Delhi HC Upholds Tax Exemption for Educational Society: Franchise Fee Collection Not Business Activity

Background of the Case

The Delhi High Court recently adjudicated writ petitions filed by DPS Society against the Union of India concerning the withdrawal of tax exemptions previously granted under Section 10(23C)(vi) of the Income Tax Act, 1961. The challenge pertained to orders issued on 26.02.2009 through which the exemption status was revoked for multiple assessment years spanning from 2002-03 through 2007-08.

The withdrawal action taken by the revenue authorities was predicated on a preceding directive dated 30.04.2008, which had cancelled the exemption for the assessment year 2008-09. This earlier cancellation became the foundation upon which subsequent withdrawal orders for prior assessment years were constructed.

The petitioner's legal representative brought to the Court's attention a significant development that had transpired after the issuance of the impugned orders. Specifically, it was highlighted that the society had previously contested the order dated 13.04.2008 through appropriate legal channels. This challenge culminated in a favorable verdict pronounced by the Delhi High Court on 03.04.2018 in the matter of DIT (Exemption) v. Delhi Public Society, which was subsequently reported in 2018 (403) ITR 49 Delhi.

Furthermore, the petitioner emphasized that the Revenue department's attempt to appeal this decision before the Hon'ble Supreme Court through a Special Leave Petition had been unsuccessful, as the apex court declined to interfere with the High Court's findings and dismissed the petition.

Critical Findings in the Earlier Judgment

The counsel for the petitioner drew particular attention to the substantive legal conclusions reached in the judgment dated 03.04.2018. In that decision, the Delhi High Court had undertaken a comprehensive examination of the society's activities and specifically addressed the question of whether collecting franchise fees from various educational institutions operating under the society's framework could be characterized as conducting business activities.

The Court had unambiguously determined that the collection of franchise fees represented merely an incidental activity ancillary to the society's primary educational objectives. This characterization was crucial because it meant that such receipts could not legitimately be treated as business income, which would have otherwise justified the withdrawal of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961.

The precedent established through this earlier judgment became the cornerstone of the petitioner's argument in the present writ petitions, as the factual matrix underlying both sets of proceedings was essentially identical.

Position Adopted by the Revenue Department

When the matter came up for hearing, Mr. Gaurav Gupta, the learned Senior Standing Counsel representing the Revenue department, found himself in a procedurally constrained position. Upon examination of the submissions made by the petitioner's counsel and review of the earlier judicial pronouncement, he acknowledged that he was unable to dispute the factual and legal position as articulated by the petitioner.