By TIOL News Service

NEW DELHI, MAY 09, 2017: THE ISSUE BEFORE THE COURT IS - Whether an institution would cease to be an education educational institution, merely because had it generated profits out of the activity of publishing and selling of school text books, when the surplus amount was again ploughed back into the main activity of 'education'. NO is the verdict.

Facts of the case:

The Assessee is a society registered under the Societies Registration Act, 1860 and was set up by the Ministry of Education, Government of India as well as by the Government of NCT of Delhi (GNCTD). The Assessee was set up to ensure timely supply of prescribed text books at fair prices to school students and to improve the quality of primary and secondary school education in Delhi schools. The Assessee's income was exempt from tax u/s 11 of the Act during the AYs 1971-72 to 2005-06. However in AYs 1975-76 and 1976-77, when the benefit of exemption from payment of income tax was denied by the concerned AO, the Assessee went in appeal before the CIT(A) who restored the exemption. The Revenue's appeals against the said order were dismissed by the ITAT vide order in ITA Nos.1239/Del/1979 & 4448/Del/1979. Those orders of the ITAT for AYs 1975-76 and 1976-77 attained finality. The net result was that continuously from AY 1971-72 to AY 2005-06 the Assessee has had the benefit of exemption from payment of income tax.

For AY 2006-07, the Assessee filed its return declaring 'Nil' income claiming exemption u/s 11 and 12 of the Act. The AO called upon the Assessee to explain why the activity of publication and sale/purchase of books should not be treated as business activity. Secondly, the Assessee was asked whether it was maintaining books of accounts as mandated by Section 11 (4A) of the Act. The approach of the AO was to consider the Assessee as a 'General Public Utility.' Referring to the decision of the Supreme Court in Sole Trustee Loka Shikshana Trust v. Commissioner of Income Tax, the AO observed that since the Assessee was earning huge profit margins of about 35.15%, the activity of publication and sale of books could not be said to be a 'charitable activity'. Accordingly, the AO treated the income from the sale and publication of books as taxable for each of the AYs in question. For the subsequent AYs, the AO continued to deny the exemption by the assessment orders for the AYs 2008-09, 2009-10, 2006-07.

On appeal, the HC held that,

++ the ITAT came to an erroneous conclusion that merely because the Assessee had generated profits out of the activity of publishing and selling of school text books it ceased carrying on the activity of 'education.' The ITAT failed to address the issue in the background of the setting up of the Assessee, its control and management and the sources of its income and the pattern of its expenditure. The ITAT had failed to notice that the surplus amount was again ploughed back into the main activity of 'education'. The question to be asked was whether the activity of the Assessee contributed to the training and development of the knowledge, skill, mind and character of students? In the considered view of the Court, the answer to that question was answered in favour of the Asseessee. The Court, accordingly, concluded that the ITAT was incorrect in setting aside the order passed by the CIT (A) and in denying exemption to the Assessee u/sections 11 and 12 of the Act. The ITAT erred in holding that the activities carried out by the Assessee fell under the 4th limb of Section 2 (15) of the Act, i.e., 'the advancement of any other object of general public utility' and that its activities were not solely for purpose of advancement of 'education'.

(See 2017-TIOL-871-HC-DEL-IT)