1. This is an appeal filed by the assessee against the order of CIT(A), dt. 10th July, 1998, for the asst. yr. 1995-96. The grievances of the assessee are as follow : A. For that the order appealed against is bad in law as well as on facts.
B. For that on the facts and circumstances of the case the learned CIT(A) erred in summarily confirming the action of the learned Addl.
Director of IT (Exemption) I, Calcutta, who had denied the exemption under Section 10(22) of the Act and determined the surplus figure at Rs. 31,17,008 which has been subjected to tax.
C. For that the learned CIT(A) failed to appreciate the facts of the appellant trust which had always been allowed exemption under Section 10(22) of the Act while there was no change of whatsoever nature in the objects of the trust and the subject-matter has been considered favourably by the jurisdictional High Court and also by the Hon'ble Supreme Court.
2. The brief facts of the case are that the assessee is a society came into being on 5th Nov., 1973 and registered under West Bengal Societies Registration Act, 1961, on 12th Nov., 1973. The society was treated as an educational institution exempt under Section 10(22) of the IT Act, 1961 since the asst. yr. 1976-77 till the asst. yr. 1997-98, except the asst. yr. 1995-96 which is under appeal presently. The assessee-society was running two Sanskrit colleges. The object of the society as contained in Article 3 of its memorandum of association, are educational in nature.
3. In the course of the assessment the AO observed that the assessee is a registered trust under Section 12A, and that it is claiming exemption under Section 10(22) and not under Section 11. The AO further observed that as per the trust deed, the objects of the society are educational.
The AO further observed that a perusal of the income expenditure account shows that the society received income from interest on debentures, rent on property at Bombay and profit on sale of investments. The total receipt as per income-expenditure account is Rs. 39,01,870 which includes rent of Rs. 27,30,435 from house property.
Against this receipt, expenses of Rs. 5,43,463 have been debited on account of school at Pushkar and Rs. 1,64,383 on account of school at Ayodhya. Surplus of Rs. 31,16,923 has been accumulated in the balance-sheet. As per AO the perusal of the balance sheet shows that out of total asset of Rs. 65,00,087 an amount of Rs. 47,25,080 is investment, which includes preference shares, equity shares and debentures of limited companies. Other investments are fixed deposit with Government companies of Rs. 6,00,000 and cash and bank balance of Rs. 7,71,813, The AO further observed that the educational activities of the society form a small part of the total activities. Main activities of the trust are investments in shares and debentures to earn income from these investments and investment in house property to earn rent. Out of the total assets of Rs. 65,00,000 as much as Rs. 60 lakhs has been invested in shares and debentures, fixed deposits, bank balance and house property. In income and expenditure account after total receipts of Rs. 39,00,000 as much as Rs. 31,00,000 is surplus and accumulated and small amount of Rs. 7,07,845 only has been applied for educational purposes.
Before the AO it was submitted by the assessee that the only activity of the society was running of two educational institutions for which it incurred expenditure of Rs. 5,43,464 and Rs. 1,64,383 during the relevant assessment year, Since the object of the society was solely educational in nature and its activities were confined to running of the two Sanskrit Mahavidyalas, it was claimed that it fell within the four corners of Section 10(22). Receiving of the income from properties of the society and let out and investment of the surplus in shares and securities, did not debar the society from exemption under Section 10(22). It was further submitted that the provisions of Section 11(5) of the IT Act, 1961 prescribing compulsory modes of investment for the trusts corning in the purview of Section 11, did not apply to an educational institution coming in the purview of Section 10(22), Reliance was placed on the CJT v. Sarsaswath Poor Students Fund (1984) 150 FTR 142 (Kar) to the effect that an educational institution existing solely for educational purposes is entitled to exemption under Section 10(22) and it was unnecessary to go into the question whether the society would be entitled to exemption under Section 11. CIT v.Academy of General Education (1984) 150 ITR 135 (Kar) was referred to point out that an educational institution may invest its funds in any manner and it would be entitled to exemption under Section 10(22) if the income generated therefrom is utilized for educational activities.
4. The AO further stated in his order that the assessee referred many other judicial pronouncements all of which are to the effect that income of any institution existing only for the educational purposes is exempt. The assessee has also stated that its income has been exempted under Section 10(22) all along over the earlier years.
5. Considering the facts of the case and various judicial pronouncements discussed hereunder the AO further stated in his order that I do not agree with the assessee that it is eligible for claim of exemption under Section 10(22). The AO, therefore, concluded that even though the assessee claims that its only activity is making investments in shares and debentures in which 92 per cent of its funds have been freshly invested (Rs. 31 lakhs out of Rs. 39 lakhs total receipts.) This, along wrth earning of rental income from house property forms the predominance part of the assessee, and income-expenditure accounts are pittance in the name of education to extract benefit of tax exemption.
The AO relied on the judgment of Madras High Court in the case of Rao Bahadur A.K.D. Dharmaraja Education Chanty Trust v. CIT (1990) 182 ITR 80 (Mad), in which it was held that in order to get benefit of Section 10(22) application of income has to be solely for educational purposes.
In case of only a small amount was spent for educational purposes and huge surplus was left the trust was not entitled to exemption under Section 10(22). What has to be seen is whether activity by which such income is earned is incidental to carrying out of educational activity.
In the assessee's case earning of rental income and income from investments are not at all incidental to carrying of the educational activity. The AO further discussed that the society by merely running a college could not utilize its provision as an instrument for exemption in respect of its sources of income which had no connection with its educational activities. There must be some co-relation between income earned and the educational institution. Therefore, as per AO what has to be seen is whether the income has a direct relation or incidental to running of the institution. In the assessee's case facts are reverse.
It is seen that the assessee had to undertake other means for earning income because its resources are scarce and there is no enough money available. On the contrary, the assessee has substantial income and has not applied it for educational purposes. In view of the above discussion the AO rejected the claim of the assessee under Section 10(22), in respect of surplus.
The AO further observed that the assessee is registered under Section 12A, it would be proper to examine if the assessee's case is eligible under Section 11, even if it has not been claimed. In order to avail the benefit of Section 11 a public charitable trust has to spend at least 75 per cent of its income during the year and any surplus has to be invested as specified under Section 11 (5). The assessee's application is much below the limit of 75 per cent. Secondly its investments are in Non-Government companies which is not specified under Section 11(5) 6. Against the above order of the AO, the assessee approached to the CIT(A), who confirmed the order of the AO by observing that the major part of the society's income arose from rent i.e., to say Rs. 27,00,000 out of Rs. 39,00,000, out of this surplus Rs. 7,07,845 has only been spent on educational activities which is less than 25 per cent of the income.
Aggrieved by the above order of the CIT(A), the assessee further approached to us for adjudication.
7. The learned senior authorised representative started his arguments and drawn our attention to the object Clauses 3, 4 & 5 of memorandum of association of the assessee "Shree Education Society", having sole object of organizing, running and managing pathshalas, schools and colleges. Our attention was drawn to the earlier assessment orders of the assessee-society for the assessment years ranging from 1976-77 to 1997-98 in which the assessee-society was granted exemption under Section 10(22), except the asst. yr, 1995-96, being the assessment year under consideration in which the assessee's claim under Section 10(22) was denied. Our attention was also drawn to various approvals granted to the assessee-society by the Government authorities like Varanasi, Sanskrit University, Secondary Education Board, Rajasthan, Ajmer, etc.
for affiliation, running the colleges, etc. The learned senior authorised representative argued that the expenditure of the assessee-society was always incurred as per the needs of the institution. He drew our attention to the statement of total income, expenditure on Vidhyalayas and the surplus/deficit therefrom since inception of the society in the asst. yr. 1976-77 till asst. yr.
1997-98, placed at pp. 37 & 38 of the paper book. The total income and the expenditure of the society keeps on increasing every year, there was surplus in some years and there were also instances when the society spent more than its income thereby resulting into deficit in some years.
8. Senior learned authorised representative Mr. Bajoria, cited the verdict of Hon'ble Supreme Court in the case the Aditanar Educational Institution v. Addl. CIT (1997) 224 ITR 310 (SC), in which it was held that an educational institution solely for educational purposes and not for profit is entitled to exemption under Section 10(22). It was categorically observed in this case that availability of exemption should be evaluated each year and if any surplus results incidentally assessee will not cease to be one existing solely for educational purposes and that one should bear in mind the distinction between the corpus, the objects and the powers of the concerned entity. In this case the Supreme Court approved the judgment of Calcutta High Court in case of CIT v. Doon Foundation (1985) 154 ITR 208 (Cal). It was held by jurisdictional High Court in Doon Foundation's case (supra) that exemption under Section 10(22) is available to an assessee, a registered society, running educational institution solely for educational purposes and not for purposes of profit.
9. Mr. Bajoria drew our attention to the Madras High Court judgment in the case of CIT v. Kshatriya Girls Schools Managing Board (2000) 245 ITR 170 (Mad) in which it was held that exemption under Section 10(22) is available to a trust running schools and the object of trust was to utilise income for imparting education through schools. Income from the properties of trust spent towards object of the trust namely, education, without making profit. Trustees given power to construct buildings and to lease them out. It was held that these powers cannot be regarded as objects of the trust and that the assessee is entitled to exemption.
10. It was emphasised that the assessee is not covered by Section 11.
Mr. Bajoria further stressed, that the Revenue was misled by relying on the judgment of the Madras High Court in the case of Rao Bahadur A.K.D.Dharmaraja Education Chanty Trust (supra), as the facts of the case are not applicable to the instant case because there is no other object of the assessee-society except the imparting of education whereas in the above case there were other charitable objects of the trust in addition to sole object of education and that huge surplus was left for other charitable purpose and a small amount was spent for educational purposes. Under such circumstances the Hon'ble Madras High Court held that the assessee trust is not entitled to exemption under Section 10(22) but is entitled to benefit of Sections 11 to 13 of the IT Act.
11. On the other hand the learned Departmental Representative argued that only a small fund was used for education and huge fund amounting to 92 per cent was invested in shares and debentures, therefore, the assessee-society is not entitled to exemption under Section 10(22) and pleaded for confirming the action of lower authorities.
12. We have heard the rival submissions, gone through the orders of the lower authorities and carefully perused the paper book filed by the learned senior authorised representative. The plain reading of Section 10(22) suggests that any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit, are exempt under Section 10(22). Thus, the exemption under Section 10(22) would not be available if the purpose is not education or income is diverted for private benefit. Receiving of income from the properties of the society let out and investment of the surplus in shares and securities did not debar the society from exemption under Section 10(22). Provisions of Section 11(5) of the IT Act, prescribing compulsory modes of investment for the trusts corning in the purview of Section 11, did not apply to an educational institution coming in the perview of Section 10(22). Hon'ble Karnataka High Court in Sarasaswath Poor Students Fund's case (supra) held that an educational institution existing solely for educational purposes is entitled to exemption under Section 10(22) and it was unnecessary to go into the question whether the society would be entitled to exemption under Section 11. Jurisdictional High Court in Birla Vidhya Vihar Trust v. CIT (1982) 136 ITR 445 (Cal) observed that, if the sources generating income exist only for educational purposes, and not for private profit, then Section 10(22) would be attracted, and exemption under Section 10(22) would not be available only if the income can be diverted for private benefit. It was further observed that merely because there was surplus of receipts over the expenditure it cannot be said that the educational institution exists for profit.
13. Hon'ble Supreme Court in Aditanar Educational Institution's case (supra) observed that exemption under Section 10(22) is available to an educational institution or an educational society or a trust or other similar body running an educational institution solely for educational purposes and not for purposes of profits. Assessee-society's objects being to establish, run, manage or assist colleges, schools and other educational organisations solely for educational purposes, it is other 'educational institution' entitled to exemption under Section 10(22).
It was further observed that the availability of exemption should be evaluated each year and if any surplus results incidentally assessee will not cease to be one existing solely for educational purposes and that one should bear in mind the distinction between the corpus, the objects and the powers of the concerned entity.
14. In the instant case an abrupt increase in the income during the year under consideration, which is alleged by the Revenue as not being invested and kept as surplus, was only due to receipt of arrears rent pertaining to the period 2nd Dec., 1991 to 31st March, 1994, amounting to Rs. 16,80,805. Applying the ratio of Supreme Court as discussed above, if any surplus results incidentally, the assessee will not be ceased to be one existing solely for educational purposes. In substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the levels of colleges and schools and so, such an educational society should be regarded as an 'educational institution' coming within Section 10(22).
15. The language of Section 10(22) 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 educational purposes and not for the purposes 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 or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity.
16. The case law relied on by the lower authority Rao Bahadur A.K.D.Dharmaraja Education Charity Trust's case (supra), is not applicable to the instant case. In this case the assessee trust was having other charitable objects in addition to object of education and only a small amount was spent by the charitable trust for educational purposes and a huge surplus was left for other charitable purposes. It was further held by the Madras High Court that the assessee-trust is not entitled to exemption under Section 10(22) but only Sections 11 to 13 could be applied.
17. In the above case, the object of the trust was to provide not only for running educational institutions but also for spending some money for religious purposes regarding two temples. It is seen that factually only a small amount had been spent for educational purposes leaving a huge surplus for other charitable purposes. In those circumstances, it cannot be said that the institution is solely for educational purposes so as to attract Section 10(22). Therefore, the Tribunal is right in holding that this case does not fall under Section 10(22) and directing the AAC to consider the application of Sections 11 to 13.
18. Thus it is crystal clear that where a charitable trust spent only a small part of its income for educational purposes leaving the huge surplus for other charitable purposes, it is not entitled to exemption under Section 10(22).
19. However a different view has been taken by Gujarat High Court in the case of Gujarat State Co-operative Union v. CIT (1992) 196 ITR 279 (Guj). In this case the assessee, a co-operative union, carried on various activities with several objects existing solely for educational purposes, imparting education to members of co-operative societies and training on various subjects by conducting regular courses in an organised manner. Assessee also engaged in publishing periodicals, books, etc. and running a printing press, incidental activities connected with educational purposes. It was held that there was no limitation for exemption under Section 10(22) unlike Section 11 (a) which imposes condition for utilisation of at least 25 per cent of the income and that the income derived by assessee is fully exempt under Section 10(22).
20. It was observed in this case that the assessee-co-operative union is given financial assistance by the Government. The resolutions of the Government clearly indicate that the grants sanctioned by the Government are for educational purposes. It is fully satisfied from the nature of the activities of the assessee-co-operative union and its objects that the assessee is existing exclusively for educational purposes and not for the purposes of profit. Section 11(1)(a) applies to income derived from property held under trust wholly for charitable or religious purpose while Section 10(22) covers any income of a university or other educational institution existing solely for educational purposes and not for purposes of profit. The exemption incorporated in Section 11(1)(a) is only in respect of the extent to which the income derived from the property is applied for charitable purpose which includes educational charity. If the income is only accumulated or set apart for such purpose, the exemption is limited to the extent of 25 per cent of the income of the property held under such trust. The exemption under Section 10(22), on the other hand, is without any such limitation. The language of Section 10(22) emphasizes that the sole purpose of the existence of the institution should be educational. The very provision of exemption under Section 10(22) indicates that the income of such institutions is contemplated.
Therefore, mere existence of profit will not disqualify the institution if the sole purpose of its existence is not profit-making but is educational activity. Incidental activities connected with the educational purposes for which the institution exists which result in income will not disqualify the institution, for Section 10(22), by its very nature, contemplates income of such institutions which is to be exempted under that provision.
21. It was, therefore, held by the Court that the co-operative union which exists solely for educational purposes is eligible for exemption under Section 10(22) and incidental activities connected with the educational purposes would not disqualify the assessee to claim exemption under this section.
22. In CIT v. Oxford University Press (1996) 221 ITR 77 (Bom) it was held that for exemption under Section 10(22), it is not necessary that the assessee itself should be a university or an educational institution. The character of the assessee is not material. He may be "any person" including a person engaged in business or profession. Even then, he would be entitled to exemption under Section 10(22) in respect of any income falling within Clause (22) of Section 10. In other words, what is exempt is "the income of a university or an educational institution existing solely for educational purposes and not for the purpose of profit". It is not necessary for the purpose of Section 10(22) that the university or educational institution itself is an assessee. Nor such university or educational institution need be established or constituted in India. What is necessary for availing the benefit of exemption under Section 10(22) is that the income is the income of university or an educational institution existing solely for educational purposes and not for purposes of profit. The expression "existing solely for educational purposes and not for purpose of profit" appearing in Section 10(22) is thus a condition precedent for exemption under Section 10(22). In the context and setting of this clause, the expression "existing" obviously means and refers to the existence of such university or institution solely for educational purposes in India. If a university or an educational institution, though existing outside India as a university or an educational institution for educational purposes, does not so exist in India, it would not be entitled to claim exemption of its income from other activity carried on by it in India by virtue of Section 10(22). In other words, a university or an educational institution, whether established in India or abroad, must retain its character of a university or an educational institution in India and the income in respect of which exemption is claimed under Section 10(22) must be the income derived by it in its capacity as a university or an educational institution. If it does not carry on its activities as a university or educational institution in India, it cannot be regarded as a university or educational institution existing solely for educational purposes and, hence, the income derived by it from any other activities would not qualify for exemption under Section 10(22).
23. Admittedly, the assessee is Oxford University Press and not the Oxford University. The Oxford University does not exist in India nor does it carry on any of the activities of a university in India. What exists in India is the Oxford University Press. The only activity carried on by the Press, which is the assessee in this case, in India is the activity of printing and publishing books and selling the same as well as publications of other publishers and to earn profit. This activity, in effect, tantamounts to carrying on the business of selling or supplying books for profit. On its own showing, even in the year under consideration, the assessee-press made a net profit of about Rs. 20 lakhs. Such income cannot be regarded as income for a university existing solely for educational purposes merely because the assessee-press claims to be a part of the Oxford University which does not exist at all in India--not to speak of solely for educational purposes. If the Oxford University had existed in India solely for educational purposes, the position would have been different and it might have been possible for it at least to contend that the income of the assessee-press is ancilliary to its activities as a university and, hence, it should be regarded as the income of the Oxford University.
But when the Oxford University itself does not exist in India, the income of the press in India cannot be held to be the income of a university for the purposes of Section 10(22) merely because the press is held to be a part of the university. True, it is that in order to be eligible to exemption under Section 10(22) it is not necessary that the university or the educational institution should be constituted in India or established in India or under the laws of India, but it cannot be accepted that in the instant case, the income of the assessee-press in India would be exempt merely because it happens to be a part of a university in the United Kingdom which admittedly does not exist in India as a university. For exemption under Section 10(22), the university or the educational institution must exist as a university or an educational institution solely for educational purposes in India. In other words, the recipient of the income must have the character of a university or an educational institution in India. Its character outside India or it being a part of a university existing outside India, is not relevant for deciding whether its income would be exempt under Section 10(22). Clause (22) has to be construed in the light of the scheme of the IT Act and the object of Section 10, in particular Clause (22) thereof, and on such a construction, even if the assessee-press is a part of the Oxford University and is being run as such in India in the absence of the existence of the Oxford University in India, the assessee-press cannot be held to be a university existing for educational purposes within the meaning of Section 10(22) and its income cannot be regarded as the income of a university. The fact that the assessee in the instant case had given an undertaking before the ITO that 60 per cent of its income would be applied for educational purposes in India and the balance only will be remitted to United Kingdom does not in any way advance the case of the assessee for exemption under Section 10(22).
24. Clauses (20A) and (23) of Section 10 do not assist the assessee in any way. On the other hand, on a comparison of the language used in these two clauses with that of Clause (22), it becomes abundantly clear that to get the exemption of its income from income-tax under the Act the university or educational institution must "exist solely for educational purposes".
25. In CIT v. Sree Narayana Chandrika Trust (1995) 212 ITR 456 (Ker), it was observed that the provisions of Section 10(22A) are analogous to Section 10(22). For exemption under Section 10(22A), it is not necessary that the income should generate from the hospital itself. If income of trust running the hospital is utilised for purposes mentioned in Section 10(22A), it is exempt, irrespective of its source. Even if a trust is partner in a firm only to raise income for the purpose of running the hospital, its income will be entitled to exemption.
Further, income of such trust during the construction and establishment of the hospital shall also be entitled to exemption.
26. It was, therefore, held that if a trust or society exists solely for educational purposes and it runs an educational institution, its income will be the income of the educational institution, and, therefore, exempt 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 was that of running an educational institution, and its activities were not for profit. The same ratio must apply to hospitals as well. The trust which is running the hospital and is existing solely for that purpose falls within the purview of Section 10(22A) with exemption for its income, if the other requirements of the section are satisfied. It should be treated as the hospital itself, as it existed solely for the running of the hospital and not for any other purposes. In other words, the society cannot be dissociated from the hospital, which is run by it. They have to be treated as one and the same. The next question is whether the income derived by the trust as a partner of the firms in which it had made some investments for the purpose of augmenting the resources available for the hospital is exempt under Section 10(22A). In this connection, it must be mentioned that if there is an integral unity between trust and the hospital for purposes of Section 10(22A), the amount invested belongs to the hospital and the income derived on such investment is also that of the hospital. A hospital is not merely the buildings in which it is housed, or the equipments that are 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 hospital, the significance of the expression "any income of a hospital" in Section 10(22A), has to be noted. Both the words 'any' and of carry a meaning. It is not income from a hospital that is exempt but "any income of hospital". If the word had been "from", the position would have been that the income should have been, derived from the actual running of the hospital itself. What appears to be relevant is that the income should reach the hospital to be utilised by it for philanthropic purposes and not for purposes of profit. The stress appears to be on the recipient of the income. If that is the hospital, that is the trust running it, Section 10(22A) must apply. The emphasis is not on whether the income was derived from the educational institution, or hospital itself, but on the purpose for which the institution, trust or society was existing and utilising the income.
Such an interpretation will subserve the object of the two provisions Sub-sections (22) and (22A) which appears to be to foster the growth of educational institutions and hospital existing solely for such purposes and not for profit.
27. During the accounting periods relevant for these years, the hospital was under construction, and became functional only on 25th April, 1978. The question, therefore, arises whether the income of the assessee-trust during these years is exempt as there was no hospital as such in existence during that period. The works related to the hospital of the assessee were started in the year 1973 though it became functional as a hospital only on 25th April, 1978. All the activities in the meanwhile were geared to the establishment of the institution and its functioning as a hospital and, therefore, the income derived during the period was also the income of the hospital entitled to exemption. Adoption of any other view of the matter will be to syphon off the income required for the starting of a hospital by way of tax, thereby depleting the resources available to the institution, defeating the very object behind Section 10(22A).
28. In CIT v. St. Xaviers (1990) 184 ITR 284 (Pat), it was held by Hon'ble Patna High Court that exemption under Section 10(22) is available to an educational institution. Assessee-society running school and having other objects other than educational institution, the Court held that it is irrelevant for deciding whether the income of assessee derived from educational institution is exempt. The assessee was held entitled for exemption under Section 10(22). It was observed that one of the clauses specified by Clause (22) of Section 10 is income of a university or other educational institution existing solely for educational purposes and not for purposes of profit. It is thus clear that, if the income of any person falls in a clause covered by Clause (22) of Section 10, then such income is not includible in the total income of that person. The fact that that person has or can have income from sources not falling under Clause (22) of Section 10 would not be relevant for deciding whether the income of such person from an educational institution would or would not be exempt. If such income falls under the clause specified in Clause (22) of Section 10, then it would be exempt and would not be liable to be included in the total income of that person while framing his assessment for the relevant assessment year.
29. It was, therefore, held that the income derived by assessee from educational institution existing solely for educational purposes but not for profit is exempt under Section 10(22) irrespective of the fact that the assessee has income from other sources not falling under Clause (22) of Section 10.
30. In Birla Vidhya Vihar Trust's case (supra) it was observed that the assessee-trust recognised under Section 11 which exists for charitable and religious purposes claiming exemption under Section 10(22) in respect of income from schools run by trust, Section 10(22) applies also to trusts owning educational institution. A trust may have income from several sources but so long as the object is educational and the income is not diverted for personal profit the trust is entitled for benefit under Section 10(22). Facts of a particular year, though relevant, cumulative factors relating to several years should be taken into account while deciding the issue. Facts relating to relevant year though material but are not conclusive.
31. The jurisdictional High Court further observed that it appears in view of the language used in the opening words under Section 10(1) r/w Sub-section (22) of Section 10 that the recipient or the owner of the income may be an assessee or any person apart from a university or an educational institution but the income not to be included under Sub-section (1) of Section 10 must be from a source, which is a university or an educational institution, which must fulfil the other requirements of Sub-section (22) of Section 10, that is to say, an educational institution must exist solely for the educational purposes and not for purposes of profit, If those conditions are fulfilled, then if the recipient or the owner of the income is other than an educational institution or a university, would not affect the position, the expression of envisages the source, that is to say, it is the generation of a particular type of income or the source of a particular type of income, i.e., Section 10(22). This view would also be corroborated by expression used under Section 10(1), namely, "the income of the previous year of any person" with the purposes of introduction of Sub-section (22A), Section 10 by the Finance Act, 1970.
It is not the entirety of the income of the recipient--the trust in this case--but the income of the particular source, namely, the educational institution, that comes within the purview of Sub-section (22) of Section 10. Merely because there is a surplus, that is to say, a surplus, of receipt over expenditure, it cannot be said that the educational institution exists for profit, if that surplus is intended or is maintained for the purpose of education and not for the purpose of personal gain of the recipient or the owner of the income.
32. If the object was educational, the means of achievement or implementation of the object would not alter the character of the object. Therefore, with that object if a source had earned any money from donation, the means of achievement of that object, which are accomplished with that object, would not, in any way, detract from the educational institution existing solely for the educational purpose.
Therefore, this recipient of the income may be a trust or an individual and that if the source generating income exists solely for the purpose of education and not for private profit, not in the sense of surplus of receipt over expenditure, but the source of income not to be diverted to persons other than the educational institution, then Section 10(22) would be attracted. Though the facts of the relevant year would be a very material factor, whether an institution exists or is existing solely for any particular purpose or not, cannot be judged only by the facts of one year. All cumulative factors will have to be taken into consideration, namely, the clause or the power enabling the institution to function, its activities in general, etc. Neither the fortuitous factor of having large surplus in any particular year, nor the solitary fact of diverting some income of the source concerned to objects charitable but not educational by itself would be decisive of the matter and in that context the fact relevant to the relevant year would be very material though not conclusive. But in this case except that there was one solitary instance in one of the prior years when there was the application of some income to non-educational purposes, there was no other fact. That by itself, would not be very material. If, however, an educational institution as a source of income was generally or usually used as a means of earning income to be utilised for non-educational purposes, then other considerations would apply. In that view of the matter the Tribunal was in error in not allowing the assessee the benefit of Section 10(22). The trust which owned the educational institution may have other charitable, though not educational purposes, but in taking all the relevant factors the educational institution generating the income was existing for only educational purposes, then the assessee was entitled to exemption under Section 10(22).
33. Thus, the exemption under Section 10(22) cannot be restricted to cover educational institutions or universities alone but has also to be extended to trusts established for charitable and religious purposes which run educational institutions not for profit; whether an educational institution exists or existing solely for one particular purpose or not cannot be judged only by the facts of one year. But all cumulative factors will have to be taken into consideration.
34. In Educational Institute of American Hotel & Motel Association, In re (1996) 219 ITR 183 (AAR), it was observed that the educational institution must exist solely for educational purposes and not for purposes of profit, but merely because there is a surplus, that is to say, a surplus of receipts over expenditure, it cannot be said that the educational institution exists for profit.
35. In Brahmin Educational Society v. Asst. CIT (1997) 227 ITR 317 (Ker), while dealing with grant of deduction under Section 80G, it was observed that the assessee-society running educational institution deriving income from chits. Such income is exempt under Section 10(22), there being no case of the Revenue that it is used for any other purpose. Deduction under Section 80G cannot be denied by recourse to Section 11(4A) as Section 11(4A) cannot override Section 10(22). The assessee was, therefore, held to be entitled to certificate under Section 80G.36. It was further observed that if a society exists solely for educational purposes and it runs an educational institution, its income will be the income of the educational institution, and, therefore, exempt 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 is that of running an educational institution and its activities are not for profit. If an institution exists solely for the purpose of educational and it derives income from any other source and if that income is used only for the purpose of education, then it will come under Section 10(22). It is clear from the memorandum of association of the society that chits are being conducted in order to make use of the commission for the purpose of education. There is no case for the Department that this amount is being used for any other purposes. In such circumstances, the CIT was wrong in holding that since chit is being conducted, which is a business activity, petitioner is not entitled to exemption under Section 10(22). Refusal is based under the provisions of Section 11(4A). This is a mistake committed by the authorities. Exemption sought for was under Section 10(22). Section 11(4) is applicable only with regard to the income from various properties. It cannot override Section 10(22). Hence, this reasoning is also not correct. The Revenue is directed to grant certificates under Section 80G.37. In view of detailed discussion, we are of the considered opinion that for claiming exemption under Section 10(22), it is not necessary that income should generate from college or school itself. If the income of the assessee-society running the school is utilised for the purpose mentioned in Section 10(22), it is exempt irrespective of its source. Even if income is generated out of rental income of the property held or dividend from shares and securities owned by it, the same will be exempt under Section 10(22).
38. Thus, the income derived by the assessee from educational institution existing solely for educational purpose but not for profit is exempt under Section 10(22), irrespective of the fact that assessee has income from other sources not falling under Clause 22 of Section 10. Furthermore, merely because there is surplus i.e., excess of income over expenditure, it can not be said that the educational institution exists for profit, if that surplus is intended or is maintained for the purpose of education and not for personal gain of the recipient or the owner of the income.
39. Thus, the trust may have income from several sources but so long as the object is educational and income is not diverted for personal profit, the trust is entitled for benefit under Section 10(22), Fact of the particular year though relevant, commutative factors relating to several years should be taken into account while deciding the issue.
Facts relating to relevant year though material but are not conclusive.
If the object is educational, the means of achievement or implementation of the object would not alter the character of the object. Therefore, with that object, if the source had earned any money, the means of achievement of that object, which are accomplished with that object, would not in any way, detract from the educational institution existing solely for educational purposes.
40. In the instant case the assessee-society had been a sole object of education and granted exemption under Section 10(22) since inception i.e., relate back to the asst. yr. 1976-77 till the asst. yr. 1997-98, except the asst. yr. 1995-96, under appeal. The assessee is spending money for running of two Sanskrit Mahavidhyalay as i.e., for educational purpose, as per the needs of the institution. During the relevant year under appeal the assessee received arrears rent of Rs. 16,80,805 relating to the period 2nd Dec., 1991 to 31st March, 1994, as contained in the details of rent placed at p. 36 of paper book, which has abruptly increased its income in this particular year, resulting in huge surplus. We have also gone through the expenditure incurred in the last ten years by the assessee-society and found that the same are gradually increasing as per the requirement of the institutions run by it. Simultaneously, the income is also increasing. The income generated by the assessee-society has been spent for educational purposes only and the Revenue has not brought on record any material which proves otherwise. The contention of the Revenue that for claiming exemption under Section 10(22), the income should generate only from the school or college, does not carry any force. If the purpose of the assessee-society consists of merely running of school and college i.e., educational institution, the source of earning will not detract it from claiming exemption, insofar as the same is intended for educational purpose and not for private profit, The Department has also grossly failed to bring any material on record to prove that surplus/income was diverted for the personal profit of the members of the society.
Furthermore, because there is a surplus, i.e., excess of income over expenditure, it cannot be said that the assessee-society exists for profit, when the surplus was intended for education and hot for purposes of personal gain of the recipient or the owner of the income.
41. Further, the fact of more surplus retained during the particular year, though relevant, but we have to keep in mind the cumulative factors relating to several years. Facts relating to relevant year, though material, but are not conclusive in denying the exemption under Section 10(22), which was granted to the assessee-society throughout the years of its existence. As has been correctly pointed out by the Hon'ble Supreme Court, in Aditanar Educational Institution's case (supra) that availability of exemption should be evaluated each year and if any surplus results incidentally, the assessee will not cease to be one existing for educational purposes and that one should bear in mind the distinction between the corpus, the objects and the powers of the concerned entity. In the instant case, the higher surplus during the year under appeal, resulted incidentally due to receipt of arrears rent by the assessee-society, which cannot be a ground for denying the exemption claimed by the assessee-society, in case, assessee-society otherwise entitled to, being existing solely for educational purposes.
42. Furthermore, there is no bar on the investment of assessee-society's fund in the specified Government securities as provided in Section 11(5), insofar as it is not claiming exemption under Section 11 and that condition of spending at least 75 per cent of its income during the year, is also not applicable to it, as it is an educational institution claiming exemption under Section 10(22) of the IT Act.
43. From the record we found that the AO has pointed out that out of total assets of Rs. 65 lakhs, an amount of Rs. 47.25 lakhs has been invested which includes investment in preference shares, equity shares and debentures of limited companies. But there is no clarity as to the status of the companies in whose shares or debentures, the funds of the assessee-society have been invested. Whether they are closely or widely-held companies or whether these companies are controlled by the trustees or the members of the assessee-society. Therefore, for the sake of justice, the matter is restored back to the file of the AO to re-examine these aspects of the nature of investment and in the light of our above observation, after giving due opportunity to the assessee.
Thus, the issue is to be decided de novo by the AO and the AO is at the liberty to ask for additional evidence, if any, required, keeping in view the ratio laid down by various Courts as discussed above.
44. In the result, the assessee's appeal is allowed for statistical purposes.