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St. Lawrence Educati... v. Commissioner Of Inco...
Structured Summary of the Opinion (W.P.(C) 1254/2010 and connected petition)
Factual and Procedural Background
Two writ petitions raising similar issues were heard together and disposed of by a single order. For clarity, the opinion narrates facts in W.P.(C) 1254/2010.
The assessee-petitioner is a society registered under the Societies Registration Act, 1860. It filed an application in Form No. 56D on 30 September 2008 seeking approval for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 for the financial year 2008-09 before the Chief Commissioner of Income Tax, Delhi (Central).
The authorized representative appeared and the assessing authority queried why the application should not be rejected in view of the Uttarakhand High Court decision in CIT v. Queens' Educational Society. The petitioner filed written submissions stating that it runs a school (nursery to 10th standard), that its principal and primary objective is to impart education (not to earn profit), and that any surplus generated (said to be less than 7% in submissions) was utilized for development of facilities and infrastructure.
The authority requested the audit report in Form No. 10BB and reviewed audit reports and income-expenditure statements for assessment years 2006-07, 2007-08 and 2008-09. It recorded that the petitioner showed surplus income of 3.35%, 7.40% and 2.06% of gross receipts respectively for those years. In the co-petition (Baptist Educational Society) surpluses were recorded as 7.57%, 8.23% and 4.04% respectively.
The authority concluded that the educational institutions run by the applicants were generating surplus year after year and that such surplus could not be regarded as merely incidental. It observed that the surpluses had been used for additions to buildings, purchase of furniture and electrical equipment. The authority referred to Aditanar Educational Institution v. Additional Commissioner of Income Tax and Municipal Corporation of Delhi v. Children Book Trust, and, following the Uttarakhand decision in Queens' Educational Society, rejected the application for approval under Section 10(23C)(vi) for the financial year 2008-09.
Petitioners challenged the rejection by writ petition. Counsel for the petitioners argued that the authority erred by relying solely on Queens' Educational Society and noted that Queens had been distinguished by the Bombay High Court (Vanita Vishram Trust), Himachal Pradesh High Court (Maa Saraswati Trust) and Punjab & Haryana High Court (Pinegrove International Charitable Trust). Counsel for the Revenue supported the authority's order.
Legal Issues Presented
- Whether the presence of a quantitative surplus (profit or surplus from receipts after expenditure) in an educational institution precludes grant of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961.
- Whether the competent authority was legally justified in rejecting an application for approval under Section 10(23C)(vi) solely on the basis of the Uttarakhand High Court decision in CIT v. Queens' Educational Society.
Arguments of the Parties
Petitioners' Arguments
- The petitioner society is primarily engaged in imparting education, running a school from nursery to 10th standard; its principal and primary objective is educational, not profit-making.
- Any surplus shown in accounts is small (submitted as less than 7% in written submissions) and was utilised for permissible purposes such as development of facilities and infrastructure.
- The authority erred in basing rejection solely on the decision in Queens' Educational Society, a position which has been distinguished by other High Courts (Vanita Vishram Trust, Maa Saraswati Trust, Pinegrove International Charitable Trust).
Revenue's Arguments
- The Revenue supported the view and order of the competent authority rejecting the approval under Section 10(23C)(vi) on the basis that the institutions were generating recurring surpluses and therefore could not be said to exist solely for educational purposes and not for profit.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Queens' Educational Society (Uttarakhand High Court) (2009) 319 ITR 160 | Authority relied on this judgment to contend that an educational institution should not generate surplus; used by authority as a basis to reject approval under Section 10(23C)(vi). | The court observed that the competent authority relied on this decision but found that later authorities have distinguished or limited its applicability; the court held that reliance solely on this decision to deny exemption because of some surplus was legally untenable. |
| Aditanar Educational Institution v. Additional Commissioner of Income Tax (1997) 224 ITR 310 | Explains that exemption availability must be evaluated year-wise; surplus arising incidentally does not change character if overall object is not to make profit; decisive test is whether object is to make profit. | The court cited this authority for the proposition that incidental surplus does not negate charitable/educational character and that the object of the institution is the decisive test. |
| Municipal Corporation of Delhi v. Children Book Trust (1992) 3 SCC 390 | Referenced by the authority (context in text: referred to along with Aditanar) though the precise principle drawn in the order is not elaborated beyond being a cited authority. | The order records that the authority referred to this decision; the court did not adopt the authority's reliance on it as a sufficient basis to uphold rejection based solely on surplus. |
| American Hotel and Lodging Association Educational Institute v. CBDT (2008) 301 ITR 86 (SC) | Reiterates that the test of predominant object (existence solely for education and not for profit) is to be applied; recognizes practical realities that some surplus may arise and empowers prescribed authority to ensure surplus is applied wholly and exclusively for educational objects. | The court relied on this Supreme Court authority to hold that generating some surplus does not automatically disqualify an institution and that the authority must examine application of balances to objects. |
| Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 | Five-Judge Constitution Bench decision: the predominant object test — whether the institution exists solely for education and not to earn profit — and that some profit does not change character; practicability considerations. | The court cited the principle from this landmark decision (as discussed in American Hotel) to reinforce that the presence of surplus is not determinative; the test is the overall object. |
| Pinegrove International Charitable Trust v. Union of India (2010) 327 ITR 73 (P&H) | Summarised several points: Section 10(23C)(vi) analogous to earlier Section 10(22); predominant object test applies; surplus does not automatically change character; authority can grant approval subject to terms/conditions (including parameters like 15%); capital expenditure wholly for education is not part of total income; registered societies can apply; excess accumulation rules post 1.4.2002; Queens' decision not applicable to s.10(23C)(vi) cases and Allahabad HC's City Montessori School lays down correct law. | The court relied on Pinegrove's analysis to conclude that the authority's strict approach (that any surplus disqualifies) is incorrect and to hold that Queens' decision does not apply to Section 10(23C)(vi) in the manner used by the competent authority. |
| Vanita Vishram Trust v. Chief Commissioner of Income-Tax (2010) 327 ITR 121 (Bom) | Bombay High Court distinguished the Queens' Educational Society decision. | The petitioners cited this decision to show that Queens had been distinguished; the court noted these distinguishing decisions when finding that the authority's reliance on Queens alone was untenable. |
| Maa Saraswati Trust v. Union of India (2010) 194 Taxman 84 (HP) | Himachal Pradesh High Court distinguished Queens' Educational Society. | The petitioners relied on this decision; the court considered that multiple High Courts had distinguished Queens and used that fact in concluding that the authority's approach was erroneous. |
| City Montessori School (Allahabad High Court) (referenced in Pinegrove) | Referred to in Pinegrove as laying down the correct law in contrast to Queens (text states that City Montessori School lays down correct law). | The court, via reliance on Pinegrove, treated the Allahabad High Court's approach as part of the correct legal matrix that undermines the authority's reliance on Queens. |
Court's Reasoning and Analysis
The court examined the approach adopted by the Chief Commissioner in rejecting the application under Section 10(23C)(vi). The authority's decision was based significantly on the Uttarakhand High Court decision in Queens' Educational Society and on the presence of recurring surpluses in audited accounts of the petitioners.
The court analyzed higher judicial authority and relevant High Court decisions. It noted authoritative pronouncements of the Supreme Court and subsequent High Court decisions which establish the following legal propositions (as reflected in the opinion):
- The entitlement to exemption under the relevant provision must be evaluated year by year, applying the test of predominant object — whether the institution exists solely for educational purposes and not for purposes of profit.
- Incidental surplus resulting from lawful educational activity does not convert an institution into one existing for profit, provided the overall or predominant object is not profit-making.
- Practical management realities mean that some surplus will often arise; the prescribed authority has a duty to ascertain whether any surplus/balance is applied wholly and exclusively to the institution's objects and may impose terms and conditions on approval to ensure compliance.
- High Court decisions (including Pinegrove, Vanita Vishram and Maa Saraswati) have distinguished the Queens' decision and Pinegrove expressly held that Queens is not applicable to cases under Section 10(23C)(vi) for reasons discussed in that judgment.
Applying these principles to the facts, the court concluded that the Chief Commissioner had erred in treating the mere existence of some surplus as dispositive that the institution was not existing "solely" for education. The court found that reasoning premised solely on the presence of any surplus was legally untenable and unjustified given the cited authorities which allow for incidental surplus and empower the authority to regulate approval conditions and ensure application of surplus to educational objects.
Accordingly, the court did not uphold the substantive finding of the Chief Commissioner rejecting approval on the ground that the institutions had shown surpluses; instead, it found that the matter required reassessment in light of controlling authorities and confined principles identified above.
Holding and Implications
Holding: The writ petition is allowed; the order passed by the competent authority rejecting the application for approval under Section 10(23C)(vi) for the financial year 2008-09 is set aside and the matter is remitted to the competent authority for fresh adjudication in accordance with law and in the light of the decisions referred to in the opinion.
Implications:
- The direct effect is that the rejection of the petitioner's application under Section 10(23C)(vi) is vacated and the competent authority must re-adjudicate the application applying the correct legal tests (predominant-object test) and considering whether any surplus is incidental and applied/accumulated for educational purposes.
- The court's order emphasizes that an institution should not be disqualified from exemption solely because it shows some surplus; instead, the authority must examine overall object, application of surplus, and may impose or ensure compliance with terms and conditions as allowed by precedent.
- The opinion does not purport to create a new legal precedent; it directs re-application of established Supreme Court and High Court authorities to the facts of these petitions.
This summary is based exclusively on the text of the provided court opinion and does not add or infer facts or legal holdings beyond those expressly set out in that opinion.
ORDER
Regard being had to the similitude of the issue involved in both the writ petitions, they were heard together and are being disposed of by a singular order. For the sake of clarity and convenience the facts in W.P(C) 1254/2010 are adumbrated herein.
2. The assessee-petitioner, a society registered under the Societies Registration Act, 1860 filed an application in Form No. 56D for grant of approval for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 (for brevity, the Act) on 30th September, 2008 for the financial year 2008-09 before the Chief Commissioner of Income Tax, Delhi (Central). The authorized representative on behalf of the assessee-petitioner appeared and a query was made by the authority why the application should not be rejected in view of the decision rendered by the Uttarakhand High Court in CIT v. Queens' Educational Society (2009) 319 ITR 160. A written submission was filed contending, inter alia, that the assessee-society is basically engaged in imparting education inasmuch as it is running a school from nursery to 10 standard and the principal and primary objective of the society is to impart education and not to earn profit. It was also contended that the surplus that is generated is less than 7% of the gross receipt and the same was utilized for development of facilities, infrastructure, etc.
3. The authority concerned required the assessee to file the audit report in Form No. 10BB and eventually came to held that the assessee was engaged in running a primary school i.e Lawrence Public School; that on a perusal of the audit reports for the assessment years 2006-07 and 2007-08 and Form No. 10BB for the assessment year 2008-09 and the income-expenditure statement for the aforesaid periods, it was clear that the assessee-society had shown surplus income of 3.35%, 7.40% and 2.06% respectively in its gross receipts after deducting all expenses including depreciation in the relevant assessment years. In case of the petitioner in W.P(C) No. 2463/2010, the Baptist Educational Society the surplus was 7.57%, 8.23% and 4.04% for the assessments years 2006-07, 2007-08 and 2008-09 respectively. The authority thereafter came to opine that the educational institutions run by the assessee-applicants were generating surplus out of their gross receipts year after year and it cannot be accepted that the surplus generated is merely incidental. An opinion was expressed that the surplus generated as above has been utilized by the educational institutions for making addition to building and purchase of furniture, electrical equipments etc. Thereafter, a reference was made to the decision in Aditanar Educational Institution v. Additional Commissioner Of Income Tax (1997) 224 ITR 310. Further the authority referred to the decision in Municipal Corporation Of Delhi v. Children Book Trust (1992) 3 SSC 390 and came to held as follows:-
“To sum up, for the grant of approval to an educational institution seeking exemption u/s 10(23C)(vi), the basic requirement of sub-clause(vi) of clause (23C) of Section 10 is that the educational institution seeking exemption should be existing solely for the purpose of education and not for the purpose of profit. Here emphasis is laid on the word solely. Considering the facts of the present case in entirety as discussed above and respectfully following the ratio of the aforesaid judgment of the Hon'ble High Court of Uttrakhand, it cannot be said that the assessee-applicant society and the educational institutions run by it are existing solely for the purpose of education and not for the purpose of profit. Hence, the application for the assessee-applicant, seeking grant of approval for the purpose of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 for the financial year 2008-09 is hereby rejected.”
4. Mr. V.P Gupta, learned counsel for the petitioner submitted that the respondent has fallen into a grave error by expressing opinion solely on the basis of the decision rendered in Queens' Educational Society (supra). Learned counsel also submitted that the decision in the case of Queens' Educational Society (supra) has been distinguished by the Bombay High Court in Vanita Vishram Trust v. Chief Commissioner of Income-Tax (2010) 327 ITR 121(Bom), Himachal Pradesh High Court in Maa Saraswati Trust v. Union of India (2010) 194 Taxman 84 (HP) and Punjab and Haryana High Court in Pinegrove International Charitable Trust v. Union of India (2010) 327 ITR 73 (P&H).
5. Mr. Sanjeev Sabharwal, learned counsel for Revenue supported the order passed by the competent authority.
6. In Aditanars Educational Institution (supra) the Apex Court while dealing with the factum of exemption has held thus:-
“The language of section 10(22) of the Act 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 purposes of profit. After meeting the expenditure, if any surplus results incidentally from the activity 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 evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity.”
6. In American Hotel and Lodging Association Educational Institute v. CBDT (2008) 301 ITR 86(SC), their Lordships have laid down the principal on following terms:-
“In Addl. CIT v. Surat Art Silk Cloth Manufacturers Association reported in [1980] 121 ITR 1, it has been held by this court that the 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 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.”
7. In the case of Pinegrove International Charitable Trust (supra), the Punjab and Haryana High Court after referring to the decision in the field has expressed the following opinion:-
(2) The provisions of Section 10(23C)(vi) of the Act are analogues to the erstwhile Section 10(22) of the Act, as has been laid down by Hon'ble the Supreme Court in the case of American Hotel and Lodging Association (supra). To decide the entitlement of an institution for exemption under Section 10(23C)(vi) of the Act, the test of predominant object of the activity has to be applied by posing the question whether it exists solely for education and not to earn profit [See 5-Judges Constitution Bench judgment in the case of Surat Art Silk Cloth Manufacturers Association (supra)]. It has to be borne in mind that merely because profits have resulted from the activity of imparting education would not result in change of character of the institution that it exists solely for educational purpose. A workable solution has been provided by Hon'ble the Supreme Court in para 33 of its judgment in American Hotel and Lodging Association's case (supra). Thus, on an application made by an institution, the prescribed authority can grant approval subject to such terms and conditions as it may deems fit provided that they are not in conflict with the provisions of the Act. The parameters of earning profit beyond 15% and its investment wholly for educational purposes may be expressly stipulated as per the statutory requirement. Thereafter the Assessing Authority may ensure compliance of those conditions. The cases where exemption has been granted earlier and the assessments are complete with the finding that there is no contravention of the statutory provisions, need not be reopened. However, after grant of approval if it comes to the notice of the prescribed authority that the conditions on which approval was given, have been violated or the circumstances mentioned in 13th proviso exists, then by following the procedure envisaged in 13th proviso, the prescribed authority can withdraw the approval.
(3) The capital expenditure wholly and exclusively to the objects of education is entitled to exemption and would not constitute part of the total income.
(4) The educational institutions, which are registered as a Society, would continue to retain their character as such and would be eligible to apply for exemption under Section 10(23C)(vi) of the Act. [See para 8.7 of the judgment - Aditanar Educational Institution case (supra)]
(5) Where more than 15% of income of an educational institution is accumulated on or after 01.04.2002, the period of accumulation of the amount exceeding 15% is not permissible beyond five years, provided the excess income has been applied or accumulated for application wholly and exclusively for the purpose of education.
(6) The judgment of Uttrakhand High Court rendered in the case of Queens Educational Society (supra) and the connected matters, is not applicable to cases fall within the provisions of Section 10(23C)(vi) of the Act. There are various reasons, which have been discussed in para 8.8 of the judgment, and the judgment of Allahabad High Court rendered in the case of City Montessori School (supra) lays down the correct law.”
8. In view of the aforesaid decisions, the opinion expressed by the respondent that the educational institutions seeking exemption should not generate any quantitative surplus is legally untanable and incorrect. The Chief Commissioner has erred in assuming that for exemption there should not be any surplus, otherwise the institution society exists for profit and not charity i.e education in the present case. In view of the aforesaid judgments of the Supreme Court, Bombay High Court and Punjab and Haryana High Court, reasoning inscribed by the competent authority solely on the foundation that there has been some surplus profit is unjustified.
9. In the result, we allow the writ petition and set aside the order passed by the competent authority and remit the matter to the said authority for fresh adjudication in accordance with law in the light of the aforesaid decisions.
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