Tax Exemption Granted to Karnataka Text Book Society: High Court Upholds Educational Institution Status

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Case Name:

THhe Director of Income Tax Exemptions and Anr. Vs Karnataka Text Book Society (High Court of Karnataka)

ITA No.398 of 2012

Date: 18th May 2020

Key Takeaways:

1. State-controlled educational committees/boards implementing educational policies are considered educational institutions.

2. Such institutions are eligible for tax exemption under Section 10(23C)(iiiab) (of Income Tax Act, 1961).

3. The court relied on the Supreme Court's interpretation in the Assam Text Book Production case to reach its decision.

Issue: 

Is the Karnataka Text Book Society eligible for tax exemption under Section 10(23C)(iiiab) (of Income Tax Act, 1961), 1961, as an educational institution?

Facts:

1. The Karnataka Text Book Society is a government-promoted entity responsible for preparing, printing, publishing, and distributing school textbooks.

2. The Society filed a tax return for the assessment year 2007-08, claiming exemption under Section 11 (of Income Tax Act, 1961).

3. The Assessing Officer rejected the claim due to lack of registration under Section 12AA (of Income Tax Act, 1961).

4. The Society appealed, and both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal ruled in its favor.

Arguments:

Revenue's Arguments:

1. The Society doesn't qualify as an educational institution.

2. It falls under Section 10(23C)(iv) (of Income Tax Act, 1961), requiring approval from the prescribed authority.

3. The Society hasn't obtained necessary approval for exemption.

Society's Arguments:

1. It qualifies as an educational institution.

2. It's entitled to exemption under Section 10(23C)(iiiab) (of Income Tax Act, 1961).

3. The Supreme Court's decision in the Assam Text Book Production case supports its claim.

Key Legal Precedents:

The court heavily relied on the Supreme Court's decision in 'ASSAM TEXT BOOK PRODUCTION AND PUBLICATION CORPORATION LTD. VS. CIT', [2009] 319 ITR 317. This case interpreted the definition of an educational institution and held that state-controlled educational committees/boards implementing educational policies should be treated as educational institutions.

Judgement:

The High Court dismissed the appeal, ruling in favor of the Karnataka Text Book Society. Key points of the judgment:

1. The Society is considered an educational institution as per the Supreme Court's interpretation.

2. It's entitled to tax exemption under Section 10(23C)(iiiab) (of Income Tax Act, 1961).

3. The court answered the substantial questions of law against the revenue.

FAQs:

1. Q: What was the main issue in this case?

  A: The main issue was whether the Karnataka Text Book Society qualifies as an educational institution eligible for tax exemption.

2. Q: What precedent did the court rely on?

  A: The court relied heavily on the Supreme Court's decision in the Assam Text Book Production and Publication Corporation Ltd. case.

3. Q: Does this judgment apply to all state-controlled educational committees?

  A: Yes, the judgment suggests that all state-controlled educational committees/boards implementing educational policies should be treated as educational institutions.

4. Q: What section of the Income Tax Act provides the exemption in this case?

  A: The exemption falls under Section 10(23C)(iiiab) (of Income Tax Act, 1961), 1961.

5. Q: Does this mean the Society doesn't need to pay any taxes?

  A: Based on this judgment, the Society is exempt from paying income tax on its earnings related to its educational activities.

1. This appeal has under Section 260A (of Income Tax Act, 1961) (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to assessment year 2007-08. The appeal was admitted by a bench of this Court by order dated 28.02.2013 on following substantial questions of law:

(i) Whether the appellate authorities were correct in holding that the assessee is eligible for exemption under Section 10(23C)(iiiab) (of Income Tax Act, 1961) even though no claim for exemption was made in the return of income?

(ii) Whether the Appellate Authorities were correct in allowing exemption under Section 10(23C)(iiiab) (of Income Tax Act, 1961) when the assessee is neither a University nor educational institution existing solely for educational purposes?

2. Facts giving rise to filing of this appeal briefly stated are that assessee is a society promoted by Government of Karnataka to acquire and to take over the business and other activities of Government of Karnataka relating to preparation, printing, publication and distribution of school text books, as well as to publish, print, sale, supply or otherwise being text books, note books and other books and literature on all subjects in different languages and to make the same available at reasonable prices before commencement of the academic session. The society is also required to get books in different languages written by committee of experts on various subjects as per the syllabi approved by Government of Karnataka and other competent authority etc. The assessee filed its return of income for the assessment year 2007-08 and deducted unspent amount of Rs.7,42,50,576/- to the utilized in the financial year 2007- 2008 out of total grant received by the government to the extent of Rs.13,01,21,594/-. The aforesaid amount was claimed as exemption under Section 11 (of Income Tax Act, 1961) read with Explanation 2 of the Act. The Society came into existence with effect from 1.04.2006. The assessing officer by an order dated 30.12.2009 rejected the claim under Section 11 (of Income Tax Act, 1961) on the ground that assessee has not obtained registration under Section 12AA (of Income Tax Act, 1961). It was further held that in the absence of registration under Section 12AA (of Income Tax Act, 1961), the exemption under Section 11 (of Income Tax Act, 1961) cannot be allowed. Accordingly, it was held that assessee is liable to pay tax, surcharge as well as interest to the tune of Rs.3,45,17,734/-.

3. Being aggrieved, the assessee filed an appeal. The Commissioner of Income Tax (Appeals) inter alia by placing reliance n the decision of the Supreme Court in the case of ‘ASSAM TEXT BOOK PRODUCTION AND PUBLICATION CORPORATION LTD. VS. CIT’, [2009] 319 ITR 317 held that state text books societies are entitled for exemption under Section 10(22) (of Income Tax Act, 1961), which was similar to Section 10(23C) (of Income Tax Act, 1961) before its amendment.

Thus, it was held that the assessee was held entitled to exemption under Section 10(23C)(iiiab) (of Income Tax Act, 1961) and the addition made by the assessing officer was deleted and the appeal was allowed. The Revenue challenged the aforesaid order in appeal before the Income Tax Appellate Tribunal. The tribunal by an order dated 04.07.2012 affirmed the order passed by the Appellate Authority. Being aggrieved, the Revenue is in appeal before us.

4. Learned counsel for the revenue submitted that the assessee would not fall within the category of educational institution and the assessee is carrying on an activity which falls under Section 10(23C)(iv) (of Income Tax Act, 1961) and therefore, the approval from the prescribed authority is mandatory. It is further submitted that since, the assessee has not obtained any approval, therefore, the Commissioner of Income Tax (Appeals) as well as Income Tax Appellate Tribunal erred in setting aside the order passed by the Assessing Officer. It is further submitted that the judgment relied upon by the tribunal in the case of ASSAM TEXT BOOK PRODUCTION AND PUBLICATION CORPORATION LTD., supra is in the context of Section 10(22) (of Income Tax Act, 1961), which has now been omitted by virtue of an amendment.

5. On the other hand, learned Government Advocate has supported the order passed by the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal.

6. We have considered the submissions made on both the sides and have perused the record. The Supreme Court in ASSAM TEXT BOOK PRODUCTION AND PUBLICATION CORPORATION LTD., supra has interpreted the definition of an educational institution in para 6. The relevant extract of which is reproduced below for the facility of reference:

Following the judgment of the Rajasthan High Court, we are of the view that, in this case, the High Court, in its impugned judgment, has not considered the historical background in which the Corporation came to be constituted; secondly, the High Court ought to have considered the source of funding, the share-holding pattern and aspects, such as Return on Investment; thirdly, it has not considered the letters issued by C.B.D.T. which are referred to in the judgment of the Rajasthan High Court granting benefit of exemption to various Board/Societies in the country under Section 10(22) (of Income Tax Act, 1961); fourthly, it has failed to consider the judgments mentioned hereinabove; and lastly, it has failed to consider the letter of the Central Government dated 9th July, 1973, to the effect that all State- controlled Educational

Committee(s)/Board(s) have been constituted to implement the Educational policy of the State(s); consequently, they should be treated as Educational Institution.

7. In view of the aforesaid enunciation of law by the Supreme Court, it is evident that all State controlled educational committees / boards that have been constituted to implement the educational policy of the States have to be treated as educational institutions.

8. In view of the aforesaid enunciation of law by the Supreme Court, the assessee, which has been constituted to implement the educational policy of the State has to be treated as an educational institution and is consequently entitled to the benefit of exemption under Section 10(22) (of Income Tax Act, 1961). In view of preceding analysis, the substantial questions of law framed by this court are answered against revenue.

In the result, we do not find any merit in this appeal. The same fails and is hereby dismissed.

Sd/-

JUDGE

Sd/-

JUDGE