The appeal has been directed by the assessee against the order of the Commissioner (Appeals) dated 28-2-2001, pertaining to assessment year 1997-98. Though various grounds of appeal have been raised, the main ground related to the denial of exemption under section 10(22) of the Income Tax Act.
Briefly, the facts of the case are that the assessee-society is running-number of schools by the names of New Era Junior School, New Era Nursery School, New Era Public School, Mayapuri, Rajouri Garden and Naraina, New Era Public School, Pochanpur. The society is not registered under section 12A nor recognised under section 80-G of the Income Tax Act, 1961. Following are the members of the society During the year, Mrs. Usha Chopra, Mrs. Vandana Chawla and Mrs.
Aradhana Sondhi were the Principals, Vice-Principals and Incharge, Pochanpur School, respectively. During the year, they were paid the following salaries and supervisory charges : During the course of assessment proceedings, the assessing officer asked the assessee to justify the payment of supervisory allowances to the above named three persons. Vide letter dated 10-2-2000, the assessee explained the same. After considering the reply of the assessee, the assessing officer observed that the reply of the learned Authorised Representative is very vague to say the least. No specific extra responsibilities have been mentioned which may warrant payment of supervisory allowance apart from salary. This is also a fact that no one else other than these family members have been paid such supervisory allowances. All the three ladies are interested persons as per section 13(3) of Income Tax Act, 1961. This unnecessary payment clearly establishes the profits motive on part of management of society. The funds are being distributed among the family members in the garb of supervisory allowances. What else is profit motive? Since the schools are being used for the purposes of profit, the assessee- society cannot be granted exemption under section 10(22) of the Income Tax Act, 1961.
The assessing officer also observed that Mrs. Vandana Chawla, Mrs. Usha Chopra, Mr. R.L. Chopra, Ashi Malhotra and Rohit Chopra have obtained substantial loans from the society without paying any interest. The assessing officer observed that Mrs. Vandana Chawla, Mrs. Usha Chopra and Mr. R.L. Chopra were the members of the society. Shri Rohit Chopra was the son of Shri R.L. Chopra whereas Ashi Malhotra was the sister of Mrs. Usha Chopra. The assessing officer observed that by paying substantial salary and supervisory allowance as well as loans to these persons, the assessee has doled out substantial funds of the society.
It shows that the money of the society was being siphoned off without educational purposes. He also observed that very nominal amounts have been advanced to staff members on which the interest was being charged.
The assessing officer also observed that the assessee has also given a donation of Rs. 25,000 which cannot be warranted for educational purposes. Certain vouchers were not signed by the assessee and certain vouchers were not supported by the bills. The assessing officer also observed that there have been many personal expenses of the members of the society which have been debited in the income and expenditure account of the society. The details of such expenses have been mentioned by the assessing officer in Annexis. A, B and C to his order.
These expenses included the expenses on clothes, grocery, hotels, sweets, medicines and farm house expenses, etc. When the assessing officer asked the assessee the reasons for debiting these expenses to the income and expenditure account of the assessee, the assessee vide its letter dated 28-3-2000, furnished its reply explaining the same. It was explained by the assessee that in the modern days, education, the educational institutions do not exist only for the purposes of teaching text books. The institution has the students from all corners of the city. The school and its vast arrary of activities are such that there is constant movement of staff and students to various parts of the city for school related activities. It could be for inter-school competitions, exhibitions, visits to museum, special service projects, staff workshops, Government bodies, meetings with outside authorities.
These staff members with or without students are often provided snack/lunch/refreshment which expenditure is reimbursed. Staff meetings are a regular part of our routine. These meetings may be for entire staff or for smaller groups during school hours or after. There is always a provision for some refreshment/lunch/snack,. etc. at such meeting held at regular intervals. The school is divided into 8 houses, at such meetings various extra- curricular activities are engaged and children participating in such extra activities which often extend to beyond school hours, are often served some small snack etc. prizes are also given to children. The school has a myriad or activities taking place throughout the year. Dozens of dignitaries, visitors come to the school during the course of an academic session. These people could be from various walks of life-including Ministers, Sr. civil servants, journalists, media personalities, educationist, professionals, health specialist, management consultant, artists artisans, etc. These people are revered guests and are invited for special occasions when they can spend some time with the students and interact with them and add meaning and values to their lives by being a source of inspiration to them. There is a tradition in the school to welcome such guests with flowers and also present a gift on such occasions. The school also celebrates various festivals and events throughout the academic year.
On various occasions staff members are presented with gifts as a token of their hard work and zeal. The gifts include sarees, suits, silver coins. The vouchers and bills pointed out by assessing officer mainly deal with food and eatables at various hotels and restaurant, presentation items including cloth, silver items and medical reimbursement, etc. The personal nature of such expenditure is denied as these expenditures are only in connection with the activities of the school and as per the rules of the school. As regards payment of medical reimbursement to persons covered under section 13(3), it is again emphasised that society is not covered by the provisions of section 13, as it is not claiming exemption under section 11.
Medical reimbursement is provided to the employees as per the rules of the school/managing committee.
Vouchers and bills had been duly entered in the books of accounts and relate to expenditure in connection with the schools' activities. In some cases when appropriate sanction authorities may not be available, vouchers may not have been signed.
The assessing officer considered the oral as well as written submissions of the assessee and observed that where all the objects of a trust are educational and the surplus if any from running the educational institution is used for educational purposes only, it can be held that the educational institute is existing for educational purposes and not for the purposes of profit. However, if the surplus can be used for non-educational purposes, it cannot be said that the institution was existing solely for educational purposes and such institution will not be eligible for exemption under section 10(22) of the Act. The assessing officer also observed that in order to get exemption under section 10(22), the assessee should have primarily engaged itself in educational activities. It may, however, take other activities incidentally for the benefit of the students or in furtherance of their education. In CIT v. Academy of General Education (1984) 150 ITR 135 (Kar), it was held that the funds may be invested in any manner, but the income therefrom must be exclusively utilised for educational activities. The word 'solely' means 'exclusively' and not 'primarily'. With this meaning of the word, 'solely' in view, even if the assessee trust had spent to the extent of 90 per cent of its income towards educational purposes and only 10 per cent towards religious or other purposes, it could still not be held that the trust was existing solely for educational purposes. This is what the word 'exclusively' as distinguished from 'primarily' signifies. But if the balance 10 per cent activity was ancillary or incidental to educational purpose, the exemption cannot be denied to the assessee vide CIT v. Maharaja Sawai Mansinghji Museum Trust (1988) 169 ITR 379 (Raj).
The assessing officer, therefore, denied exemption under section 10(22) of the Act to the society. Aggrieved by the order of the assessing officer, the appeal was filed. The Commissioner (Appeals) confirmed the findings of the assessing officer against which the assessee is in appeal before us.
It is, argued by the learned counsel that the assessee's society was registered under the Societies Act. It was born in 1963. Earlier it was running a single school but in the year under consideration, it was running 6 schools at different places of the city. It claimed exemption under section 10(22) of the Act in the past which was also allowed by the assessing officer upto assessment year 1994-95. In the assessment year 1995-96, claim of exemption under section 10(22) was denied by the assessing officer but on appeal, the same was allowed by the Commissioner (Appeals), against which no appeal was preferred by the revenue. Thus, even in assessment year 1995-96, the assessee was allowed exemption under section 10(22) of the Act. In the assessment year 1996-97, the assessing officer himself granted exemption under section 10(22), but in the year under consideration, the assessing officer again denied exemption under section 10(22) of the Act on the reasoning mentioned earlier. It was argued that exemption under section 10(22) of the Act was available to any educational institution, if it satisfies the following two conditions : While disallowing the claim of exemption under section 10(22), the assessing officer has, inter alia, made the following observations : (a) Some committee members and their relatives who are working in the institution are drawing excessive remuneration and supervisory charges; (b) The society has advanced loans to the various members and their relatives without charging any interest. Thus, the assessee has doled out its enough funds in the garb of loans.
(c) Certain expenses incurred by the assessee were not supported by the vouchers and some vouchers have not been signed by the assessee.
(d) Certain personal expenses of the members of the society have been debited to the income and expenditure account of the society. Such expenses were not incurred or have no relationship with the educational activities.
It was argued by the learned counsel that Mrs. Usha Chopra was running the institution prior to 1962. The details of her qualifications have been given at sheet which is placed at page 19 of the paper book. The qualifications of Shri R.L. Chopra and Smt. Vandana Chawla have been mentioned on page 21 to 24 of the paper book. It was stated that Smt.
Usha Chopra is the Principal of all the institutions. For that purpose in addition to administration of the schools from where she draws the remuneration, she also visits various schools run by the society for administration purposes. Similar was the case with Shri R.L. Chopra and Smt. Vandana Chawla. The learned counsel stated that even assuming that the remuneration paid to them was excessive, it will not change the character of the society/institution. Still the institution solely existed for educational purposes. The reliance was placed on the decision of Hon'ble Rajasthan High Court (Jaipur Bench) in the case of Dy. CIT v. Cosmo Politan Educational Society (2000) 244 ITR 494 (Raj).
In the said case, the Hon'ble Rajasthan High Court has held that if the income of the institution is misutilised or mismanaged for personal gains of the members, the action could be taken against the members of the society. It was stated that the SLP against the decision of the Hon'ble Rajasthan High Court has been dimissed by the Hon'ble Supreme Court as mentioned in (2000) 241 ITR 132 (St).
It was further stated that Mrs. Vandana Chawla was not the member of the society. Under Delhi School Education Act, 1973, which extends to whole of the Delhi and rule 173 of the Delhi School Education Rules have provided the rules for maintenance of the school fund. As per rule 180 of the said Rules, every un-aided (assessee's institution is un-aided) recognised public school shall submit return and documents in accordance with Appen. II. The Appen. II provides for information, inter alia, the income and expenditure account and dates of disbursement of the salaries. Rule 180 also provides that the accounts and other documents maintained by un-aided public school shall be subject to examination by auditors and inspection officers appointed by the Directorate of Education and the CAG. All these registers and documents have been maintained and were being regularly filed before the authorities. All these facts go to prove that even the remuneration paid to Mrs. Vandana Chawla was not unreasonable.
Regarding loans given to three persons mentioned by the assessing officer, the learned counsel stated that during the year the sums of Rs. 50,000, Rs. 85,045 and Rs. 79,500 were given to Mrs. Vandana Chawla, Mr. R.L. Chopra and Rohit Chopra, respectively. At the same time, the sum of Rs. 88,500 was recovered/adjusted against the loan given to Mrs. Vanadana Chawla. In other words, the amount received from Mrs. Chawla during the year was more than loan given to her during the year under consideration. The closing outstanding balance of loan in her name was much less than the opening balance of the loan. It was also stated that the entire loan given to Ashi Malhotra in the earlier year has been received back during the year under consideration. No new loans were given to Mrs. Usha Chopra during the year. Actually, a sum of Rs. 88,500 was received from her. It was also stated that the amount of loan outstanding at the end of the year was almost the same which was brought forward from the earlier years. The learned counsel reiterated that these brought forward loans were also noticed by the assessing officer in the earlier years but the assessing officer did not treat it as fatal for denying the exemption under section 10(22) of the Act.
Learned counsel further stated that the assessing officer was not justified in observing that no interest has been charged on the loans given to the members of the society or their relatives. The fact is that the interest @ 10 per cent was charged on the amount of loan advanced to them. The learned counsel further confirmed that the entire loans given to the members and their relatives have been recovered back upto financial year 1999-2000. Learned counsel clarified that earlier the institution did not have its own building. The institution was being run in the building owned by Mrs. Usha Chopra. By an agreement, the rent for the premises was fixed which was payable to Mrs. Chopra.
Mrs. Chopra was paid a lumpsum amount of loan as advance rent which was being adjusted against the rent from year to year. Thus, it cannot be said that the advance of loan to Mrs. Chopra was without any educational purposes. Such advance was warranted for the purposes of carrying on educational activities. Subsequently, when the school constructed its own building, the payment of rent was stopped because the institution shifted to its own building. But as certain advances were still with Mrs. Chopra, the same were recovered back by financial year 1999-2000. This fact alone cannot lead to a conclusion that the advance to Mrs. Chopra was for the purposes of making profit. The assessing officer/Commissioner (Appeals) clearly omitted to consider this fatal fact that everybody wants to safeguard its assets. It was under these circumstances that the advances were paid to Mrs. Chopra.
The learned counsel further observed that in the assessment year 1995-96 when the assessing officer has denied exemption under section 10(22) of the Act, the grounds for denial were the same which existed in the year under consideration. The learned counsel also filed the copies of the assessment order to prove his contention. It was stated that the Commissioner (Appeals) had considered these facts in that year and came to the conclusion that the activity of giving advances to the members of the society/relatives and the excessive payment of remuneration, if any, could not be a ground for denying exemption under section 10(22) of the Act. This order of the Commissioner (Appeals) has been accepted by the revenue as no second appeal was filed before the Tribunal. He argued that once the facts during the year are the same as that of assessment year 1995-96, there was no occasion to deny exemption under section 10(22) of the Act in the year under consideration.
Regarding incurrence of various expenses for non-educational purposes and debited to the income and expenditure account of the assessee, the learned counsel stated that the modern education was not limited to teaching the text books. The institution has to organise various seminars and festivals. The expenses have to be incurred on organising the same. The outside school trips are also taken, the extra- curricular activities were also the part of modern education. For this purpose, the music, dance, drama, competitions, etc. are also organised. All these activities are connected with the modern days education system and, therefore, the expenses incurred on these activities are wholly and solely for the purposes of education.
Regarding donation of Rs. 25,000 made by the society, the learned counsel stated that such donation was made to an educational institution and, therefore, there was no violation of any rules or the objects for which the institution exists. The learned counsel further relied on the decision of Delhi Bench of the Tribunal (TM) in the case of Shanti Devi Edu. Society v. Asstt. Director of IT (1999) 65 TTJ (Del)(TM) 181 : (1999) 68 ITD 1 (Del)(TM), the decision of Hon'ble Rajasthan High Court in the case of CIT v. L.B. Shastri Edu. Society (2001) 252 ITR 837 (Raj), the Amritsar Bench of the Tribunal in the case of Income Tax Officer v. Model Institution of Education & Research (2001) 72 TTJ (Asr) 897 : (2001) 77 ITD 375 (Asr). The learned counsel further argued that in the context of section 10(22), the applicability of sections 11 to 13 has no role to play. While relying on the decision of Hon'ble Supreme Court in Aditanar Educational Institution v. Addl.
(1997) 224 ITR 310 (SC) at 318, the learned counsel stated that for the purposes of exemption under section 10(22), the sole purpose means the dominance of that purpose. The learned counsel, therefore, argued that the assessing officer may be directed to allow exemption under section 10(22) of the Act.
On the other hand, learned Departmental Representative stated that the society has not been registered under section 12A of the Act. It has not been granted exemption under section 80-G of the Act. So, the institution cannot be said to be a public charitable institution. The society is run by the interested persons and so the institution. While referring to the decision Sole Trustee, Lok Shiksana Trust v. CIT (1975) 101 ITR 234 (SC) and in the case Addl. CIT v. Surat Art Silk Mfg. Association (1980) 121 ITR 1 (SC) and CIT v. Academy of General Education, Manipal (supra), the learned Departmental Representative stated that the surplus must be utilised solely for the purposes of education. He also stated that various case law relied on by the learned counsel were distinguishable on facts., In nutshell, he supported the order of the Commissioner (Appeals).
We have considered the rival submissions. The assessee is a society running only educational institutions., The educational institutions run by the society are constituted under the name and style of New Era Education Society. The society was set up in August 1963 and was registered with the Registrar of Societies on 26-8-1963. After the establishment of the aforesaid New Era Education Society in 1963 and in pursuance of its objectives to promote education, the society took over the primary school which had been started by Mrs. Usha Chopra in 1960.
In furtherance of its objectives, more schools were opened at different locations at different points of time and during the year under consideration, the society was running 6 educational institutions. The MCD, department of Education, Delhi Government, recognized the educational institutions with effect from 1-8-1965. The educational institutions were recognized by the Director of Education, Delhi and also affiliated to the CBSE with effect from 15-4-1984.
During the year, the assessee furnished its return of income declaring the taxable income at nil by claiming exemption under section 10(22) of the Act. This was done so on the basis of returns filed by it in all the earlier years. The returns for assessment years 1990-91 to 1994-95 were accepted by the assessing officer and exemption under section 10(22) of the Act was granted. In the assessment year 1995-96, though the assessing officer denied exemption under section 10(22), but the Commissioner (Appeals) directed to allow exemption under section 10(22). Such order of the Commissioner (Appeals) was accepted by the department and as no second appeal was filed such order became final.
In the assessment year 1996-97, the assessing officer himself allowed exemption under section 10(22) of the Act. But the same assessing officer did not allow exemption under section 10(22) for the assessment year 1997-98 which is before us. While denying exemption, the assessing officer had mainly relied on the following facts : (i) Supervisory charges paid to the members of the society and their relatives were without any justification.
(ii) The society has advanced the loans to the members and relatives on which no interest was charged.
(iii) Certain vouchers were unsigned and certain vouchers were not supported by the bills.
(iv) Certain personal expenses have been debited to income and expenditure account of the society which had no relationship with imparting the education. The list of such expenses has been given in the annexures to the assessment order.
(v) The society has given donation of Rs. 25,000 which has nothing to do with the educational purposes.
Section 10(22) of the Act under which the exemption has been claimed by the assessee reads as under : "Any income of university or other educational institution, existing solely for educational purposes and not for purposes of profits. " The Hon'ble Supreme Court in the case of Aditanar Educational Institution (supra) has held that the exemption was given to the income of an educational institution. Such educational institution will not cease to be one existing for educational purposes even if from these activities, some surplus results. Thus, the emphasis has been laid down by the Supreme Court on the objects of the institution. The Hon'ble Supreme Court at page 312 of the report further observed that in order to avail the exemption under section 10(22), the decisive or acid test is whether on overall view of the matter, the object is to make profit and in evaluating/appraising, one should always bear in mind the destination/ difference between the corpus, the object and the powers of the concerned entity. It also observed that if any surplus results incidental to activity entity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes since the object is not to make profit.
The Hon'ble Rajasthan High Court in the case (2000) 244 ITR 494 (Raj) (supra) had held that if there was any misutilisation or mismanagement, action could be taken against the members of the society, but certainly it cannot be a ground for denying exemption under. Section 10(22) of the Act.
Keeping the ratios laid down in the cases mentioned above, we have examined the objections raised by the assessing officer while denying exemption under section 10(22).
First reasoning related to the supervisory charges paid to certain members/relatives. Mrs. Usha Chopra started the institution somewhere in the year 1960. She is a reputed educationalist and founder Principal of New Era Pub. School. It has the strength of about 3,000 students. It may be mentioned that after the society was born, it took over the institution run by Mrs. Chopra. Mrs. Chopra has been awarded Delhi Government State Award for excellence in education. She is a recipient of Shrestha Shree Award 1995 conferred by the Delhi Citizen Forum for Civil Rights for her contribution to the field of education. She had participated in varous seminars, workshops inside and outside the country. The schools contingent was invited to participate in the Republic Day parade and won the award for best contingent. The school also received the UNICEF trophy for three consecutive years. In addition, she has been head examiner of English for the CBSE. She brought computer education in the schools run by the society. As Head Principal, she has to visit various foreign schools and, therefore, supervisory charges paid to her were directly relatable to the educational activities of the institution.
Similarly, Smt. Vandana Chawla is the Vice-Principal of the New Era Pub. School. She is highly qualified and having experience of 20 years.
She is very keen in developing the co-curricular activities of the school. Due to her efforts, the school has became a centre for many inter-school debates, mathematic Olympiad, art and crafts. Her interest in the classical music generated an interaction with "SPIC & MACAY", a leading society involved in the rejuvenation of Indian classical music, art and culture. In such programmes, the leading proponents of Indian classical music like Bhimsen Joshi, Hari Prasad Chourasia, Ustad Bismillah Khan have performed for the benefit of the students of the school. Under the circumstances, the supervisory charges paid to her were solely for the purposes of education.
As regards assessing officer's observations regarding loans given to the members and relatives without interest, we find that such an observation made by the assessing officer is incorrect. The society has charged interest @ 10 per cent on the loans advanced to the members/relatives. In this connection, it win not be out of place to mention that the society took over the schools run by Mrs. Usha Chopra.
As the school did not had its building, the school agreed for the payment of rent to Mrs. Usha Chopra. The advance rent was paid to her which was being adjusted against the rent payable to her. When the institution constructed its own building and shifted there, the payment of rent was stopped and the entire outstanding amount was recovered by financial year 1999-2000. From the figures furnished, it is also clear that the advances outstanding on the last day of the accounting year were more or less the same which were outstanding on the first day of the accounting year. Needless to say that the amount outstanding on the first day of the accounting year was the amount of loans which the society has given to the members/relatives in the earlier years and the assessing officer himself did not find any fault in advancing such loans. These facts clearly show that no undue favour was shown to any of the members or their relatives and, therefore, the assessing officer's objection that the society funds have been siphoned away has no basis and has to be rejected.
We have also noted the observations of the assessing officer that certain personal expenses have been debited to the income and expenditure account of the society. We have, therefore, examined these expenses as well as the submissions of the assessee. We find that in addition to the curricular educational activities, the society has actively participated in the co-curricular and extra- curricular activities. The school has many teachers who are invited to deliver lecturers. The school also invites the teachers of other institutions.
These teachers are expert in their own field and belong to other institutions or are leading professionals. Various debates are also held at the school. These include inter-school debate, inter-house meeting, inter-schools competitions. In the field of sports, the inter-school badminton tournaments held by the CBSE were conducted in the schools run by the society. The school has a faculty of music teachers. However, at periodical intervals, musicians and artists are invited. At such meetings, seminars, functions, workshops, the small refreshments are invariably served. As the guests in the school are the distinguished personalities, various gifts as token of gratitude for assisting the schools in its activities are also given. Eminent personalities who have visited the school from time to time included late Gyani Jail Singh, the then President of India, Mr. Jag Mohan (presently minister in the Union Cabinet), Dr. Man Mohan Singh, Smt.
Vaijanti Mala Bali, Ustad Jakir Hussain, Smt. Shiela Dixit, CM of Delhi, Shri Sahib Singh Verma, Smt. Sushma Swaraj and Shri Madan Lal Khurana, former CM of Delhi, eminent cricketer Shri Kapil Dev and many more. The inspectious are also carried out at periodical intervals by department of Education. The school has to also interact with various other departments including NCERT. Such dignatories have to be provided meals and refreshments. On various other occasions, like teachers' day, founder's day, Diwali and other festivals, eminent personalities are invited and the staff members were also presented with small gifts as a token of their work and zeal. Such gifts include sarees, suits, silver coins, etc. The expenditures on such items were, therefore, warranted by the educational purposes. By no stretch of imagination, such expenditure could be said to be misutilisation of the society's fund.
The assessing officer has mentioned above certain expenses on medical facilities to the members and the relatives. It was stated that while making these observations, the assessing officer has altogether ignored the fact that any extra expenditure provided on the medical facilities to the members/relatives was recovered from them. Thus, no personal expenditure has been booked in the income and expenditure account of the society. We have also examined the donation of Rs. 25,000 given by the school. Such donation was given to another institution and, therefore, cannot be said to be the misutilisation of funds. Regarding the non maintenance of certain vouchers, we find that there are various small expenses for which no vouchers could be maintained but this observation does not prove that the institution did not exist solely for the purposes of education. In order to denying exemption under section 10(22) of the Act, the assessing officer has to satisfy himself that the institution did not exist solely for the purposes of education but for the purposes of making profit. This has not been established in the instant case. Keeping in view these facts, we hold that the assessing officer and Commissioner (Appeals) were not justified in denying exemption under section 10(22) of the Act to the society. While holding so, we have also noted the fact that similar was the position in the assessment year 1995-96 when the assessing officer had denied exemption. In that year, the Commissioner (Appeals) has allowed exemption which was accepted by the department. On this ground itself, the denial of exemption under section 10(22) of the Act was not justified. We admit that the principles of res judicata does not apply to the income-tax proceedings but looking to the facts that in all the earlier years, the assessee has been allowed exemption under section 10(22) of the Act, the principles of consistency cannot be brushed aside as has been held by the Hon'ble Supreme Court in various cases.
We, therefore, direct the assessing officer to allow, exemption under section 10(22) of the Act to the assessee.
In view of our findings given therein, all other grounds have become only consequential.