Reasonableness of fee structure of unaided school cannot be compared with the fee structure of Government schools or Govt. aided schools for registration u/s 12AA
ORDER K.C. Singhal, Judicial Member
1. Though various grounds have been raised but the effective ground is whether the Commissioner of Income-tax was justified in refusing registration to the assessee Under Section 12A of the Income-tax Act, 1961 (Act).
2. Briefly stated, the facts are these: The assessee is a society registered with the Registrar of Societies, UP, as per copy of the certificate dated 22nd May, 2000 appearing at page 4 of the paper book. It was formed on 8th May, 2000 as is apparent from Memorandum of Association appearing at pages 5 to 13 of the paper book. Though various objects have been mentioned in the memorandum of association but the dominant object of the society is to impart education by running schools. Accordingly, an application Under Section 12A dated 1st March, 2001 though addressed to the Commissioner of Income-tax, was filed in the Office of Deputy Commissioner of Income-tax on 14th may, 2001 as is apparent from page 1 of the paper book. According to the AO, it was not accompanied by the statement of accounts for the financial year 2000-01. Accordingly, an enquiry notice was issued by the AO on 14th June, 2001 asking the assessee to furnish information/details regarding (a) source of income of the members of the society and their assessment details; (b) details of charitable activities carried on by the society; and (c) the fee structure regarding each classes. (Page 37 of the paper book). There was no response from assessee. Thereafter, the application of the assessee was forwarded to the CIT, Dehradun through the Addl. CIT which was received by the CIT on 26.3.02. On 27th March, 2002, a show cause notice was issued by the CIT as to why the application of the assessee be not rejected as application in form No. 10A was not accompanied by the copies of accounts maintained by the assessee for the financial year 2000-01. The reply of assessee along with the statement of accounts was received by the CIT on 4.4.02. The CIT forwarded the reply of the assessee to the concerned AO and sought a report thereon. The report of AO was received in the Office of CIT on 5th January, 2004 wherein it was stated as under:
“That education Under Section 2(15) will be charitable only if it is provided free of cost or by charging nominal fee so that its benefit is available to the general public but the society is providing education by charging hefty fee. The fee charged by the society is many times higher than the fees charged for the same education in Govt./Govt. aided schools. It could not be afforded by even higher middle income group families. Moreover, the fee charged from the students is for services rendered. Therefore, there is no income from property held under Trust or from voluntary contributions. Therefore, the benefit of Section 11 and 12 cannot be availed of by the society since the income from fee does not fall within the purview of Section 11 and 12. The assessee’s sole motive is to earn profit by running the educational institution.”
After receiving the aforesaid report, the assessee was requested vide letter dated 19th January, 2004 to supply copies of the accounts for the year 2001-02 and 2002-03. The same was received on 30th January, 2004 in the Office of CIT. On examination of the same, the CIT was of the view that fees charged from the students for the years ending 31st March, 2002 and 31st March, 2003 was Rs. 17.27 lacs and Rs. 66.39 lacs respectively but the total expenditure on students was Rs. 18.22 lacs and Rs. 33.69 lacs respectively. Accordingly, a detailed show cause notice was issued on 10th February, 2004 as to why the registration may not be refused on the following grounds:
“On examination of the documents filed by you, it is found that society is not carrying out any charitable activity within the meaning of Section 2(15) of the I.T. Act, 1961 and is engaged in profit making in the name of education. The institution does not appear to be running for charitable purpose as the same appears to be running for the purpose of profit, generating surplus out of heavy fees received from the helpless students who are supposed to be beneficiaries. Concession available Under Section 11 and 12 can be availed only if the provisions thereof and condition for registration Under Section 12-AA are fulfilled. Perusal of the documents filed reveals that there is no educational relief being provided and no element of subsidy or alimony is present in imparting of education.
From the perusal of Income & Expenditure accounts filed by the society for the period ending 31.3.2002 and 31.3.2003 following picture emerges:
31.2.2003 31.3.2002 Fee from students 66,39,012/- 17,27,352/- Donations received 1,54,000/- 2,51,000/- Membership fee - 4,518/- Misc. income 71,296- 36,173/- Total: 68,64,308 20,19,043/- Expenditure 33,69,884 18,22,419 Surplus 34,94,424 1,61,076
It is clear from the above figures that the society’s income from fees received from students is Rs. 17,27,352/- and Rs. 66,39,012/- respectively and the expenditure on students is Rs. 18,22,419/- and Rs. 33,69,884/- respectively. In the first year of the school the expenses were bound to be more but the real picture of profitability has emerged in the year 2002-03 where the fee charged from the students is Rs. 66.39 lakhs while the total expenditure is only Rs. 33.69 lakhs. Even as per assessee’s own income/expenditure account for the year ending 31.3.2003 the total expenditure on all accounts including on students is only Rs. 48.52 lacs and surplus is 20.12 lacs. There is no element of any subsidy in imparting of education and hence no charitable purpose within the meaning of Section 2(15)has been served. However, education per se is not charitable purpose and there must be an element of subsidy for the needy and alimony for the poor as was held by their Lordships of the Supreme Court of India in the case of MCD v. Children Book Trust (1992) 3 SCC 390.
Keeping in view the above facts, the dominant motive of the society appears to be only to earn profit year after year by using education as a business and it is not engaged in any charitable activities within the meaning of Section 2(15) of the I.T. Act. There is no income from property held under Trust and no voluntary contributions worth the name which could subsidise education to become a charitable purpose. No relief is being provided to the students and there is no element of charity therein.”
In response to the above show cause notice, the assessee sent the reply which was received on 25th February, 2004 by the CIT wherein it was submitted that assessee was running school without any profit motive and the object was charitable and accordingly, it was entitled to registration Under Section 12A of the Act. The gist of the submissions appearing at page 61 of the paper book is stated below:
“To conclude, we may submit before your goodself, that the intent of the legislature for incorporating the provisions for registration of the charitable organisation Under Section 12AA of the Act before they claim exemption Under Section 11 is that objects of such organisations are subjected to scrutiny by a senior quasi-judicial authority. This legislature intent can also be traced in the statue itself, wherein the time limit of six months from the date of filing of application Under Section 12AA has been prescribed for the grant of refusal of the registration. At such time, the activities cannot be verified by the CIT as hardly any time has passed since the incorporation of such organisation. The job of taking a decision whether the organisation is actually carrying out charity as contemplated Under Section 2(15) rests on the assessing officer, who is vested with sufficient authority to reject the exemption from year to year.
In view of the above, we request you to grant the registration to the assessee society and oblige. We would also like to request us to give us an opportunity of being heard in person before your goodself disposes the application.”
In support of the above submissions, the assessee had also relied on certain decisions mentioned below:
1. Thiagarajar Charities v. ACIT,
2. Addl. CIT v. Surat Art Silk and Cloth Manufacturers, 121 ITR 1 (SC)
3. Secondary Board of Education v. ITO, 86 ITR 408
4. CIT v. Shivakasi Hindu Nadars Uravinmurai,
5. Governing Body of Rangarya Medical College v. ITO, 117 ITR 284
6. CIT v. Pulikkal Medical Foundation P. Ltd., 210 ITR 299 (Kerala)
7. Fifth Generation Education Society v. CIT, 185 ITR 634 (All)
8. Industrial and Investment Corporation of India Ltd. v. Dhanesh D. Ruparelia (2000) 99 Company cases 181 (Bom)
9. Universal Ferroy Alloy Chemicals Ltd. v. P.G.K. Wariar, 143 ITR 959
10. CIT v. Ramlal Babulal, 234 ITR 776 (P&H)
11. State of Andhra Pradesh v. CTO, 169 ITR 564 (AP) However, not satisfied with the above submissions, the CIT rejected the application of assessee Under Section 12A by observing as under:
“In view of the discussion made above, the application for registration Under Section 12-AA is hereby rejected because the society is not carrying on any charitable activity within the meaning of Section 2(15) of the Income-tax Act. There is no element of subsidy or alimony for the students who are supposed to be the beneficiaries because heavy fee is being charged from them for the services provided in as much as the profit generated during the year 2002-03 out of the fee charged from the students amounting to Rs. 68.64 lakhs is Rs. 34.94 lakhs. This is not a profit generated by chance or incidentally. The fee structure is not imposed by any outside agency on the society and the same has been fixed by the society with a clear objective of generating profit. There is no income from property held under the Trust because the fee charged from the students is for services rendered and there are no voluntary contributions worth the name. Hence, the society is not eligible for claiming any benefit Under Section 11 and 12 of the I.T. Act. The application for registration Under Section 12-AA is, therefore, hereby rejected.”
Aggrieved by the same, the assessee is in appeal before the Tribunal.
3. The impugned order has been assailed by the learned counsel for the assessee by raising various submissions which are summarized as under:
(i) That enquiry at the stage of registration Under Section 12A is limited to ascertainment of charitable objects and cannot be extended to actual activity. Even if assessee is earning some profit or violates the provisions of Section 11 or 13, the AO has power to assess the same or deny the exemption, as the case may be, at the time of assessment. Reliance was placed on the judgment of Allahabad High Court in the case of Fifth Generation Education Society, 185 ITR 634.
(ii) That dominant object of society is to impart education which falls within the ambit of word of ‘charitable purpose’ as defined in Section 2(15) of the Act.
(iii) That legislature nowhere mentions that the whole or part of income of an educational institution must be subsidized in order to avail exemption Under Section 11 of the Act.
(iv) That there is no evidence that any part of profit is utilized for any private gain. On the contrary, facts on record disclose that in the first year, there is deficit while in the second year, the surplus had been utilized only for the purpose of acquiring assets for running school.
(v) The fee structure of assessee cannot be said to be abnormal considering the nature of education and facilities provided by the assessee society. The reasonableness of fee would depend on the facts of each case and cannot be decided by just comparing the same with the fees charged in government schools.
(vi) That the judgment of Hon’ble Supreme Court in the case of Children Book Trust (supra) relied upon by the CIT is distinguishable on facts and in law in as much as the apex court itself has observed that provisions of Delhi Municipal Corporation Act, 1957 (in short DMC Act) and provisions of Income-tax Act are not in pari materia.
(vii) That present case is covered by judgment of Hon’ble Supreme Court in the case of Surat Art, Silk and Cloth Mfrs.(supra). He also relied on various other judgments reported as 210 ITR 299(Kerala), 117 ITR 284 (AP), 170 ITR 476 (AP).
(viii) That order passed by CIT is beyond the period prescribed in Rule 12AA and, therefore, is illegal and assessee should be deemed to have been granted registration. Reliance has been placed on circular of the Board No. 762 of 18th February, 1998 wherein it has been stated that order Under Section 12AAhas to be passed within six months from the end of the month in which application for registration is received by the Chief Commissioner or the Commissioner.
(ix) That provisions regarding period of limitation in Section 12AA are mandatory since the word ‘shall’ has been used. No doubt, the word ‘shall’ always is not mandatory but if the consequences are penal or saddled with tax liability then the word ‘shall’ has to be understood as mandatory. Reliance was placed on Supreme Court judgment reported as 1976 SCC (2) 895 at page 899 and also judgment of Delhi High Court in the case of CIT v. Kelvinator of India Ltd. 256 ITR 1 (Full Bench).
4. On the other hand, the learned DR has vehemently supported the order of CIT and strongly objected to the arguments of assessee’s counsel by making various submissions which are summarized below:
(i) That as per Section 12A, there was no scope of enquiry but after insertion of Section 12AA w.e.f. 1.4.97, the CIT(A) is fully empowered to make enquiries in respect of actual activities carried on by the assessee before granting registration. The judgment of Allahabad High Court relied on by assessee’s counsel cannot be applied in the present case as that judgment was delivered with reference to Section 12A only.
(ii) That Education per se is not charitable. If education is imparted on commercial basis, then it cannot be said that object to run a school is charitable. If it is so held then all coaching institutions and other educational institutions running with object of profit would get exemption which is not the intention of the legislature. Heavy reliance was placed on Supreme Court judgment in the case of Children Book Trust (supra) wherein it has been held that before holding the object as charitable, it must be shown that school is run on voluntary contributions.
(iii) On facts, it has been found that high fee structure has been provided by the society and its earnings are huge. May be that in first year, there was loss but in subsequent year, huge profits i.e. more than Rs. 19 lakhs have been earned by the school. Further, no voluntary contribution had been received by it. Hence, it cannot be said that school was run with charitable purpose.
(iv) That it is not a public institution but is a closely held institution in as much as it is governed by a family. Attention was drawn to the constitution of the society. The emphasis was to show that object was to earn profit by a family.
(v) That unsecured loans were taken from trustees/relatives on which interest was paid and thus, trustees and their relatives were benefitted.
(vi) That element of altrusion must be present (4 ITR 397 All). Therefore, if dominant purpose is making of profit and element of charity is absent, then registration can be refused. It is not necessary for the revenue to prove that funds have been actually diverted for private gains.
(vii) That judgment of Supreme Court in the case of Surat Art, Silk & Cloth Mfrs. (supra) rather helps the revenue. The definition of charitable purpose under M.C.D. Act was held to be narrower by Hon’ble Supreme Court in the case of Children Book Trust (supra) as compared to income-tax provisions because the words “advancement of any other object of general public utility” appearing in Section 2(15) of Income-tax Act were not there in MCD Act. However, the words “relief of poor, education, medical relief appearing in Section 2(15) of the Act are the same in M.C.D. Act. Hence, judgment of Supreme Court in the case of Children Book Trust (supra) is fully applicable.
(viii) Reliance was placed on Supreme Court judgment in the case of Bharat Diamond Bourse, 259 ITR 280 for the proposition that entire facts should be examined and not mere objects.
(ix) Regarding delay in passing order Under Section 12AA, the following submissions were made : –
(a) The application Under Section 12AA was never filed in the office of CIT, Dehradun but was filed before AO. Hence, it could be said to have been filed on 26.3.02 when it was received in the Office of CIT from AO through Addl. CIT and not on 1.3.2001 as declared by assessee.
(b) The application was found to be defective as it was not accompanied by statement of account as required. Hence, proper application can be said to have been filed on 30.01.04 when copies of accounts for the year 2001-02 and 2002-03 were filed. Hence, the order passed by CIT on 15.03.04 was within time.
(c) Section 12AA is a procedural provision and, therefore, the word ‘shall’ cannot be considered as mandatory. Period of sixty days provided in Section 12AA is the reasonable period during which CIT is expected to pass order. There is no provision providing consequences in the absence of such order. Hence, such provision has to be considered as directory provision. Reliance was placed on Supreme Court judgment in the case of Chet Ram Vashishst v. Municipal Corporation of Delhi. Attention was also drawn to Section 245-R where Authority for Advance Ruling is required to pass the order within six months but no order is passed within such period. Reliance was also placed on other decisions reported as 195 ITR 825 (Cal), 238 ITR 237 and AIR 1992 SC 152 for the proposition that procedural provisions cannot be considered as mandatory.
5. Rival submissions of the parties have been considered carefully in the light of case law referred to and the material placed before us. First question arising in this appeal relates to the scope of enquiry by CIT Under Section 12AA. We are in agreement with the learned DR that after insertion of Section 12AA w.e.f. 1.4.97, the CIT is empowered to enquire about the activity carried on by the assessee before passing the order. There may be cases where application is made after the commencement of activity by assessee trust/institution. In such cases, the CIT is justified to enquire about such activity. However, where no activity had commenced, the question of making any enquiry regarding any activity by the CIT would not arise. The nature of enquiry would depend on the facts of each case. Hence, the contentions of ld. counsel for assessee that scope of enquiry by CIT is limited to ascertaining whether objects are charitable or not, cannot be accepted. The decision of Allahabad High Court relied on by him is distinguishable as it was not rendered with reference to Section 12AA.
6. The next question for our consideration is whether on the facts of the case and in law, the registration Under Section 12A of the Act can be refused to the assessee. Considering the scheme of the Act, we are not inclined to accept the reasonings given by the CIT. There is no provision in Chapter III of the Act to the effect that in order to claim exemption, the income of the trust/institution imparting education should be financed either by my subsidy/grant from Govt. or voluntary contribution from the public. The concept of altruism, as argued by the ld. DR, does not fit in the scheme of the Act because it is the settled legal position that dictionary or natural meaning of a word cannot be imported in the statute where such word is defined by the statute. For the purpose of Section 11 or Section 12, the words ‘charitable purpose’ has been defined in the Act in Clause (15) of Section 2. According to this definition, as originally enacted, it includes “relief of poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit”. The words ‘not involving the carrying on of any activity for profit’ qualified the last category only i.e. ‘the advancement of any other object of general public utility’ and did not affect the other objects mentioned in this definition clause. So, the object of ‘education’ has been declared as object of charitable purpose per se by the legislature and consequently, the concept of altruism cannot be imported in the scheme of the Act. This view is fully supported by the judgment of constitutional bench of the Hon’ble Supreme Court in the case of Surat Art, Silk and Cloth Mfrs. (supra) wherein it was observed as under:
“It is now well settled as a result of the decision of this court in Dharmadeepti v. CIT (1978) 114 ITR 454, that the words “not involving the carrying on of any activity for profit” qualify or govern only the last head of charitable purpose and not the earlier three heads. Where, therefore, the purpose of a trust or institution is relief of the poor, education or medical relief, the requirement of the definition of “charitable purpose” would be fully satisfied, even if an activity for profit is carried on in the course of the actual carrying out of the primary purpose of the trust or institution.”
7. At this stage, it is also pertinent to note that the word ‘not involving the carrying on of any activity for profit’ have been omitted from this definition by the legislature by Finance Act, 1983 w.e.f. 1.4.83. Therefore, after such omission, the element of profit cannot be excluded from the definition of ‘charitable purpose’ in Section 2(15) of the Act.
8. The above view is also supported by the legislative intent disclosed in Section 10(22) wherein it has been clearly provided that income of any educational institution cannot be exempted unconditionally if such institution also exists for the purpose of profit. According to this provision, if any educational institution is running on commercial basis then income of such educational institution cannot be exempted from taxation. However, such institution can claim exemption Under Section 11 and 12 as element of profit is not excluded by the legislature. The reason is obvious because financial affairs of such institution are well controlled by the provisions of Section 11 and 13 of the Act. Section 11clearly provides that in order to claim exemption, such institution must apply 75% of its income for the charitable purpose. The surplus, if any, has to be invested in the specified assets. Further, exemption can be denied if the provisions of Section 13 are violated. Therefore, if there is any violation of either of the provisions of Section 11 or Section 13, then, the profits of such institution would be taxable. Further, the fact that only 75% of income is to be applied for charitable purpose itself shows that element of profit is not excluded from the definition of ‘charitable purpose’ for the purpose of Section 11 and 12.
9. The entire reasoning of CIT and the stand of the ld. DR is based on the Supreme Court judgment in the case of Children Book Trust (supra) which, in our opinion, is quite distinguishable in as much as the definition of the word ‘charitable purpose’ considered by Hon’ble Supreme Court in that case was quite different from the definition provided in Section 2(15) of the Income-tax Act, 1961. In the above judgment, the apex court had to consider the provisions of Section 115(4) of DMC Act which provided exemptions to the land and buildings, exclusively occupied and used by a society or a body for charitable purpose, from municipal taxation. The relevant portion of above section is extracted below:-
“(4) Save as otherwise provided in this Act, the general tax shall be levied in respect of all lands and buildings in Delhi except —
(a) lands and buildings or portions of lands and buildings exclusively occupied and used for public worship or by a society or body for a charitable purpose:
Provided that such society or body is supported wholly or in part by voluntary contributions, applies its profits, if any, or other income in promoting its objects and does not pay any dividend or bonus to its members.
Explanation: “Charitable purpose” includes relief of the poor, education and medical relief but does not include a purpose which relates exclusively to religious teaching:”
It is because of the above provisions, it was held that at least part of income must be supported by voluntary contributions. The intent of the legislature was very clear that exemption was provided only to those institutions which were dependent on public contributions. That means that element of profit was impliedly excluded. Considering this aspect, the Hon’ble Supreme Court held that imparting of education with the purpose of profit was not charitable for the purpose of Section 115(4) of DMC Act. The Hon’ble Supreme Court in para 76 clearly held that rulings in the Income-tax Act would not be helpful in deciding the issue under Section 115(4) of DMC Act. Be that as it may, the constitution bench of Hon’ble Supreme Court has specifically construed the definition of the words ‘charitable purpose’ in Section 2(15) of the Act and held that profit element is not excluded from the words, “relief of poor, education or medical relief and the words “not involving the carrying on of any activity for profit” was relevant only to the last category i.e. advancement of any other object of general public utility. Even in case of any conflict between two judgments, the judgment of constitution bench, that too delivered in the context of Section 2(15) of Income-tax Act, 1961, would prevail. Hence, the ratio of judgment of Supreme Court in the case of Children Book Trust cannot be applied to the present case.
10. In view of the above discussion, it is held that element of profit is not excluded from the definition of ‘charitable purpose’ in Section 2(15) of the Act for the purpose of granting exemption Under Section 11 and 12 of the Act. So long as the provisions of Sections 11, 12, and 12A are complied with, the exemption can not be denied merely because some profit has been earned by an educational institution. Consequently, registration Under Section 12A cannot be refused for the reasons given by CIT.
11. Even otherwise on facts, we do not find merit in the arguments of learned counsel for revenue. The audited financial statements for the year ending 31.3.2002 and 31.3.2003 have been placed in the paper book at pages 14 to 36. For the year ending 31.3.2002, admittedly, there is deficit of Rs. 16,74,408/-. As far as year ending on 31.3.2003 is concerned, there is surplus of Rs. 19,66,195/- as per Income and Expenditure Account. But statement of fixed assets shows that the assessee had spent the sum of Rs. 47,62,306/- on construction of building and acquisition of computers and other assets for the school. It is the settled legal position that money spent on acquisition of assets for educational institutions amounts to application of funds for charitable purpose. (S.RM.M.CT.M. Tiruppani Trust v. CIT 230 ITR 636 SC). If this aspect is taken into consideration, then there is no surplus. Further, there is no evidence on record that funds were diverted to or used by the trustees or their relatives. The payment of interest on loan to trustees does not amount to any benefit. They would have got the interest even if money was lent to the other parties. Hence, question of any private gain did not arise. Therefore, even on facts, it could not be said that imparting of education by assessee was for the purpose of profits.
12. Much has been said on the fee structure of the assessee society. In our opinion, the reasonableness of the fee structure would depend on the facts of each case. The reasonableness of fee structure of unaided school cannot be compared with the fee structure of Government schools or Govt. aided schools. Further, in view of the discussions in the preceding paras, the aspect of fee structure would be relevant only where exemption is claimed Under Section 10(22) or 10(23C) but is not relevant where exemption is claimed Under Section 11 &12 of the Act. So long as, it is established that income of educational institution has been applied for the purpose of education in terms of Section 11(2) and there is no violation of Section 13, assessee would be entitled to enjoy exemption Under Section 11.
13. In view of the above discussion, it is held that on facts as well as in law, the assessee carried on the activity for charitable purpose in terms of Section 2(15) of the Act and consequently, the CIT was not justified in refusing registration Under Section 12A of the Act. Since assessee succeeds on merits, the issue regarding deemed registration has become academic and, therefore, need not be adjudicated. We, therefore, set aside the order of CIT and direct him to grant registration Under Section 12A of the Act.
14. In the result, appeal of the assessee is allowed