In Director of Income Tax (Exemptions) vs The Delhi Public School Society, the Delhi High Court held that Delhi Public School is engaged in charitable purpose and is entitled to the exemption under section 10(23C) (vi) of the Income Tax Act,1961.
The assessee, Delhi Public School Society (DPS), has established 11 schools and has also permitted societies, organizations, trusts with similar objects to open schools under the name of “Delhi Public School” in and outside India. The DPS allows other societies to open schools under its name via an education joint venture agreement. As per the terms of the agreement, the DPS has control in the management of all schools in its name.
The assessee had been enjoying tax exemption till the assessment year 2007-08 under section 10(22) of the Act. In 2007, when the assessee requested the Revenue to consider them for exemption under the new Section 10(23C) (iv), the Additional Director of Income Tax, rejected the assessee’s application, on the grounds that the franchise fee received by it from the satellite schools in lieu of its name, logo and motto amounts to a “business activity” with a profit motive and certain clauses of the assessee’s Memorandum of Association were not in conformity with its objectives. Aggrieved the assessee preferred a Writ Petition, before the High Court of Delhi.
The Counsel for the Assessee argued that even if the activity of entering into agreement were to be construed as business activity, it is incidental to the attainment of its object and that it would be entitled to exemption under section 10(23C) (vi) of the Act. He further contended that mandate of maintaining separate books of account was also compiled as the assessee maintained a separate account titled “Secretary’s Office” in which the receipts towards reimbursement to the assessee for common expenses from various schools with which it had entered into the agreement to provide services were duly accounted for and incorporated. This, the Assessee contended, was insufficient compliance with the meaning of section 11(4A) of the Act. Relying on the case of Queens Educational Society vs Commissioner of Income Tax, he submitted that incidentally, the society collected charges for education-related services provided to other schools would not rob it of the entitlement to be treated as a charitable trust or organization.
The Counsel for the Revenue contended that the maintenance charges were, in fact, a franchise fee, for use of the “DPS” trademark and logo and that the amounts received were for name lending. She also contested the submissions of the society with respect to education in the DPS pattern, provided by the satellite schools, by stating that the record nowhere showed that such schools were charitable in nature or their underlying objectives were not coloured by the profit motive.
The High Court Bench comprising of Justice S. Ravindra Bhat and Justice A.K. Chawla observed “it is concluded that the assessee fulfilled the requirements of section 10(23C)(vi) of the Act to qualify for exemption; DPS Society is maintaining its eleven schools and the 120 satellite schools in furtherance of the education joint venture agreements with an educational purpose that also qualifies as a “charitable purpose” within the meaning of section 2(15) of the Act and is not in contravention of section 11(4A) of the Act. This court feels compelled to observe that Section 10(23C) (vi) ought to be interpreted meticulously, on a case-to-case basis. This is because, the larger objective of an educational/ charitable purpose of the institution and its manifestation can only be subjectively adjudged; for instance, in the present situation, the balance sheets of the assessee demonstrate how the profits are utilized for the growth and maintenance of the very schools they are accrued from, thus, subscribing to a charitable motive. However, the educational institutions may take more creative steps to qualify their objectives as an “educational purpose” that is more universal than the individual objectives set out in the memoranda of objectives of such institutions.”
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