Educational institution – Exemption u/s. 10(23C)(vi) – Where assessee society was set up with object of imparting education and it had entered into franchise agreements with satellite schools and also used gains arising out of these agreements in form of franchisee fees for furtherance of educational purposes, it fulfilled requirements to qualify for exemption u/s. 10(23C)(vi)

22.  DIT (Exemption) vs. Delhi Public School
Society; 403 ITR 49 (Del); [2018] 92 taxmann.com 132 (Del): Date of Order: 3^th
April, 2018

A. Y.: 2008-09

Sections 2(15), 10(23C) and 11
of I. T. Act, 1961

Educational institution –
Exemption u/s. 10(23C)(vi) – Where assessee society was set up with object of
imparting education and it had entered into franchise agreements with satellite
schools and also used gains arising out of these agreements in form of franchisee
fees for furtherance of educational purposes, it fulfilled requirements to
qualify for exemption u/s. 10(23C)(vi)

The assessee a society
registered with the Registrar of Societies, Delhi had established 11 schools
and had also permitted societies/organisations/trusts with similar objects to
open schools under the name of ‘Delhi Public School’, in and outside India. As
on date, 120 schools were functioning under that name in and outside India. The
main objective of assessee society was to establish progressive schools or
other educational institutions in Delhi or outside Delhi, open to all without
any distinction of race or creed or caste or special status with a view to
impart sound and liberal education to boys and girls during their impressionable
years. The assessee had been enjoying exemption, in respect of its income u/s.
10(22) of the Income-tax Act, 1961 since A. Y. 1977-78 till A. Y. 2007-08. In
view of the change in law, section 10(22) was substituted by section 10(23C)(vi)
with effect from 01/04/1999, the assessee applied in (Form 56D) requesting for
approval of exemption, u/s. 10(23C)(vi) on 16/04/2007 for A. Y. 2008-09
onwards. The Additional Director of Income Tax, by order dated 30/04/2008,
rejected the assessee’s application u/s. 10(23C)(vi) seeking exemption,
on the grounds that, inter alia, the franchisee fee received by it from
the satellite schools in lieu of its name, logo and motto amounts to a
‘business activity’ with a profit motive and no separate books of account were
maintained by assessee for business activity as required u/s. 11(4A). The
assessee filed writ petition challenging the order.

The Delhi High Court allowed
the writ petition and held as under:

“i)  There is a multitude of authorities that have surveyed and analysed
the exemption permitted u/s. 10(23C)(vi), which broadly conclude that if the
educational institution merely acquires a profit surplus from running its
institution, that alone would not belie its larger education purpose. For
instance, in Queen’s Educational Society vs. CIT [2015] 372 ITR 699/231
Taxman 286/55 taxmann.com 255 (SC), the Supreme Court focused on the
requirements that were germane to qualify for exemption under the erstwhile
section 10(22) and the subsequent section 10(23C)(vi), namely that: the
activities of the educational institution should be incidental to the
attainment of its objectives and separate books of account should be maintained
by it in respect of such business; primarily to highlight that even if an
educational institution indulges in a profit making activity, that does not
necessarily subsume the larger educational/charitable purpose of the
organisation. The determining test to qualify for exemption u/s. 10(23C)(vi),
hence, lies in the final motivation on which the institution functions,
regardless of what extraneous profit it may accrue in the pursuit of the same.

ii)   This critical test therefore has a conspicuous qualitative value;
the objectives of the organisation are to be determined not merely by the
memorandum of objectives of the institution, but, also from the design of how
the profits are being directed and utilised and if such application of profits
uphold the ‘charitable purpose’ of the organisation (as postulated in section
2(15)) or if the objectives are marred by a profit making motive that emerges
more as a business activity rather than an educational purpose. Section
10(23C)(vi) while guiding the manner of this determination also,
provides a certain amount of discretion to the authority assessing the
compliance to these conditions for ascertaining whether the requirements of the
provision are met with. Such scrutiny is to be carried out every year,
irrespective of any preceding pattern in the assessment of the previous years.

iii)  As can be seen from the present income tax
appeals, the prescribed authority has examined the assessee’s application for
exemption u/s. 10(23C)(vi) in light of the recent audits of the assessee’s
accounts. Although assessee society, in the earlier years had been granted
exemption u/s. 10(23C)(vi), that itself does not cause for a res judicata
principle, as examination of the assessee’s audited accounts may be done afresh
by the prescribed authority, corresponding to the specific assessment year, as
prescribed in the second proviso to section 10(23C)(vi).

iv)  Despite this stipulation, the prescribed
authority will still have to apply the determinative test of assessing whether
the business is incidental to the attainment of the objectives of the entity
and whether separate books of account are being maintained in respect of such
business, even if the profits received by the assessee as such increase
exponentially, if the assessee qualifies this test, they will still be eligible
for exemption u/s. 10(23C)(vi).

v)   In light of the decisive test for determining eligibility for
exemption u/s. 10(23C)(vi), it is apparent that the assertion of the
DGIT that the assessee’s activities including charging a franchisee fee could
not be regarded as a charitable activity within the meaning of section 2(15),
and thus, inapplicable for exemption u/s. 10(23C)(vi), has not been
adequately substantiated, despite examination of the assessee’s audited
accounts. The DGIT asserted that the assessee is carrying out a business
activity for profit motives by entering into franchise agreements, whereby, it
has opened and is running around 120 schools, and that these charges were
received by the assessee for using the name of Delhi Public School by the
satellite schools in and outside India and no separate books of account were
maintained by the assessee for the business activity as required under section
11(4A). This is prima facie not correct, because the assessee has
maintained, accounts audited in detail for financial years 2000-2001, 2003-04,
2004-05 and 2005-06. That aspect has been found by the Tribunal for those
assessment years. Such accounts have been maintained in compliance to what is
required under the seventh proviso to section 10(23C)(vi) and section
11(4A).

vi)  Furthermore, the memorandum of association of assessee society, as
well as the joint venture agreements entered into by assessee society with the
satellite schools validate the motive of an educational purpose that the
assessee aims through its business activities and substantiate its contentions
in that regard. On review of the assessee’s audited accounts, it can be
observed that the surpluses accrued by assessee society are being fed back into
the maintenance and management of the assessee schools themselves. This,
reaffirms the assessee’s argument that the usage of the gains arising out of
its agreements are incidental to its educational purpose outlined by its
objective of the assessee.

vii) The authorities also reiterate that a mere incurrence of (surplus)
profit does not automatically presuppose a business activity that invalidates
the exemption under section 10(23C)(vi); the same has to be tested on
whether such profits are being utilised within the meaning of the larger
charitable purpose as defined in section 2(15) or not. On scrutiny, it can be
observed that the accounts
marked the heading ‘Secretary’s Account’, detail the heads of income and
expenditure that cater to the various requirements of running and maintaining
the satellite schools. Thus, arguendo if it were held that the objected
activity were indeed commercial in nature, nevertheless, the realisation of
profit by the assessee is through an activity incidental to the dominant
educational purpose that its memorandum of association sets out, and is in turn
being channelled back into the maintenance and management of the same schools,
thus, fulfilling the objectives the assessee has set out in its memorandum of
objectives.

viii)      In view of the above analysis, it is concluded that the
assessee fulfilled the requirements u/s. 10(23C)(vi) to qualify for
exemption; assessee society is maintaining its eleven schools and the 120
satellite schools in furtherance of the education joint venture agreements with
an educational purpose that also qualifies as a ‘charitable purpose’ within the
meaning of section 2(15) and is not in contravention of section 11(4A).

ix)  It is felt by this court that section 10(23C)(vi) ought to
be interpreted meticulously, on a case-to-case basis. This is because, the
larger objective of an educational/charitable purpose of the institution and
its manifestation can only be subjectively adjudged; for instance, in the present
situation, the balance sheets of the assessee demonstrate how the profits are
utilised for the growth and maintenance of the very schools they are accrued
from, thus, subscribing to a charitable motive. However, the educational
institutions may take more creative steps to qualify their objectives as an
‘educational purpose’ that is more universal than the individual objectives set
out in the memoranda of objectives of such institutions. For instance, a
percentage of profits earned from a business activity indulged in by such an
educational institution may be mandated towards fructifying the implementation
the provisions of the Right to Education Act, 2009, particularly, to create a
more sensitive learning environment for children with disabilities in implementation
of the provisions in the Persons with Disabilities (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995, or have a system to
analyse the ratio of inflow of money over progressive assessment years as
opposed to how much of this money is channelled back into the growth and
maintenance of such educational purpose, in order to put in place a visible
system of accountability. This is an observation, to ensure that the purpose
for which section 10(23C)(vi) was introduced, is adequately fulfilled and not
disadvantageously circumvented by vested parties.

x)   For the foregoing reasons, the writ petition has to succeed.
Accordingly, the assessee’s writ petition is allowed.”