Section 10(23C)(iiiad) – Educational institution – Exemption u/s. 10(23C)(iiiad) – Assessee-trust was established predominantly with an object of providing education to all sections of society – Mere fact that it spent a meagre amount of its total income on some allied charitable activities such as providing food and clothing to relatives of poor students, would not stand in way of AO to deny benefit to it u/s. 10(23C)(iiiad)

34. 
Sri Sai Educational Trust vs. CIT; [2018] 100 taxmann.com 50 (Mad): Date of order: 10^th October, 2018 A. Y. 2014-15

Section 10(23C)(iiiad) – Educational
institution – Exemption u/s. 10(23C)(iiiad) – Assessee-trust was established
predominantly with an object of providing education to all sections of society
– Mere fact that it spent a meagre amount of its total income on some allied
charitable activities such as providing food and clothing to relatives of poor
students, would not stand in way of AO to deny benefit to it u/s.
10(23C)(iiiad)

The assessee trust
was established predominantly with an object of providing school education to
all sections of society. The only activity of the assessee-trust was running of
an educational institution. The assessee-trust was granted registration u/s.
12A on 30/05/2016. The assessee filed its return for relevant year i.e. A. Y.
2014-15 claiming exemption of income. The assessee’s claim was based on plea
that in view of the registration granted u/s. 12AA of the Act, with effect from
01/04/2015 and in view of the first proviso to section 12A(2), effect of such
registration had to be applied retrospectively in respect of the subject year
i.e. A. Y. 2014-15 also and consequently, the Assessing Officer ought not to
have assessed the income to tax. The assessee’s alternative plea was that if
the exemption was not allowed with retrospective application of the
registration as contemplated u/s. 12A(2), it should have been granted the
benefit of exemption by applying section 10(23C)(iiiad). The Assessing Officer
rejected assessee’s claim of granting benefit of section 12A with retrospective
effect. He further held that since assessee was not existing solely for
educational purpose as it was carrying on some other charitable activities
also, exemption u/s. 10(23C)(iiiad) was also not allowable.

The assesee filed a
writ petition and challenged the order of the Assessing Officer. The Madras
High Court upheld the order of the Assessing Officer as regards section 12A.
The High Court allowed the writ petition and held that the assessee is entitled
to exemption u/s. 10(23C)(iiiad) and held as under:

“i)    Perusal of the provision of section
10(23C)(iiiad) would show that any income received by any University or
educational institution existing solely for educational purposes and not for
purposes of profit, shall not be included in total income. In other words, such
income is not taxable and on the other hand, gets exempted from levy of tax. It
is the contention of the assessee that since the trust is existing solely for
educational purposes without having any purpose of profit, the respondent is
not entitled to bring the disputed income to tax.

ii)    There is no dispute to the fact that the
assessee trust is running an educational institution for providing elementary
school education without distinction of caste and creed, from 1997. Though the
Trust Deed refers few other charitable activities such as providing medical
relief to the poor, relief to orphans, etc., the predominant object of the
trust is evidently seen as administering, establishing and maintaining schools
and other educational institutions to impart education to poor students without
any restriction as to caste, community or religion. This noble object of the
assessee trust cannot be looked into with magnifying glass to find out as to
whether any meagre expenditure spent by them on any allied charitable purpose,
so as to project, as though by doing such activity, the assessee-trust is not
existing solely for educational purposes. In this case, the objection of the
revenue relates to a sum of Rs.54,300/- spent by the petitioner for providing
sarees to mothers and grandmothers of the children studying in the school. This
free distribution of clothes to the mothers and grandmothers of the children is
considered by the revenue as the one not related to educational purposes.

iii)    On the other hand, it is contended by the
assessee that such distribution was made only to encourage those mothers and
grandmothers to send their ward to the school without discontinuation. This
purpose is not doubted by the Revenue. Nor any contra material is available
before the Assessing Officer to draw adverse inference. Therefore, the main
object behind the distribution of the sarees to those persons is evidently for
ensuring the continuance of study at the petitioner School and not solely for
providing clothes to needy persons totally unconnected with the school.

iv)   At this juncture, it is better to understand
the scope of Section 10(23C)(iiiad). The term “any university or
educational institution existing solely for educational purpose” used
under the above provision is heavily relied on by the Revenue to deny the
benefit of exemption to the petitioner on the sole ground that a portion of the
income spent on other charitable purpose, viz., distribution of sarees to the
mothers and grandmothers of the children studying in the school was not for
educational purpose. There is no dispute to the fact that the sum spent on such
purpose is very minimal, compared to the total income.

v)    While the nature of existence of the
institution is to be derived only by considering the predominant activity of
the institution, the nature of spending the money so received by such
institution to its various activities, has to be ascertained and adjudged going
by the ultimate purpose for which it was spent. If the event of spending and
the purpose for which such event took place, have some nexus to achieve the
main object viz., the predominant activity of the institution, then such
spending on an allied activity cannot be looked in isolation from the main
object.

vi)   An institution solely existing for
educational purposes, if indulges in certain allied charitable activities, such
as feeding and clothing poor, giving some medical aid to those people, etc.,
certainly, such activities cannot alter the predominant object of such
institution. While ‘the imparting education’ is like the water flowing in the
main channel, certain incidental other charitable activities done by such
institution, here and there, cannot be considered as major breach of the
channel, but as the reach of the ‘over flown’ water from the main channel to
the adjacent lands. So long as the desired destination of the channel (the
institution) is evidently existing and being achieved to reach the predominant
object and not disputed, the nature or character of the institution run by the
trust cannot be doubted, as it will always fit into the above term
“institution existing solely for educational purposes” and consequently,
is entitled to protection u/s. 10(23C)(iiiad).

vii)   Further, strictly speaking, Section 10(23C)
contemplates and excludes any income “received by” and not “the
spending” of such money received u/s. 10(23C). At the same time, if the
spending is totally on a deviated object or an object, which is totally
opposite or opposed to the main object for which the trust is created,
certainly such spending cannot have any protection u/s.10(23C)(iiiad). Thus, the sole purpose of existence is to be gathered, derived
and construed based on overall predominant activity and not from certain
isolated activity, especially when such activity also happens to be charitable
in nature, more particularly, when a meagre sum is spent on such activity. At
the same time, proportionality of the money spent on such activity, other than
the predominant activity, also plays a major role in deciding the nature of
existence of the institution. If major portions of the money received by the
trust is spent on certain objects other than the predominant object, certainly
the sole purpose of the Trust for which it was created, can be doubted. On the
other hand, if such spending is meagre and does not shake the conscience of the
Assessing Officer, being the quasi judicial authority, is at liberty to bring
such expenditure also under the exemption clause.

viii)  It is not established by the revenue that the
assessee is carrying on any other activities for profit other than running the
school. Therefore, when the only predominant activity is being carried on by
the assessee-trust, viz., the running of the school mere spending a meagre
amount, out of the total income derived by the trust, towards the distribution
of sarees to mothers and grandmothers of children studying in the school, could
not stand in the way of the Assessing Officer to deny the benefit u/s.
10(23C)(iiiad). Thus the respondents are not justified in rejecting the claim
of the petitioner u/s. 10(23C)(iiiad) of the Act.

ix)   Accordingly, the writ petition is allowed and
the impugned order is set aside.”