TMI Blog2007 (2) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Appeals), dated September 5, 1995, for the assessment years 1989-90, 1990-91 and 1991-92 in the matter of order of the penalty passed under section 221(1) of the Act. 2 All these appeals are being disposed of by this common order for the sake of convenience. I. T. A. Nos. 391/Gau/1995 to 395/Gau./1995, Assessment years 1987-88 to 1991-92. 3 The Revenue has taken only on common ground of appeal for all the five years. Under consideration as reads as follows: "For that the Commissioner of Income-tax (Appeals) erred in law as well as in facts in cancelling the assessment made under section 143(3)/147." 4 From the orders of the assessment, it transpires that the proceedings under section 147 in all the years were taken by the learned Assessing Officer (AO) on the premises that in his opinion the exemptions allowed to the assessee under section 10(22) of the Income-tax Act, 1961, were erroneous and, therefore, the income chargeable to tax has escaped the assessment. 5 The learned Commissioner of Income-tax (Appeals) has found that no material was brought on record to establish that the assessee is not entitled for exemption under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chool. 2. The school is established for literary purpose among the children requiring preliminary education in their childhood, to spread knowledge concerning the physical, intellectual, moral, social and mental development of the children at their childhood and likewise. 3. It will have the executive committee consisting of a president, a vice-president, a secretary, a treasurer, an assistant treasurer as office bearers arid an even number of members not exceeding six, not less than four. 4. The founder members of the school are the present principal and the headmistress, who will respectively be the permanent secretary and permanent treasurer of the executive committee. 5. The other members of the executive committee will be selected from among the guardians of the children of the institution by the founder members of the school. 6. The executive committee shall conduct and manage all the business of the school and have full control of the management and finance of the school. However, it would be subject to the rules and regulations contained in the constitution and as well as any other rules and bye laws that may be made from time to time by the committee in general m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tality of the facts and circumstances of the case whether the school exists to the purpose of profit or not. The true and correct nature of a document (i.e., the constitution of the school in the present case) is to be ascertained not from its form but from its substance. What is the real and true intention behind the said document is to be ascertained. The soul and mind of the society is vested in the instrument under which it was constituted, and as such the instrument, i.e., constitution of the school is to be examined by its substance and not its form. The nomenclature given to it is not decisive. 10 The language of section 10(22) of the Act is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during .the relevant year solely for the educational purpose and not for purpose of profit as stated by the hon'ble Supreme Court in the case of Aditanar Educational Institution v. CIT (Addl.) [1997] 224 ITR 310. The decisive or acid test to find out whether the object is to make profit is an overall view of the matter. In evaluating or appraising the overall view of the matter one should also bear in mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... novo assessment, the demand of tax raised therein have become infructuous the penalty imposed under section 221 of the Act is to be cancelled in view of the provision as contained in section 221(2) of the Act. We, therefore, cancel the penalty imposed under section 221 of the Act for all the years under appeal. 13 In the result, Appeal Nos. 391 to 395/Gau./95 and 389 and 390/Gau./95 filed by the Department are allowed for the statistical purpose and Appeal Nos. 15 to 17/Gau/96 filed by the Department are dismissed. 14 N. S. SAINI ( Accountant Member ). I have had the benefit of going through the proposed order of the learned Brother in this case. Though I agree with the conclusion as arrived at by the learned brother in I. T. A. Nos. 389 and 390(Gau.) of 1995 and 15, 16 and 17 (Gau.) of 1996 but despite my best efforts and great pursuation to myself, I have not been able to agree with the conclusion as arrived at by the learned judicial member in I. T. A. Nos. 391 to 395 (Gau.) of 1995. The reasons for the same are incorporated in the present order of mine which is as under : 15 In I. T. A. Nos. 391 to 395 (Gau.) of 1995, the Revenue has taken only one common ground of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption under section 10(22) of the Act. On appeal the Commissioner of Income-tax (Appeals) in its elaborate order for the reasons mentioned therein held that the assessee-society is eligible for grant of exemption under section 10(22) of the Act. In his opinion, as the proceedings under section 147 of the Act was initiated by the Assessing Officer on an erroneous interpretation of section 10(22) of the Act, and hence, he cancelled the assessment of all the five years under the present appeal. Being aggrieved by this order of the Commissioner of Income-tax (Appeals), the Revenue is in appeal before us on the grounds mentioned hereinbefore. 18 The learned Departmental representative vehemently supported the order of the Assessing Officer and in his argument he reiterated the observations as made by the Assessing Officer in the order of assessment. 19 On the other hand, the learned authorised representative of the assessee has filed a paper book and also filed a written submission. At the out set he raised one preliminary objection which finds place in paragraph 2 of his written submission. According to him, the finding of the Commissioner of Income-tax (Appeals) that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isdictional High Court has held that though neither the principle of res judicata nor the rule of estoppel is applicable to the assessment proceedings, yet the rule of consistency does apply to such proceeding where there was no change. A copy of intimation passed under section 143(1) (a) in the case of the assessee-society for the assessment years 1992-93, 1994-95 and 1996-97 are filed at page Nos. 7 to 9 of the paper book. 20 In respect of the provisions of section 10(22) of the Act, it was submitted that the assessee-society is running a school and thus, it is an educational institution. For the above contentions reliance was placed on the decision in CIT v. Sorabji Nusserwanji Parekh [1993] 201 ITR 939 (Guj), Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) Katra Education Society v. ITO [1978] 111 ITR 420 (All) and CIT v. A. M. M. Arunachalam Educational Society [2000] 243 ITR 229 (Mad). As the assessee-society is carrying on the primary activity of an educational institution of imparting education by running a school, in view of the above cited legal decisions, the same is an educational institution within the meaning of section 10(22) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the surplus went towards procurement of fixed assets for the school and building construction for the school. 23 It was also submitted that the remarks in the order of the assessment regarding management and control of school are factually incorrect and are not based on any material on record. Moreover, the same has no relevance for determining the eligibility of exemption under section 10(22) of the Act to the assessee-society. It was contended that as no specific mistake in the order of the Commissioner of Income-tax (Appeals) could be pointed out by the Revenue no interference with the order of the Commissioner of Income-tax (Appeals) is warranted. 24 I have carefully considered the rival submissions and perused the orders of, both the lower authorities and various decisions cited by the learned authorised representative of the assessee. 25 In the case of Indira Balkrishna [1960] 39 ITR 546, the hon'ble apex court has held that there was no appeal by the Department against the findings of the Appellate Assistant Commissioner that the provisions of section 9(3) was applicable and it was not open to the Tribunal to go behind it. In the instant case, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the total income of a previous year of any person, any income falling within any of the following clauses shall not be included. . (22) Any income of a university or other educational institution, existing solely for educational purposes and not for purposes of pro fits." 28 On examination of the provisions of section 10(22), the conditions precedent to the availability of exemption can be stated as thus (a) Income should be that of a university or other educational institution; and. (b) Such institution or university must exist solely for the educational purposes and not for the purposes of profit. 29 In the instant case, it has been admitted by both the parties that the assessee-society is carrying on the primary activity of an educational institution of imparting education by running a school. The hon'ble Madras High Court in the case of CIT v. A. M. M. Arunachalam Educational Society [2000]243 ITR 229, has held that a society which runs a school could be treated as an educational institution. The status of the assessee as a registered society is evidenced by the certificate of registration granted to the assessee-society by the Registrar of Societies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the surplus can be used for. non-educational purposes, it cannot be said that the institution is existing solely for educational purposes and such institutions will not be liable for exemption under section 10(22). But, in such cases, the applicability of section 11 can be examined and if the conditions laid down therein are satisfied, the income will be exempt under section 11." (emphasis supplied) 32 Thus, a society whose all objects are educational, and the surplus for running the educational institution can be used for educational purposes only and not for any non-educational purposes, the society or institution shall be held to be "existing for educational purposes and not for purposes of profit" and shall be entitled to exemption under section 10(22) of the Act. The word "surplus" means excess of income over expenditure, i.e., profit. 33 Further, in the case of IAC v. Matrusri Educational Society [1994] 48 ITD 583 (Hyd) the hon'ble Tribunal has held that the society registered under the Societies Registration Act like a company under the Companies Act, 1956, was an artificial legal entity, its soul and mind vested in the instrument under which it was constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to sections 13 and 14 of the Societies Registration Act, 1860. 35 Thus, an enquiry into the constitution of the assessee-society reveals that all the objects of the assessee-society are educational and the surplus generated can be utilised for the promotion of the said object only. There is specific prohibition in the constitution of the assessee-society to distribute or transfer any portion of its surplus to any member of the executive committee. Even at the time of dissolution of the society, in accordance with sections 13 and 14 of the Societies Registration Act, 1860, all the properties and assets of the society shall be transferred to another society having similar or substantially similar objects and no portion of the said properties or assets shall even at that time be distributed to any of the member of the society including founder members. 36 From the facts on record it is also observed that the surplus generated in the years under appeal totals to Rs. 25,25,799 and more than that, i.e., Rs. 36,70,089 were invested in the same period for acquisition of the fixed assets for the school. Thus, there is no evidence that the executive committee members have utilised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d view, the observation of the Assessing Officer is without any merit. I also draw support for the above view from the decision in the case of Maharishi Institute of Creative Intelligence v. ACIT [1997] 62 ITD 169 (All). 40 My view also find supports from, the following decisions : (1) St. Joseph 's Upper Primary School v. ITO [1983] 4 ITD 231 (Hyd) In this case, the assessee-society which was registered under the Societies Registration Act had as its objects, promotion of educational institutions and was actually organizing and running as upper primary school. One of the school buildings was owned by the headmistress who was also the daughter-in-law of the founder secretary. She had constructed the building partly out .of the loan taken from the society. The society earned surplus and claimed exemption under section 10(22) of the Act. This was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal held that the contention that benefit had tenured to the owner of the building was not tenable since it was not shown that rent paid was more than the market rent. Under the Societies Registration Act, the funds have to be utilised fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corpus, the objects and the power of the concerned entity. (6) In the case of Shanti Devi Progressive Education Society v. Asst. Director of I. T. [1999] 236 ITR (AT) 40; [1999] 68 ITD 1 (Delhi) (TM) it was observed that the assessee formed the society on the basis of the memorandum of association and the rules and regulations framed in this regard. The society was registered by the Registrar of Societies. The memorandum of association has even taken care of the distribution of the assets in the case of dissolution of the society. The Revenue authorities raised objection in regard to the award of contract for construction of the school building to a concern which is a family concern in which members of the society have substantial interest. It is, however, pointed out that there was no evidence that the concern, namely, Ahluwalia Construction Co., derived undue profit out of the construction work. It is also seen that the assessee neither distributed any profit nor applied the profits for the benefit of the managing committee. In such a case mere suspicion cannot replace hard facts. The hon'ble Tribunal having regard to the facts held that the assessee is entitled to exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment back to the file of the Assessing Officer to make a de novo assessment as he found it fit and proper that overall view of the matter is to be evaluated or considered to find out whether the assessee is entitled to exemption under section 10(22) of the Act ? (3) Whether, on the facts and circumstances of the case, the assessee is entitled to exemption under section 10(22) of the Act? ORDER OF REFERENCE TO THIRD MEMBER 44 N. S. SAINI ( Accountant Member ). In these appeals there is difference of opinion between the Members, In view thereof, the issue is referred to the hon'ble President of the Income-tax Appellate Tribunal under section 255(4) of the Income-tax Act, 1961, for opinion of the Third Member on the issue which are framed as under "1. Whether, on the facts and circumstances of the case, can appeal be disposed of by the Tribunal without recording any finding on the contention raised by the respondent that the Tribunal has no authority to go behind the finding of the Commissioner of Income-tax (Appeals) in respect of the eligibility of exemption under section 10(22) of the Act to the assessee as the Revenue has not filed any appeal against the above f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits also ?. 9. In view of the decision of the Tribunal in the case of IAC v. Matrusri Educational Society [1994] 48 ITD 583 (Hyd) and in view of the decision of the apex court in the case of Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310, whether it can be held that the unrestricted powers of two founder members of the assessee society to select members of the executive committee can have any bearing on the object of the assessee-society? 10. Whether, on the facts and circumstance of the case, any interference with the order of the Commissioner of Income-tax (Appeals) is warranted in respect of the matter of eligibility of the assessee for grant of exemption under section 10(22) of the Act ?" ORDER OF THIRD MEMBER 45 VIMAL GANDHI ( President ). On account of difference between the hon'ble Members of Gauhati Bench of the Income-tax Appellate Tribunal, the above appeals were referred to me under section 255(4) of the Income- tax Act, 1961 (the Act). In fact, I find that there is no difference in the five appeals, viz., I. T. A. Nos. 389 and 390 (Gau.)196 and I. T. A. Nos. 15 to 17 (Gau.)/96. Both the Members have agreed on orders proposed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D. K. Chanda and his wife Smt. Minati Chanda are founder members and hold posts of principal and director of the school respectively. These people enjoy absolute control in matters of administration, finance, appointment of staff and also select other members of the executive committee running the school. (b) That it is not known in what manner Sri D. K. Chanda and his wife occupy the posts of secretary and treasurer permanently in the executive committee of the assessee-institution. (c) That norms of appointment of principal of the school are also not known. Sri D. K. Chanda and his wife are drawing salary at Rs. 2,500 per month, whereas the salary of other teaching staff varied from Rs. 400 to Rs. 950 per month. It is thus clear that Sri Chanda and his wife is drawing much higher salary than other teachers. (d) That the other members of the executive committee have no say in the management and affairs of the school which is personal business of the founder members. (e) That Sri D. K. Chanda and his wife have let out their accommodation to the school and realized rent of Rs. 18,000 and Rs. 12,000 respectively. (f) That rent (hire) paid is considered to be much higher tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i D. K. Chanda and Smt. Minati Chanda was more than what was paid to other teachers, the educational qualifications and details of salary paid to the above persons from year to year were furnished and the same are discussed in the impugned order in paragraphs 2.11 to 2.13 of the order. With reference to details furnished, it was submitted that salary paid to Sri D. K. Chanda and other members of his family cannot be said to be unreasonable salary considering their qualifications and devotion to duty. None of them was given preferential treatment which was not given to other staff.' It was pointed out that salary paid was as per resolution of executive committee dated February 28, 1982. It was explained that out of the assets disclosed in the balance-sheet, landed property was standing in the name of the school. Evidence and record of Guwahati Municipal Corporation was filed in support of above claim. It was explained that profits/funds of the society were used for promoting its main object and not for the benefit of the members of the society. Details of investment made were furnished to the learned Commissioner of Income-tax (Appeals) and are noted in the impugned order in paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and findings that the institution of the appellant-society was being run for the purposes of earning profit although the Assessing Officer had admitted in paragraph 3 of page 2 of his order that the object of the institution was to promote preliminary education, spread knowledge concerning the physical, moral, social and mutual development of the children arid to co-operate with the national and international organizations having the similar objectives for furthering of its aims and objects. Over and above the facts narrated in the foregoing paragraphs, the Assessing Officer has not given any other reasons in support of his conclusion that the institution did not exist solely for the educational purposes, but also for the purpose of profit. He has also failed to controvert and establish that the school or institution had not been established for the purposes as mentioned by him in paragraph 3 of page 2 of his order, (narrated herein before) For want of such reasonings and narration of facts which would establish that the appellant-society was established for the purpose of running a school to earn profit, I hold that the assessments for all these five years had been completed on an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Educational Institution [1997] 224 ITR 310 and has observed that to find out the real and true object of an entity, one should look into the substance of the matter rather than its form. With reference to the assessee, the learned Judicial Member observed, "it is the object of the two founder members of the society to have a permanent post of the secretary and treasurer in the executive committee and to select other members of the committee at their will and desire without specifying therein the objective test of such selection. It is, therefore, to be ascertained whether this unrestricted power of two founder members have any bearing on the object of the society to make profit or not out of its activities". To justify remand of the matter, the learned Judicial Member observed that the Assessing Officer as well as the Commissioner of Income-tax (Appeals) did not adopt correct and proper approach to the matter in issue as they failed to take into consideration the overall view of the case and the substance of the matter. He, therefore, proposed that orders of Revenue authorities be set aside and the matter remitted back to the file of the Assessing Officer for a de novo assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e surplus fund went towards procurement of fixed assets for the school and construction of building of the school. In paragraph 9, the learned Accountant Member noted that remarks in the assessment order regarding management and control of school were factually incorrect and based on no material. Moreover, objections raised by the Assessing Officer had no relevance for determining the eligibility of exemption. After considering the facts and circumstances of the case and submissions of learned representatives of both the parties, the learned Accountant Member held that the case of the Revenue is based upon suspicion and that the learned Commissioner of Income-tax (Appeals) passed the impugned order after appreciation of all facts of the case. No interference with the order of the Commissioner of Income-tax (Appeals) was called for. He thus dismissed all the five appeals of the Revenue. 58 For reaching the above conclusion, the learned Accountant Member noted the decision of apex court in the case of Indira Balakrishna [1960] 39 ITR 546 and held that the Tribunal had no power to go behind the ground raised in appeal. He held that the Department did not challenge the finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle (8) provides that the amount of the fund account shall be utilized only for development and promotion of the object of the school and it also specifically provides that no portion thereof shall be paid, transferred directly or indirectly by way of profit to any office bearer or member of the executive committee. At the end article (12) provides that in the case of dissolution, the properties remaining will be handed over according to sections 13 and 14 of the Societies Registration Act, 1860." 61 After enquiring into the constitution of the assessee-society, the learned Accountant Member observed that all the objects of the assessee-society were educational and surplus generated could be utilized for promotion of the said object only. There was a specific provision in the constitution of the assessee-society to the distribution or transfer of this surplus to any member during its existence or on dissolution of the society. All the properties and assets of the society are to be transferred to another society having similar objects at the time of dissolution of the society. He also found that the surplus generated in the year under appeal was Rs. 25,25,799 against which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit. Thus, onus was wrongly placed on the Department to show that the assessee was not entitled to exemption under section 10(22) of the Act, whereas exemption was being claimed by the assessee. Accordingly, cancellation of assessment and grant of exemption to the assessee by the learned Commissioner of Income-tax (Appeals) was challenged by the learned Departmental representative during the course of hearing of the appeal. 63 Learned counsel for the assessee, on the other hand, supported the impugned order of the learned Commissioner of Income-tax (Appeals), as also the proposed order of the learned Accountant Member. He reiterated submissions noted and accepted by the learned Accountant Member. He argued that objections raised by the Assessing Officer in the assessment order relating to salary and rent received by Sri D. K. Chanda and his wife were factually incorrect as noted in detail by the learned Commissioner of Income-tax (Appeals). Under the Societies Registration Act, it is necessary that 7 founder members be there and, therefore, the learned Judicial Member was factually incorrect in holding that there were only two founder members in this case. Learned counsel state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on by the educational institution, it would not cease to be one existing solely for education purposes, since the object was not to make profit and the surplus, if any, was incidental to the dominant and primary object. Learned counsel for the assessee, accordingly, supported the proposed order of the learned Accountant Member. 65 After careful consideration of the rival submissions of the parties, material on record, proposed orders of the learned Members and facts of the case, I see no good reason to agree with the order proposed by the learned Judicial Member. It is clear from the perusal of constitution of the assessee institution that its main object is to run and expand school. Thus, the assessee is an institution existing solely for educational purposes. There is no material on record to show that the society is existing for purposes of profit. Even the Assessing Officer (AO) in the assessment order did not challenge the fact that the assessee was existing for educational purposes. Learned Assessing Officer's objection that Sri D. K. Chanda and his wife were exercising excessive control or were taking more than reasonable remuneration or rent are factually incorrect. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Commissioner of Income-tax (Appeals) and by the learned Accountant Member in their proposed orders. I agree with their reasonings and for additional reasons noted above confirm the impugned order of the learned Commissioner of Income-tax (Appeals). 66 During the course of hearing, before me, the learned Departmental Representative vehemently contended that learned Commissioner of Income-tax (Appeals) was wrong in cancelling assessment in this case when nobody sought cancellation of order. I have considered the above objection. It is true that the Commissioner of Income-tax (Appeals) has used the words "assessment is cancelled", but his order is to be read as a whole and when so done, he has held that the assessee is entitled to exemption under section 10(22) of the Act and, therefore, this reassessment in this case was not necessary. I see no such illegality in the order of the Commissioner of Income-tax (Appeals) vitiating the order on the above count and find no force in the contention raised by the learned Depart mental representative. In view of the above discussions, I disagree with the order proposed by the learned Judicial Member. 67 The order passed in this case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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