V.C. Daga, J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961 ('Act' for short), the Income Tax Appellate Tribunal has referred the following question of law, at the instance of the assessee, for the opinion of this Court :
'Whether, on the facts and in the circumstances of the case, assessee was entitled to exemption under Section 10(22) on interest earned on surplus funds of the school (run by the assessee-trust) for Asst. years 1979-80 and 1980-81?'
The Facts :
2. The trustees of Vanita Vishram having their office at Sardar Vallabhbhai Patel Road, Mumbai are representing the association formed in the month of January, 1928 with the object of running and maintaining schools for imparting religious, secular and industrial education and training in fine arts and libraries including circulating libraries and reading rooms, with allied objects of providing gymnasium, play-grounds etc. incidental to the educational activities. The Trust filed return for the assessment year 1978-79 showing interest income earned from the investment of surplus income (funds) of the schools run by it and claimed exemption under Section 10(22) of the Act. The said exemption was denied by the Income Tax Officer ('I.T.O.' for short) holding that the source from which the income was generated was an interest earned from investment of surplus, thus, it was not an income directly earned from the educational activities qualifying exemption.
3. The Appellate Assistant Commissioner was pleased to affirm the decision of the I.T.O. in appeal holding that the income having direct relation or incidental to the running of the educational institution could only qualify for exemption under Section 10(22) of the Act and no other income. The said decision was followed and accepted by the assessee for the assessment year 1978-79.
4. For the assessment year 1979-80 and 1980-81 the assessee claimed exemption under Section 10(22), which came to be denied by I.T.O. as well as the Commissioner of Income Tax (Appeals) and chose to follow the earlier orders denying exemption. The Tribunal upheld the orders of the Commissioner of Income Tax; holding that interest earned on surplus funds does not qualify deduction under Section 10(22) of the Act. The Tribunal, at the instance of the assessee, has referred the above-mentioned question to seek opinion of this Court as to whether the only income which had direct relation or was incidental to the running of the educational institution would qualify for exemption or other income generated from the surplus income earned from running of educational institution would also be exempt under Section 10(22) of the Act. Thus, the issue revolves around interpretation of Section 10(22) of the Act.
Statutory Provision :
5. In order to answer, it is necessary to turn to Sub-section (22) of Section 10 which stood omitted by the Finance Act (No. 2 of 1998) with effect from 1-4-1999. The said section reads thus :
'10. Incomes not included in the total income....
(22) any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit?'
Submissions:
6. Mr. Patil, learned counsel appearing for the applicant - assessee submits that the surplus income generated from running educational institution came to be profitably invested, and the investment has earned interests as such, the interest earned from such surplus generated from running of the school has to be treated as income of the educational institution existing solely for the educational purposes and not for the purposes of profit. According to him, the source from which the money is received is of no consequence. What is relevant is its application. So long as the institution is an educational institution which is not engaged in earning profit, the income earned by such institution may be; from any other source, is exempt under Section 10(22) of the Act.
7. Mr. Patil went a step ahead and submitted that income from all the sources received by the assessee is exempt provided assessee is an educational institution existing solely for educational purposes. He placed reliance on the judgment of various High Courts, viz., C.I.T. v. A.M.M. Arunachalan Educational Society, : [2000]243ITR229(Mad) ; C.I.T. v. Sree Narayana Chandrik Trust, (1995) 212 ITR 456; C.I.T. v. Kshatriya Girls Schools Managing Board, : [2000]245ITR170(Mad) ; C.I.T. v. Eco. & Entrepreneurship Dev. Foundation, : [1991]188ITR540(Cal) and Director of Income-Tax v. A.M.M. Hospitals, (2003) ITR 241 in support of his contention.
8. Per contra, Mr. Vyas, learned counsel appearing for the respondent -Revenue urged that the income directly received from the educational activities of the educational institution, is only exempt under Section 10(22) of the Act and no other income. He further urged that the interest income in question has neither been earned directly from and out of the educational activities nor it has incidental relation with the running of the educational institution, as such it cannot be said to be exempt under Section 10(22) of the Act. In other words, the submission is that the interest income in question has no direct nexus with the running of the educational institution, as such no exemption with respect to such income can be claimed. Thus, in his submission such income does not qualify for exemption under Section 10(22) of the Act. Consideration :
9. We have heard the parties at length. The question of exemption from income of the educational institution has been perennial teaser for the assessee as well as Judiciary. There are various situations which give rise to the question whether or not income is exempt under Sub-section (22) of Section 10 of the Act.
10. One of the situations in which question needs consideration is : whether or not the interest income derived from investment of surplus income of the universities and other educational institutions, existing solely for educational purposes and not for the purposes of profit is exempted? The intention of the Legislature appears to be to grant exemption to the institution, under Section 10(22) of the Act, if it solely exists for the educational purposes and not for the purposes of profit.
11. This provision has been judicially scrutinised by various High Courts as well as by the Apex Court while considering the question of exemption of income received from various sources by the educational institution existing solely for educational purposes and not for the purposes of profit.
12. In the case of A.M.M. Arunachalan Educational Society (supra), the assessee-society was formed with the object of running and maintaining a school which was earlier run by another trust. The transferor trust handed over the school to the assessee-society for running the same with the funds maintained by the trust. The assessee-society claimed that the income derived by it was the income of the educational institution and exempted under Section 10(22). The claim of the assessee-society was rejected by the Income-tax Officer, but it was allowed in appeal. The Tribunal held that the assessee-society which was being regarded as an educational institution within the scope of Section 10(22), existed solely for running the institution and that it had no other activity and no other income which required a computation. On reference, it was held that the object of the assessee-society was to run the educational institution, therefore, the Tribunal was right in holding that the assessee should be regarded as an educational institution well within the sweep of Section 10(22) as such its income exempt under that section. That the source from which the income was derived was of no consequence. What was relevant was the application of the income. It was thus ruled that so long as the institution is an educational institution, not engaged in earning profit, the income of such institution earned by way of dividend was exempt under Section 10(22) as attributable to the educational activities of the assessee-society.
13. In the case of Addl. CIT. v. Aditanar Educational Institution (Mad) (supra), the assessee was the society registered under the Societies Registration Act constituted to establish, run, manage or assist colleges, schools and other educational organisations existing solely for educational purposes. The assessee received donations from a Trust. It started a college and utilised the entire donation for the college. The question was whether the assessee was an educational institution entitled to the exemption under Section 10(22). The Departmental view was that this provision applied only to educational institutions as such and not to anyone else who might be financing the running of the institution. In that context, the High Court upheld the assessee's plea, holding that the purpose for which it had come into existence was education at the level of colleges and schools. In order to effectuate its objects, the assessee had necessarily to impart education only through the medium of a college consisting of professors and students. Unless a college itself is brought into existence by the professors, a college could ordinarily come into existence only by third parties. Therefore, it could not be said that the assessee was a mere financing body not coming within the expression 'other educational institutions' in Section 10(22). An educational society could be regarded as an educational institution if the society was running an educational institution. In holding so, the Madras High Court rejected the further contention of the Revenue that the college which was the educational institution was incorporated as a separate registered body. In other words, the High Court equated the society which was running the educational institution with the educational institution itself inasmuch as the society existed only for educational purposes.
14. In the case of CIT. v. Sindhu Vidya Mandal Trust, (1993) 142 ITR 633, the Gujarat High Court held that where the Trust existed solely for educational purposes, and was running primary and secondary schools, such schools were part of the assessee-Trust, which fell within the expression 'other educational institutions' in Section 10(22) entitled to exemption thereunder. Another similar case of a society running an educational institution is C.I.T. v. Academy of General Education, : [1984]150ITR135(KAR) . The assessee-academy was running many educational institutions and controlled and aided many others. It derived income from securities, properties and from other sources like dividends, interest, registration fees, donations, etc. The question was whether its income was exempt under Section 10(22). The Division Bench of the Karnataka High Court, speaking through Jagannatha Shetty, J. (as he then was), upheld the assessee's plea and exempted the income from tax.
15. In the case of Katra Education Society v. I.T.O., : [1978]111ITR420(All) , the Allahabad High Court held that there was no reason why an educational society cannot be regarded as an educational institution if that society was running educational institutions.
16. In Agarwal Shiksha Samiti Trust v. C.I.T, (1987) 168 ITR 751 is an analogous decision of the Rajasthan High Court. The assessee collected donations with the sole purpose of disbursing the same for educational institutions run under the auspices of one Agarwal Shiksha Samiti. The Court held that merely because these educational institutions were not run and managed directly by the assessee-Trust, it could not be stated that the assessee did not fulfil the requirements under Section 10(22). Admittedly, the assessee collected money for the purposes of education; it had no profit motive at all. Therefore, it was entitled to exemption under Section 10(22).
17. The decision of the Andhra Pradesh High Court in the case of Governing Body of Rangaraya Medical College v. I.T.O., : [1979]117ITR284(AP) is in point. The governing body of the Rangaraya Medical College was a society registered under the Societies Registration Act to manage the college which had been started by another society, the Medical Educational Society, six years earlier. The college had not been formally transferred to the assessee, as the assessee was awaiting orders from Government on its application for exemption from payment of stamp duty and registration charges. The assessee had collected compulsory donations of Rs. 12,000/- per seat and the bank accounts and deposits were maintained in the name of the society itself and not in the name of the college. The objects of the society were widely worded to manage the medical college and ancillary institutions and various others. The question was whether the society could claim exemption under Section 10(22). The High Court held that the assessee society was not different from the medical college. This was said despite the fact that the ownership of the college did not vest in the society and continued to be with the Medical Educational Society. The Court said that there was no distinction between the society and the college, and the society was an educational institution with no motive of private or personal profit. Merely because certain surplus arose from the society's operations, it could not be held that the institution was run for the purpose of profit so long as no person or individual was entitled to any portion of the said profit and the said profit was utilised for the purpose and for the promotion of the objects of the institution, the income of the society was, therefore, exempt under Section 10(22).
18. We must, also refer to the decision of the Calcutta High Court in the case of Birla Vidhya Vihar Trust v. C.I.T., : [1982]136ITR445(Cal) . The assessee in that case was a charitable Trust running educational institutions, the question was whether the Trust could claim exemption as an educational institution in respect of the income it derived from the educational institutions. The question was answered in the affirmative with the observation that the condition precedent for claiming benefit under Section 10(22) was that the university or the educational institution must exist solely for educational purposes and not for the purposes of profit.
19. The Apex Court had also an occasion to consider the scope of Section 10(22) of the Act in Aditanar Educational Institution v. Addl. C.I.T., : [1997]224ITR310(SC) ; wherein the Apex Court was pleased to hold that the language of Section 10(22) of the Act being plain and clear, it required that the exemption should be evaluated every year to find out whether the institution existed during that relevant year solely for educational purposes and not for the purposes of profit. It has also been ruled 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 an institution not existing solely for educational purposes, since the object is not one to make profit.
20. The decisive or acid test laid down in the above judgment is to find out whether, on an overall view of the matter, the object is to make profit. In the very same judgment, the Apex Court has also held that one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity. The Apex Court recorded this finding while dismissing assessee's appeals against the observations of the Madras High Court; wherein High Court had ruled that the applicability of Section 10(22) should be evaluated or investigated every year and only if it was found that the 'institution' existed solely for educational purposes in that relevant year, then even if any profit is resulted; may be from the activities incidental to the purpose of education; such income would also be exempted.
21. The legal position is thus well established on the strength of the above decisions that if a Trust or Society exists solely for the educational purposes and it runs an educational institution, its income will be the income of the educational institution and, therefore, exempted under Section 10(22). The fact that the assessee had other objects will not disentitle it to the exemption so long as the activity carried on by it in that assessment year was that of running an educational institution and not for profit.
22. In the instant case, there is no dispute about the fact that the assessee existed only for educational purposes, viz. for running schools and not for the purposes of making profit. Now the question is : whether or not the income by way of interest derived by the Trust from and out of investment, of its surplus income/funds, made to augment the resources for running school is exempt under Section 10(22) of the Act. In this connection, it must be mentioned that there is an integral unity between the Trust and the school for the purposes of Section 10(22). The amount invested belonged to the school. Consequently, the interest derived on such investments also belonged to the school. The school is not merely a building in which it is housed, or the equipment that is contained in it, but something more. It is an institution, and that institution belongs to the Trust. In dealing with the question, whether the income is that of the school, the significance of the expression 'any income of a university or other educational institution' in Section 10(22) has to be noticed. In our opinion, both words 'any' and 'of carry a definite meaning. It is not income from the educational institution that is exempt but any income of the educational institution. If the word had been 'from', the position would have been that the income should have been derived from the actual running of the school itself. What appears to be relevant is that the income should reach the school to be utilised by it for educational purposes and; not for the purposes of profit.
23. This Court in the case of CIT. v. Vidya Vikas Vihar, ITA Nos. 27 to 29 of 2001 and ITA Nos. 6, 7 and 19 of 2002 decided by Nagpur Bench on 13th February, 2003) (unreported) to which one of us (Daga, J.) is a party had an occasion to deal with more or less similar issue and decide it following the judgment of the Apex Court in the case of Aditanar Educational Institution (supra). While deciding the question as to whether donation received by the Trust running educational institution would qualify exemption under Section 10(22), this Court held as under :-
'In the instant case, it is not in dispute that the assessee-institution solely existed for educational purposes. The incidental object of constructing houses for weaker sections was never implemented or acted upon by the assessee in the relevant assessment year. Under these circumstances no fault can be found with the findings recorded by the Tribunal. The view taken by the Tribunal is absolutely in accordance with law and in consonance with the view taken by the Apex Court in Aditanar Educational Institution's case (supra). It would be necessary for the assessee to file Return every year and to demonstrate that the educational institution existed during the relevant year solely for educational purposes and not for purposes of profit.'
24. It is, thus, obvious that granting exemption to the income of the educational institutions is to enable such institutions to utilise the moneys available with them for the purpose of running the educational institutions. The source from which the moneys are received is of no consequence, what is relevant is the application of income. So long as the income of the institution, which solely exists for educational purpose and not for earning profit, is applied for the educational purpose, such income of the institution is exempted under Section 10(22) of the Act.
25. The question referred is, thus, answered in the affirmative i.e. in favour of the assessee and against the revenue.