American Hotel & Lodging Assn. Edunl. Inst Vs. Central Board of
Direct Taxes & Ors. [2008] INSC 866 (9 May 2008)
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION CIVIL APPEAL No. 3468 OF 2008 (arising out of
SLP(C) No. 6290/2007) American Hotel & Lodging Association Educational
Institute ... Appellant versus Central Board of Direct Taxes & Ors. ...
Respondents
S. H. KAPADIA, J.
Leave granted.
2. The short question which arises
for consideration in this civil appeal is as to what is the scope of enquiry by
the Prescribed Authority under Section 10(23C)(vi) read with the third proviso
thereto inserted by Finance Act, 1998 w.e.f. 1.4.1999. In this case, Central
Board of Direct Taxes ("CBDT") being the Prescribed Authority, at the
relevant time, rejected the application for approval dated 7.4.1999 vide its
order dated 12.10.2004. The said order has been upheld by the impugned judgment
dated 24.11.2006 2 delivered by Delhi High Court in Writ Petition (C) No.
17978/04, hence, this civil appeal.
3. Briefly, the facts are as
follows.
4. The claim of the appellant is
that 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 obligations under various agreements
with Government of India (Ministry 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.
It is the case of the appellant that, it's 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.
3
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 tax 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, GoI, and the RBI.
7. According to the MoU, the
appellant has to fulfill the following obligations:
4 "The Institute 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 Institute's 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 for individuals currently employed in
the hospitality industry 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 Institute's 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 customised programs."
5
8. 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 appellant's
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
apex body for hospitality management in India, lowest possible prices for its
products/services to be utilized for Schools under the umbrella of GoI. Under
Clause 2(b) of the said MoU, the National Council of Hospitality is obliged to
utilize the appellant's 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
materials and other 6 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 following questions:
"(i) Whether 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 operations.
(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, 1961 ?"
11. By its decision dated 14.2.96
the Authority held, after reviewing the objects and Agreements with GoI, that
the appellant was entitled to 7 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
appellant's 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 5= years CBDT
did not pass any order on the appellant's application. During this period
certain queries were put to the appellant which were replied to by the
appellant by various letters. The 8 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
over payments was not treated as income/profit/surplus as appropriate costs
incurred by the HO had 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 appellant's income. In
fact, the AO had called for information regarding the HO expenses 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.
9
15. By its Order dated 12.10.2004,
CBDT rejected appellant's 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 appellant's 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 failed 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.
17. Shri Jehangir D. Mistri,
learned counsel for the appellant, submits that the object of introducing
Section 10(23C)(vi) of the 1961 Act was explained by CBDT in its Circular
No.772 dated 23.12.98 [(1999)235ITR35 1 (st.)]. According to learned counsel,
the said Circular holds that the approval contemplated by Section 10(23C)(vi)
is de hors the adherence to conditions set out in the proviso to the section.
In this connection, learned counsel placed reliance on the second proviso and
submits that the said proviso clarifies that at the stage of approval what is
required to be seen by CBDT is the nature and genuineness of the activities of
the appellant- Institution under consideration. According to learned counsel,
the provisos of the said section sets out conditions which must be adhered to
by the Institution, and compliance therewith can never be tested at the stage
of approval, since they require consideration of acts and events which will
take place in the future. In this connection, learned counsel urged that
application of income is the requirement mentioned in the third proviso to
Section 10(23C)(vi) and that requirement can only be tested after the end of
the previous year when "income" is ascertained and thereafter
applied. Similarly, according to learned counsel, the requirement of
accumulation, if any, in that proviso can also only be examined at the end of
any previous year after "income", if any, is determined and
thereafter accumulated. One more example is given by the learned counsel. The
requirement of investment/deposit of funds, referred to in the third proviso,
can only be tested at the stage of investment which can only take place after 1
profit/ surplus is established. Under the 13th proviso CBDT is empowered to
withdraw the approval earlier granted. That proviso, according to learned
counsel, also proceeds on the basis that the withdrawal will be for failure to
comply with the terms of application or investment of funds or genuineness of
activities and, therefore, implicit in that proviso is an alleged violation of
application of surplus and/or investment which may result in a subsequent
withdrawal. In short, according to learned counsel, at the stage of grant of
approval the provisos dealing with items required to be monitored, as mentioned
in the third proviso, are not to be considered by CBDT and in fact it would be
impossible to ascertain compliance at the stage of approval.
For all the above reasons, learned
counsel urges that the scope of enquiry for grant of approval under Section
10(23C)(vi) is to consider only the nature, existence for non-profit purposes
and genuineness of the Institute, the remaining monitoring mechanism is not
required to be considered at the stage of approval.
18. On facts, learned counsel
submits that the appellant fell within the main part of Section 10(23C)(vi),
excluding the monitoring conditions mentioned in the provisos and, therefore,
the appellant was entitled to approval. In this connection, learned counsel
submits that even CBDT in its impugned order dated 12.10.2004 has not denied
the appellant's claim that 1 it is an educational institution, existing solely
for educational purposes and not for profit. In this connection, learned counsel
also places reliance on the decision dated 14.2.1996 given by AAR (supra) which
decision was accepted by the Department and not challenged before this Court.
According to learned counsel the
test to be applied, in this connection, is :
whether on an overall view the
object is to make profit. In this connection reliance was placed on the
judgment of this Court in the case of Additional Commissioner of Income-tax,
Gujarat v. Surat Art Silk Cloth Manufacturers Association reported in (1980)
121 ITR 1 SC. On facts, learned counsel submits even if the branch office has
incidental surplus, that does not lead to the conclusion that the
appellant-Institution exists for the purposes of profit. In short, learned
counsel submits that there is no material whatsoever on the basis of which it
can be said that the appellant is not an educational institution. On the
contrary, learned counsel states that the appellant conducts classical
education by providing course materials, designing courses, conducing
examinations, granting diplomas, supervising examinations and all these
activities are done under the terms of the agreement entered with the
Institutions of the Government of India and, therefore, it is wholly erroneous
to contend that the appellant is not an educational institution. According to
learned counsel, the amounts claimed 1 to be surplus by the Department are
actually not surplus if the costs of materials and other services provided by
the HO are taken into account and deducted from the fees collected. In any
event, according to learned counsel, surplus/deficit is not determinative of
the question as to whether the appellant exists for the profit purposes.
19. According to learned counsel,
the words "in India" should not be read into clause (a) of the third proviso
to Section 10(23C)(vi) of the 1961 Act as done by the High Court in its
impugned judgment. Learned counsel submits that the question as to whether
application of income is required to be made in India or outside India, cannot
be part of the decision-making process for grant of approval. The said
requirement cannot be taken into account at the approval stage. In the
alternative, it is urged that in any event the said requirement of application
of income in India is not there in clause (a) of the third proviso. According
to learned counsel, the plain words of the third proviso refer to the
application of income to the objects for which the institute is established and
the said proviso does not require application of income "in India".
Therefore, it is urged that there is no valid reason given by the Department as
to why the words "in India" should be read in the third proviso.
Ultimately, according to learned counsel, the only test required to be applied
must focus on the nature, activities and genuineness of the 1 institution and
not whether such institution applies its income in India.
According to learned counsel, the
Indian public obtains a benefit by having internationally recognized
education/qualifications available to it at the lowest possible costs. That,
the benefit to the Indian public is not obtained by where the surplus is spent
and therefore such criterion has no relevance to the object sought to be
achieved while granting the exemption. Lastly, on this aspect learned counsel
urges that similar words "in India" are found in Sections 10(20A),
10(22B) and 11(1)(a) of the 1961 Act but not in Section 10(23C)(vi). Therefore,
by comparison, learned counsel urges that wherever such requirement was
considered necessary by the Parliament the same has been incorporated and,
therefore, the exclusion of the words "in India" in the third proviso
to Section 10(23C)(vi) is not an oversight. For the above reasons, learned
counsel submits that the words "in India" should not be read into
clause (a) of the third proviso of Section 10(23C)(vi) of the 1961 Act.
20. Before concluding the
submissions, advanced on behalf of the appellant, one aspect needs to be
mentioned. Department has relied upon the judgment of this Court in the case of
Oxford University Press (supra).
According to learned counsel, the
judgment of this Court in Oxford 1 University Press has no application as in
that case all the three Honourable Judges held that it was impermissible to
read the words "in India" into Section 10(22) of the 1961 Act.
According to learned counsel, the question of application of income did not
arise in that case, particularly, when there were no provisos to Section 10(22)
at the relevant time and, therefore, the judgment of this Court in that case
has no bearing whatsoever on the subject-matter of the present civil appeal.
21. Shri P.V. Shetty, learned
senior counsel appearing for the Department, submits that the basic test which
CBDT as prescribed authority ("the PA" for short) is required to
consider at the stage of approval is whether the appellant's institute is
solely an educational institution without profit motive. According to the
learned counsel, if surplus is remitted to USA, appellant would not be entitled
to approval under Section 10(23C) (vi). According to the learned counsel, in
the present case, CBDT has examined the accounts of the appellant for three
years and it detected that the entire expenses was not incurred in India.
According to the learned counsel, Section 10(22) was the predecessor section of
the present Section 10(23C)(vi). Earlier, according to the learned counsel,
when Section 10(22) existed, the PA was only required to examine the objects of
the Institute and not the application of income which concept is now brought in
vide Section 1 10(23C)(vi) read with the second, third and eleventh provisos
w.e.f.
1.4.1999. Therefore, according to
the learned counsel, the PA has not only to examine at the stage of approval
the nature of the Institution, its activities and its genuineness but also its
accounts to ascertain whether the expenses incurred and the activities
undertaken are in India. According to the learned counsel, "application of
income" is the concept which is introduced for the first time by way of
third proviso to Section 10(23C)(vi). It was not there earlier. The reason,
according to the learned counsel, for insertion of the proviso to Section
10(23C)(vi) was that in the past when Section 10(22) stood alone several cases
of misuse of funds by the funds not being deployed in India came to be
detected. According to the learned counsel, in the past, prior to 1.4.1999, the
PA used to examine only the purposes and objects for which the Institute stood
established but after 1.4.1999, the PA is also required to examine application
of income in India and to that extent the concept of genuineness originally
mentioned in Section 10(22) now stands expanded to include even application of
income to the objects for which the institute is formed. According to the
learned counsel, prior to 1.4.1999, the Memorandum of Association constituted
the bases for deciding the genuineness. That prior to 1.4.1999, application of
income came within the concept of "assessment" in Section 11.
However, that 1 dichotomy, according to the learned counsel, now stands obliterated
with the insertion of the three provisos abovementioned in Section 10(23C)(vi).
Therefore, according to the
learned counsel, after 1.4.1999, even the PA is required to examine whether the
accrued income stood applied for educational activity in India. According to
the learned counsel, not only the source of income but also its application has
to be for education in India. In this connection, reliance was placed by the
learned counsel on the judgment of this Court in the case of Oxford University
Press (supra).
22. On merits, learned counsel
submits that since an amount of Rs.
1,30,30,288.00 stood remitted by
the appellant within the financial year ending 31.3.1999, the PA was right in
rejecting the approval application made by the appellant. Learned counsel
submits that the appellant is a worldwide organization. Learned counsel urged
that in the application for approval, no details have been furnished by the
appellant regarding its worldwide income, regarding its income in India and its
expenses for its activities in India. According to the learned counsel, the
burden of proof is on the applicant which it has failed to discharge. According
to the learned counsel, in the past, in several cases, funds have been diverted
and, therefore, Parliament inserted several provisos in Section 10(23C)(vi)
which are conditions to be complied with by the appellant. Learned counsel 1
submits that the provisos have got to read with the main section. That, the
third proviso requires application/utilization of income accruing to the
appellant in India and by remitting the aforestated amount(s), the Institute
herein has failed to comply with the said proviso. Learned counsel submits that
the three provisos, referred to above, are further conditions, which every
applicant has to satisfy. One such condition is application of income.
Learned counsel submits that in
order to get exemption under Section 10 (23C)(vi) the applicant has to show
that it is solely and exclusively an educational institution established solely
for educational purposes and not for profit and since, in the present case, the
appellant has earned surplus of Rs. 1,30,30,288.00/1.14 crores, which has been
remitted to USA, it is clear that the appellant's institution does not exist
solely for educational purposes and that it is profit earning institute like
any other commercial institute and, therefore, it is not entitled to the
benefit of exemption under the said Section 10(23C)(vi). Learned counsel
submits that the appellant has failed to place before the PA the requisite
material to show that it is carrying out educational activity even in USA and
that the entire income generated by it, both in India and in USA, is spent
solely on educational activity and not to earn profits and, therefore, no
interference is called for in the present case.
Learned counsel submits that the
appellant is claiming exemption under the 1 Income Tax Act, 1961. That, under
the said Act, exemption under Section 10(23C)(vi) is in the nature of a
concession to an institution which solely carries on educational activity,
which is not for profit and since Section 10 (23C)(vi) is an exemption
provision, the burden is on the applicant to show the compliance of the various
conditions in Section 10(23C)(vi). According to the learned counsel, the said
provision must be read strictly if money laundering and shifting of profits out
of India is to be prevented. According to the learned counsel, the burden is on
the applicant to show from the statement of accounts of the previous year
ending 31.3.1999 as to how it has derived the said surplus and how it has
utilized that surplus for educational activity. In the present case, according
to the learned counsel, be it surplus/profit/excess of income over expenditure,
once an amount stood remitted from India to USA, it is clear that the
appellant's institute is not existing solely for educational purposes in India
and, therefore, is not entitled to approval under Section 10(23C)(vi). Learned
counsel submits that in every case the area of activity needs to be examined by
the PA. That, the applicant which seeks exemption under the above section needs
to know, that education is the duty of the State; that every Institution which
seeks exemption under Section 10(23C)(vi) should know that it is supposed to carry
out the functions of the State in the field of education and since it is 2 a
socio-welfare function, the Legislature had stepped in by the Finance Act, 1998
so as to bring in CBDT which is the highest body of experts in the matter of
granting approval. According to the learned counsel, this Court should not
interfere unless reasons given by CBDT are extraneous.
According to the learned counsel,
the appellant's institute ought to have at the very outset, at the time of
making an application, should have declared its world income, world
expenditure, Indian income and Indian expenditure.
That, it ought to have declared at
the very outset whether the appellant's institution is an educational
institution in USA. That, at the very outset, the appellant ought to have
stated and given particulars regarding its activities abroad. Since it has
failed to disclose the relevant aspects mentioned above, the
applicant/appellant was not entitled to approval. In conclusion, learned
counsel submits that there is no dispute that certain huge amount of Rs.
1,30,30,288.00 has been remitted
and that fact alone is conclusive circumstance to show that the
appellant-institution is a commercial venture existing for profit and that it
is not existing solely for educational purposes in India. Learned counsel urged
that the third proviso brought in the concept of application of income vide the
Finance Act, 1998 in order to bring about parity between universities and other
educational institutions on one hand and public charitable trusts covered by
Sections 11 and 12 under the 1961 2 Act. Therefore, according to the learned
counsel, even at the stage of approval, the PA can take into account not only
the nature, activities and genuineness of the Institute but also the manner in
which the income derived in India is spent/utilized in India. Learned counsel
submits that, in view of the Finance Act, 1998, the provisions of Section
11(1)(a) have got to be read into the provisions of Section 10(23C)(vi) and if
so read the applicant-Institute is required to state in its application as to
how it has utilized its Income in India in the year ending 31.3.1999. In this
connection, learned counsel referred to Section 11(1)(a) which states that
certain incomes shall not be included in the total income of the previous year
of the person in receipt of such income if such income is derived from property
held under trust, wholly for charitable or religious purposes, to the extent of
which such income is applied to such purposes in India. Learned counsel submits
that under Section 10(23C)(vi) as well as the third proviso thereto, the words
"in India" are not there but to give purposive interpretation to the
said section the court should read those words into section 10(23C)(vi) to stop
shifting of the "Income"/Profits accruing in India from being
transferred to US. According to the learned counsel, when the appellant herein
expatriated a sum of Rs. 1,30,30,288.00 or Rs. 1.14 crores (approx.) after
taking into account expenses incurred by the HO to USA, it is clear 2 that the
appellant's institution has failed to comply with the requirements of Section
10(23C)(vi) and, therefore, it is not entitled to approval. For the aforestated
reasons, according to the learned counsel, no interference is called for in the
present case.
23. For the sake of convenience,
we quote hereinbelow the following provisions of Section 10(23C) of the 1961
Act, as amended w.e.f. 1.4.1999 vide Finance Act, 1998:
"10. Incomes not included in
total income.- In computing the total income of a previous year of any person,
any income falling within any of the following clauses shall not be included --
(23C) any income received by any person on behalf of- (vi) any university or
other educational institution existing solely for educational purposes and not
for purposes of profit, other than those mentioned in sub-clause (iiiab) or
sub-clause (iiiad) and which may be approved by the prescribed authority; or
Provided that the fund or trust or institution or any university or other
educational institution or any hospital or other medical institution referred
to in sub- clause (iv) or sub-clause (v) or sub-clause (vi) or sub- clause
(via) shall make an application in the prescribed form and manner to the
prescribed authority for the purpose of grant of the exemption, or continuance
thereof, under sub-clause (iv) or sub-clause (v) or sub- clause (vi) or
sub-clause (via):
Provided further that the Central
Government, before notifying the fund or trust or institution, or the 2
prescribed authority, before approving any university or other educational
institution or any hospital or other medical institution, under sub-clause (iv)
or sub-clause (v) or sub-clause (vi) or sub-clause (via), may call for such
documents (including audited annual accounts) or information from the fund or
trust or institution or any university or other educational institution or any
hospital or other medical institution, as the case may be, as it thinks
necessary in order to satisfy itself about the genuineness of the activities of
the fund or trust or institution or any university or other educational
institution or any hospital or other medical institution, as the case may be,
and the Central Government or the prescribed authority, as the case may be, may
also make such inquiries as it deems necessary in this behalf:
Provided also that the fund or
trust or institution or any university or other educational institution or any
hospital or other medical institution referred to in sub- clause (iv) or
sub-clause (v) or sub-clause (vi) or sub- clause (via)- 1 [(a) applies its
income, or accumulates it for application, wholly and exclusively to the
objects for which it is established and in a case where more than twenty-five
per cent of its income is accumulated on or after the 1st day of April, 2001,
the period of the accumulation of the amount exceeding twenty-five per cent of
its income shall in no case exceed five years; and] (b) does not invest or
deposit its funds, other than- (i) any assets held by the fund, trust or
institution or any university or other educational institution or any hospital
or other medical institution where such assets form part of the corpus of the
fund, trust or institution or any university or other educational institution
or any 1 Inserted by Finance Act 2001, w.e.f. 1.4.2002 2 hospital or other
medical institution as on the 1st day of June, 1973;
2 [(ia) any asset, being equity
shares of a public company, held by any university or other educational
institution or any hospital or other medical institution where such assets form
part of the corpus of any university or other educational institution or any
hospital or other medical institution as on the 1st day of June, 1998;] (ii)
any assets (being debentures issued by, or on behalf of, any company or corporation),
acquired by the fund, trust or institution or any university or other
educational institution or any hospital or other medical institution before the
1st day of March, 1983;
(iii) any accretion to the shares,
forming part of the corpus mentioned in sub-clause (i) and sub- clause (ia), by
way of bonus shares allotted to the fund, trust or institution or any
university or other educational institution or any hospital or other medical
institution;
(iv) voluntary contributions
received and maintained in the form of jewellery, furniture or any other
article as the Board may, by notification in the Official Gazette, specify, for
any period during the previous year otherwise than in any one or more of the
forms or modes specified in sub-section (5) of section 11:
...
Provided also that the exemption
under sub- clause (vi) or sub-clause (via) shall not be denied in relation to
any funds invested or deposited before the 1st 2 Inserted by Finance Act, 2001,
w.e.f. 1.4.2001 2 day of June, 1998, otherwise than in any one or more of the
forms or modes specified in sub-section (5) of section 11 if such funds do not
continue to remain so invested or deposited after the 30th day of March, 2001 :
Provided also that the exemption
under sub- clause (iv) or sub-clause (v) or sub-clause (vi) or sub- clause
(via) shall not be denied in relation to voluntary contribution, other than
voluntary contribution in cash or voluntary contribution of the nature referred
to in clause (b) of the third proviso to this sub-clause, subject to the
condition that such voluntary contribution is not held by the trust or
institution or any university or other educational institution or any hospital
or other medical institution, otherwise than in any one or more of the forms or
modes specified in sub-section (5) of section 11, after the expiry of one year
from the end of the previous year in which such asset is acquired or the 31st
day of March, 1992, whichever is later:
...
3 [Provided also that where the
fund or trust or institution or any university or other educational institution
or any hospital or other medical institution referred to in sub-clause (iv) or
sub-clause (v) or sub- clause (vi) or sub-clause (via) does not apply its
income during the year of receipt and accumulates it, any payment or credit out
of such accumulation to any trust or institution registered under section 12AA
or to any fund or trust or institution or any university or other educational
institution or any hospital or other medical institution referred to in sub-clause
(iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall not be
treated as application of income to the objects for which such fund or trust or
institution or university or educational institution or hospital or other
medical institution, as the case may be, is established:
3 Inserted by the Finance Act,
2002, w.e.f. 1.4.2003 2 Provided also that where the fund or institution
referred to in sub-clause (iv) or trust or institution referred to in
sub-clause (v) is notified by the Central Government 4[or is approved by the
prescribed authority, as the case may be,] or any university or other
educational institution referred to in sub-clause (vi) or any hospital or other
medical institution referred to in sub-clause (via), is approved by the prescribed
authority and subsequently that Government or the prescribed authority is
satisfied that- (i) such fund or institution or trust or any university or
other educational institution or any hospital or other medical institution has
not- (A) applied its income in accordance with the provisions contained in
clause (a) of the third proviso; or (B) invested or deposited its funds in
accordance with the provisions contained in clause (b) of the third proviso; or
(ii) the activities of such fund or institution or trust or any university or
other educational institution or any hospital or other medical institution- (A)
are not genuine; or (B) are not being carried out in accordance with all or any
of the conditions subject to which it was notified or approved :
it may, at any time after giving a
reasonable opportunity of showing cause against the proposed action to the
concerned fund or institution or trust or any university or other educational
institution or any hospital or other medical institution, rescind the
notification or, by order, withdraw the approval, as the case may be, and
forward a copy of the order rescinding the notification or 4 Inserted by the
Finance Act, 2007, w.e.f. 1.6.2007 2 withdrawing the approval to such fund or
institution or trust or any university or other educational institution or any
hospital or other medical institution and to the Assessing Officer;]"
(emphasis supplied)
24. We may quote Section 10(22) of
the 1961 Act, as it stood prior to 1.4.1999, which reads as follows:
"10. Income not included in
total income- In computing the total income of a previous year of any person,
any income falling within any of the following clauses shall not be included-
(22) any income of a university or other educational institution, existing solely
for educational purposes and not for purposes of profit."
25. We also quote hereinbelow
Section 11(1)(a) of the 1961 Act, which reads as follows:
"11. Income from property
held for charitable or religious purposes.
(1) Subject to the provisions of
sections 60 to 63, the following income shall not be included in the total
income of the previous year of the person in receipt of the income- (a) income
derived from property held under trust wholly for charitable or religious
purposes 2 to the extent to which such income is applied to such purposes in
India; and, where any such income is accumulated or set apart for application
to such purposes in India, to the extent to which the income so accumulated or
set apart is not in excess of fifteen per cent of the income from such
property"
26. At the outset, we need to
examine the scope of Section 10(22), which is the predecessor of Section
10(23C)(vi), without the provisos.
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-making but educational 2 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 - whether the activities of the applicant came within the definition
of "income of educational institution". 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.
29. In ACIT v. Surat Art Silk
Cloth Manufacturers Association reported in (1980) 121 ITR 1 it has been held
by this Court that test of predominant object of the activity is to be seen
whether it exists solely for education and not to earn profit. However, the
purpose would not lose its character merely because some profit arises from the
activity. That, it is not possible to carry on educational activity in such a
way that the expenditure 3 exactly balances the income and there is no
resultant profit, for, to achieve this, would not only be difficult of
practical realization but would reflect unsound principles of management. In
order to ascertain whether the Institute is carried on with the object of
making profit or not it is duty of the prescribed authority to ascertain
whether the balance of income is applied wholly and exclusively to the objects
for which the applicant is established.
30. 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 3
applied for non-educational purpose has to be decided only at the end of the
financial year.
31. In Oxford University Press
(supra) this Court found that the applicant was a branch of Oxford Press which
was part of the Oxford University but its activity in India was restricted to
publishing books, journals, periodicals etc. The Tribunal held that because
Oxford Press is part of the University its income was exempt under Section
10(22) as it stood at the relevant time. It is in this context that the words
"existing solely for educational purposes and not for the purposes of
profit" in Section 10(22), which words also find place in Section
10(23C)(vi), came for consideration. This Court held that location of the
University is not relevant, what is relevant is - whether there is imparting of
education in India. Therefore, the test formulated by this Court to decide the
character of the recipient of income under Section 10(22) is whether there is
in fact existence of an activity which is in the nature of "imparting of
education in India". This is how the words "in India" have come
into judgment and not by incorporation from Section 11(1)(a) of 1961 Act, as
contended on behalf of the Department.
3
32. We shall now consider the
effect of insertion of provisos to Section 10(23C)(vi) vide Finance Act, 1998.
Section 10(23C)(vi) is analogous to Section 10(22). To that extent, the
judgments of this Court as applicable to Section 10(22) would equally apply to
Section 10(23C)(vi). The problem arises with the insertion of the provisos to
Section 10(23C)(vi). With the insertion of the provisos to Section 10(23C)(vi)
the applicant who seeks approval has not only to show that it is an institution
existing solely for educational purposes [which was also the requirement under
Section 10 (22)] but it has now to obtain initial approval from the PA, in
terms of Section 10(23C)(vi) by making an application in the standardized form
as mentioned in the first proviso to that section. That condition of obtaining
approval from the PA came to be inserted because Section 10(22) was abused by
some educational institutions/universities. This proviso was inserted along
with other provisos because there was no monitoring mechanism to check abuse of
exemption provision. With the insertion of the first proviso, the PA is
required to vet the application. This vetting process is stipulated by the
second proviso. It is important to note that the second proviso also indicates
the powers and duties of the PA. While considering the approval application in
the second proviso, the PA is empowered before giving approval to call for such
documents including annual accounts or 3 information from the applicant to check
the genuineness of the activities of the applicant institution. Earlier that
power was not there with the PA.
Under the third proviso, the PA
has to ascertain while judging the genuineness of the activities of the
applicant institution as to whether the applicant applies its income wholly and
exclusively to the objects for which it is constituted/established. Under the
twelfth proviso, the PA is required to examine cases where an applicant does
not apply its income during the year of receipt and accumulates it but makes
payment therefrom to any trust or institution registered under section 12AA or
to any fund or trust or institution or university or other educational
institution and to that extent the proviso states that such payment shall not
be treated as application of income to the objects for which such trust or fund
or educational institution is established. The idea underlying the twelfth
proviso is to provide guidance to the PA as to the meaning of the words
"application of income to the objects for which the institution is
established". Therefore, the twelfth proviso is the matter of detail. The
most relevant proviso for deciding this appeal is the thirteenth proviso. Under
that proviso, the circumstances are given under which the PA is empowered to
withdraw the approval earlier granted. Under that proviso, if the PA is
satisfied that the trust, fund, university or other educational institution
etc. has not applied its income in 3 accordance with the third proviso or if it
finds that such institution, trust or fund etc. has not invested/deposited its
funds in accordance with the third proviso or that the activities of such fund
or institution or trust etc. are not genuine or that its activities are not
being carried out in accordance with the conditions subject to which approval
is granted then the PA is empowered to withdraw the approval earlier granted
after complying with the procedure mentioned therein.
33. 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.
3
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 as it deems fit provided they are not in conflict with the
provisions 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 3 India. Similarly, the PA may grant approvals on such terms and
conditions as 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.
35. The next question which arises
for consideration is: whether the words "in India" should be read into
Section 10(23C)(vi) and/or in the third proviso thereto?
36. Section 10(23C)(vi) seeks to
exempt income of institutions with laudable objects and activities such as
universities, hospitals etc.. As stated 3 above, stipulation of monitoring
conditions is different from compliance of those conditions. Compliance or
non-compliance can only be gauged at the assessment stage.
37. In the case of Oxford
University Press (supra), Oxford University had a branch in India. The only
activity of that branch was to carry on the business of a commercial printing
press which published and printed books and materials and sold the same
commercially and made a profit. The Department contended that one should read
the words "in India" along with the word "University". Accordingly,
the Department contended that Section 10(22) exemption should be denied to the
profits arising from the commercial printing activity of the University since
Section 10(22) gave exemption only to profits/income of an Indian University.
All the three Judges held that it was impermissible to read in the words
"in India" into Section 10(22) of the 1961 Act. As stated above,
Section 10(23C)(vi) is analogous to Section 10(22) of the 1961 Act. The
majority view, however, was that the University must carry on educational
activities in India in order to satisfy Section 10(22). According to the
majority view, some educational activity had to be carried on in India and
since Oxford University Press carried on no educational activity in India, the
exemption did not apply to 3 the University. In other words, the majority
judges held that "non-profit"
qualification has to be tested
against Indian activities and it is in this context that remarks regarding
"in India" are made in the judgment of the majority at page nos. 672
and 684.
38. 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 of 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. As stated, Parliament in its wisdom has stated in 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.
3 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 4
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.
40. In the light of what is stated
above, we set aside order dated 12.10.2004 passed by CBDT, we remit the matter
to CBDT for fresh consideration in accordance with law. We may clarify that, in
this case, appellant has fulfilled the threshold pre-condition of actual
existence of an educational institution under section 10(23C)(vi) and,
therefore, on that count CBDT will not reject the approval application dated
7.4.1999.
41. 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 4 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 years. 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.
42. We quote hereinbelow Rule 2CA
of the Income-tax Rules, 1962, which reads as follows:
"2CA. (1) The prescribed
authority under sub-clauses (vi) and (via) of clause (23C) of section 10 shall
be the Chief Commissioner or Director General, to whom the application shall be
made as provided in sub-rule (2).
(1A) The prescribed authority
under sub-clauses (vi) and (via) of clause (23C) of section 10 shall be the
Central Board of Direct Taxes constituted under the Central Boards of Revenue
Act, 1963 (54 of 1963) for applications received prior to 3rd day of April,
2001:
Provided that in case of
applications received prior to 3rd day of April, 2001 where no order has been
passed granting approval or rejecting the applications as on 31st day of May,
2007, the prescribed authority under 4 sub-clauses (vi) and (via) of clause
(23C) of section 10 shall be the Chief Commissioner or Director General.
(2) An application for approval
shall be made in Form No. 56D by any university or other educational
institution or any hospital or other medical institution referred to in
sub-clause (vi) or sub-clause (via) of clause (23C) of section 10.
(3) The approval of the Central
Board of Direct Taxes or Chief Commissioner or Director General, as the case
may be, granted before the 1st day of December, 2006 shall at any one time have
effect for a period not exceeding three assessment years.
Explanation.- For the purposes of
this rule, "Chief Commissioner or Director General" means the Chief
Commissioner or Director General whom the Central Board of Direct Taxes may,
authorize to act as prescribed authority, for the purposes of sub-clause (vi)
or sub-clause (via) of clause (23C) of section 10, in relation to any
university or other educational institution or any hospital or other medical
institution.
43. 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 5= 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.
44. Accordingly, the impugned
judgment dated 24.11.2006 of the Delhi High Court in Writ Petition (C) No.
17978/04 as well the decision of CBDT F.No.197/78/99-ITA.I dated 12.10.2004 are
set aside and the matter 4 is remitted to CBDT for fresh consideration in
accordance with law as discussed hereinabove.
45. Accordingly, this civil appeal
is allowed with no order as to costs.
...............................J.
( S. H. Kapadia)
...............................J.
( B. Sudershan Reddy) New Delhi;
May 9, 2008.
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