Test to Determine the Real Purpose of the Activities of an Educational Institution

Queen’s Educational Society v. Commissioner of Income Tax

 CIVIL APPEAL NO.5167 OF 2008

Recently, the Supreme Court delivered an important ruling on the “exemptions” claimed by the Educational institutions u/section 10 (23C) (iiiad) of the Income Tax Act 1961. Under the challenge were rulings from the Punjab and Haryana High Court[1] taking one view, and another other from the Uttarakhand High Court opting for the opposite view. The latter judgment was overruled in the present case. Though the provision in question in Punjab and Haryana Case was s. 10 (23C) (vi), but the provision, for the purposes of this post, was same in the material and relevant purposes to that u/s. 10 (23C) (iiiad).

The provision, whose interpretation was in question in the present case, runs as follows:

“Section 10: In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-

(23C) any income received by any person on behalf of –

(iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed...”

A.    Issues

The important questions for interpretation that arose before the Supreme Court were:

   (a)    What if an educational institution makes profit in a previous year, would that make the educational institution, an institution existing only for profit purposes?

  

   (b)   What if an Educational institution makes profit in successive years,[2] and that excess profit is spent for Institutional Requirements only, would that take the Institution out of the purview of exemption?

B.     Judgment of the Court

On Issue (a)

The Court, firstly, answered the true interpretation of the phrase “for educational purposes” and “not for profit purposes”, for which it sought to construe the meaning of term “for” as used in the provision. So, the predominant object of the activity undertaken was referred to, which in essence means that an activity when done reference to something as end, is an activity done for that purposes. The Court held, therefore, that if the activity is not pervaded by profit motive but is carried primarily for serving the charitable purposes, the activity is not for profit. The Court, relying on the case of CIT v. Surat Art Silk Cloth Manufacturers Associations,[3] held exemption clause does not require that the activity must be carried on in such a manner that it does not result in any profit as that would be not only be difficult but also reflect unsound principle of management. Mere occurrence of incidental surplus, would not make the institution existing for the purposes of making profit.

On Issue (b)

In the case of American Hotel and Lodging Association Educational Institute v. CBDT,[4] the Court laid down the test for ascertaining the object of an institute, in the context of application of the surplus generated to an Institution, as the following:

“In order to ascertain whether the institute is carried on with the object of making profit or not it is the duty of the prescribed authority to ascertain whether the balance of income is applied wholly an exclusively to the objects for which the applicant is established... The test is—the nature of activity. If the activity like running a printing press takes place it is not educational. But whether the income/profit has been applied for non-educational purpose has to be decided only at the end of the financial year.”[5]

In the impugned judgment of the Uttarakhand High Court, the Court had earlier overruled the ITAT order, which had allowed exemption to the Educational Institute on the ground that earlier, the assessee (institution) trust was initially running the school in a rented building and had generated the surplus, i.e. the excess of the receipts over expenditure. The ITAT had reasoned that the assessee had acquired its own property, computers, library, sports equipment etc. for the benefit of the students and no part of such surplus was utilized by the members of the society for their own benefit. So, such surplus was held to not come within the ambit of denying exemption u/s 10(23C) (iiiad) of the Act.

The Supreme Court in the present case, was unequivocal in its opinion when, while overruling the Uttarakhand High Court, it stated:

“The final conclusion [of the High Court] that if a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of Section 10(23C) is to ignore the language of the Section and to ignore the tests laid down in the Surat Art Silk Cloth case, Aditanar case and the American Hotel and Lodging case. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit.” [emphasis mine]

  So, in the end what matters is as to for what purpose the surplus is spent, and not whether surplus is generated year after year (as wrongly advocated by the CIT, Chandigarh, whose order was set aside in the upheld judgement of the Punjab and Haryana High Court in the present case).

Observations on the ‘Presumption of Profit- oriented activity, unless otherwise shown’ concept

The Court also referred to the observations made in the cases of Sole Trustee, Loka Shikshana Trust[6] and Indian Chamber of Commerce[7] where were on the lines that if a trust consists of carrying on business with no restrictions on them making profits, then, the court would presume that the activity is undertaken for profit purposes, unless otherwise shown.

The Court reiterated the disagreement over such presumption being made and quoted, the observations made in the case of Surat Art Silk Cloth Manufacturers Associations (supra) where the Court had held that it is not necessary that there must be a provision in the constitution of the trust or the institution that the activity shall be carried on no profit or loss basis. So, even if there is no such express provision, the nature of the charitable purpose/ manner in which the activity is carried on/ surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive.

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[1] Judgment in the case of Pine Grove International Charitable Trust v. UOI, (2010) 327 ITR 273.

[2] See para 20 of the present case, where the para 6 of the overruled order passed by the Chief, CIT is quoted. The order was set aside by the Punjab and Haryana High Court and this judgment was upheld in the present case.

[3] (1980) 121 ITR 1.

[4] (2008) 301 ITR 86.

[5] Ibid, paras 29, 30.

[6] (1975) 101 ITR 234.

[7] (1976) 1 SCC 324.

Opinion: Constitutionality Challenge to the Formation of Anti- Land Grabbing Cells and Courts by the Tamil Nadu Government

Constitutionality Challenge to the Formation of Anti- Land Grabbing Cells and Courts

Recently, the Madras High Court[1] quashed the establishment of special anti-land grabbing police cells and courts to investigate and try such cases. The Government has, consequently, appealed to the Supreme Court against this judgment. However, it is to be noted that the constitution of Special Courts to try particular type of cases was quashed not because it was bad in law, but since the constitution of Special Cells is quashed, as a natural corollary, the constitution of Special Courts is also liable to be quashed, as no purpose would be served by keeping such Special Courts in existence.

The present post deals with the issue relating to the Article 14 Constitutional challenge of the Ordinance leading to the formation of Special Cells and analyse whether the judgment can sustain in the Supreme Court.

A.    Decision of the Court

The main objection that the Court had was with respect to the absence of any definition disclosing any principle or guideline, to guide the Special Cells (constituted to deal with land grabbing cases) in selecting the class of offence, cases or class of cases for investigation. The discretion, in the Court’s view, was entirely left with the Anti Land Grabbing Cells to pick and choose cases according to their choice. The Court, in other words, found that the term "land grabbing" does not pass the first step of Reasonable Classification Test, i.e., of providing an intelligentia differentia, as it is not properly defined.

It repelled the contention of the Respondents that there is no unfettered discretion since certain offences under the IPC, i.e., Section 447 (Criminal Trespass), Section 420 (Cheating), Section 506 (Criminal Intimidation), Chapter XXVII (offences against property) and XXVIII (offences relating to documents and property marks)  etc., would clearly be attracted in case of land grabbing. The Court was partly influenced by the presence of the definition of the term “land grabbing” in the A.P. Land Grabbing (Prohibition) Act, 1982, which in the present case was not present.

As a necessary corollary to this holding, the Madras High Court also held that in the absence of any specific guideline/norms/yardstick, the possibility of misuse cannot be ruled out. While recognising that validity of a statute cannot be tested solely on the ground that it is capable of getting misused, it stated that since the investigation is done by police personnel in the rank of Inspectors of Police and therefore, such a presumption cannot be drawn.

B.    Anwar Ali Judgment

The first issue in the present case related to the violation of Equal Protection of laws aspect of Article 14 where the Court had employed the classic test of reasonable classification as employed in the case of State of West Bengal v. Anwar Ali Sarkar[2] that provided for a three- step checking mechanism to justify any differential treatment to pass the rigours of Article 14. The test lays down that in order to justify any such treatment, firstly, it has to be shown that there is a classification done on some intelligent and reasonable grounds, secondly, such classification should be done with a view to achieve an object and lastly, the classification should have a nexus with the object.[3]

The Madras High Court had extensively quoted independent opinions of the judges in the case of Anwar Ali case and concluded that the decision of the Supreme Court in that case was based on the consideration that there was no yardstick or measure for grouping either of persons or of cases or of offences by which the cases could be decided which are outside the purview of the Special Act and the Act has left the matter entirely to the unregulated discretion of the provincial Government.

In that case, the State of West Bengal launched criminal prosecution against Mr. Anwar Ali Sarkar by trying him before the Special Court. The impugned legislation had stated:

“Section 5 (1): A Special Court shall try such offences or classes of offences or cases or classes of cases, as the State Government may, by general or special order in writing, direct.”

There were divergences in the majority opinions itself. For instance, Das, J. had found the phrase “cases” to be unconstitutional, since it gave an unfettered and completely submitted to the whims of the State of Bengal’s power to decide on individual cases, whether to send such cases for disposal in special courts or not. He was of the opinion that phrases “class of offences”, “offences” and “class of cases”, would have certain common parameters, like if offence of theft is committed more regularly, then, such cases could be dealt by the Special Courts, as a separate class based on an intelligentia basis can be found. Whereas, in individual cases, there is no such consideration, since every individual’s life is important, though there might be considerations like, the person killed maybe a politician of high ranks or murder maybe committed in such a gruesome manner so as to shock the conscience of the whole society. But that does not take away from the ultimate harm caused.

Others in the majority felt that absence of any parameter to decide which cases are to be submitted to the Special Courts, constitutes arbitrary powers to the State and consequently, violating the equal protection clause. Here, it is important to realise that the State contended that there is a rational basis or an intelligentia differentia, i.e., which was cases that needed quick disposal. As Das, J. aptly opined:

“In order to be a proper classification so as not to offend against the Constitution it must be based on some intelligible differentia which should have a reasonable relation to the object of the Act as recited in the Preamble...”[4]

In other words, the object itself cannot be the basis of classification, for absence any peculiar circumstance, each and every case requires a speedy trail. Therefore, object is separate from the basis of classification.

C.    Analysis of the Court’s Reasoning

There seems to be a potent challenge to the judgment of the High Court in the Supreme Court, since there is a rational basis for classifying the “land grabbing” cases separately from the other cases by understanding the term as a generic term and by doing so, the objection of the Court regarding the lack of any proper definition would be addressed.

It must be noted that mere absence of a proper definition is not always a basis to strike down a provision. In cases like, V.C. Shukla v. State (Delhi Administration),[5] where a challenge was put forward with regard to the constitutional validity of the Special Courts Act under Articles 14 and 21, an argument was put forward  that separate group of high offices for the purpose of expeditious criminal action to be taken by Superior Courts is unreasonable and cannot be termed as valid classification and no rational basis for separately classifying emergency offenders existed. The Hon'ble Supreme Court of India repelled the said submission and held that persons holding high public or political offices is self-explanatory and admits of no difficulty and that mere absence of definition of the expression would not vitiate the classification made by the Act and since such persons [basis of classification] are in a position to take major decisions regarding social, economic, financial aspects of life of the community and other far-reaching decisions on the home front as also regarding external affairs and if their actions are tainted by breach of trust, corruption or other extraneous considerations, they would damage the interests of the country [object of the law, therefore, is to protect the interests of the country, while nexus is the position of power held by such people].

In the present case, as stated earlier, the term “land grabbing” can be seen as a generic term (class of cases/ offences) encompassing different/ separate violations of IPC like criminal trespass, Cheating, Criminal Intimidation, offences against property, offences relating to documents and property marks. Whereas, the object can be taken as quick investigation of cases of such nature, of which as many as 1887 complaints have been received (including against members of political parties) in the last 5 years. Furthermore, the petitioner itself had admitted that there is an intention to investigate validly purchased lands (as claimed by the petitioner) made by members of political parties.[6] Even though it has been stated by the petitioner that the ruling party, under the guise of being a State, is on a witch- hunt against its oppositions, still it is the State that has officially viewed the several complaints received on land grabbing,  as cases involving powerful people abusing power to commit criminal offences and escape legal sanctions.[7] This further gives a cause/ object for quick investigation.

It is left to be seen that what the Supreme Court decides but surely an interesting reasoning would be on the cards.

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[1] R. Thamaraiselvan v. Government of Tamil Nadu and Ors., W.P. Nos. 18872, 21126, 25876, 25877, 26773, 26883, 27215, 27216, 27436, 27502, 27503, 27504, 27505 of 2011 and W.P. Nos. 8227, 8261, 10185, 10198, 10775, 25834, 26956, 26957, 28060 of 2012, 4476/2014, 24925/2013, 28413/2014, 31673/2014, 20481/2014 and W.P. (MD). No. 19726 of 2014.

[2] AIR 1952 SC 75.

[3] ibid, Das, J. at para 58.

[4] Para 22, Das, J.

[5] 1980 Supp SCC 249.

[6] Para 7, present case.

[7] Para 10.1, present case.