M/S QUEEN'S EDUCATIONAL SOCIETY vs. COMMR.OF INCOME TAX

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.5167 OF 2008 M/S. QUEEN’S EDUCATIONAL SOCIETY …APPELLANT VERSUS COMMISSIONER OF INCOME TAX …RESPONDENT WITH C.A. NO.5168 OF 2008 C.A. NO.8962 OF 2010 C.A. NO.909 OF 2011 CIVIL APPEAL NO. 2919 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.3804 OF 2011] JUDGMENT CIVIL APPEAL NO. 2920 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.5381 OF 2011] CIVIL APPEAL NO. 2921 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.5383 OF 2011] CIVIL APPEAL NO. 2922 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.5530 OF 2011] CIVIL APPEAL NO. 2923 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.19945 OF 2012] 1 Page 1 J U D G M E N T R.F.Nariman, J.

th 24 September, 2007 passed by the High Court of Uttarakhand, Nainital in two income tax appeals, and a judgment of the th Punjab and Haryana High Court dated 29 January, 2010 in Pine Grove International Charitable Trust v. Union of India – (2010) 327 ITR 273 . Various other appeals (excepting Civil Appeal No.8962 of 2010) are filed by the Union of India/ Central Board of Direct Taxes in cases where the aforesaid judgment in Pine Grove has been followed. JUDGMENT 3. The facts necessary to understand the controversy in the two income tax appeals before the Uttarakhand High Court, Nainital, may be gleaned from the facts of one of them, namely, the Queen’s Educational Society case. The appellant filed its return for assessment years 2000-2001 and 2001-2002 showing a net surplus of Rs.6,58,862/- and Rs.7,82,632/- respectively. Since the appellant was established with the sole 2 Page 2 object of imparting education, it claimed exemption under Section 10(23C) (iiiad) of the Income Tax Act, 1961. The th Assessing Officer vide its order dated 20 February, 2003

th (Appeals) by its order dated 28 March, 2003 allowed the appellant’s appeal, and the ITAT, Delhi, by its judgment dated th 7 July, 2006 passed an order dismissing the appeal preferred by the revenue. In a reference to the High Court under Section 260A of the Income Tax Act, the High Court vide the impugned judgment set aside the judgment of the ITAT and affirmed the order of the Assessing Officer. 4. These appeals from the Uttarakhand High Court, Nainital, concern themselves with the provision of Section 10(23C) (iiiad) JUDGMENT of the Act:

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– (a) the educational institution must exist solely for educational purposes (b) it should not be for purposes of profit and (c) the aggregate annual receipts of such institution should not exceed the amount or annual receipts as may be prescribed. Such prescription is to be found in Rule 2CA being an amount of Rs.1 crore. 6. The said Section was inserted by Finance Act No.2 of st 1998 with effect from 1 April, 1999. Prior thereto, the Income Tax Act had a corresponding Section, namely, Section 10(22) JUDGMENT which was as follows:-

4 Page 4 7. We have heard learned counsel for the assessees as well as learned counsel for the revenue. The assessees argue that the impugned judgment is contrary to the law laid down by at

has been adopted and followed, which is a test laid down by the Assessing Officer and not by any Supreme Court judgment – namely, that whenever a profit/surplus is made by an educational institution, it ceases to exist solely for educational purposes and becomes a profit making enterprise. In support of the Punjab and Haryana High Court judgment under appeal, counsel for the assessees argued that since the sole basis for not granting them exemption for the assessment years under question was the following of the Uttarakhand High Court JUDGMENT judgment, if the said judgment is found to be incorrect, they are bound to succeed. For that reason, the revenue’s appeal against the Punjab and Haryana High Court judgment should be dismissed. Counsel for the revenue, on the other hand, attempted to support the Uttarakhand High Court judgment by stating that the Section does not contemplate the making of large profits. If an educational institution in fact makes large 5 Page 5 profits then even though it may plough such profits back into the purchase of assets for education, yet such institution cannot be said to be existing solely for educational purposes. It would

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9. Coming closer to the section at hand, in Aditanar JUDGMENT Educational Institution v. Additional Commissioner of Income Tax, (1997) 224 ITR 310, this Court while construing the predecessor Section, namely, Section 10(22) of the Income Tax act, held:

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10. In American Hotel & Lodging Assn. Educational Institute v. CBDT , (2008) 301 ITR 86, this Court dealt with Section 10(23C)(vi) as follows: “29. In CIT v. Surat Art Silk Cloth Manufacturers' Assn. [(1980) 2 SCC 31 : 1980 SCC (Tax) 170 : (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 exactly balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realisation 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 the duty of the prescribed authority to ascertain whether the JUDGMENT 13 Page 13

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15 Page 15 approval earlier granted after complying with the procedure mentioned therein. 33. Having analysed the provisos to Section 10(23- C)( vi ) one finds that there is a difference between stipulation of conditions and compliance therewith. 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 standardised form in terms of the first proviso. It is only if the prerequisite condition of actual existence of the educational institution is fulfilled that the question of compliance with 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.

11. Thus, the law common to Section 10(23C) (iiiad) and (vi) may be summed up as follows: (1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the 16 Page 16 conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit.

purpose of education should not be submerged by a profit making motive. (3) A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit. (4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the JUDGMENT educational institution, it will not be cease to be one existing solely for educational purposes. (5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons. 17 Page 17 12. The Uttarakhand High Court in the impugned judgment th dated 24 September, 2007 quoted the ITAT order in paragraph 7 as follows:

“During the years relevant for asstt. Year 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 F.Y. 1999-2000 and Rs.8,47,742/- in FY 2000-01 relevant for Asstt. 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 fee 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 the receipts over expenditure. JUDGMENT In the year under appeal (and in the earlier appeals) 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 AO wrongly interpreted the resultant 18 Page 18

13. Having set out the ITAT order, the Uttarakhand High Court held: “Thus, in view of the established fact relating to earned profit, we do not agree with the reasoning given by the ITAT for granting exemption.” JUDGMENT 14. Having said this, the impugned judgment goes on to quote Aditanar Educational Institution v. CIT . as follows:- “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 purpose 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 19 Page 19 the distinction difference between the corpus, the objects and powers of the concerned entity.

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.” 15. It is clear that the High Court did not apply its mind independently. What has been copied is one paragraph from the Supreme Court judgment in Aditanar followed by a paragraph of faulty reasoning by the Assessing Officer and the JUDGMENT said faulty reasoning of the Assessing Officer has been wrongly said to be the law laid down by the Apex Court. 16. Further, the Supreme Court Judgment in Municipal

Enclave Educational Society, (1992) 3 SCC 390 has then been followed. The aforesaid judgment dealt with a property tax provision, namely, Section 115 (4) of the Delhi Municipal 20 Page 20 Corporation Act, 1957. Three questions were raised in the said judgment as follows:- “56. In the present case, the questions which arise for our determination are: ( i ) Whether the society or body is occupying and using the land and building for a charitable purpose within the meaning of sub-section (4)? ( ii ) What is the meaning of the expression “supported wholly or in part by voluntary contribution”? ( iii ) Whether any trade or business is carried on in the premises within the meaning of sub-section (5)?” 17. In answering question one, the Court held that School Education would only come within an exemption if it involved public benefit. Having so held, the Court stated: “78. The rulings arising out of Income Tax Act may not be of great help because in the Income Tax Act “charitable purpose” includes the relief of the poor, education, medical relief and the advancement of any other object of general public utility. The advancement of any other object of general public utility is not found under the Delhi Municipal Corporation Act. In other words, the definition is narrower in scope. This is our answer to question No. 1.” JUDGMENT 18. Secondly, the extracted portion from the said judgment in the judgment of the Uttarakhand High Court concerned itself 21 Page 21 with question two, namely, whether the educational society is supported wholly or in part by voluntary contributions. It is part of paragraph 80 of the said judgment. If the sentences after the

passage relied upon by the High Court has absolutely nothing to do with the present case. The entirety of the passage is now set out hereinbelow:

19. It is clear, therefore, that the Uttarakhand High Court has erred by quoting a non existent passage from an applicable judgment, namely, Aditanar and quoting a portion of a property tax judgment which expressly stated that rulings arising out of 22 Page 22 the Income Tax Act would not be applicable. Quite apart from this, it also went on to further quote from a portion of the said property tax judgment which was rendered in the context of

by voluntary contributions, something which is completely foreign to Section 10(23C) (iiiad). The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of Section 10(23C) is to ignore the language of the Section and to ignore the tests laid down in the Surat Art Silk Cloth case, Aditanar case and the American Hotel and Lodging case. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes JUDGMENT and not for purposes of profit. In fact, in S.RM.M.CT.M. Tiruppani Trust v. Commissioner of Income Tax , (1998) 2 SCC 584, this Court in the context of benefit claimed under Section 11 of the Act held: “9. In the present case, the assessee is not claiming any benefit under Section 11(2) as it cannot; because in respect of this assessment year, the assessee has not complied with the conditions laid down in Section 11(2). The assessee, however, 23 Page 23 is entitled to claim the benefit of Section 11(1)( a ). In the present case, the assessee has applied Rs 8 lakhs for charitable purposes in India by purchasing a building which is to be utilised as a hospital. This income, therefore, is entitled to an exemption under Section 11(1). In addition, under Section 11(1)( a ), the assessee can accumulate 25% of its total income pertaining to the relevant assessment year and claim exemption in respect thereof. Section 11(1)( a ) does not require investment of this limited accumulation in government securities. The balance income of Rs 1,64,210.03 constitutes less than 25% of the income for Assessment Year 1970-71. Therefore, the assessee is entitled to accumulate this income and claim exemption from income tax under Section 11(1)( a ).” We set aside the judgment of the Uttarakhand High Court th dated 24 September, 2007. The reasoning of the ITAT (set aside by the High Court) is more in consonance with the law laid down by this Court, and we approve its decision. JUDGMENT 20. Revenue’s appeals from the Punjab and Haryana High Court concern themselves with Sections 10(23C) (vi). A large number of writ petitions were heard in Civil Writ Petition No. th 6031 of 2009 and disposed of on 29 January, 2010. By various impugned orders passed, the Chief, CIT, Chandigarh withdrew exemptions granted under Section 10(23C) (vi) of the Income Tax Act read with Rule 2CA of Income Tax Rules, 24 Page 24 1961, for various assessment years. The operative part of the order passed by the Chief, CIT in these cases is the same and reads as follows: “4. I have considered the submissions of the assessee. The decisions quoted in support of its contention are not relevant and are distinguishable on facts as well as issues. It is clear that the ratio of the decision of Hon'ble Uttarakhand High Court is squarely applicable in this case. 5. The Hon'ble Supreme Court has held, in the case of Aditanar Educational Institution etc. v. Addl. Commissioner of Income Tax [224 ITR 310 (SC)], that in the case of an educational institution, after meeting the expenditure, if any surplus results incidentally, then the institution will not cease to be one existing solely for educational purposes. 6. The crucial condition is that surplus should result only incidentally and should not be aimed for. If substantial profits are earned in one year if (it)? would be duty of the institution to lower its fees for the subsequent year so that such profits are not intentionally generated. If, however, profits continue year after year than it cannot be said that the surplus is arising incidentally. 7. In the present ease, the profits are substantial and are arising year alter year and therefore, the decision of the Apex Court in the case of Aditanar Education Institution v. Addl. Commissioner of Income Tax as well as the decision of the Hon'ble Uttrakhand High Court is applicable. 8. Exemption u/s 10(23C)(vi) is not available to the assessee under the law in view of the above facts and circumstances and therefore, exemption already granted vide order dated 4th June, 2007 is hereby withdrawn. JUDGMENT 25 Page 25 9. The assessee is at liberty to reduce the fees being charged and price of its services and apply afresh, in which case the application will be duly considered on merits.”

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 ( vi - a )]—[( a ) applies its income , or accumulates it for application , wholly and exclusively to the objects for which it is established 26 Page 26

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28 Page 28 rescinding the notification or 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;]

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31 Page 31 23. The Punjab and Haryana High Court, by the impugned th judgment dated 29 January, 2010 expressed its dissatisfaction with the view taken by the Uttarakhand High Court in the case

“8.8 We have not been able to persuade ourselves to accept the view expressed by the Division Bench of the Uttrakhand High Court in the case of Queens Educational Society (supra). There are variety of reasons to support our opinion. Firstly, the scope of the third proviso was not under consideration, inasmuch as, the case before the Uttrakhand High Court pertained to Section 10(23C)(iiiad) of the Act. The third proviso to Section 10(23C)(vi) is not applicable to the cases falling within the purview of Section 10(23C)(iiiad). Secondly, the judgment rendered by the Uttarkhand High Court runs contrary to the provisions of Section 10(23C)(vi) of the Act including the provisos thereunder. Section 10(23C)(vi) of the Act is equivalent to the provisions of Section 10(22) existing earlier, which were introduced with effect from 1st April, 1999 and it ignores the speech of the Finance Minister made before the introduction of the said provisions, namely. Section 10(23C) of the Act [See observations in American Hotel and Lodging Association Educational Institute's case (supra)]. Thirdly, the Uttrakhand High Court has not appreciated correctly the ratio of the judgment rendered by Hon'ble the Supreme Court in the case of Aditanar Educational Institution (supra) and while applying the said judgment including the judgment which had been rendered by Hon'ble the Supreme Court in the case of Children Book Trust (supra), it lost sight of the amendment which had been carried out with effect from 1st April, 1999 leading to the JUDGMENT 32 Page 32

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34 Page 34 (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 provision 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.” And finally held: “8.15 As a sequel to the aforesaid discussion, these petitions are allowed and the impugned orders passed by the Chief Commissioner of Income Tax withdrawing the exemption granted under Section 10(23C)(iv) of the Act are hereby quashed. However, the revenue is at liberty to pass any fresh orders, if such a necessity is felt after taking into consideration the various propositions of law culled out by us in para 8.13 and various other paras. 8.16 The writ petitions stand disposed of in the above terms.” JUDGMENT 24. The view of the Punjab and Haryana High Court has been followed by the Delhi High Court in St. Lawrence Educational Society (Regd.) v. Commissioner of Income Tax & Anr., (2011) 53 DTR (Del) 130. Also in Tolani Education Society v. Deputy Director of Income Tax (Exemption) & Ors., (2013) 351 ITR 184, the Bombay High Court has expressed a view in line with the Punjab and Haryana High Court view, following the 35 Page 35 judgments of this Court in the Surat Art Silk Manufacturers Association Case and Aditanar Educational Institution case as follows:

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25. We approve the judgments of the Punjab and Haryana, Delhi and Bombay High Courts. Since we have set aside the judgment of the Uttarakhand High Court and since the Chief CIT’s orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law declared by the Uttarakhand High Court, it is clear that these orders cannot stand. Consequently, Revenue’s appeals from the Punjab and Haryana High Court’s judgment dated 29.1.2010 and the judgments following it are dismissed. JUDGMENT We reiterate that the correct tests which have been culled out in the three Supreme Court judgments stated above, namely, Surat Art Silk Cloth, Aditanar, and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of th profit. In addition, we hasten to add that the 13 proviso to 37 Page 37 Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply

with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that revenue is at liberty to pass fresh orders if such necessity is felt after taking into consideration the various provisions of law contained in Section 10(23C) read with Section 11 of the JUDGMENT Income Tax Act. 26. We now come to Civil Appeal No.8962 of 2010. Vide a th judgment dated 29 January, 2010, the Punjab and Haryana High Court dismissed CWP No.7268 of 2009 in the following terms: “8. It is conceded position that the assessee- petitioner has filed the application on 23.9.2008 seeking exemption under Section 10(23C)(vi) in 38 Page 38

27. These being the facts, we see no reason to interfere. This appeal shall stand dismissed with no order as to costs. ….…..…..………………………...J. (T.S. Thakur) JUDGMENT ….…..…..………………………...J. (R.F. Nariman) New Delhi, March 16, 2015. 39 Page 39