Supreme Court of India
AMERICAN HOTEL & LODGING ASSN. EDU. INS.versusCENTRAL BOARD OF DIRECT TAXES & ORS.
- Citation
- 2008 INSC 623
- Decided
- 9 May 2008
- Disposal
- Appeal(s) allowed
- Bench
- S H KAPADIA
Holding
The Prescribed Authority may impose monitoring conditions when granting approval under Section 10(23C)(vi) but cannot reject an application on the ground of non‑compliance with those conditions if the institution satisfies the threshold requirement of actual existence as an educational institution; the words ‘in India’ are not part of the third proviso, and surplus remittance does not by itself defeat exemption.
Summary
The American Hotel & Lodging Association Educational Institute (AH&L) – a US non‑profit educational institution – had enjoyed exemption under Section 10(22) of the Income‑Tax Act until 31‑Mar‑1998. After the Finance Act, 1998 omitted Section 10(22), AH&L applied on 7‑Apr‑1999 for initial approval under the newly inserted Section 10(23C)(vi) (vi). The Central Board of Direct Taxes (CBDT) rejected the application, holding that a surplus remitted abroad showed the income was not applied to education in India. The Delhi High Court upheld the rejection. On appeal, the Supreme Court examined the scope of the Prescribed Authority’s enquiry under Section 10(23C)(vi) and its third proviso, held that the Authority may stipulate monitoring conditions before granting approval but cannot deny approval merely for non‑compliance with those conditions when the institution already satisfies the existence requirement. The Court clarified that the words “in India” are not to be read into the third proviso and that surplus remittance does not, by itself, defeat exemption. Consequently, the CBDT order was set aside and the matter remitted to CBDT for fresh consideration.
Issues considered
- The scope of enquiry by the Prescribed Authority under Section 10(23C)(vi) read with its third proviso.
- Whether the third proviso’s monitoring conditions can be used to reject an initial approval application.
- Whether the phrase ‘in India’ should be read into the third proviso of Section 10(23C)(vi).
- Whether surplus remitted abroad disqualifies the institution from exemption.
- Effect of prior exemption under Section 10(22) on the new application.
Legislation cited
- Central Boards of Revenue Act, 1963
- Finance Act, 1998
- Income Tax Act, 1961s. 10(22), s. 10(23C)(vi), s. 11(1)(a)
- Income Tax Rules, 1962s. Rule 2CA
Subjects
tax exemptioneducational institutionSection 10(23C)(vi)third provisoprescribed authoritysurplus remittanceincome taxmonitoring conditionsnon‑profitIndia
Judgment
(2008] 8 S.C.R. 117
AMERICAN HOTEL & LODGING ASSN. EDU. INS. A
v.
CENTRAL BOARD OF DIRECT TAXES & ORS.
(Civil Appeal No. 3468 of 2008)
MAY 9, 2008
B
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]
'
Income Tax Act, 1961- s. 10 (23 C) (vi) and its third pro-
visa (as inserted by Finance Act, 1998) - Tax exemption - To
assessee as an educational institution - Granted prior to Fi- c
nance Act, 1998 - Thereafter application for seeking initial
approval in terms of s. 10 (23 C) (vi) rejected by Prescribed
Authority- Propriety of- Held: By introduction of third proviso
to the Section, Prescribed Authority could stipulate monitor-
ing conditions before grant of initial approval for the first time
t D
- But in the cases where the applicant had earlier obtained
exemption, tha approval cannot be denied on the ground of
non-compliance of third proviso - However, if after grant of
approval, there is breach of conditions of approval, the ap-
proval can be withdrawn - For the sake of seeking exemption
under s. 10 (23 C) (vi) determining factor is imparting of edu- E
cation in India and not excess/deficit of income over expendi-
ture - In the present case since the assessee had fulfilled the
threshold pre-condition of actual existence of an educational
1-
institution, approval application not liable to be rejected -
Matter remitted to the Prescribed Authority- Income Tax Rules, F
1962 -· r. 2 CA.
Appellant is a non-profit organization set up in USA,
where it is exempted from tax as an educational institu-
tion. It opened its branch in India under a Memorandum
G
of Understanding (MOU), whereby it was responsible for
~
providing its educational courses. Upto the year ending
31.3.1998 it got exemption under Section 10 (22) of Income
Tax Act, 1961. The difference between the gross amount
117 H
118 SUPREME COURT REPORTS [2008] 8 S.C.R.
A collected and the expenditure in running the branch, used
to be sent from the Branch to its Head Office, and such
accounting was acceptable by the Revenue. On reference,
Authority of Advance Ruling (AAR) had also held that the
appellant was an educational institution.
B Section 10 (22) was omitted by Finance Act, 1998
w.e.f. 1.4.1999. Within seven days of its omission, appel- '
lant filed an application u/r. 2 CA of Income Tax Rules, 1962
for seeking initial approval in terms of s. 10 (23 C) (vi) of
the Act, before Centre.I Board of Direct Taxes (CBDT) the
C Prescribed Authority. After about 5 % years, CBDT dis-
missed the application holding that there was a surplus
repatriated outside India and therefore appellant had not
applied its income for the purpose of education in India.
Appellant filed writ petition, which was dismissed by High
D Court holding that gross receipts collected by the +
appellant's Branch Office in India is 'income' chargeable
to tax; and that since the gross receipts constituted 'in-
come' chargeable to tax, such 'income' was required to
be applied to educational purposes in India, and since
E the appellant had failed to do so, CBDT was right in re-
jecting the application of the appellant.
The question for consideration in appeal to this court
was as to what was the scope of enquiry by the Prescribed ...,
Authority u/s. 10 (23 C) (vi) r/w third proviso thereto in-
F serted by Finance Act, 1998 w.e.f. 1.4.1999.
Allowing the appeal and remitting the matter to CBDT,
the Court
HELD: 1. In deciding the character of the recipient, it
G is not necessary to look at the profits of each year, but to
consider the nature of the activities undertaken in India. •
If the Indian activity has no co-relation to education, ex-
emption has to be denied. Existence of surplus from the
activity will not mean absence of educational purpose. The
H test is - the nature of activity. [Para 30] [143-A,B,C]
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 119
* BOARD OF DIRECT TAXES & ORS.
Oxford University Press v. Commissioner of Income-tax A
2001 (247) ITR 658 SC - relied on.-
Aditanar Education Institution v ACIT 1997 (224) ITR 310
- relied on.
2. Section 10(23 C) (vi) of Income Tax Act, 1961 is B
' analogous to Section 10 (22) thereof. With the insertion
of the provisos to Section 10 (23 C) (vi) the applicant who
seeks approval has not only to show that it is an institu-
tion existing solely for educational purposes [which was
also the requirement under Section 10(22)] but it has now c
to obtain initial approval from the Prescribed Authority
(PA), in terms of Section 10(23 C) (vi) by making an appli-
cation in the standardized form as mentioned in the first
proviso to that Section. That condition of obtaining ap-
proval from the PA came to be inserted because Section D
10(22) was abused by some educational institutions/uni-
versities. This proviso was insertt:d along with other pro-
visos because there was no monitoring mechanism to
check abuse of exemption provision. [Para 32] [144-A-D]
3. The threshold conditions are actual existence of E
an educational institution and approval of the prescribed
authority for which every applicant has to move an appli-
cation in the standardized form in terms of the first pro-
viso. It is only if the pre-requisite condition of actual exist-
ence of the educational institution is fulfilled that the ques- F
tion of compliance of requirements in the provisos would
arise. The third proviso contains monitoring conditions/
requirements like application, accumulation, deployment
of income in specified assets whose compliance depends
on events that have not taken place on the date of the G
application for initial approval.[Para 33] [145-E,F,G]
4. To make the Section with the proviso workable, the
Monitoring Conditions in the third proviso like application/
utilization of income, pattern of investments to be made etc.
could be stipulated as conditions by the PA subject to which H
120 SUPREME COURT REPORTS [2008] 8 S.C.R.
A approval could be granted. [Para 34] [145-G,H, 146-A]
5. In the present case, broadly the activities under-
taken by the appellant are - conducting classical educa-
tion by providing course materials, designing courses,
conducting exams, granting diplomas, supervising ex-
8 ams, all under the terms of an Agreement entered into with
Institutions of the Government of India. Similarly, the PA
may grant approvals on such terms and conditions as it
deems fit in case where the Institute applies for initial ap-
proval for the first time:. The PA must give an opportunity
C to the applicant-institute to comply with the monitoring
conditions which have been stipulated for the first time
by the third proviso. Therefore, cases where earlier, the
applicant has obtained exemption(s), as in this case, need
not be re-opened on the ground that the third proviso has
D not been complied with. However, after grant of approval,
if it is brought to the notice of the PA that conditions on
which approval was given are breached or that circum-
stances mentioned in the thirteenth proviso exists then
the PA can withdraw the approval earlier given by follow-
E ing the procedure mentioned in that proviso. The view
that the PA can stipulate conditions subject to which ap-
proval may be granted also finds support from sub-clause
(ii)(B) in the thirteenth proviso. [Para 34] [146-C-G]
6. Even after the Finance Act, 1998 w.e.f. 1.4.1999, the
F third proviso to Section 10(23C)(vi), which refers to moni-
toring conditions, confines the words "application of in-
come" to the objects for which the Institution is estab-
lished. The third proviso does not use the words "in In-
dia" in the matter of application or accumulation of income
G though in several other Sections like Sections 10(20A),
10(228) and 11 (1 )(a) etc., Parliament has used the words
"in India". Therefore, the words "in India" cannot be read
into the third proviso. Parliament in its wisdom has stated
in the third proviso that the educational institution has to
H apply its income wholly and exclusively to the objects for
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 121
BOARD OF DIRECT TAXES & ORS.
+
which it is established. Therefore, the plain words of the A
third proviso do not require application of income to be
in India. It does not mean that the applicant has not to
impart educational activities in India. If the applicant wants
exemption under Section 10(23C)(vi) it has to impart edu-
cation in India and only then it would be entitled to claim B
initial approval under that section. That is the reason for
saying that the "non-profit" qualification has to be tested
against Indian activities. Impartation of education must
be in India if applicant desires exemption under Section
10(23C)(vi) and that excess/deficit of income over expen- c
diture will not decide whether the applicant exists for profit
or not. [Para 38] (147-G, 148-A,B,C,D]
Oxford University Press v. Commissioner of Income-tax
2001 (247) ITR 658 SC - relied on.
D
7. Items such as application of income or accumula-
tion of income or investment in specified assets indicated
in clauses (a) and (b) in the third proviso are a part of com-
pliance/monitoring conditions. There is a difference be-
tween application/utilization of income and outward re-
mittance of income out of India. With the insertion of the E
provisos in Section 10(23C)(vi) of the 1961 Act, it is open
to the PA to stipulate, while granting approval, that the
approval is being given subject to utilization/application
of certain percentage of income, in the accounting sense,
towards impartation of education in India. Such exercise F
would be based on estimation. [Para 39] [148-E,F,G]
8. There is a difference between 'accounting income'
and 'taxable income'. At the stage of Section 10, account-
ing income is concerned. Therefore, it is open to the PA, if G
it deems fit, to stipulate that certain percentage of account-
ing income would be utilized for impartation of education
in India. Therefore, it is always open to the PA to impose
such terms and conditions as it deems fit. The interpreta-
tion given, is based on harmonious construction of the H
122 SUPREME COURT REPORTS [2008) 8 S.C.R.
provisos inserted in Section 10(23C)(vi) by the Finance
Act, 1998. (Para 39] (148-G, 149-A]
9. There is a difference between stipulation by the
PA of such terms and conditions, as it deems fit under the
provisos, and the compliance of those conditions by the
appellant. The compliance of the terms and conditions
stipulated by the PA would be a matter of decision at the
time of assessment as availability of exemption has to be
evaluated every year in order to find out whether the in-
stitution existed during the relevant year solely for edu-
c cational purposes and not for profit.[Para 39] (149-8,C]
10. In this case, appellant has fulfilled the threshold
pre-condition of actual existence of an educational insti-
tution under Section 10 (23 C) (vi) and, therefore, on that
count CBDT will not reject the approval application. In this
0
case, the initial approval application in Form 560 was
IJated 7.4.1999. It was dismissed by CbDT on 12.10.2004
(after 5% years), therefore, in terms of Rule 2CA(1A) the
matter is remitted to CBDT for fresh consideration. [Paras
42 and 43] (150-A-H, 151-A]
E
ACIT v. Surat Art Silk Cloth Manufacturers Association
1980 (121) ITR 1 - relied on.
CIVILAPPELLATE JURISDCTION: Civil Appeal No. 3468
of 2008
F
From the Judgment & Order dated 24.11.2006 of the High
Court of Delhi at New Delhi in WP (Civil) No. 17978/2004
Jahangir D. Mistri and Rustom B. Hathikhanawala for the
Appellant
G
P.V Shetty. Tufail A. Khan, D.K. Singh, K.B. Sandeep,
Farah Fathima ane B.V. Balaram Das for the Respondents.
The Judgment of the Court was delivered by
S. H. KAPADIA, J. 1. Leave granted.
H
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 123
BOARD OF DIRECT TAXES .& ORS. [S.H.KAPADIA, J.)
2. The short question which arises for consideration in this A
civil appeal is as to what is the scope of enquiry by the Pre-
scribed Authority under Section 10(23C)(vi) read with the third
proviso thereto inserted by Finance Act, 1998 w.e.f. 1.4.1999.
In this case, Central Board of Direct Taxes ("CBDT") being the
Prescribed Authority, at the relevant time, rejected the applir.a- B
tion for appoval dated 7.4.1999 vide its order dated
12.10.2004. The said order has been upheld by the impugned
judgment dated 24.11.2006 delivered by Delhi High Court in
Writ Petition (C) No. 17978/04, hence, this civil appeal.
3. Briefly, the facts are as follows. c
4. The claim of the appellant is that it is a non-profit orga-
nization set up in USA and has been gramed tax exemption as
an educational institute in that country. Appellant has a branch
office in India, mainly to comply with its obligations under vari-
0
ous agreements with Government of India (Ministry of Tourism).
Its branch providt:s a central focal point in India for Indian n·,is-
sions to avail of its educational courses. Its branch collects data
from educational institutions/persons wishing to take the courses
offered in the field of Hospitality and fees for the required course
material which is thereafter remitted to USA. After collection of 'E
data and fees, the Head Office ("HO") sends course materials,
examination papers etc. to the branch in India for onward trans-
mission to the actual user. It is the case of the appellant that, it's
Indian branch is the small office in which administrative work is
done. Few employees attend to this work. The costs of running F
the branch office is met by deducting the same from the amounts
remitted to the H.O.
5. Thus, the appellant is an Institution whose objects are
known as "Statement of Purposes" in US. Under the Internal G
Revenue Code, 1954 in the U.S. it enjoys tax exemption status
as an educational institution. It is governed by an elected Board
of Trustees and it offers high quality educational and training
resources to enhance the professionalism of the hospitality in-
dustry worldwide.
H
124 SUPREME COURT REPORTS [2008] 8 S.C.R.
A 6. In 1993, the National Council of Hostel Management .\,
and Catering Technology, the apex Indian body overseeing hostel
management and catering education under the Ministry of Tour-
ism, signed MoU with the Educational Institute ("El", for short)
under which approval was granted to use courses, resources
B and expertise of the appellant in India with a view to improve
the quality of hospitality education and training in India. Conse-
quently, the appellant opened a liaison office in Mumbai in July
1994 with the approval of ReseNe Bank of India ("RBI", for short).
Subsequently, in February 1995 the liaison office was upgraded
c to a branch office with the approval of the Ministry of Finance,
Gal, and the RBI.
7. According to the MoU, the appellant has to fulfill the fol-
lowing obligations:
"The Institute will :
0
(a) provide a full and complete, world-recognised •
curriculum for all hospitality education programs in India ;
(b) make available for reproduction in India the texts, course
materials, and software programs utilised in the lnstitute's
Hospitality Management Diploma ;
(c) provide a comprehensive faculty development program
to upgrade the professionalism and instructional ability of
those teaching hospitality management courses in India ;
F (d) offer a comprehensive certification and registration
program for individuals currently employed in the hospitality
industry in India ;
(e) develop an accreditation system to permit the National
G Council to qualify and recognise proprietary schools ;
(f) develop through grant support, an entrance test to
identify individuals best qualified to enter the hospitality i.
industry;
(g) establish an office in India to implement and co-ordinate
H
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 125
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J]
the lnstitute's activities ; A
(h) offer the National Council the lowest possible prices
for the products and services sold to or utilised by the
schools under the umbrella of the Government of India ;
(i) utilise Indian authors whenever possible in the B
development of customised programs."
8. Thus, in accordance with the terms of the said MoU, the
appellant is responsible, inter alia, for providing a full and com-
plete curriculum, recognized throughout the worldwide, for all
hospitality educational programmes in India, making available C
text books, course materials and software programmes utilized
in the appellant's Hospitality Management Diploma, offering a
comprehensive certification and registration programme for In-
dians desiring to avail of education in the hospitality field in In-
dia. Under Clause 1(h) of the MoU, appellant is required to D
offer to the National Council in India, which is the apex body for
hospitality management in India, lowest possible prices for its
products/services tc be utilized for Schools under the umbrella
of Gol. Under Clause 2(b) of the said MoU, the National Coun-
cil of Hospitality is obliged to utilize the appellant's courses in E
its current and future Hospitality Management Schools.
9. At this stage, it may be noted that the appellant got ex-
emption under Section 10(22) up to the year ending 31.3.1998.
The branch office accounts during the said period showed the
gross amounts collected on the income side and the costs for F
running the branch were shown on the expenditure side. The
difference between these figures represented what was receiv-
able by the HO from the branch for the provision of course ma-
terials and other services provided by the HO. These accounts
were accepted by the Department till 31.3.1998. G
10. One more fact needs to be mentioned. Appellant
herein had also moved the AAR under Section 2450(1) of the
1961 Act for a ruling from the Authority on the following ques-
tions:
H
126 . SUPREME COURT REPORTS [2008] 8 S.C.R
A "(i) Whether the applicant would be entitled to exemption
under Section 10(22) of the Income-tax Act, 1961, in
respect of its various amounts of income from the following
sources in India:
(a) Conducting various courses and certification
B programmes in hospitality management and operations.
(b) Providing educational and training materials.
(c) Conducting sf~minars, workshops and other
c
programmes. ,.
(d) Providing traininu, course materials and instructional
resources to the in-house faculty of various institutions.
(ii) Whether the applicant would be entitled to exemption
under Section 11 of the Income-tax Act, 1961 ?"
D
11. By its decision dated 14.2.96 the Authority held, after
reviewing the objects a111d Agreemer;ts with Gol, that the appel-
lant was entitled to exemption from tax under Section 10(22) of
the 1961 Act. It was held that the appellant was an educational
E institution in terms of Section 10(22) of the 1961 Act. This deci-
sion of the Authority was accepted by the Department. It was
not challenged by the Department before this Court. Thus, the
Department had accepted that the appellant's income was ex-
empt from tax under Section 10(22) of the 1961 Act inasmuch
as no assessments were made and/or no demands for income-
F tax was raised for all years prior to the assessment year 1999-
2000 (corresponding to the accounting ye~r ending 31.3.1999).
12. Section 10(22) stood omitted by Finance Act, 1998
w.e.f. 1.4.1999. On 7.4.1999, i.e., within seven days, appellant
G herein made an application to CBDT (the Prescribed Authority)
for initial approval in terms of the first proviso to Section
10(23C)(vi) of the 1961 Act. The appellant applied for initial
approval in the prescribed standarised form under rule 2CA of
the Income-tax Rules, 1962 i.e. Form No.56D (See: page No.62
H of the civil appeal paper book)
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 127
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
Ill -+ 13. Over the next 5Yi years CBDT did not pass any order A
on the appellant's application. During this period certain que-
ries were put to the appellant which were replied to by the ap-
pellant by various letters. The important point to be noted is that
by the said letters appellant clarified its position regarding the
type of accounts required and maintained by its branch in India 8
under which excess of receipts over payments was not treated
as income/profit/surplus as appropriate costs incurred by the
HO had not been taken into account therein because the pur-
pose for which the accounts of the branch office were required
to be made was only to establish how much money was owned c
to the HO and not to ascertain its income or surplus. In the said
correspondence it was clarified that even the AO in assess-
ment proceedings had accepted that the excess income over
and above the expenditure shown in its account, could not be
taken as appellant's income. In fact, the AO had called for infor-
,. D
mation regarding the HO expenses for the year ending
31.3.1999 which had not been considered in the branch office
accounts.
14. During the hearing before CBDT, appellant also fur-
nished a certificate attested by the certified public accountant E
that Head Office expenses for the year ending 31.3.1999
amounted to US$.2,63,647. The appellant also pointed out to
CBDT that even the assessing officer and CIT (appeals) have
not deducted the aforestated sum of alleged surplus while com-
....
puting the appellant's income allegedly chargeable to tax. F
15. By its Order dated 12.10.2004, CBDT rejected
appellant's application holding that "there is a surplus repatri-
ated outside India and, therefore, appellant has not applied its
income for the purpose of education in India".
G
16. The said Order dated 12.10.2004 was challenged by
the appellant in the Delhi High Court vide Writ Petition No.
17978/04. By the impugned judgment dated 24.11.2006, the
Delhi High Court held that the gross receipts collected by the
appellant's branch office in India is "income" chargeable to tax.
H
128 SUPREME COURT REPORTS [2008] 8 S.C.R.
A It further held that since the gross receipts constituted "income" ~
chargeable to tax such "income" was required to be applied to
educational purposes in India and since the appellant had failed
to do so CBDT was right in rejecting the application dated
7.4.99. In this connection, the Delhi High Court placed reliance
B on the third proviso to Section 10(23C)(vi) as well as the deci-
sion of this Court in the case of Oxford University Press v. Com-
missioner of Income-tax reported in (2001) 24 7 ITR 658 SC.
17. Shri Jehangir D. Mistri, learned counsel for the appel-
lant, submits that the object of introducing Section 10(23C)(vi)
C of the 1961 Act was explained by CBDT in its Circular No. 772
dated 23.12.98 [(1999)2351TR35(st.)]. According to learned
counsel, the said Circular holds that the approval contemplated
by Section 10(23C)(vi) is de hors the adherence to conditions
set out in the proviso to the section. In this connection, learned
D counsel placed reliance on the second proviso and submits that
thi:i said proviso clarifies that at the stage of approval what is
required to be seen by CBDT is the nature and genuineness
of the activities of the appellant-Institution under consideration.
According to learned counsel, the provisos of the said section
E sets out conditions which must be adhered to by the Institu-
tion, and compliance therewith can never be tested at the stage
of approval, since they require consideration of acts and events
which will take place in the future. In this connection, learned t·
counsel urged that application of income is the requirement men-
F tioned in the third proviso to Section 10(23C)(vi) and that re-
quirement can only be tested after the end of the previous year
when "income" is ascertained and thereafter applied. Similarly,
according to learned counsel, the requirement of accumulation,
if any, in that proviso can also only be examined at the end of
G any previous year after "income", if any, is determined and there-
after accumulated. One more example is given by the learned
counsel. The requirement of investment/deposit of funds, re-
ferred to in the third proviso, can only be tested at the stage of
investment which can only take place after profit/ surplus is es-
tablished. Under the 131h proviso CBDT is empowered to with-
H
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 129
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
+ draw the approval earlier granted. That proviso, according to A
learned counsel, also proceeds on the basis that the withdrawal
will be for failure to comply with the terms of application or in-
vestment of funds or genuineness of activities and, therefore,
implicit in that proviso is an alleged violation of application of
surplus and/or investment which may result in a subsequent with- B
drawal. In short, according to learned counsel, at the stage of
grant of approval the provisos dealing with items required to be
monitored, as mentioned in the third proviso, are not to be con-
sidered by CBOT and in fact it would be impossible to ascer-
tain compliance at the stage of approval. For all the above rea- C
sons, learned counsel urges that the scope of enquiry for grant
of approval under Section 10(23C)(vi) is to consider only the
nature, existence for non-profit purposes and genuineness of
the Institute, the remaining monitoring mechanism is not required
to be considered at the stage of approval.
D
18. On facts, learned coursel submits that the appellant
fell within the main part of Section 10(23C)(vi), excluding the
monitoring conditions mentioned in the provisos and, therefore,
the appellant was entitled to approval. In this connection, learned
counsel submits that even CBDT in its impugned order dated E
12.10.2004 has not denied the appellant's claim that it is an
educational institution, existing solely for educational purposes
and not for profit. In this connection, learned counsel also places
reliance on the decision dated 14.2.1996 given by AAR (supra)
which decision was accepted by the Department and not chal- F
lenged before this Court. According to learned counsel the test
to be applied, in this connection, is : whether on an overall view
the object is to make profit. In this connection reliance was
placed on the judgment of this Court in the case of Additional
Commissioner of Income-tax, Gujarat v. Surat Arl Silk Cloth G
Manufacturers Association reported in (1980) 121 ITR 1 SC.
On facts, learned counsel submits even if the branch office has
..I.
incidental surplus, that does not lead to the conclusion that the
appellant-Institution exists for the purposes of prdfit. In short,
learned counsel submits that there is no material whatsoever
H
130 SUPREME COURT REPORTS [2008] 8 S.C.R.
A on the basis of which it can be said that the appellant is not an +
educational institution. On the contrary, learned counsel states
that the appellant conducts classical education by providing
course materials, designing courses, conducing examinations,
granting diplomas, supervising examinations and all these ac-
B tivities are done under the terms of the agreement entered with
the Institutions of the Government of India and, therefore, it is
wholly erroneous to contend that the appellant is not an educa-
tional institution. According to learned counsel, the amounts
claimed to be surplus by the Department are actually not sur-
e plus if the costs of materials and other services provided by the
HO are taken into account and deducted from the fees collected.
In any event, according to learned counsel, surplus/deficit is not
determinative of the question as to whether the appellant exists
for the profit purposes.
D 19. According to learned counsel, the words "in India"
should not be read into clause (a) of •he third proviso to Section
10(23C)(vi) of the 1961 Act as done by the High Court in its
impugned judgment. Learned counsel submits that the ques-
tion as to whether application of income is required to be made
E in India or outside India, cannot be part of the decision-making
process for grant of approval. The said requirement cannot be
taken into account at the approval stage. In the alternative, it is
urged that in any event the said requirement of application of
income in India is not there in clause (a) of the third proviso.
F According to learned counsel, the plain words of the third pro-
viso refer to the application of income to the objects for which
the institute is established and the said proviso does not re-
quire application of income "in India". Therefore, it is urged that
there is no valid reason given by the Department as to why the
G words "in India" should be read in the third proviso. Ultimately,
according to learned counsel, the only test required to be ap-
plied must focus on the nature, activities and genuineness of
the institution and not whether such institution applies its income
in India. According to learned counsel, the Indian public ob-
tains a benefit by having internationally recognized education/
H
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 131
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
+
qualifications available to it at the lowest possible costs. That, A
the benefit to the Indian public is not obtained by where the sur-
plus is spent and therefore such criterion has no relevance to
the object sought to be achieved while granting the exemption.
Lastly, on this aspect learned counsel urges that similar words
"in India" are found in Sections 10(20A), 10(228) and 11 (1 )(a) B
.. of the 1961 Act but not in Section 10(23C)(vi). Therefore, by
comparison, learned counsel urges that wherever such require-
ment was considered necessary by the Parliament the same
has been incorporated and, therefore, the exclusion of the words
"in India" in the third proviso to Section 10(23C)(vi) is not an c
oversight. For the above reasons, learned counsel submits that
the words "in India" should not be read into clause (a) of the
third proviso of Section 10(23C)(vi) of the 1961 Act.
20. Before concluding the submissions, advanced on be-
half of the appellant, one aspect needs to be mentioned. De- D
partment has relied upon the judgment of this Court in the case
of Oxford University Press (supra). According to learned coun-
sel, the judgment of this Court in Oxford University Press has
no application as in that case all the three Honourable Judges
held that it was impermissible to read the words "in India" into E
Section 10(22) of the 1961 Act. According to learned counsel,
the question of application of income did not arise in that case,
particularly, when there were no provisos to Section 10(22) at
.... the relevant time and, therefore, the judgment of this Court in
that case has no bearing whatsoever on the subject-matter of F
the present civil appeal.
21. Shri P.V. Shetty, learned senior counsel appearing for
the Department, submits that the basic test which CBDT as pre-
scribed authority ("the PA" for short) is required to consider at
the stage of approval is whether the appellant's institute is solely G
.J. an educational institution without profit motive. According to the
learned counsel, if surplus is remitted to USA, appellant would
not be entitled to approval under Section 10(23C)(vi). Accord-
ing to the learned counsel, in the present case, CBDT has ex-
amined the accounts of the appellant for three years and it de- H
132 SUPREME COURT REPORTS [2008] 8 S.C.R.
+
A tected that the entire expenses was not incurred in India. Ac-
cording to the learned counsel, Section 10(22) was the prede-
cessor section of the present Section 10(23C)(vi). Earlier, ac-
cording to the learned counsel, when Section 10(22) existed,
the PA was only required to examine the objects of the Institute
B and not the application of income which concept is now brought
in vide Section 10(23C)(vi) read with the second, third and elev-
enth provisos w.e.f. 1.4.1999. Therefore, according to the learned
.
counsel, the PA has not only to examine at the stage of approval
the nature of the Institution, its activities and its genuineness but
c also its accounts to ascertain whether the expenses incurred
and the activities undertaken are in India. According to the
learned counsel, "application of income" is the concept which
is introduced for the first time by way of third proviso to Section
10(23C)(vi). It was not there earlier. The reason, according to
the learned counsel, for insertion of the proviso to Section
0
10(23C)(vi) was that in the past when Section 10(22) stood
alone several cases of misuse c;i funds by the funds not being
deployed in India came to be detected. According to the learned
counsel, in the past, prior to 1.4.1999, the PA used to examine
only the purposes and objects for which the Institute stood es-
E tablished but after 1.4.1999, the PA is also required to examine
application of income in India and to that extent the concept of
genuineness originally mentioned in Section 10(22) now stands
expanded to include even application of income to the objects
for which the institute is formed. According to the learned coun-
F sel, prior to 1.4.1999, the Memorandum of Association consti-
tuted the bases for deciding the genuineness. That prior to
1.4.1999, application of income came within the concept of"as-
sessment" in Section 11. However, that dichotomy, according
to the learned counsel, now stands obliterated with the inser-
G lion of the three provisos abovementioned in Section
10(23C)(vi). Therefore, according to the learned counsel, after
1.4.1999, even the PA is required to examine whether the ac-
crued income stood applied for educational activity in India.
According to the learned counsel, not only the source of income
H but also its application has to be for education in India. In this
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 133
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
+ connection, reliance was placed by the learned counsel on the A
judgment of this Court in the case of Oxford University Press
(supra).
22. On merits, learned counsel submits that since an
amount of Rs. 1,30,30,288.00 stood remitted by the appellant
within the financial year ending 31.3.1999, the PA was right in 8
rejecting the approval application made by the appellant.
...
Learned counsel submits that the appellant is a worldwide or-
ganization. Learned counsel urged that in the application for
approval, no details have been furnished by the appellant re-
garding its worldwide income, regarding its income in India and c
its expenses for its activities in India. According to the learned
counsel, the burden of proof is on the applicant which it has
failed to discharge. According fo the learned counsel, in the past,
in several cases, funds have been diverted and, therefore, Par-
liament inserted several provisos in Section 10(23C)(vi) which D
" are conditions to be complier! with by the appellant. Learned
counsel submits that the provisos have got to read with the main
section. That, the third proviso requires application/utilization
of income accruing to the appellant in India and by remitting the
aforestated amount(s), the Institute herein has failed to comply E
with the said proviso. Learned counsel submits that the three
provisos, referred to above, are further conditions, which every
applicant has to satisfy. One such condition is application of
...,.,
income. Learned counsel submits that in order to get exemp-
tion under Section 10(23C)(vi) the applicant has to show that it F
is solely and exclusively an educational institution established
solely for educational purposes and not for profit and since, in
the present case, the appellant has earned surplus of Rs.
1,30,30,288.00/1.14 crores, which has been remitted to USA,
it is clear that the appellant's institution does not exist solely for
G
educational purposes and that it is profit earning institute like
-A any other commercial institute and, therefore, it is not entitled to
the benefit of exemption under the said Section 10(23C)(vi).
Learned counsel submits that the appellant has failed to place
before the PA the requisite material to show that it is carrying
H
134 SUPREME COURT REPORTS [2008] 8 S.C.R.
A out educational activity even in USA and that the entire income
.
generated by it, both in India and in USA, is spent solely on
educational activity and not to earn profits and, therefore, no
interference is called for in the present case. Learned counsel
submits that the appellant is claiming exemption under the In-
B come Tax Act, 1961. That, under the said Act, exemption under
Section 10(23C)(vi) is in the nature of a concession to an insti-
tution which solely carries on educational activity, which is not
for profit and since Section 10(23C)(vi) is an exemption provi-
sion, the burden is on the applicant to show the compliance of
c the various conditions in St)ction 10(23C)(vi). According to the
learned counsel, the said provision must be read strictly if mcney
laundering and shifting of profits out of India is to be prevented.
According to the learned counsel, the burden is on the appli-
cant to show from the statement of accounts of the previous
year ending 31.3.1999 as to how it has derived the said surplus
D
and how it has utilized that surplus for educational activity. In the
present case, according to the learned counsel, be it surplus/
profit/excess of income over expenditure, once an amount stood
remitted from India to USA, it is clear that the appellant's insti-
tute is not existing solely for educational purposes in India and,
E therefore, is not entitled to approval under Section 10(23C)(vi).
Learned counsel submits that in every case the area of activity
needs to be examined by the PA. That, the applicant which seeks
exemption under the above section needs to know, that educa-
tion is the duty of the State; that every Institution which seeks
,.
F exemption under Section 10(23C)(vi) should know that it is sup-
posed to carry out the fuoctions of the State in the field of edu-
cation and since it is a socio-welfare function. the Legislature
had stepped in by the Finance Act, 1998 so as to bring in CBDT
which is the highest body of experts in the matter of granting
G approval. According to the learned counsel, this Court should
not interfere unless reasons given by CBDT are extraneous. .I.
According to the learned counsel, the appellant's institute ought
to have at the very outset, at the time of making an application,
should have declared its world income, world expenditure, In-
H dian income and Indian expenditure. That, it ought to have de-
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 135
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.)
dared at the very outset whether the appellant's institution is an A
educational institution in USA. That, at the very outset, the ap-
pellant ought to have.stated and given particulars regarding its
activities abroad. Since it has failed to disclose the relevant
aspects mentioned above, the applicant/appellant was not en-
titled to approval. In conclusion, learned counsel submits that B
there is no dispute that certain huge amount of Rs.
1,30,30,288.00 has been remitted and that fact alone is con-
clusive circumstance to show that the appellant-institution is a
commercial venture existing for profit and that it is not existing
solely for educational purposes in India. Learned counsel urged c
that the third proviso brought in the concept of application of
income vide the Finance Act, 1998 in order to bring about par-
ity between universities and other educational institutions on
one hand and public charitable trusts covered by Sections 11
and 12 under the 1961 Act. Therefore, according to the learned D
counsel, even at the stage of approval, the PA can take into
account not only the nature, activities and ge;1uineness of the
Institute but also the manner in which the income derived in In-
dia is spent/utilized in India. Learned counsel submits that, in
view of the Finance Act, 1998, the provisions of Section 11 (1 )(a)
have got to be read into the provisions of Section 10(23C)(vi) E
and if so read the applicant-Institute is required to state in its
application as to how it has utilized its Income in India in the
year ending 31.3.1999. In this connection, learned counsel re-
ferred to Section 11 (1 )(a) which states that certain incomes shall
not be included in the total income of the previous year of the F
person in receipt of such income if such income is derived from
property held under trust, wholly for charitable or religious pur-
poses, to the extent of which such income is applied to such
purposes in India. Learned counsel submits that under Section
10(23C)(vi) as well as the third proviso thereto, the words "in G
India" are not there but to give purposive interpretation to the
said section the court should read those words into section
10(23C)(vi) to stop shifting of the "lncome"/Profits accruing in
India from being transferred to US. According to the learned
counsel, when the appellant herein expatriated a sum of Rs. H
136 SUPREME COURT REPORTS [2008] 8 S.C.R.
A 1,30,30,288.00 or Rs. 1.14 crores (approx.) after taking into
account expenses incurred by the HO to USA. it is clear that the
appellant's institution has failed to comply with the requirements
of Section 10(23C)(vi) and, therefore, it is not entitled to ap-
proval. For the aforestated reasons, according to the learned
B counsel, no interference is called for in the present case.
23. For the sake of convenience, we quote hereinbelow
the following provisions of Section 10(23C) of the 1961 Act, as
amended w.e.f. 1.4.1999 vide Finance Act, 1998:
c "10. Incomes not included in total income.- 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-
D
(vi) any university or other educational institution
existing solely for educational purposes and not
for purposes of profit, other than those
mentioned in sub-clause (iiiab) or sub-clause
(iiiad) and which may be approved by the
prescribed authority; or
Provided that the fund or trust or institution or any university
or other educational institution or any hospital or other
medical institution referred to in sub-clause (iv) or sub-
F clause (v) or sub-clause (vi) or sub-clause (via) shall make
an application in the prescribed form and manner to the
prescribed authority for the purpose of grant of the
exemption, or continuance thereof, under sub~clause (iv)
or sub-clause (v) or sub-clause (vi) or sub-clause (via):
G Provided further that the Central Government, before
notifying the fund or trust or institution, or the prescribed
authority, before approving any university or other
educational institution or any hospital or other medical
institution, under sub-clause (iv) or sub-clause (v) or sub-
H clause (vi) or sub-clause (via), may call for such documents
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 137
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J]
(including audited annual accounts) or information from A
the fund or trust or institution or any university or other
educational institution or any hospital or other medical
institution, as the case may be, as it thinks necessary in
order to satisfy itself about the genuineness of the activities
of the fund or trust or institution or any university or other B
educational institution or any hospital or other medical
institution, as the case may be, and the Central Government
or the prescribed authority, as the case may be, may also
make such inquiries as it deems necessary in this behalf:
Provided also that the fund or trust or institution or any C
university or other educational institution or any hospital or
other medical institutioJt referred to in sub-clause (iv) or
sub-clause (v) or sub-clause (vi) or sub-clause (via)-
[( a) applies its income, or accurtiulates it for application, D
wholly and exclusively to the objects for which it is
established and in a case where more tnan twenty-five
per cent of its income is accumulated on or after the 1st
day of April, 2001, the period of the accumulation of the
amount exceeding twenty-five per cent of its income shall
in no case exceed five years; and] E
(b) does not invest or deposit its funds, other than-
(i) any assets held by the fund, trust or institution
or any university or other educational institution
or any hospital or other medical institution where F
such assets form part of the corpus of the fund,
trust or institution or any university or other
educational institution or any hospital or other
medical institution as on the 1st day of June,
1973; G
(ia) any asset, being equity shares of a public
company, held by any university or other
educational institution or any hospital or other
medical institution where such assets form part H
138 SUPREME COURT REPORTS [2008] 8 S.C.R.
A of the corpus of any university or other
educational institution or any hospital or other
medical institution as on the 1st day of June,
1998;]
(ii) any assets (being debentures issued by, or on
B behalf of, any company or corporation},
acquired by the fund, trust or institution or any
university or other educational institution or any
hospital or other medical institution before the
1st day of March, 1983;
c
(iii) any accretion to the shares, forming part of the
corpus mentioned in sub-clause (i) and sub-
clause (ia), by way of bonus shares allotted to
the fund, trust or institution or any university or
other educational institution or any hospital or
D
other medical institution; •
(iv) voluntary contributions received and maintained
in the form of jewellery, furniture or any other
article as the Board may, by notification in the
E Official Gazette, specify,
for any period during the previous year otherwise
than in any one or more of the forms or modes
specified in sub-section (5) of section 11:
F Provided also that the exemption under sub-clause (vi)
or sub-clause (via) shall not be denied in relation to any
funds invested or deposited before the 1st day of June, ~·~
1998, otherwise than in any one or more of the forms or
modes specified in sub-section (5) of section 11 if such
funds do not continue to remain so invested or deposited
G
after the 30th day of March. 2001 :
1.
Provided also that the exemption under sub-clause (iv)
or sub-clause (v) or sub-clause (vi) or sub-clause (via)
shall not be denied in relation to voluntary contribution,
H other than voluntary contribution in cash or voluntary
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 139
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.)
contribution of the nature referred to in clause (b) of the A
third proviso to this sub-clause, subject to the condition
that such voluntary contribution is not held by the trust or
institution or any university or other educational institution
or any hospital or other medical institution, otherwise than
in any one or more of the forms or modes specified in B
sub-section (5) of section 11, after the expiry of one year
from the end of the previous year in which such asset is
acquired or the 31 51 day of March, 1992, whichever is
later:
[Provided also that where the fund or trust or institution C
or any university or other educational institution or any
hospital or other medical institution referred to in sub-
clause (iv) or sub-clause (v) or sub-clause (vi) or sub-
clause (via) does not apply its income during the year of
receipt and accumulates it, any payment or credit out of D
such accumulation to any trust or in~t.itution registered
under section 12AA or to any fund or trust or institution or
any university or other educational institution or any hospital
or other medical institution referred to in sub-clause (iv) or
sub-clause (v) or sub-clause (vi) or sub-clause (via) shall E
not be treated as application of income to the objects for
which such fund or trust or institution or university· or
educational institution or hospital or other medical
institution, as the case may be, is established:
Provided also that where the fund or institution referred F
to in sub-clause (iv) or trust or institution referred to in sub-
clause (v) is notified by the Central Government [or is
approved by the prescribed authority, as the case may
be,] or any university or other educational institution
referred to in sub-clause (vi) or any hospital or other medical G
institution referred to in sub-clause (via), is approved by
l the prescribed authority and subsequently that
Government or the prescribed authority is satisfied that-
(i) such fund or institution or trust or any university or other H
140 SUPREME COURT REPORTS [2008) 8 S.C.R.
A educational institution or any hospital or other medical
institution has not-
(A) applied its income in accordance with the
provisions contained in clause (a) of the third
proviso; or
8
(B) invested or deposited its funds in accordance
with the provisions contained in clause (b) of
the third proviso; or
(ii) the activities of such fund or institution or trust or any
c university or other educational institution or any hospital or
other medical institution-
(A) are not genuine; or
(B) are not being carried out in accordance with
D all or any of the conditions subject to which it
was notified or approved :
it may, at any time after giving a reasonable opportunity of
showing cause against the proposed action to the
concerned fund or institution or trust or any university or
E other educational institution or any hospital or other
medical institution, rescind the notification or, by order,
withdraw the approval, as the case may be, and forward
a copy of the order rescinding the notification or
withdrawing the approval to such fund or institution or trust
F or any university or other educational institution or any
hospital or other medical institution and to the Assessing
Officer;]"
(emphasis supplied)
G 24. We may quote Section 10(22) of the 1961 Act, as it
stood prior to 1.4.1999, which reads as follows:
"10. Income not included in total income- In computing
the total income of a previous year of any person, any
income falling within any of the following clauses shall not
H
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 141
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
be included- A
(22) any income of a university or other educational
institution, existing solely for educational
purposes and not for purposes of profit."
25. We also quote hereinbelow Section 11(1)(a) of the B
1961 Act, which reads as follows:
"11. Income from property held for charitable or
religious purposes.
(1) Subject to the provisions of sections 60 to 63, the c
following income shall not be included in the total income
of the previous year of the person in receipt of the income-
(a) income derived from property held under trust
wholly for charitable or religious purposes to
the extent to which such income is applied to D
such purposes in India; ~nd. where any such
income is accumulated or set apart for
application to such purposes in India, to the
extent to which the income so accumulated or
set apart is not in excess of fifteen per cent of E
the income from such property"
26. At the outset, we need to examine the scope of Sec-
tion 10(22), which is the predecessor of Section 10(23C)(vi),
without the provisos.
F
27. Actual existence of the educational institution was the
pre-condition of the application for initial approval under Sec-
tion 10(22). On grant of approval under Section 10(22), Sec-
tions 11 and 13 did not apply. Therefore, earlier prior to 1.4.1999
when exemption was given to the appellant, there was no as- G
sessment nor demand. Section 10(22) had an automatic ef-
J
fect. Once an applicant-institution came within the phrase "ex-
ists solely for educational purposes and not for profit" no other
conditions like application of income were required to be com-
plied with. The Prescribed Authority was only required to ex- H
142 SUPREME COURT REPORTS [2008] 8 S.C.R.
A amine the nature, activities and genuineness of the Institution.
The above phrase was the only requirement for initial approval.
The mere existence of profit/surplus did not disqualify the insti-
tution if the sole purpose of its existence was not profit-making
but educational activities as Section 10(22) by its very nature
s contemplated income of such institution to be exempted. Un-
der Section 10(22) the test was restricted to the character of
the recipient of income, viz, whether it had the character of edu-
cational institution in India, its character outside India was irrel-
evant for deciding whether its income would be exempt under
c Section 10(22).
28. The moot question in Section 10(22) was - whether
the activities of the applicant came within the definition of "in-
come of educational institution". Under Section 10(22) one had
to closely analyse the activities of the Institute, the objects of the
D Institute and its source of income and its utilization. Even if one
of tl-ie objects enabled the Institute to undeiiake commercial
activity, the institute would not be entitled to approval under
Section 10(22). The said section inter alia excludes the income
of the educational institute from the Total Income.
E 29. In ACIT v. Surat Art Silk Cloth Manufacturers Asso-
ciation reported in (1980) 121 ITR 1 it has been held by this
Court that test of predominant object of the activity is to be seen
whether it exists solely for education and not to earn profit.
However, the purpose would not lose its character merely be-
F cause some profit arises from the activity. That, it is not pos-
sible to carry on educational activity in such a way that the ex-
penditure exactly balances the income and there is no result-
ant profit, for, to achieve this, would not only be difficult of prac-
tical realization but would reflect unsound principles of manage-
G ment. In order to ascertain whether the Institute is carried on
with the object of making profit or not it is duty of the prescribed
authority to ascertain whether the balance of income is applied
wholly and exclusively to the objects for which the applicant is
established.
H
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 143
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
30. In deciding the character of the recipient, it is not nee- A
essary to look at the profits of each year, but to consider the
nature of the activities undertaken in India. If the Indian activity
has no co-relation to education, exemption has to be denied.
(see judgment of this Court in Oxford University Press [su-
pra]). Therefore, the character of the recipient of income must B
have character of educational institution in India to be ascer-
tained from the nature of the activities. If after meeting expendi-
ture, surplus remains incidentally from the activity carried on by
the educational institution, it will not cease to be one existing
solely for educational purposes. In other words, existence of c
surplus from the activity will not mean absence of educational
purpose (see judgment of this Court in Aditanar Educational
Institution v. ACIT, (1997) 224 ITR 310). 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 D
been applied for non-educational purpose has to be decided
only at the end of the financial year.
31. In Oxford University Press (supra) this Court found
that the applicant was a branch of Oxford Press which was part
of the Oxford University but its activity in India was restricted to E
publishing books, journals, periodicals etc. The Tribunal held
that because Oxford Press is part of the University its income
was exempt under Section 10(22) as it stood at the relevant
time. It is in this context that the words "existing solely for edu-
cational purposes and not for the purposes of profit" in Section F
10(22), which words also find place in Section 10(23C)(vi), came
for consideration. This Court held that location of the University
is not relevant, what is relevant is - whether there is imparting
of education in India. Therefore, the test formulated by this Court
to decide the character of the recipient of income under Sec- G
tion 10(22) is whether there is in fact existence of an activity
J which is in the nature of "imparting of education in India". This
is how the words "in India" have come into judgment and not by
incorporation from Section 11 (1 )(a) of 1961 Act, as contended
on behalf of the Department.
H
144 SUPREME COURT REPORTS [2008] 8 S.C.R.
A 32. We shall now consider the effect of insertion of provi-
sos to Section 10(23C)(vi) vide Finance Act, 1998. Section
10(23C)(vi) is analogous to Section 10(22). To that extent, the
judgments of this Court as applicable to Section 10(22) would
equally apply to Section 10(23C)(vi). The problem arises with
B the insertion of the provisos to Section 10(23C)(vi). With the
insertion of the provisos to Section 10(23C)(vi) the applicant
who seeks approval has not only to show that it is an institution
existin9 solely for educational purposes [which was also the
requirement under Section 10(22)] but it has now to obtain ini-
C tial approval from the PA, in terms of Section 10(23C)(vi) by
making an application in the standardized form as mentioned
in the first proviso to that section. That condition of obtaining
approval from the PA came to be inserted because Section
10(22) was abused by some educational institutions/universi-
D ties. This proviso was inserted along with other provisos be-
cause there was no monitoring mechanism to check abuse of
exemption provision. With 1he insertion of the first proviso, the
PA is required to vet the application. This vetting process is
stipulated by the second proviso. It is important to note that the
second proviso also indicates the powers and duties of the PA.
E While considering the approval application in the second pro-
viso, the PA is empowered before giving approval to call for
such documents including annual accounts or information from
the applicant to check the genuineness of the activities of the
applicant institution. Earlier that power was not there with the
F PA. Under the third proviso, the PA has to ascertain while judg-
ing the genuineness of the activities of the applicant institution
as to whether the applicant applies its income wholly and exclu-
sively to the objects for which it is constituted/established. Un-
der the twelfth proviso, the PA is required to examine cases
G where an applicant does not apply its income during the year of
recei~ and accumulates it but makes payment therefrom to any
l
trust or institution registered under section 12M or to any fund
or trust or institution or university or other educational institution
and to that extent the proviso states that such payment shall not
H be treated as application of income to the objects for which
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 145
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
.~
such trust or fund or educational institution is established. The A
idea underlying the twelfth proviso is to provide guidance to the
PA as to the meaning of the words "application of income to the
objects for which the institution is established". Therefore, the
twelfth proviso is the matter of detail. The most relevant proviso
for deciding this appeal is the thirteenth proviso. Under that pro- B
A.
viso, the circumstances are given under which the PA is em-
powered to withdraw the approval earlier granted. Under that
proviso, if the PA is satisfied that the trust, fund, university or
other educational institution etc. has not applied its income in .
accordance with the third proviso or if it finds that such institu- c
lion, trust or fund etc. has not invested/deposited its funds in
accordance with the third proviso or that the activities of such
fund or institution or trust etc. are not genuine or that its activi-
ties are not being carried out in accordance with the conditions
subject to which approval is granted then the PA is empowered
D
to withdraw the approval earlier granted after complying with
the procedure mentioned therein.
33. Having analysed the provisos to Section 10(23C)(vi)
one finds that there is a difference between stipulation of condi-
tions and compliance thereof. The threshold conditions are ac- E
tual existence of an educational institution and approval of the
prescribed authority for which every applicant has to move an
application in the standardized form in terms of the first pro-
viso. It is only if the pre-requisite condition of actual existence of
" the educational institution is fulfilled that the question of compli- F
ance of requirements in the provisos would arise. We find merit
in the contention advanced on behalf of the appellant that the
third proviso contains monitoring conditions/requirements like
application, accumulation, deployment of income in specified
assets whose compliance depends on events that have not
G
taken place on the date of the application for initial approval.
J
34. To make the section with the proviso workable we are
of the view that the Monitoring Conditions in the third proviso
like application/utilization of income, pattern of investments to
be made etc. could be stipulated as conditions by the PA sub- H
146 SUPREME COURT REPORTS [2008] 8 S.C.R.
A ject to which approval could be granted. For example, in mar-
ginal cases like the present case, where appellant-Institute was
given exemption up to financial year ending 31.3.1998 (assess-
ment year 1998-99) and where an application is made on
7.4.1999, within seven days of the new dispensation coming
B into force, the PA can grant approval subject to such terms and
conditions as it deems fit provided they are not in conflict with
the provisions of the 1961 Act (including the abovementioned
monitoring conditions). While imposing stipulations subject to
which approval is granted, the PA may insist on certain per-
C centage of accounting Income to be utilized/applied for impart-
ing education in India. While making such stipulations, the PA
has to examine the activities in India which the applicant has
undertaken in its Constitution, Mo Us. and Agreement with Gov-
ernment of India/National Council. In this case, broadly the ac-
D tivities undertaken by the appellant are - conducting classical
education by providing course materials, designing courses,
conduct~ng exams, granting diplomas, supervising exams, all
under the terms of an Agreement entered into with Institutions
of the Government of India. Similarly, the PA may grant approv-
als on such terms and conditions as it deems fit in case where
E the Institute applies for initial approval for the first time. The PA
must give an opportunity to the applicant-institute to comply with
the monitoring conditions which have been stipulated for the
first time by the third proviso. Therefore, cases where earlier
the applicant has obtained exemption(s), as in this case, need
F not be re-opened on the ground that the third proviso has not
been complied with. However, after grant of approval, if it is
brought to the notice of the PA that conditions on which ap-
proval was given are breached or that circumstances mentioned
in the thirteenth proviso exists then the PA can withdraw the
G approval earlier given by following the procedure mentioned in
that proviso. The view we have taken, namely, that the PA can
stipulate conditions subject to which approval may be granted
finds support from sub-clause (ii)(B) in the thirteenth proviso.
35. The next question which arises for consideration is:
H
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 147
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
"' whether the words "in India" should be read into Section A
10(23C)(vi) and/or in the third proviso thereto?
36. Section 10(23C)(vi) seeks to exempt income of insti-
tutions with laudable objects and activities such as universities,
hospitals etc .. As stated above, stipulation of monitoring condi-
tions is different from compliance of those conditions. Compli-
B
-" ance or non-compliance can only be gauged at the assessment
stage.
37. In the case of Oxford University Press (supra), Ox-
ford University had a branch in India. The only activity of that c
branch was to carry on the business of a commercial printing
press which published and printed books and materials and
sold the same commercially and made a profit. The Depart-
ment contended that one should read the words "in India" along
with the word "University". Accordingly, the Department con-
D
tended that Section 10(22) exemption should be denied to the
profits arising from the commercial printing a~tivity of the Uni-
versity since Section 10(22) gave exemption only to profits/in-
come of an Indian University. All the three Judges held that it
was impermissible to read in the words "in India" into Section
10(22) of the 1961 Act. As stated above, Section 10(23C)(vi) is · E
analogous to Section 10(22) of the 1961 Act. The majority view,
however, was that the University must carry on educational ac-
tivities in India in order to satisfy Section 10(22). According to
" the majority view, some educational activity had to be carried
on in India and since Oxford University Press carried on no edu- F
cational activity in India, the exemption did not apply to the Uni-
versity. In other words, the majority judges held that "non-profit"
qualification has to be tested against Indian activities and it is
in this context that remarks regarding "in India" are made in the
judgment of the majority at page nos. 672 and 684. G
<
1.
· 38. Moreover, it is important to note that, even after the
Finance Act, 1998 w.e.f. 1.4.1999, the third proviso to Section
10(23C)(vi), which refers to monitoring conditions, confines the
words "application of income" to the objects for which the /nsti-
H
148 SUPREME COURT REPORTS [2008] 8 S.C.R.
A tution is established. The third proviso does not use the words
"in India" in the matter of application or accumulation of income
though in several other sections like Sections 10(20A), 10(228)
and 11(1)(a) etc., Parliament has used the words "in India".
Therefore, forth is one more reason, we cannot read in the words
B "in India" into the third proviso. As stated, Parliament in its wis-
dom has stated in the third proviso that the educational institu-
tion has to apply its income wholly and exclusively to the ob-
;ects for which it is established. Therefore, the plain words of
the third proviso do not require application of income to be in
C India. Our judgment should not be understood to mean that the
applicant has not to impart educational activities in India. If the
applicant wants exemption under Section 10(23C)(vi) it has to
impart education in India and only then it would be entitled to
claim initial approval under that section. That is the reason for
our saying that the "non-profit" qualification has to be tested
0
against Indian activities. Our conclusion is that impartation of
education must be in India if applicant desires exemption un-
der Section 10(23C)(vi) and that excess/deficit of income over
expenditure will not decide whether the applicant exists for profit
or not.
E
39. For the sake of clarity, we may reiterate that items such
as application of income or accumulation of income or invest-
ment in specified assets indicated in clauses (a) and (b) in the
third proviso are a part of compliance/monitoring conditions.
F As stated, however, there is a difference between application/
utilization of income and outward remittance of income out of
India. As discussed above, with the insertion of the provisos in
Section 10(23C)(vi) of the 1961 Act, it is open to the PA to stipu-
late, while granting approval, that the approval is being given
G subject to utilization/application of certain percentage of income,
in the accounting sense, towards impartation of education in
India. Such exercise would be based on estimation. There is a
difference between 'accounting income' .and 'taxable income'.
At the stage of Section 10, we are concerned with the account-
ing income. Therefore, it is open to the PA, if it deems fit, to
H
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 149
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
'1 stipulate that certain percentage of accounting income would A
be utilized for impartation of education in India. Therefore, in
our view, it is always open to the PA to impose such terms and
conditions as it deems fit. The interpretation we have given is
based on harmonious construction of the provisos inserted in
Section 10(23C)(vi) by the Finance Act, 1998. Lastly, we may B
reiterate that there is a difference between stipulation by the PA
of such terms and conditions, as it deems fit under the provi-
sos, and the compliance of those conditions by the appellant.
The compliance of the terms and conditions stipulated by the
\
PA would be a matter of decision at the time of assessment as c
availability of exemption has to be evaluated every year in or-
--- t>-
der to find out whether the institution existed during the relevant
year solely for educational purposes and not for profit.
40. In the light of what is stated above, we set aside order
dated 12.10.2004 passed by CBDT, we remit the matter to
CBDT for fresh consideration in ?.':Cordance with law. We may
D
clarify that, in this case, appellant has fulfilled the threshold pre-
condition of actual existence of an educational institution under
section 10(23C)(vi) and, therefore, on that count CBDT will not
reject the approval application dated 7.4.1999. E
41. Before concluding, we may state that in this case the
appellant had applied for exemption in Form 56D on 7.4.1999
seeking initial approval of exemption under Section 10(23C)(vi)
"'( for the accounting year ending 31.3.1999 (assessment year
1999-2000). That application was made under Rule 2CA of the F
Income-tax Rules, 1962. Under Rule 2CA, it is open to the PA
to grant exemption up to 3 years. We are not concerned with
the controversy as to whether the PA should grant initial approval
for the accounting year ending 31.3.1999 or for three years.
Suffice it to state that, one of the points which arises for deter- G
mination in this case is whether the matter should be remitted
·t to the Chief Commissioner/Director General or whether it should
be remitted to CBDT because we are informed that today the
PA is the Chief Commissioner/Director General and not the
CBDT. H
150 SUPREME COURT REPORTS [2008] 8 S.C.R.
A 42. We quote hereinbelow Rule 2CA of the Income-tax "
Rules, 1962, which reads as follows:
"2CA. (1) The prescribed authority under sub-clauses (vi)
and (via) of clause (23C) of section 10 shall be the Chief
Commissioner or Director General, to whom the
B application shall be made as provided in sub-rule (2).
(1A) The prescribed authority under sub-clauses (vi) and
(via) of clause (23C) of section 10 shall be the Central
Board of Direct Taxes constituted under the Central Boards
c of Revenue Act, 1963 (54 of 1963) for applications
received prior to 3rd day of April, 2001:
Provided that in case of applications received prior to 3rd ..-
day of April, 2001 where no order has been passed
granting approval or rejecting the applications as on 31st
D day. of May, 2007, the prescribed authority under sub-
clauses (vi) and (via) of clause (23C) of section 10 shall
be the Chief Commissioner or Director General.
(2) An application for approval shall be made in Form No.
56D by any university or other educational institution or
E any hospital or other medical institution referred to in sub-
clause (vi) or sub-clause (via) of clause (23C) of section
10.
(3) The approval of the Central Board of Direct Taxes or
F Chief Commissioner or Director General, as the case •
may be, granted before the 1st day of December, 2006
shall at any one time have effect for a period not exceeding
three assessment years.
Explanation.- For the purposes of this rule, "Chief
G Commissioner or Director General" means the Chief
Commissioner or Director General whom the Central
Board of Direct Taxes may, authorize to act as prescribed }.
authority, for the purposes of sub-clause (vi) or sub-clause
(via) of clause (23C) of section 10, in relation to any
H university or other educational institution or any hospital or
AMERICAN HOTEL & LODGING ASSN. v.. CENTRAL 151
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J.]
other medical institution. A
43. In this case, the initial approval application in Form
56D was dated 7.4.1999. It was dismissed by CBDT on
12.10.2004 (after 5Yi years), therefore, in terms of Rule 2CA(1A)
we are required to remit this matter to CBDT for fresh consider-
ation in the light of the law discussed hereinabove. B
44. Accordingly, the impugned judgment dated 24.11.2006
of the Delhi High Court in Writ Petition (C) No. 17978/04 as
well the decision of CBDT F.No.197178/99-ITA. I dated
12.10.2004 are set aside and the matter is remitted to CBDT c
for fresh consideration in accordance with law as discussed
hereinabove.
45. Accordingly, this civil appeal is allowed with no order
as to costs.
D
K.K.T. Appeal allowed.
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