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Green Acres Educational Trust v. Deputy Commissioner of Income-tax, 5(2)(2), Mumbai

Income Tax Appellate Tribunal

Jun 24, 2016

Judgment

CaseIQ

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Factual and Procedural Background

The assessee is a trust constituted by a trust deed dated 10 February 2012. The trust deed records objects including imparting education by setting up schools (including pre-primary schools), colleges and vocational training institutes in India. The trust deed was registered with the Charity Commissioner of Mumbai on 17 May 2012.

The assessee filed an application in Form No.10A dated 29 May 2012 under section 12A of the Income-tax Act seeking registration. The Director of Income Tax (Exemption), Mumbai (DIT) by order dated 29 November 2012 rejected the application for registration under section 12AA(1)(b)(ii) read with section 12A. The DIT gave two primary reasons: (i) that the trust was running a pre-school which the DIT regarded as a stage prior to "normal schooling" and therefore outside the scope of "education" under section 2(15); and (ii) that the trust was charging various fees (prospectus, school kit, admission fees, etc.) and therefore carrying on a commercial activity.

The assessee appealed to the Income-tax Appellate Tribunal. The appeal was heard with arguments by the authorised representative for the assessee and by a departmental representative for the Revenue. The Tribunal examined the DIT's reasons and the evidence before it and allowed the appeal, directing the DIT to grant registration under section 12A with effect from the date of filing of the application.

Legal Issues Presented

Whether pre-schooling falls within the meaning of "education" as contemplated by section 2(15) of the Income-tax Act.
Whether charging fees and retaining surplus amounts amounts to carrying on a commercial activity such that an educational trust is disentitled to registration/exemption under sections 11 and 12.
Whether the DIT erred in rejecting the assessee's application for registration under section 12A on the grounds given.

Arguments of the Parties

Appellant's Arguments

The trust deed expressly includes imparting education by setting up schools including pre-primary (pre-school) schools; pre-school activity is part of the objects and should be seen as an educational activity.
The pre-school activity was an initial activity undertaken soon after constitution of the trust; it cannot be isolated from the broader educational purpose stated in the trust deed.
Pre-schooling is integral to education; it should be regarded as part of "education" under section 2(15). Reliance was placed on Life Shines Educational & Charitable Trust v. Asstt. CIT (Chennai Bench) to support this proposition.
Financial statements showed aggregate expenses of about Rs. 53 lakhs against receipts of not more than Rs. 12 lakhs for the relevant year, resulting in a deficit of approximately Rs. 41.50 lakhs; this undermines the DIT's finding of a commercial activity driven by surplus generation.
At the stage of registration under section 12A, the DIT's role is limited to examining genuineness of activities and conformity with objects; detailed factual questions about application of income and compliance with other provisions are within the jurisdiction of the Assessing Officer (AO) at assessment stage.

Revenue's Arguments

The departmental representative relied upon the order of the DIT and the cases relied upon by the DIT in support of the rejection of registration.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Life Shines Educational & Charitable Trust v. Asstt. CIT [2015] 60 taxmann.com 155 / 70 SOT 570 (Chennai Bench)	Held that the activity of running a pre-school and collecting fees for imparting education to children falls within the meaning of "education" under section 2(15).	The Tribunal relied on this decision as authority that pre-schooling is part of "education" and used it to support the conclusion that the assessee's pre-school activity falls within section 2(15).
ADIT (Exemption) v. Jeevan Vidya Mission [2015] 64 taxmann.com 62 / 155 ITD 1150 (Mumbai Bench)	Analysed the scope of the term "education" in section 2(15) and held that the term should not be given a restricted meaning; educational activities have wide scope and amplitude.	The Tribunal reproduced and relied upon the observations in this order to support a broad and inclusive interpretation of "education", rejecting a narrow view that would exclude pre-schooling.
CIT v. Queen's Educational Society [2009] 319 ITR 160 / 177 Taxman 326 (Uttarakhand High Court)	Held that if an educational institute earns surplus (receipts exceed expenditure) it would lose benefit of exemption under the Income-tax Act (a view contrary to other High Courts).	The Tribunal noted this decision as having taken a restrictive view; it treated that decision as creating a controversy which was later discussed/resolved by the Supreme Court.
Queen's Educational Society v. CIT [2015] 231 Taxman 286 / 55 taxmann.com 255 (Supreme Court)	The Supreme Court disagreed with the Uttarakhand High Court and held that mere surplus does not, by itself, result in an educational institute losing charitable status or exemption.	The Tribunal relied on this apex court decision to conclude that earning a surplus (or charging fees) does not automatically disentitle an educational institution from registration/exemption; this supported the conclusion that charging fees is not a ground to refuse registration.

Court's Reasoning and Analysis

The Tribunal considered the two reasons given by the DIT for refusing registration and rejected both as erroneous in law and on facts.

On whether pre-schooling falls within "education" (section 2(15)):

The Tribunal held that the DIT's restrictive view was "highly myopic and regressive" in the context of modern educational needs and social realities.
The Tribunal emphasized that "education" has a wide scope, comprising multiple stages (pre-schooling, schooling, higher education, professional education, vocational training, etc.) and that education may begin at any stage and continue throughout life.
It noted that pre-schooling is often a mandatory prelude to school education and is integral to the educational ladder; therefore it cannot be isolated and excluded from the meaning of "education".
The Tribunal relied on prior Tribunal authority (Jeevan Vidya Mission) which analyzed section 2(15) broadly, and on Life Shines (Chennai) which specifically held pre-schooling falls within section 2(15).
On that basis the Tribunal concluded that pre-schooling is within the ambit of "education" under section 2(15) and that the DIT erred in excluding it.

On whether charging fees and retaining surplus converts the activity into commercial activity (disentitling exemption):

The Tribunal observed that the statute does not require educational institutions to carry out activities entirely free of charge in order to obtain exemption under sections 11 and 12; section 2(15) includes "education" within "charitable purpose".
At the stage of registration under section 12A, the DIT's role is limited to examining the genuineness of the trust's activities and conformity with the objects in the trust deed; it is not the stage to investigate detailed application of income or to decide whether receipts have been properly applied.
The Tribunal noted the historical controversy arising from the Uttarakhand High Court's decision (CIT v. Queen's Educational Society) which took a contrary view on surplus, but referred to the Supreme Court decision (Queen's Educational Society v. CIT) which held that mere surplus does not, by itself, deprive an educational institution of charitable status.
Given these principles and the specific facts (including the assessee's accounts showing excess of expenditure over receipts), the Tribunal found no justification for the DIT's conclusion that the trust was engaged in commercial activity simply because fees were charged for certain items.

Conclusion of analysis: both reasons given by the DIT were legally and factually incorrect; the trust was carrying out educational activity as per its objects and was entitled to registration under section 12A.

Holding and Implications

Holding:

The appeal is allowed and the assessee is granted registration under section 12A of the Income-tax Act with effect from the date the application was filed.

Implications / Consequences (as stated in the opinion):

The DIT is directed to grant the benefit of registration under section 12A to the assessee trust with retrospective effect from the date of filing of the application.
The Assessing Officer (AO) remains competent and is at liberty to examine at the stage of assessment whether the receipts/income of the trust have been applied solely for the purpose of education and whether the trust is complying with other provisions; if the AO is not satisfied, the AO may, in accordance with law, deny the benefit of exemption for relevant assessment years.
The Tribunal held that charging of fees and the fact of earning surplus (by itself) does not automatically disqualify an institution from being charitable; the question of application of income is to be examined at assessment stage rather than at the registration stage.

The opinion does not purport to lay down a new legislative rule beyond these direct determinations and directions as applied to the facts before the Tribunal.

Show all summary ...

ORDER

Ashwani Taneja, Accountant Member - This appeal has been filed by the Assessee against the order passed by the Director of Income Tax (Exemption) Mumbai dated 29.11.2012, u/s 12AA(1)(b)((ii) r.w. section 12A of the Act, on the following grounds:

'1. The learned Director of Income-tax (Exemptions), Mumbai (DIT) erred in passing an order under section 12AA read with section 12A rejecting appellant's application for grant of registration.

2. The DIT erred in holding that the appellant is running the pre-school essentially as a business or commercial activity rather than as a charitable one.

3. The appellant submits that the DIT failed to appreciate the objects of the appellant trust including educational object for running educational institutes while rejecting its application for grant of registration.

4. The DIT erred in taking a very narrow meaning of "normal schooling" in rejecting its application for grant of registration. The appellant submits that the DIT ought to have taken a broad meaning of the term "education" contained in section 2(15) while considering its application for grant of registration.

5. The appellant submits that merely because pre-schooling is not recognized or regulated by any authority would not imply that the relevant activity cannot be regarded as "education" within the meaning of section 2(15).

6. The appellant submits that it had filed full details and explanation before the DIT in support of its application for grant of registration including the charitable nature of its objects and the DIT erred in rejecting its application.

7. The appellant submits that the order of the DIT rejecting its application for registration be set aside and the DIT be directed to grant registration to the appellant trust.

8. Each of the above grounds of appeal are independent and without prejudice to each other.

9. The appellant craves liberty to add, alter and/or amend the grounds of appeal as and when necessary.'

2. During the course of hearing, arguments were made by Shri Madhur Agarwal, Authorised Representative (AR) on behalf of the Assessee and by Shri Goli Sriniwas Rao, Departmental Representative (DR) on behalf of the Revenue.

3. The brief facts and background of this case as culled out from the orders of the lower authorities and evidences produced before us are that the assessee is a trust as its name suggest, which has been constituted by the trust deed dated 10th day of February 2012, with the following objects as mentioned at para 3 of the trust deed:

"Objects of the Trust

The settler hereby declares and irrevocably constitutes the Trust for the purpose of imparting high quality education to students of all castes, creeds and communities by way of setting up schools (including pre-primary schools), colleges, and educational and vocational training institutes in India."

3.1 The assessee trust filed an application u/s 12A in form No.10A dated 29.05.2012 with the Director of Income Tax (Exemption)-Mumbai for the purpose of seeking registration u/s 12A. It is noted that the aforesaid trust deed was duly registered with the Charity Commissioner of Mumbai on 17.05.2012. The Ld. DIT rejected the application for grant of registration on following two reasons:

(i) The assessee is running the pre-school which is stage prior to normal schooling, and therefore, its activities cannot be treated as falling within the gamut of 'Education' as per section 2(15) of the Act. The justification given by the Ld. DIT is that as compared to formal education imparted in course of normal schooling, pre-schooling is a kind of informal education which is not recognized or regulated by the State Government/Education Board/ BMC.

(ii) The assessee trust is charging fees for issue of prospects, additional fees on account of supply of School Kit, admissions fees etc. and on the basis of the same Ld. DIT concluded that assessee trust was engaged in the business of commercial activity while running the pre-school.

3.2 Thus, on both these reasons, Ld. DIT refused the benefit of registration to the assessee trust.

3.3 Being aggrieved, the assessee filed an appeal before the Tribunal.

3.4 During the course of hearing, Ld. Counsel vehemently and exhaustively made his arguments to assail the reasoning given by the Ld. DIT for denying the benefit of registration. It has been submitted by the Ld. Counsel that Ld. DIT has ignored the object mentioned in the trust deed wherein it is specifically provided that the trust has been constituted for the purpose of imparting high quality education to all types of students from any background by way of setting up schools, colleges and vocational training institutes in India. The pre-school is just one of the activities; which has been taken up just in the beginning of the activities because, only little time had passed since date of constitution of trust when the application for registration was filed. It was further submitted on 'without prejudice' basis that in any case pre-schooling was also integral part of 'education' and cannot be and could not be seen in isolation from it. Ld. Counsel also relied upon the judgment of Chennai Bench of the Tribunal in the case of Life Shines Educational & Charitable Trust v. Asstt. CIT [2015] 60 taxmann.com 155/70 SOT 570 (Chennai) for the proposition that activity of running a pre-school and collecting the fee for imparting education to children shall be covered within the meaning of the term 'education' as envisaged u/s 2(15).

3.5 Further, with regard to the second reason given by Ld. DIT, our attention was drawn upon the Income and Expenditure Account of the trust showing that an aggregate amount of expenses of Rs. 53 lakhs were incurred as per Income and Expenditure Account for the year ending on 31st March 2013, whereas the receipt of the trust aggregated to rupees not more than 12 lakhs and therefore, there was a deficit (i.e. excess of expenses over receipts) amounting to Rs.41.50 lakhs. It was submitted that the assessee is required to maintain appropriate infrastructure & establishment as well as arrangement of competent faculties so as to provide good quality of education for the students. Therefore, all the facts should be seen in totality and not in isolation. It was lastly submitted by him that in any case it was beyond the jurisdiction of Ld. DIT to examine these facts at this stage. It would be domain of the AO to examine whether the receipts from education activity have been applied solely in the activity of education or not. In case the AO is not satisfied, then the legislature has provided all the powers to the AO to deny the benefit of exemption at the time of assessment also. Thus, the Ld. DIT has gone wrong as per law and facts while denying benefit of registration to the assessee and his order may be reversed and registration should be granted.

3.6 Per contra, Ld. DR relied upon the order of Ld. DIT as well as cases relied upon by Ld DIT in his order.

3.7 We have gone through the facts of this case and evidences brought before us and we do not agree with either of the reasons given by the Ld. DIT for refusing the benefit of registration to the assessee trust, in view of our observations and discussion made in following paras'.

3.8 Whether Pre-School would fall in the term 'education' as envisaged u/s 2(15):

We have gone through the reasoning given by the Ld. DIT and we find that the view adopted by him is not only contrary to law and facts, but we also find it to be highly myopic and regressive. In today's world the 'education' has attained its unprecedented dimensions. With the advancement of technologies and evolution of multi-cultural societies, the complexities in business and real life situations have grown many folds. Under such circumstances, need for appropriate education for each and every person right from its childhood can never be over emphasized. The education has got different meaning, purpose or object for each person depending upon its position and background. We have education of various types e.g. Pre-schooling, schooling, higher education, professional education, vocational training, professions training etc etc.

After completing the school education, students go for higher education which may be obtained through college, university or they may choose to go for a professional course even after completing the professional qualification. There are many post-qualification courses. That is to convey that 'education' may begin at any stage and it may go on throughout the life of a person. Under these circumstances, one cannot isolate 'education' given at one of the stages to say that it should not be treated as part of 'education'. The pre-schooling has become today a mandatory prelude to school education. It is like step number one in the ladder. If step number one is taken properly, then other higher steps would be achievable more efficiently and effectively. That is the purpose as has been understood by the parents who send their kids to pre-schools and it has become a mandatory requirement today for all the schools imparting quality educations. It is because sending a child to pre-school is like preparing a sapling of the tree to be planted in the fields. Recently, Mumbai Bench of the Tribunal in the case of ADIT (Exemption) v. Jeevan Vidya Mission [2015] 64 taxmann.com 62/155 ITD 1150 analysed scope of the term 'Education' as envisaged by the legislature while mentioning it u/s 2(15). Observation given in the order may be useful here and therefore reproduced hereunder:

'8.1 In our considered opinion, based upon analysis of the facts of this case, the assessee trust is engaged in the field of 'education'. In our considered view, based upon our understanding of law, there is no merit in the order of Assessing Officer to give a restricted meaning to the scope of meaning of term educational activities. It is not necessary that there should be holding of regular classes or wholesome educational activities to be only eligible to be called educational activities eligible for benefits under sections 11 and 12. As per our understanding, the term "education" is of wide scope and amplitude, especially in the context of section 2(15). In this fast evolving society, the term 'education' has assumed greater role and significance, then ever. Education has got pivotal role in evolution of a society. Therefore, keeping this crucial aspect in mind, the legislature in its wisdom had decided to place this activity within the definition clause of the term "charitable purpose", as per section 2(15) of the Income-tax Act, wherein it has been specifically mentioned that the term 'charitable purpose' includes …. "education" …. Thus, the very activity of education itself has been included within the meaning of the term 'charitable purpose'. It may further be seen that activity of imparting "education" has been specifically included in the definition, thus showing that the intention of the legislature, very clearly, is to promote education, which is further fortified by the fact that when the first proviso was inserted to section 2(15), the activity of 'education' was not covered therein and only other object of general public utility alone was covered therein. The first proviso was brought in to curtail the scope of 'charitable purpose' with respect to the activities of general public utility, by excluding the same from this definition, if it involved carrying on of any activity in the nature of trade, commerce or business. Further, even after huge litigation with respect to blanket exemption to educational institutions, when the amendment was made by the Finance Act, 2009, the activity of the education was kept outside the purview of newly inserted proviso. Thus, impliedly, it can be said that, it is clear that the legislature has given great significance to the utility of 'education' in our country.'

3.9 Further, it is noted in the case of Life Shines Educational & Charitable Trust (supra) Chennai Bench of the Tribunal held that "pre-schooling' shall fall within meaning and scope of the 'education' as used u/s 2(15). Thus, in view of the aforesaid discussion and facts of this case, we do not find any justification in the view adopted by the Ld. DIT that pre-schooling is not part of education activity. In our considered view pre-schooling is very much integral part of the term 'education' as has been envisaged u/s 2(15) of the Act and we hold so.

3.10 Whether charging of fee and retaining surplus amounts to commercial activity, disentitling an assessee from the benefit of exemption u/s 11 and 12:

It has been mentioned by the Ld. DIT that since the school is charging fee for issue of prospectus, school uniforms, kits and admission fees etc., and thus, the pre-school is being run like a commercial activity and therefore, the assessee should be refused the benefit of registration. We find that here also, Ld. DIT has gone wrong on law as well as on facts. It has not been stipulated under the statute that for the purpose of getting the benefit of exemption u/s 11 and 12 by the educational institutions, the assessee must carry out all its activities free of cost i.e. without charging anything from anyone. Rather as per section 2(15), the term 'charitable purpose' includes inter alia 'education'. Thus the intention of the legislature is unambiguously clear that carrying out the activity of 'education' itself is charitable. Thus, when the carrying out of the activity of 'education' itself is a charitable purpose, then at the stage of granting registration u/s 12A, Ld. DIT is required to examine only the genuineness of the activities of the trust. Thus, the DIT may examine at this stage that activities of the trust are as per the objects contained in the trust deed or its memorandum. He is neither permitted nor obliged under the law, to go beyond that at the stage of registration.

3.11 The second aspect to be examined is whether the amount received or income earned by the assessee from carrying out of the education activities are applied solely for the purpose of education or not. But, since the registration is granted at the very inception of an institution, therefore the law has not put this duty upon the shoulders of the Ld. CIT/DIT. This obligation has been put by the legislature upon the shoulders of the AO who shall examine these facts at the stage of assessment of the trust and in case he is not satisfied with this aspect and find that the income of the trust has been applied for activities which are not permitted under the law, and the same has not been applied for the activities for which registration has been granted, then the benefit of exemption can be denied by the AO in accordance with law. It is further noted by us that this controversy had been arising earlier because of the judgment of Hon'ble Uttarakhand High Court in the case of CIT v. Queen's Educational Society [2009] 319 ITR 160/177 Taxman 326 (Uttarakhand) wherein it was held by the Hon'ble High Court that if an 'educational institute earns any surplus i.e. if receipts of the institute are more than its expenditure then the institute shall loose the benefit of exemption under the income tax Act. Various High Courts had taken a contrary view. Finally this controversy has been put to rest by Hon'ble Supreme Court in the case of Queen's Educational Society v. CIT [2015] 231 Taxman 286/55 taxmann.com 255 wherein Hon'ble Apex Court has not agreed with the judgment of Hon'ble Uttarakhand High Courts and agreed with the judgments of other High Court and held that merely because an Educational institute happens to earn surplus then by that facts itself it would not be held that educational institute is not charitable and will not loose the benefit of exemption under the law by that fact alone.

3.12 Thus, keeping in view totality of the facts and circumstances, we find that Ld. DIT had gone wrong on law as well as facts, on both of the above aspects. In our view, the assessee trust is carrying out the activity of education and is therefore entitled for benefit of registration u/s 12A and we direct the DIT to grant the benefit of registration u/s 12A. Accordingly, the assessee is hereby granted the benefit of u/s 12A with effect from the date when the application was filed by the assessee. The AO is at liberty under the law to examine the aspect of application of income solely for the purpose of education and also to examine that the assessee is carrying out the activity of education only and AO is also permitted to examine compliance of other provisions of the law in this regard and accordingly he may decide about the granting of benefit of exemption at the time of assessment in different years. In view of the same, appeal of the assessee is allowed.

4. In the result, appeal filed by the assessee is allowed.

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