Judgment:
1. These two appeals, the first one being an appeal by the Revenue for assessment year 1983-84 and the other by the assessee for assessment year 1984-85, are against the orders of the Commissioner of Income-tax (Appeals) and as they involve common points they are being disposed of by this common order for the sake of convenience.
2. The sole dispute in these appeals is as to whether the assessee is entitled to exemption under Section 10(22) of the Income-tax Act, 4961.
The assessee is an educational society registered under the A.P.(Telengana Area) Societies Act, 1989 on 4-9-1980. The society has no other activity except running of Matari Venkata Subba Rao Engineering College. It was started in September 1981 and continues its affiliation with Osmania University since inception. The College has Civil Engineering, Mechanical Engineering, Computer Science, Electronics and Communication 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 leaving the assessee's college and joined there, he mentioned the peculiar features of the entries as under: (f) the entries have been made on dates when there has been heavy withdrawals from bank.
He then gave certain examples of irregularities noticed by him and concluded that the assessee did not prove refund of Rs. 10,60,800 and that there was no proof for the refund of Rs. 5,94,700 out of Rs. 23,30,500 claimed to have been refunded by the assessee. On collection side also he noticed that the sum of Rs. 7,72,400 was not accounted for either in the building fee account or the tuition fee account. In this background he considered the claim of the assessee for exemption under Section 10(22) and concluded that: The fact brought on record above all go to show that the profit factor was the strongest motive in this joint venture. Heavy amounts were collected in the Society account and later withdrawn from the Society's accounts. Some of the amounts have been directly relating to Sri M.V. Subba Rao whereas the other withdrawals are not so clear about the destination or how exactly these amounts were apportioned.
But the fact ramains that the Society did not act as an association solely existing for educational purpose without profit motive.
An analysis of the books of account reveal that Matrusri Educational Society is only an extension of the Matrusri Group of cases. Heavy amounts were withdrawn by Matrusri Constructions, M.V. Subba Rao personally, Matrusri Finance Corporation, Matrusri Enterprises to tide over them and liquidate problems.
In the case of Matrusri Finance Corporation, a proprietory concern of Shri M.V. Subba Rao, huge amounts were shown as received from Matrusri Educational Society accounts to the tune of Rs. 4.05 lakhs.
This is not reflected in the Society account. When questioned Mr.
M.V. Subba Rao in his personal assessment stated that huge amounts of almost 17 lakhs were collected and maintained separately in Andhra Bank. This was not brought into accounts of the Society at all. But this amount is claimed to have utilised by all the Matrusri group 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 view to make profit. He did not discuss the observations of the Inspecting Assistant Commissioner on merits, though he specifically mentioned two points in his order which are as follows: (1) Regarding refunds to two students, viz., (i) Shri H.R. Deepak and (ii) Dayanand which refunds he found to have not been claimed by the assessee, and (2) Withdrawal of Rs. 2 lakhs on 6-7-1982 which he found was repaid by cash withdrawn by Shri M.V. Subba Rao on that very date. Lastly he found that no amount of Rs. 4.05 lakhs was advanced by the Society to Mr. Subba Rao's proprietory concern, namely, M/s.
Matrusri Financial Corporation in the books and that Rs. 17 lakhs did not relate to the year and that that was shown in the liability side and on the top side Rs. 15,20,601 was shown comprising of two main advances to M/s. Vijayalakshmi Industries with Rs. 9,76,000 and Bowrampet Land with Rs. 3,91,500.
4. In the second year, however, the Commissioner of Income-tax (Appeals) upheld the order of the Inspecting Asst. Commissioner (Assts) by observing in para 5 as under: I consider that the order of the IAC (Assts.) is a well reasoned order. He has marshalled the facts in support of his case that the appellant is not a 10(22) institution, in a clear, cogent, unambiguous and lucid manner, after scrutiny of the seized material and after gathering information through the concerned persons, including the students to whom refund of capitation fee was allegedly made. With reference to the seized material and other relevant documents, the IAC (Asst.) had brought out the following facts: 2. The Secretary himself admitted that in violation of the rules of the society he had taken away a large sum of Rs. 4.5 lakhs for his finance corporation.
3. There were gaping holes in the explanation regarding utilisation of capitation fee collected from the students who did not gain admission.
4. Unexplained portion of the capitation fee was evidently used for the benefit of those in charge of the affairs of the appellant society.
6. There was no evidence to support the claim for refund of capitation fee in several cases.
The above findings and conclusions of the IAC (Asst.) stand almost unrebutted. Even in the grounds of appeal these conclusions have not 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 purposes of profit. This, however, does not mean that the institution should not have any surplus. Not only, should the institution be for private profit, but it should not spend the surplus on purposes other than educational, otherwise exemption will be refused (please see Law on Income-tax in India by V.S. Sundaram, 11th Edn., Vol. 1, page 764). The facts in the appellant's case clearly show that it did not exist solely for educational purposes, that least one important members of the executive committee helped himself liberally with its funds and that some of the receipts were not accounted for leading to the conclusion that they were used for purposes other than those of the appellant. It would be traversy of facts and incorrect application of law if an institution like that of the appellant is held to be an institution coming under Section 10(22) of the Act.
He also referred to some passage from news reported in 'Hindu' dated 12-5-1988 under the caption "R.V. flays capitation fee system" and concluded that the capitation fees are collected against morality and public policy which was banned by Government of A. P. in 1983 because of the pernicious effect it had on the education system. The revenue is in appeal in the first year whereas the assessee is in appeal in the second year.
5. The learned Sr. Departmental Representative, Shri M.L. Kuppusamy, submitted that the institution was not existing solely for the purpose of education and, therefore, it was not entitled to exemption under Section 10(22) of the Act. Referring to various discrepancies pointed out by the Assessing Officer in detail, he submitted that Shri Subba Rao was doing every thing for his personal benefit, pocketed or diverted the funds of the institution for the benefit of his concerns.
He further submitted that other members were not objecting and, therefore, all should be deemed to have been taking collective participation in the matter. The dominant purpose of the institution was to benefit members, particularly Shri Subba Rao. He referred to the Orissa High Court's decision in the case of Secondary Board of Education v. ITO [ 1972] 86 ITR 408, the A.P. High Court's decision in Governing Body of Rangaraya Medical College v. ITO [1979] 117 ITR 284, the Calcutta High Court's decision in the case of Birla Vidhya Vihar Trust v. CIT [1982] 136 ITR 445, the decision reported in Thiagarajar 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 entries were not found in the books and misappropriated by Shri Subba Rao, the responsibility of which was owned by him which he either refunded (Rs. 2,25,000) or made arrangement for refunding the same (Rs. 2,63,000). He, therefore, submitted that the institution was not for the benefit of Shri Subba Rao but for education purpose only and if some office bearer of it misappropriated it should not lose the benefit under Section 10(22). One should go by the Charter to see the purpose of its being into existence. The Charter according to him does not authorise any private benefit. Therefore, anything contra done in violation should be immaterial. He referred to various clauses of memorandum of association and rules and regulations of the society in this behalf. He also relied on the decisions mentioned below: He also submitted that the society has no other activity except to run the college and, therefore, the institution and college are one and the same. When college is recognised under Section 10(22) of the Act, he submitted, there is no reason to deny the benefit to the society. The society has also been recognised for the benefit under Section 10(22) for the assessment years 1985-86 and 1986-87 by the Commissioner of Income-tax (Appeals) and no second appeal was filed against the same and by the Inspecting Assistant Commissioner himself for assessment years 1987-88 to 1989-90. In these circumstances, he submitted that there is no reason for denying the benefit for these two years merely on the ground that there are some discrepancies in the account or misappropriation by Shri Subba Rao, Where capitation fee is capital receipt if accounted and has been so treated by the Assessing Officer, it should also be capital receipt if not accounted for in the books of the assessee.
7. We have heard the parties and considered the rival submissions.
Section 10(22) reads as under: In computing the total income 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: (i) To impart and promote education in Kinder Garten primary and secondary education, Arts, Science and Technical Education in Engineering, Medicine, Degree and Diploma Courses and also to establish the residential schools and research courses in above fields.
(ii) To provide assistance and help to students of the above courses in promoting in cultural, physical and educational fields.
(iii) To achieve national integration by effectively working up and improving upon national educational system.
(iv) To co-operate with the authorities concerned to tone up educational standards and morale.
(v) To cater to the urgent needs of educational institutions like providing accommodation and hostel facilities for students.
(vi) To do whatever else is essential for the all round development of education.
A certificate is also appended in the memorandum of association as under: Certified that this society does not work on profit motive and it will not involve any commercial activities in its working.
The Rules and Regulations of the Society also provide as to how the funds are to be utilised. The following is stated regarding funds at page 172 of the paper book: Funds: The funds shall be spent only to the attainment of the objects of the Society and no portion thereof shall be paid or transferred directly or indirectly to any of its members through any means.
The term 'funds' again finds a place after the term 'Quorum' in the Rules and Regulations in a different language. We don't know why. It reads as under: All funds of the society shall be kept in any Scheduled Bank or Post Office Saving Bank Account. The cash balance from the bank or Post Office shall be operated either by the Treasurer jointly with Secretary or Chairman.
It may further be noted that even in the case of winding up, it so provided that the funds are being used only for educational purposes by making following provisions: In case the society has to be wound up the funds and property of the society that remain after full satisfaction of all the liabilities of the society shall be transferred or paid to some other institutions having similar aims and objectives.
8. The Karnataka High Court in the case of Academy of General Education (supra) has held that the assessee must be an educational institution or an establishment which primarily engages itself in educational activities. The institution however 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 (supra) 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 between the two in the light of the decision of the A.P. High Court in the case of Governing Body of Rangaraya Medical College (supra). This also finds support from the decisions of the various High Courts in the following cases: We, therefore, hold that the society came into existence for educational purposes and as there being no clause in its memorandum of association and rules and regulations providing for any other purpose or activities, it should be held that its sole object was educati6n and none else.
10. The claim of the Revenue that Shri Subba Rao was running it for his benefit or for the benefit of his proprietory concern and, therefore, it could not be said to be existing solely for deriving income cannot be accepted principally because there is no such clause in the Memorandum of Association and Rules and Regulations of the Institution allowing Shri Subba Rao or any of his private concerns to benefit by running the institution and also because the benefit enjoyed by Shri Subba Rao was recompensed by either payment or offering security. The purpose of an institution coming into existence, one has to find in its Memorandum of Association and Rules and Regulations and if something is done in violation thereof or unauthorised by it cannot lead to a conclusion that the institution was not established or existing solely for educational purposes. None of the clauses in the Memorandum of Association/Rules and Regulations of the Society authorised directly or indirectly Shri Subba Rao to make use of the institution for his private purposes. The society registered under the Act like a Company under the Companies Act is an artificial legal entity; soul and mind vests in the instrument under which it is constituted. Anything contrary to the provisions in the instrument under which it is constituted would be ultra vires and void ab initio and not binding upon it. Such action cannot even be ratified by all the members taken together until the object clauses therein the purpose of its existence lies are amended and approved or sanctioned under the provisions of the Act under which it is incorporated. Curiously enough the membership of the society in the present case is also restricted under clause (3) of the Rules and Regulations only to "educated persons 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 institution but its conduct by Shri Subba Rao. The contention of the learned Departmental Representative that subsequent events or in other words events after the end of the previous year should not be looked into and should not cloud the decision in determining the issue has also no force. The subsequent events depict the position of the society and the learned Departmental Representative himself had contended that in fact Shri Subba Rao was doing everything and others having not objected took collective decisions in allowing Subba Rao to benefit privately. Had that been the position, why recovery should have been there of a sum of Rs. 4.88 lakhs, the money of the society used by Shri Subba Rao for his proprietory concern and the society was granted exemption under Section 10(22). It could at best be a case of misappropriation by one of its functionaries of which the society was never a party or sanctioning authority and, therefore, for this misappropriation which as aforesaid, was later recovered too, the society should not be deprived of the benefit of Section 10(22) and burden with those liabilities for these two years. It is running the college for a noble cause imparting technical education to about 1200 students and enriching the nation by adding about 300 engineers every year. The college run by it, which could not be a distinct entity as per the decision of the jurisdictional High Court has been granted deduction under Section 10(22), has distinction of being recognised as one of the best Engineering Colleges in the twin cities. In our opinion, therefore, the benefit available under Section 10(22) of the Act should not be denied to the assessee.
12. Now let us have a look at the decisions relied upon by the learned Departmental Representative. In Secondary Board of Education's case (supra), the Orissa High Court held that the dominant object is to be seen and when that dominant object is profit motive, it would not be entitled to exemption. Here as a society, the object of the assessee was to impart education and education alone, therefore, this decision does not advance the cause of the revenue any further. In Governing Body of Rangaraya Medical College's case (supra) it was not a case of misappropriation and the observations are that because some surplus arose in its operation, it cannot be held that it was being run for 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. 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 (supra), Thiagarqjar Educational Trust's case (supra) and St. Joseph's Upper Primary School's case (supra) 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 (supra) 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 but it was recovered later and utilised for education purposes alone.
13. The discussion in para 87 of V.S. Sundaram's 'Law of Income-tax in India' also does not advance the case of the revenue. It provides that the educational institution should exist solely for educational purposes and should not be for purposes of profit. This, however, does not mean that the institution should not have any surplus. But not only should it not be for private profit but it should not spend the surplus on purposes other than education. Otherwise the exemption will be refused. We have already stated above that the Charter of the assessee does not allow its purpose to be for private profit or to spend surplus on purposes other than education. The misappropriation by Subba Rao has been made good by either refunding the amount and/or by offering security and thereby it shows that there was no purpose of the institution other than education.
14. In view of the aforesaid, we are of the opinion that the society is entitled to exemption under Section 10(22) of the Act. It may be stated here that we have not gone into the details of the irregularities found out by the Income-tax Officer in view of the fact that most of the discrepancies have been explained by the assessee and only the sum of Rs. 4,88,000 which could not be explained was accepted to have been misappropriated by Shri Subba Rao lor which he owned the liability and part thereof refunded. We have discussed the effect of this misappropriation in aforesaid paragraphs of our order.
15. In result, the appeal for assessment year 1983-84 filed by the Revenue is dismissed and the appeal of the assessee for assessment year 1984-85 is allowed.