TMI Blog1993 (10) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... munication Engineering Branches with 290 annual intake of students --- 250 for 4 years Degree Course and 40 for three years Diploma Course. In the previous year relevant to assessment year 1983-84, 240 students were admitted --- 140 from General List panel on merit, 60 from Management quota and 40 from Government List prepared for Scheduled Castes/Scheduled Tribes/Backward Classes. Capital fee was collected at the rate of Rs. 25,000 to Rs. 35,000 and transferred to College for construction of buildings and meeting other capital expenditure. The society collected Rs. 83,51,900 in assessment year 1983-84 and a sum of Rs. 23,50,500 was claimed to have been refunded to the students of Backward Classes/Scheduled Castes/Scheduled Tribes as per the directives of the Government on production of their requisite certificates, certifying the class to which they belong. The Assessing Officer concluded that the maximum which could have been refunded to the students was 40 students whereas on counting number of heads he worked out refund to 93 students and 8 of them appeared twice in the list. However, since some drafts were endorsed by Vasavi Academy of Education as these pertained to students ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of concerns to tide over liquidity problems. These amounts have been advanced of at all without any interest to concerns with which society has no business connections. The fact that these amounts due from other concerns to Society (specially Matrusri Finance Corporation) of Rs. 4.05 lakhs is not reflected in the balance sheet of the Society proves that these amounts were met by the refunds withdrawn and appropriated by the members of the Society. Last of all reasons, the very fact that heavy amounts have been withdrawn without considering the objects of the Society is sufficient cause to deny exemption claimed under section 10(22). The society can at best be described as a highly commercialised business venture run by an association of persons. Since the college is run as an extension of the Society and has no separate legal entity of its own, the excess of income over expenditure is also considered in the hands of the Society only." 3. The Commissioner of Income-tax (Appeals) allowed the claim of the assessee and held that no case has been made out by the Inspecting Assistant Commissioner for holding that the assessee had engaged in, in this activity of education with a vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been challenged. Only an omnibus claim that the appellant is a 10(22) institution is made. Having taken due note of the facts supplied by the IAC (Assts.). In the assessment order, I find it difficult to go along with the finding of my predecessor that the appellant qualifies for exemption under section 10(22). Section 10(22) institution is an institution which should exist solely for educational purposes and not for purposes of profit. I have to record that the institution was conceived of by Shri M.V. Subba Rao for his benefit and not with the laudable purpose of promoting education. Though certain well meaning and highly competent persons were involved in the running of the institution, the unfortunate fact is that they did not exercise any control over the financial affairs of the appellant institution and left enormous collections of capitation fee to be handled by Shri M.V. Subba Rao. It is no doubt true that the fact that the recipient or the owner of the income is a person other than the institution would not effect the position. It has to be noted that the educational institution spoken of in section 10(22) should exist solely for educational purposes and should not be for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jar Educational Trust v. ITO [1982] 8 Taxman 77 (Mad. -Trib.) and the circular of the Board referred to therein, the decision in the case of St. Joseph's Upper Primary School v. ITO [1983] 4 ITD 231 (Hyd.) and the decision of the Karnataka High Court in CIT v. Academy of General Education [1984] 150 ITR 135 at 139 and the order of the Commissioner of Income-tax (Appeals) for 1984-85. He further submitted that section 10(22) is a privilege and the assessee must comply with the conditions therefore to avail the concession. Even the money appropriated by Shri Subba Rao for his benefit was recovered later, he submitted, this fact should not cloud the decision that it was an institution for the benefit of Shri Subba Rao. He also referred to the commentary of Shri V.S. Sundaram (Law of Income-tax in India, Vol. I, page 764, para 87). 6. The learned counsel for the assessee Shri Y. Ratnakar on the other hand, submitted that there was no discrepancy as pointed out by the Assessing Officer and his observations are on a wrong reading of the facts. Each and every item is explainable and in fact was explained to him. Out of the sum of Rs. 9,18,000 and the difference of Rs. 4,88,000 for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of a previous year of any person, any income falling within any of the following clause shall not be included--- (22) any income of a university or other educational institution existing solely for educational purposes and not for purposes of profits." The institution whose income is not includible in the total income or in other words whose income is beyond the purview of income-tax should be an institution existing solely for educational purposes and not for the purpose of profit. The purposes of its existence must be solely education. The section further provides that the purpose for its existence must not be to make profit. The only activity of the assessee-society in which it was engaged in the two years under consideration is sponsoring and running of the college. The purpose for which the assessee came into existence is contained in the provisions of its memorandum of association and the rules and regulations. On a perusal of these two documents, we do not find any clause providing for carrying on any activity of profit and on the contrary, following clauses demonstrate that its purposes are solely education : "3. Names Objects : (i) To impart and promote educ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver may incidentally take other activities for the benefit of the students or in furtherance of their education. It may invest its funds in any manner but the income generated therefrom must be utilised exclusively for educational activities. If these requirements are complied with, the assessee's income shall be exempt under section 10(22) of the Act. The jurisdictional High Court in the case of Governing Body of Rangaraya Medical College also observed that merely because certain surplus arose from the society's operations, it cannot be held that the institution was being run for the purpose of profit so long as no person or individual was entitled to any portion of the said profit and so long as that profit was not utilised for any purpose other than promotion of the objects of the society. 9. The society itself need not be an educational institution and it would be sufficient if it runs an educational institution and does not engage itself in activities other than education. Except running of the Engineering College, the assessee-society is not doing any other activity. In such circumstances, the college and the institution are one and the same and there can be no distinction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of age 18 years and above who subscribe to the aims and objects of the society and not to all". 11. In our opinion, therefore, the purposes of existence of artificial legal entity like the present assessee-society should be enquired and found in the veil of Memorandum of Association/Rules and Regulations and when that does prove that its sole purpose was education no further enquiry would be necessary to grant exemption under section 10(22) of the Act. A word of caution here. The corporate veil can be lifted in the case of fraud or to arrest the evasion of tax under the Tax Laws. Here in this case no fraud has been established in its creation. No evasion of tax is also visible. It is true that some mistake or irregularities are committed by Subba Rao or the Society in maintaining its accounts but these discrepancies do not lead to any evasion of tax. The money misappropriated by Shri Subba Rao has been recompensed. Had the institution been not existing for educational purposes, it should not have been granted exemption under section 10(22) of the Act in subsequent years when Shri Subba Rao had little or no role to play. The objection is, therefore, not with the frame of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was entitled to any portion of the said profit and so long as that profit was not utilised for any purpose other than promotion of the objects of the society. These observations were in the context of determining the question whether it was a society "not for the purpose of profit" and emphasis in this case and the circular of the Board relied upon by the learned Departmental Representative was on the entitlement of any person/individual to utilise the property. No such case is there in the present case. Neither the Memorandum of Association nor the Rules Regulations provides and the user, if any, for the benefit of Shri Subba Rao was recompensed subsequently. Birla Vidhya Vihar Trust's case, Thiagarajar Educational Trust's case and St. Joseph's Upper Primary School's case are examples of diversion of society's funds or profits for personal use and no evidence appears to have been brought on record for its recovery by the society as it has been done in the case of the assessee. In Academy of General Education's case at p. 139 it was held that income should be utilised for educational purposes alone. No doubt in the present case the money was misappropriated for certain period bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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