TMI Blog2004 (11) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. The assessee had incurred similar expenditure for non-education purpose from the assessment years 1990-91 to 1998-99. Therefore, according to the Assessing Officer, the decision of the Supreme Court in the case of McDowell Co. Ltd. v. Commercial Tax Officer [1985] 154 ITR 148 is applicable in this case. Hence, the exemption under section 10(22) was denied to the assessee. The finding was confirmed by the CIT (Appeals). 3. The learned counsel appearing on behalf of the assessee has submitted that during the earlier years and subsequent years, the assessee was allowed exemption in similar circumstances. Therefore, there is no reason to withhold the exemption under section 10(22) in this year. It was submitted that in the case of the assessee, the Tribunal for the assessment years 1995-96 to 1997-98 and 1980-81 decided similar issues in favour of the assessee after allowing exemption under section 10(22) of the Act. Copies of the orders have been filed before us along with the Paper Book. The learned A.R. of the assessee in this connection placed reliance on different decisions as follows:- 1. Birla Vidhya Vihar Trust v. CIT [1982] 136 ITR 445 (Cal.) 2. Aditanar Education ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their funds are not invested in accordance with the provisions of section 11(5) of the Act. It is hereby clarified that since section 10(22) does not impose any restriction regarding mode of investment of funds, such institutions are not required to invest their funds in the modes specified under section 11(5) of the Income-tax Act. This clarification will not apply to the institution seeking exemption under section 11 of the Act." From the said Circular it appears that if the assessee-trust fails to invest funds as provided under section 11(5) of the Act, exemption under section 10(22) cannot be denied. It has been clearly explained that investment of funds under section 11(5) is required in the case of exemption under section 11 of the Act which is not the case here. The Supreme Court in the case of Aditanar Educational Institution held that after meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the Educational Institution, it will not cease to be one existing solely for educational purpose, since the object is not one to make profit and the surplus if any is incidental to dominant and primary object. Similar view has been t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer to allow exemption under section 10(22) of the Act. 5. In the result, the appeal is allowed. Per M.K. Sarkar, A.M. - The assessee is in appeal with the following grounds: "1. That the ld. CIT(A) was wrong in enhancing the assessment and determining the total income of the appellant for the assessment year 1998-99 at Rs. 84,05,370 as against the returned loss of Rs. 90,82,933 and the total income assessed by the Assessing Officer at Rs. 83,62,580. 2. That the ld. CIT(A) was wrong in holding that the income of the school, Shree Daulatram Nopany Vidhyalaya, which is a part of the appellant trust, is not exempt from taxation under section 10(22) of the Income-tax Act, 1961 for the assessment year 1998-99. 2.01 That the ld. CIT(A) was wrong in holding that the ratio of the decision of the ITAT 'E' Bench, Kolkata dated 9-11-2001 in the case of the appellant for the assessment years 1995-96 to 1997-98 is not applicable in so far as it relates to the income of Shree Daulatram Nopany Vidhyalaya. 2.02 That the ld. CIT(A) failed to appreciating that on the facts and in the circumstances of the appellant's case in so far as it relates to the income of the school, Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for assessment year 1998-99 at Rs. 84,05,370 as against the returned loss of Rs. 90,82,933 and the total income assessed by the Assessing Officer at Rs. 83,62,580. 3. The facts of the case are that the assessee is a trust owning an educational institution Shree Daulatram Nopany Vidyalaya which is the part of the assessee-trust. Before the Assessing Officer it was contended that the trust's income would be exempt under section 11 and the income of the school would be exempt under section 10(22). The Assessing Officer wanted the assessee to furnish the following details at the time of assessment: "1. Balance sheet/Annual Accounts of the School Shree Daulatram Nopany Vidhyalaya for the financial year 1997-98 with the Auditor's Report. 2. Detailed break-up of additions to the assets to the tune of Rs. 50,32,980 claimed as deduction in the computation of total income. 3. Break-up of Interest Income of Rs. 33,442 and administrative expenses of Rs. 2,03,548 thereon. 4. You have claimed deduction under section 10(22) (in Part IV of the I.T.S. 3A Return) for school. Is your case covered in Law in view of the ratio of the decision in the case of Aditanar Education Ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (India) Pvt. Ltd.; Continental Electronics Pvt. Ltd., Shree Hanuman Sugar Industries Ltd. This contention of the Assessing Officer has not been contested either before CIT(A) or before us. The Assessing Officer referred to the decision in the case of Governing Body of Rangaraya Medical College v. ITO [1979] 117 ITR 284 (AP) and Secondary Board of Education v. ITO [1972] 86 ITR 408 (Ori.). The Assessing Officer also went on to apply the acid test prescribed by the Hon'ble Supreme Court in the case of Aditanar Educational Institution and found that the assessee failed in the acid test as prescribed by the Hon'ble Supreme Court and, therefore, its income could not be exempted from tax either under section 11 or under section 10(22). He adopted the income of Rs. 83,62,579 and initiated consequent penal proceedings. 6. The assessee went in appeal before the CIT(A) who observed that the school run by the assessee-trust had made investment in equity shares in assessee's group companies. He also found that the profit of the school was not spent for education purpose but was given away as donation and aids during the financial year. He found that the Assessing Officer's action of app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 ITR 201 wherein it was held that Form No. 10 is mandatory and if no such form was filed, exemption under section 11 could not be allowed to such trust. In this case the assessee applied less than 75% of its income towards charitable and religious purposes. The remaining amount has also not been accumulated as provided under section 11(1) and 11(2). Further, such unspent income has also not been deposited or accumulated in the manner provided under section 11(5) and 11(1)(d). Besides, the assessee did not file Form No. 10. In this view of the matter, the CIT(A) was of the view that exemption available under section 11 could not be extended and allowed to the assessee. According to him, since the assessee would no longer enjoys the benefit of exemption under section 11, the aids and donations made by the assessee amounting to Rs. 38,36,733 could also not be allowed as an allowable deduction as they were not allowable in normal business activity, except in respect of a trust which has the benefit of exemption under section 11. In this view of the matter, he decided that the excess of income over expenditure in the income and expenditure account of the assessee amounting to Rs. 45,69 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of education or charity. However, we also observe that neither the Assessing Officer nor the ld. CIT(A) has come to a finding of fact whether the investments made by the school with the companies viz., Shri Annapurna Financing Co. Ltd. [Rs. 15 lakhs]; Hanuman Industries (India) Pvt. Ltd. [Rs. 20 lakhs]; Continental Electronic Industries Ltd. [Rs. 10 lakhs] and Shree Hanuman Sugar Industries Ltd. [Rs. 31.89 lakhs] - totalling Rs. 76.89 lakhs are actually the investments made by the school or by the trust in the assessee's group companies which would leave an effect on eligibility of benefit of exemption under section 10(22) to the school and/or denial of exemption under section 11 to the trust. It is also seen that such investment by the school and/or transactions with various companies over a number of years have also not been examined as to in which year/years the investments were originally made and whether the investments were in the name of the school or the trust and whether any income was derived therefrom. 11. In the case of Birla Vidhya Vihar Trust the Hon'ble Calcutta High Court gave the following finding "but in this case except that there was one solitary instan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce is to impart education at the level of college and school and such educational society should come under section 10(22) of the Act. With this observation, the Hon'ble Supreme Court declined to interfere with the order of Hon'ble Madras High Court. More importantly, the Hon'ble Supreme Court made the observations viz., "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 educational institute existed during the relevant year solely for educational purposes and not for the purpose of profit. After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution it will not cease to be one existing solely for educational purposes, since the object is not one to make profit. The decisive on the acid test is whether, on an overall view of the matter, the object is to make profit." 14. In the instant case, the Assessing Officer has established beyond reasonable doubt that applying the acid test required by the Hon'ble Supreme Court in the case of Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310, it can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol invested substantial surplus money in some companies run commercial operations, the motive was not profit. Obviously, the school management which may also include management of the trust were propelled by profit motive as well as commercial consideration while such investments were made from the surplus of the school. This is clearly violative of the provisions of section 10(22) and, therefore, the question of exemption under section 10(22) to such institution does not arise at all, on a plain reading of the provision of section 10(22) which prohibits activity for profit. 17. Similarly, as regards the trust also, since the trust has consciously encouraged unauthorized investment in this case, provision of section 11(5) has been clearly violated. Therefore, there cannot be any question of exemption under section 11 to be granted to the trust. On both the counts, taken together, the school is no longer eligible for exemption under section 10(22) on the facts and circumstances of the case. Similarly, the trust also is not eligible for exemption under section 11 on the facts and circumstances of the case as elaborated hereinabove. Since another Bench of the Tribunal has taken a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used and finally Tribunal in appeal, allowed exemption under section 10(22) of the Act to the income of the Vidyalaya and to the trust under section 11 of the Act. 3. For the assessment year under consideration, the assessee filed return declaring income at 'Nil'. It claimed exemption under section 10(22) of the Income-tax Act. The Assessing Officer after making assessment under section 143(1)(a) of the Income-tax Act, issued notices under section 142(1) of the Income-tax Act calling for certain details. In response to above notices, the assessee as per reply dated 13-3-2001 placed information on record. The Assessing Officer however felt that his notice under section 142(1) was not fully complied with and details were not filed. He, therefore, held that provisions of section 144 were attracted in this case and proceeded to make assessment under the above section to the best of his judgment. 4. He noted details of donation of Rs. 38,36,733 made by the trust to different persons in the year under consideration. These details are mentioned at pages 5 to 7 of the assessment order. The assessee claimed that above donations were made for advancement of education, relief and scholars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts of school, he has found that the same was being run for profit for the past several years. The assessee was spending its income for non-educational proposes. The income of the trust from sources other than school was only Rs. 58,624. The Assessing Officer accordingly concluded that the assessee is not entitled to exemption under section 10(22) of the Act. In his view the decision of the Hon'ble Supreme Court in the case of McDowell Co. Ltd was applicable. During the year under consideration the assessee had earned as high as 52.6% profits from school. The aids and donations taken as expenditure if ignored, the net profit would be as high as Rs. 84,06,357 which was 96.8%. The Assessing Officer was of the view that profit of the institution was to be computed at 45% of receipt and this way computed assessee's income at Rs. 83,62,579 after rejection of books of account. 8. Above assessment of income and denial of relief under sections 10(22) and 11 of the Income-tax Act was challenged by the assessee in appeal before the CIT(A). The learned CIT(A) found that the assessee-trust had three types of income from properties held under the trust. The income was earned from lease-hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut here the assessee did not file Form No. 10 nor made any application for accumulation of income. Further the "unspent income" was not deposited as provided under sections 11(5) and 11(1)(d) of the Act. The aids and donations amounting to Rs. 38,36,733 claimed as deduction could not be allowed as they were not normal business activities in the hands of the trust. Thus above amount was to be added to excess of income over expenditure of trust i.e. Rs. 45,69,524. Thus total taxable income of the assessee was worked out at Rs. 84,05,367. The learned CIT(A) further held that maximum marginal rate was to be applied to the above income. 10. The assessee being aggrieved took up the matter in appeal before the Appellate Tribunal. After hearing both the parties, the learned Judicial Member found that the assessee had given donations and aids to different concerns. On perusal of details of above donations, the learned Judicial Member held that these were given for education and cultural research and for advancement of medical and other education-related programmes. In the written submissions filed before the learned CIT(A), the assessee had submitted accounts of trust as well as that of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned AM the following three issues required to be considered: (i) Whether the school had applied its income for purposes other than for education, particularly with a profit motive; (ii) If the school has invested the amount either in the past or in the current year for purpose other than education, whether the school can be exempt under section 10(22); and (iii) In the case of the trust whether the trust can be exempted in spite of the fact that the trust received surplus income of the school and made investment in violation of section 11(5). The learned AM further observed that excess of income over expenditure amounting to Rs. 45,69,524 was carried to and merged with funds of the trust and the trust in turn made certain donations to persons, organizations, institutions which were held not to be exclusively for purposes of education or charity. However, revenue authorities did not come to a finding of fact whether these investments were made with companies by the school or by the trust as above finding has an affect over claim of exemption under section 10(22) to the school and denial of exemption under section 11 to the trust. The revenue authorities further did not examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion: "(a) In view of the fact that the school has invested huge amounts in commercial institutions with a profit motive, whether the school can claim exemption under section 10(22) of the Act; and (b) Whether the trust which has made investment in violation of section 11(5) can be allowed exemption under section 11 of the Act." 14. On the above difference, the question quoted earlier has been referred to me under section 254(4) of the Income-tax Act. The matter was fixed for hearing and both the parties were heard at Kolkata on 12-10-2004. Both the parties were also permitted to file written submissions upto the end of October, 2004. The assessee has filed written submissions whereas the department has relied upon oral submissions made during the course of hearing. All the relevant material has been taken into account. 15. Shri K.V. Singh, learned counsel for the assessee pointed out that question proposed by the learned Members does not cover the entire controversy as the learned AM has directed for constitution of a larger Bench to consider the question of exemption to the assessee. The aforesaid view is not reflected in the proposed question. He, therefore, suggested th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The excess of income over expenditure in school account, Rs. 86,90,577 was utilized, in, making donations to educational and other charitable institutions or making capital investment in the building of the school. He drew my attention to page 35 of the Paper Book which showed that a sum of Rs. 49,01,250 was added to the building of the school in the period under consideration. Thus total amount spent on school was much more than what was received from the school. He also drew my attention to details of donations made for educational purposes. Similar donations made were allowed by the Bench of the ITAT right upto assessment year 1996-97. Shri Singh further placed reliance on Circular of CBDT referred to by the learned JM in his proposed order. 17. Referring to the proposed order of the learned AM, Shri Singh submitted that wrong observations have been made by the learned AM. In this connection he referred to para 9 of the proposed order, where it has been observed that investment was made by the trust. This was wrong as investment was made by the school out of Development Deposits as explained above. The investment was made in earlier year. In spite of above clear facts, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22) of the Income-tax Act all along right upto assessment year 1997-98. Of course there was a dispute in the assessment years 1980-81 and 1995-96 to 1997-98 but on further appeal Income-tax Appellate Tribunal as per their orders, held that income of the Vidyalaya was exempt. 20. In the year under consideration, the Assessing Officer took into account factors like profit made by the Vidyalaya from its teaching activities, investments made in shares of company in which the trustees are interested etc. etc. and held that the assessee was not entitled to exemption under section 10(22) of the Income-tax Act. The trust and the school were held to be existing for making profit and not solely for purposes of education. The Assessing Officer also rejected book results of the assessee and applied a flat rate to determine assessee's income at Rs. 83,62,579. On appeal, the learned CIT(A) not only confirmed the addition but enhanced the same from Rs. 83,62,579 to Rs. 84,05,370. 21. On further appeal before the ITAT, the Members have differed and details of their proposed orders have already been noted. 22. After careful consideration of rival submissions I do not see any difference betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. apart from spending Rs. 38,36,733 for educational purposes. Thus, income of the school is being spent on the school itself and not distributed in the hands of the trustees or others. Therefore on facts of the case, it is difficult to hold that school did not exist for educational purposes but for making profit. The decision of the Apex Court also supports the claim of the assessee. There is absolutely no justification for not granting exemption of income of the school under section 10(22) of the Income-tax Act. 24. Here I may point out a distinction which exists between section 11 and section 10(22) of the Income-tax Act. Income falling under various clauses of section 10 including clause (22) are not to be included in the total income of the person, here trust. Thus while computing income of the trust, income of school was required to be excluded under section 10(22) from the total income of the trust. The exemption under the above provision could not be denied merely because the school had made investment in shares of certain companies in which the trustees of the assessee were interested. Having regard to CBDT Circular No. 712 dated 25th of July, 1995, it was not material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to evaluate whether the institution existed during the relevant year solely for educational purposes. In fact, the above question on which some dissenting notes are available in the decision of the Hon'ble Calcutta High Court, was raised by the assessee in its appeal before the Hon'ble Supreme Court, which was also dismissed by making a passing reference that the apprehension relating to hypothetical question, causing prejudice to the assessee were unfounded. Their Lordships stated that for proper evaluating or apprising the question, the decision of Hon'ble Andhra Pradesh High Court in the case of Governing Body of Rangaraya Medical College laid down the correct test to be applied. The test to be applied is whether an institution is existing for profit, is to see, whether surplus of the institution is being utilized for purposes and for promotion of object of the institution or is distributed among certain persons and the individuals. If surplus was to serve, individual or personal purpose, then institution was held to be existing for profit, otherwise surplus rose from operation of the institution has to be treated as incidental income qualifying for exemption. The claim of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that activities of the institution for the assessment year under consideration are relevant and are to be evaluated. It is further clear from record that a sum of Rs. 86,90,577 was transferred as excess of income over expenditure to the trust account from school and the resultant figure of excess of income over expenditure in the hands of the trust is only Rs. 45,69,524. Therefore, if income of Vidyalaya is treated as exempt under section 10(22) of the I.T. Act, and the same is excluded from the income of the trust, there is loss in the hands of the trust and revenue authorities made no attempt to show that the above figures were not correct. No attempt was made to establish that trust had income independent of income of the Vidyalaya. The order of CIT(A) also takes income of trust (inclusive of income of the school) at Rs. 45,69,524 and thereafter disallows expenditure of Rs. 38,36,733, the amount spent on donations. He did not examine details of donations and justification of their payments and therefore, his finding on above disallowance cannot be approved. On the other hand, I agree with the findings of the learned JM on this point. Even if 100% of the donations are disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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