2006 (5) TMI 68 - HC - Income Tax

Respondent-assessee is running an educational institution AO declined exemption u/s 10(22) on the ground that the assessee was a profit making organisation and that the same did not exist solely for educational purpose. In support the Assessing Officer relied upon investments made by the respondent in three different companies - surplus funds available with the assessee could be suitably invested whether by way of fixed deposit in a bank or financial institution or in stock market to earn profit which would in turn be available to the society for being utilised to pursue its educational purposes. Inasmuch as the assessee had in the instant case invested a part of its surplus funds for purchase of rights and bonus shares in companies wherein it had acquired some shares in the earlier years it could not be said to have digressed from its basic purpose of running the educational institution. revenue appeal dismissed no perversity in tribunal s order exemption available

Summary

Issues:
1. Exemption under section 10(22) of the Income-tax Act for an educational institution.
2. Assessing Officer's denial of exemption due to profit-making activities and investments.
3. Commissioner of Income-tax (Appeals) and Income-tax Tribunal's decisions in favor of the assessee.
4. Judicial interpretation of the purpose and utilization of surplus funds by the educational institution.

The High Court of Delhi addressed the issue of exemption under section 10(22) of the Income-tax Act for an educational institution that had been running for several years. The Assessing Officer had denied the exemption for the assessment years 1995-96 and 1996-97, citing the institution's profit-making nature and investments in various companies. The Commissioner of Income-tax (Appeals) and the Income-tax Tribunal both ruled in favor of the educational institution, emphasizing its existence solely for educational purposes and its exemption eligibility despite investments. They highlighted that the surplus funds could be utilized for better returns to support educational activities, as per relevant legal precedents and government circulars.

The High Court concurred with the lower authorities, affirming that the educational institution had no profit motive and operated solely for educational purposes. The Court acknowledged the permissibility of investing surplus funds for profit generation to further educational objectives. Notably, the Court recognized the institution's substantial allocation of funds towards educational activities, indicating a commitment to its core purpose. The Court found no legal error or irregularity in the Tribunal's decision, concluding that no substantial legal question warranted their intervention. Therefore, the Court dismissed the appeal, upholding the Tribunal's decision in favor of the educational institution.

In conclusion, the judgment clarified the eligibility of an educational institution for exemption under section 10(22) of the Income-tax Act, emphasizing the institution's primary purpose and the permissible use of surplus funds for educational advancement. The decision underscored the importance of maintaining the institution's core objectives while utilizing funds for investment purposes, ultimately supporting the institution's educational mission.