Judgment:
1. On account of difference between the Hon'ble Members of Gauhati Bench of I.T.A.T., the above appeals were referred to me Under Section 255(4) of the Income-tax Act, 1961 (the Act). In fact, I find that there is no difference in five appeals, viz., I.T.A. Nos. 389 & 390 (Gau)/96 and I.T.A. Nos. 15 to 17 (Gau)/96, Both the Members have agreed on orders proposed by the Ld. Judicial Member and above appeals have already been disposed off.
1.1. The Ld. Members did not agree even on questions which were required to be referred covering points of difference between the Members. The Ld. Judicial Member proposed three questions to which the Ld. Accountant Member did not agree. He has proposed 10 different questions. With the consent of the learned representatives of the parties, I framed the following question covering the controversy for hearing of appeals: Whether, on the facts and in the circumstances of the case, the consolidated order of C.I. T. (A) dated 25.8.1995 is required to be upheld, as proposed by the Ld. Accountant Member or matter requires to be set aside for making a de novo assessment, as proposed by the Ld. Judicial Member 2. The facts of the case are that the assessee is a society duly registered under the Societies Regulation Act, 1860 and was running a public school in the periods relevant to assessment years 1987-88 to 1991-92, The society is also recognized by Govt. of Assam. It is also approved by the Secondary Board of Education, Assam. It was treated as a society existing for running a school and was granted exemption Under Section 10(22) of the Act in past years. Even in the five assessment years before me, the society was granted exemption, but proceeding was reopened Under Section 147 of the Act. The assessee did not challenge reopening of the proceeding in appeal before the C.I.T.(A) and, therefore, the details relating to the reopening are neither available on record nor being discussed.
2.1. The main order for denying exemption to the assessee-society Under Section 10(22) of the Act was passed on 30.3.1994 for the assessment year 1987-88 and it was applied in other four assessment years. In the said order, the Ld. Assessing Officer has recorded that primary object of the society is to promote preliminary education, spread knowledge concerning the physical, moral, social and mutual development of the children and to cooperate with the national and international organizations having the similar objectives for furtherance of its aims and objects. The Ld. Assessing Officer gave following reasons for denying exemption to the assessee: (a) That Principal Sri D.K. Chanda and his wife Smt. Minati Chanda are founder members and hold posts of Principal and Director of the School respectively. These people enjoy absolute control in matters of administration, finance, appointment of staff and also select other members of the executive committee running the school.
(b) That it is not known in what manner Sri D.K. Chanda and his wife occupy the posts of Secretary and Treasurer permanently in the executive committee of the assessee-institution.
(c) That norms of appointment of Principal of the school are also not known. Sri D.K. Chanda and his wife are drawing salary @ Rs. 2,500/- per month, whereas the salary of other teaching staff varied from Rs. 400/- to Rs. 950/- per month. It is thus clear that Sri Chanda and his wife is drawing much higher salary than other teachers.
(d) That the other members of the executive committee have no say in the management and affairs of the school which is personal business of the founder members.
(e) That Sri D.K. Chanda and his wife have let out their accommodation to the school and realized rent of Rs. 18,000/- and Rs. 12,000/- respectively.
(f) That rent (hire) paid is considered to be much higher than the market rent. The assessee failed to establish that rent paid was reasonable and represented market rent.
2.2. For the aforesaid reasons, the Assessing Officer held that the institution did not exist solely for educational purposes but also for the purposes of profits. It was observed that the assessee did not fulfill necessary conditions for getting exemption Under Section 10(22) of the Act. The school exists for purposes of earning income. It is merely a name created for making profit and the founder members made it an educational institution so as to get income-tax benefit. In this way exemption was denied and total income of the assessee was subjected to tax.
3. The assessee against the impugned assessment was in appeal before the C.I.T.(A). As already mentioned above, the assessee did not challenge the initiation of proceeding Under Section 147 of Act. It challenged denial of exemption to the assessee Under Section 10(22) of the Act.
4. In the appellate proceedings, representative of the assessee brought to the notice of the Ld. C.I.T.(A) that executive committee of the school consists of a President, a Vice-President, a Secretary and a Treasurer and a Asstt. Treasurer who are the office bearers. It consisted of members not exceeding six but not less than four. Sri D.K.Chand and his wife were founder members of the society and thus enjoy permanent membership. The Ld. Representative then drew attention of the various objections raised by the Assessing Officer in the impugned order. These are noted by the C.I.T.(A) in paras-2.3 to 2.5 of the order. Clarifications on the objections of the Assessing Officer were given and are noted by the Ld. C.I.T.(A) in para 2.6 of the order. It was pointed out that the assessee-society was registered with the Registrar of Societies on 6.3.1973. The learned representative then drew attention of the C.I.T.(A) to three objects of the society. These are reproduced in the impugned order in paras-2.6 & 2.7. It was explained with reference to Section 10(22) of the Act that the assessee-institution did not exist for profit but existing solely for education purposes. In order to meet the objection of the Assessing Officer that salary to Sri D.K. Chand and Smt. Minati Chanda was more than what was paid to other teachers, the educational qualifications and details of salary paid to the above persons from year to year were furnished and the same are discussed in the impugned order in paras-2.11 to 2.13 of the order. With reference to details furnished, it was submitted that salary paid to Sri D.K. Chand and other members of his family cannot be said to be unreasonable salary considering their qualifications and devotion to duty. None of them was given preferential treatment which was not given to other staff. It was pointed out that salary paid was as per resolution of executive committee dated 28.2.1982. It was explained that out of the assets disclosed in the balance sheet, landed property was standing in the name of the School. Evidence and record of Guwahati Municipal Corporation was filed in support of above claim. It was explained that profits/ funds of the society were used for promoting its main object and not for the benefit of the members of the society. Details of investment made were furnished to the Ld. C.I.T.(A) and are noted in the impugned order in paras 2.15 to 2.17. It was submitted that conclusion of the Assessing Officer that the appellant-society existed only for Sri D.K. Chand and his wife was erroneous. Clarification was also issued relating to rent realized by Sri D.K. Chand and his wife.
4.1. It was further pointed out that the Assessing Officer himself has admitted in para-1, page-2 of the assessment order that appellant had come into existence solely for educational purposes. The Assessing Officer has further not established that the appellant had carried on any other activity for profit in violation of Section 10(22) of the Act. It was explained that profit earned as surplus and invested for acquisition of fixed assets cannot be considered as violation of Section 10(22) of the Act. Reliance in this connection was placed on three decisions noted by the C.I.T.(A) in para 2.25 of his order, which are as under: Governing Body of Rangaraya Medical College v. ITO 117 I.T.R. 284 (AP) These decisions are discussed by the Ld. C.I.T.(A) in paras 2.30 & 2.31 of the order. The sum and substance of the decision in the case of Governing Body of Rangaraya Medical College (supra) is that for certain surplus arising from operation, it cannot be held that the institution is being run for purposes of profit so long as no person or individual is entitled to any portion of the said profit and the said profit is used for purposes and for promotion of object of the institution. The other decisions are also to the same effect.
5. The Ld. C.I.T.(A) held that the assessee-society was entitled to exemption Under Section 10(22) of the Act with the following observations: 2.32. In the case under appeal, apart from discussing the mode of running the institution i.e., appellant Society, the salaries to the Principal and Head Mistress and also other teaching members, the payment of rent for the school premises to the Principal and the Mead Mistress, the A.O. has not been able to establish with cogent reasons and findings that the institution of the appellant Society was being run for the purposes of earning profit although the A.O. had admitted in para 3 of page 2 of his order that the object of the institution was to promote preliminary education, spread knowledge concerning the physical, moral, social and mutual development of the children and to co-operate with the national and international organizations having the similar objectives for furthering of its aims and objects. Over and above the facts narrated in the foregoing paragraphs, the A.O. has not given any other reasons in support of his conclusion that the institution did not exist solely for the educational purposes, but also for the purpose of profit. He has also failed to controvert and establish that the school or institution had not been established for purposes as mentioned by him in para 3 of page 2 of his order, (narrated herein before). For want of such reasonings and narration of facts which would establish that the appellant Society was established for the purpose of running a school to earn profit, I hold that the assessments for all these five years had been completed on an erroneous interpretation of Section 10(22) of the Act, wrong perception of fact and, therefore, accordingly cancelled.
(2.33) Since the assessments have been cancelled, no other grounds are taken up.
6. The Revenue challenged the above decision of the C.I.T.(A) before the Tribunal by raising a ground that the C.I.T.(A) erred in law as well as in fact in canceling assessment made Under Section 143(3)/147 of the Act. The Ld. Members after hearing the appeals were unable to agree with the proposed order. The Ld. Judicial Member, who proposed the leading order, was of the view that it was for the assessee to show that all the conditions of Section 10(22) of the Act were satisfied and thus the assessee was legally entitled to exemption under the above section. He noted provisions of Section 10(22) of the Act in his order and observed that educational institution or university must exist solely not only for educational purposes but at the same time must exist not for purposes of profit. The onus was on the assessee to prove that educational institution exists not for purposes of profit. The assessee is claiming exemption and, therefore, the Assessing Officer is not supposed to disprove the case of the assessee. He thereafter noted the constitution of the assessee. He noted that Principal and Head Mistress are permanent members of the executive committee in the capacity of Secretary and Treasurer respectively as founder members of the School. On facts of the case he concluded that it was necessary to enquire into and find out the very existence of artificial legal entity, i.e. the society and to make enquiry in the veil of the constitution of the school. There is no restriction to lift the veil of this artificial legal entity and to pay regard to the substance of it.
The veil may be lifted where a taxing statute or a beneficial statute is sought to be evaded. The Memorandum of Association is to be examined and verified to find out the manner of forming the society in the instant case. It is required to be ascertained from totality of facts and circumstances of the case whether the school exists for the purposes of profit or not. What is the real and true intention behind the said document is to be ascertained, He referred to decision of Supreme Court in the case of Aditanar Educational Institution v. CIT and has observed that to find out real and true object of an entity, one should look into the substance of the matter rather than its form. With reference to the assessee, the Ld. Judicial Member observed, "it is the object of the two founder members of the Society to have a permanent post of the Secretary and Treasurer in the Executive Committee and to select other members of the committee at their will and desire without specifying therein the objective test of such selection. It is, therefore, to be ascertained whether this unrestricted power of two founder members have any bearing on the object of the society to make profit or not out of its activities." To justify remand of the matter, the Ld. Judicial Member observed that the Assessing Officer as well as the C.I.T.(A) did not adopt correct and proper approach to the matter in issue as they failed to take into consideration the overall view of the case and the substance of the matter. He, therefore, proposed that orders of Revenue authorities be set aside and the matter remitted back to the file of the Assessing Officer for a de novo assessment.
7. The Ld. Accountant Member did not agree with the order proposed by the Ld. Judicial Member. He noted that the assessee-society was registered on 6.3.1973 with Registrar of Societies, Assam. The assessee started running a school since 1973. The school was recognized by the Govt. of Assam and plot of land was allotted to the society by the Govt. on 10.4.1985. The school is also recognized by Board of Secondary Education, Assam. The Assessing Officer also found that object of the assessee-society was charitable. The Ld. Accountant Member also noted objections raised by the Assessing Officer for denying exemption to the assessee Under Section 10(22) of the Act. He also noted elaborate discussions made by the Ld. C.I.T.(A) while holding that the assessee was eligible for exemption Under Section 10(22) of the Act.
7.1. The Ld. Accountant Member further noted the submissions of the Ld.
Departmental Representative and the Ld. Authorized representative of the assessee in paras 4 and 5 of his proposed order. It was also noted that in subsequent years, i.e. after assessment year 1991-92, exemption Under Section 10(22) of the Act was granted to the assessee by the Assessing Officer. He also noted the arguments of the assessee that when in the subsequent years the Revenue has conceded that the assessee-society is entitled to exemption Under Section 10(22) of the Act, then these appeals have become infractuous in the light of decision of jurisdictional High Court in the case of Dhansiram Agarwalla v. C.I.T. 217 I.T.R. 4. The case law relied upon by the representative of the assessee in support of his claim and Circular of C.B.D.T. on this point are noted by the Ld. Accountant Member in paras 6 & 7 of his proposed order. In para-8 of the proposed order, he has specifically noted that it has not been found that any person or individual was entitled to any portion of the profit of the assessee-society or that any part of surplus generated by the assessee-society in any previous year under consideration was to be utilized for non-educational purposes. The Ld. Accountant Member also noted that investment made in acquiring fixed assets for school was more than the surplus generated. It was thus evident that the surplus fund went towards procurement of fixed assets for the school and construction of building of the school. In para-9, the Ld. Accountant Member noted that remarks in assessment order regarding management and control of school were factually incorrect and based on no material.
Moreover, objections raised by the Assessing Officer had no relevance for determining the eligibility of exemption. After considering the facts and circumstances of the case and submissions of learned representatives of both the parlies, the Ld. Accountant Member held that the case of the Revenue is based upon suspicion and that the Ld.
C.I.T.(A) passed the impugned order after appreciation of all facts of the case. No interference with the order of the C.I.T.(A) was called for. He thus dismissed all the five appeals of the Revenue.
8. For reaching above conclusion, the Ld. Accountant Member noted the decision of Apex Court in the case of C.I.T. v. Indira Balkrishna 39 I.T.R. 546 and held that Tribunal had no power to go behind the ground raised in appeal. He held that the department did not challenge the finding of C.I.T.(A) that provisions of Section 10(22) of the Act are applicable. In the light of the ground raised, he held that the Tribunal had no power to go beyond the conclusion of the Ld. C.I.T.(A) relating to exemption Under Section 10(22) of the Act.
9. On the question whether assessee was entitled to exemption Under Section 10(22) of the Act, the Ld. Accountant Member took into account provisions of above section and the conditions on which exemption was available. He noted the decision of Hon'ble Madras High Court in the case of C.I.T. v. A.M.M. Arunachalam Educational Society 243 I.T.R.229, wherein it was held that a society which runs a school would be treated as an educational institution. He noted that the assessee was a society registered under the Societies Regulation Act, 1860. The Revenue did not show that the registration was not granted to the society in accordance with law. He, accordingly, treated the assessee as a society and an educational institution for purposes of Section 10(22) of the Act, He also relied upon the decision in the case of Governing Body of Rangaraya Medical College v. ITO (supra) to hold that even if certain surplus resulted in working of the society, it could not be said that society was being run for profit so long no individual was entitled to any part of the said profit/surplus. The Ld. Accountant Member also made reference to circular No. F. 194/16-17 IT(AI) and highlighted the following portion of the circular: Where all the objects of these trusts are educational and the surplus, if any, from running the educational institution is used for education purposes only, it can be held that the institution is existing for educational purposes and not for purposes of profit.
However, if the surplus can be used for non-educational purposes, it cannot be said that the institution is existing solely for educational purposes and such institutions will not be liable for exemption Under Section 10(22).
to show that surplus of the society cannot be used for non-educational purposes. The Ld. Accountant Member referred to Articles of the assessee-society and observed as under: The Article (7) provides that the surplus generated by the assessee shall be transferred to a fund account. Article (8) provides that the amount of the fund a/c. shall be utilized only for development and promotion of the object of the school and it also specifically provides that no portion thereof shall be paid, transferred directly or indirectly by way of profit to any office bearer or member of the Executive Committee. At the end Article (12) provides that in the case of dissolution, the properties remaining will be handed over according to Sections 13 and 14 of the Societies Regulation Act, 1860.
10. After enquiring into the constitution of the assessee-society, the Ld. Accountant Member observed that all the objects of the assessee-society were educational and surplus generated could be utilized for promotion of the said object only. There was a specific provision in the constitution of the assessee-society to the distribution or transfer of this surplus to any member during its existence or on dissolution of the society. All the properties and assets of the society are to be transferred to another society having similar objects at the time of dissolution of the society. He also found that the surplus generated in the year under appeal was Rs. 25,25,799/- against which the assessee had invested more, i.e. Rs. 36,70,089/- in fixed assets acquired for the school. There was no evidence that executive committee members have utilized profit of the assessee-society for personal purposes. The purpose of the society had been expansion of school. He, accordingly, held that the assessee was rightly allowed exemption Under Section 10(22) of the Act. He also discussed the factual remarks made by the Assessing Officer in the assessment order regarding control and management of the school but held them to he based on surmises and conjectures and not on any relevant material. In support of his conclusion, the Ld. Accountant Member relied upon the following decisions: (b) Maharani Institute of Creative Intelligence v. ACIT 62 I.T.D. 69 (All.)CIT v. Pulikkal Medical Foundation (P) Ltd. 210 I.T.R. 299 (Ker.) (h) Shanti Devi Progressive Education Society v. ADI (Exemp) 68 ITD 1 (TM).
11. In the light of above difference, the matter has been brought before me. I have heard the learned representatives of both the parties. The Ld. Departmental Representative drew my attention to order of C.I.T.(A) and argued that the assessee did not plead for cancellation of assessment. In spite of above, the Ld. C.I.T.(A) cancelled the assessment. In fact, reopening of assessment was not challenged before the C.I.T.(A) and this fact cannot be disputed even by the opposite party. The Ld. Departmental Representative further submitted that in the impugned order it was not appreciated by the Ld.
C.I.T.(A) that onus to prove that school did not exist for profit was on the assessee and the same was not discharged. The Ld. C.I.T.(A) failed to record any finding that the assessee-institution did not exist for profit. Thus onus was wrongly placed on the department to show that the assessee was not entitled to exemption Under Section 10(22) of the Act, whereas exemption was being claimed by the assessee.
Accordingly, cancellation of assessment and grant of exemption to the assessee by Ld. C.I.T.(A) was challenged by the Ld. Departmental Representative during the course of hearing of the appeal.
12. The learned Counsel for the assessee, on the other hand, supported the impugned order of Ld. C.I.T.(A), as also proposed order of Ld.
Accountant Member. He reiterated submissions noted and accepted by the Ld. Accountant Member. He argued that objections raised by the Assessing Officer in the assessment order relating to salary and rent received by Sri D.K. Chanda and his wife were factually incorrect as noted in detail by the Ld. C.I.T.(A). Under the Societies Regulation Act, it is necessary that 7 founder members be there and, therefore, the Ld. Judicial Member was factually incorrect in holding that there were only two founder members in this case. The learned Counsel stated that the object of the society was to run the school as clearly noted and appreciated by the Ld. Accountant Member in his proposed order.
Profit/surplus of the society could only be used for purposes of school is clear from Articles-7, 8 & 12, which were as under: 7) Any surplus or deficit in a particular as revealed in the Accounts will be transferred to Fund Account. Such surplus or deficit should be arrived at after meeting such expenditures as may be approved by the Executive Committed.
8) The amount of Fund Account shall be utilized only for the development and promotion of the object of the School and no portion thereof shall be paid, transferred directly or indirectly by way of profit to any office-bearer or member of the School.
12) If necessary, the Society will be dissolved and properties remain will be handed over according to Section 13 & 14 of Societies Regulation Act, 1860.
12.1. It is thus clear that object and purpose of the society are to run a school. It is existing for education and not for profit. The learned Counsel also pointed out that even the Ld. Judicial Member did not rely upon any of the findings recorded by the Assessing Officer (except erroneous finding that there were only two founder members) and embarked upon and directed to carry a new enquiry and investigations not made by the Assessing Officer. The observations of Ld. Judicial Member were against law as I.T.A.T. cannot make out a new case. He relied upon decisions of Andhra Pradesh High Court in the case of CIT v. G.M. Chennabasappa 35 I.T.R. 261 and Bombay High Court in the case of J.B. Greaves v. CIT 49 I.T.R. 107. He also relied upon a decision of Third Member in the case of Nopany Education Trust v. Addi. Director of Income-tax (E) 93 I.T.D. 152 (Kol) (TM) where the Third Member after considering all the relevant case laws including the decisions in the cases of Aditanar Educational Institution v. Addl. CIT 224 I.T.R. 310 (SC), C.I.T. v. Rao Bahadur Calavala Cunnan Chetty Charities 135 I.T.R.485 (Mad), Governing Body of Rangaraya Medical College v. ITO 117 I.T.R. 284 (AP) and C.I.T. v. Nagpur Hotel Owners Association 247 I.T.R. 201 (SC) held that after meeting expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it would not cease to be one existing solely for education purposes, since the object was not to make profit and the surplus, if any, was incidental to dominant and primary object. The learned Counsel for the assessee, accordingly, supported the proposed order of the Ld. Accountant Member.
13. After careful consideration of the rival submissions of the parties, material on record proposed orders of Ld. Members and facts of the case, I see no good reason to agree with the order proposed by Ld.
Judicial Member. It is clear from perusal of constitution of the assessee-institution that its main object is to run and expand school.
Thus the assessee is an institution existing solely for educational purposes. There is no material on record to show that society is existing for purposes of profit. Even the Assessing Officer (A.O.) in the assessment order did not challenge the fact that the assessee was existing for educational purposes. Ld. A.O's objection that Sri D.K.Chanda and his wife were exercising excessive control or were taking more than reasonable remuneration or rent are factually incorrect.
Correct figures and circumstances are noted by the Ld. C.I.T.(A) in the impugned order. In fact, 2/3 circumstances mentioned by the Assessing Officer do not lead to the conclusion that the assessee is existing for purposes of profit. There are specific objects in the constitution of the assessee-society prohibiting use of profit for benefit of any individual. It is to be used for the purposes of school during its existence and even on the dissolution of the institution. Relevant objects have been noted above in detail and also in the proposed order of the Ld. Accountant Member. The assessee-society was granted exemption Under Section 10(22) of the Act in the past and also in future and it was, therefore, for the Revenue to show that said exemption was wrongly granted and the assessee, in fact was existing for purposes of profit. No such case was made by the Revenue. Burden of proof in this case was rightly placed by the C.I.T.(A). It is true that Revenue can for purposes of allowability of exemption Under Section 10(22) evaluate each year to find out whether institution existed during the relevant year solely for educational purposes or for purposes of profit. But then this has to be done by the Revenue. The assessee can only put all material facts, its activities and income from which reasonable inference is to be drawn by the A.O. and case made out against the assessee that it existed for profit. How can assessee prove that it is not existing for profit No attempt was made by the Assessing Officer in the present case to deny exemption to the assessee. The Ld. C.I.T.(A), on the other hand, gathered relevant facts and evidence to show that the assessee existed solely for educational purposes and not for profit. In my considered opinion, the Ld.
C.I.T.(A) approached the problem in proper perspective and rightly decided the issue after an elaborate discussion. I do not find any error in his approach. The Ld. Judicial Member, on the other hand, tried to give a second innings to the Revenue without justifying it on the facts of the case. He also wrongly.stated that it was for the assessee to show that it did not exist for purposes of profit. It is not deemed necessary to repeat all that has been stated by the Ld.
C.I.T.(A) and by the Ld. Accountant Member in their proposed orders. I agree with their reasonings and for additional reasons noted above confirm the impugned order of the learned C.I.T.(A).
13.1. During the course of hearing before me, the Ld. Departmental Representative vehemently contended that Ld. C.I.T.(A) was wrong in canceling assessment in this case when nobody sought cancellation of order. I have considered above objection. It is true that the C.I.T.(A) has used words "assessment is cancelled", but his order is to be read as a whole and when so done, he has held that the assessee is entitled to exemption Under Section 10(22) of the Act and, therefore, this reassessment in this case was not necessary. I see no such illegality in the order of C.I.T.(A) vitiating the order on above count and find no force in the contention raised by the Ld. Departmental Representative. In view of above discussions, I disagree with the order proposed by the Ld. Judicial Member.
14. The order passed in this case may be placed before the regular Bench for passing consequential order under the law in accordance with majority view.
1. The Hon'ble President Shri Vimal Gandhi, Income-tax Appellate Tribunal, being the Third Member after hearing the counsels of the parties on 08-02-2007 has opined that the assesses is entitled for exemption Under Section 10(22) of the IT. Act, 1961. The re-assessment in this case was not necessary and no illegality was found in the order of the Ld. CIT(A) and found no force in the contention raised by the Ld. Departmental Representative while disagreeing with the opinion of the Ld. Judicial Member.
2. While taking the majority view the appeals of the Revenue are dismissed in favour of the assessee.(B.R. Kaushik) (Hemant Sausarkar)ACCOUNTANT MEMBER JUDICIAL MEMBER 1. We, having differed on the point in the above appeals ITA Nos. 391 to 395 (Gau) of 1995 filed by the Department, refer the following points of difference to the Hon'ble President of the Income-tax Appellate Tribunal under the provisions of Section 255(4) of the Income-tax Act, 1961 for necessary orders as the President may desire: (1) Whether on the facts and circumstances of the case and where the CIT(A) has cancelled the assessment for all the five years under the consideration by observing "For want of such reasonings and narration of facts which would establish that the appellant society was established for the purpose of running a school to earn profits, I hold that the assessments for all these five years had been completed on an erroneous interpretation of Section 10(22) of the Act, wrong perception of fact and, therefore, accordingly cancelled" and where the Reverme has raised the grounds as follows: (1) For that the Commissioner of Income-tax (Appeals) erred in law as well as in facts in canceling the assessment made under Section 143 (3)/147.
(2) For that any other ground or grounds may be allowed to be raised at the time of hearing It is justified on the part of Accountant Member to hold that the Department has not appealed against the findings of the CIT (A) that the provisions of Section 10(22) was applicable and as such this Tribunal cannot go behind the findings of the CIT(A) that the income of the assessee is exempt Under Section 10(22) and can arrive at a different conclusion (2) Whether, on the fasts and circumstances of the case, the Judicial Member is justified in remitting the assessment back to the file of the Assessing Officer to make a de novo assessment as he found it fit and proper that overall view of the matter is to be evaluated or considered to find out whether the assessee is entitled to an exemption Under Section 10(22) of the Act. (3) Whether, on the facts and circumstances of the case, the assessee is entitled to an exemption Under Section 10(22) of the Act ?(N.S. Saini) (C.L. Sethi)ACCOUNTANT MEMBER JUDICIAL MEMBER 1. In these appeals there is difference of opinion between the Members.
In View thereof, the issue is referred to the Hon'ble President of the Income Tax: Appellate Tribunal Under Section 255(4) of the IT. Act, 1961, for opinion of the Third Member on the issue Which are framed as under: 1) Whether, on the facts and circumstances of the case, can appeal be Disposed of by the Tribunal without recording any finding on the contention raised by the respondent that the Tribunal has no authority to go behind the finding of the CIT(A) in respect of the eligibility of exemption Under Section 10(22) of the Act to the assessee as the Revenue has not filed any appeal against the above finding of the C1T(A) 2) Whether, on the facts and circumstances of the case, and more particularly in view of the finding of the CIT(A) that the assessee society does not exist for the purpose of profit and exist solely for the purpose of education and in view of the decision of the Apex Court in the case of C.I.T. v. Indira Balkrishna 39 I.T.R. 546 (S.C.), can Tribunal go behind the finding of the CIT(A) that the income of the assessee is exempt Under Section 10(22) of the Act and arrive at a different conclusion 3 ) Whether, on the facts and circumstances of the case and in view of the finding of the CIT(A) which implies that whole of the income of the assessee is exempt Under Section 10(22) and thus, no income chargeable to tax has escaped assessment, the CIT(A) was justified in canceling the assessment made Under Section 147/143 of the Act 4) Whether, on the facts and circumstance of the case, there was any material on record to show that the assessee society was not. formed in the manner as required under the Societies Registration Act or the constitution on the basis of which the registration was granted by the Registrar of Societies to it was not in accordance with the provisions of the registration of Societies Act 5) Whether, on the facts and circumstances of the case, the order of the CIT(A) can be set aside to verify the manner of the formation of the assessee society 6) Whether, on the facts and circumstance of the case and in view of the Decision of the Tribunal in the case of I.A.C. v. Matrusshri Educational Society 48 LTD 583 (Hyderabad), the purpose of the existence of the assessee society is to be enquired into and found from its constitution only for granting exemption Under Section 10(22) of the Act or any other enquiry is necessary for the aforesaid purpose 7) Whether, on the facts and circumstances of the case, an enquiry into the constitution of the assessee society evidence that the assessee exists for any purpose other than the purposes of education 8) On the facts and circumstances of the case, in terms of Section 10(22) of the Act was there any material on record to show that the assessee society exists for the purpose of profits also 9) In view of the decision of the Tribunal in the case of I.A.C. v. Matrushri Educational Society 48 I.T.D. 583 (Huderabad) and in view of the decision of the Apex Court in the case of Aditanar Educational Institution v. Additional C.IT. 224 ITR 310, 318(SC), whether it can be held mat the unrestricted powers of two founder Members of assessee society to select Members of the Executive Committee can have any bearing on the object of the assessee society 10) Whether, on the facts and circumstance of the case any interference with the order of the CIT(A) is warranted in respect of the matter of eligibilitv of the assessee for grant of exemption Under Section 10(22) of the Act? 1. All these appeals bearing I.T.A. No. 391 to 395/Gan/l995, filed by the Department, are against the consolidated order of the CIT(A) dated 25.8.95 passed in the matter of assessment made- Under Section 143(3)/147 of the I.T.Act,1961 for the assessment year 1987-88 to 1991-92 and the appeals being I.T.A. No. 389/95, 390/95, 15 (Gau) 96, 16 (Gau) 1 996 and 17 (Gau) 1996 filed by the Department, are against the consolidated orders of the CIT(A) dated 25.8.95 for assessment year 1987-88 and 1988-89 and a consolidated orders of the CIT(A), dated 5.9.95 for the assessment year 1989-90,1990-91 and 1991-92 in the matter of order of penalty passed Under Section 221(I) of the Act 2. All these appeals are being disposed of by this common order for the sake of convenience.
3. The revenue has taken only on common ground of appeal for all the five years Under consideration as reads as follows: For that the CIT(A) erred in law as well as in facts in canceling the assessment made Under Section 143(3)/147.
4. From the orders of the assessment, it transpires that the proceedings us/147 in all the years were taken by the learned Assessing officer (A.O.) on the premises that in his opinion the exemptions allowed to the assessee Under Section 10(22) of the I.T. Act,1961 were erroneous and therefore, the income chargeable to tax has escaped the assessment The Ld. CIT(A) has found that no material was brought on record to establish that the assessee is not entitled for exemption Under Section 10(22), the assessee has satisfied all the conditions of Section 10(22) of the Act and thus, was legally entitled for the exemption Under Section 10(22) of the Act and the assessment for all the years under appeal were completed on an erroneous interpretation of Section 10(22) of the Act and on wrong perception of the facts. In view of the above findings of the Ld. CIT(A), the premises itself on which the Ld A.O.assumed the jurisdiction and initiated proceedings Under Section 147 in the case of the assessee remained no longer valid and hence, he cancelled the assessment under present appeals.
5. We have heard both the parties, and have considered their rival contentions. We have perused the orders of the authorities below. We have perused the written submission filed by the assessee.
6. It is therefore, seen that issue involved in these all the appeals is regarding the claim of exemption Under Section 10(22) of the Act. OH reading of the provisions of Section 10(22) of the Act, the conditions for the availability of the exemption are: i) Income should be that of a university or other education institution, and ii) Such institution or university must exist solely for educational purposes and not for the purpose of profit.
It is, therefore, clear that the education institution or university must exist solely not only for educational purposes but at the same must exist not for the purpose of profit. It is, therefore, for the assessee to prove that the educational institution exists solely for education purposes and not for the purpose of profit in order to be entitled to an exemption Under Section 10(22) the assessee must strictly come within the terms of the provisions of Section 10(22) of the Act., if an assessee wanted to bring his case within any of the exemptions it will be- for him to make out a case quite clearly within the language of the exemption granted It is needless to say that the onus of showing that a particular class of income is exempt lies on the assessee. The A.O. is not supposed to disprove the case of the assessee unless and until the onus lies on the assessee is discharged by the assessee.
7. On perusal of the constitution of the assessee. We find amongst others, the Following stipulation: 2. The School is established for literary purpose among the children requiring prelimirary education in their childhood, to spread knowledge concerning the physical, intellectual, moral, social and mental development of the children at their child hood and likewise.
3. It will have the executive committee consisting of a president, a vice-President, a secretary, a Treasurer, an Asstt. Treasurer as office bearers and an even number of members not exceeding six, not less then four 4. The founder members of the school are the present principal and the Head Mistress, who will respectively be the permanent secretary and permanent Treasurer of the executive committee.
5. The other members of the executive committee will be selected from among the guardians of the children of the institution by the founder members of the school.
6. The Executive committee shall conduct and manage all the business of the school and have full control of the management and finance of the school. However, it would be subject to the rales and Regulation contained in the constitution and as well as any other rales and bye lows that may be made from time to time by the committee in General meetings.
7. Except two permanent members as stated above, the other members of the executive committee are liable to retire by rotation after a period of one year but eligible for re-selection. On reading the aforesaid clauses of the constitution of school, it is apparent that the Principal and the Head Mistress, who are permanent members of the executive committee in the capacity of secretary and Treasurer respectively were founder members of the school. These is nothing mentioned about the constitution and nature of General Body/Assembly of school. Nothing is specified about the members of the General Body of the society, their eligibility, power and functions. It is also seen that Executive committee is not elected by general body of the school, but its members are selected by the two founder members.
It is at the whims and desire of the two founder members who are permanent members of the executive committee, to select other members of the executive committee. It is, therefore, necessary to require in to and find out the very existence of artificial legal entity, i.e. the society and to make enquiry in the veil of the constitution of the school. There is no restriction to lift the veil of this artificial legal entity and to pay regard to the substance of it The veil may be lifted where a faxing statute or a beneficial statute is sought to be evaded. The memorandum of association is to be examined and verified to find out the manner of forming society in the instant case. It is stated by the assesses in this constitution about only two founder members of the school. It is, therefore, to be find out whether two members could form the society under the provisions of the societies registration Act. It is to be examined whether the it is permissible for the two permanent members only to select other members of the executive committee without being elected by the general body in the case of society registered under the societies registration Act. The enquiry as to the essential ingredients to claim exemption Under Section 10(22) is to be properly made at the and of the A.O., so that all material facts and materials required to decide the issue under appeal are brought on record. We further find that it is no where mentioned in the constitution mat the school does not exist for the purpose of profit It is, therefore, to be ascertained from totality of the facts and circumstances of the case whether the school exist to the purpose of profit or not The true and correct nature of a document (i.e. the constitution of the School in the present case) is to be ascertained not from its form but from its substance. What is the real and true intention behind the said document is to be ascertained. The soul and mind of the society is vested in the instrument under which it was constituted, and as such the instrument i.e. constitution of the School is to be examined by its substance and not its form. The nomenclature given to it is not decisive.
8. The language of Section 10(22) of the Act is plain and clear and the availability of She exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for the educational purpose and not for purpose of profit as stated by the Hon'ble Supreme Court in the case of Aditanar Educational Institution v. Addl. C.I.T. . The decisive or acid test to find out whether the object is to make profit is an overall view of the matter. In evaluating or app-araising the overall view of the matter one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity. To find out real and true objects of the concerned entity, one should look to the substance of the matter rather than its form. On perusal of the constitution it is noticed that if is the object of the two founder members of the Society to have a permanent post of the Secretary and Treasurer in the Executive Committee and to select other members of the committee at their will and desire without specifying therein the objective test of such selection. It is, therefore, to be ascertained whether this unrestricted power of two founder members have any bearing on the object of the society to make profit or not out of its activities. The A.0 may ascertain the game also by examining the members of the Executive committee constituted from time to time. The A.O. as well as CTT(A) has not made a correct and proper approach to the matter in issue as they have failed to take into consideration the overall view of the case and the substance of the matter.
9. As discussed above, we find that overall view of the matter is to be evaluated or considered to find out whether the assessee is entitled to an exemption Under Section 10(22) of the Act Hence without going into the question of admissibility or non-admissibility of the exemption Under Section 10(22) to the assessee, we set aside the orders of the authorities below and to remit the assessment back to the file of the A.O. to make a de-novo assessment and to adjudicate the issue under appeal a fresh in the light of the observation made above, and as well as in accordance with the provision of law contained in that behalf.
The A.O. shall provide adequate opportunity of being heard to the assesses, who shall be at liberty to furnish or produce, such other materials and documents as it deem fit and proper in support of its claim.
10. These appeal relates to the issue of imposing penalty Under Section 221 of the Act for non payment of tax demanded in pursuance to an assessment made under Section 143(3)/14 7 of the Act for the assessment years 1987-88 to 1991-92. Since the assessments made by the A.O. have been set-aside by us for making a de-novo assessment, the demand of tax raised therein have become infructuous the penalty imposed Under Section 221 of the act is to be cancelled in view of the provision as contained in Section 221(2) of the Act We, therefore, cancel the penalty imposed Under Section 221 of the Act for all the years under appeal.
11. in the result, the appeal Nos. 391 to 395/Gau/95 and 389 and 390/Gau/95 filed by the Department are allowed for the statistical purpose and the Appeal Nos. 15to 17/Gau/ 96 filed by the Department are dismissed 1. I have the benefit of going through the proposed order of the learned Brother in this case. Through I agree with the conclusion as arrived at by the learned Brother in I.T.A. Nos. 389 and 390(Gau) of 1995 and 15,16 & 17(Gau) of 1996 but despite my best efforts and great pursuation to myself I have not been able to agree with the conclusion as arrived at by the learned Judicial Member in I.T.A. Nos. 391 to 395(Gau) of 1995. The reasons for the same are incorporated in the present order of mine which is as under: 2. In I.T.A. Nos. 391 to 395(Gau) of 1995 the Revenue has taken only one common ground of appeal for all the five years under appeal which reads as under: For that the Commissioner of Income-Tax (Appeals) erred in law as well as in facts in canceling the assessment made under Section 143(3)/147.
The assesses society was registered on 6-3-1973 which the Registrar of Societies, Assam, Guwahati vide registration No. 236 of 1972-73.
The assesses society is running a school from 1973. The school is recognized by the Govt. of Assam and a plot of land was also allotted to the assesses society from the Govt. of Assam vide allotment letter No No. 16/85/9 dated 10-4-1985. The assessee societies' school syllabus is also recognized by the Board of Secondary Education, Assam. The A.Q. found that the primary object of the assessee society is to promote primary education, spread knowledge concerning the physical, moral social and mutual development of the children and to cooperate with the national and international organisations having the similar objectives for furtherance of its aims and objects. The A.O. further observed that the assesses society is managed by an Executive Committee consisting of 8 to 10 persons. Shri D.K. Chanda, Principal and Smt. Minati Chanda, Headmistress who are the founder members of the assesses society are respectively permanent Secretary and Treasurer of the assesses society. The salary drawn by them is higher in comparison to sakary of other teachers and staff. According to the A.O., all the powers of administration, finance, selection and appointment of teaching staff etc. are vested in these two founder members and the other members of the Executive has no say in the aforesaid matters.
Shri D.K. Chanda and Smt. Minati Chanda also realised rent from the assessee society for accommodation provided by them to the school and the hire and location of the properties, he considered the rent paid as much higher than the market rent Observing as above, the A.O. concluded that, in his opinion, the institution does not exist solely for the educational purposes but also exists for the purposes of profits. Thus, as the assessee society does not fulfill me necessary conditions so as to entitle it for exemption Under Section 10(22) of the Act, he completed the assessment without granting exemption Under Section 10(22) of the Act On appeal the C3T(A) in its elaborate order for the reasons mentioned therein held that the assessee society is eligible for grant of exemption Under Section 10(22) of the Act In his opinion, as the proceedings Under Section 147 of the Act was initiated by the A.O. on an erroneous interpretation of Section 10(22) of the Act and hence, he cancelled the assessment of all the five years under the present appeal. Being aggrieved by this order of the CIT(A), the Revenue is in appeal before us on the grounds mentioned herein before.
4. The learned Departmental Representative vehemently supported the order of the A.O. and in his argument he reiterated ore observations as made by ore A.O. in the order of assessment 5. On the other hand, the learned authorised representative of the assessee has filed a paper book and also filed a written submission. At the outset he raised one preliminary objection which finds place in para 2 of his written submission. According to him, the finding of the CIT(A) that the assessee has satisfied all the conditions for getting exemption Under Section 10(22) has been, accepted by the Revenue and the same has not been challenged under the present appeals and the Revenue has allowed the said findings to become final. In the case of CIT v. Indirra Balkrishna 39 ITR 546 (S.C.) the Apex Court has held that where the Department has not filed any appeal against the A.A.C.'s finding in favour of the assessee, it is not open to the Tribunal to go behind the finding and arrive at a different conclusion. Relying on the above decision of the Hon'ble Supreme Court he contended that as the eligibility of the assessee society for availing of exemption Under Section 10(22) of the Act is not in dispute in the present appeals of the Revenue as evidence by the ground of appeals taken in the memorandum of appeal, the same cannot be now interfered with. He submitted that in view of the above final finding of the CIT(A) which is not in dispute, as the very basis on which the A.O. had assumed the jurisdiction over this case is no longer subsisting, hence, the CIT(A) was folly justified in law in canceling the assessments made Under Section, 143(3 )/147. From a copy of the letter from the CIT, Shillong, which is placed at page 6 of the paper book, it was pointed out that the CIT, Shillong has also, vide its letter No.R-17/7 3-74/6638 dated 10-07-1974, after going through the activities and constitution of the assessee society, opined that the assesses society is an educational instifution and its income is exempt Under Section 10(22) of the Act.
Further during all the five years under consideration, the assesses society had run the school on the same basis and on similar facts as it had run is the subsequent years i.e. after assessment year 1991-92.
That grant of exemption us. 10(22) by the A.O. in the subsequent years to the assessee society on the similar facts evidence that the Revenue has conceded that the assessee society is eligible for grant of exemption u/g. 10(22) and makes these appeals of the Revenue as infructuous in the light of the decision of the Hon'ble Gauhati High Court in the case of Dhansiram Agarwalla v. CIT 217 ITR 4 wherein the jurisdictional High Court has held that though neither the principle of res-judicata nor the rule of stopple is applicable to the assessment proceedings, yet the rule of consistency does apply to such proceedings where there was no change. A copy of intimation passed Under Section 143(1)(a) in the case of the assessee society for the assessment years 1992-93, 1994-95 and 1996-97 are filed at page nos. 7 to 9 of the paper book.
6. In respect of the provisions of Section 10(22) of the Act, it was submitted mat the assessee society is running a school and thus, it is an educational institution. For the above contentions reliance, was placed on the decision in CIT v. Sorabji Nusserwanji Parekh , sole Trustee, Loka Shikshana Trust v. CTT ; Karta Education Society v. ITO 111 ITR 420 (Alh.) and CTT v. A.M.M. Arunachalam Educational Society 243 ITR 299 (Mad,).
As the assessee society is carrying on the primary activity of an educational institution of imparting education by by running a school, in view of the above cited legal decisions, the same is an educational institution within &e meaning of Section 10(22) of the Act.
7. A copy of the certificate of registration of the society granted to the assesses by the Registrar of Societies, Assam, Guwahati, is filed at page I of the paper book and a copy of the constitution on the basis of which the assesses was granted registration tinder the Societies Registration Act is also filed at page 10 to 23 of the paper book. It was pointed out from the object clause of the assesses society as enumerated in article 3 of the constitution of the assessee society that all the objects of the assesses society are educational and the assessee society exists for the purpose of education only and not for any other purposes whatsoever. Further, it was pointed out from the articles 4(d), 7,8 and 12 of the constitution of the assessee-society that surplus of the assessee society can be utilised for educational purposes only and no portion of the same can be utilised for any personal purposes of the members of the society and for that matter, any non-educational purposes whatsoever. There is no power to any member whosoever to divert the fund of the society for any purpose other than its objects which all are educational. Thus, the view of the C.B.D.T.'s circular No.F.194/16-17-IT(AT) quoted in the case of Birla Vidya Vihar Trust v. CTT 136 ITR 445 at page 453-454 (Cal), the assessee society "exists solely for the educational purposes and not for the purposes of Profit", and it is legally entitled for exemption Under Section 10(22) of the Act 8. Further, it was submitted that the CTT(A) has also not found in the order of assessment in respect of any of the years under appeal that any person or individual was entitled to any portion of the profit of the assessee society or that any part of the surplus generated by the assessee society in any of the years under consideration was utilised for for non-educational purposes. If was pointed our from page 7 of the order of the CIT(A) that the total surplus earned by the assessee society during the years under appeal was invested in acquisition of fixed assets for the school In fact, the surplus generated in the years under appeal totals to Rs. 25,25,799/- and more titan that i.e. Rs. 36,70,089/- were invested in the same period for acquisition of fixed assets for the school Thus, it has been evidence feat the surplus went towards procurement of fixed assets for the school and building construction for the school.
9. It was also submitted feat the remarks in the order of the assessment regarding management and control of school are factually incorrect and are not based on any material on record. Moreover, the same has no relevance for determining the eligibility of exemption Under Section 10(22) of the Act to the assessee society. It was contended that as no specific mistake in the order of the C3T(A) could be pointed out by the Revenue no interference with the order of the CIT(A) is warranted.
10. I have carefully considered the rival submissions and perused the orders of both the lower authorities and various decisions cited by the learned authorised representative of the assessee.
11. In the case of CIT v. Indira Balkrishna 39 ITR at page 550 the Hon'ble Apex Court has held feat there was no appeal by the Department, against the findings of the A. A.C. that the provisions of Section 9(3) was applicable and it was not open to the Tribunal to go behind it. In the instant case, I find that the Department has not appealed against the findings of the CIT(A) (sic) the provisions of Section 10(22) was applicable. The only ground taken in the memorandum of appeal for all the years under consideration is that the CIT(A) erred in canceling the assessments made Under Section 143/147. Even at the time of hearing no leave of Tribunal was sought to xxxxxxxxxxxxxxxxxxxxxxxxxxx to raise the issue of applicability of Section 10(22) as an additional ground of appeal In the circumstances, in view of the above decision of the Hon'ble Apex Court in my considered view, we cannot go behind the findings of the CIT(A) that the income of the assessee is exempt Under Section 10(22) and can arrive at a different conclusion. Thus, on the facts of the case, as the whole of the income of the assesses is exempt Under Section 10(22) and no income chargeable to tax has escaped assessment during the years under appeal., in my considered opinion, the CIT(A) was justified in canceling the assessments made Under Section 147/ 143(3). My above view also finds support from the decisions in the case of CIT v. Central Provinces Railway Co. Ltd. 119 ITR 161 (Bombay) and Modi Charitable Fund Society and Anr. v. I.T.O., Central Circle, Delhi , 12. Even on the merit of the case also. I do not find any reason to interfere with the order of the CTT(A). In the instant case the A.O.has opined that the assessee society does not exist solely for the purposes of the education but also exists for the purposes of profits and for this reason he denied the exemption Under Section 10(22) of the Act to the assessee. The CIT(A) has observed that the assessee society exists solely for the purposes of education and not for the purposes of profits. Thus, the dispute is, whether the assessee society exists solely for the purposes of education and not for the purposes of profits or the same exists for the purpose of profits also.
13. The main issue in this case is in a narrow compass and the determination thereof depends upon the true and correct interpretation of Section 10(22) of the Act. Section 10(22) of the Act as it stood at the material time reads as under: 10. In computing to total income of a previous year of any person, any income falling within any of the following clauses 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.
14. On examination of the provisions of Section 10(22), the conditions precedent to the availability of exemption can be stated as thus: (a) income should be that of a university or other educational institution : and....
(b) Such institution or university must exist solely for educational purposes and not for the purposes of profit 15. In the instant case it has been admitted by both the parties that the assessee society is carrying on the primary activity of an educational institution of imparting education by running a school. The Hon'ble Madras High Court in the case of CIT v. A.M.M. Arunachalam Educational Society 243 ITR 229 has held that a Society which runs a school could be treated as an educational institution. The status of the assessee as aregistered society is evidenced by the certificate, of registration granted to the assessee society by the Registrar of Societies certifying under his hand mat the assessee society is registered under the societies Registration Act, 1860, which is placed at page No. 1 of the paper book. No material has been brought on record by the Revenue to show that the assessee society was not formed in the manner as required under the Societies Registration Act or the constitution on the basis of which registration was granted to it by the Registrar of Societies was not in accordance with the provisions of the Registration of Societies Act. Moreover, the Revenue at no stage has disputed the status of the assessee which is a registered society.
Hence, in my considered opinion, the assessee society is an educational institution within the meaning of Section 10(22) of the Act.
16. Further, let us examine whether the assessee society exists solely for the educational purposses and not for the purposes of profits. In the case of Governing Body of Rangaraya Medical College v. I.T.O. it was held that even if certain surplus results on the working of the society, it cannot e said that the institution run by it was so run for the purpose of profit so long as no parson or individual was entitled to arty portion of the said profit and the said profit was utilised for the purpose of, and promotion of the objections of, the institution.
17. In this connection reference may be made to the circular of C.B.D.T. being Circular No. F. 194/16-173T(AI), reproduced from the decision in Birla Vidya Vihar Trust v. CIT (1932) 136 ITS. 445 at page 453-54 (Cal) which states: 3. The question for consideration is whether an educational institution existing solely for education purposes but which shows some surplus at the end of year is eligible for this exemption. If the profit of the educational institution can be diverted for the personal use of the proprietor thereof, then the income of the educational institution will be subject to tax. However, there may be cases where the educational institution may be owned by the trust or societies to whom the provisions of Section 11 may be applicable.
Where all the objects of these trusts are educational, and the surplus, if any, from running the educational institution is used for educational purposes only, it can be held that the institution is existing for educational purposes and not for purposes of profit.
However, if the surplus can be used for non-educational purposes, it cannot be said that the institution is existing solely for educational purposes and such institution will not be liable for exemption Under Section 10(22). But in such cases, the applicability of Section 11 can be examined and if the conditions laid down therein are satisfied, the income will be exempt Under Section 11.
Thus, a society whose all the objects are educational, and the surplus for running the educational institution can be used for educational purposes only and not for any non educational purposes, the society or institution shall be held to be "existing for educational purposes and not for purposes of profit" and shall be entitled for exemption Under Section 10(22) of the Act. The word "surplus" means excess of income over expenditure i.e. profit.
18. Further in the case of Inspecting Assistant Commissioner v.Matrusri Educational Society 48 I.T.D. 583 (Hyderabad) the Hon'ble Tribunal has held that the society registered under the Societies Registration Act like a company under the Companies Act 1956., was an artificial legal entity, its soul and mind vested in the instrument under which it was constituted. Anything contrary to the provisions in the instrument under which it was constituted would be ultra vires and void ab initio and not binding upon it such action could not be ratified by all the members taken together until the object clause wherein the purpose of its existence lay were amended and approved under the provisions of the Act under which it was incorporated. The purpose of existence of an artificial legal entity like society should be enquired into and found in the instrument, under which it was constituted and when feat proves feat its sole purpose is education, no further enquiry would be necessary to grant exemption Under Section 10(22). Here it may be pertinent to point out the observation of the Hon'bie Madras High Court in the case of CIT v. L.G. Ramamurthi wherein it has been observed that "no Tribunal, if fact, has any right or jurisdiction to come to a conclusion entirely contrary to one reached by another Bench of the same Tribunal on the same facts." 19. In view of the above position of law, now let us examine that instrument under which the assessee society is constituted and registered under the Societies Registration Act, 1860 to ascertain the purpose of its existence. A copy of the constitution of the assessee society is filed at page nos. 10 to 23 of the assessee's paper book.
Article (1) and (2) prescribes the name and place of the assessee society. Article (3) prescribed the aims and objects of the assessee society which all are educational. Article (4) relates to the constitution of the Executive Committee. Article (5) prescribes the duties and power of the Executive Committee. Article (6) prescribes that except two permanent members the other members of the Executive Committee shall retire after a period of one year but are eligible for re-election. The Article (7) provides that the surplus generated by the assessee shall be transferred to a find account Article (8) provides that the amount of the fund a/c. shall be utilised only for development and promotion of the object of the school and it also specifically provides that no portion thereof shall be paid, transferred directly or indirectly by way of profit to any office bearer or member of the Executive Committee At the and Article (12) provides that in the case of dissolution, the properties remaining will be handed over according to Section 13 and 14 of the Societies. Regulation Act, 1860 20. Thus, an enquiry into the constitution of the assesses society reveals that all the objects of the assesses society are educational and the surplus generated can be utilised for the promotion of the said object only. There is specific prohibition in the constitution of the assesses society to distribute or transfer any portion of its surplus to any member of the Executive Committee. Even at the time of dissolution of the society, in accordance with Section 13 and 14 of the Societies "Regulation Act, 1860, all the properties and assets of the society shall be transferred to another society having similar or substantially similar objects and no portion of the said properties or assets shall even at that time be distributed to any of the member of the society including founder members.
21. From the facts on record it is also observed feat the surplus generated in the years under appeal totals to Rs. 25,25,799/- and more than that i.e. 36,70,089/- were invested in the same period for acquisition of fixed assets for the school. Thus there is no evidence that the Executive Committee members have utilised the profits of the assesses society for their personal purposes. The purpose had been shown to have been utilised for for expansion of the school activities.
Further, the surplus went towards procurement of fixed assets of the school and building construction of the school.
22. In view of the above facts, as no person or individual is antitled to any portion of the surplus of the assessee society and further as all the surplus of the assessee society was utilised towards promotion of its objects which all are educational, in my considered opinion it can not be held that the assessee society also exists for the purpose of profit My view also finds support from the decision of the Hon'ble Orissa High Court in the case of the Secondary Board of Education v.ITO (1972) 86 ITR 408. As the assessee society cannot be held to exist for the purpose of profits during the year under consideration and as the same is an educational institution existing solely for the purpose of education, I find that the assessee society satisfies all the conditions of Section 10(22) of the Act and is eligible for grant of exemption under that section.
23. From the reading of clauses of article (5) of the constitution of the assessee society it shows that the power like management and finance of the school, appointment of teaching and other staff etc. are vested with the Executive Committee of the assessee society. As per Clause (k) of article (5), the decisions and resolutions of the Executive Committee shall be passed by 2/3rd. majority of its members.
As per Clause (a) of article (4) such Executive Committee shall always consists of at least another eight persons apart from two founder Members Viz. D.K. Chanda and Smt. Minati Chanda. The said two founder members have no right to expel any member of the Executive Committee.
Thus, the remarks of the A.O. regarding control and management of the school is in the realm of surmises and conjecture and the same is not based on any relevant materials.
24. Further no material was brought on record to show feat the salary and rent paid by the assesses society to the principal and the Headmistress were unreasonable and executive. It is observed that even the A.O. has in computing the total income of the assessee allowed full deduction for the salary and rent paid for all the years under appeal.
Therefore, in my considered view, the observation of the A.O. is without any merit. I also draw support for the above view from the decision in the case of Maharishi Institute of Creative Intelligence v.ACTT 62 ITD 69 (Allahabad).
(1) St Joseph's Upper Primary School v. ITO 4 I.T.D. 231 (Hyderabad)- in this case the assessee society which was registered under the Societies' Registration Act, had as its objections promotion of educational institutions and was actually organizing and running as upper primary school. One of the school building was owned by the Headmistress who was also the daughter-in-law of the founder secretary. She had constructed the building partly out of the loan taken from the society. The society earned surplus and claimed exemption Under Section 10(22) of the Act. This was disallowed by the I.T.O. and the A.A.C. The Tribunal held that the contention that benefit had tenured to the owner of the building was not tenable since it was not shown that rent paid was more than the market rent Under the Societies Registration Act, the funds have to be utilised for running educational institution and hence this was a case where the surplus could not be diverted in any purpose other than the objects of the society. The Tribunal directed for allowance of exemption Under Section 10(22) to the society.
(2) In the case of CIT v. (sic) Hospital Trust 181 ITR 512 (Kerala) fee distinction between the objects and power is drawn at page 515.
It is obvious that the payments made as salary and rent are to be charged to fee working expenses of the assesses society, the payment is made as an incidental or ancillary power for the attainment of the main objects of the assessee society which are educational.CIT v. Pulikkal Medical Foundation (P) Ltd. 210 ITR 299 (Kerala) the Hon'ble High Court has held that as long as the dominant purpose is a philanthropic one, the mere circumstances that the managing director or director gets some advantage or exercises some patronage while running the institution, will not be ground to hold that the main purpose of the institution is not philanthropic.
These benefits would be merely incidental to the carrying out of the main or primary purpose and so, such benefit would not militate against the philanthropic of the institution. As long as the purpose of earning profits is to expend such profit for the achievement of the main philanthropic purpose, the assessee may carry on any activity for profit. The profit should be redeployed in the same institution or in another similar institution.Additional CIT v. Surat Art Silk Cloth Mfrg.
Association 121 ITR 1 (S.C.) it was held by a five Judge Bench of the Supreme Court that though the objects specified in some clauses of the memorandum of association of the assessee would benefit the members of the assessee, the benefit would be incidental to the carrying out of the main primary purpose and that if the primary purpose of the assessee was charitable the subsidiary objects set out in those clauses would not militate against its charitable character.
(5) In the case of Aditar Educational Institution v. Addl. CIT 224 ITR 310 (S.C.) it was held that an overall view is to be taken and with being hyper technical in granting exemption Under Section 10(22) of the Act. In evaluating or apprising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the power of the concerned entity.
(6) In the case of Shani Devi Progressive Education Society v. Asst D.I. (Exemption) 68 I.T.D. 1 (T.M.) it was observed that the assessee formed the society on the basis of the memorandum of association and the rates and regulations framed in this regard, The society was registered by the Registrar of Societies, The memorandum of association has even taken care of the distribution of the assets in the case of dissolution of the society. The Revenue authorities raised objection in regard to the award of conntract for construction of the school building to a concern which is a family concern in which members if the society have substantial interest, It is, however, pointed out that there was no evidence that the concern, namely, Ahluwalia Construction Co. derived undue profit out of the construction work. It is also seen that the assessee neither distribute any profit nor applied the profits for the benefit of the managing committee. In such a case mere suspicion cannot replace hard facts. The Hon'ble Tribunal having regard to the facts held that the assessee is entitled to exemption Under Section 10(22) of the Act.
26. In the circumstances, I am of the considered opinion that the order of the CIT(A) was passed after proper appreciation of all facts of the case. No mistake in the order of the CIT(A) could be brought on record by the Revenue. Viewed thus, on the facts of the the case, no interference with the order of the CIT(A) is called for and the appeals of fee Department are dismissed