Case Note & Summary
The petitioner, a public trust and society registered under the Bombay Public Trusts Act, 1950 and Societies Registration Act, 1960, operated a commerce college in Mumbai affiliated to the University of Mumbai and receiving aid from the State Government. It held registration under Section 12A of the Income Tax Act, 1961. The controversy arose from the revenue's inconsistent treatment of the petitioner's claim for exemption under Section 10(23C) of the Income Tax Act. Initially, for Assessment Year 2003-04, the Director of Income-tax (Exemptions) informed the petitioner that being wholly or substantially financed by the Government, its case was covered under sub-clause (iiiab) of Section 10(23C) and not sub-clause (vi). Between 1985-86 and 2005-06, the petitioner enjoyed exemption under Section 11. For Assessment Years 2006-07 and 2007-08, exemption under sub-clause (iiiab) was allowed. However, for Assessment Year 2008-09, the Assessing Officer denied the benefit of sub-clause (iiiab) while granting Section 11 relief, and the petitioner challenged that assessment in appeal. For Assessment Year 2009-10, the benefit under (iiiab) was again allowed. For Assessment Year 2011-12, the petitioner applied for exemption under sub-clause (vi) to the Chief Commissioner of Income-tax. By order dated 29 November 2011, the Chief Commissioner rejected the application on two grounds: first, that since the petitioner received substantial government grants it fell under sub-clause (iiiab) and not (vi); second, that the petitioner did not exist solely for educational purposes and not for profit. The petitioner challenged this order by way of a writ petition under Article 226 of the Constitution, contending that the revenue's stand was incoherent—while one arm insisted the institution was covered under (iiiab), another denied (iiiab) exemption, and yet another rejected (vi) approval on a ground common to both clauses, leaving the assessee without remedy. The revenue justified both the denial of (iiiab) and the rejection of (vi) in its affidavit-in-reply. The High Court analyzed the statutory scheme of Section 10(23C), noting that sub-clauses (iiiab) and (vi) are mutually exclusive: institutions wholly or substantially financed by the Government fall under (iiiab) without requiring separate approval, while sub-clause (vi) covers the residual category. The court observed that the Chief Commissioner correctly held that a substantially funded institution does not fall under sub-clause (vi), but then erroneously delved into the question of whether the institution existed solely for educational purposes—a criterion common to both (iiiab) and (vi). This flawed approach resulted in inconsistency and prejudice. Scrutinizing the financials, the court noted that the petitioner's objects were purely educational, its fees were regulated, it operated at a deficit, and all receipts including donations and interest were applied to educational objects without any distribution of profit. The court held that the institution indeed existed solely for educational purposes and not for profit. Consequently, the impugned order was quashed, and the Chief Commissioner was directed to reconsider the application afresh. The revenue was also instructed to pass consistent orders in pending related matters. The writ petition was allowed, and Rule made absolute.
Headnote
A) Income Tax - Exemption for Educational Institutions - Section 10(23C) - Scheme and mutual exclusivity of sub-clauses (iiiab), (iiiad), (vi) - The court interpreted that institutions wholly or substantially financed by Government are covered by sub-clause (iiiab) and are not required to obtain approval under sub-clause (vi); sub-clause (vi) is residuary for those not covered by (iiiab) or (iiiad). Held that a finding that an institution does not exist solely for educational purposes and not for profit would disqualify it from both (iiiab) and (vi) and thus the revenue must avoid inconsistent positions. (Paras 5-8)
B) Income Tax - Exemption for Educational Institutions - Existence solely for educational purposes and not for profit - The court held that merely because an educational institution receives donations, interest on deposits, or miscellaneous income, and its fees are regulated by the Government, does not mean it exists for profit. The fact that it runs at a deficit and uses all receipts for educational objects, without distributing profits, establishes it is solely for educational purposes. (Paras 8-9)
Issue of Consideration
Validity of rejection of exemption under Section 10(23C)(vi); determination of whether educational institution exists solely for educational purposes and not for profit; applicability of sub-clauses (iiiab) and (vi) to institutions receiving substantial government grants.
Final Decision
The High Court allowed the petition, quashed and set aside the order of the Chief Commissioner dated 29 November 2011. The court held that the institution existed solely for educational purposes and not for profit. It directed the Chief Commissioner to process the petitioner's application under Section 10(23C)(vi) afresh in accordance with law and the observations made, and further directed that the revenue shall pass a consistent order in the pending matters. Rule made absolute accordingly.
Law Points
- Interpretation of Section 10(23C) sub-clauses (iiiab)
- (iiiad)
- (vi)
- requirement of existence solely for educational purposes and not for profit
- institution substantially financed by government falls under (iiiab) and not (vi)
- approval not required for (iiiab) institutions
- mere receipt of donations and interest does not negate educational purpose if no profit motive
- revenue must take consistent position
- 13th proviso requires application under (vi) by September 30 of assessment year
Case Details
2013 LawText (BOM) (01) 24
Writ Petition No. 1167 of 2012
Dr. D.Y. Chandrachud, A.A. Sayed
S.E. Dastur (Sr. Counsel), Nitesh Joshi, Atul K. Jasani, P.C. Tripathi, A.R. Malhotra
Deputy Director of Income-tax (Exemptions)-I(2), Mumbai & Ors.
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Nature of Litigation
Writ petition under Article 226 of the Constitution of India challenging the order of the Chief Commissioner of Income Tax rejecting application for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961, and seeking direction for consistency in the revenue's stance on exemption.
Remedy Sought
The petitioner sought quashing of the order dated 29 November 2011 passed by the Chief Commissioner of Income Tax, Mumbai, rejecting exemption under Section 10(23C)(vi), and a direction to the revenue to grant exemption either under sub-clause (iiiab) or (vi) of Section 10(23C).
Filing Reason
The revenue took inconsistent positions: the Director of Exemptions informed that the petitioner was substantially financed by government and thus covered under sub-clause (iiiab), yet the Assessing Officer denied exemption under (iiiab) for AY 2008-09, and the Chief Commissioner rejected application under (vi) for AY 2011-12 onward on the ground that the petitioner did not exist solely for educational purposes, leaving the petitioner without a remedy.
Previous Decisions
For Assessment Year 2008-09, the Assessing Officer denied the benefit of Section 10(23C)(iiiab) but allowed Section 11; the petitioner appealed to CIT(A). For Assessment Year 2009-10, the benefit of (iiiab) was allowed. For Assessment Year 2011-12, the Chief Commissioner passed the impugned order dated 29 November 2011 rejecting the application under (vi).
Issues
Validity of the order of the Chief Commissioner of Income Tax rejecting the exemption under Section 10(23C)(vi)
Whether the institution exists solely for educational purposes and not for profit
Whether the revenue can take inconsistent stands on the exemption provisions
Applicability of sub-clauses (iiiab) and (vi) of Section 10(23C) to an institution receiving substantial government grants
Submissions/Arguments
Petitioner argued that the revenue's stand was inconsistent: the Director of Exemptions had advised that the institution fell under (iiiab) as it was substantially financed by government, but the Assessing Officer denied (iiiab) exemption and the Chief Commissioner rejected (vi) approval on the ground of non-existence solely for educational purposes, thereby leaving the petitioner in a vacuum.
Petitioner contended that the institution existed solely for educational purposes, as all its receipts were applied to educational objects, it ran at a deficit, and no part of its income was distributed as profit.
Revenue argued that the fact the petitioner received government grants and had a deficit was not conclusive proof of its existence solely for educational purposes and not for profit, and that the institution derived substantial income from donations, interest, and other receipts which indicated profit motive.
Revenue sought to sustain both the denial of exemption under (iiiab) and the rejection of approval under (vi).
Ratio Decidendi
Sub-clauses (iiiab) and (vi) of Section 10(23C) of the Income Tax Act are mutually exclusive; an educational institution which is wholly or substantially financed by the Government falls under sub-clause (iiiab) and does not require separate approval under sub-clause (vi). The revenue cannot simultaneously deny exemption under (iiiab) and reject approval under (vi) on the ground that the institution does not exist solely for educational purposes, as that criterion is common to both clauses, leading to inconsistency. The existence solely for educational purposes is to be determined by examining the objects of the institution, application of its income, and absence of distribution of profits; mere receipts of donations, interest, or aid, and regulated fees do not per se indicate profit motive. Where the revenue takes inconsistent positions depriving the assessee of a clear remedy, the writ court can intervene to direct a consistent and lawful determination.
Judgment Excerpts
the cases which are wholly or substantially financed by the Government are covered by the provisions of Section 10(23C)(iiiab).
Sub-clause (iiiab) applies to those institutions which are wholly or substantially financed by the government.
Sub-clause (vi) covers universities or educational institutions, other than those mentioned in sub-clauses (iiiab) or (iiiad) and which may be approved by the prescribed authority.
the finding that the Petitioner does not exist solely for educational purposes and not for the purposes of profit would, in effect, not merely lead to the rejection of the exemption under Sub-clause (vi) but would also affect the claim of the Petitioner to the grant of an exemption under Sub-clause (iiiab) as well.
the requirement that an institution must exist solely for educational purposes and not for the purposes of profit one which is common both to sub-clause (iiiab) as well as sub-clause (iiiad).
Procedural History
The petitioner was registered as a public trust on 30 October 1980 under the Bombay Public Trusts Act, 1950, and as a Society under the Societies Registration Act, 1960. It obtained registration under Section 12A of the Income Tax Act on 11 December 1980. For assessment years 1985-86 to 2005-06, the petitioner was granted exemption under Section 11. On 10 May 2004, it applied for exemption under Section 10(23C)(vi) for Assessment Year 2003-04, but the application was closed on 26 September 2005 with the observation that it was covered under Section 10(23C)(iiiab). For Assessment Years 2006-07 and 2007-08, exemption under (iiiab) was allowed. For Assessment Year 2008-09, the Assessing Officer denied (iiiab) but granted Section 11 benefits; the petitioner filed an appeal before the CIT(A). For Assessment Year 2009-10, (iiiab) was again allowed. On an application for Assessment Year 2011-12, the Chief Commissioner of Income Tax, Mumbai, passed the impugned order dated 29 November 2011, rejecting the claim for exemption under Section 10(23C)(vi). The petitioner then filed the present writ petition under Article 226 of the Constitution.
Acts & Sections
- Income Tax Act, 1961: 10(23C)(iiiab), 10(23C)(iiiad), 10(23C)(vi), 11, 12A, 80G(5), 143(1), 143(3)
- Bombay Public Trusts Act, 1950:
- Societies Registration Act, 1960:
- Comptroller and Auditor General (Duties, Powers and conditions of Service) Act, 1971:
- Constitution of India: Article 226
