Educational society not eligible for the benefit u/s 10(23C)(iiiad) when the income generated from running schools flows directly into a commercial entity on the basis of a profit sharing arrangement

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Educational society not eligible for the benefit u/s 10(23C)(iiiad) when the income generated from running schools flows directly into a commercial entity on the basis of a profit sharing arrangement

ITO Vs Vidya Bharti Samiti
Whether to claim benefit u/s 10(23C), it is sine qua none that income earned by the educational institution existing solely for educational purposes does not exceed annual receipts aggregating Rs. 1 crore – YES: ITAT
Whether receipts qua a tightly sealed joint venture agreement between an educational society and a commercial entity are revenue receipts if sharing of profits from running schools is one of the conditions of such agreement – YES: ITAT
Whether an educational society is eligible for the benefit u/s 10(23C)(iiiad) when the income generated from running schools flows directly into a commercial entity on the basis of a profit sharing arrangement – NO: ITAT
– Revenue’s appeal allowed: JAIPUR ITAT
The assessee-society runs two schools, namely Tree House High School for Girls and Tree House High School for Boys. To run the school facilities, assessee entered into an agreement/joint venture with one M/s Tree House Education and Accessories Ltd ( THEAL). The arrangement was to pay 50% of the gross receipt to THEAL. For the relevant AY, the assessee declared its income as nil after claiming exemption u/s 11 and section 10(23C)(iiiad). During the scrutiny assessment, the AO noted that though the application u/s 12AA was pending for decision before the CIT(A), the assessee was till the date of filing the return was not eligible to claim benefit u/s 11. The AO also noted that assessee had receipt a sum from THEAL against the transfer of specific rights under the agreement in favour of THEAL. Holding such transfer as revenue receipt, the AO made the addition of whole receipt. The assessment order was passed after disallowing all the claims of the assessee. The CIT(A), held that amount received from THEAL was a repayable liability as they were advances as security deposit and not as business commercial receipts. Further holding that assessee was eligible for the benefit u/s 10(23C)(iiiad), the CIT(A) allowed the claims.
Having heard the parties, the Tribunal held that,
Whether to claim benefit u/s 10(23C), it is sine qua none that income earned by the educational institution existing solely for educational purposes does not exceed annual receipts aggregating Rs. 1 crore – YES: ITAT
 on the asspect of benefit u/s 10(23C)(iiiad), even as per the admitted gross receipts for the year under consideration, breaches the limit provided u/s 10(23C)(iiiad). The receipt for transfer of business/ commercial rights which were not recorded in the books of the assessee due to certain clerical error. The AO later reopened the assessment and treated the receipt as income of the assessee which has not been challenged in view of this undisputed fact that there was receipt of Rs. 2 crores apart from the admitted receipt by the assessee from two schools which brought the total receipt to Rs. 2,12,60,000. Hence, this part of CIT(A) order is set aside;
Whether receipts qua a tightly sealed joint venture agreement between an educational society and a commercial entity are revenue receipts if sharing of profits from running schools is one of the conditions of such agreement – YES: ITAT
 on the aspect of treating the receipt from THEAL as revenue receipts, the entire arrangement between the assessee society and THEAL is in the nature of joint venture for 30 years. The agreement in question is irrevocable as the parties to the agreement have no right to terminate the agreement accept fulfillment of terms and conditions. In substance the THEAL has made an investment more than Rs. 8 crores and in return was entitled to 50% of the gross receipts from running of the schools. Therefore, this arrangement is not to provide the facility of running of the schools but it is for sharing the profit of the income from activity of running the school.
Whether an educational society is eligible for the benefit u/s 10(23C)(iiiad) when the income generated from running schools flows directly into a commercial entity on the basis of a profit sharing arrangement – NO: ITAT
 similarly, the assessee has taken the school buildings on lease with the conditions that the minimum 30% of the receipt will be paid for each schools as rent to the parties from whom the schools were taken on lease. Thus, it is clear that the assessee is not existed solely for education purpose but for the purpose of profit. The pre-dominate purpose is to run the schools in the capacity of intermediary and to serve the commercial interests of THEAL under the arrangements. Thus the sharing of the profit or income under the agreement and 80% of the income is going to the commercial entities clearly established the intention of the parties in this arrangements being for profit are not solely for providing education. Hence, this part of CIT(A) order is also set aside.
ITA No. 1063/JP/2018

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