# 8 S.C.R. 117 AMERICAN HOTEL & LODGING ASSN. EDU. INS v. CENTRAL BOARD OF DIRECT TAXES & ORS

- **Citation:** [2008] 8 S.C.R. 117
- **Court:** Supreme Court of India
- **Decided:** 2008-05-09
- **Case number:** Civil Appeal No. 3468 of 2008
- **Bench:** S.H. Kapadia, B. Sudershan Reddy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/8-s-c-r-117-american-hotel-lodging-assn-edu-ins-v-central-board-of-direct-taxes-24690
- **Pages:** 35

## Headnote

Income Tax Act, 1961- s. 10 (23 C) (vi) and its third provisa (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 monitort
ing conditions before grant of initial approval for the first time 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approval, there is breach of conditions of approval, the approval can be withdrawn - For the sake of seeking exemption
E
under s. 10 (23 C) (vi) determining factor is imparting of education in India and not excess/deficit of income over expenditure - In the present case since the assessee had fulfilled the
1threshold pre-condition of actual existence of an educational
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 institution. 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 dismissed 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 'income' 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 rejecting 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 inF 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, exemption 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 o

## Text

_Characters 0–39,817 of 72,573. This is a partial read: ask again with offset=39817 for what follows._

(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 provisa (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 monitort
ing conditions before grant of initial approval for the first time 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 approval can be withdrawn - For the sake of seeking exemption
E
under s. 10 (23 C) (vi) determining factor is imparting of education in India and not excess/deficit of income over expenditure - In the present case since the assessee had fulfilled the
1threshold pre-condition of actual existence of an educational
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 institution. 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 dismissed 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 'income' 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 rejecting 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 inF 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, exemption 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 institution 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 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 D
10(22) was abused by some educational institutions/universities. This proviso was insertt:d along with other provisos 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 application in the standardized form in terms of the first proviso. It is only if the pre-requisite condition of actual existence of the educational institution is fulfilled that the quesF
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 undertaken by the appellant are - conducting classical education by providing course materials, designing courses,
conducting exams, granting diplomas, supervising ex8 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 approval 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 circumstances mentioned in the thirteenth proviso exists then
the PA can withdraw the approval earlier given by followE ing the procedure mentioned in that proviso. The view
that the PA can stipulate conditions subject to which approval 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 monitoring conditions, confines the words "application of income" to the objects for which the Institution is established. The third proviso does not use the words "in India" 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 education 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.
7. Items such as application of income or accumulation of income or investment in specified assets indicated
D
in clauses (a) and (b) in the third proviso are a part of compliance/monitoring conditions. There is a difference between application/utilization of income and outward remittance 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, accounting income is concerned. Therefore, it is open to the PA, if G
it deems fit, to stipulate that certain percentage of accounting 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 interpretation 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 institution existed during the relevant year solely for educ 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 institution under Section 10 (23 C) (vi) and, therefore, on that
0 count CBDT will not reject the approval application. In this
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
F
G
H
ACIT v. Surat Art Silk Cloth Manufacturers Association
1980 (121) ITR 1 - relied on.
CIVILAPPELLATE JURISDCTION: Civil Appeal No. 3468
of 2008
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
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.
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 Prescribed 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.aB
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.
4. The claim of the appellant is that it is a non-profit organization set up in USA and has been gramed tax exemption as
c
an educational institute in that country. Appellant has a branch
office in India, mainly to comply with its obligations under vari0
ous agreements with Government of India (Ministry of Tourism).
Its branch providt:s a central focal point in India for Indian n·,issions 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
'E
material which is thereafter remitted to USA. After collection of
data and fees, the Head Office ("HO") sends course materials,
examination papers etc. to the branch in India for onward transmission 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 industry 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 Tourism, 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. Consequently, 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 following obligations:
0
"The Institute will :
(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;
H
(g) establish an office in India to implement and co-ordinate
AMERICAN HOTEL & LODGING ASSN. v. CENTRAL 125
BOARD OF DIRECT TAXES & ORS. [S.H.KAPADIA, J]
the lnstitute's activities ;
(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 ;
A
(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 complete 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 Indians desiring to avail of education in the hospitality field in India. 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 Council 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 exemption 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 receivable by the HO from the branch for the provision of course materials 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 questions:
H
A
B
c
D
126
. SUPREME COURT REPORTS
[2008] 8 S.C.R
"(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
programmes in hospitality management and operations.
(b) Providing educational and training materials.
(c) Conducting sf~minars, workshops and other
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 ?"
11. By its decision dated 14.2.96 the Authority held, after
reviewing the objects a111d Agreemer;ts with Gol, that the appellant 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 decision 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 exempt from tax under Section 10(22) of the 1961 Act inasmuch
as no assessments were made and/or no demands for incomeF
tax was raised for all years prior to the assessment year 19992000 (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 queries were put to the appellant which were replied to by the appellant 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 purpose 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 assessment 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 inforD
,.
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 furnished 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 repatriated outside India and, therefore, appellant has not applied its
income for the purpose of education in India".
16. The said Order dated 12.10.2004 was challenged by G
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 decision of this Court in the case of Oxford University Press v. Commissioner of Income-tax reported in (2001) 24 7 ITR 658 SC.
17. Shri Jehangir D. Mistri, learned counsel for the appellant, 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 Institution, 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
counsel urged that application of income is the requirement menF tioned in the third proviso to Section 10(23C)(vi) and that requirement 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 thereafter accumulated. One more example is given by the learned
counsel. The requirement of investment/deposit of funds, referred to in the third proviso, can only be tested at the stage of
investment which can only take place after profit/ surplus is established. Under the 131h proviso CBDT is empowered to withH
t·
+
..I.
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 investment 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 withB
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 considered by CBOT and in fact it would be impossible to ascertain compliance at the stage of approval. For all the above reaC
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.
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,
D
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 chalF
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
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
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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 acB 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 educational institution. According to learned counsel, the amounts
claimed to be surplus by the Department are actually not sure 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 question 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 proviso refer to the application of income to the objects for which
the institute is established and the said proviso does not require 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 applied 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 obtains 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 surplus 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 requirement 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 behalf of the appellant, one aspect needs to be mentioned. DeD
partment has relied upon the judgment of this Court in the case
of Oxford University Press (supra). According to learned counsel, 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 prescribed 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). According to the learned counsel, in the present case, CBDT has examined the accounts of the appellant for three years and it deH
132
SUPREME COURT REPORTS
[2008] 8 S.C.R.
A tected that the entire expenses was not incurred in India. According to the learned counsel, Section 10(22) was the predecessor section of the present Section 10(23C)(vi). Earlier, according 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 eleventh 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
0
the learned counsel, for insertion of the proviso to Section
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 esE 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 counF sel, prior to 1.4.1999, the Memorandum of Association constituted the bases for deciding the genuineness. That prior to
1.4.1999, application of income came within the concept of"assessment" in Section 11. However, that dichotomy, according
to the learned counsel, now stands obliterated with the inserG 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 accrued 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
8
within the financial year ending 31.3.1999, the PA was right in
...
rejecting the approval application made by the appellant.
Learned counsel submits that the appellant is a worldwide organization. Learned counsel urged that in the application for
approval, no details have been furnished by the appellant regarding 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, Parliament 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
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[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 InB come Tax Act, 1961. That, under the said Act, exemption under
Section 10(23C)(vi) is in the nature of a concession to an institution which solely carries on educational activity, which is not
for profit and since Section 10(23C)(vi) is an exemption provision, 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 applicant to show from the statement of accounts of the previous
D year ending 31.3.1999 as to how it has derived the said surplus
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 instiE
tute is not existing solely for educational purposes in India and,
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 education is the duty of the State; that every Institution which seeks
,.
F
exemption under Section 10(23C)(vi) should know that it is supposed to carry out the fuoctions of the State in the field of education 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, InH 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 appellant 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 entitled 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 conclusive 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 parity 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 India 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.