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2018 Supreme(Del) 379
IN THE HIGH COURT OF DELHI AT NEW DELHI
S. RAVINDRA BHAT, A.K. CHAWLA, JJ.
Director of Income Tax (Exemption) – Appellant
Versus
The Delhi Public School Society – Respondent
ITA 1086 of 2005, 501, 521, 605, 609 of 2008, 1432 of 2010, W.P.(C) 5340 of 2008
Decided On : 03-04-2018
For the Appellant : Ms. Vibhooti Malhotra, Mr. Puneet Rai
Mr. M.S. Syali, Mr. Satyen Sethi, Mr. Arta Trana Panda, Mr. Mayank Nagi, Ms. Gargi Sethee and Mr. Mohit Jhamb, Advs. for respondent in ITA Nos. 1086/2005, 501/2008, 521/2008, 605/2008, 609/2008 & 1432/2010 and for the petitioner in ITA No. 5340/2008
Mr. Anurag Ahluwalia, CGSC for UOI in ITA No. 5340/2008
The main legal point established in the judgment is that an educational institution's business activities should be incidental to the attainment of its objectives and separate books of account should be maintained in order to qualify for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961.
Headnote:
Exemption - Educational Institution - Section 10(23C)(vi) - Summary of Acts and Sections: Section 10(22), Section 10(23C)(iiiad), Section 10(23C)(vi), Section 11(4A) - The court analyzed the application of Section 10(23C)(vi) to the Delhi Public School Society and its satellite schools, emphasizing the requirement that the business activity should be incidental to the attainment of the institution's objectives and separate books of account should be maintained. The court found that the society fulfilled the requirements and qualified for exemption under Section 10(23C)(vi) of the Act.
Fact of the Case:
The Delhi Public School Society (DPS Society) sought relief against the rejection of its application for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961. The society had been enjoying exemption under Section 10(22) of the Act until the law was substituted by Section 10(23C)(vi) with effect from 1st April, 1999. The Additional Director of Income Tax rejected the society's application, contending that the franchisee fee received from satellite schools amounted to a business activity with a profit motive and that certain clauses of the society's Memorandum of Association were not in conformity with its objectives.
Finding of the Court:
The court found that the DPS Society fulfilled the requirements under Section 10(23C)(vi) of the Act to qualify for exemption. It concluded that the society's business activities were incidental to the attainment of its educational objectives and that separate books of account were maintained in compliance with the legislative requirements.
Issues: The issues raised in the income tax appeals included whether the franchisee fee received by the Assessee from satellite schools was exempt under Section 10(23C)(vi) of the Act, whether the income received by the Assessee from satellite schools was a business income subject to the provisions of Section 11(4A) of the Act, and whether the orders passed by the ITAT were perverse in law.
Ratio Decidendi: The court emphasized the need for the business activity to be incidental to the attainment of the institution's objectives and for separate books of account to be maintained. It concluded that the DPS Society qualified for exemption under Section 10(23C)(vi) of the Act as its business activities were in furtherance of its educational purpose and the profits were utilized for the growth and maintenance of the schools.
Final Decision: The court allowed the writ petition filed by the DPS Society and dismissed all income tax appeals against the society. The questions of law framed for the appeals were answered in favor of the assessee and against the revenue. The court held that the society qualified for exemption under Section 10(23C)(vi) of the Act.
S. RAVINDRA BHAT, J.
1. This judgment will dispose of Writ Petition (Civil) No. 5340/2008 (“the writ petition” and several appeals (ITA No. 605/2008 for assessment years (“AYs”) 1998-1999, ITA No. 609/2008 for AY 1999-2000, ITA 521/2008 for AY 2000-2001, ITA No. 1086/2005 for AY 2001-2002, ITA No. 501/2008 for AY 2003-2004 and ITA No. 1432/2010 for AY 2005-2006). The assessee Delhi Public School Society (“DPS Society” or “the Assessee”) claims relief against the revenue’s ruling dated 30.04.2008, rejecting its application under Section 10(23C)(vi) of the Income Tax Act, 1961 (“the Act” hereafter) for grant of exemption, in the writ petition; the appeals have been preferred by the income tax department under Section 260A of the Act, (hereafter “the revenue”) against orders of the Income Tax Appellate Tribunal (“ITAT”).
Facts and Contentions
2. The assessee is aggrieved by the rejection by the DGIT of its application grant of exemption for assessment years 2008-09 onwards, as a charitable organization. The assessee is a society registered under the Societies Registration Act, 1860 with the Registrar of Societies, Delhi. It has established 11 schools and has also permitted societies/ organizations/trusts with similar objects to open schools under the name of “Delhi Public School”, in and outside India. As on date, 120 schools are functioning under that name in and outside India as on date. The arrangement for opening schools by other societies is through execution of an “education joint venture agreement” (hereinafter, also referred to as “agreement”). In terms of the agreement, the parties jointly agree to manage the school where the Assessee has a significant say and control in the management of these schools.
3. The main object of DPS Society as detailed in their memorandum of association is as follows:
“(i) 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.
(ii) to impart sound and liberal education to boys and girls during their impressionable years - a type of education that will lay stress on character building, team work, esprit de corps, physical development and will infuse in school children a spirit of adventure, fair play and justice.
(iii) to develop among its students a feeling of pride in Indian culture and to produce citizens who will be truly Indian and will rise above social, communal, religious or provincial prejudices.”
4. The Assessee had been enjoying exemption, in respect of its income under section 10(22) of the Act since assessment year 1977-78 till assessment year 2007-08. In view of the change in law Section 10(22) of the Act was substituted by Section 10(23C)(vi) with effect from 1stApril, 1999, the assessee applied in (Form 56D) requesting for approval of exemption, under Section 10(23C)(vi) on 16.4.2007 for AY 2008-09 onwards. The Additional Director of Income Tax (E) issued show cause notice to the assessee directing it to file requisite evidence in support of the claim for exemption under section 10(23C)(vi) of the Act. In response, the assessee stated that it received maintenance charges from the 120 functional schools it runs (also called the satellite schools)in terms of education joint venture agreements that it enters into with the satellite schools, for providing services to such schools. It also stated that the maintenance charges received by it were not in lieu of a franchise of its name and logo, but towards a number of obligations discharged by it which were all in the course of imparting education.
5. The Additional Director of Income Tax, by order dated 30.4.2008, rejected the assessee’s application under Section 10(23C)(vi) of the Act seeking exemption, on the grounds that, inter alia, the franchisee fee received by it from the satellite schools
