198/Ahd/2010

The Income Tax Officer, Vs Charotar Education Society, Ward 3, 2nd floor, S. P. Station Road, Complex, Nr. Old C.K. Hall, Anand 388 001 Mayfair Road,Anand 388001

PA No. ADAPK 9546 J(Appellant) (Respondent)

Appellant by Shri S. S. Parida, DR Respondent by Shri Asheem L. Thakkar, ARORDERPER BHAVNESH SAINI: This appeal by the revenue is directed against the order of the learned CIT(A)-IV, Baroda dated 27th September, 2010, for assessment year 2007-08, challenging the order of the learned CIT(A) in directing the AO to examine the claim u/s 11 of the IT Act on the basis of revised audit report in Form No.10B on merits.2. Briefly, the facts of the case as noted by the learned CIT(A) in the impugned order are that return of income was filed claiming exemption u/s 10 (23C) (iiiad) of the IT Act. The return of income was accompanied with Form No.10BB and Form No.10B. At the assessment stage it was pointed out by the AO that exemption u/s 10 (23C) (iiiad) of the IT Act cannot be granted because assessee's Vadodara 2 ITO, Ward 3, Anand Vs Charotar Education Societyannual receipt exceeded Rs.1 Crores and the institution was not approved by the prescribed authority. It was submitted that the assessee was wholly Educational Trust and application was made to the CCIT being the prescribed authority for approval and the assessee was also eligible for relief u/s 11 (2) of the IT Act. It was submitted that the assessee was registered u/s 12A of the IT Act with CIT, Baroda and was also having registration certificate u/s 80G (5) of the IT Act which is also renewed. It was submitted that even if exemption claimed u/s 10 (23C) of the IT Act was not available; still the assessee was eligible for deduction u/s 11 of the IT Act. The AO further noted that form No.10B filed by the assessee for assessment year 2006-07 as well as for assessment year 2007-08 was filed without relevant information for claiming exemption u/s 11 of the IT Act. The AO was of the view that the claim of exemption u/s 11 of the IT Act was not substantiated with corroborative evidences, necessary and vital to fulfill pre-conditions for allowing exemption u/s11 of the IT Act. The assessee was required to file copy of the exemption certificate u/s 12A of the IT Act because it was found to be misplaced. The assessee thereafter, filed certified copy of registration u/s 12A and 80 G certificates. The AO denied exemption u/s 11 of the IT Act by observing that the assessee was required to fulfill the conditions of section 11(5) of the IT Act and has to furnish the necessary details in form No.10 before expiry of the time allowed u/s 139 (1) of the IT Act and since in the case of the assessee return was filed late, therefore, exemption cannot be granted u/s 11 of the IT Act. The assessee challenged the order before the learned CIT(A) and filed written submission which is reproduced in the impugned order by the learned Vadodara 3 ITO, Ward 3, Anand Vs Charotar Education Society

CIT(A) and it was briefly explained that the assessee is registered u/s 12A and 80G of the IT Act and further approval is granted u/s 10(23C) of the IT Act by the CCIT. It was submitted that the assessee is a Charitable Trust which runs and operates educational institutions. It was submitted that complete details were furnished for claiming exemption u/s 11A of the IT Act. Further details were also filed. Comments of the AO were called for on the submissions of the assessee. Further comments of the assessee were called for on the remand report. Same have been reproduced in the appellate order. The learned CIT(A) considering the explanation of the assessee and material on record noted that the assessee filed audit report in form NO.10B Curing the defects in the report filed with the return of income which is not examined by the AO. Therefore, the AO was directed to verify the claim on the basis of the revised audit report in form No.10 B and examine the facts of the case. The findings of the learned CIT(A) in Para 4 of the impugned order are reproduced as under:"4. I have carefully considered the facts of the case, AO's report and appellant's submissions. Appellant had claimed exemption u/s. 10 (23C) in the return of income filed; however on being pointed out that approval of Chief Commissioner of Income tax under Rule 2CA of Income- tax Rules was pending, appellant made a claim u/s. 11 before the Assessing Officer. AO's observation in the remand repot that the claim u/s. 11 should have been made by filing a revised return u/s. 139(5) in view of Supreme Court's decision in th4e case of Goetze India Ltd. 284 ITR 323 is taken up first. Claim u/s. 11 was made by the appellant at assessment stage itself and at that time, this objection was not raised by the Assessing Officer. Such an objection has been raised by the Assessing Officer at appellate stage only. Vadodara 4 ITO, Ward 3, Anand Vs Charotar Education SocietyCourts/Tribunals have held in various decisions that CIT(Appeals)/Tribunal have to entertain claims on merits, even though not made by filing a revised return. In the case of Chicago Pneumatic India Ltd. (2007) 15 SOT 252 (Mumbai), it was held that CIT (appeals) having co- terminus powers with Assessing Officer and due to appellate proceedings being continuation of original proceedings, has to entertain claim of assessee and allow it, if other conditions of provisions of law are satisfied. In case of Jay Parabolic Prints Ltd. (2008) 306 ITR 42 (Del.), Emerson Network Power India Ltd. (2009) 122 TTJ (Mumbai) 67, Hero Honda Finlease Ltd. (2008) 115 TTJ (Del) (T M) 752 and Ramco International [ITA No.1417 of 2008] (Punjab & Haryana), similar view was taken. It is therefore, held that the claim u/s. 11 is required to be examined on merits. Contention of the Assessing Officer that audit was got done late and return of income was filed late, cannot be a valid reason to reject the claim u/s.11. The condition of filing return of income within the due date is applicable u/s. 139 (3) in respect of loss return only for allowing carry forward losses. Appellant filed the return within the time allowed u/s. 139(4) and the claim had to be examined on merits. Assessing Officer's another observation was that the appellant had to furnish details in Form 10 before expiry of time u/s. 139(1). Appellant claims to have applied more than 85% of income derived from property held under trust for charitable purposes during the previous year. Form 10 is to be filed in cases where less than 85% of income is applied towards charitable purpose during the previous year. Assessing Officer has not examined the claim u/s. 11 on merits and it was therefore, premature to come to a conclusion that Form 10 was required to be filed. Appellant has filed audit report in Form 10B curing the defects in the report filed with return of income. Since the Assessing Officer has not examined the claim for exemption u/s. 11 on merits so far, it is directed that the claim u/s. 11 made on the basis of revised audit report in Form 10B examined on merits and allowed accordingly." Vadodara 5 ITO, Ward 3, Anand Vs Charotar Education Society3. The learned DR relied upon the order of the AO and submitted that since audit report in Form No.10 B was filed late, therefore, claim u/s 11 of the IT Act was rightly rejected by the AO. On the other hand, the learned Counsel for the assessee reiterated the submissions made before the authorities below.4. On consideration of the above facts, we are of the view the issue is now squarely covered by the order of the ITAT Ahmedabad "C" Bench in the case of The Xavier Kelavani Mandal Pvt. Ltd in ITA No.2050/Ahd/2009 in which departmental appeal has been dismissed vide order dated 17-06-2011. The findings of the Tribunal in Para 7 and 8 are reproduced as under:7. We have considered the rival submissions and the material available on record. The facts noted above are not in dispute. The affidavit of the concern person Mohamad Iqbal Vohra (PB-4) filed before the

learned CIT(A) in support of the contention of filing of the prescribed return of income. It is explained in the affidavit that dispatch clerk refused to accept the return on the ground that ACIT, Circle-6 is Company Circle and only company return can be accepted. He advised to file return in Form No.1 through e-filing because it was mandatory to do so. The dispatch clerk of ADIT (Exemption) refused to accept the return on the ground that though the return is in Form No.3A, the PAN mentioned is of company; therefore, same cannot be accepted. Since both the dispatch clerks refused to accept the proper return, therefore, income tax return in Form No.1 was filed through e-mailing on 20-12-2006. Form No.3A along with audit report in Form No.10B was handed over to ACIT, Circle- 6 in person on 29-12-2006. The learned CIT(A) called for comments of the AO at the appellate stage. The assessee explained that the powers of learned CIT(A) is Vadodara 6 ITO, Ward 3, Anand Vs Charotar Education Societycoterminous as that of the AO, therefore, report filed before the learned CIT(A) may be admitted in evidence. The learned CIT(A) admitted the same audit report at the appellate stage on which the revenue has not taken any ground of appeal challenging the discretion exercised by the learned CIT(A) in admitting the audit report at the appellate stage. Since, the findings of the learned CIT(A) to that extent have not been disputed or challenged, therefore, it stands finally concluded that the audit report in prescribed form was admitted at the appellate stage. The Hon'ble Calcutta High Court in the case of CIT Vs Hardeodas Agarwalla Trust (SUPRA) held as under:"Held, that, in the instant case, the assessee was not given an opportunity to file the audit report in the prescribed form which wasavailable with the assessee before theassessment was completed. In such a case, the appeal being a continuation of the original proceedings, the appellate authority had the power to accept the audit report and direct the Assessing Officer to redo the assessment."7.1 The Hon'ble Punjab & Haryana High Court in the case of CIT Vs Shahzedanand Charity Trust 228 ITR 292 held as under:"Under section 11 of the Income-tax Act, 1961, subject to certain provisions of the Act, and on fulfilling of certain conditions provided under section 12A, income from property held for charitable or religious purpose has beenexempted from payment of tax. Section 12Aprovides that the provisions of sections 11 and 12 shall not apply in relation to the income of any trust or institution unless the twoconditions provided in clauses (a) and (b) of section 12A are fulfilled. Section 12A lays down that the trust or institution has to furnish an auditor's report duly signed and verified by the Vadodara 7 ITO, Ward 3, Anand Vs Charotar Education Societychartered accountant with the return of income. According to circular dated February 9, 1978 of the Central Board of Direct Taxes, it is not mandatory under section 12A (b) to file the audit report along with the return of income.Normally, a charitable or religious trust or institution is expected to file the auditor's report along with the return but in cases where for reasons beyond the control of the assessee some delay has occurred in filing the said report, the Income-tax Officer, for reasons to be recorded, has been authorized to condone the delay in furnishing the auditor's report and accept the same at a belated stage. It has been clarified that the exemption available to the trust under section 11 may not be denied merely on account of delay in furnishing the auditor's report. The word "shall" occurring in section 12A cannot, under the circumstances, be read as "must" making it mandatory for the trust to furnish the auditor's report along with the filing of the return. If for certain unavoidablecircumstances, the assessee is unable tofurnish the auditor's report along with the return, then the same can be furnished at a later date with the permission of the AssessingOfficer who may permit the assessee to do so after recording his reasons. The Central Board of Direct Taxes by issuing the circular dated February 9, 1978, has treated the provisions regarding furnishing of auditor's report along with the return to be procedural and, therefore, directory in nature. By showing

sufficient cause, the auditor's report could be produced at any later stage either before the Income-tax Officer or before the appellate authority."7.2 In this case, the AO has not given any notice to the assessee at the assessment stage that the return was incomplete because of non-filing of the audit report, the Vadodara 8 ITO, Ward 3, Anand Vs Charotar Education Societysame be filed at the appellate stage. Therefore, appellate proceedings being continuation of the assessment proceedings, the learned CIT(A) on proper appreciation of the facts correctly admitted the audit report at the appellate stage. In the above position, it was held that the assessee can file auditors report before the appellate authority and the appeal being continuation process of the assessment proceedings, the appellate authority has the power to accept the audit report and the appellate authority can do what the AO can do and direct him to do what he has failed to do. In this case, it is not in dispute that the audit report in prescribed form was obtained prior to filing of the return on 20-12-2006; therefore, there was no reason for the assessee to keep the audit report with it in order to loose the exemption. The assessee in the earlier as well as in the subsequent assessment years filed the audit report and got the exemption. The conduct of the assessee in earlier year and subsequent years would prove that due to the facts stated above there was delay in filing the audit report and the contention of the assessee was supported by the affidavit of Mohamad Iqbal Vohra (PB-4). The learned CIT(A) on proper appreciation of the facts and material on record in the light of the decisions of the Hon'ble Punjab & Haryana High Court and the Hon'ble Calcutta High Court rightly directed the AO to accept the audit report of the assessee and grant exemption u/s 11 of the IT Act. We, therefore, do not find any infirmity in the order of the learned CIT(A). We confirm his findings and dismiss the appeal of the revenue.8. In the result, the departmental appeal is dismissed."5. Considering the facts of the case in the light of the above order of the Tribunal we are of the view that since the assessee filed audit report in prescribed form before the AO, therefore, the AO shall have to examine the claim of the assessee u/s 11 of the IT Act on merits. The learned CIT(A), therefore, rightly directed the AO to examine the Vadodara 9 ITO, Ward 3, Anand Vs Charotar Education Societyclaim of the assessee u/s 11 of the IT Act on the basis of revised audit report in Form No.10B. There is no merit in the departmental appeal. The same is accordingly dismissed.6. In the result, the departmental appeal is dismissed. Order pronounced in the open Court on 24-06-2011Sd/- Sd/-(A. N. PAHUJA) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER Date : 24-06-2011Lakshmikant/-Copy of the order forwarded to:1. The Appellant2. The Respondent3. The CIT concerned4. The CIT(A) concerned5. The DR, ITAT, Ahmedabad6. Guard FileBY ORDERDy. Registrar, ITAT, Ahmedabad

An analysis of provisions of section 10(23C)(vi) of Income-tax Act

CA. K S KOHLI

KOHLI AND ASSOCIATES - A Senior Chartered Accountants Firm __Address :- B-181, Naraina Vihar, New Delhi-110028 kohliandassociates@gmail.com __ Mob.: 9810012983TAXATION OF CHARITABLE TRUSTS

An analysis of provisions of section 10(23C)(vi) of Income-tax Act Governing Exemption of Income of Educational Institutions

This write-up makes an analysis of provisions of section 10(23C)(vi) of the Income-tax Act, 1961 governing exemption of income of educational institutions.

Introduction1. Recently, it is being observed that department is rejecting/ withdrawing approvals of educational institutions/hospitals which are required under section 10(23C)(vi)/(via) of the Income-tax Act, 1961 (‘the Act’). This is generally being done on the ground that these institutions are being run for profit. Though it may be true that in some of the cases view of the department may be correct, yet in most of the cases

rejection of approval is not correct and is creating hardship. Keeping in view this background, an attempt is being made herein to analyse the provisions of the Act and the case law. The analysis is being done with reference to the provisions applicable to educational institutions. The legal position is same in respect of hospitals/medical institutions also.2. An Analysis of Legal provisions- Section 2(15) of the Act defines the term ‘charitable purpose’ and it, inter alia, includes education.- Up to the assessment year 1998-99, section 10(22), was providing exemption from taxability of income of an educational institution. It was providing that income was exempt of an educational institution if it was existing solely for the educational purposes and not for the purposes of profit. Section 10(22) was providing no condition at all for granting exemption to an educational institution. In other words, there was no condition of spending of amount. There was no monitoring by any Government authority. Not even return of income was required to be filed. Even the income derived from any other source by an educational institution was exempt and same was required to be spent for educational purposes. Conditions provided in sections 11 and 13 of the Act were also having no application. Reference in this regard can be made to circulars of CBDT Nos. 712, dated July 25, 1995, 372, dated December 28, 1983 and 772, dated December 23, 1998.- Section 10(23C) was amended with effect from April 1, 1999 simultaneously to omission of section 10(22) sub-clauses (iiiab) and (iiiad) of section 10(23C), however, provided exemption to educational institutions in the same manner as was available earlier under section 10(22). Above sub-clauses were applicable to educational institutions substantially financed by the Government and to educational institutions having annual receipts up to Rs. 1 crore. In respect of other educational institutions, however, exemption was available under sub-clause (vi) of section 10(23C). With reference to above sub-clause, certain conditions were provided with a view to monitor activities of such educational institutions. Second proviso to above section specifically provided for power of the Central Government to call for any information in order to satisfy itself about the genuineness of the activities of the educational institution. In this regard, reference can be made to circular of CBDT No. 779, dated September 14, 1999. With a view to keep monitoring, it was required that approval of the prescribed authority is to be obtained. In order to avail exemption by an educational institution under section 10(23C)(vi), following conditions are provided :—(a) educational institution exists solely for educational purposes;(b) it is not for purposes of profit; and(c) it is approved by the prescribed authority.Further, provisos to above section provide certain conditions, such as, income is to be applied up to 85 per cent of receipts towards educational purposes; in case accumulation is to be made in excess of 15 per cent, same would be only for a period of five years; investment of funds has to be in the modes prescribed in section 11(5); and books of account have to be maintained and audited and also report in the prescribed proforma is to be submitted with the return of income.Section 11 provides for exemption of income of a charitable institution. These are general provisions applicable to every charitable institution, including an educational institution. Conditions provided for exemption under section 11 are that 85 per cent of receipt should be spent for charitable purposes, accumulation in excess of 15 per cent has to be made for the purpose of the institution for a period of five years, investment has to be made in the modes prescribed in section 11(5); and accounts have to be audited and report has to be submitted in the prescribed form. Section 13 further provides that exemption under section 11 will not be available in case any part of income has been used for the personal purpose or benefit of a person having interest in the activities of the charitable society including its founder, substantial contributor, trustees, etc.- On the basis of above analysis of provisions of the Act governing exemption of income of a charitable institution and of educational institution, it is stated that after amendment of section 10(23C), by and large, conditions prescribed for an educational institution referred to in sub-clause (vi) of above section are the same as are applicable to a charitable institution in a normal course. Conditions provided under section 13, however, are still not specifically applicable to an educational institution, if covered under the

above sub-clause.- Further, it can be observed on the basis of above analysis that the intention of the Government is always there to grant blanket exemption to income of an educational institution if it is solely for the purpose of carrying of education activities and not for the purpose of profit. While granting approval, a prescribed authority is also required to only satisfy itself to the genuineness of its activities. Section 10(23C)(vi), however, further provides for application of its income to the extent of 85 per cent, which condition was earlier not existing in section 10(22).3. Conditions to be satisfied by Educational Institutions- As has been shown hereinabove with reference to analysis of relevant provisions of the Act, in order to avail exemption by an educational institution under section 10(23C)(vi) it should be solely for the purpose of education and it should apply at least 85 per cent of its receipts during the year for educational purposes and it should be not for the purpose of profit.- In view of above, it is necessary to examine with reference to the case law and clarification given by the CBDT, the scope and meaning of following terms :—(i) Education.(ii) Solely for the purpose of education.(iii) Not for the purpose of profit.(iv) Application of income.The term ‘Education’ has not been specifically defined in the Act. Accordingly, common meaning of above term has been adopted for the purpose of granting exemption to educational institutions. Commonly, it has been understood that an institution imparting education by way of classroom courses in schools, colleges, etc., including courses for professionals, lectureships, scholarships, fellowships and readerships and also grants in respect of researches, prized essays and other academic rewards is for promotion of education. The Apex Court in Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 enunciated the following principles while interpreting the expression ‘education’ in section 2(15).“The sense in which the word ‘education’ has been used in section 2(15) in the systematic instruction, schooling or training given to the young is preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word ‘education’ has not been used in that wide and extended sense, according to which every acquisition of further knowledge constitutes education. According to this wide and extended sense, travelling is education, because as a result of travelling you acquire fresh knowledge. Likewise, if you read newspapers and magazines, see pictures, visit art galleries, museums and zoos, you thereby add to your knowledge. Again, when you grow up and have dealings with other people, some of whom are not straight, you learn by experience and thus add to your knowledge of the ways of the world. If you are not careful, your wallet is liable to be stolen or you are liable to be cheated by some unscrupulous person. The thief who removes your wallet and the swindler who cheats you teach you a lesson and in the process make you wiser though poorer. If you visit a night club, you get acquainted with and add to your knowledge about some of the not much revealed realities and mysteries of life. All this in a way is education in the great school of life. But that is not the sense in which the word ‘education’ is used in clause (15) of section 2. What education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by normal schooling.” (p. 241)Societies set up for extending financial assistance to educational institutions have also been considered for the purpose of education. Granting of loans, scholarships and grants for purchase of books and other educational requisites by a society have also been considered for educational purposes.- The term ‘solely for the purpose of education’ has also come up for discussion before the Courts in certain cases. In this regard also, the Courts have taken a common man’s approach depending upon the facts and circumstances of each case and has taken a view that wherever receipts/income are being spent only for educational purposes, society is solely for educational purposes. In a case, however, only a small portion of income of trust was spent for educational purpose leaving a huge portion thereof for other charitable purposes and a part of income was also spent on religious purposes, therein it was held that trust was not existing solely for educational purpose so as to qualify for exemption under section 10(22) -

Sri Rao Bahudur A.K.D. Dharmaraja Education Charity Trust v. CIT [1990] 182 ITR 80/[1989] 47 Taxman 441 (Mad.). In another case where memorandum of an educational society provided for managing other allied or ancillary institutions also including an automobile workshop, driving school and printing press, etc., and it was provided that, if need be these ancillary institutions can be run on commercial basis in order to make them self-supporting, it was held by the Madras High Court that the clause of the memorandum providing to run these ancillary institutions on commercial basis was only to make them self supporting and the intention was to run them on a no profit no loss basis and, accordingly, this excluded the idea of any intention to earn profit by establishing such institution and, therefore, the society was solely for the purpose of education and not for the purpose of earning profit. CIT v. Bimetal Bearings Ltd. [1985] 152 ITR 85/[1984] 16 Taxman 235 (Mad.). Accordingly, it is to be seen with reference to facts of each case that whether institution is solely for educational purposes or not. In the case of CIT v. Vidya Vikas Vihar [2004] 265 ITR 489 (Bom.), it was held that if an educational institution as per its objects undertakes construction of houses for poor out of its surplus income and profit earned therefrom is also to be used solely for the purpose of promoting education, it cannot be said that institution is not solely for the purpose of education and, accordingly, it was held to be eligible for exemption.- The term “not for the purpose of profit” has also been considered by the Courts in certain cases. It has been observed that overall facts and circumstances of each case have to be considered in order to decide whether institution is for the purpose of profit or not. In the case of Ereaut v. Girl’s Public Day School Trust Ltd. [1930] 15 TC 529 (HL) inspite of the facts that the society had issued preference shares to generate funds for the purpose of establishing the school and dividend was paid on preference shares, the House of Lords came to the conclusion that issue of preference shares and payment of dividend was only a method of raising funds for the purpose of funding the charitable religious organization. The dominant purpose of the institution was to run school as a charity. The purpose of making a profit was completely a subsidiary purpose. Accordingly, the institution was not for the purpose of making profit. Applying the above test, it has been held by the Andhra Pradesh High Court in the case of Governing Body of Rangaraya Medical College v. ITO [1979] 117 ITR 284, 287 that where no finding was recorded that any surplus arising from the operations of the institution was distributed by way of profit to any individuals, the assessee-trust, the sole object of which was managing and maintaining the medical college, was an educational institution without any motive of private or personal profit. It was also observed that “.....Merely because certain surplus arises from its operations, it cannot be held that the institution is being run for the purpose of profit so long as no person or individual is entitled to any portion of the said profit and the said profit is used for the purposes and for the promotion of the objects of the institution......” It was further held in the above case that merely because immovable properties had not been formally vested in the society, it would not be in any manner, deprived of its character of an educational institution existing solely for the purpose of educational purpose. However, in the case of Dharmaraja Educational Charity Trust (supra), it has been held that where only a small portion has been spent for charitable purpose it would not qualify for exemption as educational institution under section 10(22). Further, in the case of CIT v. Delhi Kannada Education Society [2000] 246 ITR 731/113 Taxman 503, the Delhi High Court held that merely for the reason that middle and higher secondary schools were being run at profit so as to subsidise the primary school it would not lose the exemption. Further, it has been held that income from dividend CIT v. A.M.M. Arunachalam Society [2000] 243 ITR 229/[2003] 128 Taxman 285 (Mad.) and income from manufacture of furniture and stone crushing CIT v. Lal Bahadur Shastry Education Society [2001] 252 ITR 837/118 Taxman 374 (Raj.) would be exempt when societies are engaged in the activities of education and no profit is being distributed to any individual. Income from all the sources received by the assessee is exempt, provided the assessee is an educational institution existing solely for educational purposes - A.M.M. Arunachalam Educational Society’s case (supra); CIT v. Sree Narayana Chandrika Trust [1995] 212 ITR 456/81 Taxman 199 (Ker.); CIT v. Kshatriya Girls Schools Managing Board [2000] 245 ITR 170/[1998] 101 Taxman 555 (Mad.); CIT v. Economic Entrepreneurship Development Foundation [1991] 188 ITR 540/59 Taxman 156 (Cal.); Director of Income-tax (Exemptions) v. A.M.M. Hospital & Medical Benefit Society [2003] 262 ITR 241/[2004] 140 Taxman 81

(Mad.) and Trustees of Vanita Vishram v. CIT [2006] 280 ITR 345/[2005] 148 Taxman 546 (Bom.).- The term ‘application of income’ has also been repeatedly considered by the Courts and it has held by the Courts that application of income need not be equated with spending :—- CIT v. Trustees of H.E.H. the Nizam’s Charitable Trust [1981] 131 ITR 497/7 Taxman 178 (AP).- CIT v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All.).- CIT v. St. George Forane Church [1988] 170 ITR 62/36 Taxman 42 (Ker.).Expenditure incurred for capital purposes including construction of a building for charitable purpose and also repayment of loan borrowed for the purpose of construction of building would also be considered as application of income for charitable purposes and would, accordingly, qualify for exemption;- Satya Vijay Patel Hindu Dharamshala Trust v. CIT [1972] 86 ITR 683 (Guj.)- CIT v. St. George Forane Church [1988] 170 ITR 62/36 Taxman 42 (Ker.)- CIT v. Janmabhumi Press Trust [2000] 242 ITR 457 (Kar.)- CIT v. Kannika Parameswari Devasthanam & Charities [1982] 133 ITR 779 (Mad.)In this regard reference can also be made to case of CIT v. Kamla Town Trust [1996] 217 ITR 699/84 Taxman 248 in which case the dispute travelled up to the Supreme Court on the issue whether a trust with the object of constructing residential quarters for poor workers was having object of general public utility. It was, however, an accepted position that construction of quarters was application of income.Legal Controversies4. In connection with exemption of income in the cases of educational institutions broadly following controversies have arisen for the reason that exemption has been refused by the Assessing Officer’s or approval required under section 10(23C)(vi) has been rejected on the basis of these contentions :—(a) Exemption is available to educational institution and not to the trust/society running the educational institution.(b) Objects of trust/society include other objects also and, therefore, it is not solely for educational purposes.(c) Activities have resulted in surplus and, therefore, it cannot be said that society is being run not for the purpose of profit.These issues have arisen for consideration before the Courts in a number of cases and the Courts have been taking the view that exemption is available in respect of income of educational institution and it is immaterial whether exemption is being claimed in the assessment of educational institution, i.e., school or college or in case of a society running the educational institution. Similarly, as regards second controversy, the Courts have taken the view that the educational institution for which exemption is being claimed should be solely for the purpose of education. It may be that there are other charitable objects also being carried on by the same assessee. In such a case, exemption is not available in respect of receipts from other objects. It has also been the view of the Courts that it would make no difference if there are objects other than education also in the memorandum, but, in fact, only object of education is being pursued by the assessee-society. Similarly, as regards the third controversy regarding surplus of income also, the Courts in number of decisions have observed that exemption will not be denied simply for the reason that there has been surplus from the running of educational institution in case same is used for educational purposes only. In fact, the Supreme Court in the case of Addl. CIT v.Surat Art Silk & Cloth Mfrs. Association [1980] 121 ITR 1, 26/[1979] 2 Taxman 501 observed that “.....where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditures balances the income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management......” Further, the Hon’ble Supreme Court in the case of Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310/90 Taxman 528, 534 observed that “......We may state that the language of section 10(22) is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for the purposes of

profit. After meeting the expenditure, if any surplus results incidentally from the activities lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes, since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit.....” In fact, all the three legal controversies mentioned hereinabove were elaborately discussed by the High Court of Calcutta in the case of Birla Vidhya Vihar Trust v.CIT [1982] 136 ITR 445/[1981] 7 Taxman 391. In the above case, the High Court had also reproduced a circular of the CBDT No. F. No. 194/16-17II(AI), wherein the CBDT had, in fact, expressed its view in respect of all the three legal controversies mentioned above after taking note of the fact that a number of instances have come to the notice of the Board that exemptions were not being allowed to educational institutions and hospitals under sections 10(22) and 10(22A). It was clarified that an educational institution may be owned by the trust or society. Further, where all the objects of the trust are educational and the surplus is used only for educational purposes, it cannot be said that institution was not existing solely for educational purposes and for the purpose of profit. Further, it was stated that if surplus can be used for non-educational purposes, then only it could be said that institution is not existing solely for educational purposes. If profit of an educational institution can be diverted for the personal use of the proprietor, then income of the educational institution will be subject to tax. In view of aforesaid circular of the CBDT as well as large number of the Courts’ decision on the subject including the decisions of the Supreme Court, these legal controversies could have been settled and no further dispute ought to have been raised on these grounds. It has, however, not happened so and controversies are being raised even now. At times even the counsels representing the department before the Courts with a view to pursue the contention taken by the Assessing Officer do not provide desirable assistance to the Courts and decisions in such circumstances may be rendered by the Courts without correctly noticing the correct legal position. One such example, which has created a serious controversy/difficulty in the matters of charitable institutions is the decision of the Uttarakhand High Court in the case of CIT v. Queens’ Educational Society and St. Paul Sr. Secondary School [2009] 319 ITR 160/177 Taxman 326. In the above case the assessee-societies were running educational institutions and had claimed exemption under section 10(23C)(iiiad). The Assessing Officer rejected the exemption on the ground that there were surpluses from gross receipts though after taking into consideration expenditure on fixed assets there were losses in some of the years and in some of the years there were minor surpluses. The Commissioner (Appeals) as well as the Tribunal upheld the claim of the assessee societies. The High Court, however, set aside the order of the Tribunal and affirmed the order of the Assessing Officer. The High Court while rendering the decision had not noticed that there was no condition for applying a particular percentage of income under section 10(23C)(iiiad). It has already been held in various cases that in order to avail exemption under section 10(22), the only requirement has been that the educational institution should be solely for the educational purposes and not for the purpose of profit. As mentioned hereinabove, it has also been held by the Courts, including the Supreme Court that in case whole of the income is being applied for educational purposes only and no amount is diverted for personal benefit of any person, it cannot be said that institution was being run for the purpose of making profit. It was also not noticed that as per general provisions of section 11 as well as provisions of section 10(23C)(vi) also, accumulation up to 15 per cent of gross receipts is permitted and even accumulation in excess of above limit can be made for a limited period of five years (earlier ten years). Further, expenditure incurred on purchase of capital asset is also an application of income. After the aforesaid decision of the Uttarakhand High Court, the department started rejecting the approvals under section 10(23C)(vi) and also rejecting the claims for exemption of income in assessments of educational institutions even if surplus of income over expenditure has been within the limit of 15 per cent. The CBDT ought to have appreciated the correct position and should have issued clarification to its officers so as to avoid harassment to educational institutions. Number of cases by way of writ petitions had to be filed before the Courts by such educational institutions and the Courts have been burdened by such cases. Recently, the High Court of Punjab and Haryana vide its decision dated 29-1-2010 disposed of 21 writ petitions, which were filed against similar orders of the Chief Commissioners of Chandigarh and Ludhiana passed on being inspired by the view taken by the Uttarakhand High Court. The Punjab & Haryana High Court has discussed quite in detail the legal

position and whole case law on the subject and has after dissenting with the view expressed by the Uttarakhand High Court summarized the legal principles in regard to the matter as have been laid down by the Supreme Court in earlier decisions. Accordingly, orders passed by the Chief Commissioners were quashed with the direction to pass fresh orders after taking into consideration propositions of law culled out by the High Court in its order.In regard to the matter, it would also be relevant to refer to the decision of the Supreme Court in the case of American Hotel & Lodging Association, Educational Institute v. CBDT [2008] 301 ITR 86/170 Taxman 306. In the above case, the issue that came up before the Supreme Court was also regarding approval of an educational institution under section 10(23C)(vi). The Supreme Court analyzed the relevant provisions quite in detail and held that at the stage of granting prior approval scope of the authority is restricted to examine whether the institution has the necessary stipulation for the compliance of the conditions. Actual compliance of the conditions has to be examined subsequently. Accordingly, at the time of granting the approval, the authority has to satisfy that institution existed solely for educational purposes and not for profit. The questions regarding application of income, accumulation of income or investments in specified assets, etc., have to be examined at the time of assessment and in case the institutions do not fulfil the condition, exemption can be denied and approval earlier granted can be withdrawn. In the light of aforesaid decision of the Supreme Court also, approval in terms of section 10(23C)(vi) should be granted considering the objects of the institutions.It may be added that legal position discussed hereinabove in the context of educational institutions is equally applicable in respect of hospitals and other institutions carrying on activities solely for philanthropic purposes, to which institutions provisions of section 10(23C)(iiiae) or 10(23C)(via) are applicable.Conclusion5. In conclusion, it is submitted that the revenue should not raise controversies, which have already been settled by the Courts and CBDT should issue necessary instructions in regard to the matter so as to avoid harassment to the assessees and also to develop confidence of the assessees in the department. The legal position needs to be settled in the interest of encouraging charitable activities also.

Taxability of educational institutions

Subject : Income Tax LawMonth-Year : May 2004Author/s : V. K. Subramani

F.C.A.Topic : Taxability of educational institutionsArticle Details :1. Introduction :

Educational institutions are not subject to tax in respect of the incomes earned by them. S. 10(22) which provided for the exemption of such educational institutions was omitted by the Finance (No. 2) Act, 1998 and S. 10(23C) was amended for accommodating the exemption in respect of those institutions.

The issues as to the taxability of educational institutions in respect of incomes from investments and deposits or income from properties have been the subject matter of controversy. This write-up discusses some of the court decisions and covers the taxability of such educational institutions.

2. Classication of non-profit educational institutions :

2.1 Any income of a university or other educational institution existing solely for educational purposes and not for purposes of profit was exempt u/s.10(22). The Finance (No. 2) Act, 1998, while deleting S. 10(22) and amending S. 10(23C), has classified educational institutions into three categories.

2.2 S. 10(23C)(iiiab) provides that any income of any university or other educational institution existing solely for educational purposes and not for purposes of profit is eligible for exemption, provided it is wholly or substantially financed by the Government.

2.3 Where the educational institution is not financed by the Government and the aggregate annual receipt of the university or educational institution does not exceed Rs.100 lakhs, then any income of such educational institution or university is also exempt, subject to the condition that it exists solely for

educational purposes and not for purposes of profit [S. 10(23C) (iiiad)].

2.4 Any university or other educational institution existing solely for educational purposes and not for purposes of profit and which is not financed wholly or substantially by the Government and the aggregate annual receipt of such institution exceeds Rs.100 lakhs, then the income will be exempt from tax, subject to approval by the prescribed authority. [S. 10(23C) (vi)].

3. Some pertinent issues :

3.1 Where an educational institution running a hostel makes a surplus from such activity or receives voluntary contributions, whether such surplus (from hostel) or voluntary contributions are eligible for exemption u/s.10(23C) ?

The Apex Court, in Aditanar Educational Institution v. Addl. CIT, (1997) 224 ITR 310 (SC), has held that the availability of exemption must be evaluated by finding out whether the educational institution existed during the relevant year solely for educational purposes and not for purposes of profit. If the institution, after meeting the expenditure, makes surplus incidentally from the activity lawfully carried out, then such surplus is also exempt from tax.

However, if the educational institution has carried on the activity of running a hostel accommodating any public without discrimination, then such activity cannot be treated as incidental to education. But still, if the surplus is meant for education, then such income will also be exempt from tax.

In Rao Bahadur AKD Dharmaraja Education Charity Trust v. CIT, (1990) 182 ITR 80 (Mad.), it was held that for the purpose of granting the benefit of exemption, the main criteria to be looked into is the application of income, solely for educational purposes. Hence, even if the hostel run by the educational institution results in profit and if such profit is applied only for educational purposes, the income from such activity will be exempt from tax.

In the case of educational institutions covered by S. 10(23C)(vi), separate books of accounts have to be maintained in respect of activities which are not incidental to attainment of its objectives. Hence, where the activity is not incidental to the objectives of the institution, then separate books have to be maintained [Seventh proviso to S. 10(23C)].

3.2 Where the educational institution does not carry on any educational activity and merely publishes books for enlightening the humanity — whether such income is taxable or exempt ?

Where an existing educational institution, meant solely for education, engages in publication of periodicals, books, etc., then income from such activity is also eligible for exemption. Refer Gujarat State Co-operative Union v. CIT, (1992) 195 ITR 279 (Guj.).

However, the activity of publication must be incidental with educational purposes. Where institution, meant solely for education, does not carry on any educational activity in India during the relevant period, then it will not be eligible for exemption in respect of other incomes, in view of the decision given in Oxford University Press v. CIT, (2001) 247 ITR 658 (SC).

Also, a trust created for establishing educational institution will not be eligible for exemption, unless during the relevant previous year it has commenced the activity of imparting education. Initiation of

steps for establishing an educational institution will not insulate the assessee from tax consequences, when it has income chargeable to tax during the relevant previous year [CIT v. Devi Educational Institution, (1985) 153 ITR 571 (Mad.)].

3.3 Where an educational institution existing solely for education makes surplus by way of sale of textbooks and notebooks to its students — whether such surplus is chargeable to tax ?

If the educational institution makes surplus by selling textbooks and notebooks to the students and such surplus is used solely for educational purposes, then such income is also eligible for exemption. In Brahmin Educational Society v. ACIT, (1997) 227 ITR 317 (Ker.) it was held that income from any source is exempt, provided such income is used for educational purposes.

Where a trust has multiple activities and sale of text books and note books is done to the general public, then such income cannot be attributed to educational activity. Such income, hence, will have to be applied towards pursuing the objects of the trust and would be governed by S. 11 to S. 13 of the Act.

3.4 Where an educational institution allows the school building for public, in return for rent — whether such rental income is chargeable to tax ?

Applying the above analogy of the decision given in Brahmin Educational Trust (supra), the income of the educational institution from letting out its building for rent, if meant for application of such income for educational purposes, then such income will also be exempt from tax [Birla Vidhya Vihar Trust v. CIT, (1982) 136 ITR 445 (Cal.)]. However, if the trust owning the educational institution has multiple objectives, then such income from let out of school building will be governed by S. 11 to S. 13 of the Act.

3.5 Where an educational institution pursuing only objects of education, constructs buildings and earns rental income therefrom — whether such rental income is chargeable to tax ?

Where the educational institution earns rental income by constructing buildings, then such rental income is also exempt from tax, subject to the condition that the income so earned is meant for application towards educational purposes. Where the institution has other charitable objectives in addition to education, then such institution will have to satisfy the requirements of S. 11 for the purpose of obtaining exemption.

3.6 Where an educational institution has deposited surplus funds with private borrowers for interest, — whether such interest income is taxable ?

An educational institution existing solely for educational purposes is not subject to any of the conditions prescribed in S. 11(5) and such institution may deposit the funds in any manner and the income thereof will be exempt from tax, provided such income is meant for educational purposes. Circular No. F. No. 194/16/17-IT (A-I).

However, educational institutions with aggregate annual receipt above Rs.100 lakhs have to deposit or invest the funds in the mode prescribed in S. 11(5).

3.7 Where an educational institution makes a deposit to comply with the pre-condition of the regulating authority for obtaining recognition and earns interest income from such deposit — whether

such deposit interest is taxable ?

An educational institution making deposit to comply with the requirements of the regulating authority can also claim exemption in respect of the income from such deposit, provided it is meant for application towards educational purposes. Where the educational institution is covered by S. 10(23C)(vi), then such income will also be reckoned for the purpose of application given in clause (a) of third proviso to S. 10(23C).

Deposit made by the educational institution for the purpose of satisfying the norms of the regulating authority, will also be treated as application of income in respect of institutions covered by S. 10(23C)(vi).

3.8 Where an educational institution carries out any other charitable activity in addition to education — whether it would be subject to tax in the above referred situations ?

Where an institution is engaged in any other charitable activity in addition to education activity, then such institution will be governed by S. 11 to S. 13 of the Income-tax Act, 1961.

However, income from the educational institution will be totally exempt, provided such income is retained for application towards educational purposes.

Where the aggregate annual receipt of the educational institution exceeds Rs.100 lakhs, then the conditions prescribed in provisos to S. 10(23C) as regards mode of investment, accumulation and application in the future years, have to be satisfied.

Where the educational institution has aggregate annual receipt below Rs.100 lakhs, then the conditions as regards investment or accumulation or application will not apply and the promoting charitable trust need not pay tax on the income of the educational institution as well. This is because income from the activity of education (not meant for profit) is exempt from tax in the hands of recipient. Birla Vidhya Vihar Trust v. CIT, (1982) 136 ITR 445 (Cal.).

3.9 What will be the consequence in the case of an educational institution having annual receipt below Rs.100 lakhs in the earlier years and has deposited in private companies, has received aggregate annual receipt above Rs.100 lakhs in the subsequent year ?

The Fifth and Sixth provisos to S. 10(23C) provide that the investments made by any university or other educational institution, otherwise than in the mode or form prescribed in S. 11 (5), will have to be converted into any one or more of the forms or modes specified in S. 11(5).

The time limit for conversion is one year from the end of the previous year in which the asset or investment was acquired. Hence, when the institution covered by S. 10(23C)(iiiad) falls into the category covered by S. 10(23C)(vi), then within one year from the end of the previous year in which the asset was acquired, it must be converted into an asset or investment of the form or mode specified in S. 11(5).

Also, it is possible to argue that the investments made by the institution in the earlier year [covered by S. 10(23C)(iiiad)] being a totally exempt income, should not be subjected to conditions applicable for S. 10(23C)(vi) institutions and such investments may be allowed to continue in the same form even after

being covered by S. 10(23C)(vi).

In such situations the educational institution, instead of claiming S. 10(23C) benefit, may opt for S. 11 in which case the provisions of S. 11 to S. 13 would be applicable to such institution.

3.10 Conditions as regards application of income by educational institutions.

In the case of institutions which are wholly or substantially financed by the Government covered in S. 10(23C)(iiiac), the statute does not mandate for application of income by such educational institutions.

Where such institutions are covered by S. 10(23C)(iiiad), there is no condition for application of income or for accumulation of income.

Where such educational institution is covered by S. 10(23C)(vi), then the institution has to apply 85% of its income towards educational objects. It can accumulate 15% of its income for future uses, if such accumulation is made on or after 1-4-2002. Such accumulated sum will have to be used within a period of 5 years.

The tenth proviso to S. 10(23C) provides that if the institution does not apply its income but accumulates it, then any payment from such accumulation to any institution or trust or fund will not be treated as application of income.

Also, it is worth noting that an educational institution obliged to apply 85% of the income, accumulates more than the maximum of 15% of its income, then such excess will be chargeable to tax. For example, if the institution has Rs.200 lakhs as income and accumulates Rs.50 lakhs for future uses, then the excess accumulation of Rs.20 lakhs (Rs.30 lakhs is only allowed for accumulation) is chargeable to tax. However, the entire Rs.50 lakhs must be kept in investments specified in S. 11(5). [Please refer Circular No. 29 dated 23-8-1969 {74 ITR (St.) 7}].

3.11 Tax deduction in respect of interest payments made to educational institutions.

Educational institutions can obtain a certificate for non-deduction or lower deduction of tax at source as prescribed in S. 197. The CBDT Circular No. 4/2002 dated 16-7-2002 provides for exemption in respect of educational institution from tax deduction, only where such institution is wholly or substantially financed by the Government.

In other words, educational insti-tutions covered by S. 10(23C)(iiiab) are eligible to receive incomes without deduction of tax at source. In respect of other educational institutions, the tax deduction provisions are applicable subject to lower or non-deduction at source authorised by their assessing officers.

4. Conclusion :

Institutions existing solely for educational purposes can claim exemption in respect of any income without any conditions, so long as their aggregate annual receipt does not exceed Rs.100 lakhs. However, if the aggregate annual receipt exceeds Rs.100 lakhs, then conditions similar to S. 11 to S. 13 will have to be complied with.

The statute presently provides the conditions for big educational institutions by means of provisos to S. 10(23C) and it would be better if a simple omnibus clause is inserted in S. 10(23C) for providing the application of S. 11 to S. 13 to such institutions having aggregate annual receipt above Rs.100 lakhs.

Educational institutions covered by S. 10(23C)(iiiad) need not file return of income in view of the blanket exemption given in the statute. However, the tax deduction at source provisions are fully applicable to such institutions. It is strange that the statute on the one hand, provides for exemption without conditions and on the other hand, seeks the assessees to obtain a certificate from the assessing officer for receiving incomes without tax cuts.