Commissioner Of Income-Tax v. Queens' Educational Society

I.T.A Nos. 103 and 104 of 2007

Decided on September 24, 2007

JUDGMENT

1. Both these appeals, preferred by Revenue under section 260A of the Income-tax Act, 1961, involve a common question of law based on common set of facts and, therefore, are being, decided by one and common judgment. Appeal No. 103 of 2007 is directed against the consolidated judgment dated July 7, 2006, of the Income-tax Appellate Tribunal, Delhi Bench ‘B’, New Delhi (for short, “the ITAT”) passed in I.T.A Nos. 2191 and 2189 (Delhi) of 2004 pertaining to the assessment years 2000-01 and 2001-02, whereas Appeal No. 104 of 2007 has been preferred by the Revenue against the judgment dated July 7, 2006, passed by the Income-tax Appellate Tribunal in Appeal No. 2190 (Delhi) of 2004 pertaining to the assessment year 2001-02. The facts, in brief, are that the assessees are educational societies registered under the Societies Registration Act and have been imparting education to children. In the relevant assessment years the assessees in both the appeals claimed exemption under section 10(23C)(iiiad), which provides that the income received by the educational societies which exist solely for educational purposes and not for the purpose of profit shall not be subjected to tax. With the returns of the assessees, the statement of account for the relevant assessment years, i.e, 2000-01 and 2001-02, showed the net surplus at Rs. 6,58,862 and Rs. 7,82,632, respectively, in I.T.A Nos. 2191 and 2189 and in another case of St. Pauls Sr. Secondary School, the statement of profit is contained in the chart which indicates surplus, investment in fixed assets and net surplus and the same is reproduced as under:

Financial year Gross receipts (Rs. p.) Surplus (Rs. p.) Investment in fixed assets (Rs. p.) Net surplus (Rs. p.) 2001-2002 1,15,72,753 97,313.56 11,41,275.76 10,43,962.20 2000-2001 96,49,062 7,12,704.80 10,40,501.92 32,797.12 1999-2000 64,05,334 12,29,531.54 8,00,908.40 52,86,623.14 1998-1999 61,96,745 7,58,397.20 5,89,670.90 1,68,726.30 1997-1998 52,10,985 5,85,764.56 5,80,858.21. 4,906.35

2. The Assessing Officer assessed both the assessees rejecting the exemption as claimed, against which appeals of the assessees were allowed by the Commissioner of Income-tax (Appeals). Then the Revenue filed appeals before the Income-tax Appellate Tribunal, which were dismissed.

3. The Income-tax Appellate Tribunal having rejected the contentions of Revenue in this regard, the Department has come up in appeal before us.

4. We have heard learned counsel for the parties and perused the record.

5. The following question arises before this court for consideration:

“Whether, in the facts and circumstances of the case, exemption as claimed by the assessees was allowable or not?”

6. The Income-tax Appellate Tribunal, while granting exemption under section 10(23C)(iiiad), recorded the following reasons:

“During the years relevant for the assessment years 2000-01 and 2001-02, the excess of income over expenditure stood at Rs. 6,58,862 and Rs. 7,82,632, respectively. It was also noticed that the appellant-society had made investment in fixed assets including building at Rs. 9,52,010 in the financial year 1999-2000 and Rs. 8,47,742 in the financial year 2000-01 relevant for the assessment years 2000-01 and 2001-02 respectively. Thus, if the amount of investment into fixed assets such as building, furniture and fixture, etc., were also kept in view, there was hardly any surplus left…. The assessee-society is undoubtedly engaged in imparting education and has to maintain a teaching and non-teaching staff and has to pay for their salaries and other incidental expenses. It, therefore, becomes necessary to charge certain fees from the students for meeting all these expenses. The charging of fee is incidental to the prominent objective of the trust, i.e, imparting education. The trust was initially running the school in a rented building and the surplus, i.e, the excess of receipts over expenditure in the year under appeal (and in earlier years) has enabled the appellant to acquire its own property, acquire computers, library books, sports equipments, etc., for the benefit of the students. And more importantly the members of the society have not utilized any part of the surplus for their own benefit. The Assessing Officer wrongly interpreted the resultant surplus as the main objective of the assessee-trust. As held above, profit is only incidental to the main object of spreading education. If there is no surplus out of, the difference between the receipts and outgoings, the trust will not be able to achieve the objectives. Any educational institution cannot be run in rented premises for all times and without necessary equipment and without paying to the staff engaged in imparting education. The assessee is not getting any financial aid/assistance from the Government or other philanthropic agency and, therefore, to achieve the objectives, it has to raise its own funds. But such surplus would not come within the ambit of denying exemption under section 10(23C)(iiiad) of the Act.”.

7. The reasons recorded by the Income-tax Appellate Tribunal are hypothetical and against the set up case of the Revenue relating to earned profit. The Income-tax Appellate Tribunal failed to appreciate the profit of 30 per cent, in the assessment year 2000-01 and 27 per cent, in the assessment year 2001-02 of the total receipts in the case of Queens' Educational Society, Rani Kothi, Haldwani and in the case of St. Pauls Sr. Secondary School, the profit is indicated in the chart as net surplus which have been reproduced above from the Income-tax Appellate Tribunal's order by us. Thus, in view of the established fact relating to earned profit, we do not agree with the reasoning given by the Income-tax Appellate Tribunal for granting exemption. The law is well-settled that if the profit is proved by an educational society then that will be income to the society as the surplus amount remains in the account books of the society after meeting all the expenses incurred towards imparting the education. The hon'ble apex court in the case of Aditanar Educational Institution v. Additional Commissioner Of Income Tax, [1997] 224 ITR 310 has observed as under (page 318):

“After meeting the expenditure, if any surplus result 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 powers of the concerned entity.”

8. If one looks at the objects clause, there are other noble and pious objects but the assessee-society has done nothing to achieve the other objects except pursuing the main object of providing education and earning profit. Further, with profit earned the society has strengthened or enhanced its capacity to earn more rather than to undertake any other activities to fulfil other noble objects for the cause of poor and needy people or advancement of religious purpose.

9. Therefore, the law laid down by the apex court has rightly been applied and exemption has also rightly been refused by the Assessing Officer in the facts and circumstances of the case. Further, as noticed by the Income-tax Appellate Tribunal in the case of Queens' Educational Society that it had made investment in fixed assets including building at Rs. 9,52,010 in the financial year 1999-2000 and Rs. 8,47,742 in the financial year 2000-01 relevant for the assessment years 2000-01 and 2001-02 respectively. This fact has been discussed by the Assessing Officer and the Assessing Officer rejected the submission of the assessee relying on the judgment of the Delhi High Court, wherein it has been observed that merely because the society is not distributing the profit, or is applying the profit earned from running of the school on construction of school building is not enough for it to claim exemption. The hon'ble apex court agreed with the findings of the High Court in Municipal Corporation Of Delhi v. Children Book Trust, (1992) 3 SCC 390 and observed as under (page 413):

“In other words, what we want to stress is, where a society or body is making systematic profit, even though that profit is utilized only for charitable purposes, yet it cannot be said that it could claim exemption. If, merely qualitative test is applied to societies, even school which are run on commercial basis making profit would go out of the purview of taxation and would demand exemption.”

10. In our considered opinion, the ratio of the aforesaid judgment fully applies in the present case, may be the said observation has come in a matter of levy of tax by the municipal corporation. We may further add that the investment in the fixed assets like furniture and buildings are the properties of the society and may be connected with the imparting of education but the same has been constructed and purchased out of income from imparting the education with a view to expand the institution and to earn more income.

11. For the reasons recorded above, the order of the Income-tax Appellate Tribunal is set aside. The Order of the Assessing Officer is affirmed. The question is answered in favour of the Revenue and against the assessees. There shall be no order as to costs.